CENTRAL WAREHOUSING CORPORATION Vs. CIT I
LAWS(IT)-2008-1-14
INCOME TAX APPELLATE TRIBUNAL
Decided on January 25,2008

Appellant
VERSUS
Respondents

JUDGEMENT

Rajendra Singh, Accountant Member - (1.) THIS appeal by the assessee is directed against the order-dated 29.3.2005 of CIT-I, New Delhi for the Assessment year 2000-01. Though the assessee has raised several grounds of appeal, the only effective issue is whether on the facts and in the circumstances of the case, CIT was justified in setting aside the assessment made by the A.O., Under Section 263.
(2.) The facts of the case in brief are that the assessee which was originally set up for warehousing activities diversified its activities in 1984 and started new lines of business of running of container freight station (CFS) and inland container depot (ICD). During the assessment proceedings, the A.O. noted that the assessee had treated the entire income arising from all the activities as exempt under Section 10(29) though under the provisions of said section, only the income derived from letting of godowns or warehousing for storage, processing or facilitating marketing of agricultural products, seeds, manure, fertilizer, agricultural implements and notified commodities. The A.O. asked the assessee to explain as to why the receipts not directly related to warehousing activities be denied exemption Under Section 10(29) and also to give details of income and expenditure relating to the different activities. The A.O. also asked the assessee to explain why the deduction Under Section 10(29) should not be denied in respect of interest and dividend income, misc. receipts and income from investment and other joint ventures. The assessee explained that the major income of the assessee was from warehousing activities and the remaining income was from the activities, which were incidental to warehousing such as agency commission from handling of transportation. It was also submitted that though the income from interest dividend, income from investments and from joint ventures etc. was not exempt as held by Hon'ble Supreme Court, the assessee had one and only indivisible business and therefore, the entire expenditure incurred by the assessee had to be set off against taxable income as held by the Hon'ble Supreme Court in case of Rajasthan Warehousing Corporation (159 CTR 132). The A.O. was not satisfied with the explanation given by him. It was observed by him that the assessee failed to give information required to bifurcate the income into exempted and non-exempted category and thus the provisions of Section 14A as per which expenditure in relation to the exempted income was not allowable as deduction, could not be applied. The A.O. therefore, denied the entire claim of exemption amounting to Rs. 2107272892/- Under Section 10(29). The decision of the A.O. was disputed by the assessee in appeal. 2.1 In appeal, the assessee disputed the decision of the A.O. denying exemption Under Section 10(29) and also the decision of the A.O. to treat the activities of CFS/ICD as a distinct line of business. CIT(A) following the decision in the earlier year held that activities of CFS/ICD was neither an independent activity nor a separate line of business as held by the A.O. It was also held by him that only the storage charges received by the assessee from activities of CFS/ICD would qualify for exemption Under Section 10(29) and not the other income derived from CFS/ICD activity. As regards the exemption Under Section 10(29), CIT(A) observed that Hon'ble Supreme Court in case of Orissa State Warehousing Corporation (237 ITR 589) had denied exemption of the warehousing corporation only in respect of such income which did not have any direct nexus to warehousing activities such as interest, dividend and other income not derived from the warehousing. It was accordingly held that the assessee will be entitled to exemption Under Section 10(29) in respect of warehousing charges and not in respect of other income. In relation to applicability of Section 14A, the assessee reiterated the earlier submission that the business of assessee was one and indivisible and therefore expenses could not apportioned between exempted and non-exempted income following the judgement of Hon'ble Supreme Court in case of Rajasthan Warehousing Corpn. (supra). It was also pointed out that Section 14A had been amended by Finance Act 2002 and as per the amendment, the provisions were effective only from 11.5.2001 whereas, the present assessment related to Assessment year 2000-01. The provision of Section 14A were therefore not applicable in case of the assessee. Reference was also made to the decision of the tribunal in assessee's own case in Assessment year 1976-77 to 1979-80 in I.T.A. No. 696-699 in which it was held that business of the assessee was indivisible. CIT(A) was satisfied with the explanation given by the assessee. It was held by him that provisions of Section 14A were not applicable for the Assessment year 2000-01 and considering the judgement of Hon'ble Supreme Court in case of Rajasthan State Warehousing Corpn. (supra), the expenses relating to exempted income could not be disallowed. 