Income Tax Appellate Tribunal - Mumbai
Schenectady Beck India Ltd. vs Deputy Commissioner Of Income Tax on 15 July, 2003
Equivalent citations: (2005)92TTJ(MUM)872
ORDER
B.L. Chhibber, A.M.
1. These two appeals are directed against the orders of the CIT, City-IV, Mumbai, under Section 263 of the IT Act and the main common ground raised reads as under:
"The learned CIT made a grievous error by assumption of jurisdiction under Section 263 not vested in her by law. In any event, the learned CIT exceeded the jurisdiction available under Section 263 and, therefore, the order is ab initio void and bad in law."
2. The AO 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 asst. yr. 1995-96 and Rs. 39,42,230 for the asst. yr. 1996-97 was allowed by the AO, at the time of assessment as the revenue expenditure. The CIT was of the opinion that interest was paid for non-payment of instalments as per agreement made on 12th May, 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 AO had allowed it as revenue expenditure and hence, the proceeding under Section 263.
3. The learned CIT dealt with this issue under Section 36(l)(iii) although it was submitted before her that it could be allowed either under Section 36(l){iii) or under Section 28 or Section 37 of the Act. The conclusion of the learned CIT was that the provisions of Section 43(1), with Expln. 8 were very clear that interest in connection with acquisition of an asset has to be considered as cost of the asset. The CIT, 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 asst. yr. 1995-96. It was debited to the P&L a/c 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 AO should have disallowed the same at the time of assessment, which was completed on 30th Sept., 1997. The assessment made by the AO is thus prejudicial to the interest of Revenue."
4. Shri Khare, the learned counsel for the assessee first drew our attention to the highlights of the agreement which are as follows:
Clause (1) Agreement to lease-Lessee to make deposit of Rs. 5.67 crores and to pay lease rent of Rs. 2 per sq. ft. Lessor to construct building as per design given by lessee. No lease rent payable for partially completed building.
Clause (2) Lease deposit payment-Lessee to make payment of lease deposit in three equal instalments (of Rs. 1.857 crores) first along with agreement, second within 12 months when RCC work is complete and third within 30 months on completion of building.
Lessor agrees to finance the instalments upto 5 years with interest @ 27 per cent per annum. Any payment made by lessee would reduce proportionate interest.
Clause (3) Bank guarantee by 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 lessor along with the agreement.
Clause (6) Lessee to have right to terminate the agreement in the event the construction schedule is not adhered to by lessor. Bank guarantee will also be invoked.
Clause (13) Both the parties to execute lease deed within seven days of possession of building by 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 lessee decides to terminate lease without opting for purchase, lessee will have to forego interest payments and also have to pay Rs. 1 .62 crores as compensation for the 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.
He submitted that the learned GIT did not take into consideration the entirety of the subject agreement dt. 12th May, 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. The 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.
5. The learned counsel for the assesses further submitted that the assessee debited the interest to the P&L a/c as primarily, the agreement provided for lease though there was an option to purchase the building which was completed sometime 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. The learned counsel for the assessee further submitted that the power of assessment under the IT 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 p. 8192 of Chatuivedi & 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 AO under Section 147. The CIT, in exercise of its revisional jurisdiction, should not ignore such specific power [Cf. Bidar Shankar Karkhana Ltd. v. State of Karnataka (1985) 58 STC 65, 67 (Kar); H. Kenche Gowda v. State of Karnataka (1988) 174 ITR 389, 393 (Kar)]".
6. The 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 s, 147. He pointed out that the Revenue had already completed the revised assessment under Section 147 for the asst. yrs. 199394 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. The learned counsel for the assessee further pointed out that the assessee has filed appeals against the original assessment order for the asst. yrs. 1995-96 and 1996-97 which are sought to be revised and, therefore, the AO could have requested the CIT(A) for making an enhancement as per the provisions of the Act. The learned counsel for the assessee concluded that the CIT made a grievous error by assumption of jurisdiction under Section 263 not vested in her by law.
7. Shri Shah, the learned Departmental Representative strongly supported the order of the learned CIT. He submitted that the CIT 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.
8. 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 CIT must satisfy herself prima facie that the order of the AO is erroneous and prejudicial to the interests of 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 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. Gabrial India Ltd. (1993) 203 ITR 108 (Bom). The relevant portion is reproduced below:
"There must be material available on record called for by the CIT 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 arbitary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such material 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 record called for by the CIT."
