2023 (4) TMI 91 - AT - Income Tax

Revision u/s 263 - as per PCIT it is not clear what was the purpose for which interest bearing loan was taken and where the same was utilized - AO has not verified the aspect of the correct amount of interest expenditure which was claimed against interest income - interest bearing funds utilized by the assessee to earn interest income on loans and deposits to an extent and the remaining portion of interest bearing loan was not utilized for the purpose of earning interest by the assessee - HELD THAT - Assessment of the assessee was taken up under limited scrutiny under CASS for verifying the following CASS reasons large deduction claimed under Section 57, higher turnover reported in Service Tax Return as compared to ITR . Accordingly, the very purpose of initiating assessment proceedings under limited scrutiny assessment was with a view to examine large deduction claimed u/s 57. Notice was issued by the AO on 04.03.2019 u/s 142(1) in which a specific query was put forth to the assessee regarding the claim of deduction u/s 57 asking for details of expenditure claimed u/s 57 against the head income from other sources . Assessee had filed reply in which he had given details of interest expenditure claimed by the assessee during the year under consideration. Therefore, it cannot be stated that there was any lack of enquiry or non-application of mind by the AO in respect of justification for expenses claimed by the assessee u/s 57 - Also in the immediate preceding year similar claim of interest deduction was allowed to the assessee under Section 36(1)(iii) and hence taking into consideration the above fact the AO did not make any addition on this aspect. We are of the considered view that there is neither any lack of enquiry by the A.O. during the course of assessment proceeding and nor there is any prejudice which has been caused to the Department looking into the instant set of facts. Accordingly we are directing that the 263 order passed by the Ld. PCIT is liable to be set-aside. Appeal of the assessee is allowed.

Summary

Issues involved:
The issues involved in the judgment are the validity of the order under section 263 of the Act, consideration of submissions by the appellant, verification of deduction claim under section 57(iii) of the Act, lack of enquiry by the Assessing Officer, and the assessment of interest expenditure against income.

Validity of the order under section 263 of the Act:
The appeal was filed by the assessee against the order passed by the Ld. PCIT(Appeals)-1, Rajkot under section 263 of the Act for Assessment Year 2017-18. The grounds of appeal included challenging the validity of the order under section 263 of the Act, asserting that the assessment order was not erroneous or prejudicial to the interest of revenue.

Consideration of submissions by the appellant:
The PCIT observed that the assessee had taken unsecured loans for earning interest income but had not utilized a significant portion of the interest-bearing loans for this purpose. The PCIT further noted that the interest expenditure claimed by the assessee was not wholly and exclusively for the purpose of making or earning income, leading to a loss from other sources. The PCIT held that the Assessing Officer's lack of detailed verification amounted to a "lack of enquiry," rendering the order erroneous and prejudicial to the revenue's interest.

Verification of deduction claim under section 57(iii) of the Act:
The PCIT directed a de-novo assessment regarding the verification of the allowability of the claim of deduction under section 57(iii) of the Act. The PCIT emphasized the need for the interest expenditure to be incurred wholly and exclusively for the purpose of making or earning income, highlighting discrepancies in the assessee's utilization of interest-bearing loans for income generation.

Lack of enquiry by the Assessing Officer:
The Counsel for the assessee argued that the Assessing Officer had examined the aspect of interest expenditure claimed against interest income during the assessment proceedings. The Counsel pointed out that the assessee had provided detailed replies and justifications for the claimed interest expenditure, asserting that there was no lack of enquiry by the Assessing Officer in this regard.

Assessment of interest expenditure against income:
The Tribunal found that the Assessing Officer had initiated limited scrutiny assessment to examine the large deduction claimed under section 57 of the Act. The Tribunal noted that specific queries were raised by the Assessing Officer regarding the deduction under section 57, and the assessee had provided detailed responses. Considering the lack of lack of enquiry or prejudice caused to the Department, the Tribunal set aside the order passed by the PCIT under section 263 of the Act.