2023 (3) TMI 261 - AT - Income Tax

Revision u/s 263 - disallowance u/s 36(1)(iii) - HELD THAT - We find that the AO only asked the assessee to show cause as to why the interest expense on debentures should not be disallowed being capital in nature and be added back to the total income of the assessee. In its reply assessee submitted that the amount capitalised u/s 36(1)(iii) includes proportionate interest on debentures and the remaining amount was claimed as revenue expenses by the assessee. Thus, it was submitted by the assessee that it has already capitalised the interest cost on debentures till the Unit-2 was put to use. Though the assessee has provided detailed working of computation of disallowance u/s 36(1)(iii) however, it is not evident from the record that any specific enquiry/investigation/examination of such details was ever conducted by the AO or any show cause notice was issued by the AO to examine the other components of expenditure during the assessment proceedings. The assessee has also not brought on record any show cause notice issued by the AO on this issue. Since the issue under consideration during the assessment proceedings was only confined to the disallowance of interest expenses on debentures, therefore, we are of the considered view that revision proceedings under section 263 have correctly been initiated in respect of this issue. Accordingly, to this extent, the impugned order passed u/s 263 is upheld. Applicability of section 79 - As held that the assessee has diluted shareholding in respect of major shareholder vis- -vis the preceding years in which loss was incurred, and thus as per section 79 he assessee is not entitled to carry forward earlier years brought forward losses, which was allowed by the AO. Since no enquiry in this regard, which was warranted in the facts and circumstances of the case, was made by the AO resulting in the assessment order to be erroneous insofar as prejudicial to the interest of the Revenue. During the hearing, Tribunal in Khajrana Ganesh Properties Pvt Ltd. 2017 (9) TMI 1726 - ITAT MUMBAI and Instant Traders Private Limited 2018 (9) TMI 211 - ITAT MUMBAI wherein it has been held that the issue whether the loss in the year may be carried forward to following year and set off against the income of subsequent year is liable to be determined by the Assessing Officer who deals with the assessment of such a subsequent year. Thus, we are of the considered opinion that this issue was duly examined by the Assessing Officer during the scrutiny assessment proceedings. Therefore, the impugned revision order passed under section 263 of the Act is set aside to this extent. Taxability of the share premium received by the assessee u/s 56(2)(vii)(b) - One of the requirements was that the loan given by the lender banks are to be converted into equity shares/preference shares and part of promoter shares were also to be transferred to the lender bank. In pursuance of the above scheme, the assessee company, during the year, converted the existing loan given by the banks into equity shares. Accordingly, the shares were issued to banks, namely, Allahabad Bank, Bank of India, Corporation Bank, Union Bank of India and Andhra Bank. We find that the disclosure regarding the issuance of shares to the aforesaid bank was also made by the assessee in its audited financials. Thus, it is evident that the circumstances under which shares were issued to the banks were completely different than the shares issued to M/s Prism Cement Ltd., as the earlier was under the Scheme/Guidelines issued by RBI. Thus we are of the considered opinion that this issue was duly examined by the AO during the scrutiny assessment proceedings. Therefore, the impugned revision order passed under section 263 of the Act is set aside to this extent. Grounds raised by the assessee are partly allowed.

Issues Involved:
1. Revision of assessment order under section 263 of the Income Tax Act, 1961.
2. Disallowance of interest expenses under section 36(1)(iii) of the Act.
3. Denial of carry forward of losses under section 79 of the Act.
4. Taxability of share premium under section 56(2)(viib) of the Act.

Issue-wise Detailed Analysis:

1. Revision of Assessment Order under Section 263:
The assessee challenged the order dated 23/03/2022 passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961. The PCIT initiated revisionary proceedings on the grounds that the assessment order dated 20/12/2019 was erroneous and prejudicial to the interest of the revenue due to the failure of the Assessing Officer (AO) to make necessary enquiries on specific issues.

2. Disallowance of Interest Expenses under Section 36(1)(iii):
The PCIT noted that the assessee capitalized interest expenses of Rs.13,35,03,728 related to Unit-2, but the correct amount should have been Rs.21,08,33,602, resulting in a difference of Rs.7,73,29,874 not being added to the total income. The PCIT held that the AO failed to make necessary inquiries, rendering the assessment order erroneous and prejudicial to the revenue. The Tribunal upheld the PCIT's order on this issue, noting that the AO did not conduct a specific examination or issue a show-cause notice regarding the other components of the expenditure.

3. Denial of Carry Forward of Losses under Section 79:
The PCIT held that the assessee was not entitled to carry forward earlier years' losses due to a change in shareholding pattern by more than 51%, which was not examined by the AO. The Tribunal found that the AO had raised specific queries regarding the change in shareholding and the applicability of section 79, and the assessee had duly replied. The Tribunal concluded that this issue was examined during the assessment proceedings and set aside the PCIT's order on this point.

4. Taxability of Share Premium under Section 56(2)(viib):
The PCIT observed that the share premium received from M/s Prism Cement Ltd was in excess of the fair market value, as the shares were valued at Rs.5.37 per share when issued to banks. The PCIT held that the AO failed to make necessary inquiries, making the assessment order erroneous and prejudicial to the revenue. The Tribunal found that the AO had sought details and valuation reports for the shares issued and that the shares issued to banks were under a different scheme (S4A) due to financial distress. The Tribunal concluded that this issue was examined during the assessment proceedings and set aside the PCIT's order on this point.

Conclusion:
The Tribunal partially sustained the PCIT's order under section 263, specifically upholding the revision regarding the disallowance of interest expenses under section 36(1)(iii) but setting aside the revisions related to the carry forward of losses under section 79 and the taxability of share premium under section 56(2)(viib). The appeal by the assessee was partly allowed.

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