Income Tax Appellate Tribunal - Mumbai
Schenectady Beck India Ltd. vs Deputy Commissioner Of Income-Tax (No. ... on 15 July, 2003
Equivalent citations: [2005]272ITR103(MUM)
ORDER
B.L. Chhibber, Accountant Member
1. These two appeals are directed against the orders of the Commissioner of Income-tax, City-IV, Mumbai, under section 263 of the Income-tax Act, 1961, and the main common ground raised reads as under :-
"The learned Commissioner of Income-tax made a grievous error by assumption of jurisdiction under section 263 not vested in her by law. In any event, the learned Commissioner of Income-tax exceeded the jurisdiction available under section 263 and, therefore, the order is ab initio void and bad in law."
2. The Assessing Officer completed the assessments under section 143(3) for both the years under appeal. Interest paid to land developers at Pune, amounting to Rs. 96,57,346 for the assessment year 1995-96 and Rs. 39,42,230 for the assessment year 1996-97 was allowed by the Assessing Officer, at the time of assessment as the revenue expenditure. The Commissioner of Income-tax was of the opinion that interest was paid for non-payment of instalments 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.
3. 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 of acquiring office premises at Pune and he had defaulted towards the payment of instalment, which resulted in the payment of interest amounting to Rs. 96,57,346 in the assessment year 1995-96. It was debited to the profit and loss account by the assessee as revenue expenditure. As the expenses incurred were related to the acquisition of capital asset, which is of enduring nature, the interest paid to the land developers at Pune is a capital expenditure. Therefore, the Assessing Officer should have disallowed the same at the time of assessment, which was completed on September 30, 1997. The assessment made by the Assessing Officer is thus prejudicial to the interests of the Revenue."
4. Shri Khare, learned counsel for the assessee first drew our attention to the highlights of the agreement which are as follows :
Clause (1) Agreement to lease-The lessee to make deposit of Rs. 5.67 crores and to pay lease rent of Rs. 2 per sq. foot. The lessor to construct building as per design given by the lessee. No lease rent payable for partially completed building.
Clause (2) Lease deposit payment-The lessee to make payment of lease deposit in three equal instalments (of Rs. 1.857 crores) first along with the agreement, the second within 12 months when RCC work is complete and the third within 30 months on completion of a building. The lessor agree to finance the instalments up to 5 years with interest at 27 per cent, per annum. Any payment made by the lessee would reduce proportionate interest.
Clause (3) Bank Guarantee by the lessor to cover interest payments as also any other payments towards instalments.
Clause (4) Post dated cheques for interest payments to be given by the lessee to the lessor along with the agreement.
Clause (6) The lessee to have a right to terminate the agreement in the event the construction schedule is not adhered to by the lessor. Bank Guarantee will also be invoked.
Clause (13) Both the parties to execute the lease deed within seven days of possession of building by the lessee.
Clause (21) Lessee to have an option to if they have made payment of deposit (Rs. 5.67 crores) purchase price will be equal to lease deposit. In case the lessee decides to terminate the lease without opting for purchase, the lessee will have to forego interest payments and also have to pay Rs. 1.62 crores as compensation for their design.
Clause (23) Lessees to have option for lease for initial period of 5 years to be renewed for a further period of 4 years 11 months.
5. 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 the arrangement is also for financing though, of course, by the developer himself, which is evident from the lease agreement and for this statement, he drew our attention to clauses 2 and 3 thereof.
