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TMI Blog2005 (11) TMI 186X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned herein above. Since initiation of proceeding itself is bad in law and invalid, whatever follows thereafter must also necessarily be invalid as it was held in the case of Rawatmal Harakchand v. CIT [ 1978 (3) TMI 10 - CALCUTTA HIGH COURT] . Consequently, assessment orders passed in this case also are bad in law and invalid. Admittedly, the phrase 'principal business' has not been defined anywhere in the Act. What constitutes 'principal business' will, therefore, depend upon the facts and circumstances of each case. In that situation, past history of the assessee, current business of the assessee, break-up of the income earned during the relevant year will all help in determining the principal business of the assessee-company. As has been stated earlier, reopening of assessment was not made for assessment year 1992-93. It is only from assessment year 1993-94 that the Assessing Officer entertained D the belief that the assessee earned substantial interest out of loans advances and thus liable to pay interest-tax on such interest income. In assessment year 1993-94, the total sales were amounted to over Rs.4 crores as against gross interest earned of Rs. 1.35 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and annulled. 4. We shall first take up the issue regarding admission of additional grounds of appeal, reproduced above, raised by the assessee. According to the learned counsel of the assessee, these additional grounds are legal issues and no new facts which are not on record, are involved in these additional grounds. The Assessing Officer passed the orders under section 8(2)/10 of the Interest Tax Act, 1974 (the Act) reopening and reassessing the interest tax chargeable on the assessee and thereby imposing liability on the assessee of Rs. 17,04,478, Rs. 13,00,319 and Rs. 11,30,938 respectively for the assessment years 1993-94 to 1995-96, which were confirmed by the C.I.T.(A). He thus contended that the assessee is entitled to the relief being claimed by way of additional grounds, sought to be substituted for the original ground and the same can be disposed off on the basis of q material on record accordingly inasmuch as the same is also germane to the issue of computation of assessee's income in proper and correct manner. In support of his contentions, the learned assessee's counsel has cited the decision of Hon'ble Supreme Court in the case of National Thermal Power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to press a ground which he does not press before the 1st Appellate Authority although he has taken and include in the grounds of the first appeal. The proposition of law on the issue of admission of additional or new grounds by 1st Appellate Authority was laid down by the Hon'ble Supreme Court in the case of Jute Corpn. of India Ltd. v. CIT [1991] 187 ITR 688 and Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. held that the same will apply to appeal before ITAT Hon'ble Allahabad High Court in the case of CIT v. Mohd. Ayyub Sons Agency [1992] 197 ITR 637 has held that the power of the Tribunal to permit any party to the appeal to raise the question of jurisdiction, which goes to the root of the matter and does not involve further investigation into facts, cannot be disputed on the plain reading of rule 11 of the Income-tax (AT) Rules, 1963. Indeed on such a plea being taken, the Tribunal is under a statutory obligation not only to entertain the plea but also to decide the same after providing sufficient opportunity of being heard to the other side. Similar views have been taken by Hon'ble Delhi High Court (i) in the case of CIT v. Mahalakshmi S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or deprived of it, even if the claim pertaining to the same is made for the first time before the Tribunal during pendency of appeal before it. In the present case, the issues raised in additional grounds are the legal issues which goes to the root of the matter and for deciding these legal issues no new facts arc-required to be considered as all the facts are already recorded in the orders of the authorities below. In this view of the matter, we do not find any force in the contention of the Ld. Departmental Representative that assumption of jurisdiction was not challenged before the Assessing Officer, therefore, the jurisdiction was correctly assumed by the Assessing Officer under section 10 of Interest Tax Act. We are also unable to concede to the request of the Ld. Departmental Representative that the matter may be restored for re-verification and fresh adjudication on the legal issues in view of our above discussion on the issue of scope and ambit of power of Tribunal to admit additional/new grounds. Accordingly, we admit the additional grounds taken by the assessee and we shall now proceed to dispose of the issues raised in additional grounds. 7. The first issue raised in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the effect that interest income has escaped assessment under Interest-tax Act, 1974. While recording the reasons the Assessing Officer must have reasons to believe on the basis of material available with him that income chargeable to tax has escaped assessment. There has to be a direct nexus between the formation of belief and availability of material. It is now a settled law that unless all the requisite conditions for assumption of jurisdiction for re-assessment purposes under the provisions of Direct Tax Act are satisfied, the assumption of jurisdiction will be invalid and the entire re-assessment proceeding would become non est. Further, for assumption of such jurisdiction, issuance of a valid notice is must which again prerequisites recording of reasons for formation of belief by the Assessing Officer about escapement of income from assessment. In the present case, it is obvious that the proceeding under section 10 of Interest Tax Act was initiated by the Department merely on the basis of observation of audit objection as the audit objection was intimated to the Department on 12-3-1998 and notice under section 10 was issued on 9-11-1998, the Ld. Departmental Representative did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of initiation of reassessment proceeding, in the present case, the audit party has simply observed that under the Interest Tax Act, Interest Tax is leviable on the chargeable interest income of 'credit institution' inter alia... audit report is silent on the issue whether the appellant-company is a credit institution determination of which is pre-requisites for assumption of jurisdiction under section 10 of the Interest Tax Act. Therefore, it was incumbent upon the Assessing Officer, after receiving the audit report, to ascertain whether assessee falls in the category of credit institution , but the same was not done and in most mechanical manner, jurisdiction was assumed and notice under section 10 was issued. It is obvious from the assessment order itself. The relevant portion is reproduced below:- The interest was earned by the assessee-company from the loans and advances given to different parties. With a reason to believe that chargeable interest for the assessment year 1993-94 has escaped from assessment a notice under section 10 of the Interest-tax Act, 1974 was issued on 9-11-1998 to the assessee requiring him to file a return under section 7 of the Interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee-company earned interest income and there was escapement of chargeable interest on the said interest earned on loans and advances. 12.2 The Ld. Counsel thereafter referred to the provisions of subsection (5A) of section 2 which defines the category under which a company can be treated as a 'credit institution'. Similarly, section 2(5B) which defines the meaning of 'financial company' and clause (iv) of the section clarifies that a company which carries on, as its 'principal business', the business of providing finance, whether by making loans or advances or otherwise shall come under this definition. The Ld. Counsel invited our attention to the audited accounts for three years under appeal to strengthen his arguments that the principal business of the assessee-company was not that of as a credit institution or financial company. He submitted that the assessee was engaged in the business of jute, cloth, tea, shares and advancing of loans advances computed under the head 'Income from other sources'. The income from these businesses, other than that of interest on loan, was far more than earnings from interest on advances made. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions from charging section that interest tax is leviable on every credit institution and the credit institution is defined in section 2(5A), the same is reproduced below:- (i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act); (ii) a public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956); (iii) a State Financial Corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); and (iv) any other financial company ; Now, from the meaning of credit institution, we find that includes other financial company and the term 'financial company' is defined in sub-section (5B) of section 2 and it includes in its meaning 7 categories of companies. The relevant category for consideration is clause (iv) of section (5B) which is as under:- (iv) a loan company, that is to say, a company [not being a company referred to in sub-clauses (i) to (iii)] which carries on, as its principal business, the business of providing finance, whether by maki ..... X X X X Extracts X X X X X X X X Extracts X X X X
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