TMI Blog2003 (7) TMI 646X X X X Extracts X X X X X X X X Extracts X X X X ..... as per agreement made on May 12, 1992, with the land developer, Mr. Pramod Navalkar for construction of office premises, admeasuring about 27,000 sq.ft., and development of land surrounding the building. The total consideration fixed as per agreement was Rs. 5.67 crores. This was to be paid as per clauses 2(a), (b), (c) of the said agreement. It was mentioned in the said agreement that the failure to pay any of the instalments shall attract interest at the rate of 27 per cent. per annum as per the prevalent rate of interest. The Assessing Officer had allowed it as revenue expenditure and hence, the proceeding under section 263. The learned Commissioner of Income-tax dealt with this issue under section 36(1)(iii) although it was submitted before her that it could be allowed either under section 36(1)(iii) or under section 28 or section 37 of the Act. The conclusion of the learned Commissioner of Income-tax was that the provisions of section 43(1), with Explanation 8 were very clear that interest in connection with acquisition of an asset has to be considered as cost of the asset. The Commissioner of Income-tax, accordingly, concluded as under : The assessee was in the process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease for initial period of 5 years to be renewed for a further period of 4 years 11 months. He submitted that the learned Commissioner of Income-tax did not take into consideration the entirety of the subject agreement dated May 12, 1992. The Agreement consisted of three parts, namely (1) availing of the lease as per the provisions of the agreement, (2) financing the subject sum of Rs. 5.67 crores by the developer in case the appellant could not provide funds and (3) option to purchase or lease was to start from the date of completion of the building or exercising of purchase option during the stipulated time. The agreement starts with the right to lease followed by the option to purchase, whichever is suitable to the assessee. Learned counsel for the assessee admitted that it is a fact that when the building was completed, the assessee-company exercised the option to purchase rather than lease, as at that time the company s financial position had improved from its earlier position where exports to Soviet Russia, main client, was affected due to political changes in that country as also due to non-receipt of duty drawback incentives from the Government. He further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not under section 263. Learned counsel for the assessee further pointed out that the assessee has filed appeals against the original assessment order for the assessment years 1995-96 and 1996-97 which are sought to be revised and, therefore, the Assessing Officer could have requested the Commissioner of Incometax (Appeals) for making an enhancement as per the provisions of the Act. Learned counsel for the assessee concluded that the Commissioner of Income-tax made a grievous error by assumption of jurisdiction under section 263 not vested in her by law. Shri Shah, the learned Departmental Representative strongly supported the order of the learned Commissioner of Income-tax. He submitted that the Commissioner of Income-tax rightly assumed jurisdiction under section 263 of the Act, as the interest paid by the assessee was part of acquisition and was clearly capital expenditure. We have considered the rival submissions and perused the facts on record. It is now well settled position of law that in order to assume jurisdiction under section 263 of the Act, the Commissioner of Income-tax must satisfy herself prima facie that the order of the Assessing Officer is erroneous and preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. The hon ble Supreme Court in the above judgment has disapproved the observations of the hon ble Madras High Court in the case of Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129 and have referred to CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom) and have impliedly approved the observations of the Bombay High Court in the aforesaid judgment. The basis of the impugned order of the learned Commissioner of Income-tax is that while passing the orders under section 143(3), the Assessing Officer has held the interest paid by the assessee as revenue expenditure. The learned Commissioner of Income-tax has gone by the agreement dated May 12, 1992, but it is clear that he did not take into consideration the entirety of the subject agreement, the salient features of which have been reproduced supra. It is evident that the agreement con sisted of three parts viz., (1) availing of the lease as per the provisions of the agreement ; (2) financing the subject s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28 independently. It will thus be seen that under no circumstances, where interest is payable under section 28 or section 36(1)(iii) or section 37, the interest becomes the cost of the asset more so in this case, as the assesseecompany is debiting interest to its profit and loss account and never capitalized the same in the books of account, as also primarily the agreement provided for lease, though covered by the option and further notwithstanding the fact that after the building was completed the assesseecompany had the option in respect of entering into a lease, yet, the interest could never be disallowed being an expenditure of capital nature. As pointed out by learned counsel for the assessee, the Department has already completed the re-opened assessment orders under section 147 for the assessment years 1993-94 and 1994-95 and, therefore, it has taken a stand that the disallowance of interest which was originally allowed comes within the jurisdiction of section 147 of the Act and not under section 263. In this connection, the relevant observations made in page 8192 of Chaturvedi and Pithisaria s book, reproduced in para. 5 (page 109) above are very relevant, because