2017 (8) TMI 1179 - AT - Income Tax

Revision u/s 263 - A.O failed to examine the issue of purchase of TDR for Asha Kiran , even though the records indicate the purchase of TDR by M/s. Kamanwala Construction Ltd., directly from M/s. Eversmile Construction Ltd - Held that - A.O had issued show cause notices on various dates and called for necessary details in respect of Asha Kiran project and loan and advances. The assessee has a filed paper book containing details filed before the A.O. Assesse has filed copies of MOU between the assessee and M/s. Kamanwala Construction Co. and also agreement for purchase of TDR between M/s. Kamanwala Construction Co. and M/s. Eversmile Construction Co. P. Ltd. wherby we find the assessee had entered into a MOU with M/s. Kamanwala Lakshchandi Todays Developers to facilitate development of project and also to load 100% TDR on the project, for which the assessee was paid consideration of ₹ 4.50 crore. The CIT, without appreciating the facts, observed that the liability was not on the assessee to purchase TDR and came to the conclusion that the A.O has erroneously allowed expenditure on TDR, which is not otherwise allowable to the assessee. Disallowance of interest for diversion of interest bearing funds - Held that - A.O has examined the issue at the time of 143(3) assessments and also initiated rectification proceedings under section 154 of the Act, for the specific purpose of disallowance of proportionate interest paid on loans for diversion of interest bearing funds to group concerns. However, after satisfied with the explanation given by the assessee dropped 154 proceedings, therefore the CIT was incorrect in observing that there is a lack of enquiry on the part of the A.O in examining the issue of disallowance of interest. We find force in the arguments of the assessee, for the reason that although the audit reports states that the assessee has advanced interest free loans, the assessee categorically proved that the loan is advanced out of commercial expediency in the normal course its business which has been repaid over a period of time. The A.O has followed the ratio in the case of S.A Builders Ltd 2006 (12) TMI 82 - SUPREME COURT to decide the issue of disallowance of interest which cannot be said to be erroneous and also prejudicial to the interest of the revenue. Therefore, we are of the considered view that the order passed by the A.O is neither erroneous nor prejudicial to the interest of the revenue. In the present case on hand, the order passed the AO is not erroneous, as the AO has examined the issues and also had applied his mind to the issues pointed out by the CIT, which is evident from the fact that the AO has called for necessary details required for completion of assessment. The order passed by the AO is not prejudicial to the interest of the revenue - Decided in favour of assessee.

Issues Involved:
1. Legality of the revision of the assessment order under Section 263 of the Income Tax Act, 1961.
2. Examination of expenses incurred for the purchase of Transferable Development Rights (TDR) for the 'Asha Kiran' project.
3. Disallowance of interest paid on loans due to the diversion of interest-bearing funds to group concerns without charging any interest.

Issue-Wise Detailed Analysis:

1. Legality of the Revision of the Assessment Order under Section 263:

The appeal was filed by the assessee against the order of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961. The CIT issued a show cause notice to the assessee proposing to revise the assessment order passed by the Assessing Officer (A.O) under Section 143(3), citing that the order was erroneous and prejudicial to the interest of the revenue due to certain omissions and commissions. The CIT observed that the A.O failed to verify the expenses incurred for the purchase of TDR and the disallowance of interest paid on loans for diversion of interest-bearing funds to group concerns. The CIT held that the assessment order was brief, cryptic, and lacked proper examination of the issues, thus invoking Section 263 to revise the order.

The assessee contended that the assessment order was neither erroneous nor prejudicial to the interest of the revenue, as the A.O had examined the issues during the assessment process. The assessee provided necessary details and explanations regarding the TDR purchase and interest on loans, which the A.O had accepted. The assessee argued that the CIT cannot invoke Section 263 merely because the A.O's enquiry was inadequate or because the CIT had a different opinion.

The Tribunal found merit in the assessee's arguments, noting that the A.O had issued show cause notices, called for details, and examined the issues before completing the assessment. The Tribunal held that the CIT cannot invoke Section 263 merely because the enquiries conducted by the A.O were inadequate. The Tribunal quashed the CIT's order under Section 263 and restored the assessment order passed by the A.O.

2. Examination of Expenses Incurred for the Purchase of TDR for the 'Asha Kiran' Project:

The CIT observed that the A.O failed to verify the expenses incurred by the assessee for the purchase of TDR for the 'Asha Kiran' project. The CIT noted that the agreement for the purchase of TDR was between M/s. Kamanwala Construction Ltd. and M/s. Eversmile Construction Ltd., and not the assessee. The CIT concluded that the liability to purchase TDR was not on the assessee, and the expenditure of ?1,42,03,098/- on TDR purchases was erroneously allowed by the A.O, causing prejudice to the interest of the revenue.

The assessee argued that the A.O had examined the issue and accepted the explanation regarding the TDR purchase. The assessee provided details of the project expenses, agreements, and MOU, which indicated that the assessee was responsible for facilitating the loading of TDR on the project. The Tribunal found that the assessee had entered into an MOU with M/s. Kamanwala Lakshchandi Todays Developers to facilitate the development of the project and load 100% TDR, for which the assessee received consideration of ?4.50 crore. The Tribunal held that the CIT's observation that the liability was not on the assessee was incorrect and that the A.O had properly examined the issue.

3. Disallowance of Interest Paid on Loans Due to Diversion of Interest-Bearing Funds to Group Concerns Without Charging Any Interest:

The CIT observed that the assessee had advanced interest-free loans of ?2,37,58,057/- out of interest-bearing funds and the A.O failed to disallow proportionate interest on such loans. The CIT noted that the audit report indicated the diversion of interest-bearing funds to sister concerns without charging any interest, and the A.O failed to apply his mind to disallow proportionate interest.

The assessee contended that the advances to group concerns were made in the normal course of business and out of commercial expediency. The assessee argued that the A.O had examined the issue during the assessment and rectification proceedings under Section 154, and after being satisfied with the explanation, dropped the rectification proceedings. The Tribunal found that the assessee had proved that the advances were made out of commercial expediency and in the normal course of business. The Tribunal noted that the Supreme Court's decision in S.A. Builders Ltd. vs. CIT (2007) 288 ITR 1, which held that interest cannot be disallowed if the advances are made out of commercial expediency, still prevails. The Tribunal held that the A.O's decision to allow the interest was neither erroneous nor prejudicial to the interest of the revenue.

Conclusion:

The Tribunal concluded that the order passed by the A.O under Section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal quashed the CIT's order under Section 263 and restored the assessment order passed by the A.O. The appeal filed by the assessee was allowed.

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