2018 (4) TMI 40 - AT - Income Tax

Revision u/s 263 - allowability of charge of interest - Held that - We find that the Assessing Officer has duly asked the assessee and made enquiry regarding the charge of interest. The specific question asked was the assessee is asked to explain why interest has not been capitalized. From the above, it is apparent that the charge of interest to profit and loss account and non capitalization of the same was duly enquired by the Assessing Officer. In response, the assessee has referred to Accounting Standard 16 issued by the Institute of Chartered Accountant of India. Now we note that it is not the case of the Commissioner of Income Tax (Appeals) that the said project was not substantially completed as submitted by the assessee. Hence, prima facie, the view adopted by the Assessing Officer cannot be said to be incorrect. Hence, if the Assessing Officer has adopted one of the views, it cannot be said that the assessment order needs to be visited by revisionary powers of the ld. Commissioner of Income Tax (Appeals). Furthermore, it is also not the case of the ld. Commissioner of Income Tax (Appeals) that the project is not substantially complete and the said Accounting Standard 16 has not been rightly completed. Thus we set aside the order of the ld. Commissioner of Income Tax (Appeals) and quash the order passed u/s. 263 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the Principal Commissioner of Income Tax (Pr. CIT) exercising power under section 263.
2. Disallowance of interest expenses amounting to ?8,07,14,446 under section 36(1)(iii) and capitalization of the same as work in progress.
3. Consideration of proper facts by the Pr. CIT in passing the order under section 263.

Issue-wise Detailed Analysis:

1. Legality of the Principal Commissioner of Income Tax (Pr. CIT) exercising power under section 263:

The appeal by the assessee challenges the order by the Pr. CIT under section 263 of the Income Tax Act, which allows the Pr. CIT to revise any order passed by the Assessing Officer (AO) if it is considered erroneous and prejudicial to the interests of the revenue. The assessee argued that the AO had duly enquired into the matter of interest expenses and had adopted one of the possible views, which should preclude the Pr. CIT from exercising jurisdiction under section 263. The Tribunal referred to the Supreme Court's decision in CIT vs. Max India Ltd., which held that if two views are possible and the AO adopts one, the Pr. CIT cannot revise the order merely because he has a different view. The Tribunal found that the AO had indeed made enquiries and accepted the assessee’s explanation based on Accounting Standard 16, thus the Pr. CIT’s invocation of section 263 was not justified.

2. Disallowance of interest expenses amounting to ?8,07,14,446 under section 36(1)(iii) and capitalization of the same as work in progress:

The Pr. CIT directed the AO to disallow the interest expenses claimed by the assessee and capitalize the same as work in progress, citing that the borrowed capital was used for project development and should be capitalized as per the previous year’s practice. The assessee contended that as per Accounting Standard 16, capitalization of borrowing costs should cease when substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete. The Tribunal noted that the AO had enquired into this matter, and the assessee had provided an explanation that the project was substantially completed, thus justifying the charge of interest to the profit and loss account. The Tribunal found that the AO’s acceptance of this explanation was a plausible view, and thus the Pr. CIT's direction to capitalize the interest expenses was not warranted.

3. Consideration of proper facts by the Pr. CIT in passing the order under section 263:

The Tribunal observed that the Pr. CIT did not dispute the assessee’s claim that the project was substantially completed, which was crucial for determining whether the interest expenses should be capitalized or charged to the profit and loss account. The Tribunal found that the Pr. CIT’s order lacked consideration of this key fact and was based on an incorrect assumption that the AO had not made adequate enquiries. The Tribunal concluded that the AO had indeed considered the relevant facts and the assessee’s compliance with Accounting Standard 16, thus the Pr. CIT’s order under section 263 was not justified.

Conclusion:

The Tribunal set aside the order of the Pr. CIT and quashed the revision under section 263, allowing the appeal by the assessee. The Tribunal emphasized that the AO had adopted a plausible view based on adequate enquiry and the assessee’s compliance with Accounting Standard 16, and thus the Pr. CIT’s exercise of revisionary powers was not warranted. The decision underscores the principle that if the AO has taken one of the possible views after due enquiry, the Pr. CIT cannot invoke section 263 merely because he holds a different view.