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2012 (7) TMI 794 - AT - Income TaxDis allowance of interest paid on capital borrowed for the acquisition of capital assets (WIP) - CIT stated that the assessment order u/s 143(3) should be treated as erroneous and prejudicial to the interest of the revenue - Held that - Undisputed fact that the Assessee had made written submissions both before CIT & AO that though the assessee had made acquisition of assets during the year under consideration but had not borrowed funds for its acquisition and hence the provisions of sec 36(1)(iii) are not applicable and accordingly no part of interest was required to be capitalised the Commissioner did not adequately deal with these contentions, and rejected the same by observing that the interest payment should not have been allowed as a deduction. The A.O. has after considering all the facts and after satisfying himself accepted the contentions of assessee and made no disallowance u/s. 36(1)(iii). CIT has not been able to establish and pin point unequivocally the error or the mistake made by the A.O. which makes the order unsustainable in law as the finding of the CIT must be clear, unambiguous and not debatable - A.O. having exercised his mind over the issue, it cannot be termed as erroneous and prejudicial to the interest of the Revenue - in favour of assessee.
Issues Involved:
1. Whether the order passed by the Assessing Officer (AO) under section 143(3) was erroneous and prejudicial to the interest of the Revenue. 2. Whether the interest expenses incurred by the assessee on secured and unsecured loans should have been disallowed under section 36(1)(iii) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Erroneous and Prejudicial Order: The Commissioner of Income Tax (CIT) issued a show cause notice to the assessee questioning why the assessment order under section 143(3) should not be treated as "erroneous and prejudicial to the interest of the revenue" and thus be subject to revision under section 263. The CIT argued that the AO failed to disallow interest expenses of Rs.1,49,85,496/- on the grounds that these were related to funds borrowed for capital work in progress (WIP) and should have been capitalized as per proviso (iii) to section 36(1)(iii). The assessee contended that it had sufficient own funds to finance its capital assets and had not used any interest-bearing funds for the acquisition of capital assets. The AO had examined these details during the assessment proceedings and found no grounds for disallowance, thus the order was neither erroneous nor prejudicial to the interest of Revenue. 2. Disallowance of Interest Expenses: The CIT did not accept the assessee's explanation, stating that the interest paid on borrowed capital for the acquisition of assets under WIP should not have been allowed as a deduction. The CIT emphasized that the AO had not made any inquiries into the utilization of borrowed funds, making the assessment order erroneous and prejudicial. The assessee argued that the AO had examined the details of interest expenses and was satisfied that no disallowance was warranted. The assessee also cited judicial precedents, including the decision in CIT vs Reliance Utilities and Power Ltd., which supports the presumption that if sufficient interest-free funds are available, they are used for investments. Tribunal's Findings: The Tribunal observed that for invoking section 263, the CIT must demonstrate that the AO's order is erroneous and prejudicial to the interests of the Revenue. The Tribunal referred to the case of CIT vs. Gabriel India Ltd., which clarifies that an order cannot be termed erroneous unless it is not in accordance with the law. The Tribunal noted that the AO had applied his mind and examined the details provided by the assessee before making the assessment. The Tribunal also referred to the case of CIT vs. Hero Auto Ltd., which states that the CIT must provide clear and unambiguous findings that the order is erroneous. The Tribunal found that the CIT failed to establish unequivocally the error or mistake made by the AO. Conclusion: The Tribunal concluded that the AO had exercised his quasi-judicial power in accordance with the law and had made a reasoned decision. Therefore, the assessment order could not be considered erroneous and prejudicial to the interest of the Revenue. Consequently, the Tribunal quashed the CIT's order under section 263 and allowed the assessee's appeal. Judgment: The appeal filed by the assessee was allowed. The Tribunal held that the AO's order was neither erroneous nor prejudicial to the interest of the Revenue, and the CIT's order under section 263 was quashed.
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