1988 (3) TMI 132 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act, 1961.
2. Merits of the allowability of the sum paid to the arbitrator during preceding years.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act, 1961:

The assessee challenged the Commissioner's jurisdiction under Section 263(1) of the Income-tax Act, 1961, arguing that the Commissioner could not invoke these powers given the facts and circumstances of the case. The Commissioner issued a notice under Section 263, contending that the Income-tax Officer's (ITO) order was erroneous and prejudicial to the interests of revenue because it allowed a claim for payment of Rs. 40,500 to an arbitrator, out of which Rs. 30,500 was paid in earlier years. The Commissioner argued that the ITO should not have allowed the deduction of Rs. 30,500. The assessee contended that the assessment order merged with the appellate orders, thus no order existed for revision under Section 263.

The Tribunal examined the Full Bench decision of the Andhra Pradesh High Court in Addl. CIT v. Watan Mechanical & Turning Works [1977] 107 ITR 743, which held that limitation is part of procedural law. Since the period of limitation was extended by the Taxation Laws (Amendment) Act, 1984, the Commissioner was within his powers to pass an order by 31st March 1986, as the ITO's order was passed on 30th September 1983. The Tribunal concluded that the Commissioner was legally competent to proceed under Section 263, and the objection regarding jurisdictional incompetence was overruled.

2. Merits of the Allowability of the Sum Paid to the Arbitrator During Preceding Years:

The assessee argued that the details of the payment of Rs. 40,500 were furnished to the ITO, and the ITO was aware that the payment was spread over the years 1973 to 1979. However, the Tribunal found no reference in the impugned order indicating that this issue was considered by the first appellate authority or the Tribunal. The Tribunal cited the Supreme Court's decision in Madurai Mills Co. Ltd.'s case, which stated that the doctrine of merger depends on the nature of the appellate or revisional order and the scope of the statutory provisions conferring the appellate or revisional jurisdiction. The Tribunal also referred to the High Court of Madhya Pradesh's decision in Kanhiram Ramgopal v. CIT [1988] 170 ITR 41, which held that the Commissioner had jurisdiction to revise the ITO's order under Section 263 on issues not considered by the appellate authority.

The Tribunal concluded that the question of the allowability of Rs. 40,500 paid to the arbitrator was not the subject matter of the appeal and thus did not merge with the appellate order, leaving it open for the Commissioner to act under Section 263.

Regarding the merits, the assessee claimed to follow a hybrid system of accounting. The Tribunal found no evidence to support this claim and noted that companies generally follow the mercantile system of accounting. The Commissioner's order under Section 263 highlighted that the payments of Rs. 30,500 were made in earlier years and should not have been claimed in the assessment year 1981-82. The Tribunal agreed with the Commissioner's reasoning, concluding that there was no legal justification for the deduction of Rs. 30,500 during the year in question.

Conclusion:

The Tribunal upheld the Commissioner's jurisdiction under Section 263 and found no merit in the assessee's claim for the deduction of Rs. 30,500. The appeal was dismissed.