Ajit K.Sengupta, J. - (1.) In this reference made by the Tribunal under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, the following question calls for determination : "Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that there was no error in the assessment order of the Income-tax Officer and so the Commissioner of Income-tax was not justified in annulling the order of the Income-tax Officer under Section 263 of the Act ?"
(2.) Shortly stated, the facts leading to the reference are that the assessment for the assessment year 1985-86 was completed under Section 143(3) on November 26, 1985. The Commissioner of Income-tax was of the view that the said assessment order was erroneous in so far as it was prejudicial to the interests of the Revenue on the ground that the Income-tax Officer had applied an incorrect rate of tax and that there had been an incorrect application of Article 12(2) of the Convention for Avoidance of Double Taxation resulting in a total undercharge of tax of Rs. 37,690. In that view, he started proceedings under Section 263 by issue of a notice dated February 23, 1988. The assessee's counsel appeared before the Commissioner of Income-tax and submitted that the rate of tax at 15 per cent. was correctly applied by the Income-tax Officer on interest on short-term deposits with banks and the Housing Development Finance Corporation (in short, "the H. F. D. C.") and that the said interest satisfied the conditions necessary for applying Article 12(2) of the Convention for avoidance of Double Taxation between India and the United Kingdom. The Commissioner of Income-tax, after referring to Article 12(2), held as under : "It is seen from records that the rate of 15 per cent. was not to be applied to interest on dividend arising from investments made prior to October 21, 1981, which is the date of entry into force of the Avoidance of Double Taxation Convention between India and the U. K. It is further noticed from records that the deposits were all along kept with banks and other organisations even before the convention came into force. It is also seen that old deposits were renewed from time to time with the permission of the Reserve Bank of India, which shows that the deposits were old which were being renewed from time to time. A renewal cannot be called fresh deposit within the meaning of Article 12(2) of the aforesaid convention. Hence, the correct rate of tax applicable in this case was not 15 per cent. in Article 12(2) of the convention but the rate prescribed by the relevant Finance Act. Since it was not done by the Income-tax Officer, who framed the assessment, the order passed by him is erroneous being prejudicial to the interests of the Revenue."
(3.) Accordingly, the Commissioner of Income-tax set aside the assessment order and directed the Income-tax Officer to frame a fresh assessment keeping in view his discussions in the order under Section 263 and after allowing the assessee a reasonable opportunity of being heard.;