6. Learned counsel for the assessee further submitted that the assessee debited the interest to the profit and loss account as primarily, the agreement provided for lease, though there was an option to purchase the building which was completed some time in August 1995. The company was justified in debiting the interest on the basis of primary provision of lease and availability of premises on lease, as per the agreement and, therefore, this expenditure was of revenue nature. Learned counsel for the assessee further submitted that the power of assessment under the Income-tax Act is specifically vested in various functionaries under the Act and those functionaries should act within their limited jurisdiction so as to ensure that there is no conflict and resultantly trenching of power by higher functionary over the subordinate functionary so far as the judicial function of the assessment is concerned. In this context, he drew our attention to the following paragraph on page 8192 of Chaturvedi and Pithisaria's book :
"Revision vis-a-vis income escaping assessment : The revisional power under section 263 cannot be exercised in respect of a matter which falls within the power to assess escaped income. The revising authority, in other words, should not trench upon the powers which are expressly reserved to the Assessing Officer under section 147. The Commissioner, in exercise of its revisional jurisdiction, should not ignore such specific power (Cf. Bidar Sahakar Sakkare Karkhana Ltd. v. State of Karnataka [1985] 58 STC 65, 67 (Karn); H. Kenche Gowda v. State of Karnataka [1988] 174 ITR 389, 393 (Karn))."
7. Learned counsel for the assessee further brought to our notice that if the same authority has got power under two different sections, say, under section 154 or under section 147, then on the facts of the case, he could be justified to act either under section 154 or under section 147. He pointed out that the Revenue had already completed the revised assessment under section 147 for the assessment years 1993-94 and 1994-95 and, therefore, it has taken a stand that disallowance of interest, which was originally allowed, comes within the jurisdiction of section 147 and 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 Income-tax (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.
8. 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.
9. 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 prejudicial to the interests of the Revenue. Such satisfaction must be based on the material on record. The assumption of jurisdiction under section 263 cannot be made in a casual and arbitrary manner and if there is no material on record to satisfy prima facie that the aforesaid two conditions are present then the provisions of section 263 cannot be invoked. In this connection, reference may be made to the decision of the hon'ble Bombay High Court in the case of CIT v, Gabriel India Ltd. [1993] 203 ITR 108. The relevant portion is reproduced below (page 116) :
"There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It well settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard ... It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from the records called for by the Commissioner."
10. The hon'ble Madras High Court in the case of Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129, has held that when an order of assessment of the Income-tax Officer is in accordance with law, it cannot be held to be erroneous in law and consequently it cannot be prejudicial to the interests of the Revenue and hence the action of the Commissioner of Income-tax in such case cannot be justified. The Commissioner of Income-tax cannot indirectly do what is barred from doing under the Act.
11. The hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 have observed at page 88 as follows :-
"The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue ; or where two views are possible and the Income-tax 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."
12 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.
13. 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 consisted of three parts viz., (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 assessee 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. The essence of the agreement is lease and the arrangement is also for financing though, of course, by the developer himself, which is evident from the lease agreement (clauses 2 and 3 thereof). It is also noted that the assessee debited the interest to the profit and loss account as primarily the agreement provided for lease though there was an option to purchase the building which was completed sometime in August 1995.
14. In our opinion, the company was justified in debiting the interest amount to the profit and loss account on the basis of the primary provisions of lease and availability of premises on lease as per the agreement and, therefore, this expenditure was of revenue nature and the learned Assessing Officer has rightly allowed the same as revenue expenditure, while completing the assessment under section 143(3) of the Act. Should there be two views, the view already taken by the Assessing Officer cannot be substituted by another view on the assumption of the Commissioner of Income-tax because, as held in Gabriel India Ltd. [1993] 203 ITR 108 (Bom), the Commissioner of Income-tax cannot substitute his discretion for that of the Assessing Officer. It is further noted that when the assessee is carrying on its business for the last more than two decades, if the premises were to be acquired on lease, because of felt needs of business to carry on its operation more systematically and profitably, Explanation 8 will not come in the way and the interest in respect of lease of premises cannot be capitalized on the basis of Explanation 8. Even if option to purchase is exercised, though it all depended upon the circumstances after the completion of the construction, interest cannot be capitalized at the cost of the asset. The hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 talks about the case where interest was capitalized in case of a newly started business or starting of a distinct, separate business, income is to be ascertained by applying the provisions of section 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 assessee-company 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 assessee-company had the option in respect of entering into a lease, yet, the interest could never be disallowed being an expenditure of capital nature.
