2004 (12) TMI 622 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of CIT under section 263 of the Income-tax Act, 1961.
2. Classification of interest on hundies and finance charges as business income.
3. Opportunity of being heard and principles of natural justice.
4. Validity of the certificate under section 35AC and its implications.
5. Reopening of assessment under section 147 and its impact on section 263 proceedings.
6. Allowability of deductions under section 35AC.

Issue-wise Detailed Analysis:

1. Jurisdiction of CIT under section 263 of the Income-tax Act, 1961:
The assessee challenged the CIT's jurisdiction under section 263, arguing that the CIT had overstepped by questioning the withdrawal of approval granted under section 35AC, which was not relevant to the assessee's case. The CIT's action was based on the belief that the assessment orders were erroneous and prejudicial to the interests of revenue because the claimed deductions under section 35AC were not properly scrutinized. The Tribunal, however, found that the Assessing Officer had duly verified the records and allowed the deductions based on valid certificates, thus negating the CIT's jurisdiction to invoke section 263.

2. Classification of interest on hundies and finance charges as business income:
The CIT had held that interest on hundies and finance charges did not constitute business income. The assessee contended that these had been assessed as business income for decades. The Tribunal supported the assessee's view, citing various decisions (e.g., Mazagaon Dock Ltd. v. CIT) that broadly construed the term "business." It was determined that the interest on hundies and finance charges should indeed be considered as business income.

3. Opportunity of being heard and principles of natural justice:
The assessee argued that they were not given a proper opportunity to be heard, as the CIT's inspection of the premises occurred shortly before the order was passed, and the results of this inspection were not communicated to the assessee. The Tribunal agreed, emphasizing that the principles of natural justice were violated since the assessee was not confronted with the findings of the CIT's inspection.

4. Validity of the certificate under section 35AC and its implications:
The CIT questioned the validity of the certificate under section 35AC, suggesting that the Basketball Complex was used for private purposes rather than for the approved project. The Tribunal noted that the approval by the national committee was valid during the assessment periods in question. Any issues regarding the misuse of the facility should have been addressed by withdrawing the approval through the proper channels, not by disallowing the deductions claimed by the assessee.

5. Reopening of assessment under section 147 and its impact on section 263 proceedings:
The assessee contended that once the Assessing Officer had reopened the assessment under section 147 and issued a notice under section 148, the CIT had no jurisdiction to invoke section 263. The Tribunal supported this view, referencing the Gujarat High Court's decision in CIT v. Arvind Jewellers, which stated that a different view by the CIT should not form the basis for invoking section 263 if the Assessing Officer had already taken a particular view.

6. Allowability of deductions under section 35AC:
The CIT argued that the deductions under section 35AC were not allowable as the income did not qualify as business income. The Tribunal, however, referred to its previous decision in ITO v. O.T. Gandhi & Sons, which allowed deductions under section 80GGA(2)(bb) in conjunction with section 35AC, regardless of whether the income was from business. The Tribunal concluded that the Assessing Officer had properly verified and allowed the deductions, and there was no basis for the CIT's disallowance.

Conclusion:
The Tribunal set aside the revisional order of the CIT, restoring the assessment orders and allowing the appeals in favor of the assessee. The Tribunal emphasized that the Assessing Officer had conducted a proper inquiry and that the CIT's action under section 263 was unwarranted. The principles of natural justice were upheld, and the validity of the deductions under section 35AC was confirmed.