1987 (9) TMI 61 - AT - Income Tax

Revision, Order Prejudicial To Interests Of Revenue, Business Expenditure, Year In Which Deductible

Summary

Issues Involved:
1. Legality of initiating proceedings under section 263 of the Income-tax Act.
2. Merits of deductibility of excise duty liability.

Detailed Analysis:

1. Legality of Initiating Proceedings under Section 263 of the Income-tax Act

Arguments by the Assessee:
The assessee challenged the initiation of proceedings under section 263 on several grounds:
- Assessments made under Section 143(3)/144B: The assessee argued that since the assessments were made as per the directions of the Inspecting Assistant Commissioner (IAC) under section 144B, the Commissioner of Income-tax could not revise the decision under section 263, as it would essentially be revising the decision of the IAC, not the Income-tax Officer (ITO).
- Vagueness of Show Cause Notice: The show cause notice issued by the Commissioner of Income-tax was argued to be vague and not intelligible, as it only stated that "the deduction of excise duty was incorrectly allowed" without specifying the reasons.
- Non-erroneous Orders: The assessee claimed that the orders passed by the ITO were not erroneous as they were backed by various reported decisions of the Supreme Court and High Courts.
- No Prejudice to Revenue: Specifically for the assessment year 1979-80, the total income of the assessee remained Nil both before and after giving effect to the order of the Commissioner of Income-tax, indicating no loss to the revenue.

Arguments by the Department:
- The department contended that the Commissioner of Income-tax had exercised her revisionary powers to revise the decision of the ITO, not the IAC.
- The amendments made to section 263 with effect from 1-10-1984 empowered the Commissioner to review and revise assessments framed under section 143(3)/144B, irrespective of when the assessment order was passed.
- The overall effect of the assessments, including adjustments and carry forwards, needed to be considered to determine if the original orders were erroneous and prejudicial to the interest of the revenue.

Tribunal's Decision:
The Tribunal upheld the assumption of jurisdiction by the Commissioner of Income-tax under section 263, stating that:
- The Commissioner was empowered to assume jurisdiction under section 263 even if the assessment was framed under section 143(3)/144B, post the amendment effective from 1-10-1984.
- The assessee was fully aware of the reasons behind the Commissioner's decision to assume jurisdiction, as evidenced by the detailed correspondence.
- The original orders were erroneous and prejudicial to the interest of the revenue, justifying the Commissioner's action.

2. Merits of Deductibility of Excise Duty Liability

Arguments by the Assessee:
- The assessee maintained books on a mercantile system of accounting, and excise duty is levied on the manufacture/production of goods.
- The provisions for excise duty were made based on a demand notice dated 24-6-1980 for the period from 1-10-1975 to 31-1-1978.
- The assessee argued that the liability had crystallized during the years under appeal and should be allowed as a deduction, relying on principles from various reported decisions, including the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT.
- The assessee emphasized that if the writ petition challenging the excise duty was decided in its favor, the amounts could be taxed under section 41(1) in the year of the decision.

Arguments by the Department:
- The department argued that the liability had not crystallized during the years under appeal as no demand notice was served during those years.
- The assessee's reliance on the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. was misplaced, as the facts differed significantly.
- The department cited various cases to support its contention that the liability could only be recognized when a demand notice was served.

Tribunal's Decision:
The Tribunal found considerable merit in the assessee's arguments and held:
- The assessee, following a mercantile system of accounting, was justified in claiming the deduction of excise duty liability based on the demand notice received for the earlier period.
- The liability had indeed crystallized during the years under appeal, and the ITO/IAC had rightly allowed the deductions in the original assessments.
- The Tribunal noted that the Commissioner of Income-tax had not revised the ITO's order for the assessment year 1981-82, despite similar circumstances, further supporting the assessee's position.
- The Tribunal set aside the order of the Commissioner of Income-tax, thereby allowing the deductions for the excise duty liabilities.

Conclusion:
The appeals were partly allowed, with the Tribunal upholding the assumption of jurisdiction under section 263 but siding with the assessee on the merits of the deductibility of the excise duty liabilities.