2004 (5) TMI 236 - AT - Income Tax

Summary

Issues Involved:
1. Assumption of jurisdiction under section 263 of the Income-tax Act.
2. Allowability of interest paid as revenue expenditure.
3. Verification of deduction under section 80-I of the Income-tax Act.
4. Applicability of section 147 versus section 263 for revising assessments.

Issue-wise Detailed Analysis:

1. Assumption of jurisdiction under section 263 of the Income-tax Act:
The primary issue was whether the Commissioner of Income-tax (CIT) exceeded her jurisdiction under section 263 and whether the order was ab initio void and bad in law. The CIT invoked section 263, arguing that the Assessing Officer's (AO) order allowing interest as revenue expenditure was erroneous and prejudicial to the interests of the Revenue. The Tribunal noted that for the CIT to assume jurisdiction under section 263, the order must be both erroneous and prejudicial to the Revenue's interests. The CIT's action was supported by the decision in Metro Theatre Bombay Ltd. v. CIT [1946] 14 ITR 638 (Bom.), where it was held that a purchase of a capital asset on long-term credit with interest does not amount to borrowing of capital within the meaning of section 10(2)(iii) of the old Act, now section 36(1)(iii).

2. Allowability of interest paid as revenue expenditure:
The AO had allowed the interest paid to land developers as revenue expenditure under section 36(1)(iii). The CIT argued that this interest should be considered capital expenditure as it was related to the acquisition of a capital asset. The Tribunal examined the agreement and found that it consisted of three parts: availing of the lease, financing the deposit by the developer, and the option to purchase or lease. The Tribunal concluded that the essence of the agreement was lease, and the interest was debited to the profit and loss account based on the primary provision of lease, making it a revenue expenditure. However, the dissenting opinion held that the interest was capital in nature, as it was related to the acquisition of the property, not borrowed capital for business purposes.

3. Verification of deduction under section 80-I of the Income-tax Act:
For the assessment year 1996-97, the CIT directed the AO to verify the assessee's claim for deduction under section 80-I. The dissenting opinion supported this direction, stating that granting deduction without verification of material is erroneous and prejudicial to the Revenue's interests. The majority opinion did not discuss this issue in detail.

4. Applicability of section 147 versus section 263 for revising assessments:
The assessee argued that the disallowance of interest falls under section 147 (income escaping assessment) and not section 263. The Tribunal noted that the revisional power under section 263 cannot be exercised in matters reserved for the AO under section 147. However, the dissenting opinion disagreed, stating that section 263 is an exclusive power vested in the CIT to protect Revenue interests, and if both conditions (erroneous and prejudicial) exist, the CIT's power under section 263 is unfettered.

Third Member Decision:
The Third Member, Vice President M.K. Chaturvedi, agreed with the dissenting opinion, concluding that the CIT was justified in assuming jurisdiction under section 263. The conditions precedent for assuming jurisdiction under section 263 existed, and the AO's order was erroneous and prejudicial to the interests of the Revenue. The majority view thus was that the appeal should be dismissed.

Final Outcome:
In accordance with the majority view, the appeals filed by the assessee were dismissed. The Tribunal upheld the CIT's assumption of jurisdiction under section 263 and the subsequent setting aside of the AO's order.