1982 (9) TMI 85 - AT - Income Tax

Summary

Issues Involved:
1. Justification of CIT(A) in setting aside the assessment under Section 263 of the IT Act, 1961.
2. Validity of the initiation of proceedings under Section 263 of the IT Act, 1961.
3. Merger of the ITO's order with the order of the CIT(A).
4. Entitlement to Investment Allowance under Section 32A of the IT Act, 1961.
5. Validity of depreciation allowance and adequacy of the notice provided by CIT.
6. Allowance of advertisement expenses.

Issue-wise Detailed Analysis:

1. Justification of CIT(A) in Setting Aside the Assessment under Section 263 of the IT Act, 1961:
The primary contention in this appeal was that the CIT(A) was not justified in setting aside the assessment under Section 263 of the IT Act, 1961. The CIT had initiated proceedings under Section 263(1) of the Act, issuing a notice to the assessee and subsequently passing an order that the assessment made by the ITO was erroneous and prejudicial to the interests of the revenue. The CIT directed the ITO to reframe the assessment, withdrawing the investment allowance under Section 32A, restricting advertisement expenses to Rs. 15,000, and allowing depreciation at a lower rate.

2. Validity of the Initiation of Proceedings under Section 263 of the IT Act, 1961:
The ld. counsel for the assessee argued that the initiation of proceedings under Section 263 was bad in law as it was done at the instance of the audit party and not by the CIT himself. The counsel pointed out that the CIT had acted on the advice of the audit and not on his own examination of the record. It was contended that the CIT should have independently called for and examined the record to consider if the ITO's order was erroneous and prejudicial to the interests of the revenue. The Tribunal agreed with this submission, noting that the CIT had not independently examined the record but had acted based on the audit party's observations.

3. Merger of the ITO's Order with the Order of the CIT(A):
The assessee argued that the ITO's order had merged with the order of the CIT(A) dated 22nd April 1980, and therefore, it could not be revised under Section 263. The Tribunal upheld this argument, citing the Allahabad High Court's decision in J.K. Synthetics Ltd. vs. Addl. CIT, which held that once an assessment order is appealed, the appellate authority can adjudicate on all findings, whether in favor of or against the assessee. Thus, the CIT had no jurisdiction to revise the ITO's order under Section 263 as it had merged with the CIT(A)'s order.

4. Entitlement to Investment Allowance under Section 32A of the IT Act, 1961:
On the merits, the assessee contended that it was entitled to the investment allowance under Section 32A. The Tribunal agreed, referencing its own decision in the assessee's case for earlier assessment years, where it was held that the assessee was entitled to such an allowance. The Tribunal reaffirmed that the ITO had correctly allowed the investment allowance in accordance with the law and decided authorities.

5. Validity of Depreciation Allowance and Adequacy of the Notice Provided by CIT:
The assessee argued that the notice issued by the CIT regarding the withdrawal of depreciation was vague and did not specify the items or extent of depreciation incorrectly allowed by the ITO. The Tribunal agreed, noting that the CIT had not provided a proper opportunity for the assessee to be heard on this issue. The Tribunal held that the CIT's order was invalid as it did not meet the requirements of Section 263(1) regarding jurisdiction and the opportunity to be heard.

6. Allowance of Advertisement Expenses:
The CIT had restricted the allowance of advertisement expenses to Rs. 15,000, whereas the ITO had allowed Rs. 1,49,879. The assessee contended that the CIT(A) had not considered the provisions of Section 37(2A) of the Act. However, the Tribunal did not find it necessary to address this issue separately, as it had already cancelled the CIT's order on other grounds.

Conclusion:
The Tribunal allowed the appeal, cancelling the order passed by the CIT under Section 263(1) of the IT Act, 1961, on the grounds that the initiation of proceedings was not valid, the ITO's order had merged with the CIT(A)'s order, and the assessee was entitled to the investment allowance. The Tribunal also noted the inadequacy of the notice regarding depreciation and the improper restriction of advertisement expenses.