2017 (1) TMI 1144 - AT - Income Tax

Revision u.s 263 - assessee has arranged his affairs in the proprietorship concern vis- -vis partnership in such a manner where at the cost of proprietorship, partnership was allowed to earn more income which is tax free, and therefore, a prejudice has been caused to the Revenue - assessee borrowed unsecured loans and paid interest - Held that - Most of the credit balance in the accounts is on account of sales made by M/s.Meera Impex. If any investment has been made that was made out of personal books and duly reflected. It was not from interest bearing funds. This argument has been jettisoned by the ld.Commissioner by making a reference of total business vis- -vis sundry debtors. Both the issues are altogether non-comparables, specifically by making reference in terms of percentage. How it can be alleged that total unsecured loans taken by the assessee in Meera Impex should be used in the items sold to partnership concern only then business needs will be accepted. The loan was taken for the business purpose of Meera Impex. It cannot be assumed that it was used only in sales made to Metal Alloys. It might have been used for other business needs of Meera Impex. The ld.Commissioner failed to take note of the fact that the assessee was holding a capital of ₹ 415.90 lakhs and noninterest bearing funds of ₹ 60.37 lakhs. These two amounts itself can take care of, if any outstanding balance was available towards M/s.Metal Alloys Corporation. These facts have been highlighted in the written submission filed before the ld.Commissioner. The ld.Commissioner failed to take cognizance of these facts in right perspective. We are of the view that the ld.Commissioner was not justified in taking action under section 263 of the Income Tax Act, 1961, therefore, we allow the appeal of the assessee

Issues Involved:

1. Legitimacy of the order passed under Section 263 of the Income Tax Act, 1961.
2. Validity of the disallowance of interest expenditure by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Legitimacy of the Order Passed Under Section 263 of the Income Tax Act, 1961:

The case revolves around the order passed by the Commissioner under Section 263 of the Income Tax Act, 1961, which was challenged by the assessee. The Commissioner believed that the assessment order was erroneous and prejudicial to the interests of the Revenue, primarily because the AO did not conduct a proper inquiry into the transactions between the assessee’s proprietary concern, M/s. Meera Impex, and the partnership firm, M/s. Metal Alloys Corporation.

The Commissioner observed that the assessee had borrowed funds in his proprietorship concern and advanced those funds to M/s. Metal Alloys Corporation, which resulted in higher tax-exempt income for the latter. The Commissioner issued a show cause notice under Section 263 and after considering the assessee's reply, concluded that the AO’s order was erroneous due to inadequate inquiry.

However, the Tribunal noted that the AO had indeed conducted an inquiry and the assessee had provided detailed explanations regarding the transactions and the use of funds. The Tribunal emphasized that the Commissioner cannot invoke Section 263 merely because he has a different opinion or believes the inquiry was inadequate. It must be shown that the AO’s order was erroneous and unsustainable in law. The Tribunal cited various judicial pronouncements, including the Hon’ble Supreme Court’s decision in Malabar Industrial Co. Ltd. and the Hon’ble Delhi High Court’s decision in CIT vs. Sun Beam Auto, to support its view.

The Tribunal concluded that the Commissioner failed to demonstrate how the AO’s order was erroneous and prejudicial to the interests of the Revenue. Therefore, the Tribunal quashed the order passed under Section 263, allowing the assessee’s appeal.

2. Validity of the Disallowance of Interest Expenditure by the Assessing Officer (AO):

The Revenue challenged the deletion of the disallowance of ?43,67,561/- made by the AO on the grounds that the assessee had used borrowed funds for non-business purposes by advancing them to M/s. Metal Alloys Corporation. The Tribunal noted that the AO’s jurisdiction to make this disallowance was infused by the order passed under Section 263, which had already been quashed.

For academic purposes, the Tribunal examined the merits of the disallowance. The assessee had demonstrated that the transactions with M/s. Metal Alloys Corporation were business transactions and that the funds advanced were not from interest-bearing loans but from interest-free funds available with the assessee. The Tribunal upheld the CIT(A)’s order, which had deleted the disallowance, stating that the assessee had sufficient interest-free funds to cover the advances made to M/s. Metal Alloys Corporation.

In conclusion, the Tribunal dismissed the Revenue’s appeal, finding no merit in the disallowance of interest expenditure, and upheld the CIT(A)’s order.

Summary:

The Tribunal allowed the assessee’s appeal, quashing the order passed under Section 263 of the Income Tax Act, 1961, and dismissed the Revenue’s appeal, upholding the deletion of the disallowance of interest expenditure. The Tribunal emphasized that the Commissioner must demonstrate how the AO’s order was erroneous and prejudicial to the interests of the Revenue and that mere inadequacy of inquiry does not justify invoking Section 263. The Tribunal also found that the assessee had sufficient interest-free funds to cover the advances made to M/s. Metal Alloys Corporation, thereby justifying the deletion of the disallowance of interest expenditure.

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