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Before: Shri V. Durga Rao & Shri Manoj Kumar Aggarwal
O R D E R
PER V. DURGA RAO, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Principal Commissioner of Income Tax Chennai-3, Chennai, dated 30.03.2023 relevant to the assessment year 2018-19 passed under section 263 of the Income Tax Act, 1961 [“Act” in short].
Facts are, in brief, that in this case, the Assessing Officer has completed the assessment under section 143(3) of the Act dated 31.03.2021 of National e-Assessment Centre, Delhi and the income returned by the assessee was accepted.
Subsequently, the ld. PCIT has noticed that the assessee had incurred interest expenditure of ₹.261,02,65,942/- on the loan borrowed from the banks which have been exclusively used for investing in the shares of the subsidiary companies. While computing the taxable income under normal provisions, the assessee disallowed the entire expenses in the computation of income. The underlying assets are investments in CCDs in its subsidiary company, namely M/s. Chemplast Cuddalore Vinyls Limited. The ld. PCIT has noted that the said CCDs have been classified by the assessee itself in its books as equity. However, the interest expenditure incurred by the assessee did not make disallowance under clause (f) of Explanation 1 to section 115JB of the Act. Had this disallowance been considered, there would be positive income of ₹.2,06,91,491/- (2610265942-2589574451) under the provisions of section 115JB of the Act. By considering the above facts, the ld. PCIT was of the opinion that the Assessing Officer omitted to consider the disallowance as per clause (f) of Explanation 1 to section 115JB of the Act in respect of expenditure of ₹.2,06,91,491/- relating to CCDs by making proper enquiry and verification and hence observed that the assessment is deemed to be erroneous and prejudicial to the interests of Revenue. In view of the above, the ld. PCIT issued a show-cause notice under section 263 of the Act dated 11.01.2023 calling for explanation. In response to the above notice, the assessee has submitted as under: With reference to your letter dated 11/01/2013 proposing to initiate action under section 263 in respect of the order passed by the National e-Assessment Centre Delhi, under section 143 (3) of the Income Tax Act vide order dated 31/03/2021 was erroneous as the order has been passed without disallowing Interest expenses of Rs.261,02,65,942/- for the following reasons:
1. 1. Loan borrowed on which interest of Rs.261,02,65,942/- paid was exclusively used in investing in the shares of the subsidiary companies (We submit that the investment was made in debentures of the subsidiary company and not in shares).
2. Interest expenditure is to be considered for disallowance under clause (f) of Explanation 1 to section 115JB of the Income tax Act.
3. The investments made in subsidiary company have been classified as Equity in the books of accounts. Our Reply to the proposed disallowance At the outset it is submitted that the company disallowed the interest expenses under section 37 of the Income tax Act (as the same is not incurred for business purposes) and not under section 14A of the Income Tax Act. The investments made in the subsidiary company are in the nature of Compulsorily Convertible Debentures which is a debt and any income arising from the same is subject to Income tax and the same is not an exempt income as per the provisions of Income tax Act. The company has to mandatorily follow and prepare the accounts as per Indian Accounting Standards (Ind AS). Based on the Accounting Standards Convertible Debentures are to be classified as Equity in the books of accounts, and the company classified the same accordingly. It is further submitted that mere characterising of a debt (CCD) as Equity does not affect the treatment of income earned / expenses incurred on the debt and the same cannot be brought under the provisions of Clause (f) of Explanation 1 to section 115JB of the Income tax Act. The company disallowed the interest expenditure under section 37 of the Income tax Act and not under section 14A of the Income tax Act. As per clause (f) of Explanation I to section 115JB of the Income tax Act only those expenses which are incurred to earn exempted income viz share income from firm, dividend income, Agricultural income etc has to be added back for computing adjusted profits of the business. Since debenture is a debt and the income derived from the same is not exempted under the provisions of Income tax Act, application of clause (f) of Explanation 1 to section 115JB is not warranted. In view of the above, it is respectfully submitted that an Order cannot be erroneous unless it is not in accordance with the law, Section 263 does not visualize a case of substitution of judgement of the Commissioner for that of the Assessing Officer, who passed the Order unless it is erroneous. The Madras High Court in the case of Venkatakrishna Rice Mills Limited Vs Commissioner of Income Tax (163 ITR 129) has held that to invoke action under Section 263, Power of the CIT has to be judged on the words employed in the section. The language used by the Legislature in section 263 is to the effect that the Commissioner may interfere in revision if he considers that the Order passed by the Income-Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. It is quite clear from the above phrasing that two things must co-exist in order to give jurisdiction to the Commissioner to interfere in revision. The Order of the Income-tax Officer in question must not only be erroneous but also the error in the Income-tax Officer's order must be of such a kind that it can be said of it that it is prejudicial to the interests of the Revenue. If one of the two conditions is absent the order of the ITO cannot be revised u/s 263 (1). The phrase prejudicial to the interest of the Revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the Revenue. This view was followed by Hon’ble Madras HC in the case of CIT Vs SAK soft Ltd vide Tax Case Appeal No. 586 of 2007 vide order dated 13.06.2007. During the course of the assessment proceedings the company furnished complete details with regard to investment in subsidiary companies, details of loans, details of exempted income. Based on the submissions only the Assessing officer National e assessment centre Delhi has applied his mind and passed the order under section 143 (3) of the Income tax Act. In view of the above it is humbly requested that the proposal to revise the assessment under section 263 of the Income tax Act may be dropped as the same is not erroneous and prejudicial to the interest of the Revenue.
