2025 (3) TMI 142 - AT - Income Tax

Reopening of assessment - returned loss under the head income from other sources on account of interest income earned having claimed huge interest expenses against the same and further noting that as per section 57(iii) this interest expenses were allowable only when they were incurred for the purpose of earning interest income - case of the CIT was that the assessee s claim of interest expenses was not examined by the AO in the light of the provisions of section 57(iii) while passing his order u/s 147 allowing the entire claim of interest expenses. HELD THAT - PCIT we find has completely misdirected himself in his finding of error in the order of the AO. While he finds the order erroneous for the AO not having examined claim of the assessee to interest expenses against interest income earned in terms of section 57(iii) of the Act the scope of which is to allow only those expenses incurred wholly and exclusively to earn income the error found by him actually relates to genuineness of the said expenses which is not the concern of section 57(iii) - PCIT records no error in the order with regards to eligibility of claim of interest expenses u/s 57(iii) of the Act. Even from the standpoint of genuineness considering the facts noted by him we find there is no error found by the PCIT. He notes the assessee to have deducted TDS on interest expenses and thereafter directs the AO to verify whether the interest expenses have been returned to tax by the recipients of the same. When the only fact noted by him is of TDS having been deducted on the interest expenses how does it by any way create any doubt on the genuineness of the claim we fail to understand. In fact there is no doubt about the genuineness of the claim of interest expenses also. He has only directed the AO to verify further which the Ld. PCIT we hold has no power to do u/s 263. Section 263 of the Act requires the Ld. PCIT to record finding of error in the order. Without himself recording any error he cannot exercise any power u/s 263 of the Act. In the present case therefore we find that there is no error found by the Ld. PCIT in the order passed in the case of the assessee u/s 147 of the Act vis-a-vis allowability of claim of interest expenses either in terms of section 57(iii) of the Act for which purpose the case of the assessee was initially reopened or for that matter with respect to the genuineness of the claim. Appeal of the assessee is allowed.

Summary

The appeal in this case was filed by the assessee against an order passed by the Principal Commissioner of Income-1, Ahmedabad, exercising revisionary power under section 263 of the Income Tax Act, 1961, for the Assessment Year 2017-18. The grounds raised by the assessee primarily challenged the finding of the Principal Commissioner that the assessment order passed under section 147 r.w.s. 144B was erroneous and prejudicial to the interest of the revenue. The issue at hand revolved around the deduction of interest expenses under section 57(iii) of the Act.The Principal Commissioner found the assessment order to be erroneous based on the fact that the Assessing Officer (AO) had not verified whether the recipients of the interest income had offered the income in their respective tax returns. The Principal Commissioner directed the AO to verify this aspect and determine the genuineness of the claimed interest expenses. However, the Tribunal noted that the Principal Commissioner had misdirected himself in finding error in the AO's order. The Tribunal held that the Principal Commissioner's concerns about the genuineness of the expenses were not within the purview of section 57(iii) of the Act, which focuses on expenses incurred wholly and exclusively to earn income.The Tribunal further observed that the mere fact that TDS had been deducted on the interest expenses did not create doubt about the genuineness of the claim. The Principal Commissioner's direction to verify further was deemed beyond the scope of his powers under section 263 of the Act, as he had not recorded any specific error in the order. Consequently, the Tribunal held that the Principal Commissioner's order was not sustainable in law and set it aside, allowing the appeal of the assessee.In conclusion, the Tribunal found that the Principal Commissioner had erred in his interpretation of the law and the assessment order, leading to the decision to set aside the Principal Commissioner's order and allow the appeal of the assessee. The Tribunal emphasized the importance of correctly applying the legal framework and precedents in tax matters to ensure fair and just outcomes.