1985 (1) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the Commissioner's order under section 263 of the Income-tax Act, 1961.
2. Whether the Commissioner acted on the basis of an audit objection.
3. Merger of the ITO's order with the Commissioner (Appeals) order.
4. Nature of the expenditure (capital vs. revenue).

Detailed Analysis:

1. Legality of the Commissioner's Order Under Section 263:

The assessee contended that the Commissioner's order under section 263 was "bad in law and not supported by facts or circumstances of the case." The Commissioner initiated proceedings under section 263 after examining the assessment records and noticing that the assessment order for the year 1980-81 was erroneous and detrimental to the interests of the revenue. The Commissioner pointed out discrepancies in the expenditure claimed by the assessee, particularly Rs. 2,30,505 under 'Repairs of factory shed' and Rs. 2,34,153 for the construction of two new factory sheds. The Commissioner concluded that the expenditure was either excessive or of a capital nature and initiated action under section 263.

2. Whether the Commissioner Acted on the Basis of an Audit Objection:

The assessee argued that the action under section 263 was taken based on an audit objection, not the Commissioner's quasi-judicial discretion. The Commissioner requested evidence from the assessee to support this claim, which the assessee failed to provide. The Tribunal noted that the Commissioner examined the assessment records independently and found the assessment order erroneous. The Tribunal emphasized that section 263 does not require the Commissioner to record 'information' or indicate the source of information before acting. The Tribunal found no indication that the Commissioner acted mechanically based on the audit objection.

3. Merger of the ITO's Order with the Commissioner (Appeals) Order:

The assessee contended that the ITO's order merged with the Commissioner (Appeals) order under section 154, and thus, the Commissioner could not take action under section 263. The Tribunal did not find merit in this argument, as the Commissioner has the authority to revise orders that are erroneous and prejudicial to the interests of the revenue under section 263, regardless of the merger.

4. Nature of the Expenditure (Capital vs. Revenue):

On the merits, the assessee argued that the expenditure was correctly allowed as revenue since the property did not belong to the assessee but was taken on rent. The Commissioner found that the expenditure was partly capital in nature, particularly for new items like garage, testing shed, painting shed, platform, and stores amounting to Rs. 71,642. The Commissioner concluded that Rs. 1 lakh should be treated as capital expenses, and the balance as revenue. The Tribunal modified this finding, agreeing with the assessee that only Rs. 71,642 should be treated as capital, and the rest as revenue.

Conclusion:

The Tribunal upheld the Commissioner's jurisdiction under section 263, finding no evidence that the Commissioner acted solely on the audit objection. However, the Tribunal modified the Commissioner's order on the nature of the expenditure, treating only Rs. 71,642 as capital and the balance as revenue. The appeal by the assessee was partly allowed.