1996 (1) TMI 444 - AT - Income Tax

Summary

Issues Involved:
1. Whether the order under Section 263 was passed in violation of the principles of natural justice.
2. Whether there was an error in the assessment orders that was prejudicial to the interests of the Revenue.
3. Whether the method of accounting adopted by the assessee for income-tax purposes was correct.

Issue-wise Detailed Analysis:

1. Violation of Principles of Natural Justice:
The assessee contended that the order under Section 263 was passed without providing an opportunity to be heard, violating the principles of natural justice. The CIT rejected the adjournment request due to the impending time-limit for passing the order under Section 263, which would expire by 31st March 1994. The Tribunal found merit in the assessee's contention, stating that the CIT reached a conclusion without affording an effective opportunity to the assessee to present its case. This was particularly relevant for the assessment year 1990-91, where the time-limit for passing the order under Section 263 did not expire by 31st March 1994, yet the assessee was not given a chance to be heard. Thus, on this ground alone, the orders of the CIT for both assessment years were liable to be set aside.

2. Error in Assessment Orders Prejudicial to Revenue:
The CIT believed that the assessments should have been based on the reducing balance method, as used in the assessee's books, rather than the EMI method used for income-tax purposes. The Tribunal observed that the assessments were completed under Section 143(3) read with Section 115J after scrutiny and discussion, and the book profits under Section 115J were larger than the profits computed under other provisions of the IT Act. The consequential assessment after the CIT's order resulted in the same figures for both years, indicating no error prejudicial to the interests of the Revenue. Therefore, the Tribunal held that there was no error in the assessment orders that warranted the invocation of Section 263.

3. Method of Accounting for Income-Tax Purposes:
The assessee used the EMI method for income-tax purposes, while the reducing balance method was used in its books. The Tribunal emphasized that the method of accounting should align with the terms of the agreement between the parties. The agreements specified the EMI method, which was deemed the appropriate method for recognizing income. The Tribunal clarified that the terms "reducing balance method," "SOD method," and "EMI method" are techniques of accounting and not synonymous with the "method of accounting" as understood in income-tax law. The Tribunal concluded that the AO correctly computed the income using the EMI method, which was in accordance with the agreement, and thus, there was no error in the assessment orders.

Conclusion:
The Tribunal set aside the orders of the CIT passed under Section 263 for both assessment years, allowing the appeals. The Tribunal found that the orders were passed in violation of the principles of natural justice, there was no error in the assessment orders prejudicial to the interests of the Revenue, and the EMI method adopted by the assessee for income-tax purposes was correct and in accordance with the agreements.