2023 (3) TMI 343 - AT - Income Tax

Revision u/s 263 - claim of interest expense - HELD THAT - There is no enquiry or verification initiated and undertaken by the AO during the course of entire assessment proceedings regarding the claim of interest expense and therefore, we agree with the findings of the ld. PCIT that it is a case where the AO has failed to conduct any enquiry and verification. In light of the same, we are unable to accept the ld. AR's contention that there was no requirement in law to raise queries even on the issues on which the AO after examining the record feels satisfied as it is case where there is a failure on the part of the AO to examine the profit/loss and balance sheet where there is substantial movement in loan transactions both on the liability and asset side of the balance sheet besides claim of interest expense in the profit/loss account and the question of satisfaction will arise where the matter has been examined at first place and which is completely absent in the instant case. Bank charges and interest on car loan cannot be subject matter of disallowance u/s. 36(1)(iii) of the Act and to this extent, we agree with the ld. AR and the order passed by the AO cannot be held to be erroneous in so far as prejudicial to the interest of the Revenue and the findings of the ld. PCIT are set-aside to this extent. Interest expense for availing cash credit limits from Punjab National Bank - The credits and withdrawals in such cash credit account need to be examined and a clear nexus is required to be established between the borrowed funds and making of loans/advances to Sister concerns. On the same footing, the argument of the assessee regarding availability of its own funds need to be tested and examined after analyzing the nature and position of funds at the relevant point of time of making such advances. In light of aforesaid discussions, we uphold the order of the ld. PCIT to this extent and the assessment order is set-aside to this limited extent to examine the matter afresh in light of above discussions and as per law. Needless to say, the Assessing officer shall provide reasonable opportunity to the assessee and the latter shall submit the desired information/documentation as so desired by the Assessing officer. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Examination of Sundry Creditors.
3. Correctness of Interest Expenses under Section 36(1)(iii).
4. Nature and Reasonableness of Expenses Claimed in Profit and Loss Account.

Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act, 1961:
The Assessee challenged the invocation of Section 263 by the Principal Commissioner of Income Tax (PCIT), arguing that the assessment order under Section 143(3) dated 23.09.2016 was neither erroneous nor prejudicial to the interest of revenue. The Assessee contended that the Assessing Officer (AO) had examined the books of account and made necessary additions, thus fulfilling his duties.

The Tribunal observed that the case was selected for complete scrutiny to verify low income shown by large contractors, large increase in sundry creditors against reduction in business income, and mismatch in amounts paid to related persons under Section 40A(2)(b). The Tribunal found that the AO failed to conduct any enquiry or verification regarding the substantial claim of interest expenses and movement in loan transactions. Therefore, it upheld the PCIT's invocation of Section 263 to the extent of interest expenses claimed under Section 36(1)(iii).

2. Examination of Sundry Creditors:
The Assessee initially raised the issue of sundry creditors being examined by the AO during the assessment proceedings. However, the Assessee did not press this ground during the appeal. Consequently, this ground was dismissed as not pressed.

3. Correctness of Interest Expenses under Section 36(1)(iii):
The primary issue in dispute was the disallowance of interest expenses amounting to Rs. 19,48,522/- under Section 36(1)(iii). The Assessee argued that the AO had thoroughly examined the books of account, and the interest expenses were justified.

The Tribunal noted that the interest expenses included bank charges of Rs. 1,32,786/-, interest on car loan amounting to Rs. 91,293/-, and interest of Rs. 17,24,442/- for availing cash credit limits from Punjab National Bank. It was found that the bank charges and car loan interest could not be disallowed under Section 36(1)(iii). However, the Tribunal upheld the PCIT's findings regarding the interest on cash credit limits, noting that the AO had failed to examine the nexus between the borrowed funds and interest-free advances to sister concerns.

The Tribunal directed the AO to re-examine the matter, focusing on the nature and movement of funds in the cash credit account and the availability of interest-free funds at the relevant time.

4. Nature and Reasonableness of Expenses Claimed in Profit and Loss Account:
The Assessee also raised the issue of the nature and reasonableness of expenses claimed in the Profit and Loss Account. Similar to the issue of sundry creditors, this ground was not pressed by the Assessee during the appeal and was subsequently dismissed.

Conclusion:
The Tribunal partly allowed the appeal, setting aside the assessment order to the limited extent of examining the interest expenses under Section 36(1)(iii). The AO was directed to re-examine the matter, ensuring a thorough analysis of the nexus between borrowed funds and interest-free advances, and the availability of interest-free funds at the relevant time. The Tribunal upheld the PCIT's invocation of Section 263 for the interest expenses but dismissed the grounds related to sundry creditors and other expenses as not pressed.