The Hon'ble Madras High Court in the case of Venkatakrishna Rice Co. v. CIT (1987) 163 ITR 129 (Mad), has held that when an order of assessment of the ITO 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 CIT in such case cannot be justified. The CIT cannot indirectly do what is barred from doing under the Act.
9. The Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) have observed at p. 88 as follows:
"The phrase 'prejudicial to the interests of the Revenue' has to be used in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the ITO is unsustainable in law."
The Hon'ble Supreme Court in the above judgment has disproved the observations of the Hon'ble Madras High Court in the case of Venkatakrishna Rice Co. (supra) and have referred to Gabrial India Ltd. (supra) and have impliedly approved the observations of the Bombay High Court in the aforesaid judgment.
10. The basis of the impugned order of the learned CIT is that while passing the orders under Section 143(3), the AO has held the interest paid by the assessee as revenue expenditure. The learned CIT has gone by the agreement dt. 12th May, 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 P&L a/c as primarily the agreement provided for lease though there was an option to purchase the building which was completed sometime in August, 1995.
11. In our opinion, the company was justified in debiting the interest amount to the P&L a/c 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 AO 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 AO cannot be substituted by another view on the assumption of the CIT because, as held in Gabrial India Ltd. (supra), the CIT cannot substitute his discretion for that of the AO. 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, Expln. (8) will not come in the way and the interest in respect of lease of premises cannot be capitalized on the basis of Expln. (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 as the cost of the asset. The Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC) 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 moreso in this case, as the assessee-company is debiting interest to its P&L a/c 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.
12. As pointed out by the learned counsel for the assessee, the Department has already completed the re-opened assessment orders under Section 147 for the asst. yrs. 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 p. 8192 of Chaturvedi & Pithisaria's Book, reproduced in para 5 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 AO under Section 147.
13. In the light of the above discussion, we see no justification for the impugned orders under Section 263. The same are accordingly quashed.
14. In the result, the appeals filed by the assessee are allowed.
N. Vijayakumaran, J.M.
15. Regretting my inability to persuade myself to the view taken in the order of my learned brother, I proceeded to write a dissenting order:
16. The vital issue before the Tribunal is whether the GIT exceeded the jurisdiction vested with her under Section 263 of IT Act and whether the 263 order is ab initio void and bad in law.
17. The interest paid to land developers at Pune Rs. 96,57,346 for asst. yr. 199596 and Rs. 39,42,230 for asst. yr. 1996-97 was allowed by the AO as revenue expenditure. As per agreement dt. 12th May, 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 AO during the assessment proceedings and this made the CIT to invoke Section 263 of IT Act and by order under Section 263 cancelled the assessment as it was erroneous and prejudicial to the interest of Revenue. This view of the CIT 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 the borrowing of capital within the meaning of Section 10(2)(iii) of old Act. This Section 10(2)(iii) is in pari materia to present Section 36(1)(iii) of IT Act, 1961.
18. For the asst. yr. 1996-97 yet another direction was issued by the CIT under Section 263 to the AO to verify the assessee's claim for deduction under Section 80-I of IT Act, 1961.
19. The narrow point for consideration before us is whether the CIT is right in assuming jurisdiction under Section 263 and whether the cancellation of assessment made by the AO is valid in law ?
20. The CIT can assume jurisdiction under Section 263 when two conditions are satisfied. The first one is when the order of the AO is erroneous and the second one is that it should be prejudicial to the interest of Revenue. Both ingredients must be present for exercising power under Section 263 of the IT Act. Herein the case present before us is that the assessee paid interest for alleged delayed payment of instalment to the builder. There is no borrowal of fund, the Section 36(1)(iii) deduction was not available. Therefore, the order of the AO in allowing the deduction of interest is erroneous and prejudicial to the interest of the Revenue. In my opinion the CIT 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 Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC).
21. On the direction of the CIT to the AO to verify the Section 80-I deduction claim, ray 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 interest of the Revenue.
22. On the issue that allowance of interest comes within the jurisdiction of Section 147 and not under s, 263, I totally disagree with my learned brother. Section 263 is the exclusive power vested with CIT to protect the interest of the Revenue. As held by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) the conditions for invoking Section 263 is that the order must be erroneous and prejudicial to the interest of the Revenue. If these two conditions exist then the power under Section 263 vested with the CIT is unfettered. Therefore, the order of the CIT under Section 263 is valid in law and within her jurisdiction is my humble view.
