1997 (10) TMI 114 - AT - Income Tax

Summary

Issues Involved:
1. Validity of CIT's order u/s 263 regarding deductions under sections 80HH, 80HHA, 80-I, and 80-IA.
2. Whether the units set up in earlier years were formed by reconstruction or splitting up of existing business.
3. Whether the activity of making bidis constitutes manufacture or production.
4. Inclusion of bank interest and other miscellaneous income for deductions.
5. Applicability of the doctrine of merger.
6. Principles of res judicata in income-tax proceedings.

Summary:

1. Validity of CIT's Order u/s 263:
The appeal by the assessee challenges the CIT's order u/s 263 for A.Y. 1992-93, which found the Assessing Officer's (AO) allowance of deductions u/s 80HH, 80HHA, 80-I, and 80-IA erroneous and prejudicial to the interest of revenue. The CIT held that the AO failed to make necessary inquiries regarding the eligibility of these deductions.

2. Formation of Units by Reconstruction or Splitting Up:
The CIT's notice suggested that the new units might have been formed by reconstruction or splitting up of existing business, which would disqualify them from deductions. The assessee argued that there was no fresh material to support this claim and relied on previous decisions that had consistently allowed such deductions. The Tribunal held that the condition regarding the formation of units should be examined in the initial year of commencement, not in subsequent years, unless new material is presented. Therefore, the AO's order was not erroneous on this ground.

3. Manufacturing Activity:
The CIT questioned whether the activity of making bidis amounted to manufacture or production. The Tribunal noted that this issue had been settled in earlier years where the AO had accepted the activity as manufacturing. Without new evidence, the CIT could not reopen this issue. The Tribunal cited the Bombay High Court's decision in Paul Bros., which held that deductions allowed in earlier years could not be denied in subsequent years without disturbing the initial year's allowance.

4. Inclusion of Bank Interest and Other Income:
The CIT contended that the AO wrongly allowed deductions on bank interest and other income. The Tribunal found that this issue had been considered by the CIT(A) in an appeal, and thus, the doctrine of merger applied. Therefore, the CIT could not invoke section 263 on this ground.

5. Doctrine of Merger:
The Tribunal agreed with the assessee that the CIT's power u/s 263 was limited by the doctrine of merger, which means that once an issue has been decided in appeal, it merges with the appellate order, and the CIT cannot revise it.

6. Principles of Res Judicata:
The Tribunal acknowledged that while the principles of res judicata do not strictly apply to income-tax proceedings, there should be finality and certainty in litigation. The earlier decisions on the same question should not be reopened without fresh material.

Conclusion:
The Tribunal upheld the CIT's order u/s 263 only concerning the new units set up during the year under consideration, as no material was furnished to support the claim. However, it quashed the part of the order regarding the units formed in earlier years, holding that the AO's order was not erroneous or prejudicial to the interest of revenue on those grounds. The appeal was partly allowed.