2021 (7) TMI 196 - AT - Income Tax

Revision u/s 263 - case of the assessee was selected for scrutiny and assessment u/s.143(3) - as per CIT AO failed to examine the admissibility of the interest expenses deducted under the head income from business - valuation officer had determined the fair market value of the sold property at ₹ 2,32,04,000/-, however, the Assessing Officer has taken the sale consideration of ₹ 2,02,50,000/- as per the sale deed instead of ₹ 2,32,04,000/- determined by the DVO - HELD THAT - As noticed that during the course of assessment proceedings vide notice u/s. 142(1) Assessing Officer has made specific investigation and verification on the issue of claim of interest expenditure AO has asked the assessee in the notice u/s. 142(1) to furnish the copies of ledger accounts detail of lenders and purpose for which borrowed funds have been used. Again vide notice u/s. 142(1) AO has also asked the assessee to prove nexus between deduction claimed of and income earned. In response to query raised by the AO the assessee has duly furnished the copies of ledger account of interest paid on borrowed fund along with copies of ledger account of all the parties to whom the interest was paid -assessee has specifically explained that funds were utilized for the business purpose and also filed copies of balance sheet and ledger account for verification. It is noticed that again vide letter dated 9th March, 2015 the assessee has pointed out that he has submitted copies of balance sheet, confirmation of all the persons from whom the funds were borrowed and also given the break-up of the gross income before deducting any expenses. The assessee has also explained that many of the borrowed funds were carried forward from the earlier years and in all these earlier years he has claimed the deduction of interest on borrowed funds. Pr. CIT has failed to substantiate how the Assessing Officer has not examined the admissibility of interest expenses, therefore, the ld. Pr. CIT is unjustified in treating the interest payment as not allowable. Correct sale consideration adoption while determining the capital gain in the order u/s. 143(3) - We have gone through the report of the DVO and it is noticed that nowhere in his report the DVO has discussed the encroachment of the land which compelled assessee to sell the land at the price which was only less by about 12% from the value determined by the DVO in his report. - AO has considered the material facts of the existence of encroachment on the land and the finding since the variation in the value shown in the sale deed and the value reported in the DVO report was only 12.73% which was within the tolerable limit of 15% variation as recognized by the Hon ble Supreme Court in the case of C.B. Gautam 1992 (11) TMI 1 - SUPREME COURT .We consider that judicial findings as discussed in this order articulate the fact that small variation within the tolerable limit of 15% as held by Hon ble Supreme Court as elaborated supra between the value shown by the assessee and the value of the DVO is liable to be ignored because of element of estimation involved in valuation of immoveable property. Thus we consider that order passed under section 263 of the act is not sustainable - Decided in favour of assessee.

Summary

Issues Involved:
1. Admissibility of interest expenses claimed by the assessee.
2. Valuation of the sale consideration of property for computing capital gains.

Detailed Analysis:

1. Admissibility of Interest Expenses:

The assessee filed an original return of income and a revised return, declaring total incomes of ?1,04,28,560/- and ?1,07,53,050/- respectively. The Assessing Officer (AO) completed the assessment under section 143(3) of the Income Tax Act, 1961, accepting the declared income. The Principal Commissioner of Income Tax (Pr. CIT) initiated proceedings under section 263, questioning the admissibility of interest expenses amounting to ?64,46,142/- claimed by the assessee.

The Pr. CIT issued a show cause notice stating that the AO failed to verify whether the interest expenses were admissible under the head "income from business." The assessee responded, providing detailed explanations and documentary evidence showing that the AO had specifically examined the interest expenses during the assessment proceedings. The AO had sought details of unsecured loans and the utilization of funds on which the interest was paid, and the assessee provided the necessary information, including balance sheets, confirmations, and details of income earned.

Despite the assessee's submissions, the Pr. CIT held that the AO had erroneously allowed the interest expenses, concluding that the interest-bearing funds were diverted to assets for which the interest expenditure was not allowable. The Pr. CIT deemed the assessment order erroneous and prejudicial to the interests of the revenue.

Upon appeal, the tribunal found that the AO had conducted a detailed verification of the interest expenses during the assessment proceedings. The tribunal noted that the AO had made specific inquiries and the assessee had provided comprehensive responses, including documentary evidence. The tribunal concluded that the Pr. CIT failed to substantiate how the AO had not examined the admissibility of interest expenses. Therefore, the tribunal held that the order under section 263 on the issue of interest expenses was not sustainable in law.

2. Valuation of Sale Consideration for Capital Gains:

The Pr. CIT also questioned the valuation of the sale consideration of a property sold by the assessee. The AO had taken the sale consideration as per the sale deed at ?2,02,50,000/- instead of ?2,32,04,000/- determined by the District Valuation Officer (DVO). The Pr. CIT argued that the AO should have adopted the DVO's valuation for computing long-term capital gains, as per the provisions of section 50C of the Act.

The assessee contended that the property had encroachments, which affected its market value. During the assessment, the AO had considered the encroachment issue and the fact that the DVO's valuation exceeded the sale consideration by only 12.73%, which was within the tolerance limit of 15% as recognized by the Supreme Court in the case of C.B. Gautam vs. Union of India. The AO had also reviewed relevant judicial decisions and material facts before concluding the assessment.

The tribunal found that the AO had made specific inquiries regarding the applicability of jantri value and had considered the encroachment issue. The tribunal noted that the DVO's report did not account for the encroachment, and the AO had appropriately considered the material facts and judicial findings. The tribunal referenced several judicial pronouncements supporting the view that minor variations within a tolerable limit should be ignored in valuation matters.

The tribunal concluded that the AO's decision to adopt the sale consideration as per the sale deed, considering the encroachment and the small variation from the DVO's valuation, was justified. The tribunal held that the order under section 263 on the issue of sale consideration was not sustainable.

Conclusion:

The tribunal quashed the order passed under section 263 by the Pr. CIT, ruling in favor of the assessee on both issues. The appeal of the assessee was allowed. The order was pronounced in the open court on 18-06-2021.