2019 (1) TMI 31 - AT - Income Tax

Revision u/s 263 - allowability of the claim under section 57(iii) - order erroneous and prejudicial to revenue - Held that - The details revealed that the assessee has received the interest @ 12% from M/s. Vishal Agencies, the partnership firm as against the interest charged by the same firm from the assessee @ 18%, hence there is a difference of 6% in the interest received and paid by the assessee. All these aspects were not even examined by the AO. There is no bar for considering the audit objections by the ld. Pr. CIT if the audit objection reveals certain relevant and crucial facts about the allowability of the claim. Therefore, we do not find any substance or merit in the contention of the ld. A/R on this point as it is clear that it is a case of lack of enquiry particularly on the issue of allowability of the claim under section 57(iii) of the Act. Thus the order of the AO suffers from error so far as it is prejudicial to the interest of the revenue. Hence CIT has rightly invoked the provisions of section 263 and directed the AO to conduct a proper enquiry on this issue. As regards the other issues raised by the ld. Pr. CIT in the show cause notice, those were not specifically discussed in the impugned order as the assessee explained some of the issues which were factually found to be correct. Accordingly, we restrict the fresh adjudication of the matter only on the issue of allowability of the claim under section 57(iii) of the Act, to that extent the impugned order of Pr. CIT is upheld. Following the order in the case of Shri Naresh Agarwal 2018 (8) TMI 1756 - ITAT JAIPUR we uphold the impugned order of the CIT on the issue of allowability of the claim under section 57(iii) of the Act. - Decided against assessee.

Summary

Issues Involved:
1. Legality of the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263.
2. Whether the Assessing Officer's (AO) order was erroneous and prejudicial to the interest of revenue.
3. Adequacy of the AO's enquiry and verification regarding the claim of interest payment against interest receipt.
4. Consideration of audit objections by the PCIT.

Issue-wise Detailed Analysis:

1. Legality of the Order Passed by the PCIT under Section 263:
The assessee challenged the legality of the PCIT’s order under section 263, claiming it was illegal and bad in law. The original assessment was completed under section 143(3) on 29th March 2016, accepting the returned income. The PCIT, upon examining the records, found that the AO did not conduct any enquiry regarding the allowability of the claim of interest expenditure under section 57(iii) and other issues. Consequently, the PCIT set aside the AO's order and directed a fresh examination of the issue. The tribunal upheld the PCIT’s order, confirming that the invocation of section 263 was appropriate due to the lack of enquiry by the AO.

2. Whether the AO's Order was Erroneous and Prejudicial to the Interest of Revenue:
The PCIT held that the AO’s order was erroneous and prejudicial to the interest of revenue because it was based solely on an audit objection, which the AO had not accepted. The tribunal noted that the AO had accepted the returned income in summary proceedings without examining multiple transactions of loans taken and given by the assessee. The PCIT provided detailed tables of interest received and paid, highlighting discrepancies and lack of proper verification by the AO. The tribunal agreed with the PCIT’s finding that the AO’s order was erroneous and prejudicial to the interest of revenue due to the lack of enquiry on the allowability of interest expenditure under section 57(iii).

3. Adequacy of the AO's Enquiry and Verification Regarding the Claim of Interest Payment Against Interest Receipt:
The assessee argued that the AO had examined the claim of interest payment and allowed it after thorough enquiry and verification. However, the tribunal observed that the AO did not raise any query about the allowability of interest under section 57(iii) during the assessment. The tribunal emphasized that even if details were filed by the assessee, the absence of examination in the context of section 57(iii) constituted a complete lack of enquiry. The tribunal highlighted that the AO did not examine the discrepancy in interest rates (e.g., the assessee received interest at 12% from M/s. Vishal Agencies but paid interest at 18% to the same firm). Therefore, the tribunal upheld the PCIT’s direction for a fresh enquiry on this issue.

4. Consideration of Audit Objections by the PCIT:
The assessee contended that the PCIT erred by considering audit objections, which the AO had not accepted. The tribunal clarified that there is no bar on considering audit objections if they reveal relevant and crucial facts about the allowability of a claim. The tribunal found no merit in the assessee’s contention, as the audit objection highlighted a lack of enquiry by the AO on the allowability of the claim under section 57(iii). Thus, the tribunal supported the PCIT’s consideration of the audit objection in invoking section 263.

Conclusion:
The tribunal upheld the PCIT’s order under section 263, directing the AO to conduct a proper enquiry on the allowability of the claim under section 57(iii) of the Income Tax Act. The appeal of the assessee was partly allowed, restricting fresh adjudication to the issue of allowability of the claim under section 57(iii). The order was pronounced in the open court on 03/08/2018.