2003 (7) TMI 646 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction under section 263 of the Income-tax Act.
2. Nature of interest expenditure - whether capital or revenue.
3. Verification of deduction under section 80-I of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income-tax Act:
The primary issue was whether the Commissioner of Income-tax (CIT) exceeded her jurisdiction under section 263 of the Income-tax Act. The CIT believed the Assessing Officer's (AO) order was erroneous and prejudicial to the interests of the Revenue, thus invoking section 263. The assessee argued that the CIT's assumption of jurisdiction was not vested in her by law, making the order ab initio void and bad in law. The Tribunal emphasized that for the CIT to assume jurisdiction under section 263, she must prima facie satisfy herself that the AO's order is erroneous and prejudicial to the Revenue's interests, based on material on record. The Tribunal referred to the decision in CIT v. Gabriel India Ltd. [1993] 203 ITR 108, which states that the assumption of jurisdiction under section 263 cannot be made casually or arbitrarily.

2. Nature of Interest Expenditure - Capital or Revenue:
The AO had allowed the interest paid to land developers as revenue expenditure. The CIT, however, concluded that this interest was related to the acquisition of a capital asset and should be considered a capital expenditure. The assessee contended that the agreement primarily provided for a lease with an option to purchase, and the interest was debited to the profit and loss account as a revenue expenditure. The Tribunal noted that the agreement consisted of three parts: availing of the lease, financing the sum by the developer, and an option to purchase. The Tribunal concluded that the essence of the agreement was lease, and the interest expenditure was of a revenue nature. The AO's view was one of the permissible views in law, and the CIT could not substitute her discretion for that of the AO.

3. Verification of Deduction under Section 80-I:
For the assessment year 1996-97, the CIT directed the AO to verify the assessee's claim for deduction under section 80-I of the Income-tax Act. The Tribunal's Accountant Member did not discuss this issue in his order. The Judicial Member, however, upheld the CIT's exercise of power under section 263, stating that granting deduction under section 80-I without verification of material is erroneous and prejudicial to the interests of the Revenue. The Third Member did not comment on this issue as there was no conflict in the orders regarding this aspect.

Conclusion:
The Tribunal's Accountant Member quashed the CIT's orders under section 263, allowing the assessee's appeals. The Judicial Member dissented, upholding the CIT's orders. The Third Member agreed with the Judicial Member, concluding that the conditions precedent for assuming jurisdiction under section 263 existed. The matter was to be decided by the regular Bench in accordance with the majority opinion.