Commissioner of Income Tax vs Rane Brake Linings Ltd.

K. Raviraja Pandian, J.—The appeal is filed by the Revenue against the order of the Tribunal, Madras ''B'' Bench made in ITA No. 1346/Mad/2005 dt. 4th April, 2007. The relevant asst. yr. is 2000-01.

The facts culminating in filing the appeal are as follows:

The assessee is engaged in the manufacture of automobile ancillary products and railway brake blocks. For the asst yr. 2000-01, the AO completed the assessment on a total income of Rs. 3.70 crores. The CIT having found that the order of assessment was erroneous and prejudicial to the interest of the Revenue, as the assessee had utilised borrowed funds for investment in shares of group companies, the amount of interest paid which were claimed as a deduction, issued show-cause notice on 25th Feb., 2005 stating that the failure of the AO to look into the above aspect has resulted in an erroneous assessment prejudicial to the interest of Revenue. After giving a due opportunity to the assessee, the CIT passed a detailed order u/s 263 directing the AO to arrive at the correct figure of proportionate interest and disallow the same and revise the assessment accordingly. Aggrieved by the said order of the CIT the assessee filed an appeal to the Tribunal. The Tribunal quashed the order of revision on the ground that the CIT has not recorded a finding in his order that the order of the AO was prejudicial to the interest of the Revenue and thus the twin conditions which were prerequisite for invocation of Section 263 was absent in this case and after referring the apex Court''s decision in the case of MALABAR INDUSTRIAL CO. LTD. Vs. COMMISSIONER OF INCOME TAX, allowed the appeal and set aside the order of the CIT(A). The correctness of the said order is put in issue in this tax case appeal by formulating the following question of law:

Whether in the facts and circumstance of the case, the Tribunal was right in holding that the order passed by the CIT is bad in law since he did not specifically state that it is prejudicial in the operative part of the order?

Learned Counsel for the Revenue contended that the reasoning given by the Tribunal that the CIT has not recorded a finding that the order passed by the AO was prejudicial to the interest of the Revenue is not correct. While issuing the show-cause notice, the CIT has categorically stated the reason for invocation of power u/s 263 of the Act to the effect that the assessment made for 2000-01 was erroneous and prejudicial to the interest of Revenue which reads as follows:

On the perusal of your published accounts, it is seen that your investment in shares of group companies is Rs. 15.55 crores. Sizeable portion of this has come out of borrowed funds of this and earlier years. During the year, you have claimed an expenditure of about Rs. 5.55 crores towards interest under various types of borrowings. The income from dividends is exempt. Therefore, as per the provisions of Section 37 interest pertaining to the borrowals invested in the purchase of shares is not wholly and exclusively incurred for the purpose of business and is not allowable. The AO has not looked into this aspect at all. Failure to do so has resulted in an erroneous assessment prejudicial to the interest of Revenue.

After detailed discussion, the revised order has been passed. Of course, it is true in the ultimate para 16 the word "prejudicial to the interest of Revenue" has been left out. But that cannot by itself mean that the twin conditions which are required u/s 263 has not been complied with.

We heard the arguments of the learned Counsel on either side and perused the materials on record.

It is true that the show-cause notice dt. 25th Feb., 2005 contained the terminology that the CIT was of the view that the order of the AO was erroneous and also prejudicial to the interest of the Revenue. He further discussed the case on merits and ultimately held that the order of the AO was erroneous inasmuch as proportionate interest pertaining to the borrowed money invested in purchase of shares of group companies had not been disallowed. However, on facts, the Tribunal has recorded a finding to the effect that the assessee had sufficient funds by way of retained earnings and capital for making the investment in the group companies and the assessee had not borrowed any amount used in the investment. No doubt the amounts were made out of OD/CC account on bank but the assessee has never surplus fund with whole (sic). The Tribunal had also perused the balance sheet placed before it and convinced that the assessee was having sufficient profits and also the general reserve fund. Hence on facts the stand taken by the Revenue before CIT has been reversed by the Tribunal. Though, we are in agreement with the question of law as framed by the Revenue that mere not incorporation of the word "prejudicial to the interest of Revenue" would not ipso facto vitiate the order of the CIT, but on facts as it was held against the Revenue, we are not inclined to entertain the appeal.

The tax case appeal is dismissed.