2001 (5) TMI 144 - AT - Income Tax

Summary

Issues Involved:
1. Assumption of jurisdiction by the CIT under section 263 of the Income-tax Act.
2. Validity of the order passed by the CIT under section 263 to set aside the assessment orders passed by the Assessing Officer under section 143(3) of the Act.
3. Allowance of deduction for interest paid to members of the AOP on their capital investment.
4. Consideration of the value of empty bottles remaining with the trader.
5. Adoption of the calendar year as the previous year for accounting purposes.

Issue-wise Detailed Analysis:

1. Assumption of Jurisdiction by the CIT under Section 263:
The CIT assumed jurisdiction under section 263 on the grounds that the assessment orders for the years 1987-88 and 1988-89 were erroneous and prejudicial to the interest of revenue. The CIT issued notices on 7-12-1991 for both years, highlighting issues such as the allowance of interest deductions, treatment of empty bottles, and the adoption of the calendar year for accounting purposes.

2. Validity of the Order Passed by the CIT under Section 263:
The Tribunal examined whether the CIT's order under section 263 was valid. The CIT's order was based on three main points:
- Interest deduction paid to members of the AOP.
- Treatment of empty bottles.
- Adoption of the calendar year as the accounting period.

3. Allowance of Deduction for Interest Paid to Members of the AOP:
The assessee argued that the interest paid to members of the AOP was a legitimate business expenditure, citing the decision of the M.P. High Court in CIT v. Hamandrai Shrikishan Akodia. The CIT, however, distinguished this case, arguing that the interest was on capital contributions, not borrowed money, and thus not allowable under section 36(1)(iii). The Tribunal noted that the CIT's order did not consider the Tribunal's own decision in the case of Bulandshahr Wine Syndicate, which allowed such deductions. The Tribunal concluded that the Assessing Officer's order allowing the interest deduction was not erroneous or prejudicial to the revenue, as it was based on a permissible view supported by judicial precedents.

4. Consideration of the Value of Empty Bottles:
The CIT found the Assessing Officer's order erroneous for not considering the value of empty bottles. The assessee contended that there was no element of profit in handling empty bottles, as they were returned to the distillery for a credit of Rs. 1.45 per bottle. The Tribunal agreed with the assessee, noting that the sales were in cash and it was impractical to produce evidence of payments to customers for empty bottles. The Tribunal found that the Assessing Officer's treatment of empty bottles was not erroneous or prejudicial to the revenue.

5. Adoption of the Calendar Year as the Previous Year:
The CIT argued that the assessee's adoption of the calendar year as the previous year was not justified, as the business was set up in the financial year 1985-86, not 1986-87. The Tribunal examined the facts and concluded that the business was indeed set up in the financial year 1985-86, as the licence was obtained and the bid money deposited before 1-4-1986. The Tribunal held that the assessee did not satisfy the conditions under section 3(1)(d) to adopt the calendar year as the previous year. Therefore, the CIT was justified in setting aside the assessment orders on this issue.

Conclusion:
The Tribunal modified the CIT's order, holding that the assessment orders for the years 1987-88 and 1988-89 were not erroneous or prejudicial to the revenue concerning the interest deduction and the treatment of empty bottles. However, the Tribunal upheld the CIT's decision to set aside the orders regarding the adoption of the calendar year as the previous year. The assessee's appeals were partly allowed.