2008 (5) TMI 633 - HC - Income Tax

Order Passed u/s 263 by CIT(A) without jurisdiction - Claim for interest due on sticky loans - Whether the Tribunal was right in law in allowing the assessee s claim regarding interest due on sticky loans? - Claim discount on bonds and debentures as allowable expenditure - HELD THAT - The CIT has power to exercise jurisdiction, if the order of the Income-tax Officer is erroneous and prejudicial to the interest of the Revenue. An incorrect assumption of fact or an incorrect application of law would satisfy the requirement of the order being erroneous - The expression prejudicial to the interest of Revenue as understood in its ordinary meaning is of wide import and not confined to the loss of tax alone. If due to an erroneous order of the AO, the revenue is loosing, as lawfully payable by a person, it should be certainly prejudicial to the interest of Revenue Malabar Industrial Co. Ltd. v. CIT 2000 (2) TMI 10 - SUPREME COURT , Rampyari Devi Saraogi v. CIT 1967 (5) TMI 10 - SUPREME COURT and Smt. Tara Devi Aggrawal v. CIT 1972 (11) TMI 2 - SUPREME COURT . While setting aside the assessment order, the CIT noted that the Income-tax Officer passed the order without any material on record. Admittedly, the Circular has also not been considered by the AO. In our view, the AO failed to apply its mind in its correct perspective and the order passed by him is erroneous. There is no material on record to support the decision arrived at by the Tribunal. In this background, the Tribunal, therefore, was wrong in arriving at its conclusion that the CIT had exceeded its jurisdiction while setting aside the same. The CIT rightly exercised his power u/s 263(1) of the Act - Questions of law Nos. 1 and 3 are answering accordingly. Whether the Tribunal was right in law in holding that the discount pertaining to bonds issued up to 31-3-1976 and thus relating to AY 1976-77 was allowable in the AY 1977-78, the previous year in respect of which ended on 31-3-1977? - This issue is squarely covered by a decision rendered by this Court in H.P. Financial Corpn. Ltd. v. CIT 1997 (5) TMI 19 - HIMACHAL PRADESH HIGH COURT held that it is not necessary for the assessee to make out a case of actual expenditure before claiming allowable deduction under the provisions of section 37 of the Act - Question is answered accordingly as admittedly having been covered by the aforesaid decision. The matter is remanded back to the AO to frame fresh assessment order in view of our aforesaid observations.

Summary

Issues Involved:
1. Interpretation of Income-tax Act regarding interest due on sticky loans.
2. Allowability of discount on bonds issued in a specific assessment year.
3. Jurisdiction of the Commissioner of Income-tax in setting aside an assessment order.

Analysis:

Issue 1:
The case involved questions regarding the correctness of the Income-tax Appellate Tribunal's decision on the assessee's claim regarding interest due on sticky loans. The Commissioner of Income-tax set aside the assessment order, directing reassessment based on the evidence provided by the assessee. The Tribunal, relying on a previous decision, found the Commissioner's order to be without jurisdiction. However, the High Court determined that the Tribunal's decision was incorrect as the Commissioner rightly exercised power under section 263(1) of the Act. The Tribunal's conclusion lacked supporting material, and the Assessing Officer failed to consider relevant Circulars during assessment, leading to an erroneous order.

Issue 2:
Regarding the allowance of discount on bonds issued in a specific assessment year, the High Court referenced a previous decision to affirm that the discount amount should be spread proportionately over the years for which the bonds were issued. The Court held that the discount was an allowable expenditure under section 37 of the Act, emphasizing that actual expenditure proof was not necessary for claiming a deduction. The Court directed the Assessing Officer to frame a fresh assessment order based on this interpretation.

Issue 3:
The jurisdiction of the Commissioner of Income-tax in setting aside an assessment order was also a key issue. The High Court clarified that an incorrect assumption of fact or law could render the order erroneous and prejudicial to the interest of Revenue. The Commissioner's power under section 263(1) of the Act allowed for correction of such errors. The Court emphasized that the Commissioner rightly exercised jurisdiction in this case, as the Assessing Officer's order lacked material and failed to consider relevant Circulars, leading to an erroneous decision.

In conclusion, the High Court answered the questions referred to it, remanding the matter back to the Assessing Officer for a fresh assessment order based on the Court's observations. The judgment highlighted the importance of following legal provisions and considering all relevant factors in making tax assessments to ensure accuracy and fairness in tax matters.