2021 (5) TMI 761 - AT - Income Tax

Validity of assumption of jurisdiction by the ld. PCIT u/s.263 - disallowance of interest on borrowed funds - HELD THAT - Assessee had furnished the details of loans taken during the year and corresponding interest payments made thereon before the ld. AO during the course of original assessment proceedings. But we find that the basic premise on which the ld PCIT had invoked revisionary jurisdiction is that the AO having alleged that the assessee had invested in plant and machinery only to the extent of ₹ 8.26 crores (based on valuation report of DVO), ought to have correspondingly examined the allowability of interest expenditure on borrowed funds utilised for investment in plant and machinery. Since this was not examined by the ld AO while framing the original assessment, the order passed by the ld AO becomes erroneous in as much as it is prejudicial to the interest of the revenue. The issue pending before the ld CITA is only on the depreciation on value of plant and machinery and the issue of disallowance of interest on borrowed funds thereon was not before the ld CITA. Hence the argument advanced by the ld DR that provisions of Explanation 1 clause (c ) of section 263(1) of the Act does not come into operation in the instant case, holds good and deserves to be accepted. We find that the ld. PCIT had presumed that the investment in plant and machinery and other assets have been made out of borrowed funds of the assessee. In this regard, we find that the ld AR vehemently argued that the assessee was having sufficient interest free funds in its kitty to make investment in plant and machinery. However, we find that there is no finding of fact to this effect in the orders of the lower authorities. We find that this matter certainly requires factual verification and the ld AO had to give a factual finding as to whether the assessee is indeed having sufficient interest free funds which would explain the investment in plant and machinery. To this extent, the order of the ld PCIT u/s 263 of the Act stands modified as per the aforesaid directions to the ld AO to examine the availability of interest free funds with the assessee. Accordingly, the grounds raised by the assessee are partly allowed. Production expenses disallowed u/s.40(a)(ia) of the Act for valuation of TDS provisions - We find that ultimately this is a matter requiring factual verification. There is no mention as to whether these details were filed by the assessee before the ld. AO in the course of original assessment proceedings. Hence, it could be safely held that the ld. PCIT had indeed validly assumed revision jurisdiction u/s.263 of the Act in respect of this issue of production expenses vis- -vis its TDS compliance. This is a matter requiring factual verification, hence, we hold that the ld. PCIT had rightly invoked revision jurisdiction in respect of this issue of production expenses. We find that the ld. AR had also placed on record the copy of the assessment order passed by the ld. AO dated 11/12/2019 u/s.143(3) r.w.s. 263 of the Act wherein the ld. AO had ultimately on verification of the entire details of all the parties vis- -vis the TDS compliance made thereon, held that the sum of ₹ 3,60,000/- is required to be disallowed u/s.40(a)(ia) of the Act for payments made without deduction of tax at source. In view of these observations, we hold that the ld. PCIT had rightly assumed revision jurisdiction u/s.263 of the Act in respect of this issue of production expenses. Accordingly, the ground No.3 raised by the assessee is dismissed and ground No.1 raised by the assessee is partly allowed.

Summary

Issues Involved:
1. Challenge to validity of assumption of jurisdiction by Principal Commissioner of Income Tax under Section 263 of the Act.
2. Disallowance of interest on borrowed funds on merits.

Issue 1: Challenge to Validity of Assumption of Jurisdiction by Principal Commissioner of Income Tax under Section 263 of the Act

The appeal was filed against the revision order of the Principal Commissioner of Income Tax-12, Mumbai under Section 263 of the Act for the assessment year 2013-14. The Principal Commissioner set aside the assessment by the Assessing Officer (AO) as erroneous and prejudicial to the interest of the revenue. The revision was based on the alleged non-utilization of borrowed funds for acquiring plant and machinery. The Principal Commissioner concluded that the AO did not examine the allowability of interest expenditure on borrowed funds. The Appellate Tribunal noted that the AO had disallowed depreciation on plant and machinery based on a valuation report by the District Valuation Officer (DVO). The Tribunal observed that the issue of interest expenses was connected with the primary issue of overvaluation of plant and machinery, which was under dispute before the Commissioner of Income Tax (Appeals). The Tribunal modified the Principal Commissioner's order and directed the AO to examine the availability of interest-free funds with the assessee for investment in plant and machinery.

Issue 2: Disallowance of Interest on Borrowed Funds on Merits

In the appeal for the assessment year 2014-15, the Principal Commissioner revised the assessment by the AO under Section 263 of the Act. The revision included disallowance of loan processing charges, disallowance of production expenses, and disallowance of interest expenditure on inflated value of plant and machinery. The Appellate Tribunal noted that the AO had already adjudicated on the disallowance of interest on borrowed funds in the appeal for the previous assessment year. The Tribunal held that the decision for the previous year applied with equal force for the current assessment year. Regarding the disallowance of production expenses, the Tribunal found that the Principal Commissioner rightly assumed revision jurisdiction as the issue required factual verification. The Tribunal observed that the AO, after verification, had disallowed a specific amount for non-compliance with TDS provisions. Therefore, the Tribunal partly allowed the appeal for the assessment year 2014-15.

In conclusion, the Appellate Tribunal partially allowed both appeals, addressing the challenges to the assumption of jurisdiction by the Principal Commissioner under Section 263 of the Act and the disallowance of interest on borrowed funds on merits for the respective assessment years.