2012 (12) TMI 83 - HC - Income Tax

Enhancement of Assessment - power of CIT(A) to enhancement - held that - When, in the course of considering the assessee s appeal on a different issue, the CIT (A) thought it fit to exercise his enhancement powers with reference to one aspect of assessment, which was not the subject matter of the appeal, it is no doubt true that Sec 251 of the Income Tax Act provides for such authority and jurisdiction to enhance the assessment.- But, then, Sub Section (2) of Section 251 of the Act, stated that such authority could be exercised only subject to the assessee being given a reasonable opportunity to show cause against such enhancement - order of tribunal set aside - matter remanded back to CIT(A) Spreading over of interest - assessment of income - held that - In contrast to the decided case relating to claim of deduction as expenditure, the case on hand is related to the assessment of income. Even though the parameter for considering the expenditure and income is not the same, yet, the principle to be followed is that when the instrument concerned is certain as to its period of life and specifically points out to a particular interest amount to be paid on the maturity date, the question of assessing the entire interest in the first year itself, does not arise. - the question of assessing the entire interest income of Rs.3,10,43,664/- in the assessment year 1997-98 does not arise and that the Revenue would be entitled to assess a sum of Rs.3,37,431/- alone for the assessment year 1997-98 and the balance amount of Rs.3,07,06,233/- has to be assessed for the assessment year 1998-99.

Summary

Issues Involved:
1. Inclusion of interest income in the assessment year 1997-98.
2. Distortion of profit picture due to interest assessment.
3. Alleged option to receive discounted interest.
4. Legality of the Commissioner of Income Tax (Appeals) directions regarding interest deduction.

Detailed Analysis:

Issue 1: Inclusion of Interest Income in Assessment Year 1997-98
The primary contention was whether the interest of Rs.3,07,06,233/- should be included in the Appellant's income for the assessment year 1997-98. The assessee argued that only Rs.3,37,431/- was relatable to 31st March 1997, and the remaining interest should be assessed in the subsequent year. The Tribunal, however, held that the entire interest was includible in the assessment year 1997-98. The High Court found this position unsupported by material evidence, noting that the interest was credited to the assessee's account only upon maturity of the deposits on 1.7.1997 and 3.7.1997. Consequently, the Tribunal's order was set aside, and it was held that only Rs.3,37,431/- was assessable for the year 1997-98, with the balance to be assessed in 1998-99.

Issue 2: Distortion of Profit Picture
The assessee contended that assessing the entire interest in the year 1997-98 distorted the profit picture, as the deposits matured in the subsequent year. The High Court agreed, emphasizing that the interest should be spread over the period of the deposits to avoid a distorted profit picture. This view was supported by the principle from the Apex Court's decision in MADRAS INDUSTRIAL INVESTMENT CORPORATION LIMITED v CIT, which allows for the spreading of expenditure over ensuing years to present a true profit picture.

Issue 3: Alleged Option to Receive Discounted Interest
The Tribunal alleged that the assessee had exercised an option to receive discounted interest on 31st March 1997. However, the High Court found no material evidence to support this claim. The deposits were made at a discounted value, but the interest was only credited upon maturity. The Tribunal's finding was deemed perverse and without basis, leading to the conclusion that the assessee did not receive interest in advance.

Issue 4: Legality of CIT(A) Directions on Interest Deduction
The Commissioner of Income Tax (Appeals) had, suo motu, considered the enhancement of assessment regarding the interest deduction of Rs.49,77,552/-, without providing the assessee a reasonable opportunity to show cause against such enhancement, as required by Section 251(2) of the Income Tax Act. The High Court found this to be a violation of natural justice principles. The Tribunal's confirmation of the CIT(A)'s order was set aside, and the matter was restored to the CIT(A) for fresh consideration, directing that the assessee be given a reasonable opportunity to present their case.

Conclusion:
The High Court allowed the appeal, setting aside the Tribunal's order on both the inclusion of interest income for the year 1997-98 and the enhancement of assessment by the CIT(A). The matter was remanded to the CIT(A) for a fresh hearing with proper notice to the assessee. The High Court emphasized the need for fair opportunity and adherence to natural justice principles in tax assessments.