2018 (8) TMI 1756 - AT - Income Tax

Revision u/s 263 - allowing the claim of interest payment against the interest receipt is without making proper enquiry or verification - lack of enquiry on a issue of allowability of the claim of interest expenditure under section 57(iii) - Held that - As it is evident from the available details there are various transactions of loans given by the assessee as well as capital introduced in the old partnership firms by using the borrowed funds from various parties as well as from the partnership firm. Thus the assessee has borrowed the fund from the partnership firm M/s. Vishal Agencies in the category of over-drawing and at the same time a capital of ₹ 28,21,000/- was also introduced in the same firm. This is not a newly formed firm but this is an old partnership firm and, therefore, it is not an initial introduction of capital by the partners. AO while passing the assessment order has not raised even a query about the allowability of the interest under section 57(iii) of the Act. There is no such query raised either in the notice issued under section 142(1) or otherwise and, therefore, even if the details filed by the assessee were considered by the AO but if the same are not examined in the context of allowability of the claim under section 57(iii), then the case would certainly fall in the category of complete lack of enquiry on a particular issue of allowability of the claim of interest expenditure under section 57(iii) - the details revealed that the assessee has received the interest @ 12% from M/s. Vishal Agencies, the partnership firm as against the interest charged by the same firm from the assessee @ 18%, hence there is a difference of 6% in the interest received and paid by the assessee. All these aspects were not even examined by the AO. there is no bar for considering the audit objections by the ld. Pr. CIT if the audit objection reveals certain relevant and crucial facts about the allowability of the claim. Therefore, no merit in the contention of the A/R on this point as it is clear that it is a case of lack of enquiry particularly on the issue of allowability of the claim under section 57(iii) of the Act. Thus the order of the AO suffers from error so far as it is prejudicial to the interest of the revenue. CIT has rightly invoked the provisions of section 263 and directed the AO to conduct a proper enquiry on this issue. As regards the other issues raised by the ld. Pr. CIT in the show cause notice, those were not specifically discussed in the impugned order as the assessee explained some of the issues which were factually found to be correct. Accordingly, we restrict the fresh adjudication of the matter only on the issue of allowability of the claim under section 57(iii) to that extent the impugned orders of ld. Pr. CIT is upheld. - Appeals of the assessee are partly allowed.

Summary

Issues Involved:
1. Legality of the order passed under section 263 of the I.T. Act.
2. Whether the Principal CIT was justified in holding the AO's order as erroneous and prejudicial to the interest of revenue due to alleged lack of proper enquiry.
3. Allowability of interest payment against interest receipt.
4. Genuineness of unsecured loans and discrepancies in the balance sheet.

Detailed Analysis:

1. Legality of the Order Passed Under Section 263:
The assessee contended that the order passed by the Principal CIT under section 263 is illegal and bad in law. The Principal CIT's order dated 22.03.2018 for the assessment years 2013-14 and 2014-15 was challenged on the grounds that the AO had already examined the relevant details and was satisfied with the assessee’s claims.

2. Justification of Principal CIT's Decision:
The Principal CIT found the AO's order erroneous and prejudicial to the interest of revenue due to a lack of proper enquiry. Specifically, the AO allowed the deduction of ?19,26,409/- interest paid against ?6,08,668/- interest received without adequate verification, resulting in a loss of ?13,17,741/-. Furthermore, the balance sheet showed an increase in unsecured loans amounting to ?1,44,63,110/- without supporting evidence, and an advance of ?10,00,000/- to one Shri Banwari Lal Meena without corresponding interest income. The assessee argued that all relevant details were presented to the AO, who was satisfied with the claims, and that the Principal CIT cannot exercise powers under section 263 merely because the AO did not pass an elaborate order.

3. Allowability of Interest Payment Against Interest Receipt:
The assessee claimed deduction on account of interest paid on borrowed funds under section 37(1) and section 57(iii) of the Act. The AO accepted the returned income without detailed enquiry into the allowability of the interest claim. The Principal CIT noted discrepancies such as the assessee receiving interest at 12% from Vishal Agencies while paying 18% to the same firm, indicating a lack of proper enquiry by the AO.

4. Genuineness of Unsecured Loans and Discrepancies in the Balance Sheet:
The Principal CIT highlighted that the balance sheet reflected an increase in unsecured loans without supporting evidence and discrepancies in loan repayments to Shri Kapoor Chand Jain. The AO did not conduct a thorough enquiry into these transactions, which the Principal CIT deemed necessary.

Tribunal's Conclusion:
The Tribunal upheld the Principal CIT’s decision to invoke section 263, noting that the AO accepted the returned income in a summary manner without conducting a proper enquiry into the allowability of the interest claim under section 57(iii). The Tribunal found no merit in the assessee’s contention that the Principal CIT cannot consider audit objections if they reveal relevant facts. The Tribunal restricted the fresh adjudication to the issue of allowability of the claim under section 57(iii), upholding the Principal CIT’s order to that extent.

Final Judgment:
The appeals of the assessee were partly allowed, with a direction for fresh adjudication on the specific issue of the allowability of the claim under section 57(iii) of the Act. The order was pronounced in the open court on 03/08/2018.