2.2 Subsequently CIT examined the assessment records and noted that though the A.O. had denied exemption Under Section 10(29) on the ground of non-furnishing of details, he did not mention in the assessment order that in case the exemption was found allowable in appeal, the claim of expenses relating to warehousing activities would be disallowed. He noted that the assessee had claimed depreciation on warehousing building amounting to Rs. 126910786/- which stood allowed after the decision of CIT(A) allowing exemption Under Section 10(29). It was also noted by him that the assessee had debited a sum of Rs. 25867057/- on account of prior period expenses but in the computation of income the assessee had made addition only to the tune of Rs. 15123578/-. CIT accordingly issued show cause notice to the assessee to explain as to why the assessment order should not be modified being erroneous and prejudicial to the interest of the revenue. The assessee pointed out that the order passed by the A.O. had merged with the order of CIT(A) and therefore, CIT was not empowered to take action Under Section 263. CIT was however not satisfied. It was observed by him that these issues were not mentioned by the A.O. in the assessment order and therefore, the same could not be subject matter of appeal before CIT(A). The contention of the assessee that the order of the A.O. had merged with that of CIT(A) was thus rejected. CIT accordingly, cancelled the assessment order Under Section 263 and directed the A.O. to reframe the assessment after making proper inquiries and after allowing opportunity of being heard to the assessee. Aggrieved by the said decision, the assessee is in appeal before the tribunal. Before us, the Ld. A.R. for the assessee argued that CIT was not empowered to exercise jurisdiction Under Section 263 as the order dated 31.3.2003 of the A.O. had merged with the order of CIT(A) dated 3.9.2003. It was pointed out that the issues raised by the CIT in show cause notice Under Section 263 were in relation to disallowance of depreciation on the warehousing building, disallowance of expenses in relation to the exempt dividend income and prior period expenses. The issue relating to disallowance of expenses in relation to exempted income i.e. warehousing income and dividend income was duly considered by the A.Q. who had made a specific reference to Section 14A of the I T Act. This issue had also been raised before CIT(A) who had held that that provisions of Section 14A were not applicable and the business of the assessee being one and indivisible, expenses relating to exempted part of income could not be disallowed. Thus, in so far as the disallowance of depreciation on the warehousing building used for exempted income as well as the expenses in relation to dividend income were concerned, these were clearly subject matter of appeal on which CIT(A) had given a decision and therefore, such issue could not be made subject matter of jurisdiction Under Section 263. As regards the prior period expenses, it was submitted that as per CIT, the prior period expenses disallowable were to the tune of Rs. 2.58 crores in place of only Rs. 1.51 crores added by the assessee. It was pointed out that the assessee in the revised computation of income, which is available at page 2 of the paper book had already added a sum of Rs. 2.70 crores on account of prior period expenses, which consisted of Rs. 15123578/- and Rs. 11930086/-. As the assessee had already added more than the sum pointed out by CIT, the order of the A.O. could not be prejudicial to the interest of the revenue. 3.1 The ld Sr. DR appearing for the revenue on the other hand supported the order of CIT. It was submitted that the issue relating to Section 14A did not arise before the A.O. as the A.O. had treated the entire income as non-exempt. The issue of apportioning the expenses was not therefore, before the A.O. The CIT had therefore, jurisdiction to pass order Under Section 263. 3.2 In reply, the Ld. A.R. for the assessee pointed out that the A.O. in the questionnaire issued to the assessee, which is available at page 21 of the paper book had made clear reference to Section 14A of the Act. He had also made specific reference regarding apportionment of expenses in relation to exempted and non-exempted income in the letter dated 9.1.2003 addressed to the assesses which is available at page 22 of the paper book. Further, the assessee had raised specific ground in relation to Section 14A before CIT(A) which had been dealt with by the latter. It was therefore, not correct to say that the issue raised in the show cause notice Under Section 263 had not been decided by CIT(A).
