2021 (1) TMI 396 - AT - Income Tax

Revision u/s 263 - interest payment to the foreign banks disallowed - similar show cause notice under section 263 was issued by learned PCIT for three subsequent assessment years - interest expenses have been incurred by assessee in the form of payment of interest on borrowings from foreign banks for the purpose of making investment in share capital of subsidiary companies outside India and assessee has wrongly claimed this amount as an item of expenditure under section 57(iii) and that assessing officer has wrongly allowed such interest expenditure - HELD THAT - When the show cause notice under section 263 on similar ground for revising the assessment order for assessment year 2009-10 has been set aside by High Court and by accepting the order of High Court similar revision proceedings initiated on similar show cause notice for three subsequent assessment years, has already been dropped by revenue, therefore the issues raised in the present appeal is squarely covered in favour of assessee. The contention of revenue that the decision of Directorate of Income tax (L R), CBDT or Principal CIT is not binding on Tribunal is fair that the decisions of Directorate of Income tax (L R), CBDT or Principal CIT is not binding on Tribunal, however, those decision are binding on Principal CIT and learned DR of revenue. Once, the order of High Court on identical issues for assessment year 2009-10 is accepted by higher authorities of revenue, now it is not open for learned DR for revenue or to learned PCIT to deviate from such decisions. Thus, in our view the contention of learned DR is misplaced. - Decided in favour of assessee.

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Erroneous and prejudicial assessment order.
3. Allowability of interest expenditure under Section 57(iii) and Section 36(1)(iii).
4. Principles of natural justice.
5. Timeliness of the order under Section 263.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act, 1961:
The assessee challenged the jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263, arguing that the assessment order passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the interest of the revenue. The PCIT had issued a show cause notice under Section 263, claiming the AO's order was erroneous and prejudicial because it allowed interest expenditure that should have been disallowed under Section 36(1)(iii).

2. Erroneous and prejudicial assessment order:
The PCIT revised the assessment order, arguing that the AO erroneously allowed the interest expenditure claimed by the assessee under Section 57(iii). The PCIT contended that the interest paid on borrowings for investment in subsidiary companies outside India should be disallowed under Section 36(1)(iii), as the investments were made to promote the subsidiary and not to earn dividend income.

3. Allowability of interest expenditure under Section 57(iii) and Section 36(1)(iii):
The core issue was whether the interest expenditure incurred on borrowings for investment in subsidiary companies outside India was allowable under Section 57(iii) or should be disallowed under Section 36(1)(iii). The assessee argued that similar issues for the assessment year 2009-10 were decided in their favor by the Gujarat High Court, which held that the AO's view was plausible and not open to revision by the PCIT. The High Court had accepted that the interest expenditure could be allowed under Section 57(iii) even if no dividend income was earned in the relevant year.

4. Principles of natural justice:
The assessee contended that the PCIT passed the order under Section 263 without affording a reasonable opportunity for a personal hearing, violating the principles of natural justice. The Tribunal noted that the PCIT issued the show cause notice and provided a hearing date, but the assessee's contention regarding the lack of a personal hearing opportunity was not specifically addressed in the judgment.

5. Timeliness of the order under Section 263:
The assessee argued that the order under Section 263 was not served within the prescribed time, making it barred by limitation. However, the Tribunal did not specifically address this issue in the judgment, focusing instead on the substantive issues of jurisdiction and the merits of the case.

Tribunal's Decision:
The Tribunal ruled in favor of the assessee, holding that the issues raised were directly covered by the Gujarat High Court's decision in the assessee's own case for the assessment year 2009-10. The Tribunal noted that similar proceedings initiated for subsequent assessment years were dropped by the PCIT following the High Court's decision. The Tribunal concluded that the AO's view was plausible and not open to revision by the PCIT, and the interest expenditure was allowable under Section 57(iii). The Tribunal allowed the assessee's appeal, setting aside the PCIT's order under Section 263.

Conclusion:
The Tribunal's judgment emphasized the binding nature of the High Court's decision on similar issues and the importance of consistency in tax administration. The order under Section 263 was quashed, and the assessee's appeal was allowed in toto.

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