2016 (8) TMI 417 - AT - Income Tax

Revision u/s 263 - Expenditure incurred for raising the debenture - revenue or capital - Held that - It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. If the Assessing Officers are allowed to make assessments in an arbitrary manner, as has been done in the case before us, the administration of revenue is bound to suffer. If without discussing the nature of the transaction and materials on record, the Assessing Officer had made certain addition to the income of the assessee, the same would have been considered erroneous by any appellate authority as being violative of the principles of natural justice which require that the authority must indicate the reasons for an adverse order. We find no reason why the same view should not be taken when an order is against the interests of the revenue. As a matter of fact such orders are prejudicial to the interests of both the parties, because even the assessee is deprived of the benefit of a positive finding in his favour, though he may have sufficiently established his case. In view of the foregoing, it can safely be said that an order passed by the Assessing Officer becomes erroneous and prejudicial to the interests of the Revenue under Section 263. In view of this, exercising jurisdiction u/s.263 of the Act by CIT is justified. However, on merit, the issue in dispute with regard to the expenditure incurred for issue of debenture was come before the Madras High Court in the case of CI Vs. FIRST LEASING CO. OF INDIA LTD. reported in 2006 (2) TMI 151 - MADRAS High Court wherein held that there is no distinction between discount and premium, the discount on debentures as well as the premium payable on actual redemption on debentures in future years and the expenditure incurred for issue of such debentures are all held to be revenue expenditure, entitled to be spread over the period of debentures and consequently, allowable as deduction in a particular assessment year.

Summary

Issues:
1. Assessment of professional charges for issuing optionally fully convertible debentures as revenue or capital expenditure.
2. Validity of invoking section 263 of the Act by the Commissioner.
3. Interpretation of relevant case laws in determining the nature of expenditure for issuing debentures.

Analysis:

Issue 1: Assessment of professional charges
The appeal involved a dispute over the treatment of professional charges incurred for issuing optionally fully convertible debentures as revenue or capital expenditure. Initially, the Assessing Officer (AO) allowed the charges as revenue expenditure. However, the Commissioner of Income-tax (CIT) invoked section 263 of the Act, deeming the expenditure as capital based on a Supreme Court judgment. The appellant contended that the expenditure should be considered revenue, citing various judgments from the Madras High Court and the Apex Court supporting their position. The Tribunal referred to a judgment by the Madras High Court and remitted the issue back to the AO for fresh assessment in line with the High Court's ruling.

Issue 2: Validity of invoking section 263
The Tribunal addressed the validity of invoking section 263 by the CIT. It emphasized that an assessment order must be reasoned and legally sound, as the Assessing Officer acts in a quasi-judicial capacity. The Tribunal highlighted that erroneous orders, prejudicial to revenue, necessitate revision under section 263. It outlined scenarios where an order becomes erroneous, including errors of reasoning, law, or fact, incorrect assumptions, or lack of application of natural justice principles. The Tribunal concluded that the CIT's jurisdiction under section 263 was justified in this case.

Issue 3: Interpretation of case laws
The Tribunal analyzed relevant case laws to determine the nature of expenditure for issuing debentures. It referenced judgments from the Madras High Court and the Calcutta High Court, emphasizing that both discounts and premiums on debentures should be treated as revenue expenditure spread over the debenture period. The Tribunal relied on precedents to support the appellant's argument that the expenditure in question should be considered revenue and allowed as a deduction over the debenture period. Consequently, the Tribunal partly allowed the appeals for statistical purposes, remitting the issue back to the AO for fresh assessment in accordance with the High Court's judgment.

In conclusion, the Tribunal's detailed analysis of the issues surrounding the treatment of professional charges for issuing debentures, the validity of invoking section 263, and the interpretation of relevant case laws provided clarity on the matter, resulting in a partial allowance of the appeals for further assessment.