The Commissioner of Income Tax can exercise revisional powers under Section 263 only if the assessment order is both erroneous and prejudicial to the revenue, requiring a thorough examination of the issues involved.

JUDGMENT :

Jitendra Jain, J.

1. This Income Tax Appeal is filed, under Section 260A of the Income Tax Act, 1961, by the Appellant-Assessee for the assessment year 1988-1989 challenging an order of the Income Tax Appellate Tribunal (Tribunal) dated 8 October 2002, whereby the Appellant-Assessee’s appeal challenging jurisdiction of the Commissioner of Income Tax to invoke revisional power under Section 263 of the Income Tax Act, 1961 (“the IT Act”) was dismissed.

2. This appeal was admitted on 25 October 2004 on the following substantial question of law:-

“Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in holding that the deduction of the decapitalised interest of Rs.317.63 lacs (Rs.396.94 lacs minus Rs.79.21 lacs) pertaining to earlier years while computing book profits under Section 115J had not assumed finality.”

3. By consent of both the parties, the substantial question of law is reframed to bring out the exact controversy:

"Whether the Tribunal was justified in upholding exercise of revisional power by the CIT u/s 263 of the Act and further was Justified in holding that observations made by the CIT in his order u/s 263 on the issue of Section 115J is not definite finding on the merits of the issue?"

FACTS :

4. The Appellant-Assessee are successor to the erstwhile Asian Cables Limited. On 1 January 1987, Asian Cable and Corporation Ltd. amalgamated with Wiltech India Ltd. we.f. 1 January 1987 and the name of the amalgamated company was changed to Asian Cables Ltd.

5. In the hands of Wiltech India Ltd., interest on term loan from financial institutions were capitalised, including interest for the period subsequent to the date of commencement of commercial production (i.e. 1 May 1982). Total interest aggregating to Rs.617,07,00,000/- was capitalised. Depreciation on such capitalised interest claimed by Wiltech India Ltd. in the accounts for 1982-1983, 1983-1984, 1984-1985 and 1985-1986 was Rs.79.21 lakhs. From the accounting year, ending 31 March 1988, i.e. the year of the amalgamation, the accounting policy of capitalising future interest was changed, whereby interest relating to period from the commencement of production upto 31 December 1986 was decapitalised and charged as an expenditure in the profit and loss account of the year 1987-1988, and the depreciation claim on the said capitalised interest in the earlier year was also written back to the profit and loss account in 1987-1988.

6. On 28 July 1988, the Appellant-Assessee filed its return of income declaring loss. The said return was revised on 7 July 1989 and income under Section 115J of the IT Act was declared at Rs.49,19,380/-. The said revised return was further revised on 23 April 1990 in which the deduction under Section 32AB of Rs.80,85,862/- was claimed, but the income under Section 115J remained the same i.e. Rs.49,19,380/-. The said return was selected for scrutiny assessment.

7. On 28 February 1991, an assessment order under Section143(3) of the IT Act was passed by the assessing officer , assessing the income under normal provisions of the IT Act at rupees ‘NIL after making disallowance under Rules 6D, 37(2A), incentive payment,40A(5), 43B, payment to club, addition on account of mortgage etc. and after setting off unabsorbed losses. The assessing officer after computing income under normal provisions of the IT Act, accepted computation of income made by the Appellant-Assessee under Section 115J at Rs.49,19,377/-.

8. On 25 February 1993, a notice under Section 263 of the IT Act was issued by the Commissioner of Income Tax (CIT) in which he stated that the assessment framed by the ITO is erroneous insofar as it is prejudicial to the interest of revenue on the ground that deduction allowable under Section 32AB of the IT Act has not been computed correctly, since interest on loans relating to prior period amounting to Rs.3,96,84,098/- has been added to the book profit and further book profit under Section 115J of the IT Act are