(3.) WE have perused the records and considered the rival contentions carefully. The issue raised before us is regarding jurisdiction of CIT for setting aside the assessment made by the A.O. for Assessment year 2000-01 Under Section 263 of the I.T. Act. The assessee was originally set up for undertaking warehousing activities but subsequently also started new lines of business of running of container freight service (CFS) and Inland Container Depot (ICD). The assessee for the relevant year had also derived income from interest, dividend as well as income from investments and joint ventures. Under the provisions of Section 10(29), income derived from letting of godown or warehousing for storage, processing or facilitating of marketing of agricultural products, seeds, manure, fertilizers, agricultural implements and other notified commodities is exempt from tax. The dividend income was also exempt Under Section 10(34). The A.O. during the assessment proceedings, asked the assessee to explain as to why the deduction Under Section 10(29) should not be denied in respect of receipts not directly related to warehousing activities. He also asked for the bifurcation of exempted and non-exempted income with a view to applying the provisions of Section 14A as per which expenditure relatable to the exempted income could not be allowed as a deduction. As the assessee did not give the necessary details and bifurcation, the A.O. disallowed the entire claim of exemption Under Section 10(29). The assessee had claimed the entire income as exempt on the ground that it had one indivisible business and therefore, expenditure in relation to the exempted income could not be disallowed in such cases following the judgement of Hon'ble Supreme Court in case of Rajasthan State Warehousing Corporation (supra). In appeal, CIT(A) held that the business of CFS/ICD was not separate line of business but only the storage charges received by the assessee in respect of CFS/ICD activities would qualify for exemption Under Section 10(29). He also held that the assessee was entitled to exemption Under Section 10(29) only in respect of warehousing charges and not in respect of other income such as interest etc. CIT(A) also examined the applicability of Section 14A. It was held by him that in view of the amendment made by the Finance Act 2002, the provisions of Section 14A were effective only from 11.5.2001 and therefore, not applicable to the present case which related to Assessment year 2000-01. As the provisions of Section 14A were not applicable, CIT(A) held that expenditure in relation to exempted income could not be disallowed following the judgement of Hon'ble Supreme Court in case of Rajasthan State Warehousing Corpn. (Supra), as the assessee had one indivisible business. 4.1 The power of CIT to modify an assessment made by the A.O. has to be examined in the background of the case given in the preceding para. CIT can modify the assessment Under Section 263 only when the assessment made is found to erroneous and prejudicial to the interest of the revenue. Further, as per Clause (c) of the Explanation to Sub-section (1) of Section 263, in case, the assessment order passed by the A.O. is disputed in appeal, CIT cannot exercise jurisdiction Under Section 263 in respect of matters considered and decided in appeal. CIT in this case, issued notice Under Section 263 for modifying the assessment in respect of disallowance of depreciation on the warehousing building, disallowance of expenses in relation to exempt dividend income and prior period expenses. CIT had proposed to disallow the expenses and depreciation Under Section 14A as income from warehousing and dividend was exempt. WE find that this issue had already been considered by CIT(A) who had specifically examined the allowability of expenses with respect to the provision of Section 14A in respect of exempted income but held that provisions of Section 14A were not applicable and the expenses in relation to exempted income could not be disallowed following judgement of Hon'ble Supreme Court in case of Rajasthan State Warehousing Corporation (supra). Therefore, we find force in the argument of the Ld. A.R. that depreciation on warehousing building and the expenses relating to the dividend income which had already been considered by CIT(A) could not be considered by CIT Under Section 263. Proper remedy in such a case would be to appeal against the order of CIT(A) and not action Under Section 263. As regards the prior period expenses, the CIT had proposed to disallow only a sum of Rs. 2.58 crores whereas the Ld. A.R. has pointed out that the assessee in the revised computation of income had already added a sum of Rs. 2.7 crores on account of prior period expenses. The ld Sr. DR appearing for the revenue could not controvert the factual submissions made by the Ld. A.R. As the assessee had already added prior period expenses more than the sum proposed by CIT Under Section 263, the order of the A.O. could not be said to be prejudicial to the interest of revenue. In view of the foregoing discussion we are of the opinion that the CIT on the facts of the case, had no power to exercise jurisdiction Under Section 263. Accordingly, we set aside the order of CIT passed Under Section 263 and allow the appeal of the assessee.;


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