2019 (5) TMI 635 - HC - Income Tax

Revision by CIT u/s 263 - issue on revision directed are disallowance u/s 14A ; undervaluation of the closing stocks; interest on borrowed funds w.r.to interest free loan to its sister concerns; and commission on sales - CIT also directed that AO is free to examine any other issues which have not been covered in this order except those issues which have already been considered and decided by the CIT (A) - The ITAT held that it was incumbent upon the CIT to have shown as to how the assessment order was prejudicial to the interest of the Revenue and this had to be done on the basis of an assessment of the material on objective criteria and quashed the revision - HELD THAT - Disallowance under Section 14A - A substantial portion of the borrowings stood repaid in the preceding year out of internal accruals. The question that had to be answered was whether the Assessee had made any investment out of the borrowed funds in the AY in question i.e. 2000-01. On this specific aspect, the ITAT found that there is merit in the Assessee s contention that all its present borrowings were for earmarked purposes and none of them was for investment in shares . The ITAT also followed the rule of consistency after noticing that in the previous years and in the immediate succeeding AY 2001-02, no disallowance was made u/s 14A. Disallowance of interest expenditure - The ITAT importantly found that the AO did examine this issue. By a letter dated 14th January, 2003, he had called for the relevant information from the Assessee and the Assessee had filed such information with the AO. The secured loans were indeed earmarked and could not be utilized for making investments or advancing further loans. Further, the Assessee had its own interest free funds of ₹ 209.74 crore which could easily take care of the investment in the shares of ₹ 67.22 crore, apart from lending funds at lower rates to the subsidiaries. In the circumstances, the Court concurs with the view expressed by the ITAT that this issue did not require to be revisited u/s 263 Valuation of stock - The ITAT found that approach of the CIT and that its conclusion that there was an error in valuation of closing stock was neither correct nor justified. Point No.8 of Schedule 22 of the Assessee s balance sheet contained the disclosure in this regard and this change was consistent with the accounting standards prescribed by the ICAI. On this aspect also, the view taken by the ITAT appears to be justified and does not call for interference. Commission on sales - ITAT found that it had to be inquired into by the AO. He had obtained a written explanation on non reduction of TDS on commission payment to non-resident parties. The ITAT found nothing unusual about the commission payment. Importantly, this was not a case where the AO had not made any inquiry. For all of the aforementioned reasons, the Court finds that the impugned order of the ITAT suffers from no legal infirmities, requiring any interference - decided in favour of the Assessee

Summary

Issues:
1. Whether the Commissioner of Income-tax was right in exercising powers under Section 263 (1) of the Income-tax Act, 1961?

Analysis:
The case involves an appeal by the Revenue against an order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2000-01. The issues considered in the assessment order by the Assessing Officer included capitalization of interest, deferred business expense, royalty payment, superannuation funds contribution, and wealth tax paid. The Commissioner of Income Tax issued a show cause notice to the Assessee on various issues, including expenses allocation, payments under Section 43B, undervaluation of closing stock, bad debts, borrowed funds nexus, and commission on sales. The CIT held certain issues to be erroneous and prejudicial to Revenue, leading to the cancellation of the assessment order on those issues. The Assessee challenged this decision before the ITAT.

The ITAT found that the CIT erred in assuming lack of necessary inquiries by the AO automatically rendered the assessment order erroneous. The ITAT emphasized the need for objective criteria to determine prejudice to Revenue. The ITAT disagreed with the CIT on various issues, such as the nexus between borrowed funds and dividend income, interest expenditure disallowance, and valuation of closing stocks. The ITAT also noted that the AO had made inquiries regarding certain issues, including interest expenditure and commission payments, which negated the claim of lack of inquiry.

Upon detailed examination, the Court concurred with the ITAT's findings. The Court found that the CIT's conclusions were based on surmises and not factual evidence. The Court upheld the ITAT's decision on issues related to disallowance under Section 14-A, interest expenditure, valuation of stock, and payment of commission. The Court concluded that the ITAT's order had no legal infirmities, leading to the dismissal of the appeal in favor of the Assessee and against the Revenue.

In summary, the judgment delves into the Commissioner's exercise of powers under Section 263 of the Income-tax Act, analyzing various issues raised during the assessment process and subsequent challenges before the ITAT. The Court's detailed examination upholds the ITAT's findings, emphasizing the need for factual evidence and objective criteria to determine prejudice to Revenue, ultimately dismissing the appeal in favor of the Assessee.