23. In the result, the appeal is dismissed.
REFERENCE UNDER Section 255(4) OF THE IT ACT, 1961 B.L. Chhibber, A.M.
1. As there is a difference of opinion between the AM and the JM, the matter is being referred to the President of the Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire:
"Whether, on the facts and in the circumstances of the case, the learned CIT(A) is justified in assuming the jurisdiction under s, 263 of the IT Act and thereafter setting aside the order of the AO ?"
M.K. Chaturvedi, Vice President (Third Member) 15th July, 2003
1. 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 CIT is justified in assuming the jurisdiction under Section 263 of the IT Act and thereafter setting aside the order of the AO ?"
2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. The assessee is manufacturer of insulation material and varnishes. On 12th May, 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.
3. The assessee was not liable to pay the lease rent so long the building was not complete.
4. 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 within 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 within 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.
5. 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 asst. yr. 1995-96 and Rs. 39,42,230 for the asst. yr. 1996-97.
6. 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 as because the construction of the building was not completed. It was stated that the building was ready for possession on 20th Aug., 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.
7. While completing the assessments for the asst. yrs. 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 AO in regard to the allowability of interest. CIT opined that interest was not allowable in view of Expln. 8 to Section 43(1) of the IT Act, 1961 (hereinafter called the Act). As such, in her opinion, error was crept in the order of the AO and the said error was prejudicial to the interest of the Revenue. Accordingly she assumed jurisdiction under Section 263 of the Act.
8. 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. The learned counsel placed reliance on the various precedents to buttress his point.
9. 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.
10. Shri Bhatti, 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 AO did not consider this aspect, as such error was committed. The error was prejudicial to the interest of the Revenue. CIT was, therefore, correct in assuming the jurisdiction under Section 263 of the Act.
11. In regard to deduction under Section 80-I of the Act, relevant for the asst. yr. 1996-97, it was stated that the learned AM did not discuss this issue in his order. It was incumbent on the AO to make proper verification of material before granting the deduction claimed by the assessee under Section 80-I of the Act. This was not done. As such, the CIT directed the AO 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 interest of the Revenue. As such, the CIT was correct in assuming the jurisdiction under Section 263 of the Act on this count.
12. 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 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 the borrowing of the capital.
13. 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 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 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.
14. The various cases relied on by the learned counsel refer 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.
15. The apex Court in the case of Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai AIR 1976 SC 1455, at pp. 1467-68 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."
16. In the case of CIT v. Associated Fibre & 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 business, the interest paid on the amount borrowed for purchase of machinery was deductible amount. The facts of this case are different from the facts of the present case.
17. 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.
18. In the case of CIT v. Laxmi Mills Co. Ltd. (2000) 242 ITR (St). 186, the Hon'ble apex Court dismissed the SLP filed by the Revenue, whereby the Hon'ble High Court held that the interest on deffered payment of cost price of machinery was revenue expenditure. Here also the facts are different.
19. In the case of Dy. CIT v. Core Healthcare Ltd. (2001) 251 ITR 61 (Guj), capital was borrowed for purchase of machinery to increase productivity in existing business. Interest was allowed. Here also the facts are different.
20. In the case of CIT v. Sunil Kumar Sharma (2002) 254 ITR 103 (P&H), interest was payable on capital borrowed for acquisition, construction of the property. 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.
21. 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 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. 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.
22. 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 AO did not enquire this aspect. There is absolutely no discussion in the order in this regard.
23. The apex Court in the case of Smt. Tara Dew Aggarwal v. CIT (1973) 88 ITR 323 (SC) has held that CIT may consider an order of the AO 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 stereotyped 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 CIT to make further enquiries before cancelling the assessment order of the AO. The CIT can regard the order as erroneous on the ground that in the circumstances of the case, the AO should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The AO 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.
24. In the case of Malabar Industrial Co. Ltd. (supra), 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,
25. As such, in my opinion, the order of the AO was erroneous and prejudicial to the interests of the Revenue.
26. In regard to the verification of the claim under Section 80-I of the Act, the learned AM 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.
27. 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 JM.
28. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
M.K. Chaturvedi, Vice President
1. By this miscellaneous petition, the assessee claims that a mistake has crept into the order of the Third Member of the Tribunal in ITA Nos. 2999 and 3000/Mum/1999, dt. 15th July, 2003, and requests that the mistake may appropriately be rectified either by recalling the order or otherwise.
2. We have heard the rival submissions in the light of material placed before us and precedents relied upon. It was submitted that the order passed by the Third Member expressing an opinion on an aspect on which there was no difference of opinion constitutes a mistake of fact and law that is apparent from record. Reference was made to para 21 of the impugned order. It was submitted that these observations are likely to unnecessarily prejudice the minds of the Revenue authorities while giving effect to the order of the Tribunal for the earlier assessment years for which assessments have been reopened by the AO. These observations also amount to in a sense prejudging the issue of penalty under Section 271(1)(c) of the Act, even before it is levied and dealt with by the Revenue authorities.
3. It was further stated that the Third Member did not resolve the dispute between the AM and the JM, whether such interest could be alternatively allowed as a deduction under Section 28 or Section 37 of the Act. Whereas the AM has considered the claim of the assessee under Sections 28, 36(1)(iii) and 37; the JM has confined himself to Section 36(1)(iii) only. The Third Member has also not considered the aspect that 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 should not trench upon the powers, which are expressly reserved to the AO under Section 147 of the Act.
4. The learned Departmental Representative submitted that the core of the controversy was duly adjudicated by the Third Member. In para 22, it is clearly laid down that the expenditure in question was incurred for the acquisition of the property. No other purposes can be. ascribed for the payment of such interest. As such, it cannot be construed to be an expenditure of revenue nature. This aspect was not enquired by the AO. As such, mistake was crept in the order, which was prejudicial to the interest of the Revenue.
5. The question posed before the Third Member was:
"Whether, on the facts and in the circumstances of the case, the learned CIT is justified in assuming the jurisdiction under Section 263 of the IT Act and, thereafter setting aside the order of the AO ?"
6. To decide the aforesaid issue, all the factual details were considered. The finding given in para 21 is contextual. It was found that conditions precedent for assuming jurisdiction under Section 263 of the Act did exist in the facts and circumstances of the present case. As such, there was no trench upon the powers reserved under Section 147 of the Act. On the aspect of assumption of jurisdiction under Section 263 of the Act, there was difference of opinion and to resolve that difference all the relevant facts were taken into consideration. Therefore, it is not correct to say that the Third Member expressed an opinion on an aspect on which there was no difference. The finding was rendered only to resolve the difference. These cannot be construed to be uncalled observations. Observations contained in para 21 were made after taking into consideration the totality of facts. As per the mandate of Section 254(2) of the Act, scope and extent of power of rectification is limited. Only apparent errors can be corrected within the ken of this section. It is well-settled that Section 254(2) of the Act, which empowers the Tribunal to amend any order passed by it under Section 254(1) with a view to rectify a mistake apparent from the record, does not authorise the Tribunal to review its order or even worse, to sit in appeal over its earlier order. The Tribunal is a creature of the statute. It has not been vested with the review jurisdiction by the statute creating it. The Tribunal does not have any power to review its own judgments or orders. The prayer of the learned counsel is for reviewing the decision of the Tribunal. No apparent error was pointed out. In the circumstances, we find that this application is inutile and futile and suffers summary rejection. Ex consequenti, we hold that there is no merit in the application, as such we reject the same.
7. In the result, miscellaneous application stands rejected.
Pramod Kumar, A.M. On a difference of opinion between the Members constituting this Bench, when appeal originally came up for hearing, following question was referred for the esteemed views of a Third Member:
"Whether on the facts and in the circumstances of the case, the learned CIT(A) is justified in assuming the jurisdiction under Section 263 of the IT Act and thereafter setting aside the order of the AO ?"
2. Shri M.K. Chaturvedi, Hon'ble Vice President (MZ) and acting as a Third Member, held that the CIT was justified in assuming jurisdiction under Section 263 of the Act. He thus concurred with the learned JM, Shri N. Vijay Kumaran who had also held so and, for that reason, dismissed the assessee's appeal.
3. The majority view thus is that the appeal is liable to be dismissed.
4. In the result, and in accordance with the majority view, the appeals are dismissed.