2024 (2) TMI 1333 - AT - Income Tax

Revision u/s 263 - Validity of limited scrutiny proceedings - as per CIT AO has passed assessment order without proper verification and interest expenses claimed as deduction u/s 57 were required to be disallowed - assessee submitted that the assessment proceedings were selected for limited scrutiny with the specific purpose of enquiry into claim of interest expenses u/s 57. HELD THAT - On going through the contents of the 263 order and the assessment records, we observe that firstly there was no evidence lack of enquiry on part of the AO on the aspect of allowability of claim of deduction u/s 57 of the Act. We observe that the case of the assessee was opened under limited scrutiny to examine whether the deduction against interest income from other sources has been correctly shown in the return of income and also to examine whether deduction claimed on account of interest expenses is deductible. The assessee had also filed replies to the query raised by the Assessing Officer during the course of assessment proceedings. Even before PCIT, the assessee had filed written submissions giving the basis for claim of deduction of interest expenses u/s 57 by stating that the aforesaid interest income had been incurred exclusively for the purpose of earning interest income and accordingly the order passed by the AO was not erroneous and prejudicial to the interest of the Revenue. Assessee had filed detailed written submission before Ld. PCIT explaining that the notice issued u/s 263 was on an incorrect understanding / appreciation of the facts of the assessee s case and the assessee had submitted that the interest expenditure had been incurred wholly for the purpose of earning interest income. Assessee had also submitted that only that part of interest expenditure had been claimed by way of deduction u/s 57 which had been incurred for earning interest income and the proportionate part of the interest expenditure which was not utilized for earning interest income had not been claimed by the assessee as deduction under Section 57 of the Act. As PCIT did not give any specific finding to controvert the written submissions filed by the assessee during the course of 263 proceedings and proceeded to hold that the assessment order passed by the AO is erroneous and prejudicial to the interest of the Revenue. Accordingly, PCIT has erred in facts and law in holding that the assessment order passed by the Assessing Officer in the instant case is erroneous and prejudicial to the interest of the Revenue. Appeal of the assessee is allowed.

Issues Involved:

1. Jurisdiction under Section 263 of the Income Tax Act.
2. Allowability of interest expenses as a deduction under Section 57 of the Income Tax Act.
3. Verification and inquiry by the Assessing Officer (AO) during assessment proceedings.

Summary:

1. Jurisdiction under Section 263 of the Income Tax Act:
The appeal was filed by the assessee against the order passed by the Principal Commissioner of Income Tax (PCIT), Rajkot-1, invoking Section 263 of the Income Tax Act, which allows revision of an assessment order if it is erroneous and prejudicial to the interest of the revenue. The PCIT held that the assessment order dated 05-12-2018 under Section 143(3) was erroneous and prejudicial to the revenue's interest, thus assuming jurisdiction under Section 263.

2. Allowability of Interest Expenses as a Deduction under Section 57:
The PCIT initiated proceedings on the grounds that the assessee's interest expenses of Rs. 21,75,945/- were wrongly allowed as deductions under Section 57. The PCIT observed that the interest of Rs. 10,34,960/- paid on a loan from Central Bank of India was used for earning profit in the proprietary concern and not for earning interest income. Similarly, Rs. 11,40,985/- paid on a loan from ICICI Bank was used for purchasing property, not for earning interest income. The PCIT concluded that these expenses did not meet the conditions of Section 57(iii), which requires expenses to be laid out wholly and exclusively for the purpose of earning income.

3. Verification and Inquiry by the Assessing Officer:
The assessee contended that the AO had conducted due inquiries during the assessment proceedings. The AO had issued specific queries regarding the deduction of interest expenses under Section 57, and the assessee had provided detailed responses. The assessee argued that the PCIT did not provide specific findings to counter these submissions and had merely stated that the AO's order was erroneous and prejudicial to the revenue's interest.

Tribunal's Findings:
The Tribunal found that the AO had indeed conducted inquiries regarding the allowability of interest expenses under Section 57 during the assessment proceedings. The Tribunal noted that the assessee had provided detailed written submissions justifying the deduction, which the PCIT did not specifically refute. The Tribunal concluded that the PCIT erred in holding the assessment order as erroneous and prejudicial to the revenue's interest without proper justification.

Conclusion:
The Tribunal set aside the order passed under Section 263 by the PCIT, allowing the appeal of the assessee. The Tribunal directed that the assessment order passed by the AO was not erroneous and prejudicial to the revenue's interest and should be maintained.

Result:
The appeal of the assessee was allowed, and the order under Section 263 was set aside.

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