IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA 1. I.T.Appeal No. 1 of 2002. 2. I.T.Appeal No. 2 of 2002. 3. I.T.Appeal No. 9 of 2004. 4. I.T.Appeal No.10 of 2004. Judgment reserved on: 4.11.2008 Date of decision: 3.12.2008 HP State Industrial Development Corporation Ltd. …..Appellant Versus Commissioner of Income Tax Shimla …. Respondent. Coram The Hon’ble Mr. Justice Jagdish Bhalla, Chief Justice The Hon’ble Mr. Justice Kuldip Singh, Judge. Whether approved for reporting?1 Yes For the Appellant : Mr. Vishal Mohan, Advocate ( In all the appeals) For the Respondent : Mr. Vinay Kuthiala, Advocate. ( In all the appeals) Kuldip Singh, Judge. The learned counsel for the parties have submitted that in ITA Nos.1 of 2002 and 2 of 2002 common substantial questions of law are involved, similarly in ITA Nos.9 of 2004 and 10 of 2004 identical questions of law are involved. On the joint request of learned counsel for the parties, all the four appeals were heard together, hence this judgment shall dispose of ITA Nos. 1 of 2002, 2 of 2002, 9 of 2004 and 10 of 2004. Whether the reporters of the local papers may be allowed to see the Judgment?Yes 2. The brief facts of each appeal are given herein below separately. I.T.Appeal No.1 of 2002 This appeal has been filed under Section 260 A of Income Tax Act, 1961 read with Section 21 of the Interest Tax Act, 1974 ( for short, Act) against the order dated 11.9.2001 passed by Income Tax Appellate Tribunal, (ITAT), Chandigarh Bench passed in Interest Tax Appeal Nos.1, 2/Chd/2000 for the assessment year 1993-94. The further facts are that assessee filed the return for the AY 1993-94 ( 1.10.1992 to 31.3.1993 ) of chargeable interest Rs.60,04,8248/-on 31.12.1993 and the interest tax was charged at the rate of 3% on the basis of interest actually received during the previous year relevant to AY 1993-94. The assessment was completed under Section 8(2) of the Act vide order dated 10.3.1995 of Deputy Commissioner Income Tax, Special Range, Solan. The Assessing Officer issued notice under Section 10 of the Act for reopening of the assessment on 4.12.1995. The re-assessment proceedings under Section 8(2) read with Section 10 of the Act were completed vide order dated 20.2.1998 passed by Deputy Commissioner Income Tax, Special Range, Solan vide which chargeable interest was assessed at Rs.11,62,76,000/-. The order dated 20.2.1998 was assailed in appeal which was dismissed by Commissioner Income Tax (Appeals) on 10.2.2000. The order dated 10.2.2000 was further assailed by way of appeal before ITAT, which was dismissed on 11.9.2001. The order dated 11.9.2001 has been assailed by the assessee in this Court by way of ITA No.1 of 2002. I.T.Appeal No.2 of 2002 3. This appeal has been filed under Section 260 A of Income Tax Act, 1961 read with Section 21 of the Interest Tax Act, 1974 ( for short, Act) against the order dated 11.9.2001 passed by Income Tax Appellate Tribunal, ( ITAT), Chandigarh Bench passed in Interest Tax Appeal Nos.1, 2/Chd/2000 for the assessment year 1992-93. The further facts are that assessee filed the return for the AY 1992-93 (1.10.1991 to 31.3.1992) of chargeable interest Rs.2,33,23,994 on 29.11.1994 and the interest tax was charged at the rate of 3% on the basis of interest actually received during the previous year relevant to AY 1992-93. The assessment was completed under Section 8(2) of the Act vide order dated 14.3.1995 of Deputy Commissioner Income Tax, Special Range, Solan. The Assessing Officer issued notice under Section 10 of the Act for reopening of the assessment on 4.12.1995. The re-assessment proceedings under Section 8(2) read with Section 10 of the Act were completed vide order dated 20.2.1998 passed by Deputy Commissioner Income Tax, Special Range, Solan vide which chargeable interest was assessed at Rs.5,12,39,000/-. The order dated 20.2.1998 was assailed in appeal which was dismissed by Commissioner Income Tax ( Appeals) on 10.2.2000. The order dated 10.2.2000 was further assailed by way of appeal before ITAT, which was dismissed on 11.9.2001. The order dated 11.9.2001 has been assailed by the assessee in this Court by way of ITA No.2 of 2002. I.T.Appeal No.9 of 2004 4. This appeal has been filed under Section 260 A of Income Tax Act, 1961 read with Section 21 of the Interest Tax Act, 1974 ( for short, Act) against the order dated 9.12.2003 passed by Income Tax Appellate Tribunal, (ITAT), Chandigarh Bench passed in Interest Tax Appeal No. 2/Chandi/2003 for the assessment year 2000-2001. The further facts are that assessee filed the return for the AY 2000-2001 of chargeable interest Rs.57073965/- on 18.3.2002 and the assessment was completed under Section 8(2) of the Act on 14.6.2002 by Deputy Commissioner Income Tax, Circle, Shimla. The order dated 14.6.2002 was assailed by the assessee before Commissioner Income Tax ( appeals) , Shimla which was dismissed on 12.12.2002. The assessee filed appeal against the order dated 12.12.2002 before ITAT which was dismissed on 9.12.2003. The assessee has filed appeal against the order dated 9.12.2003 in this Court. I.T.Appeal No.10 of 2004 5. This appeal has been filed under Section 260 A of Income Tax Act, 1961 read with Section 21 of