2014 (3) TMI 846 - HC - Income Tax

Revisional powers u/s 263 of the Act - Netting and set off of interest towards interest paid - Whether the assessee is entitled for netting of interest by setting off of interest earned towards interest paid deposits made by the assessee were made due to compulsion for procuring import licence and letter of credit - Held that - Revenue rightly contended that the Tribunal committed grave error of law in directing the AO to allow netting of interest and grant set off of interest earned towards interest paid without verifying whether the deposits made by the assessee were made due to compulsion for procuring import licence and letter of credit and that the assessee had borrowed the amount from the bank on interest. The assessee did not place any material on record to show that the fixed deposits were made due to compulsion for procuring import licence and letter of credit and for that purpose the assessee had borrowed the amount from the bank on interest - the jurisdictional Commissioner of Income Tax shall examine the case/record if he deems fit and proper and in exercise of his revisional powers u/s 263 of the IT Act the Commissioner shall examine whether the assessee is entitled for setting-off of interest earned towards interest paid Decided in favour of Revenue.

Issues:
1. Whether the assessee's claim under section 10B of the IT Act can be allowed.
2. Whether the assessee is entitled to netting of interest.

Analysis:

Issue 1: Claim under section 10B of the IT Act
The Tribunal considered the challenge against the order of the Commissioner of Income Tax Appeals-III Bangalore regarding the assessee's claim under section 10B of the IT Act. The Tribunal's focus was on whether the claim could be allowed. The appeals were directed against the Tribunal's findings on the second ground of challenge, specifically related to netting of interest.

Issue 2: Netting of Interest
The Tribunal observed that the deposits made by the assessee were due to the compulsion for procuring import license and letter of credit, leading to borrowing from the bank on interest. Consequently, the Tribunal directed the Assessing Officer to allow netting of interest and grant set off of interest earned towards interest paid. The revenue contended that the Tribunal erred in assuming the truth of the case without proper verification. The revenue argued that the assessee did not provide evidence to support the claim that fixed deposits were made due to compulsion for specific purposes.

Arguments and Counterarguments:
The revenue argued that the Tribunal's direction for netting of interest was based on assumptions without proper verification of the facts. On the other hand, the assessee's counsel maintained that the assessee was entitled to seek netting of interest as the fixed deposits were made for specific purposes, such as procuring import license and letter of credit, with borrowed funds from the bank on interest.

Judgment:
The Assessing Officer, in compliance with the Tribunal's order, granted partial relief on netting of interest for the assessment years in question. The Tribunal found that the Assessing Officer accepted the assessee's case to a certain extent. However, recognizing the need for further examination, the Tribunal allowed the jurisdictional Commissioner of Income Tax to review the case and issue appropriate directions within a specified timeline. The Commissioner was tasked with determining the justification of allowing netting of interest by setting off interest earned against interest paid. The decision emphasized that if the case presented by the assessee was proven, netting of interest would be permissible.

In conclusion, the appeals were disposed of with the directive for the Commissioner to review the case and make a decision within the specified timeframe to ensure justice is served.

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