2015 (6) TMI 91 - AT - Income Tax

Revision u/s 263 - AO failed to disallow the interest debited to the P&L a/c as as there was no income from business, the expenditure debited for ₹ 40,33,313 needs to be disallowed - Held that - The issue has been subjected to scrutiny by the AO as it is part of the reasons recorded for reopening the completed assessment u/s 143(3) of the Act. The AO had come to the conclusion and gave the finding for the set off of interest payment of ₹ 40,33,313 from out of the interest income of ₹ 46,28,979 based on the facts examined by him in the course of assessment/reassessment proceedings. Explanation was submitted before the AO and the AO had applied his mind on the issue. It is only when there is non-application of mind to relevant material or incorrect assumption of fact or an incorrect application of law that the CIT can assume jurisdiction u/s 263 as held in the case of CIT vs. Jawahar Bhattacharjee (2012 (4) TMI 222 - GAUHATI HIGH COURT). Further, when two views are possible and when the AO takes one of the two views permissible in law to which the Commissioner does not agree with, it cannot be treated as erroneous and prejudicial to the interests of the Revenue as held by the decisions (i) CIT vs. Max India Ltd (2007 (11) TMI 12 - Supreme Court of India) and (ii) Malabar Industries Company Ltd (2000 (2) TMI 10 - SUPREME Court). Hence, the revisionary jurisdiction assumed by the CIT (A) is invalid. The facts in the present case was that the assessee borrowed funds on interests, the same was kept in fixed deposit. Out of the interest received from FD s, assessee paid interests on borrowed funds, which was allowable u/s 57(iii). AO after examining this has allowed the same. It is CIT who wrongly considered the expenditure as business expenditure. See CIT vs. Taj International Jewellers (2010 (12) TMI 451 - Delhi High Court) - Decided in favour of assesse.

Summary

Issues:
1. Jurisdiction of CIT under section 263 regarding interest income treatment and expenditure disallowance.

Analysis:
The case involved an appeal against the CIT's order under section 263 of the Income Tax Act, 1961, concerning the treatment of interest income and disallowance of expenditure by the assessee company for the assessment year 2003-04. The CIT assumed jurisdiction based on discrepancies in the P&L account, noting interest income earned on fixed deposits without any business income. The CIT disallowed the expenditure debited to the P&L account, arguing that interest earned on fixed deposits should be treated as income from other sources without allowing set off of expenditure. The assessee contended that the interest paid was to earn interest income, justifying the set off.

The dispute revolved around whether the interest income should be treated as income from other sources and if the expenditure should be disallowed. The assessee argued that the interest paid was a legitimate business expense incurred to earn the interest income. The CIT relied on the Tuticorin Alkali Chemicals case to support disallowance, while the assessee cited the Taj International Jewellers case to justify the set off of interest paid against interest income.

Upon review, the Tribunal found that the AO had considered the set off during assessment proceedings, applying relevant judicial principles. The Tribunal noted that the CIT's assumption of jurisdiction under section 263 required a lack of proper application of mind or incorrect legal application, citing precedents like Jawahar Bhattacharjee and Ashish Rajpal cases. Additionally, the Tribunal highlighted the principle that when two permissible views exist, the CIT cannot intervene, as established in Max India Ltd and Malabar Industries cases.

Ultimately, the Tribunal ruled in favor of the assessee, stating that the CIT's order was not erroneous or prejudicial to revenue interests. The Tribunal emphasized that the interest paid was a deductible expense under section 57(iii), as seen in the Taj International Jewellers case, and set aside the CIT's order, allowing the appeal of the assessee. The decision was pronounced in open court on 25th March 2015.