2016 (9) TMI 1341 - AT - Income Tax

Revision u/s 263 - addition under section 40A(2)(b) - exercise of revision jurisdiction even when an assessment is framed without any enquires - Held that - It is an undisputed fact that the Assessing Officer had framed a regular assessment. He issued section 142(1) notice dated 23.12.2011. Specific query seeking details of the impugned interest expenses raised. This question raised is at sl. no.19. The assessee filed reply thereto placing on record all necessary details for the interest expenditure in question. Page no.35 is annexure-III depicting comparative chart of the two payees. DR raises a very strong objection that the assessee has not deliberately placed on record Annexures-I & II filed before the CIT. We put up a special query as to whether there is any attempt to mislead the bench or contents of the relevant paper book are not correct. The reply received is in negative. The Revenue s objection is accordingly overruled. We proceed further to notice that the assessee had acquired the sum in question of ₹ 5 crores in lieu of reserving 50000 sq. mtr. plot in its project submitted in correspondence with the payee dated 04.08.2008. It accepted MPSEZ s booking withdrawal on 01.04.2009 sought vide letter dated 17.03.2009 with interest stipulation @ 18% till actual payment. Assessee s ledger maintained disclosing payment of ₹ 5 crores and interest in question made between 18.02.2010 to 26.03.2010. All this followed the regular assessment dated 28.05.2012 not making any interest disallowance. These facts indicates that the Assessing Officer had made all due enquiries, examined the interest issue in question and find it a fit case for not invoking section 40A(2)(b) of the Act. At this stage relies upon section 263 Explanation 2 inserted in the Act by the Finance Act 2015 w.e.f. 01.06.2015 envisaging exercise of revision jurisdiction even when an assessment is framed without any enquires and verification which should have been, in the opinion of revisional authority, deemed to be erroneous in so far as prejudicial to the interest of the revenue. Next argument of the assessee is that it is payee M/s MPSEZ has already been assessed at maximum marginal rate. It quotes board s circular dated 06.07.1968 clarifying that an interest expenditure is not to be disallowed in case there is no tax saving at payee s behalf. Learned authorised representative places on record M/s MPSEZ s return filed for the impugned assessment year itself stating net total income of ₹ 1,27,39,970/- i.e. taxable at maximum rate. There is no rebuttal coming at Revenue s instance. Assessee s third argument is that its interest outgo of 18% & 10% in question is very much distinguishable. We have already indicated in preceding paragraphs that assessee had incurred 10% interest qua a claim raised under section 36(1)(ii) of the Act in respect of capital borrowed as against that @ 18% in question arising from retention of booking advances of ₹ 5 crores. These two interest sums stand on different footings. We find that hon ble jurisdictional high court in case of CIT vs. Sarjan Realties Limited (2014 (8) TMI 206 - GUJARAT HIGH COURT) is of the view that section 40A(2)(b) disallowance does not arise because of the mere fact that an assessee has paid different interest rate to different payees thereby comparing the same in order to hold the higher outgo as excessive. There is no issue that the CITs finding in question take into account assessee s interest expenses difference i.e. 18% and 10% (supra) for directing AO to frame a fresh assessment. These two interest sums arise in totally different backgrounds not having any similarity. We are further of the opinion that the CIT has erred in directing the Assessing Officer to frame a fresh assessment in these peculiar facts and circumstances. We accept assessee s arguments to reverse the CIT s order under challenge in view of our discussions hereinabove. No other point was argued in the course of hearing except those specifically dealt in our instant adjudication. Assessee s appeal is allowed

Summary

Issues:
Assessment of interest payments under section 40A(2)(b) of the Income Tax Act, 1961.

Analysis:
1. Background: The appeal pertains to the assessment year 2010-11 of a real estate development/construction company. The Assessing Officer made disallowances/additions, including interest payments to specified parties under section 40A(2)(b) of the Act.

2. Revision under Section 263: The Commissioner sought to revise the assessment under section 263, alleging that the Assessing Officer erred in accepting the interest claim of the company without proper examination. The CIT contended that interest payments to different parties were not adequately scrutinized.

3. Assessee's Response: The company argued that the Assessing Officer had conducted thorough inquiries and had valid reasons for not disallowing the interest payments. It maintained that the interest payments were made based on business expediency and did not violate section 40A(2)(b) of the Act.

4. CIT's Decision: The CIT rejected the company's explanation, asserting that the assessment order was erroneous and prejudicial to revenue interests. The CIT relied on the Supreme Court judgment in the case of Malabar Industrial Co. Ltd. vs. CIT (SC) 243 ITR 83 to support the revision under section 263.

5. Appellate Tribunal's Analysis: The Tribunal reviewed the case and found that the Assessing Officer had indeed examined the interest issue by issuing specific queries and receiving detailed responses from the company. The Tribunal also noted that the interest payments were made in the context of business transactions and were not in violation of tax laws.

6. Legal Interpretation: The Tribunal considered the applicability of section 263 Explanation 2, introduced by the Finance Act 2015, and rejected the Revenue's argument regarding inadequate inquiry. It cited relevant case law to support the position that the Assessing Officer's assessment was valid and did not require further scrutiny.

7. Decision and Rationale: The Tribunal overturned the CIT's order, emphasizing that the interest payments were justified, and there was no tax-saving benefit to the payee. It differentiated between the interest rates paid to different parties based on the nature of transactions and legal precedents. The Tribunal concluded that the CIT's directive for a fresh assessment was unwarranted, and the company's appeal was allowed.

In conclusion, the Appellate Tribunal upheld the company's appeal, highlighting the proper examination of interest payments, the absence of tax-saving benefits, and the distinct nature of the interest rates paid to different parties. The Tribunal's decision provided a detailed analysis of the legal and factual aspects, ensuring a fair and just outcome in the assessment dispute.