15. 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 revisionary power under section 263 cannot be exercised in respect of matter which falls within the powers to assess escaped income. The revising authority, in other words, should not trench upon the powers which are expressly reserved to the Assessing Officer under section 147.
16. In the light of the above discussion, we see no justification for the impugned orders under section 263. The same are accordingly quashed.
17. In the result, the appeals filed by the assessee are allowed.
N. Vijayakumaran, Judicial Member
18. Regretting my inability to persuade myself to the view taken in the order of my learned Brother, I proceeded to write a dissenting order :
The vital issue before the Tribunal is whether the Commissioner of Income-tax exceeded the jurisdiction vested with her under section 263 of Income-tax Act and whether the 263 order is ab initio void and bad in law.
19. The interest paid to land developers at Pune, Rs. 96,57,346 for the assessment year 1995-96 and Rs. 39,42,230 for the assessment year 199697 was allowed by the Assessing Officer as revenue expenditure. As per the agreement dated May 17, 1992, entered into between the assessee with one Mr. Pramod Navalkar (the land developer) for a total consideration of Rs. 5.67 crores which the assessee agreed to pay in instalments. For failure to make the instalments it attracts interest at the rate of 27 per cent, per annum. For such default on the part of the assessee in making the instalment payment the above interest amount was incurred as expenses. This was claimed by the assessee as revenue expenditure allowable under section 36(1)(iii). This was allowed by the Assessing Officer during the assessment proceedings and this made the Commissioner of Income-tax to invoke section 263 of the Income-tax Act and by order under section 263 cancelled the assessment as it was erroneous and prejudicial to the interests of the Revenue. This view of the Commissioner is also found supported by the decision of the hon'ble High Court in the case of Metro Theatre Bombay Ltd. v. CIT [1946] 14 ITR 638 (Bom) wherein it was held that a mere purchase of capital asset on a long-term credit with a stipulation for the payment of interest on the reduced balance does not amount to borrowing of capital within the meaning of section 10(2) (iii) of the old Act. This section 10(2)(iii) is in pari materia to the present section 36(1)(iii) of the Income-tax Act, 1961.
20. 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.
21. 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 ?
22. 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 Revenue. In my opinion the Income-tax Commissioner has exercised her power rightly and she acted according to law. This exercise of power under section 263 was also upheld by the ratio of the hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83.
23. On the direction of the Commissioner of Income-tax to the Assessing Officer to verify section 80-I deduction claim, my learned Brother has not discussed the issue in his order. I am of the firm view that it also comes under the power vested under section 263 as granting deduction under section 80-I without verification of material is itself erroneous and prejudicial to the interests of the Revenue.
24. On the issue that allowance of interest comes within the jurisdiction of section 147 and not under section 263, I totally disagree with my learned Brother. Section 263 is the exclusive power vested with the Income-tax Commissioner to protect the interests of the Revenue. As held by the hon'ble Supreme Court in the case of Malabar Industrial Co, Ltd. v. CIT [2000] 243 ITR 83 the conditions for invoking section 263 is that the order must be erroneous and prejudicial to the interests of the Revenue. If these two conditions exist then the power under section 263 vested with the Commissioner is unfettered. Therefore, the order of the Commissioner of Income-tax under section 263 is valid in law and within her jurisdiction is my humble view.
25. In the result, the appeals are dismissed.
ORDER OF THIRD MEMBER M.K. Chaturvedi, Vice-President
26. This appeal came before me as a Third Member to express my opinion on the following question :
"Whether, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax is justified in assuming the jurisdiction under section 263 of the Income-tax Act and thereafter setting aside the order of the Assessing Officer ?"