revision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act, 1961. For the assessment year 1996-97 yet another direction was issued by the Commissioner of Income-tax under section 263 to the Assessing Officer to verify the assessee s claim for deduction under section 80-I of the Incometax Act, 1961. The narrow point for consideration before us is whether the Income-tax Commissioner is right in assuming jurisdiction under section 263 and whether the cancellation of assessment made by the Assessing Officer is valid in law ? The Commissioner of Income-tax can assume jurisdiction under section 263 when two conditions are satisfied. The first one is when the order of the Assessing Officer is erroneous and the second one is that it should be prejudicial to the interests of the Revenue. Both ingredients must be present for exercising power under section 263 of the Income-tax Act. Here in the present case before us, is that the assessee paid interest for alleged delayed payment of instalment to the builder. There is no borrowal of fund, section 36(1)(iii) deduction was not available. Therefore, the order of the Assessing Officer in allowing the deduction of interest is erroneous and prejudicial to the interests of the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to pay the lease rent so long as the building was not complete. Apropos the deposit of Rs. 5.67 crores, the assessee was required to make the payment as under : (a) Rs. 1.856 crores to be paid at the time of execution of these presents. (b) Rs. 1.857 crores to be paid 12 months from the execution of these presents at the time of completion of the reinforced cement concrete (RCC). (c) Rs. 1.857 crores to be paid 30 months from the execution of these presents within one week of the receipt of completion certificate from Pune Municipal Corporation and premises are ready for occupation in all respects. (d) Rs. 10 lakhs to be paid within one year of receiving completion certificate from PMC being the amount retained for a period of 1 year in order to ensure specified quality of construction. The assessee did not make deposit. It agreed to pay interest at the rate of 27 per cent. per annum on the amount financed by the land developer. Resultantly, the assessee made the payment of interest to the tune of Rs.96,57,346 for the assessment year 1995-96 and Rs. 39,42,230 for the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue. The Commissioner of Income-tax was, therefore, correct in assuming the jurisdiction under section 263 of the Act. In regard to deduction under section 80-I of the Act, relevant for the assessment year 1996-97, it was stated that the learned Accountant Member did not discuss this issue in his order. It was incumbent on the Assessing Officer to make proper verification of the material before grant ing the deduction claimed by the assessee under section 80-I of the Act. This was not done. As such, the Commissioner of Income-tax directed the Assessing Officer to verify the claim. Where the law prescribes conditions for the allowability of claim and the claim is not tested on the touch-stone of such conditions, it amounts to an error. This error can be said to be prejudicial to the interests of the Revenue. As such, the Commissioner of Income-tax was correct in assuming the jurisdiction under section 263 of the Act on this count. In the case of Metro Theatre Bombay Ltd. v. CIT [1946] 14 ITR 638 (Bom) the assessee entered into an agreement for the purchase of the building on lease. It was stipulated in the agreement that the consideration shall be paid in six monthly instalme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of another. The apex court in the case of Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai [1976] 49 FJR 15 ; AIR 1976 SC 1455, at page 1467 has held : it is trite that a ruling of superior court is binding law. It is not of scriptural sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. In the case of CIT v. Associated Fibre and Rubber Industries P. Ltd. [1999] 236 ITR 471 (SC), money was borrowed for the purchase of machinery. The machinery was treated as business asset. On this factual backdrop the hon ble Supreme Court has held that such machinery was treated as business asset and it was purchased only for the purposes of the busi ness, the interest paid on the amount borrowed for purchase of machinery was a deductible amount. The facts of this case are different from the facts of the present case. In the case of CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395 (Bom), the borrowed capital was invested in tax free bonds. It was found that such investment was in the course of business. As such, the interest was held to be deductible. This case also deals with different situation not akin to that of the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern and the object with which the expense was incurred. The word capital connotes permanency and capital expenditure is therefore closely akin to the concept of securing something, tangible or intangible property, or cor poreal or incorporeal right, so that they could be of a lasting or enduring benefit to the enterprise in issue. The revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise. To put it differently, capital means an asset which has an element of permanency about it and which is capable of being a source of income and capital expenditure must, therefore, generally mean acquisition of an asset and the asset must be intended to be of a lasting value, while revenue expenses are generally running expenses incurred in earning profit or expenses incurred with the primary object of an immediate return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return or a very limited number of returns. Indisputably the expenditure in question was incurred for the acquisition of the property. No other purpose can be ascribed for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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