2005 (11) TMI 186 - AT - Income Tax

Powers Of Appellate Tribunal - additional grounds - assumption of jurisdiction - initiation of proceeding u/s 10 of Interest Tax Act for reopening of assessment - whether the assessee falls in the category of 'credit institution' falling within the ambit of sections 2(5A) and 2(5B) of Interest-tax Act, 1974 - HELD THAT - The assumption of jurisdiction must have legal sanction. Nonobjection to assumption of jurisdiction u/s 10 in the course of assessment proceeding will not validate the issuance of notice u/s 10, an argument advanced by the Ld. Counsel. Even the consent does not confer jurisdiction. It is so because the initiation can validly be made strictly in the circumstances and manner specified. In our considered opinion, in the present case, jurisdiction under section 10 has not been validly assumed, hence issue of notice is bad in law as there is no nexus between formation of belief and material available which is clear from the facts mentioned herein above. Since initiation of proceeding itself is bad in law and invalid, whatever follows thereafter must also necessarily be invalid as it was held in the case of Rawatmal Harakchand v. CIT 1978 (3) TMI 10 - CALCUTTA HIGH COURT . Consequently, assessment orders passed in this case also are bad in law and invalid. Admittedly, the phrase 'principal business' has not been defined anywhere in the Act. What constitutes 'principal business' will, therefore, depend upon the facts and circumstances of each case. In that situation, past history of the assessee, current business of the assessee, break-up of the income earned during the relevant year will all help in determining the principal business of the assessee-company. As has been stated earlier, reopening of assessment was not made for assessment year 1992-93. It is only from assessment year 1993-94 that the Assessing Officer entertained D the belief that the assessee earned substantial interest out of loans advances and thus liable to pay interest-tax on such interest income. In assessment year 1993-94, the total sales were amounted to over Rs.4 crores as against gross interest earned of Rs. 1.35 crores. In the subsequent two years, the sales were higher than the interest income earned by the assessee. Therefore, in view of the above facts and discussion we hold that the appellant does not fall under the category of credit institution . The very charging section 4 is not attracted in the case of the appellant, hence, Interest Tax is not leviable in the case of the appellant and the appellant is not required to file Interest Tax return. Thus, on merit also, we are unable to uphold the orders of the authorities below and the same are quashed. As a result, all the appeals filed by the assessee are allowed as indicated above.

Summary

Issues Involved:
1. Admission of Additional Grounds of Appeal
2. Initiation of Proceedings under Section 10 of the Interest Tax Act for Reopening of Assessment
3. Determination of Assessee as a "Credit Institution" under Sections 2(5A) and 2(5B) of the Interest Tax Act, 1974

Issue-wise Detailed Analysis:

1. Admission of Additional Grounds of Appeal:
The assessee raised additional grounds of appeal, arguing that these are legal issues involving no new facts not on record. The Tribunal acknowledged its power to permit new grounds of appeal under Rule 11 of the Income-tax (AT) Rules, 1963, provided they do not require further investigation into facts. Citing several judicial pronouncements, including the Supreme Court's decision in National Thermal Power Co. Ltd. v. CIT, the Tribunal emphasized that the purpose of assessment proceedings is to correctly assess the tax liability. The Tribunal thus admitted the additional grounds, noting that they are legal issues going to the root of the matter and involve no new facts.

2. Initiation of Proceedings under Section 10 of the Interest Tax Act for Reopening of Assessment:
The assessee contended that the Assessing Officer (AO) should have first determined whether the assessee is a "credit institution" or "financial company" before forming a belief that chargeable interest escaped assessment. The Tribunal noted that the AO initiated proceedings based on an audit objection, which is not a valid basis for reassessment. The Tribunal highlighted that the AO must have a direct nexus between the formation of belief and available material. It was found that the AO mechanically assumed jurisdiction without determining the assessee's status as a "credit institution." Consequently, the Tribunal held that the initiation of proceedings under Section 10 was invalid, rendering the subsequent assessment orders void.

3. Determination of Assessee as a "Credit Institution" under Sections 2(5A) and 2(5B) of the Interest Tax Act, 1974:
The Tribunal examined whether the assessee falls under the category of "credit institution" as defined in Sections 2(5A) and 2(5B) of the Interest Tax Act. The assessee argued that its principal business was not that of providing finance. The Tribunal reviewed the assessee's audited accounts, which showed that the principal business activities included jute, cloth, tea, and shares, with income from these activities exceeding that from interest on loans and advances. The Tribunal concluded that the assessee's principal business was not providing finance, thus it did not qualify as a "credit institution." Consequently, the charging section 4 of the Interest Tax Act was not applicable, and the assessee was not liable to file an Interest Tax return. Therefore, the Tribunal quashed the orders of the authorities below on merit as well.

Conclusion:
In conclusion, the Tribunal allowed the appeals filed by the assessee, admitting the additional grounds of appeal, invalidating the initiation of proceedings under Section 10, and determining that the assessee did not qualify as a "credit institution" under the Interest Tax Act.