27. I have heard the rival submissions in the light of the material placed before me and precedents relied upon. The assessee is a manufacturer of insulation material and varnishes. On May 12, 1992, the assessee entered into a lease agreement to pay monthly lease rent at the rate of Rs. 2 per sq. ft. of the built up area in the building to be constructed, to have a total built-up area of 27,000 sq. ft. and to make a deposit of Rs. 5.67 crores for enabling the lessor to construct the building.
28. The assessee was not liable to pay the lease rent so long as the building was not complete.
29. 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.
30. 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 year 1996-97.
31. In the said lease agreement, vide clause 21, option was given to the assessee to purchase the property for a consideration of Rs. 5.67 crores. In other words, the amount of so called deposit was the agreed consideration for the purchase of property in the eventuality of option being exercised. No lease rent was paid during the lease period because the construction of the building was not completed. It was stated that the building was ready for possession on August 20, 1995. On that day the assessee exercised the purchase option and consequently conveyance was executed. Accordingly building was purchased for a consideration of Rs. 5.67 crores.
32. While completing the assessments for the assessment years 1995-96 and 1996-97, interest paid to the land developer was allowed to the assessee. There is absolutely no discussion in the order made by the Assessing Officer in regard to the allowability of interest. The Commissioner of Income-tax opined that interest was not allowable in view of Explanation 8 to section 43(1) of the Income-tax Act, 1961 (hereinafter called "the Act"). As such, in her opinion, error had crept in the order of the Assessing Officer and the said error was prejudicial to the interest of the Revenue. Accordingly she assumed jurisdiction under section 263 of the Act.
33. Shri Khare, learned counsel for the assessee vehemently argued that the amount of interest is allowable under section 36(1) (iii) of the Act. It was submitted that the expenditure incurred in the nature of interest for acquiring the property cannot be disallowed unless that expenditure is per se capital in nature. Learned counsel placed reliance on the various precedents to buttress his point.
34. It was further contended that the conditions precedent for assuming the jurisdiction under section 263 of the Act did not exist in the facts and circumstances of the present case.
35. Shri Bhatti, the learned Departmental Representative, submitted that the interest paid was incidental to the purchase of the property. It had a close nexus with the acquisition of property, which is apparent from the perusal of various details. The payment of interest was of capital nature ; as such it cannot be allowed as revenue expenditure. It was submitted that the Assessing Officer did not consider this aspect, as such error was committed. The error was prejudicial to the interests of the Revenue. The Commissioner of Income-tax was, therefore, correct in assuming the jurisdiction under section 263 of the Act.
36. 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 granting 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.
37. 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 instalments with interest on the instalments outstanding from time to time. The assessee made default in the payment of instalment. Interest was recovered from him. On this factual backdrop the hon'ble jurisdictional High Court has held that a mere purchase of capital asset on a long-term credit with a stipulation for the payment of interest on the reduced balance does not amount to borrowing of the capital.
38. The essence of interest is that it is a payment which becomes due because the creditor has not had his money at his disposal. It may be regarded either as representing the profit he might have made if he had the use of his money, or conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. Interest on moneys borrowed for the purposes of the business is a necessary item of expenditure in a business. For allowability of the claim, all that is necessary is that, firstly, the money, that is capital, must have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business ; and, thirdly, the assessee must have paid interest on the borrowed amount. The prescription of section 36(1) (iii) of the Act is amply clear. It provides for the allowability of the amount of interest paid in respect of capital borrowed for the purposes of business or profession. It is important that the capital must be borrowed for the purposes of business. The Legislature has, under this clause, permitted as an allowance of interest paid on capital borrowed for the purposes of business, and the capital, in this context, means money and not any other asset purchased on credit. A mere purchase of capital asset on credit with a stipulation for payment of interest does not amount to borrowing a capital. The term "borrowed money" must be construed in its natural and ordinary meaning. It implies a real borrowing and a real lending.
