2022 (8) TMI 915 - HC - Income Tax

Revision u/s 263 - Deduction u/s 36(1)(vii) with respect to write off of interest receivable forgone under the One Time Settlement ( OTS ) entered into by the assessee with its borrowers and Deduction u/s 36(1)(iii) with respect to Interest expenditure incurred with respect to borrowings made for the slum rehabilitation project at Dindoshi - HELD THAT - Findings of fact by the Tribunal which is the highest fact finding authority. No material has been brought to our notice controverting the same nor do we find any perversity in the said findings. We observe that the AO had called for particulars of interest. Tribunal clearly records in paragraph 8.2 that this is not a case where the AO has not made inquiry and blindly accept the return filed by the assessee. AO has called for particulars at the time of the scrutiny of assessment proceedings, received the reply and following the principles of natural justice, passed an assessment order expressing his opinion in the matter. Once this is done, then the Commissioner cannot impose/ substitute his opinion on the view taken by the AO to say that the said assessment order is erroneous and prejudicial to the interest of the revenue. Revisional CIT cannot substitute his view upon the view of the Assessing Officer if the Assessing Officer has taken one of the possible/plausible views, unless AO s view is unsustainable in law. As supported by the view of the in the case of CIT (Central), Ludhiana v/s. Max India Ltd. 2007 (11) TMI 12 - SUPREME COURT where it has been observed that where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an order erroneous and prejudicial to the interest of the revenue unless the view taken by the AO is unsustainable in law. Once the AO has raised queries which the assessee may not have answered fully then to say that this is a case of no enquiry cannot be permitted. What Section 263 covered prior to insertion of Explanation 2 was a case of no enquiry but not a case of inadequate enquiry. As noted above, with the introduction of Explanation 2 with effect from 1st June, 2015 even cases of inadequate or improper enquiry may be covered albeit not for the assessment year in question. We are concerned with the assessment year 2006-07. Prior to the insertion of Explanation 2, it was the prerogative of the Assessing Officer to determine what enquiry he wants to make while completing the assessment. We have already observed that an enquiry was made by the AO and the assessment order passed. CIT could not invoke jurisdiction u/s 263 as the view taken by the AO was a possible/plausible view. It was only if the AO had not made any enquiry then it could be said that the order passed was erroneous. This is not a case of lack of enquiry though it may be a case of inadequate enquiry. Inadequacy of enquiry as elucidated above does not give jurisdiction to the CIT to invoke provisions of Section 263 prior to the insertion of Explanation 2. In our view, the Explanation 2 does not help the revenue in as much as the same is prospective and applicable with effect from 1st June, 2015. Therefore, the order of the Tribunal cannot be faulted with. There is no error apparent nor any perversity in the findings of the Tribunal. The appeal does not raise any substantial question of law and is dismissed.

Summary

Issues Involved:
1. Deduction under Section 36(1)(vii) for write-off of interest receivable forgone under One Time Settlement (OTS).
2. Deduction under Section 36(1)(iii) for interest expenditure incurred for borrowings made for the slum rehabilitation project at Dindoshi.
3. Jurisdiction of the Commissioner under Section 263 of the Income Tax Act, 1961.

Detailed Analysis of the Judgment:

1. Deduction under Section 36(1)(vii) for Write-off of Interest Receivable Forgone under OTS:
The Tribunal noted that the assessee had provided details regarding the OTS and the write-off of interest receivable. The Assessing Officer (AO) had issued a notice under Section 142(1), specifically querying the details of bad debts, including the income offered to tax and efforts made to recover the debts. The assessee responded with the necessary details, and the AO considered these before allowing the deduction. The Tribunal concluded that the AO had made a proper inquiry and that the Commissioner of Income Tax (CIT) could not invoke Section 263 merely because he had a different opinion. The Tribunal emphasized that the CIT could not substitute his view for that of the AO unless the AO's view was unsustainable in law.

2. Deduction under Section 36(1)(iii) for Interest Expenditure Incurred for Borrowings Made for the Slum Rehabilitation Project at Dindoshi:
The Tribunal observed that the AO had queried the details of interest expenditure, including the name of the person to whom it was paid, the rate of interest, the amount, and the period for which it was paid. The assessee provided the necessary details, and the AO considered these before allowing the deduction. The Tribunal noted that the Dindoshi project was substantially complete, and the capitalization of interest ceased as per Accounting Standard 16 (AS-16). The Tribunal found that the AO had made the necessary inquiries and that the CIT could not invoke Section 263 on the ground of inadequate inquiry.

3. Jurisdiction of the Commissioner under Section 263 of the Income Tax Act, 1961:
The Tribunal and the High Court noted that prior to the insertion of Explanation 2 to Section 263, it was the prerogative of the AO to determine the inquiries to be made while completing the assessment. If the AO had made inquiries and considered the evidence, the CIT could not invoke Section 263 unless the AO's view was unsustainable in law. The High Court emphasized that Explanation 2, which deems an order to be erroneous if passed without making inquiries or verification, is prospective and applicable from 1st June 2015. Since the assessment year in question was 2006-07, the CIT could not invoke Section 263 based on the inadequacy of inquiry. The High Court supported this view with several judicial precedents, including the Supreme Court's decision in Commissioner of Income-Tax (Central), Ludhiana v/s. Max India Ltd., which held that where two views are possible, the CIT cannot treat the AO's view as erroneous unless it is unsustainable in law.

Conclusion:
The High Court upheld the Tribunal's order, dismissing the revenue's appeal. The Court concluded that the AO had made the necessary inquiries before allowing the deductions under Sections 36(1)(vii) and 36(1)(iii), and the CIT could not invoke Section 263 merely on the ground of inadequate inquiry. The appeal did not raise any substantial question of law, and the Tribunal's findings were neither erroneous nor perverse.