2022 (8) TMI 202 - AT - Income Tax

Revision u/s 263 - Disallowance of interest u/s 36(1)(iii) in respect of loans and advances made to sister concerns - HELD THAT - There is no gainsaying that the power of revision can be exercised by the ld. PCIT based on the opinion formed by himself. The revision based on the subjective opinion of PCIT cannot be sustained in the eyes of law. As observed by us, there was no existence of facts and circumstances on the base of which the PCIT had formed an opinion that an enquiry is warranted into the item appearing under the head Advance for properties . The opinion formed by the PCIT that assessment order is erroneous for the fact that the Assessing Officer had not caused any enquiry into items advance for purchase of properties is based on no evidence. In such circumstances, it can be said that the ld. PCIT had not applied his mind or did not honestly form his opinion. Thus, the order of revision passed on this item by the ld. PCIT is unreasonable and not based on any material. As regards to the issue of average rate of interest to be adopted for the purpose of computing amount of disallowance u/s 36(1)(iii) on the loans and advances made to the sister concern, it is an admitted position that the question of disallowance u/s 36(1)(iii) is not subject matter of revision, but the rate to be adopted for the purpose of computing the amount of disallowance u/s 36(1)(iii). During the course of assessment proceedings, the appellant had categorically stated that the average rate of interest is only 14% as the appellant had borrowed the funds at the rate of interest ranging from 8% to 20%. The appellant had also filed the details such as name of the lenders and rate of interest etc. Therefore, it cannot be said that the Assessing Officer had adopted rate of interest @ 14% without making any enquiry as to the average rate of interest at which the loans were borrowed by the appellant company. As things stand today, the question of disallowance u/s 36(iii) does not arise for the reason that the addition made by the Assessing Officer came to be deleted by the CIT(A) on appeal. Therefore, the issue as to what is the correct rate of interest to be adopted had become academic. In the circumstances, the order of revision passed by the ld. PCIT cannot be sustained in the eyes of law. Since, we held that the order of revision cannot be sustained in the eyes of law, we need not delve into the issue of doctrine of merger and the applicability in the case of Smt. Renuka Philip 2018 (12) TMI 129 - MADRAS HIGH COURT and in the case CIT vs. Vam Resorts Hotels (P.) Ltd. 2019 (8) TMI 1418 - ALLAHABAD HIGH COURT - In the circumstances, the issue raised by the assessee-company in the present appeal stands allowed.

Summary

Issues involved:
1. Disallowance of interest under section 36(1)(iii) by Assessing Officer.
2. Revision of assessment order by Principal Commissioner of Income Tax (PCIT) under section 263.
3. Exercise of power of revision by PCIT in matters subject to appeal before Commissioner of Income Tax (Appeals) [CIT(A)].

Detailed Analysis:
1. Disallowance of interest under section 36(1)(iii) by Assessing Officer:
The appellant, a company engaged in property development, filed a return of income for the assessment year 2015-16, declaring total income of Rs. Nil. The Assessing Officer completed the assessment, disallowing interest under section 36(1)(iii) at Rs. 32,39,72,372. The PCIT found the disallowance unjustified, as the interest rates on loans varied from 12% to 19%, not 14% as assumed by the Assessing Officer. The PCIT also noted the Assessing Officer did not consider interest-bearing funds utilized for non-business purposes. The PCIT proposed to revise the assessment order, considering it erroneous and prejudicial to revenue.

2. Revision of assessment order by PCIT under section 263:
The PCIT issued a show-cause notice proposing to revise the assessment order, citing errors in disallowance of interest and lack of examination of advances for properties. The appellant argued that the Assessing Officer had considered all relevant aspects during assessment and that the PCIT's revision was unwarranted. The PCIT set aside the assessment order, directing a fresh assessment after hearing the appellant. The appellant appealed, contesting the PCIT's revision.

3. Exercise of power of revision by PCIT in matters subject to appeal before CIT(A):
The appellant contended that issues revised by the PCIT were part of the pending appeal before the CIT(A), and thus, the PCIT should not have exercised revisionary powers. The PCIT's revision was challenged on the grounds that the Assessing Officer had already examined the issues. The PCIT's decision was deemed unreasonable and lacking in proper evidence. The Tribunal held that since the CIT(A) had deleted the disallowed interest, the PCIT's revision was unsustainable, and the appeal by the appellant was allowed.

In conclusion, the Tribunal found in favor of the appellant, holding that the PCIT's revision was unjustified, and the issues raised were adequately addressed during the assessment proceedings and appeal before the CIT(A).