2021 (5) TMI 346 - AT - Income Tax

Validity of revision jurisdiction u/s. 263 - CIT directing the ld. AO to disallow the interest paid on borrowed funds u/s.36(1)(iii) - HELD THAT - AO had made adequate enquiries in the original assessment proceedings itself with regard to the issue of interest on borrowed funds and respectfully following the aforesaid decision, we hold that the said assessment completed after due enquiries, cannot be the subject matter of revision proceedings u/s 263 of the Act by the ld PCIT. No hesitation in holding that revision order passed by the ld. PCIT u/s 263 of the Act deserves to be quashed and is hereby quashed on this count itself. It is not in dispute that the borrowings and interest free advances to IHCL were made in earlier years and not during the year under consideration. In earlier orders we find that the borrowings made by the assessee and its utilisation thereof by way of interest free advance to IHCL has been accepted by the Revenue in scrutiny assessment proceedings, as meant for business purposes. PCIT invoked revision jurisdiction u/s.263 of the Act for A.Y.2013-14 but did not initiate any action with reference to this issue of disallowance of interest u/s.36(1)(iii) of the Act though the borrowings and utilisation thereon by way of interest free advance to IHCL were made prior to A.Y.2013-14. All these assessment orders and order of ld. PCIT u/s.263 of the Act were indeed available before the ld. AO while framing the assessment for A.Y.2015-16 which drives home the principle of consistency as well as the stand taken by the department in assessee s own case for various years. While this is so, the ld. AO taking a consistent view thereof in A.Y.2015-16 i.e. the year under consideration, cannot be categorised as passing erroneous order. On the contrary the ld. PCIT has passed an erroneous order in the instant case. Hence, revision jurisdiction u/s.263 of the Act invoked by the ld. PCIT deserves to be quashed even on this count both on technicality as well as on merits. Since, we have already held that sufficient enquiries were indeed carried out by the ld. AO in the course of original assessment proceedings, the reliance placed by the ld. PCIT on the provisions of Explanation-2 to Section 263 of the Act would not be relevant at all for the purpose of adjudication. Accordingly, the grounds raised by the assessee are allowed.

Issues Involved:
1. Validity of revision jurisdiction under Section 263 of the Income Tax Act.
2. Validity of the Principal Commissioner of Income Tax's (PCIT) direction to disallow interest paid on borrowed funds under Section 36(1)(iii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Revision Jurisdiction under Section 263 of the Income Tax Act:

The assessee challenged the revision jurisdiction exercised by the PCIT under Section 263 of the Income Tax Act. The PCIT had treated the assessment order passed by the Assessing Officer (AO) as erroneous and prejudicial to the interest of the Revenue because the AO had not disallowed the interest paid on borrowed funds under Section 36(1)(iii) of the Act. The PCIT's reasoning was based on an incorrect assumption that the assessee was engaged primarily in investment activities, where the primary motive is to earn interest income on loans extended to parties. However, the Tribunal found that the assessee was actually engaged in real estate and infrastructure development, not in the business of financing. Therefore, the premise of the PCIT's decision was factually incorrect.

The Tribunal observed that the AO had indeed conducted proper enquiries during the original assessment proceedings. The AO had issued a show-cause notice to the assessee regarding the disallowance of interest under Section 36(1)(iii) and received detailed submissions from the assessee, which explained the commercial expediency of the interest-free advances to IHCL. The Tribunal noted that the PCIT's claim of no enquiry by the AO was contradicted by the PCIT's own acknowledgment of the AO's examination of the issue.

The Tribunal relied on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Nirav Modi, which held that if queries were raised and responded to during assessment proceedings, the absence of mention in the assessment order does not imply non-application of mind by the AO. The Tribunal concluded that the AO had made adequate enquiries, and the assessment order could not be revised under Section 263 on the grounds of inadequate enquiry.

2. Validity of PCIT's Direction to Disallow Interest Paid on Borrowed Funds under Section 36(1)(iii) of the Income Tax Act:

The PCIT had directed the AO to disallow the interest on borrowed funds used to advance interest-free loans to IHCL. The Tribunal found that the borrowings and interest-free advances were made in earlier years and had been accepted by the Revenue in scrutiny assessment proceedings as meant for business purposes. The Tribunal listed the assessment particulars for the relevant years, where no disallowance of interest under Section 36(1)(iii) was made.

The Tribunal noted that the PCIT had invoked revision jurisdiction for A.Y. 2013-14 but did not take any action regarding the disallowance of interest, even though the borrowings and utilisation for interest-free advances were made prior to A.Y. 2013-14. The Tribunal emphasized the principle of consistency and held that the AO's consistent view in A.Y. 2015-16 could not be categorized as an erroneous order. On the contrary, the PCIT's order was found to be erroneous.

The Tribunal concluded that sufficient enquiries were carried out by the AO during the original assessment proceedings, and the reliance placed by the PCIT on Explanation-2 to Section 263 of the Act was not relevant. Therefore, the grounds raised by the assessee were allowed, and the revision order passed by the PCIT under Section 263 was quashed.

Conclusion:

The appeal of the assessee was allowed, and the revision order passed by the PCIT under Section 263 was quashed. The Tribunal held that the AO had conducted adequate enquiries during the original assessment proceedings, and the PCIT's direction to disallow interest on borrowed funds was based on an incorrect assumption of the assessee's business nature. The principle of consistency and the adequacy of the AO's enquiries were emphasized in the judgment.

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