COMMISSIONER OF INCOME TAX, TRISSUR Vs. PAUL JOHN

JUDGEMENT

(1.) The question raised in the appeal filed by the Revenue is whether the Tribunal was justified in cancelling the order issued by the Commissioner of Income tax under Section 263 of the IT. Act directing the assessing officer to disallow and bring to tax expenditure wrongly claimed by the assessee and allowed in the original assessment as a deduction which is otherwise not allowable by virtue of the express provision contained in Section 14A of the IT. Act. The deduction claimed by the assessee is interest paid on borrowed funds for investment in a partnership firm where-from the assessee as partner got share income which is exempt from tax under Section 10(2) of the IT. Act. Admittedly the claim of deduction made by the assessee and allowed by the officer is expressly prohibited by Section 10A which prohibits grant of deduction of any expenditure incurred by the assessee in relation to any income which does not form part of the total income computed under the Act. Since the claim of deduction was wrongly allowed, the order happened to be prejudicial to the interest of the revenue and therefore the Commissioner in exercise of power under Section 263 of the Act set aside the assessment with direction to the assessing officer to revise the assessment for the purpose of withdrawing deduction wrongly given and for levying tax thereon. When the assessee challenged order of the Commissioner in appeal before the Tribunal, the Tribunal held that in view of the prohibition contained in the proviso to Section 14A prohibiting the assessing officer from reopening past assessment for the purpose of disallowing the expenditure wrongly allowed, the Commissioner is also bound by the said prohibition and so much so the order issued under Section 263 by the Commissioner is illegal and unsustainable. It is against this order of the Tribunal that the revenue has filed this appeal. We have heard standing counsel appearing for the appellant-revenue and senior counsel Sri. Joseph Markose appearing for the respondent-assessee. Section 14A introduced by Finance Act 2001 with retrospective effect from 1.4.1962 is as follows: