Commissioner of Income Tax vs Lotte India Corporation Ltd., (Formerly Parrys Confectionery Ltd.)

P.D. Dinakaran, J.—The above tax case appeal is directed against the order of the Income Tax Appellate Tribunal dated 12.10.2005 made

in I.T.A. No. 270/Mds/2001 for the assessment year 1997-98, setting aside the order of the Commissioner of Income Tax (Appeals) dated

10.11.2000 and confirming the order of the assessment dated 10.3.2000 made by the Assessing Officer holding that interest on debentures and

corporate borrowings is an allowable deduction, relying on the decision of the Apex Court in India Cements Ltd. Vs. Commissioner of Income

Tax, Madras, .

2.1. The facts in a nutshell are that the Assessing Officer while completing assessment for the assessment year 1997-98 allowed the claim of the

assessee with respect of Rs. 1,26,06,781/- being the interest on debenture and inter corporate dividends, but disallowed other claims of the

assessee.

2.2. Aggrieved by the disallowed portion of the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax

(Appeals), who, while partly allowing the appeal and remitting the matter to the Assessing Officer held that it was not clear as to how the

expenditure which had been capitalised in the books of accounts and claimed in the adjustment statement has been allowed by the Assessing

Officer and observed that this part of the case also needs to be examined.

2.3. On further appeal by the assessee to the Tribunal, the Tribunal by order dated 12.10.2005 held that the Commissioner of Income Tax

(Appeals) committed an error in law, as the power conferred u/s 251(2) of the Income Tax Act (for brevity, ""the Act"") cannot be exercised by the

Commissioner of Income Tax (Appeals) without giving a reasonable opportunity to the assessee against such enhancement or reduction.

2.4. Hence, the present appeal by the Department raising the following substantial questions of law:

(i) Whether in the facts and circumstances of the case, the Tribunal was right in cancelling the direction of the CIT(A) to adjudicate the issue of

interest on debenture and inter corporate dividends that was allowed by the assessing officer, on the ground that no notice u/s 251(2) was issued,

even though the assessee had participated in the appeal proceedings? and

(ii) Whether in the facts and circumstances of the case, the order of the CIT(A) directing the Assessing Officer to verify and pass orders is in the

nature of enhancement is prejudicial to the assessee and notice u/s 251(2) of the Act is mandatory?

Before proceeding further, it is profitable to refer the relevant statutory provision, viz., Section 251 of the Act, which deals with the powers of

the Commissioner of Income Tax (Appeals):

Section : 251. Powers of the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals).--(1) In disposing of an

appeal, the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall have the following powers--

(a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; or he may set aside the assessment and

refer the case back to the Income Tax Officer for making a fresh assessment in accordance with the directions given by the Appellate Assistant

Commissioner or, as the case may be, the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the Income

Tax Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of

such fresh assessment;

(b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the

penalty;

(c) in any other case, he may pass such orders in the appeal as he thinks fit.

(2) The Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall not enhance an assessment or a penalty or

reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.

Explanation.--In disposing of an appeal, the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) may consider

and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not

raised before the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) by the appellant.

The finding of the Commissioner of Income Tax (Appeals) that it is not clear in the assessment order as to how the expenditure which had been

capitalised in the books of accounts and claimed in the adjustment statement has been allowed by the Assessing Officer and that the said aspect

also needs to be reexamined, certainly leads to the conclusion that there may be an enhancement of assessment or a penalty or reduction of the

amount of refund. It that be so, as contemplated u/s 251(2) of the Act, referred to above, the Commissioner of Income Tax (Appeals), as rightly

held by the Tribunal, should not exercise the power conferred u/s 251(2) without giving a reasonable opportunity to the assessee showing against

such enhancement or reduction, and to that extent the Tribunal is right in coming to the conclusion that the Commissioner of Income Tax (Appeals)

has committed an error in rendering the finding that it is not clear in the assessment order as to how the expenditure which had been capitalised in

the books of accounts and claimed in the adjustment statement has been allowed by the Assessing Officer.

In any event, it is a settled law vide India Cements Ltd. Vs. Commissioner of Income Tax, Madras, that the loan obtained was not an asset or

an advantage for the enduring benefit of the business of the assessee.

Applying the said principle, we find that interest on debentures and corporate borrowings also cannot be treated as an asset or an advantage for

the enduring benefit of the business of the assessee and accordingly confirm the order of the Tribunal.

In the result, finding no substantial question of law, this appeal is dismissed. No costs.