2022 (9) TMI 1184 - AT - Income Tax

Revision u/s 263 by CIT - Addition u/s 41(1) - liability towards the share application money as on the balance sheet date and has returned an incorrect finding - HELD THAT - Where the assessee receives share application money, it doesn t incur any loss, expenditure or trading liability and the question of an allowance or deduction made in the assessment for any year in respect of loss, expenditure or trading liability doesn t arise at first place. Therefore, the first condition for invocation of provisions of section 41(1) is not satisfied in the instant case. As a result, the second condition which is an offshoot of the first condition where it says that the assessee has obtained any amount in respect of such loss, expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the question of invocation thereof again doesn t arise as the phrase such has to be read in context of first condition where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. We are of the considered view that there is no legal basis for invocation of provisions of section 41(1) in respect of share application money which continues to remain outstanding pending allotment of shares and continues to remain reflected in the balance sheet of the assessee company as on 31/03/2016 and thus, we set-aside the findings of the ld PCIT in this regard where he says that the order so passed by the AO is erroneous and prejudicial to the interest of the Revenue for non-invocation of section 41(1) and carrying out requisite enquiries in this regard. TDS u/s 194A - Non-deduction of TDS on interest payment to PSIDC, on perusal of the balance sheet and the profit/loss of the assessee company for the financial year relevant to impugned assessment year - HELD THAT - The application of relevant provisions have to be examined in its entirety including the relevant exemption provisions and tested based on facts and circumstances of each case and merely stating that certain provisions are applicable without establishing its applicability to the facts of the given case cannot be a basis to hold that the order passed by the AO is erroneous as he has failed to apply the relevant provisions. Further, even where it is held that interest so paid is subject to provisions of section 194A of the Act, how the order passed by the AO can be held as erroneous where at first place there is no claim of such interest payment made by the assessee while filing its return of income for the impugned assessment year and we find that the ld PCIT has not addressed the same as well. We find that by virtue of repayment of PSIDC loan, there is a reduction rather than increase in secured loan during the year under consideration and one of the matters for which the case of the assessee was selected for limited scrutiny, even going by the phraseology employed by the ld PCIT in the show cause notice where he says that the case was selected for examining large increase in unsecured loans during the year, we find that matter of repayment of secured loan including the interest thereon was not a subject matter of limited scrutiny and the ld PCIT cannot enlarge the scope of assessment proceedings by invoking provisions of section 263 of the Act. The impugned order passed by the ld. Pr.CIT u/s 263 cannot be sustained in the eyes of law and the same is hereby set aside and the order passed by the AO is sustained. Appeal of assessee allowed.

Summary

Issues Involved:
1. Legitimacy of the share application money and its treatment under Section 41(1) of the Income Tax Act.
2. Non-deduction of TDS on interest payment to PSIDC.

Issue-wise Detailed Analysis:

1. Legitimacy of the Share Application Money and Its Treatment under Section 41(1):

The assessee's case was selected for limited scrutiny to verify the genuineness of unsecured loans and share application money. The Assessing Officer (AO) accepted the assessee's submissions that no share application money was received during the year under consideration. However, the Principal Commissioner of Income Tax (Pr. CIT) issued a show-cause notice under Section 263, arguing that the AO failed to verify the outstanding share application money of Rs. 1,36,00,000/- pending since before 31/03/2007, which should have been returned within 90 days as per the Companies Act. The Pr. CIT held that this constituted a cessation of liability under Section 41(1).

The Tribunal noted that for Section 41(1) to apply, two conditions must be met:
- An allowance or deduction must have been made in a previous assessment year concerning a loss, expenditure, or trading liability.
- The assessee must have obtained some benefit concerning such liability by way of remission or cessation.

In this case, the share application money did not constitute a trading liability, and no deduction was claimed by the assessee. Therefore, the first condition for invoking Section 41(1) was not satisfied. Consequently, the second condition also did not apply. The Tribunal concluded that the provisions of Section 41(1) were not applicable to the outstanding share application money, and thus, the Pr. CIT's order was set aside.

2. Non-deduction of TDS on Interest Payment to PSIDC:

The Pr. CIT also contended that the AO failed to verify the non-deduction of TDS on interest payment of Rs. 1,20,78,503/- to PSIDC. The assessee argued that the interest was part of a one-time settlement and merged with the total repayment amount, and that PSIDC, being a financial corporation established under a State Act, was exempt from TDS provisions under Section 194A.

The Tribunal examined the financial statements and found no interest debited in the profit and loss account. The Pr. CIT's assertion that the assessee paid interest without deducting TDS was based on presumption and not supported by the records. The Tribunal noted that any payment to PSIDC, a financial corporation, was exempt from TDS under Section 194A. Furthermore, since the assessee did not claim any interest as an allowable deduction, the AO's order could not be deemed erroneous or prejudicial to the interest of the Revenue.

The Tribunal also highlighted that the case was selected for limited scrutiny concerning unsecured loans and share application money, and the Pr. CIT could not expand the scope of assessment under Section 263. The Tribunal referred to previous decisions, emphasizing that revisional jurisdiction under Section 263 could not be used to broaden the scope of limited scrutiny assessments.

Conclusion:

The Tribunal set aside the Pr. CIT's order under Section 263, ruling that the AO's assessment was neither erroneous nor prejudicial to the interest of the Revenue. The appeal filed by the assessee was allowed.