2017 (9) TMI 512 - AT - Income Tax

Revision u/s 263 - loan related to WIP was not considered while calculating the short term capital loss - tax neutral exercise - Held that - Sale consideration in table no 1 is taken at ₹ 4 crores against the cost of net asset(WIP) of ₹ 37,15,08,970/- which was calculated after deducting the payments towards loan of ₹ 32 crores. Whereas in the second table-2, the sale consideration was taken at ₹ 36,00,00,000/- against the cost of net asset of ₹ 69,15,08,970/- which was before payment towards discharge of loan of ₹ 32 crores. In this case, the short term capital loss was worked out to ₹ 32,64,08,970/- It is amply clear from the two tables hereinabove tha the whole exercise as proposed by the Commissioner under proceedings u/s 263 is tax neutral as no tax evasion is caused by the assessee resulting into any prejudicial to the interest of the revenue. In one case, the assessee has not considered the payment towards loan and taken net consideration and capital gain was worked out by taking the net asset after reduction of loan. Whereas in the second case as proposed by the CIT if the gross amount of consideration is taken the corresponding reduction is not made of the loan from the fixed assets and therefore, the net result is same as calculated by the assessee. In view of this facts, we are of the considered opinion that the one of the condition that prejudicial to the interest of revenue is missing in the present case, and therefore proceedings under section 263 is quashed. - Decided in favour of assessee.

Summary

Issues:
1. Invocation of Provisions of Section 263 of the Income Tax Act, 1961 by the CIT.
2. Consideration of loan liabilities in relation to capital work in progress.
3. Correctness of the assessment order and exercise of revisionary powers under section 263.

Issue 1: Invocation of Provisions of Section 263:
The appeal was against the order of the Principal Commissioner of Income Tax invoking Section 263 of the Income Tax Act, 1961. The assessee contended that the CIT erred in raising issues and making inquiries under Section 263 without proper examination. The CIT's order was criticized for setting aside the assessment without sufficient conclusion. The assessee argued that the order under Section 263 should be canceled.

Issue 2: Consideration of Loan Liabilities:
The dispute arose from the treatment of loan liabilities in relation to capital work in progress. The PCIT observed that the pending liabilities of loans related to WIP were not considered, leading to an overestimation of net worth by Rs. 25.75 crores. The PCIT concluded that this overstatement resulted in an under-assessment of income. The assessee argued that the loan was squared up before the slump sale agreement, and the net worth details were submitted to the CIT. The assessee contended that the PCIT's order did not consider the documents and explanations provided during the proceedings under Section 263.

Issue 3: Correctness of Assessment Order and Revisionary Powers:
The assessment order declared a total loss, which was accepted after scrutiny proceedings. The PCIT initiated proceedings under Section 263, claiming errors in the assessment order regarding the treatment of short-term capital loss and loan liabilities. The assessee argued that the revisionary proceedings were tax-neutral and did not prejudice revenue. The PCIT's exercise of revisionary powers was challenged on the grounds that the assessment order was not erroneous or prejudicial to revenue, as required for invoking Section 263.

In analyzing the case, the Tribunal reviewed the calculations presented by both the assessee and the PCIT regarding capital gains. The discrepancy arose from the treatment of loan liabilities in the calculation of short-term capital loss. The Tribunal noted that the different approaches taken by the assessee and the PCIT resulted in the same short-term capital loss figure. It was observed that the assessee had considered the loan amount in the net asset calculation, while the PCIT did not reduce the loan amount from the gross consideration. The Tribunal concluded that the exercise under Section 263 was tax-neutral and did not cause any loss to revenue. As a result, the Tribunal quashed the proceedings under Section 263 and allowed the appeal of the assessee.