2006 (9) TMI 141 - HC - Income Tax

Interest on debentures and intercorporate dividends - treated as an asset or an advantage for the enduring benefit of the business? - non issuance of notice u/s 251(2) - HELD THAT - The finding of the CIT(A) that it is not clear in the assessment order as to how the expenditure which had been capitalised in the books of account and claimed in the adjustment statement has been allowed by the Assessing Officer and that the said aspect also needs to be re-examined, certainly leads to the conclusion that there may be an enhancement of assessment or a penalty or reduction of the amount of refund. If that be so, as contemplated u/s 251(2) of the Act, the CIT(A), as rightly held by the Tribunal, should not exercise the power conferred u/s 251(2) without giving a reasonable opportunity to the assessee showing against such enhancement or reduction, and to that extent the Tribunal is right in coming to the conclusion that the CIT(A) has committed an error in rendering the finding that it is not clear in the assessment order as to how the expenditure which had been capitalised in the books of account and claimed in the adjustment statement has been allowed by the Assessing Officer. In any event, it is a settled law vide India Cements Ltd. v. CIT 1965 (12) TMI 22 - SUPREME COURT that the loan obtained was not an asset or an advantage for the enduring benefit of the business of the assessee. Applying the said principle, we find that interest on debentures and corporate borrowings also cannot be treated as an asset or an advantage for the enduring benefit of the business of the assessee and accordingly confirm the order of the Tribunal. In the result, finding no substantial question of law, this appeal is dismissed.

Summary

Issues:
1. Appeal against the order of the Income-tax Appellate Tribunal regarding interest on debentures and corporate borrowings deduction for the assessment year 1997-98.
2. Disallowed portion of the assessment order by the Commissioner of Income-tax (Appeals).
3. Error in law committed by the Commissioner of Income-tax (Appeals) in exercising powers under section 251(2) of the Income-tax Act, 1961.
4. Questions of law raised by the Department regarding the Tribunal's cancellation of the direction of the Commissioner of Income-tax (Appeals) and the nature of enhancement prejudicial to the assessee.

Analysis:

1. The High Court of Madras heard an appeal against the order of the Income-tax Appellate Tribunal concerning the deduction of interest on debentures and corporate borrowings for the assessment year 1997-98. The Tribunal set aside the order of the Commissioner of Income-tax (Appeals) and confirmed the assessment order made by the Assessing Officer, allowing the deduction based on the decision in India Cements Ltd. v. CIT [1966] 60 ITR 52.

2. The Assessing Officer allowed the claim of the assessee for interest on debentures and intercorporate dividends but disallowed other claims during the assessment for the year 1997-98.

3. The assessee appealed to the Commissioner of Income-tax (Appeals) against the disallowed portion of the assessment order. The Commissioner partly allowed the appeal and remitted the matter to the Assessing Officer for further examination, questioning the capitalization of expenditure and its allowance by the Assessing Officer.

4. The Tribunal held that the Commissioner of Income-tax (Appeals) erred in law by exercising powers under section 251(2) of the Income-tax Act, 1961, without providing a reasonable opportunity to the assessee against enhancement or reduction. The Tribunal emphasized the necessity of issuing a notice under section 251(2) before making such decisions.

5. The Department raised substantial questions of law challenging the Tribunal's decision to cancel the Commissioner of Income-tax (Appeals) direction without issuing a notice under section 251(2) and the nature of enhancement prejudicial to the assessee. The relevant statutory provision, section 251 of the Act, was analyzed to understand the powers of the Commissioner of Income-tax (Appeals) in such cases.

6. The High Court concluded that the interest on debentures and corporate borrowings cannot be considered as assets or advantages for the enduring benefit of the business, following the precedent set by India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC). Therefore, the Court confirmed the Tribunal's order and dismissed the appeal, finding no substantial question of law.