2018 (2) TMI 47 - AT - Income Tax

Revision u/s 263 - diallowance of interest claimed by the assessee for paying earnest money - interest free funds sufficient to meet investments - Held that - In reply to show cause notice the assessee had explained the facts that there were sufficient interest free funds but Ld. CIT held that no evidence was filed whereas the fact remains that assessment record was with him and copies of balances sheet were part of the assessment record. The Ld. CIT should have examined those records with respect to reply filed by assessee and then he should have noted his satisfaction which he has failed to do. In view of the above, the order passed by CIT u/s 263 is quashed. - Decided in favour of assessee.

Issues Involved:
1. Validity of the order passed by the Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act.
2. Classification of Excise Duty refund and interest subsidy as capital receipts.
3. Disallowance of proportionate interest on borrowed funds.

Detailed Analysis:

1. Validity of the Order Passed by the CIT under Section 263:
The primary issue in this case is whether the CIT was correct in invoking section 263 of the Income Tax Act, which allows the CIT to revise an assessment order if it is deemed erroneous and prejudicial to the interests of the revenue. The Tribunal noted that for an order to be revised under section 263, it must be both erroneous and prejudicial to the interests of the revenue. The Tribunal referenced the case law of Shyam Biri Works and Brahma Builders to emphasize that a show cause notice under section 263 must specify reasons for considering the order erroneous and prejudicial. The Tribunal found that the CIT's show cause notice was cryptic and non-speaking, lacking specific reasons for the proposed disallowances.

2. Classification of Excise Duty Refund and Interest Subsidy as Capital Receipts:
The assessee argued that the Excise Duty refund and interest subsidy received were capital receipts, referencing the judgment of the Jammu & Kashmir High Court in the case of Balaji Alloys, which was upheld by the Supreme Court. The Tribunal observed that the Assessing Officer (AO) had discussed these items during the assessment proceedings and had initially disallowed them but failed to add them back in the computation of income. The Tribunal held that the AO was bound to follow the jurisdictional High Court's decision, which classified these receipts as capital and not liable to tax. Consequently, the AO's failure to add these amounts did not render the assessment order erroneous or prejudicial to the interests of the revenue.

3. Disallowance of Proportionate Interest on Borrowed Funds:
Regarding the disallowance of proportionate interest, the Tribunal noted that the assessee had sufficient interest-free funds to cover the earnest money paid for a plot, as evidenced by the balance sheet showing a partner's capital of ?2.03 crores against an earnest money payment of ?72.30 lakhs. The Tribunal cited the Punjab & Haryana High Court's ruling in the case of CIT Vs. Max India Ltd., which established that if interest-free funds are available, it is presumed that these funds were used for investments. The Tribunal also referenced similar judgments from other courts, including Reliance Utilities & Power Ltd. and Woolcombers case, supporting the view that no disallowance was warranted. The Tribunal criticized the CIT for not examining the assessment records and the balance sheet, which were part of the assessment record, before concluding that the order was erroneous.

Conclusion:
The Tribunal concluded that the CIT's order under section 263 was not sustainable as it failed to meet the necessary conditions of being both erroneous and prejudicial to the interests of the revenue. The Tribunal quashed the CIT's order and allowed the appeal filed by the assessee.

Order:
The appeal filed by the assessee is allowed. The order pronounced in the open court on 04.12.2017.

← Previous Next →