2023 (9) TMI 435 - AT - Income Tax

Income under the head Capital gains by considering the cost of acquisition of debentures - HELD THAT - It is during the year under consideration, namely, financial year ending 31-03-2016, that the assessee sold the debentures and reduced the amount of investments shown in the balance sheet at Rs. 56.00 crore from the full amount of consideration for computing the amount of long term capital gain. It is ostensible that the assessee never claimed deduction towards interest of Rs. 6.00 crore in the past, but capitalized it to the value of investment initially acquired at Rs. 50.00 crore. Naturally, when the debentures were sold in the year under consideration, the amount of interest capitalized along with the purchase cost, was also liable to be deducted from the full value of consideration for computing the amount of long term capital gain. It is this principle of law which was followed by the AO in the computation of capital gain. In fact, the interest cost was capitalized in an earlier year and represented a part of the opening balance of debentures for the year under consideration. Ergo, the opinion canvassed by the ld. CCIT that the interest of Rs. 6.00 crore could not have been added to the cost of debentures, in our considered opinion, is not tenable. We, therefore, set-aside the impugned order on this score. Deduction towards remuneration to partners with reference to Long term capital gain offered on sale of debentures, which was not allowable in terms of section 40(b)(v) of the Act - assessee was selected for Limited scrutiny (CASS) and the reason assigned for such scrutiny, as u/s. 143(2) by the AO, is Whether capital gains/loss is genuine and has been correctly shown in the return of income - As entire focus has been on the grant of deduction towards remuneration to partners at Rs. 22.50 crore, which, in his opinion, was not deductible in view of income under the head Profits and gains of business or profession being Nil. Reasons for Limited scrutiny (CASS) - case of converting limited scrutiny into complete scrutiny - DR argued that the AO ought to have converted limited scrutiny into complete scrutiny to cover the aspect of remuneration to partners and this act of non-conversion per se made the assessment order erroneous and prejudicial to the interest of the Revenue - The scope of arguments by the DR is restricted to the issues decided in the impugned order. He cannot travel beyond such issues and step into the shoes of the authority(ies) which passed the order(s). Coming to the revision, the DR cannot characterize the assessment order to be erroneous and prejudicial to the interest of the Revenue on a new count other than those taken note of in the revisionary order. Such an attempt, if allowed, would clothe the DR with the power of revision, which obviously, is not feasible. As the ld. CCIT did not make out any case of converting limited scrutiny into complete scrutiny as a ground for revision, we are afraid that the contention of the ld. DR on this score cannot be entertained. It is, therefore, held that the ld. CCIT was not justified in branding the assessment order erroneous and prejudicial to the interest of the Revenue on this ground as well.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Cost of acquisition of debentures.
3. Deduction towards remuneration to partners.

Summary:

1. Delay in Filing the Appeal:
The appeal by the assessee was time-barred by about 45 days. The delay was condoned due to reasons related to the corona infection, and the appeal was admitted for disposal on merits.

2. Cost of Acquisition of Debentures:
The Chief Commissioner of Income-tax (CCIT) held the assessment order to be erroneous and prejudicial to the interest of the Revenue because the Assessing Officer (AO) did not look into the issue of the cost of acquisition of the debentures. The debentures were acquired for Rs. 50.00 crore, but the assessee capitalized Rs. 6.00 crore towards interest paid on loans, making the total cost Rs. 56.00 crore. The Tribunal found that the interest cost was capitalized in an earlier year and represented a part of the opening balance of debentures for the year under consideration. Therefore, the opinion of the CCIT that the interest of Rs. 6.00 crore could not have been added to the cost of debentures was not tenable. The Tribunal set aside the impugned order on this score.

3. Deduction Towards Remuneration to Partners:
The CCIT argued that the assessee wrongly claimed a deduction towards remuneration to partners amounting to Rs. 22.50 crore with reference to Long term capital gain, which was not allowable under section 40(b)(v) of the Act. The Tribunal noted that the case was selected for Limited scrutiny (CASS) to examine whether the capital gains/loss is genuine and correctly shown in the return of income. The CCIT did not dispute the genuineness of the capital gain or its correct reflection in the return of income. The Tribunal found that the remuneration to partners is allowable with reference to book-profit, which means the net profit shown in the Profit and loss account computed in the manner laid down in Chapter IV-D, dealing with income under the head "Profits and gains of business or profession." Since the assessee's income under this head was Nil, the Tribunal held that the remuneration was not deductible. However, the Tribunal also noted that there were two legally sustainable views on this issue, and the AO adopted one in favor of the assessee. Citing the Supreme Court's ruling in Malabar Industrial Company Limited Vs. CIT, the Tribunal held that the CCIT cannot revise the order on such a debatable issue. Furthermore, the Tribunal rejected the argument that the AO should have converted 'limited scrutiny' into 'complete scrutiny,' as this was not a ground taken by the CCIT for revision.

Conclusion:
The Tribunal allowed the appeal, setting aside the order of the CCIT and holding that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The order was pronounced in the Open Court on 07th September, 2023.