ORDER
SMT. P. K. AMMINI, J.M. :
This appeal, by the assessee, pertaining to the asst. yr. 1986-87, is against the order of the CIT, passed under s. 263 of the IT Act, 1961.
2. The facts leading to this appeal are as follows : The assessee, a company, was started in 1957 in Bangalore for the manufacture of pressure cookers under the brand name Prestige. It started a new unit, in 1983, in a backward area in Hosur. Separate accounts were maintained in respect of the Hosur unit and separate P&L a/c and balance sheet prepared and filed. As on 31st October, 1983, the total investment in the Hosur unit was Rs. 1,33,28,905. It had a paid-up capital and reserves amounting to Rs. 3,21,03,136 as on 31st October, 1983. Therefore, according to the assessee, the investment in the Hosur unit was made out of capital and reserves. A sum of Rs. 57,67,400 had been specifically borrowed for the Hosur unit which had been separately shown. The same procedure had been followed in all the subsequent years. The interest attributable to Hosur unit had been charged to that unit and claimed against its profits. Since the company had sufficient capital and reserves at the inception of the Hosur unit, no part of the borrowings made at Bangalore could be assumed to have been utilised in the business of the new unit. Therefore, it was the contention of the assessee that no portion of the interest charged to the head office was attributable to the Hosur unit. The sum of Rs. 73,94,656 shown under the Hosur Unit was composed of the following loans :
S.No.
Secured loans :
Rs.
(a)
Deferred payment guarantee from banks through IDBI against Hypothecation of Machinery
39,36,656
(b)
Term loan from SIPCOT, Madras
15,08,000
(c)
Interest-free sales-tax loan from SIPCOT
19,50,000
An amount of Rs. 12,46,798 being interest payable under IDBI bills discounting scheme for purchase of machinery for both factories had been allowed as a revenue charge against the profits. The amount attributable to Hosur unit was Rs. 2,99,099.46. Further, the sum of Rs. 19,50,000 represented interest-free sales-tax loan from SIPCOT on which no interest was payable. The interest chargeable to Hosur unit was as under :
Rs.
Amount already charged towards term loan
2,95,084
Amount to be charged under IDBI bills discounting scheme
2,99,099
Total
5,94,183
While completing the assessment, the AO allowed deduction under ss. 80HH and 80-I in respect of the Hosur unit of the assessee-company. The CIT exercised his jurisdiction under s. 263 and he found that the computation of deduction under s. 80HH and 80-I made by the AO was erroneous and prejudicial to the interests of Revenue as the allocation of interest payment of borrowals between the Bangalore unit and Hosur unit of the company was not proportionate to the loan outstanding against the respective units. Hence, the CIT found that the assessment so made was liable to be revised. According to the CIT, as a result of such inequitable allocation of interest payments, the profit of the Hosur unit had been inflated and thereby the assessee had become entitled to a higher amount of deduction under ss. 80HH and 80-I of the IT Act, which would not have been the case, had the interest been properly allocated having regard to the loan outstanding in respect of each unit. The CIT, therefore, issued notice under s. 263. The assessee objected to the rectification by its letter dt. 28th February, 1991. According to the assessee, notice under s. 263 had not been issued to rectify any apparent mistake which would fall well within the purview of s. 154 of the Act. The notice sought to revise or make good the loss of revenue on account of an order which was erroneous and prejudicial to the interests of Revenue, in the opinion of the CIT. Therefore, in the view of the CIT, the decision of the Supreme Court in the case of T. S. Balram, ITO vs. Volkart Bros. (1971) 82 ITR 50 (SC) was relevant. The CIT, therefore, directed the AO to revise the deductions allowed under ss. 80HH and 80-I of the Act by properly allocating the interest payment attributable to the Hosur unit of the assessee-company having regard to the quantum of loan outstanding in respect of that unit vis-a-vis the total liabilities. Aggrieved, the assessee is in appeal before us.
3. The learned representative of the assessee contended that the order passed by the CIT under s. 263 is invalid, illegal and without jurisdiction. Therefore, it is liable to be set aside. According to him, the notice issued under s. 263 is not valid. For our perusal, a copy of the notice is furnished and para 2 thereof reads :
“I therefore, propose to pass appropriate orders under s. 263 of the IT Act, 1961, in respect of the asst. yr. 1986-87 to make good the loss of revenue. Your objections, if any, to the proposed action may be filed in this office on or before …… You are also given an opportunity of hearing in person, or through your authorised representative, in this regard, by me, at my office on ……… at ……”
According to the learned representative of the assessee, the notice issued as above is invalid. Hence, the order passed on the basis of the above notice, without giving an opportunity to the assessee of being heard, is a nullity. It is also pointed out that the assessee replied to the notice dt. 25th February, 1991 by its letter dt. 28th February, 1991, objecting to the proposed action of the CIT under s. 263. Still the assessee was not given an opportunity of being heard. Without hearing the assessee, the CIT passed his order under s. 263 directing the AO to revise the computation. In support of his contention, the learned representative of the assessee relied on the following case law :
(i) R. B. Sreeram Durga Prasad and Fatechand Nursing Das vs. Settlement Commission (IT & WT) & Anr. (1989) 176 ITR 169 (SC);
(ii) CIT vs. Chandan Wood Products (1996) 217 ITR 834 (MP); and
(iii) Acme Fabric Plast Co. vs. ITO (1997) 225 ITR 826 (MP).
