2024 (10) TMI 24 - AT - Income Tax

Revision u/s 263 - disallowance of interest income - allowability of Interest us. 57 (iii) - assessee failed to substantiate the nexus between the interest-bearing loans taken from financial institutions and the advances made to group companies or relatives. The interest rate of loans borrowed (12.75%) was higher than the interest earned (12%), resulting in an excess claim for which no satisfactory explanation was provided - PCIT also concluded AO has wrongly addition in income on account of unexplained cash credits appearing the bank, submission of assessee not considered. HELD THAT - As observed that the assessee has borrowed loan from various financial institutions against the mortgage of properties at the rate of interest more than 12% p.a. and since the interest earned from various parties is at the rate of 12% p.a., the assessee has restricted the claim of interest expense u/s. 57 of the Act to 12%. So far as passing reference of notional rent in his order u/s 263 of the Act, the AR stated that the assessee has disclosed rental income from the property - Mayuresh Elanza in his return of income which is Rs. 23,35,200/-. The same is verified with the copy of return of income filed and found to be correct. Thus, the contention of PCIT relating to notional rent is also factually incorrect. As well-settled proposition of law in the case of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT that the power of revision under Section 263 cannot be exercised to correct each and every error committed by the AO, but only those which render the assessment order erroneous and prejudicial to the interests of the Revenue. The revisionary authority cannot invoke Section 263 of the Act merely because it has a different view on the matter. In the present case, the PCIT has failed to demonstrate that the AO s order was erroneous due to inadequate inquiry. The AO conducted the necessary inquiries and applied his mind to the facts presented during the assessment proceedings. As demonstrated by the assessee, there is no any prejudice caused to the Revenue. The order of the PCIT is, therefore, unsustainable in law. Appeal filed by the assessee is allowed.

Summary

Issues:
Appeal against PCIT's order under Section 263 of the Income Tax Act, 1961 for AY 2017-18 on grounds of interest income, unexplained cash credits, and reopening of the case.

Analysis:
The appeal was filed against the PCIT's order setting aside the AO's assessment under Section 143(3) of the Act for AY 2017-18. The AO had questioned the source of a significant difference in credit entries in the bank accounts of the assessee. The PCIT observed discrepancies in the interest income declared by the assessee and the deductions claimed against it. The PCIT found the AO's assessment erroneous due to lack of verification regarding interest expenses and loans. The PCIT issued a notice under Section 263 and set aside the AO's order.

The assessee challenged the PCIT's order on various grounds, including the disallowance of interest expenses and unexplained cash credits. The revised grounds of appeal highlighted the alleged wrongful reopening of the case by the PCIT under Section 263. During the hearing, the AR argued that the AO had already inquired into the interest expenses and loans during the assessment. The AR provided detailed statements and submissions to support the claim. The DR relied on the PCIT's order.

Upon review, the Tribunal noted that the AO had issued specific notices under Section 142(1) questioning the interest claimed under Section 57(iii) of the Act. The assessee had responded with detailed submissions and justifications for the interest expenses. The Tribunal found that the PCIT's conclusion of inadequate inquiries by the AO was incorrect. The Tribunal also clarified the actual interest claimed by the assessee and the reconciliation of interest paid and received.

The Tribunal referred to the principle established in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) that Section 263 cannot be used to correct every error but only those prejudicial to revenue. It concluded that the PCIT failed to show the AO's order was erroneous due to insufficient inquiry. The Tribunal found no prejudice to revenue and deemed the PCIT's order unsustainable. Consequently, the Tribunal quashed the PCIT's order under Section 263, allowing the assessee's appeal.

In conclusion, the Tribunal allowed the appeal filed by the assessee against the PCIT's order, pronouncing the judgment on 23 September 2024 in Ahmedabad.