39. The various cases relied on by learned counsel refers to a situation which is different from the present case. Contextually also decisions are rendered on different facts. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a significant detail may alter the entire aspect. In deciding such cases, one should avoid temptation as said by Cordoza, by matching the colour of one case against the colour of another.
40. 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."
41. 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 business, 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.
42. 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.
43. In the case of CIT v. Laxmi Mills Co. Ltd. [2000] 242 ITR (St.) 186, the hon'ble apex court dismissed the S. L. P. filed by the Revenue, whereby the hon'ble High Court held that the interest on deferred payment of cost price of machinery was revenue expenditure. Here also the facts are different.
44. In the case of CIT (Deputy) v. Core Healthcare Ltd. [2001] 251 ITR 61 (Guj), capital was borrowed for the purchase of machinery to increase productivity in existing business. Interest was allowed. Here also the facts are different.
45. In the case of CIT v. Sunil Kumar Sharma, [2002] 254 ITR 103 (P & H), interest was payable on capital borrowed for acquisition and construction of the property. The hon'ble High Court has held that interest portion of the instalment of the purchase price was allowable as a deduction under section 24(1)(vi) of the Act. This was not in the context of section 36(1)(iii) of the Act.
46. In the present case I am concerned with a different set of facts. A mere purchase of a capital asset on credit with a stipulation for payment of interest is not tantamount to borrowing of capital. In the present case the assessee first entered into a lease agreement. The property was not in existence. The user of the property was impossible. Rent for lease was not paid because the property was under construction. The purpose was to acquire the property. To achieve that object, tax planning was done accordingly. It is true that an assessee is entitled to arrange his affairs in such a way as to reduce his tax liability by all legal ways. But it is sine qua non that the arrangement ultimately adopted must be genuine. The object of entering into the lease agreement and agreeing for the payment of deposit appears to have been done for gaining tax advantage. The purpose was to acquire the property. The interest was paid towards the cost of acquiring the property. In the real sense there was no borrowing. It was only an arrangement. The relation of the assessee with the developer of land was not that of the borrower and lender. It was a deal to buy the property developed by him. For determining whether expenditure is of a capital or revenue nature, it is immaterial whether the expenditure is made out of money withdrawn from the capital or out of the profits. One should consider the nature of the concern, the ordinary course of business usually adopted in the concern 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 corporeal 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.
47. Indisputably the expenditure in question was incurred for the acquisition of the property. No other purpose can be ascribed for the payment of such interest. As such, I fail to understand that how this can be construed to be an expenditure of revenue nature. The Assessing Officer did not enquire this aspect. There is absolutely no discussion in the order in this regard.
48. The apex court in the case of Tarn Devi Aggarwal v. CIT [1973] 88 ITR 323 has held that the Commissioner of Income-tax may consider an order of the Assessing Officer to be erroneous not only if it contains some apparent error of reasoning or of law or of fact on the face of it but also because it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries which are called for in the circumstances of the case. It is not necessary for the Commissioner of Income-tax to make further enquiries before cancelling the assessment order of the Assessing Officer. The Commissioner of Income-tax can regard the order as erroneous on the ground that in the circumstances of the case the Assessing Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The Assessing Officer is not only an adjudicator but is also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out of this context.
49. In the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC), it was held that an incorrect assessment of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase "prejudicial to the interests of the Revenue" must be read in conjunction with an erroneous order.
50. As such, in my opinion, the order of the Assessing Officer was erroneous and prejudicial to the interests of the Revenue.
51. In regard to the verification of the claim under section 80-I of the Act, the learned Accountant Member did not discuss the issue in his order. As such, on this count there is no dispute. For a dispute, there should be conflicting orders. There is no conflict on this aspect. As such, this issue is not coming within the ambit of the jurisdiction of the Third Member. I, therefore, decline to comment over the same.
52. In my opinion, the conditions precedent for assuming jurisdiction under section 263 of the Act did exist in the facts and circumstances of the present case. As such, I am inclined to agree with the view taken by the learned Judicial Member.
53. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.