4. The learned Departmental Representative, on the other hand, strongly supported the order of the CIT passed under s. 263.
5. We have heard the rival submissions. It is clear from the notice issued by the CIT under s. 263, the material portion of which has been quoted by us above, that the CIT has not given the specific date during which the assessee was to file its objection, if any, to the proposed action of the CIT under s. 263. He has also not given the date and time at which the assessee or its authorised representative was to appear before him. Therefore, we cannot, but accept the contention of the learned representative of the assessee that the order under s. 263 by the CIT was passed without giving an opportunity of being heard to the assessee. When an order is passed without hearing the assessee or without giving an opportunity to the assessee, what follows is clearly laid down in the case law cited on behalf of the assessee.
(i) In the case of Shreeram Durga Prasad (supra), the Honble Supreme Court, it is held that an order passed violating the principles of natural justice is a nullity. It is further held :
“(ii) that the earlier order passed by the Settlement Commission on 24th August, 1977, was a nullity because it was made in violation of the principles of natural justice;
(iii) that, therefore, the application for settlement was still pending when the amendment made by the Finance Act, 1979, came into effect; and that amendment being procedural, the amended s. 245D would govern the proceedings and the Commission would have the power to overrule the objections of the CIT;
(iv) that the appellant was entitled to be heard on the objections;
(v) that, on the facts, though the appellant had made its submissions on the CITs objections, no clear opportunity had been afforded to it to demonstrate that the Commission ought not to accept the objections. It might be that in spite of the fact that concealment for the years 1948-49 to 1959-60 had been upheld in appeal, it would be possible for the appellant to demonstrate that in disclosure of concealment of income for a spread-over period, settlement for the entire period should be allowed and not bifurcated in the manner sought by the CIT.”
Since the assessee has got a right of being heard and an opportunity was not given natural justice is violated in this case.
(ii) In the case of CIT vs. Chandan Wood Products (supra), the MP High Court held :
“that as found from the record by the Tribunal, a copy of the report of the expert was not given to the assessee. The act of the CIT was in derogation of the principles of natural justice and, therefore, the order under s. 263 passed by him was not valid.”
(iii) In the case of Acme Fabric Plast Co. (supra) the MP High Court considered a case where the CIT passed an order on 7th February, 1983, directing the ITO to pass a fresh order under s. 154 of the IT Act, 1961, rejecting the petition of the assessee claiming development rebate at a higher rate of 25 per cent. On a writ petition :
“Held, that even though the petitioner had taken precautions to file written submissions, this was not enough to assume that oral hearing was not required to be given. This had definitely prejudiced the case of the petitioner. Moreover, the CIT had given a direction to the ITO to pass the order of rectification. This left no option to the ITO. This would also vitiate the principles of natural justice. The order of the CIT was not valid and was liable to be quashed.”
As stated earlier, the notice under s. 263 does not bear the date of hearing. We, therefore, hold that the order passed by the CIT under s. 263 is a nullity and is liable to be cancelled.
6. Coming to the merits, the assessee has already shown the accounts in respect of Hosur unit and Bangalore unit in respect of borrowals and the interest thereon separately. Hence, there is no necessity of again giving a direction to the AO to pass an order after bifurcating the accounts in respect of the two units. The learned representative of the assessee placed reliance on the decision of the Honble Supreme Court of India in the case of CIT vs. Indian Bank Ltd. (1965) 56 ITR 77 (SC) and CIT vs. Maharashtra Sugar Mills Ltd. (1971) 82 ITR 452 (SC).
7. (a) In the case of Indian Bank Ltd. (supra) the Honble Supreme Court held that interest paid by the bank on moneys borrowed from its various depositors had to be allowed in its entirety under s. 10(2)(iii) of the Indian IT Act, 1922, and there was no warrant for disallowing a proportionate part of the interest referable to moneys borrowed for the purchase of securities whose interest was tax-free. In the present case also, some of the borrowals was interest-free.
(b) In the case of Maharashtra Sugar Mills Ltd. (supra) it is held that the entire managing agency commission was laid out or expended for the purpose of the business carried on by the assessee and was allowable under s. 10(2)(xv) of the IT Act, 1922, and that the fact that the income from a part of the business was not exigible to tax under the Act was not a relevant circumstance.
8. Following, with respect, the above two judgments of the Honble Supreme Court, we also hold, in favour of the assessee, on merits also.
9. In the result, the appeal is allowed.