the Interest Tax Act, 1974 ( for short, Act) against the order dated 9.12.2003 passed by Income Tax Appellate Tribunal, (ITAT), Chandigarh Bench passed in Interest Tax Appeal No. 1/Chandi/2003 for the assessment year 1996- 97. The further facts are that assessee filed the return for the AY 1996-97 of chargeable interest Rs.7199503/- on 30.11.1996 and the assessment was completed under Section 8(2) of the Act on 8.1.2002 by Deputy Commissioner Income Tax, Circle, Shimla. The order dated 8.1.2002 was assailed by the assessee before Commissioner Income Tax ( appeals), Shimla which was dismissed on 21.11.2002. The assessee filed appeal against the order dated 21.11.2002 before ITAT which was dismissed on 9.12.2003. The assessee has filed appeal against the order dated 9.12.2003 in this Court. 6. The I.T. appeals Nos. 1 and 2 of 2002 were admitted on identical five substantial questions of law but at the time of hearing learned counsel for the appellant in both the appeals has confined his submissions only on following substantial questions of law :- 1. Whether under the facts and circumstances of the case the tribunal is justified as per provisions of law in upholding the action of the learned A.A. in initiating the reassessment proceedings under Section 10 of the Interest Tax Act of 1974 and in consequence of the same made thereby upholding the reassessment? 2. Whether, under the facts and circumstances of the case the Tribunal was not justified by not giving any relief in respect of the interest earned on refinance operations and the said interest being payable to various Financial Institutions like IDBI, ICICI, IFCI, UTI and Apex Financial Institutions wherein the said Institutions have an overriding title as getting the refinance and lending of money to its constituents are integrated transactions and the interest payable to the said institutions need to be excluded from the taxable interest? 7. The I.T. Appeal Nos. 9 and 10 of 2004 have been admitted on following identical substantial questions of law:- 1 Whether, under the facts and circumstances of the case the Tribunal was not justified by not giving any relief in respect of the interest earned on refinance operations and the said interest being payable to various Financial Institutions like IDBI, ICICI, IFCI, UTI and Apex Financial Institutions wherein the said Institutions have an overriding title as getting the refinance and lending of money to its constituents are integrated transactions and the interest payable to the said institutions need to be excluded from the taxable interest? 2 That there is no judgment on the said issue by this Hon’ble Court and the Hon’ble Supreme Court of India? 8. We have heard Mr. Vishal Mohan, learned counsel for the appellant in each appeal and Mr. Vinay Kuthiala, learned counsel for the respondent and gone through the record. On behalf of the appellant it has been submitted that ITAT was not justified in not giving relief to the assessee in respect of interest earned on refinance operations, as the interest was payable by the various Financial Institutions like IDBI, IFCI, ICICI, UTI, SIDBI and Apex financial institutions who have overriding title and the interest payable to those institutions needs to be excluded from the taxable interest. In I.T. Appeal Nos.1,2 of 2002 it has been additionally submitted that reopening of the case in both the appeals by the revenue against the assessee was illegal and not sustainable. The assessment orders passed by the Assessing Officer could not have been reopened and therefore, re-assessment orders of the assessee in I.T. Appeal Nos.1,2 of 2002 are wrong and not sustainable. The learned counsel for the respondent in each appeal has supported the impugned order. Substantial questions of law No.1 in I.T. Appeal Nos.1 and 2. 9. In CIT vs. British Paints India Ltd. 188( 1991) ITR 44 it has been held that assessing officer has to determine the fact whether or not the books disclose the true state of accounts and the correct income can be deduced from the books of account, and this question has to be decided with reference to relevant material on record. The assessing officer is not duty bound to accept the system of accounting regularly employed by the assessee, correctness of which has not been questioned in the past, if under such system correct income cannot be determined. ITAT has noticed 188 (1991) ITR 44 in the order dated 11.9.2001. ITAT after noticing sub section (3) of Section 7 of the Act has further observed that assessee is obliged and is duty bound to submit the return of the chargeable interest by the date mentioned in Section 7 . According to ITAT chargeable interest means amount of interest accruing or arising to the credit institution in the previous year. The assessing officer is duty bound to tax the correct chargeable income as per law irrespective of the system of accounting followed by the assessee. If the system of accounting cannot give correct figure of chargeable interest under the Act such system is to be rejected and correct interest income is to be brought to tax. ITAT has returned the findings that chargeable interest can not be computed on the basis of cash system of accounting as was