Ajit K.Sengupta, J. - (1.) This reference at the instance of the Commissioner under Section 256(1) of the Income-tax Act, 1961, relates to the assessment year 1981-82. The assessment in this case was completed by the Inspecting Assistant Commissioner of Income-tax (Assessment), Range-III, Calcutta, on February 28, 1985, computing the total income at " nil ". Subsequently, on examination of the assessment records, the Commissioner of Income-tax found that interest of Rs. 49,15,435 was not taxed by the Inspecting Assistant Commissioner on the basis of the Central Board of Direct Taxes Circular No. 201/20/84, dated October 9, 1984, wherein it was provided that the interest on the advance which could not be recovered for three consecutive years may not be subjected to tax. The Commissioner of Income-tax found that the Inspecting Assistant Commissioner (Assessment) was not justified in not taxing the said interest amount in view of the decision of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102. The Commissioner of Income-tax thereby set aside the assessment dated February 28, 1985, holding that the final state of law as pronounced by the Supreme Court in the above case showed that the order of the Inspecting Assistant Commissioner (Assessment) was erroneous and prejudicial to the interests of the Revenue on this issue.
(2.) The assessee's counsel urged that, when the Inspecting Assistant Commissioner (Assessment) completed the assessment, only the CBDT circular was available which was binding upon the Inspecting Assistant Commissioner (Assessment). Consequently, in view of that circular, the interest was not subjected to tax. He further contended that the decision of the Supreme Court, in State Bank of Travancore v. CIT [1986] 158 ITR 102, came in 1986 and this decision was not available before the Inspecting Assistant Commissioner (Assessment). Therefore, the assessee's counsel urged that the order passed by the Inspecting Assistant Commissioner (Assessment) was neither erroneous nor prejudicial to the interests of the Revenue. The Departmental representative, on the other hand, supported the order of the Commissioner of Income-tax.
(3.) After hearing both the parties, the Tribunal concluded the matter as follows : "7. The action under Section 263 of the Act has been taken by the Commissioner of Income-tax on the ground that interest for which there was no recovery for three consecutive years should have been taxed and that the Inspecting Assistant Commissioner was not justified in accepting the plea of the assessee placing reliance on CBDT Circular No. F.201/21/ 84.ITA-II, dated October 9, 1984. The contention of the assessee appears to be correct. The assessment for the year under appeal was made on February 28, 1985, when, on the subject, only the Board circular was available according to which interest in respect of accounts where there was no recovery for three consecutive accounting years should not be subjected to tax. The Supreme Court decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 came much later in 1986. However, the observations of their Lordships have been considered again by the Patna and Kerala High Courts (supra). There is difference of opinion on the issue. Therefore, it cannot be said that the Inspecting Assistant Commissioner was wrong in following the Board circular and that his order is prejudicial to the interests of the Revenue. When the assessment was completed, the only paper available was the Board circular dated October 9, 1984. Therefore, it cannot be said that the assessment made was erroneous and prejudicial to the interests of the Revenue.";