2020 (3) TMI 782 - AT - Income Tax

Revision u/s 263 - Addition in respect of interest on arbitration awards granted to the appellant - HELD THAT - Assessee during the course of regular proceedings with respect to taxability of interest on arbitration awards were not called for by AO in notice u/s 142(1) and the submissions were purely suo-moto voluntary submissions which would clearly demonstrate that Ld. AO did not apply his mind to this aspect while framing the assessment. We find that assessee has duly certified the paper-book containing the said submission that the aforesaid submissions vide letter No. PG/26138 as well as supporting documents were duly submitted to Ld.AO during the course of regular hearing. The factum of making said submission during the course of regular assessment proceedings was reiterated by the assessee in para-5 of its submissions dated 25/03/2019 to Ld. Pr.CIT while opposing the revision proceedings u/s 263. CIT-DR has not disputed the fact that the said documents were not, at all, available before Ld.AO during the course of regular assessment proceedings. The argument advanced is that the said documents were not called for by Ld. AO and the same were not considered by Ld.AO while framing the assessment. It is difficult to accept the fact that the said documents were not appreciated / considered by Ld. AO since a specific disallowance has been made, being conscious of the fact that certain arbitration income was not offered to taxation by the assessee. The assessment orders for earlier years were specifically called for vide notice u/s 142(1) and the same were also furnished by the assessee. Upon perusal of the same, Ld.AO specifically took note of the fact that similar disallowance was made in earlier years and therefore, he chose to make similar disallowance during the year under consideration. The computation of income filed by the assessee clearly demonstrated that arbitration awards received during the year were offered to tax whereas interest on arbitration award was reduced while computing the taxable income. The revenue recognition policy being followed by the assessee to recognize the interest income was fully disclosed in Notes to the account. In the light of all these facts, it could safely be concluded that the position taken by assessee to recognize the interest income was accepted by Ld.AO who was well conscious of the fact that certain arbitration income was not offered to tax. Hence, it could not be said that there was non-application of mind by Ld. AO on the sated issue. This being the case, a logical assumption would arise that Ld.AO has duly applied his mind to the issue of interest on arbitration award and chose not to make any addition thereof. Therefore, it could not be said that there was non-application of mind and no view was taken by Ld. AO on the stated matter. Subject matter of proposed revision was already deliberated upon by Ld. AO and a possible was taken in the matter. That view could not be said to be contrary to law, perverse or unsustainable in law, in any manner and the same would be a possible view keeping in mind the rule of consistency. Assessment order could not be termed as erroneous or prejudicial to the interest of the revenue u/s 263 as held by Pr. CIT. The action of AO, in our opinion, was in consonance with the position accepted by the revenue in earlier years and therefore, it could not be said that the order was not in accordance with law. In such a case, the action of Ld. Pr.CIT in invoking jurisdiction u/s 263 could not be sustained in the eyes of law. Therefore, we quash the same in terms of settled legal position as enumerated by us in opening paragraphs. Keeping in view the fact that in the present appeal we are merely concerned with determining the validity of revisional jurisdiction u/s 263, the argument that whether the action of the assessee in recognizing the interest income, in such a manner, was in consonance with the provisions of The Arbitration and Conciliation Act, 1996 or not, is left open. The other arguments also, on merits, not delved into and left open. - Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of the order under Section 263 of the Income Tax Act, 1961.
2. Addition in respect of interest on arbitration awards granted to the appellant.

Issue-wise Detailed Analysis:

1. Validity of the order under Section 263:

1.1 The provisions of Section 263 of the Income Tax Act, 1961, empower the Pr. Commissioner of Income Tax / Commissioner of Income Tax to suo-moto revise any order passed by the Assessing Officer (AO) if two conditions are satisfied: (i) the order is erroneous, and (ii) it is prejudicial to the interest of the revenue. This principle was upheld by the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. V/s CIT and reiterated in subsequent judgments like CIT V/s Max India Ltd. and Grasim Industries Ltd. V/s CIT.

1.2 The Hon'ble Delhi High Court in CIT V/s Vikas Polymers clarified that an order cannot be termed "erroneous" unless it is not in accordance with law. A mere difference in opinion between the Commissioner and the AO does not render the AO’s order erroneous. The Commissioner cannot substitute his judgment for that of the AO unless the AO's decision is unsustainable in law.

1.3 The Hon'ble Bombay High Court in Moil Ltd. Vs. CIT observed that if a query is raised and responded to by the assessee during the assessment proceedings, it does not imply non-application of mind by the AO even if the query is not explicitly dealt with in the assessment order.

1.4 Explanation-2 to Section 263, inserted by Finance Act 2015, deems an order as erroneous and prejudicial to the interest of the revenue if it is passed without making necessary inquiries or verifications, allows any relief without proper inquiry, is not in accordance with directions or instructions issued by the Board, or is not in accordance with binding judicial precedents.

2. Addition in respect of interest on arbitration awards:

2.1 The assessee challenged the validity of the revisional jurisdiction exercised by the Pr. Commissioner of Income Tax for the Assessment Year 2014-15. The grounds raised included that the CIT erred in holding the assessment order as erroneous and prejudicial to the interests of the revenue, failed to appreciate the conditions specified under Explanation 2 to Section 263, and did not consider the principle of consistency applied by the Supreme Court in Radhasoami Satsang v. CIT.

2.2 The regular assessment for the year was framed on 30/12/2016, determining the income at ?37.44 Crores after disallowing professional fees for arbitration awards. The Book Profits of ?103.62 Crores were accepted without further adjustment.

2.3 The Pr.CIT noted that the AO failed to assess income of ?36.22 Crores on account of interest on arbitration awards, leading to the issuance of a show-cause notice u/s 263. The assessee argued that the AO had specifically show-caused the assessee regarding the interest on arbitration awards and had applied his mind to the issue.

2.4 On merits, the assessee submitted that the interest on arbitration awards was not taxable as the awards were challenged in High Courts and had not reached finality. The interest was merely a book entry and would accrue only when the matter reached finality in the assessee’s favor.

2.5 The assessee also relied on the principle of consistency, arguing that similar submissions were made in earlier years and accepted by the revenue. The assessee cited various judicial precedents to support its claim that the interest on arbitration awards should be taxed only when the matter reached finality.

2.6 The Pr.CIT, however, opined that the interest income would accrue in the year the award was issued and rejected the assessee's plea, stating that the AO had failed to conduct adequate inquiries.

Conclusion:

The Tribunal quashed the revision order under Section 263, stating that the AO had applied his mind to the issue of interest on arbitration awards and had taken a possible view. The assessment order could not be termed as erroneous or prejudicial to the interest of the revenue. The Tribunal emphasized the principle of consistency and found that the AO’s action was in line with the revenue's position in earlier years. The appeal was allowed to the extent indicated in the order.