2010 (3) TMI 884 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of Pass Book Benefit Receivable.
2. Entitlement to interest under section 244A.
3. Validity of proceedings under section 154.
4. Limitation period for rectification under section 154.
5. Jurisdiction and procedure under section 244A(2).

Issue-wise Detailed Analysis:

1. Taxability of Pass Book Benefit Receivable:
The assessee, a company, contended that the Pass Book Benefit Receivable should not be taxed in the assessment year 1997-98 as no income had accrued until the credit was received in the pass book. This issue was raised for the first time before the CIT(A), who held that the benefit receivable could not be taxed. Consequently, the Assessing Officer (AO) excluded the amount from the total income, resulting in a refund.

2. Entitlement to Interest under Section 244A:
The AO initially granted interest under section 244A on the refund. However, the CIT directed the AO to withdraw this interest, arguing that the claim for non-taxability was made for the first time before the CIT(A) and not in the original return, implying that the delay was attributable to the assessee. The AO, without giving notice or an opportunity to be heard, withdrew the interest. The ITAT restored the issue to the AO, directing that an opportunity be given to the assessee.

3. Validity of Proceedings under Section 154:
The assessee argued that the proceedings under section 154 were barred by limitation as they were initiated beyond the four-year period stipulated under section 154(7). The ITAT held that the order under section 154 passed by the AO pursuant to the ITAT's order was beyond time and could not be accepted, citing the Orissa High Court's decision in CIT v. Gangaram Chapolia & Co.

4. Limitation Period for Rectification under Section 154:
The assessee contended that the rectification order dated 26-8-2002 was passed beyond the four-year limitation period from the end of the financial year in which the original order was passed, making it time-barred and void. The ITAT agreed, noting that the limitation period could not be extended by the appellate order, as any order passed without following the principles of natural justice is a nullity.

5. Jurisdiction and Procedure under Section 244A(2):
The ITAT emphasized that when a dispute arises regarding the period to be excluded for interest calculation under section 244A, the AO must refer the matter to the Chief Commissioner or Commissioner. In this case, the CIT's letter directing the AO to withdraw interest was done without following the proper procedure and without giving the assessee an opportunity to be heard. The ITAT held that the AO's order under section 154 was bad in law as it did not comply with the procedure under section 244A(2).

Conclusion:
The ITAT allowed the appeal of the assessee, holding that the order under section 154 was not sustainable both on procedural grounds and on merits. The ITAT emphasized the necessity of following the proper procedure and providing the assessee with an opportunity to be heard, especially when the issue involves a potential exclusion of interest under section 244A.