2013 (6) TMI 531 - AT - Income Tax

Jurisdiction power u/s 263 by CIT(A) - directing AO to disallow the pre-operative capitalisation of interest, enquire into the genuineness of transaction relating to 22% non-convertible debentures subscribed by the holding company,enquire into the genuineness of transaction relating to advances made for the purpose of land development charges and disallow @ 22% p.a. as interest from preoperative capitalisation, enquire into the genuineness of claim of interest included in preoperative capitalisation and directing AO to compute interest on the deposit at 15% from the date of deposit till the closing date relevant accounting period - Held that - AO after duly considering the explanation and information filed in response to the notice issued u/s. 143(2) on being satisfied with such explanation chose not to make any further enquiry. Endless enquiry is not possible and it is for the AO to decide when to end the enquiry. The CIT cannot transgress the jurisdiction under Section 263 by mentioning that no proper enquiry was made. As decided in Rishi Kumar Gupta v. CIT 2004 (2) TMI 270 - ITAT AGRA AO having made the assessment after enquiry, as admitted by the CIT in his notice as well as in his order u/s. 263, he was not justified in setting aside the assessment on the ground that the AO had failed to make proper enquiry . Thus the order passed u/s. 263 quashed. In favour of assessee.

Issues Involved:
1. Limitation of the order under section 263.
2. Legality of the invocation of power under section 263.
3. Direction for part enhancement and part set aside of the assessment order.
4. Disallowance of pre-operative capitalisation of interest.
5. Enquiry into the genuineness of transactions relating to non-convertible debentures.
6. Enquiry into the genuineness of advances made for land development charges.
7. Enquiry into the genuineness of the claim of interest included in preoperative capitalisation.
8. Computation of interest on deposits.

Detailed Analysis:

1. Limitation of the Order under Section 263:
The assessee contended that the order passed by the CIT under section 263 was barred by limitation. However, the judgment did not explicitly address this issue, focusing instead on the substantive merits of the CIT's directions.

2. Legality of the Invocation of Power under Section 263:
The assessee argued that the invocation of jurisdiction under section 263 was bad in law, as there was no business commencement in the relevant assessment year, and the return of income declared nil income. The Tribunal noted that to invoke section 263, the order must be both erroneous and prejudicial to the interest of revenue. The Tribunal found that the assessee had no taxable income, and there was no claim of carried forward loss or depreciation. Thus, even if there were errors, they did not result in taxable income, making the CIT's invocation of section 263 inappropriate.

3. Direction for Part Enhancement and Part Set Aside of the Assessment Order:
The CIT directed part enhancement and part set aside of the assessment order. The Tribunal held that the CIT could not substitute his views for those of the Assessing Officer (AO) unless the AO's order was erroneous and prejudicial to the revenue. The Tribunal found that the AO had made a proper scrutiny and passed the assessment order after considering all relevant information and explanations.

4. Disallowance of Pre-Operative Capitalisation of Interest:
The CIT observed that the assessee wrongly capitalised interest relating to redeemable non-convertible debentures, resulting in excess capitalisation of Rs. 2,83,41,184. The Tribunal, however, noted that the interest was capitalised as preoperative expenditure, and there was no income gone out of computation. The Tribunal relied on the Supreme Court judgments in Challapally Sugars and Tuticorin Alkali Chemicals & Fertilisers Ltd., which supported the assessee's treatment of interest.

5. Enquiry into the Genuineness of Transactions Relating to Non-Convertible Debentures:
The CIT directed the AO to enquire into the genuineness of the transaction relating to 22% non-convertible debentures subscribed by the holding company. The Tribunal found that the AO had already examined the accounts and made enquiries, and the CIT could not re-examine the accounts simply because he would have estimated the income differently.

6. Enquiry into the Genuineness of Advances Made for Land Development Charges:
The CIT directed the AO to enquire into the genuineness of the advance made by the assessee for land development charges. The Tribunal noted that the assessee had paid the advance after deducting TDS, and the TDS section had levied interest for belated payment. Since the advance was not claimed as expenditure, the assessment order was not erroneous or prejudicial to the revenue.

7. Enquiry into the Genuineness of the Claim of Interest Included in Preoperative Capitalisation:
The CIT directed the AO to enquire into the genuineness of the claim of interest of Rs. 2,00,95,891 included in preoperative capitalisation. The Tribunal found that the interest was capitalised and not claimed as expenditure, resulting in no loss to the revenue.

8. Computation of Interest on Deposits:
The CIT directed the AO to compute interest on the deposit of Rs. 15.50 crores at 15% from the date of deposit till the closing date relevant to the accounting period. The Tribunal noted that the deposit was not interest-bearing, and no interest was offered to tax. Since the assessee did not claim any expenditure, there was no question of disallowing any notional interest.

Conclusion:
The Tribunal annulled the order passed under section 263, finding that the CIT's directions were not justified as the assessment order was neither erroneous nor prejudicial to the interest of the revenue. The appeal of the assessee was allowed, and the Stay Application was dismissed as infructuous.

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