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2021 (9) TMI 402 - AT - Income TaxRevision u/s 263 - AO allowing the loss on account of differential interest under the head income from other sources in the absence of Balance Sheet/ bank statement of relevant period as erroneous and prejudicial to the interest of revenue - HELD THAT - Absence of proper inquiring by the AO would render the assessment order erroneous as well as prejudicial to the interest of revenue. We also draw strength from the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs CIT 2000 (2) TMI 10 - SUPREME COURT wherein it was held that an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. A.O. has simply accepted the returned income filed by the assessee mentioning the fact that after discussion and examination, income of the assessee for the A.Y. 2016-17 in the status of individual is assessed read with Section 143(3) of the Income Tax Act - The order passed by the A.O. was not in accordance with law and it is prejudicial to the Revenue. The submissions of the ld. AR and the case laws relied by him is not found tenable at the facts of the present case. Therefore, we found no error or illegality in the order passed by the ld. Pr.CIT U/s 263 of the Act and we uphold the same. - Decided against assessee.
Issues Involved:
1. Legality of the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961. 2. Examination of the differential interest claimed under the head "income from other sources." 3. Validity of invoking Section 263 when the issue was already under scrutiny by the Assessing Officer (AO) under Section 154. 4. Justification of interest rates charged and paid by the assessee and its impact on tax liability. Detailed Analysis: 1. Legality of the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961: The assessee challenged the order of the PCIT, arguing it was illegal and bad in law. The PCIT had set aside the assessment order passed by the AO under Section 143(3), deeming it erroneous and prejudicial to the interests of revenue. The Tribunal upheld the PCIT's order, emphasizing that the AO's failure to conduct proper inquiries and verification rendered the order erroneous and prejudicial to the revenue. The Tribunal referred to judicial precedents, including the Hon'ble Supreme Court's decision in Malabar Industrial Co. Ltd. vs CIT 243 ITR 83, which stated that an incorrect assumption of facts or incorrect application of law would render an order erroneous. 2. Examination of the differential interest claimed under the head "income from other sources": The PCIT held that the AO's acceptance of the assessee's claim of differential interest without proper examination was erroneous. The assessee had borrowed funds at 16% interest and lent them at 9%, resulting in a net loss under "income from other sources." The PCIT noted that the AO did not verify the direct nexus between the borrowed and advanced amounts, nor did he examine the balance sheets or bank statements. The Tribunal agreed with the PCIT, stating that the AO's failure to investigate the justification for the differential interest rates and the lack of sound business rationale for the transactions warranted the invocation of Section 263. 3. Validity of invoking Section 263 when the issue was already under scrutiny by the Assessing Officer (AO) under Section 154: The assessee argued that the issue of differential interest was already under scrutiny by the AO under Section 154, and thus, invoking Section 263 was inappropriate. However, the Tribunal noted that the AO had not passed any order against the notice issued under Section 154. The PCIT had issued a show cause notice under Section 263 on the same issue, highlighting the lack of details and verification in the AO's assessment. The Tribunal found that the PCIT's invocation of Section 263 was valid, given the AO's failure to conduct a thorough examination. 4. Justification of interest rates charged and paid by the assessee and its impact on tax liability: The PCIT questioned the rationale behind the assessee borrowing at 16% and lending at 9%, noting that this arrangement led to a reduction in the assessee's tax liability. The PCIT observed that the transactions lacked a sound business rationale and appeared to be structured to lower the tax burden. The Tribunal agreed, stating that the interest differential and the lack of proper verification by the AO justified the PCIT's order under Section 263. The Tribunal cited the Hon'ble Supreme Court's decision in S.A. Builders 288 ITR 1, emphasizing that tax authorities should not dictate business decisions but must ensure that transactions are genuine and not solely for tax avoidance. Conclusion: The Tribunal dismissed the assessee's appeal, upholding the PCIT's order under Section 263. The Tribunal found that the AO's failure to conduct proper inquiries and verification rendered the assessment order erroneous and prejudicial to the revenue. The Tribunal emphasized that the PCIT's invocation of Section 263 was justified, given the lack of sound business rationale for the transactions and the AO's inadequate examination of the differential interest claimed by the assessee.
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