followed by the assessee in the past. ITAT has also held that return filed by the assessee on 29.11.1994 for the AY 1992-93, was invalid return as it was filed beyond the time prescribed under the statute. The assessing officer on the basis of such a return could not proceed and assessment based upon such return is also void and without jurisdiction and could be reopened under Section 10(a) of the Act. 10. The learned counsel for the appellant has submitted that assessing officer vide order dated 14.3.1995 and order dated 10.3.1995 had accepted the returns of the assessee for the AY 1992- 93 and the AY 1993-94 respectively. The return for the AY 1992-93 was filed on 29.11.1994 and that of AY 1993-94 on 31.12.1993. He has submitted that ITAT has misinterpreted Section 7 of the Act. According to sub section 1 of Section 7 the financial institution shall furnish a return of the chargeable interest of the credit institution of the previous year in the prescribed form before 31st of December of the assessment year. The sub section (3) of Section 7 further prescribes that any assessee who has not furnished a return within the time allowed under sub section (1) or sub section (2), or having furnished a return under sub section (1) or sub section (2), discovers any omission or wrong statement therein, may furnish a return or a revised return, as the case may be, at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. It is clear from sub section (3) of Section 7 that an assessee who has not furnished a return within the time allowed under sub section (1) or sub section (2), discovers any omission or wrong statement therein may furnish a return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. In case of AY 1992-93 under sub section(1) of Section 7 the date of filing of the return was 31st December of that assessment year. This period under sub section (3) of Section 7 was extendable before the expiry of one year from the end of the relevant assessment year. The assessee for AY 1992-93 could file the return before 31.3.1994 but assessee filed the return for AY 1992-93 on 29.11.1994 and was thus beyond prescribed limit. The assessee filed the return of AY 1993-94 on 31.12.1993, under sub section (3) of Section 7, this return could be filed by the assessee till 31.3.1995, hence the assessee filed the return for AY 1993-94 within prescribed limit, ITAT has also not held that return filed by the assessee for the AY 1993-94 was not as per Section 7. The question is whether for the reasons stated in assessment reopening orders dated 20.2.1998 assessment orders for the AY 1992-93 and AY 1993-94 could be reopened by the assessing officer under Section 10 of the Act. 11. The assessing officer in separate reopening orders dated 20.2.1998, for AY 1992-93 and for AY 1993-94 after noticing judgment dated 28.8.1995 in M/s. Himachal Pradesh State Financial Corporation Ltd. of CIT(A), Shimla rejected the contention of assessee to assess the chargeable interest on the basis of cash system of accounting i.e. receipt basis on the ground that the same will be levied on interest income accruing or arising. The assessing officer in the reopening order dated 20.2.1998 has not recorded a finding that chargeable interest cannot be computed on the basis of cash system of accounting adopted by the assessee, nor a finding has been given that returns filed by the assessee for the AY 1992-93 and AY 1993-94 were factually incorrect. Late filing of return for AY 1992-93 had not affected the merits of the decision dated 10.3.1995 of the assessing officer. The original assessment orders were opened on the basis of decision dated 28.8.1995 of CIT(A), Shimla in M/s. Himahal Pradesh State Financial Commission. 12. The Apex Court in Kerla State Industrial Development Corpn. Ltd. Vs. Commissioner of Income-Tax 259 (2003) ITR 51 after considering the findings of the High Court that the chargeable interest, in terms of section 5 of the Act was the total amount of interest accruing in the relevant previous year and that there was no scope in the section to read ‘chargeable interest’ as meaning the amount actually received in the relevant previous year, has held as follows:- “The assessee, in the case before us, has followed the cash system of accounting in respect of the interest income. The learned counsel appearing on behalf of the assessee, therefore, has, in our opinion rightly, contended that section 5 of the Interest-tax Act would in the circumstances allow the calculation or computation of chargeable interest on the basis of the amount of interest actually received”. In view of the law laid down by the Apex Court , the assessing officer in the reassessment orders dated 20.2.1998 has wrongly rejected the contention of the assessee to assess the chargeable interest on the basis of cash system of accounting i.e. receipt basis. The assessing officer in reopening orders dated 20.2.1998 has not held that interest could not be computed on the basis of cash system of accounting adopted by assessee. 