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2018 (1) TMI 74 - AT - Income TaxRevision u/s 263 - provisions of section 40(a)(ia) applicability - accepting the returned loss filed by the assessee was erroneous and prejudicial to the interests of the revenue - Held that - It is an admitted position that the AO before completing the assessment did not make any enquiries questioning whether provisions of section 194A of the Act were applicable to factoring charges and consequently factoring charges cannot be allowed as a deduction in computing income from business in view of the provisions of section 40(a)(ia) of the Act for non-deduction of tax at source. The law with regard to exercise of jurisdiction u/s.263 of the Act on the ground that the AO failed to make enquiries which he ought to have made in the given circumstances of a case is well settled. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. We derive support for the proposition as stated above from the decision of the Hon ble Delhi High Court in the case of Gee Vee Enterprises (1974 (10) TMI 29 - DELHI High Court). In the light of the law on the issue and in the light of the admitted fact that the AO did not make any enquiries which were required to be made on the issue in question, the order of the AO became both erroneous and prejudicial to the interest of the revenue calling for exercise of revisional jurisdiction u/s.263 of the Act. We therefore uphold the exercise of jurisdiction u/s.263 of the Act by the CIT by the impugned order. the observations of the Pr. CIT with regard to the retrospective operation of second proviso to section 40(a)(ia) of the Act should not influence the AO or the appellate authorities in the proceedings pursuant to the impugned order. This is because the Pr. CIT in the impugned order has not considered the question as to whether in the absence of the decision of jurisdictional High Court, whether the view favourable to the assessee rendered by the non-jurisdictional High Court or the view against the assessee by the non-jurisdictional High Court should be taken into consideration. In any event, we are of the view that when the assessment is set aside on the ground that the AO did not make proper and adequate enquiries before concluding the assessment, the Pr. CIT ought not to have expressed any view on the other issues that might arise for consideration in the assessment proceedings, pursuant to the order u/s. 263 of the Act. With the aforesaid modifications, we confirm the order of the Pr. CIT.
Issues Involved:
1. Whether the factoring charges paid by the assessee are in the nature of interest under section 2(28A) of the Income-tax Act, 1961. 2. Whether the assessee was required to deduct tax at source under section 194A on the factoring charges. 3. Whether the assessment order passed by the AO was erroneous and prejudicial to the interests of the revenue. 4. The applicability of the second proviso to section 40(a)(ia) retrospectively. Issue-wise Detailed Analysis: 1. Nature of Factoring Charges: The Principal Commissioner of Income-tax (Pr. CIT) held that the factoring charges paid by the assessee to M/s. Easy Access Financial Services were in the nature of interest as defined under section 2(28A) of the Income-tax Act, 1961. The Pr. CIT explained that factoring involves the assignment of a debt to a financier, and the fees paid to the factor, whether termed as factoring charges, discounting charges, or commercial finance, essentially represent interest. The Pr. CIT emphasized that the character of the payment does not change by the name it is called, and it falls within the ambit of "interest" under section 2(28A). 2. Requirement to Deduct Tax at Source: The Pr. CIT concluded that the assessee should have deducted tax at source under section 194A on the factoring charges. Since the assessee failed to do so, the Pr. CIT opined that the AO should have disallowed the deduction of factoring charges by invoking section 40(a)(ia). The Pr. CIT clarified that M/s. Easy Access Financial Services, being a Non-Banking Financial Company (NBFC), is not exempt from the application of section 194A, unlike banking companies governed by the Banking Regulation Act, 1949. 3. Erroneous and Prejudicial Assessment Order: The Pr. CIT exercised his powers under section 263, stating that the AO's assessment order dated 01.11.2013 was erroneous and prejudicial to the interests of the revenue. The Pr. CIT noted that the AO did not examine whether the provisions of section 194A were applicable to the factoring charges. The Pr. CIT highlighted that the AO should have investigated the arrangement between the assessee and the factor to determine if it constituted a loan on which interest was charged. 4. Retrospective Applicability of Second Proviso to Section 40(a)(ia): The Pr. CIT rejected the assessee's argument that the second proviso to section 40(a)(ia), introduced by the Finance Act, 2012, should be applied retrospectively. The Pr. CIT referred to decisions of the Kerala High Court and the Punjab & Haryana High Court, which held that the proviso is prospective. The Pr. CIT decided not to follow the Delhi High Court's contrary view in CIT v. Ansal Landmark Township Pvt. Ltd., which supported retrospective application. Tribunal's Findings: The Tribunal upheld the exercise of jurisdiction under section 263 by the Pr. CIT, agreeing that the AO failed to make necessary inquiries regarding the applicability of section 194A to factoring charges. The Tribunal referenced the decision of the Delhi High Court in Gee Vee Enterprises, which established that the AO must investigate the facts stated in the return when circumstances warrant further inquiry. The Tribunal emphasized that the AO's failure to make such inquiries rendered the assessment order erroneous and prejudicial to the revenue's interests. However, the Tribunal clarified that the question of whether factoring charges fall under section 2(28A) should remain open. The Tribunal noted that the Pr. CIT did not consider the ITAT Kolkata Bench's decision in ITO v. MKJ Enterprises Ltd., which held that discounting/factoring charges are not interest under section 2(28A). The Tribunal also stated that the Pr. CIT's observations on the retrospective application of the second proviso to section 40(a)(ia) should not influence subsequent assessment or appellate proceedings. Conclusion: The Tribunal partly allowed the appeal, confirming the Pr. CIT's order with modifications. The Tribunal directed that the AO should re-examine the claim of factoring charges without being influenced by the Pr. CIT's observations on the nature of factoring charges and the retrospective application of the second proviso to section 40(a)(ia).
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