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2005 (4) TMI 264 - AT - Income TaxRevision u/s 263 - Of orders prejudicial to interest of revenue - No Proper enquiry conducted - whether any prejudice in fact has been caused to the Revenue or not by lack of enquiry on the part of the AO - HELD THAT - The appellant has furnished a detailed reply to the show-cause notice by making reference to the facts of the case. Despite that, learned CIT did not deal with any of the points raised in the assessee s written statement. He is rather found emphatically stating that I am not deciding the merit of the question whether any disallowance was called for or not, or that I am only concerned with the question whether the AO applied his mind to the issue. The conclusion of the learned CIT that the order is prejudicial to the interests of Revenue is not a matter of subjective satisfaction of the CIT. He, therefore, ought to have found out this on the basis of objective material after assessing the contentions raised by the appellant in his reply to the show-cause notice. He, however, did not do this but reached a conclusion that the order was prejudicial with a view that the present AO shall undertake that exercise after the assessment has been set aside for his consideration. Such a view is not well founded in law and accordingly action taken by the learned CIT is liable to be set aside. Dividend received invoking provisions of s. 14A - We fail to understand how advancing of loans to subsidiary and other companies have any bearing on the question of deduction of interest from the dividend income. If at all this issue is relevant it will be relevant in the context of allowability of interest expenditure and not in the context of attribution of interest cost to earning of dividend. It is also pertinent to note that in the immediately succeeding year, i.e., in asst. yr. 2001-02, AO has specifically looked into the applicability of s. 14A and has made no disallowance. Further, in the preceding years also there has been no disallowance of interest against dividend income. Applying the rule of consistency, no disallowance was called for unless there has been material change in the facts. The CIT in his order has not brought out any change in the facts and thus on this plea also no disallowance was called for. We also agree with the plea of the ld AR that dividend is a dormant income and no efforts or expenses are required to earn the same. This view is also supported by the decision of Calcutta Bench of the Tribunal in the case of Usha Martin Investment Ltd. vs. Dy. CIT. We, therefore, do not agree with learned CIT that the AO committed any error in not applying provisions of s. 14A in the present case. Interest expenditure - The settled principle of law is that a business has to be run as per the decision made by the assessee and not as per whims and fancies of the Revenue authorities. Further, we are not able to understand how learned CIT can object to appellant s act of declaration of interest income of Rs. 12.94 crores on money advanced to M/s Hexa Securities. Declaration of certain income can by no stretch of imagination be prejudicial to the interest of Revenue unless the same does not belong to him. At the same breath he has objected to non-accounting of interest on loans advanced for Rs. 6.10 crores to M/s Jindal Seamless Tubes Ltd. due to their poor financial health. We also do not agree with the learned CIT that AO has not examined the details and rate of interest on loans and advances made to subsidiary and other corporate bodies. The learned CIT in para 12 of his order has narrated that the AO vide letter dt.14th Jan., 2003, did call for the relevant informations from the appellant and the same were duly filed. We also find considerable weight in appellant s argument that all the secured loans are earmarked (as per the details filed at p. 83 of paper book) and cannot be utilised for investment or making loans. In any case appellant had interest-free and own funds of Rs. 209.74 crores which would take care of investment in shares of Rs. 67.22 crores and interest-free lending of funds at lower rate. We find that once the tax auditor has certified the payments, no further evidence was needed in this respect. It is also pointed out that CBDT has accepted this position in its Circular No. 601, dt.4th June, 1991. We also find that the learned CIT in his order vide para 22 has himself very clearly expressed that the order cannot be said to be erroneous and prejudicial on this ground. He still went on to hold that AO may call for certificates of payment from financial institutions. This was unnecessary and, as such, order of AO could not be revised. On the last issue of payment for commission, the learned CIT has set aside the assessment order by holding that AO has not done any enquiry. However, Authorised Representative has pointed out that it was enquired by the AO during the assessment proceedings and he even obtained a written explanation on non-deduction of TDS on commission payment to non-resident parties which is decisive on allowability thereof in terms of provisions of s. 40 of the Act. There was nothing unusual about commission payment. We, therefore, do not find that the AO did not make any enquiry on allowability of deduction for commission payment. Furthermore, the learned CIT did not state as to what prejudice has been caused to Revenue by allowing the deduction of assessee s claim. Without doing so, the decision taken by the learned AO cannot be termed as erroneous and prejudicial to the interest of Revenue so as to revise the same. Having considered the factual as well as the legal position, we do not find any justification in the action of learned CIT to revise the order passed by the AO. As a result, appeal of the assessee stands allowed.
Issues Involved:
1. Disallowance under Section 14A for dividend income. 2. Claim of deduction under Section 43B. 3. Valuation of closing stock. 4. Claim of bad debts. 5. Disallowance of interest on borrowed funds. 6. Commission payment. Detailed Analysis: 1. Disallowance under Section 14A for Dividend Income: The CIT argued that the AO failed to disallow expenses related to dividend income under Section 14A. The assessee contended that no borrowed funds were used for investments in shares during the relevant year. The assessee's investments were made from own funds, and no major investments were made in the last five years. The Tribunal found that the CIT did not provide evidence of borrowed funds being used for investments and noted that the AO had not disallowed interest in previous or subsequent years. The Tribunal concluded that the AO's decision was consistent and no disallowance was warranted. 2. Claim of Deduction under Section 43B: The CIT initially questioned the deduction of Rs. 2,54,24,232 under Section 43B due to lack of evidence of payment. The assessee provided details of payments in the tax audit report. The CIT accepted the explanation but still directed the AO to make further inquiries. The Tribunal found this direction unnecessary and beyond jurisdiction since the tax auditor had certified the payments, and no further evidence was required. 3. Valuation of Closing Stock: The CIT alleged discrepancies in the valuation of closing stock, suggesting that the AO failed to examine the issue properly. The assessee explained that the valuation was in accordance with Accounting Standard 2 and provided a detailed breakdown of costs. The Tribunal found that the CIT's approach was based on guesswork and not on objective material. The change in valuation method was mandatory and consistent with statutory requirements. Thus, the AO's acceptance of the valuation was not erroneous or prejudicial to the Revenue. 4. Claim of Bad Debts: The CIT questioned the allowance of bad debts of Rs. 6,19,12,759 without proper inquiry. The assessee provided a chartered accountant's certificate, and the CIT expressed satisfaction with the explanation. However, the CIT still directed the AO to make further inquiries. The Tribunal found this direction unwarranted and beyond jurisdiction since the CIT had already accepted the assessee's explanation. 5. Disallowance of Interest on Borrowed Funds: The CIT argued that the AO failed to examine the nexus between borrowed funds and advances to subsidiaries and other companies. The assessee provided details showing that interest was charged on loans given, and the borrowings were for specific purposes. The Tribunal noted that the AO had considered the issue and disallowed interest related to a new unit, which was later allowed by the CIT(A). The Tribunal concluded that the CIT had no jurisdiction to revise the order on this issue due to the theory of merger. 6. Commission Payment: The CIT alleged that the AO allowed commission payments without proper inquiry. The assessee provided details of commission payments and reasons for non-deduction of TDS. The Tribunal found that the AO had made inquiries and obtained explanations. The CIT did not demonstrate any prejudice to the Revenue, and the Tribunal concluded that the AO's decision was not erroneous or prejudicial. Conclusion: The Tribunal found that the CIT's order to revise the assessment was not justified. The AO's decisions were based on proper inquiries and consistent with previous and subsequent assessments. The Tribunal allowed the assessee's appeal, setting aside the CIT's order.
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