1998 (3) TMI 174 - AT - Income Tax

Tribunal upholds revision under sec 263 finding AO error in deduction calculation, directs fresh assessment.

The Tribunal upheld the Commissioner of Income-tax's invocation of revisionary jurisdiction under section 263 of the Income-tax Act, 1961, finding the ... Intercorporate Dividends, Net Dividend Income, Bank Loan Against Uti Units, Revision, Prejudicial To The Interests Of Revenue, Opportunity Of Being Heard Issues Involved1. Validity of the Commissioner of Income-tax's (CIT) invocation of revisionary jurisdiction under section 263 of the Income-tax Act, 1961.2. Correct computation of deduction under section 80M of the Income-tax Act, 1961.3. Attribution of interest expenditure to the purchase of units for the purpose of computing net dividend income.Detailed Analysis1. Validity of the CIT's Invocation of Revisionary Jurisdiction under Section 263The appeal was filed by the assessee against the order of the CIT, Patiala, who invoked section 263 of the Income-tax Act, 1961, to revise the assessment for the assessment year 1991-92. The CIT felt that the Assessing Officer (AO) had erred by not reducing the interest expenditure of Rs. 3.56 crores from the gross dividend income to arrive at the correct deduction under section 80M. The CIT issued a show cause notice and, after considering the assessee's representations, concluded that the interest expenditure was incurred for earning dividend and should be deducted under section 57(iii) while computing the dividend income for deduction under section 80M. The AO's assessment was cancelled, and a fresh order was directed to be passed under section 143(3).The Tribunal held that the CIT's assumption of jurisdiction under section 263 was justified. The AO had failed to properly compute the deduction under section 80M due to non-application of mind and reliance on conjectural presumptions. The AO did not verify the source of funds used for purchasing units, despite a significant increase in interest expenditure from Rs. 98 lakhs to Rs. 3.56 crores. The Tribunal found that the CIT's action was supported by ample material indicating that the AO's order was erroneous and prejudicial to the revenue's interest.2. Correct Computation of Deduction under Section 80MThe assessee contended that the AO had already considered the matter and deducted 5% of the dividend income (Rs. 27,98,979) as expenditure incurred for earning the dividend. The assessee argued that the interest of Rs. 3.56 crores was not attributable to the purchase of units and should not be deducted from the total dividend income for section 80M relief. The Tribunal, however, rejected this contention, stating that the AO failed to compute the deduction under section 80M correctly. The Tribunal noted that the AO's assessment lacked proper enquiry and verification, and the CIT was correct in directing a fresh computation of the deduction under section 80M.3. Attribution of Interest Expenditure to the Purchase of UnitsThe assessee argued that the interest expenditure was not related to the purchase of units and provided detailed submissions to support this claim. The assessee maintained that investments in units were made from its own resources and not from borrowed funds. The Tribunal, however, found that the interest on demand loans raised from American Express Bank, Bank of America, and Grindlays Bank on May 30 and 31, 1990, was related to the purchase of units. The Tribunal directed that the interest expenditure of Rs. 74,85,770 be deducted from the gross dividend income for computing the net dividend income under section 57(iii).The Tribunal also considered the alternative plea of the assessee that if any interest expenditure were to be deducted, it should be limited to Rs. 74,85,770, which was the interest on loans directly linked to the purchase of units. The Tribunal accepted this plea and directed the AO to allow the deduction under section 80M after reducing the interest amount of Rs. 74,85,770 from the gross dividend.ConclusionThe Tribunal modified the CIT's order, directing the AO to pass a fresh assessment order confined to considering the deduction under section 80M, which should be computed after deducting the interest amount of Rs. 74,85,770 from the gross dividend. The appeal was partly allowed.