2022 (9) TMI 148 - AT - Income Tax

Revision u/s 263 - Addition u/s 14A - HELD THAT - AO has not examined the issues of 14A of the Act and the interest subsidy and grant in aid received from the Government which was to be recognized as income as per section 2(24)(xviii) - AR argued that the amount was treated by the PCIT as difference between the opening and the closing balance of interest subsidy receivable from the Central Government as mentioned in the balance sheet. As not produced before the AO for examination. As contended that the Appellant has already offered 1% and 2% interest subsidy as income which is credited in the profit and loss account and is verifiable from total interest income on loans and advances reported in the profit and loss account for the year under consideration which includes interest subsidy as evident from break-up of total interest income - We are not convinced and satisfied with the argument of the AR that since the issue of interest subsidy has not been touched upon by the AO. The interest subsidy being credited in the profit and loss account and is verifiable from total interest income on loans and advances certainly need examination and de novo verification in compliance the revisionary order passed u/s 263 by the Pr. CIT. As in Sir Dorabji Tata Trust Vs. DCIT(E) 2020 (12) TMI 1121 - ITAT MUMBAI we understand that the PCIT was satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the AO, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the CIT, in the exercise of his powers u/s 263, can set aside an order, for lack of proper inquiry or verification, and ask the AO to conduct such inquiries or verifications afresh. Accordingly, we hold that the ld. Pr.CIT is justified facts in law in holding that the assessment order passed by the AO without making enquiries in respect of interest subsidy as erroneous so far as prejudicial to the interest of the Revenue. Thus, the impugned order is sustained.

Summary

Issues Involved:
1. Legality of the order passed under section 263 of the Income-tax Act, 1961 by the Principal Commissioner of Income Tax (PCIT).
2. Recognition of interest subsidy and non-refundable grant-in-aid as income.
3. Adequacy of inquiries and verifications conducted by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Legality of the Order under Section 263:
The appellant-assessee challenged the legality of the order passed by the PCIT under section 263 of the Income-tax Act, 1961. The PCIT had noted that the AO's assessment order dated 26.12.2019 was erroneous and prejudicial to the interest of the revenue. The PCIT observed that the AO failed to consider the interest subsidy and grant-in-aid received from the Government as income under section 2(24)(xviii) of the Act. The order was deemed erroneous due to non-application of mind to relevant material and incorrect application of law. The Tribunal upheld the PCIT's order, citing the judgment of the Hon'ble Apex Court in Malabar Industrial Limited v/s CIT 243 ITR 1, which supports the revision of an assessment order that is erroneous and prejudicial to the interest of the revenue.

2. Recognition of Interest Subsidy and Non-refundable Grant-in-aid as Income:
The PCIT held that the interest subsidy of Rs. 1,32,18,600 and the non-refundable grant-in-aid of Rs. 8,62,00,000 should be recognized as income. The assessee argued that the non-refundable capital grant was meant to maintain the capital adequacy ratio and should not be treated as taxable income. They cited section 2(24)(xviii) and the Finance Bill, 2016 to support their claim that such grants are not taxable if they are for the corpus of a trust or institution established by the Central or State Government. The Tribunal found that these issues were not properly examined by the AO and required further inquiry and verification.

3. Adequacy of Inquiries and Verifications Conducted by the AO:
The Tribunal noted that the AO did not adequately examine the issues related to section 14A of the Act and the interest subsidy and grant-in-aid received from the Government. The PCIT's order emphasized that the AO's failure to conduct necessary inquiries and verifications resulted in an erroneous assessment order. The Tribunal referred to the Mumbai Bench of the Tribunal in the case of Sir Dorabji Tata Trust Vs. DCIT(E) 188 ITD 38, which outlines the situations where the CIT can set aside an assessment order for lack of proper inquiry or verification. The Tribunal concluded that the PCIT was justified in setting aside the AO's order and directing a fresh inquiry.

Conclusion:
The Tribunal upheld the PCIT's order under section 263, agreeing that the AO's assessment was erroneous and prejudicial to the interest of the revenue due to inadequate inquiries and verifications. The case was remanded for fresh examination of the issues related to the interest subsidy and non-refundable grant-in-aid. The order was pronounced in the open Court on 10/08/2022.