After considering the explanations of the assessee, the ld. PCIT has set aside assessment order dated 31.03.2021 for limited purpose of examination of the issue of disallowance under clause (f) of Explanation 1 to section 115JB of the Act and directed the Assessing Officer to pass the order after due verification as per law after giving reasonable opportunity to the assessee. The relevant portion of the revision order is extracted as under: 6. I have considered the submission of the assessee. In assessee’s case, it i seen that the debentures are compulsorily convertible debentures, which are considered equivalent to equity. In fact, the assessee itself has classified the same as equity in its financials. From the said reason, it has disallowed the interest expenditure while computing the income under normal provisions. The issue of “Expenses incurred for earning exempt income” is one of the issues in the scrutiny and on perusal of the assessment order, it is seen that the Assessing Officer has not made any enquiry or verification in regard to this issue. The assessee has quoted a decision of the High Court but the decision was rendered prior to the amendment to Section 263 with insertion of Explanation 2 thereunder w.e.f 1.6.2015. Under clause (a) of Explanation 2 to Section 263 of the Income-tax Act, 1961, if an order is passed without making inquiries or verification which should have been made in the opinion of the Principal Commissioner, it shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue. This provision will apply to the facts and circumstances of the case. However, the assessee did not take cognizance of the same. 7. It is clear from the order of assessment dated 31.03.2021, the AO has failed to make the necessary enquiry and verification which were required to be made while framing the assessment and hence, the order of assessment dated 31.03.2021 is deemed to be erroneous in so far as it is prejudicial to the interests of the revenue under clause (a) of Explanation 2 to Section 263 of the Income-tax Act, 1961, Therefore, I deem it fit to hold the order dated 31.03.2021 to be erroneous in so far as it is prejudicial to the interest of the revenue on this issue to the extent. 8. The assessment order dated 31.03.2021 is therefore set aside to the Assessing Officer for the limited purpose of the examination of this issue of disallowance under clause (f) Explanation 1 to section 115JB of the Income tax Act and he shall pass the order after due verification as per law and also take into consideration of the submissions of the assessee. Assessing Officer is directed to complete the assessment as discussed above after giving reasonable opportunity to the assessee.
On being aggrieved, the assessee carried the matter in appeal before the Tribunal. The ld. Counsel for the assessee has pointed out from paper book page 13 and submitted that all the details in respect of expenses incurred by the assessee were filed before the Assessing Officer. The Assessing Officer, by considering all the details, the assessment order was passed and therefore, the order passed by the Assessing Officer cannot be said that it is erroneous and prejudicial to the interest of revenue.
The ld. Counsel for the assessee has also submitted that the assessee company disallowed interest expenditure under section 37 of the Act and not under section 14A of the Act. As per clause (f) Explanation 1 to section 115JB of the Act only those expenses, which are incurred to earn exempted income viz., share income from firm, dividend income, agricultural income, etc. has to be added back for computing adjusted profits of the business. Since the debenture is a debt and the income derived from the same is not exempted under the provisions of Income Tax Act, application of clause (f) of Explanation 1 to section 115JB of the Act is not warranted.
On the other hand, the ld. DR strongly supported the revision order passed by the ld. PCIT.
We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including paper book. The point at issue is whether the interest expenditure disallowed under section 37 of the Act has to be disallowed while computing the income under section 115JB of the Act. The case of the Department is that the interest expenditure disallowed under normal provision has to be considered for disallowance under clause (f) of Explanation 1 to section 115JB of the Act. The case of the assessee is that the assessee has disallowed the interest expenditure under section 37 of the Act and not under section 14A of the Act and therefore, no disallowance is warranted while computing income under section 115JB of the Act. Admittedly, the assessee borrowed loan, on which interest expenses were incurred, were exclusively used in investing in the debentures of the subsidiary. The investments made in the subsidiary company are in the nature of Compulsorily Convertible Debentures (CCDs), which is a debt till conversion and any income arising, the same is subjected to tax and not exempt under the provisions of Income Tax Act. While computing the taxable income under normal provision, the assessee has disallowed the entire expenses in the computation of income. Since the assessee has disallowed the interest expenditure under section 37 of the Act and not under section 14A of the Act, we are of the opinion that no disallowance is warranted while computing the income under section 115JB of the Act for the reason that only those expenses which are incurred to earn exempted income such as share income from firm, dividend income, agricultural income etc., has to be added back for computing adjusted profits of the business. In view of the above, application of clause (f) of Explanation 1 to section 115JB of the Act is not warranted. Thus, the revision order passed under section 263 of the Act stands quashed.
In the result, the appeal filed by the assessee is allowed. Order pronounced on 22nd December, 2023 at Chennai.