2022 (12) TMI 1477 - AT - Income Tax

Revision u/s 263 - claim of deduction of the impugned interest on Perpetual Non-Convertible Debentures (PNCDs) - HELD THAT - We find that the assessee during the course of assessment proceedings itself had submitted the entire facts of the case by placing reliance on various provisions of the Companies Act and SEBI Regulations and had also taken efforts to explain the meaning of the term debentures , debts , bonds , shares etc., under provisions of various Acts. The main case of the Revenue is only that the perpetual debentures issued are akin to equity and hence, it does not fall under the ambit of borrowing and accordingly, no interest would become allowable on the said alleged borrowing. In this regard, we find that assessee had already explained the very same query before the AO at the time of assessment proceedings itself which is evident from the reply filed by the assessee which is reproduced hereinabove at the beginning of the order. Moreover, we also find that these bonds were indeed repaid by the assessee on 18/03/2021 with interest and on 11/05/2021 with interest. The evidences in this regard are enclosed and the fact of repayment of these borrowings with interest had also been duly notified by the assessee to BSE Ltd. and NSE Ltd as per the requirement of SEBI regulations. This categorically goes to prove that it is not a case of equity and the issue of perpetual bonds is only borrowing made by the assessee. Since the said borrowing has been used for business purposes of the assessee, the interest paid thereon would be squarely allowable as deduction u/s. 36(1)(iii) of the Act. Hence, even on merits, the action of the ld. PCIT would have no legs to stand. Thus we have no hesitation in quashing the revision order passed by the ld. PCIT u/s. 263 of the Act. Accordingly, the grounds raised by the assessee are allowed

Issues Involved:
1. Validity of assumption of jurisdiction under Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT).
2. Justification of the PCIT in revising the assessment order concerning disallowance of interest on perpetual hybrid securities and issue expenses.

Detailed Analysis:

1. Validity of Assumption of Jurisdiction under Section 263:
The primary issue was whether the PCIT was justified in assuming revisionary jurisdiction under Section 263 of the Income Tax Act. The assessee argued that the final assessment order dated 25/01/2016 was passed pursuant to the directions of the Dispute Resolution Panel (DRP), which comprised a collegium of three Senior Officers in the rank of Commissioner of Income Tax. Hence, the PCIT cannot invoke revision jurisdiction under Section 263 on an order effectively passed by officers of the same rank. The PCIT dismissed this plea, stating that revision powers under Section 263 are restricted only in respect of matters decided by the Commissioner of Income Tax (Appeals), and all other orders are subject to revision.

The Tribunal noted that the Karnataka High Court in the case of Devas Multimedia Pvt. Ltd. vs. PCIT (419 ITR 391) addressed a similar issue, concluding that there is no bar for the Principal Commissioner to invoke Section 263 to examine the final assessment order passed by the AO pursuant to the DRP decision.

2. Justification of the PCIT in Revising the Assessment Order:
The second issue was whether the PCIT was justified in revising the assessment order concerning the disallowance of interest on perpetual hybrid securities and issue expenses. The assessee contended that it had duly filed details of the claim of deduction of the impugned interest on Perpetual Non-Convertible Debentures (PNCDs) during the assessment proceedings. The AO had made adequate inquiries regarding the said issue and granted the deduction accordingly. The Tribunal found that the AO had indeed asked for various details and explanations from the assessee, including proof of utilization of Hybrid Bond expenses and reasons why they should not be treated as capital in nature. The assessee provided detailed submissions and supporting documents, which the AO duly appreciated and accepted.

The Tribunal observed that the AO had examined the entire borrowings made by the assessee and the interest paid thereon during the assessment proceedings. The AO had also considered the interest component while making disallowances under Section 14A and Section 36(1)(iii) of the Act. Therefore, the Tribunal held that the AO had made a complete inquiry into the impugned issue, and the assessment could not be termed erroneous by the PCIT.

The Tribunal noted that the PCIT had shifted his stand from "lack of inquiry" to "inadequate inquiry" and back to "no inquiry" during the proceedings, indicating non-application of mind. The law is well-settled that revision jurisdiction under Section 263 can be invoked only when there is a "lack of inquiry" and not when there is "inadequate inquiry." In this case, the AO had fully inquired into the matter and taken a possible view, making the provisions of Explanation 2 to Section 263 inapplicable.

Conclusion:
The Tribunal quashed the revision order passed by the PCIT under Section 263, holding that the AO had made a complete inquiry into the impugned issue and taken a possible view. The Tribunal followed judicial precedents, including a similar case involving Tata Power Company Ltd., where the revision proceedings under Section 263 were quashed. The appeals of the assessee were allowed for both assessment years.

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