2015 (4) TMI 436 - AT - Income Tax

Revision u/s 263 - unaccounted interest payments - Held that - In this present case, the Assessing Officer completed assessment u/s.143(3) on 30.11.2011 which means that the Assessing Officer applied his mind and came to the conclusion that the assessee had properly accounted interest payments in his books of accounts. After he came to the conclusion that the whole expenditure incurred by the assessee towards interest payment of D48,39,309/-, he allowed the same as business expenditure. For this conclusion reached by the Assessing Officer, the Commissioner of Income Tax cannot find fault and he cannot impose his view on the Assessing Officer. The Assessing Officer has taken one possible view. The view taken by the Assessing Officer cannot be considered as erroneous if the income from interest on fixed deposit is considered as income from other sources, than the interest incurred by the assessee on borrowings used for making deposits is to be allowed as expenditure. Further, if there is any loss under the head Income from other sources it is to be set off against income from any other head of Income as per provisions of section 71 of the Act. Then also, there is no revenue loss to the department. From this point of view, the order passed by the Assessing Officer cannot be prejudice to the interests of Revenue. Thus Commissioner of Income Tax is not justified in exercising his jurisdiction u/s. 263 of the Act and the order of the Commissioner of Income Tax passed u/s. 263 is quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of invoking the provisions of Section 263 of the Income Tax Act by the Commissioner of Income Tax (CIT).
2. Legitimacy of the interest claimed as business expenses by the assessee.

Issue-wise Detailed Analysis:

1. Jurisdiction of invoking the provisions of Section 263 of the Income Tax Act by the Commissioner of Income Tax (CIT):

The primary issue revolves around whether the CIT was justified in invoking Section 263 of the Income Tax Act, which allows for revision of an order by the Assessing Officer (AO) if it is deemed erroneous and prejudicial to the interest of the Revenue. The judgment references the case of Malabar Industries Co. Ltd. Vs. CIT, stating that the Commissioner can exercise revision jurisdiction under Section 263 if the order is both erroneous and prejudicial to the interests of the Revenue. The term 'erroneous' is defined as involving error or deviating from the law, while 'error' itself is described as a deviation from the truth or law. The judgment further explains that an order can be considered erroneous if it is based on incorrect assumptions, incorrect application of law, or if it lacks sufficient material or inquiry.

The judgment elaborates that the role of the AO is not only to adjudicate but also to investigate. The AO must not passively accept claims in the return but should scrutinize them, especially in cases picked for scrutiny under Section 143(3). The AO's duty is to protect both the interests of the assessee and the Revenue. The judgment emphasizes that an AO's order should not be arbitrary and must be reasoned, especially when it involves substantial issues. The CIT can consider an order erroneous if it lacks inquiry or examination of the genuineness of the claims made by the assessee.

2. Legitimacy of the interest claimed as business expenses by the assessee:

The CIT observed that the assessee had taken loans from banks, part of which was used to make bank deposits rather than for business purposes. The CIT directed the AO to disallow the portion of interest on the borrowed capital not used for business purposes. However, the judgment notes that the AO had completed the assessment under Section 143(3), indicating that the AO had scrutinized the assessee's accounts and concluded that the entire interest payment of Rs. 48,39,309 was a legitimate business expense.

The judgment asserts that the CIT cannot impose his view on the AO if the AO has taken a possible and reasoned view. It is mentioned that if the income from interest on fixed deposits is considered as "income from other sources," the interest incurred on borrowings used for making deposits should be allowed as an expenditure. Furthermore, any loss under "income from other sources" can be set off against income from other heads as per Section 71 of the Act, implying no revenue loss to the department.

Conclusion:

The judgment concludes that the AO had applied his mind and taken a possible view, which cannot be considered erroneous or prejudicial to the interests of the Revenue. Therefore, the CIT was not justified in exercising jurisdiction under Section 263. The order of the CIT passed under Section 263 is quashed, and the appeal filed by the assessee is allowed. The judgment was pronounced on 27th March 2015 at Chennai.