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2021 (11) TMI 130 - AT - Income TaxRevision u/s 263 - As per CIT Assessee, in the garb of conversion from loan to equity, was irregularly allowed Long-Term Capital losses - HELD THAT - The assessee had made strategic investment in RLS Inc. in earlier years. The investment was in the shape of share application as well as loans. As per the agreement, the loan was convertible into share capital. Accordingly, entire share application money as well as loan was converted into share capital / capital surplus as on 31/03/2011 - Long-Term Capital losses have been computed by the assessee as per the provisions of Sec.46 by deducting the indexed cost of acquisition from sale consideration. These transactions were duly reflected in the computation of income and necessary disclosures were made at appropriate places in the financial statements. These transactions were also reflected in Form No.3CEB which has been subjected to benchmarking before Ld. TPO. Not only this, specific enquiries were made by Ld. AO by issuance of notice u/s 142(1) wherein elaborate information was sought from the assessee with respect to this claim. The assessee responded to the queries comprehensively along with requisite information and documentary evidences. Allegation of Ld. Pr. CIT that the assessment order was passed without making requisite enquiries do not have any sound basis rather the same is based more on surmises and conjectures without appreciating material facts on record and without considering detailed response filed by the assessee during assessment proceedings as well as during revisional proceedings. As per settled legal position, the revisionary proceedings could not be held to be valid where Ld. AO had made enquiries and adopted the claim with due application of mind. Merely because the issue has not been discussed in the assessment order, the same would not lead to a conclusion that assessment was made without application of mind. On the facts and circumstances of the case, we are of the opinion that revisional jurisdiction as exercised by Ld. Pr. CIT u/s 263 is bad in law and is liable to be quashed in terms of settled legal position . Allowability of interest - As the interest was taxable u/s 56 to 59 as Income from Other Sources , the claim made u/s 36(2) could not be made and therefore, incorrect grant of the deduction has made the assessment order erroneous - We find that the allegations made by Ld. Pr. CIT are without any sound basis. The interest income was offered as well as accepted as Business Income which is evident from the assessment order framed by Ld. AO. Not only this, the assessment orders for AYs 2009-10 to 2014-15 has been placed by the assessee on record, the perusal of which would show that interest income has always been accepted as Business Income only. The opinion that interest would be taxable as Income from Other sources is nothing more than an opinion of Ld. Pr. CIT and is one of the possible views. However, it is a fact on record that Ld. AO has chosen to accept the interest income as business income in all the earlier years as well as in this year and accordingly, the write-off would be allowable business expenditure to the assessee as claimed in the Profit Loss Account. This view is an equally possible view keeping in mind the fact that the investments were strategic investments in subsidiary and out of commercial expediency. This stand of the assessee was always accepted by the revenue in earlier years as well as in this year. The rule of consistency would debar the revenue to take different stand on similar factual matrix which is supported by the decision of Hon ble Bombay High Court in the case of Pr.CIT V/s Quest Investment Advisors Pvt. Ltd 2018 (7) TMI 479 - BOMBAY HIGH COURT After going through the assessment proceedings, it could be seen that the claim was well examined by Ld. AO and specific queries were raised with respect to the claim. The same were duly responded to by the assessee along with requisite documentary evidences. After considering the same, the claim was allowed with due application of mind. The view taken by Ld.AO could not be said to be contrary to the law. Therefore, the assessment order could not be held to be erroneous and prejudicial to the interest of the revenue. Assessee appeal allowed.
Issues Involved:
1. Validity of revisional jurisdiction under Section 263 of the Income Tax Act. 2. Adequacy of inquiries made by the Assessing Officer (AO) during assessment proceedings. 3. Nature and treatment of Long-Term Capital Loss (LTCL) on transfer of shares. 4. Validity of the claim of bad debts on account of write-off of non-recoverable interest income. 5. Applicability of Section 92CE regarding secondary adjustment. 6. Consistency in the treatment of interest income as business income. Detailed Analysis: 1. Validity of Revisional Jurisdiction under Section 263: The judgment emphasizes that the Principal Commissioner of Income Tax (Pr. CIT) can exercise revisional jurisdiction under Section 263 if the order passed by the AO is erroneous and prejudicial to the interest of the revenue. The Supreme Court in Malabar Industrial Co. Ltd. v/s CIT clarified that both conditions must be satisfied for invoking Section 263. The judgment reiterates that an order cannot be termed erroneous unless it is not in accordance with law, and mere loss of revenue is not sufficient to invoke Section 263 unless the AO's order is unsustainable in law. 2. Adequacy of Inquiries Made by the AO: The judgment discusses the distinction between "lack of inquiry" and "inadequate inquiry," stating that the Pr. CIT can only intervene in cases of "lack of inquiry." The AO had raised specific queries regarding the LTCL and bad debts, which were comprehensively responded to by the assessee. The AO, after verifying the details, accepted the claims, indicating that inquiries were made with due application of mind. The judgment cites Gabriel India Ltd., holding that merely because the AO did not discuss the issue in the assessment order does not mean the order was passed without application of mind. 3. Nature and Treatment of Long-Term Capital Loss (LTCL) on Transfer of Shares: The assessee claimed LTCL on the transfer of shares of its wholly-owned subsidiary, RLS Inc., which was dissolved. The AO raised specific queries and received detailed responses from the assessee, including documentary evidence. The AO accepted the claim after due verification. The Pr. CIT's allegation that the AO failed to make necessary inquiries was found to lack a sound basis, as the AO had indeed made inquiries and applied his mind to the issue. 4. Validity of the Claim of Bad Debts on Account of Write-off of Non-recoverable Interest Income: The assessee wrote off accrued interest on loans given to its AE, RLS BV, as bad debts and claimed it under Section 36(2). The AO raised specific queries, and the assessee provided detailed explanations and documentary evidence. The AO accepted the claim after due verification. The Pr. CIT's contention that the interest was taxable under "Income from Other Sources" and not as business income was found to be an opinion rather than a factual basis. The AO had consistently treated the interest as business income in earlier years. 5. Applicability of Section 92CE Regarding Secondary Adjustment: The Pr. CIT directed the AO to verify the applicability of Section 92CE, which deals with secondary adjustments in transfer pricing. However, the judgment notes that the provisions of Section 92CE were applicable only from AY 2017-18, and the year under consideration was AY 2015-16. Therefore, the direction to verify the applicability of Section 92CE was not tenable. 6. Consistency in the Treatment of Interest Income as Business Income: The judgment highlights the principle of consistency, stating that the AO had consistently treated the interest income as business income in earlier years. The rule of consistency, supported by the decision in Pr. CIT v/s Quest Investment Advisors Pvt. Ltd., debarred the revenue from taking a different stand on similar facts. The AO's acceptance of the interest income as business income was a plausible view, and the Pr. CIT's differing opinion did not justify the revision of the assessment order. Conclusion: The revisional jurisdiction exercised by the Pr. CIT under Section 263 was found to be invalid as the AO had made necessary inquiries and applied his mind to the issues. The assessment orders were neither erroneous nor prejudicial to the interest of the revenue. Consequently, both appeals were allowed, and the revision orders were quashed.
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