Tribunal overturns Commissioner's order, rules in favor of assessee on interest payments allocation

The Tribunal allowed the appeal, setting aside the order passed by the Commissioner under section 263. The Tribunal ruled in favor of the assessee regarding the allocation of interest payments between the Bangalore and Hosur units of the company, holding that the order passed by the Commissioner without giving the assessee an opportunity to be heard was a nullity. The Tribunal found in favor of the assessee on the merits of the case, emphasizing the separate accounting maintained by the assessee for the units and the proper allocation of interest payments.

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Issues:
1. Validity of the order passed by the Commissioner under section 263 without providing an opportunity of being heard to the assessee.
2. Merits of the case regarding the allocation of interest payments between the Bangalore unit and Hosur unit of the company.

Detailed Analysis:

Issue 1: The validity of the order passed by the Commissioner under section 263 without providing an opportunity of being heard to the assessee:
The appeal before the Appellate Tribunal ITAT Bangalore pertained to the assessment year 1986-87 and challenged the order of the Commissioner of Income-tax passed under section 263 of the Income-tax Act, 1961. The Commissioner exercised jurisdiction under section 263, finding the assessment made by the Assessing Officer to be erroneous and prejudicial to the revenue's interests due to the improper allocation of interest payments between the Bangalore unit and Hosur unit of the company. The CIT issued a notice under section 263 directing the Assessing Officer to revise the deductions allowed under sections 80HH and 80-I by properly allocating the interest payment attributable to the Hosur unit. The assessee contended that the order passed by the CIT under section 263 was invalid, illegal, and without jurisdiction as the notice issued did not provide a specific date for filing objections or a date for a hearing. The Tribunal held that the order passed by the CIT without giving the assessee an opportunity to be heard was a nullity, citing various case laws emphasizing the violation of natural justice.

Issue 2: Merits of the case regarding the allocation of interest payments between the Bangalore unit and Hosur unit of the company:
The assessee had maintained separate accounts for the Bangalore and Hosur units, with separate profit and loss accounts and balance sheets. The company contended that the investment in the Hosur unit was made out of capital and reserves, with specific borrowings for the Hosur unit separately shown. The Assessing Officer allowed deductions under sections 80HH and 80-I for the Hosur unit, which the CIT found to be erroneous due to disproportionate allocation of interest payments between the units. The Tribunal, after considering the arguments presented, relied on judgments of the Hon'ble Supreme Court in cases such as Indian Bank Ltd. and Maharashtra Sugar Mills Ltd. to hold in favor of the assessee on merits. The Tribunal concluded that there was no necessity to bifurcate the accounts again as the assessee had already shown the accounts separately, and the order passed by the CIT under section 263 was held to be a nullity, leading to the appeal being allowed.

In conclusion, the Tribunal allowed the appeal, setting aside the order passed by the Commissioner under section 263 and ruling in favor of the assessee on the merits of the case regarding the allocation of interest payments between the Bangalore and Hosur units of the company.

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