13. The assessment was reopened on the basis of another order of CIT(A), Shimla in M/s. Himachal Pradesh Financial Corporation Ltd. where the plea of assessee that the chargeable interest may be assessed on cash system was not accepted. The learned counsel for the revenue has submitted that order of CIT(A), Shimla in M/s. Himachal Pradesh Financial Corporation Ltd. came to the notice of assessing officer after passing the assessment orders for the AY 1992-93 and AY 1993-94, therefore, said order is an information under clause(b) of Section 10 of the Act. There is no substance in this submission of the learned counsel for the revenue. The Apex Court in Kerla State Industrial Development Corpn. Ltd. Vs. Commissioner of Income-Tax 259 (2003) ITR 51 has held that Section 5 of the Act allows the calculation or the computation of the chargeable interest on the basis of amount of interest actually received. In these circumstances, the assessment could not have been reopened on the basis of judgment of CIT(A), Shimla in another case holding that the chargeable interest cannot be assessed on the basis of cash system of accounting. In Commissioner of Income Tax vs. Tarajan Tea Co. (P) Ltd. 236(1999) ITR 477 after noticing Section 147 (a) (b) of the Income Tax Act ,1961 which was similar to Section 10(a)(b) of the Act, it has been held that order passed by the Assistant Commissioner, in another case is not information within the meaning of the Section 147, hence neither clause (a) nor clause (b) of Section 147 would apply. Therefore in view of 236 (1999) ITR 477 the decision in CIT(A), Shimla in M/s. Himachal Pradesh Financial Corporation Ltd. cannot constitute as ‘information’ under Section 10 of the Act, for reopening the assessment. 14. ITAT in the impugned order has also observed that the return filed by the assessee for AY 1992-93 was not filed within the time, therefore, it was no return and any order passed on the basis of such return is nonest and could be reopened. The assessing officer has not reopened the assessment for AY 1992-93 on the ground that assessment was nonest as the assessee had filed return for AY 1992-93 beyond time, nor the late filing of the return has affected the decision on merits. In view of the findings recorded above, the reopening orders of assessments for AY 1992-93 and 1993-94 are not sustainable and the impugned orders in ITA Nos. 1 and 2 are liable to be set aside. The substantial questions of law No.1 in IT appeal Nos. 1 and 2 of 2002 are decided in favour of the assessee and against the revenue. Substantial question of Law No.2 in IT appeal Nos. 1 and 2 of 2002 and substantial question of law No.1 in IT appeal Nos.9 and 10 of 2004. 15. The learned counsel for the assessee has submitted that ITAT has erred in not giving any benefit to assessee in respect of interest earned on refinance operation and the said interest being payable to various financial institutions under different schemes. The assessee acts as a channelising agency and the financial institutions have overriding title to the interest which is chargeable from the loanee. The interest payable to the financial institutions needs to be excluded from taxable interest. The learned counsel for the revenue has submitted that as per sub-section 2 of Section 4 of the Act there shall be charged on every credit institution for every assessment year commencing on and from the Ist day of April, 1992, interest tax in respect of its chargeable interest of the previous year at the rate of 3% of such chargeable interest. The assessee being credit institution is liable to pay interest tax under the Act. In Commissioner of Income Tax vs. State Bank of Travancore 228 (1997) ITR 40 one of the question for consideration was-- “whether, on the facts and in the circumstances of the case, the interest earned on refinancing operations is to be excluded from the taxable interest”? 16. A Division Bench of Kerla High Court after noticing Industrial Development Bank of India Refinance Scheme has held that amount of interest represents the aspect of rediscounting and, therefore, cannot form part of the interest income of the assessee as chargeable under the provisions of the Act. and answered the above question in affirmative against the revenue and in favour of the assessee. The revenue has not taken the stand that in the present case terms and conditions of refinance of the assessee by the financial institutions during the relevant period were different from the terms and conditions noticed in ITR 228 (1997) ITR 40, hence judgment of Kerla High Court is fully applicable in the present case and substantial question of law No.2 in IT Appeal Nos.1 and 2 of 2002 and substantial question of law No.1 in IT appeal Nos. 9 and 10 of 2004 are decided in favour of the assessee and against the revenue. 17. The question No.2 in IT appeal Nos.9 and 10 of 2004 is no substantial question of law and is decided against the assessee. 18. No other point was urged. 19. The result of the above discussion, ITA Nos.1 of 2002, 2 of 2002, 9 of 2004 and 10 of 2004 are allowed. ITAT order dated 11.9.2001 for the AY 1993-94, ITAT order dated 11.9.2001 for the AY 1992-93, ITAT order dated 9.12.2003 for the AY 2000-2001 and ITAT order dated 9.12.2003 for the AY 1996-97 are set aside with no order as to costs. ( Jagdish Bhalla) Chief Justice ( Kuldip Singh), Judge. December 3 , 2008 (sks)