1991 (5) TMI 101 - AT - Income Tax

Summary

Issues Involved:

1. Validity of the CIT's order under section 263 of the I.T. Act, 1961.
2. Method of accounting for newsprint taken on loan.
3. Non-charging of interest on debit balances of group companies.

Detailed Analysis:

1. Validity of the CIT's order under section 263 of the I.T. Act, 1961:

The assessee raised a preliminary objection that the CIT's order was ab initio void as it was not based on the record available at the time the AO passed his order. The assessee argued that materials collected by the IAC after the assessment order could not form part of the records. The Tribunal rejected this objection, stating that the material relied upon by the CIT was available on the record, and the letter from the IAC did not introduce new facts that formed the basis for the CIT's opinion that the AO's order was erroneous and prejudicial to the interest of the revenue.

2. Method of accounting for newsprint taken on loan:

The assessee had been following a method of accounting where the value of newsprint taken on loan from group companies was debited to the consumption account at the prevailing market price. The CIT argued that this method resulted in a notional debit, which was a contingent liability. The Tribunal disagreed, stating that the revised method of accounting adopted by the assessee was more scientific and capable of reflecting true profits and losses. The Tribunal emphasized that it is permissible for an assessee to change from one recognized method of accounting to another, provided it is consistently followed thereafter. The Tribunal concluded that the CIT was not justified in holding that the AO's order was erroneous and prejudicial to the revenue.

3. Non-charging of interest on debit balances of group companies:

The CIT noted that the assessee did not charge interest on substantial debit balances of group companies, which was against its earlier practice. The assessee contended that the debit balances occurred due to inter-corporate transactions and not due to advances. The Tribunal found that the debits were mostly on account of group companies receiving revenues on behalf of the assessee and that it would be wrong to determine interest on a notional basis on such debit balances. The Tribunal rejected the CIT's findings, stating that the failure of sister concerns to transfer funds did not amount to conversion of collections to loans. The Tribunal referred to the decision of the Bombay High Court in CIT v. Bombay Samachar Ltd. and concluded that disallowance of interest on this ground was unjustified.

Conclusion:

The Tribunal concluded that the CIT's order under section 263 could not be upheld. The revised method of accounting adopted by the assessee was more scientific and reflected true profits and losses. The non-charging of interest on debit balances was justified based on the nature of inter-corporate transactions. The Tribunal allowed the appeal and canceled the CIT's order.