2019 (12) TMI 575 - AT - Income Tax

Revision u/s 263 - an order which is erroneous and prejudicial to the interest of Revenue - deduction in respect of interest and exchange fluctuation loss outstanding on Floating Rate Notes (FRN) - The assessee has added interest paid and foreign exchange loss on the date of Balance Sheet to Capital Assets in those cases where funds were applied for acquisition of capital assets/projects and in case if the funds are applied for working capital , then the said interest / foreign exchange losses were charged to Profit and Loss Account as Revenue Expenses. Held that - The assessee has completely failed to discharge its onus and the AO clearly erred in accepting the bald statement made by the assessee without conducting any enquiry and certainly the action of the AO in accepting these capital work in progress accumulated over years as Revenue expenses in the year under consideration while computing income of the assessee chargeable to tax without making any enquiry which was certainly warranted based on facts and circumstances of this case before allowing entire capital work in progress existing upto ay 2002-03 as Revenue expenses in this year viz. ay 2003-04 is clearly erroneous and prejudicial to the interest of Revenue and learned CIT rightly interfered by invoking his revisionary powers u/s 263 of the 1961 Act. The AO simply accepted the contentions of the assessee that the assessee has made claim of deduction of lower interest but has not directed its enquiry as to whether any benefit or cessation or remission of liability has taken place which is required to be brought to tax u/s 41(1) or Section 28(iv) or any other relevant section of the 1961 Act. Thus, under these circumstances, the assessment order passed by AO is erroneous so far as is prejudicial to the interest of Revenue and the learned CIT rightly invoked its revisionary powers u/s 263 of the 1961 Act, which action of learned CIT we upheld/confirms. We order accordingy. Appeal of the assessee dismissed.

Summary

Issues Involved:
1. Jurisdiction under Section 263.
2. Deduction of interest and exchange fluctuation loss on Floating Rate Notes (FRN).
3. Deduction for the written-off value of the crankshaft.
4. Disallowance of proportionate interest on loans to an associate company.
5. Examination of Inter Corporate Deposit (ICD) funding sources.
6. Taxability of interest relief under Corporate Debt Restructuring (CDR).

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263:
The Commissioner of Income Tax (CIT) assumed jurisdiction under Section 263 to revise the assessment order, treating it as erroneous and prejudicial to the interest of revenue. The tribunal noted that the CIT had the authority to invoke Section 263 if the assessment order was found to be erroneous and prejudicial to the revenue's interest, as established in the case of Malabar Industrial Company Ltd. vs. CIT (243 ITR 83).

2. Deduction of Interest and Exchange Fluctuation Loss on FRN:
The assessee claimed a deduction of ?11627.84 lakhs for interest and exchange fluctuation loss on FRN, which was initially capitalized. The CIT found that the Assessing Officer (AO) allowed the deduction without critical examination, despite the expenditure not relating to the year of account. The tribunal upheld the CIT's decision, noting that the AO failed to verify the utilization and allocation of funds from the FRN proceeds and the reasons for abandoning the projects. The tribunal emphasized the necessity of detailed inquiry before allowing such claims.

3. Deduction for the Written-off Value of the Crankshaft:
The assessee claimed a deduction of ?202.42 lakhs for the written-down value of the crankshaft attached to the DG set. The CIT observed that the AO allowed the deduction without considering whether the crankshaft was part of the block of assets and the applicability of Section 32(1)(iii) and Section 50 of the Income Tax Act. The tribunal upheld the CIT's direction for a fresh examination, noting that the AO failed to verify the claim's validity under the block of assets concept.

4. Disallowance of Proportionate Interest on Loans to an Associate Company:
The CIT directed the AO to examine the disallowance of proportionate interest on ?16.78 crores advanced to SPEL Semi Conductor Ltd., which the AO initially overlooked. The tribunal upheld this direction, stating that the AO must verify the commercial expediency of such advances, as established in S.A. Builders Ltd. vs. CIT (288 ITR 1).

5. Examination of Inter Corporate Deposit (ICD) Funding Sources:
The CIT directed the AO to examine whether the ICD of ?675 lakhs was funded from internal accruals or borrowed funds. The tribunal upheld this direction, noting that the AO failed to inquire about the funding sources, which was necessary given the significant interest expenses claimed by the assessee.

6. Taxability of Interest Relief under CDR:
The CIT found that the AO did not properly consider the interest relief of ?883.98 lakhs under the CDR scheme, which was disclosed in the notes to accounts. The tribunal upheld the CIT's direction for the AO to re-examine the issue, considering the possibility of income arising from the remission or cessation of liability under Section 41(1) or Section 28(iv) of the Income Tax Act.

Conclusion:
The tribunal dismissed the appeal, upholding the CIT's revisionary order under Section 263, which directed the AO to re-examine the issues with proper inquiry and application of relevant legal provisions.