SVL LIMITED,CHENNAI vs. ACIT,CORPORATE CIRCLE(92), CHENNAI

आदेश / O R D E R PER MANJUNATHA.G, AM: This appeal filed by the assessee is directed against the order of the

Principal Commissioner of Income Tax, Chennai-3, passed u/s.263 of the

Income Tax Act, 1961, dated 29.03.2022 and pertains to assessment year

2017-18.

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(a) CIT Central Vs. Max India Ltd, (166 Taxman 188) [SC]

(b) CIT Vs,Future Co-op, resources Ltd. (132 Taxmann.com 173) Bombay HC

(c) Sutures India P,Ltd. VS CIT (273 Taxman 112) Karnataka HC

For these and other grounds that may be adduced before or at the time of hearing the Hon'ble ITAT may be pleased to cancel the order u/s 263.

Ltd., filed its return of income for the AY 2017-18 on 31.10.2017 declaring

‘Nil’ total income. The case has been selected for scrutiny under ‘complete

category’ and the assessment has been completed u/s.143(3) of the

Income Tax Act, 1961 (in short “the Act") on 24.12.2019 and determined

total income at Rs.NIL by making additions towards disallowance of

expenditure in relation to exempt income u/s.14A r.w.r.8D of the Income

Tax Rules, 1962 (in short “the Rules") and disallowance u/s.36(1)(va) of

the Act, towards belated payment of employees’ contribution to PF & ESI.

by the PCIT, Chennai-3, and notices u/s.263 of the Act, dated 01.03.2022

was issued and served on the assessee. In the said show cause notice, the

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PCIT had taken up three issues for revision proceedings and according to

the PCIT, the assessment order passed by the AO u/s.143(3) of the Act,

dated 24.12.2019, is erroneous in so far as it is prejudicial to the interest

of the Revenue, because, the AO has failed to carry out required enquires

he ought to have been carried out in light of Explanation-2 to Sec.263 of

the Act, on the issue of allowability of increase in provision made for

premium on Non-Convertible Debentures (in short “NCDs"), non-

verification of allowability of interest paid on borrowed capital for diversion

of interest bearing funds to group companies and non-application of mind

in respect of allowability of interest expenditure u/s.40(a)(ia) of the Act,

for non-compliance of relevant TDS provisions. According to the PCIT,

although, the assessee has made provision for premium on NCDs, which is

not allowable expenditure being contingent in nature, the AO has failed to

decide the same while computing assessment. The PCIT further noticed

that the assessee has paid interest on borrowed capital and also diverted

huge interest bearing funds to group companies, but the AO has failed to

disallow proportionate interest in respect of amount diverted to the group

companies. Further, although, the assessee has deducted TDS on the

interest, but there was a short deduction and this fact has not been verified

by the AO. Therefore, the PCIT opined that for three reasons, the

assessment order passed by the AO is erroneous in so far as it is prejudicial

to the interest of the Revenue and thus, called upon the assessee to file its

objections, if any, for proposed revision.

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passed by the AO is neither erroneous nor prejudicial to the interest of the

Revenue, because, all the three issues taken up for revision proceedings,

has been thoroughly examined by the AO during the course of assessment

proceedings, which is evident from the fact that the AO had issued notices

u/s.143(2) & 142(1) of the Act, on various dates, for which, the assessee

has filed complete details in respect of provision made for premium on

NCDs, disclosure on loans & advances given to group companies, and also

compliance of TDS provision in respect of interest payment. The AO after

considering relevant facts has chosen not to make any addition in respect

of these three items, and thus, it cannot be said that the AO has not applied

his mind to relevant provisions of the Act, which caused prejudice to the

interest of the Revenue.

also taken note of various details filed by the assessee during revision

proceedings, dropped proposed revision of assessment proceedings in

respect of provision made for premium on NCDs on the ground that the

said expenditure is genuine in nature. The PCIT had also dropped proposed

revision of assessment in respect of non-deduction of TDS on interest

payments. However, in respect of disallowance of proportionate interest

on diversion of interest bearing funds to group companies, the PCIT for the

reasons stated in their order dated 29.03.2022, set aside the assessment

order passed by the AO u/s.143(3) of the Act, dated 24.12.2019 with a

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direction to re-do the assessment in light of discussions given in 263 order.

Aggrieved by the order of the PCIT, the assessee is in appeal before us.

submitted that the assumption of jurisdiction by the PCIT on the issue of

disallowance of proportionate interest in respect of loans & advances given

to sister concerns, is illegal and opposed to fact, because, in order to invoke

jurisdiction u/s.263 of the Act, the PCIT must satisfy himself that

assessment order passed by the AO is erroneous in so far as it is prejudicial

to the interest of the Revenue. In this case, the assessment order passed

by the AO is neither erroneous nor prejudicial to the interest of the

Revenue, because, the issue has been thoroughly examined by the AO in

light of financial statements filed by the assessee along with relevant

explanation in respect of loans borrowed from various banks & financial

institutions and also loans & advances given to group companies. Just

because, the AO has not specifically discussed the issue in the assessment

order, it cannot be said that the AO has not verified the issue and also not

applied his mind on the issue at the time of assessment proceedings. In

this regard, he relied upon by the decision of the Hon’ble Supreme Court in

the case of CIT (Central), Ludihiana v. Max India Ltd., reported in 166

Taxman 188 (SC).

submitted that the PCIT has brought out clear facts to the effect that the

assessment order passed by the AO is erroneous in so far as it is prejudicial

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to the interest of the Revenue on the issue of diversion of interest bearing

funds to group companies without charging any interest, even though, the

assessee has paid huge interest on borrowed funds from banks & financial

institutions. The AO failed to examine the issue in light of relevant

provisions which rendered the assessment order passed by the AO to be

erroneous in so far as it is prejudicial to the interest of the Revenue, and

thus, assumption of jurisdiction by the PCIT is in accordance with law and

their orders should be upheld.

record and gone through orders of the authorities below. The provisions of

Sec.263 empower the PCIT to revise the assessment order, in case, if he

satisfies that the assessment order passed by the AO is erroneous in so far

as it is prejudicial to the interest of the Revenue. In the present case, on

perusal of facts available on record, we find that the PCIT set aside the

assessment order on the issue of disallowance of proportionate interest

expenditure for diversion of interest bearing funds to group companies. We

find that the reasons given by the PCIT is on sound footing, because, issue

has not been examined by the AO in light of relevant provisions of the Act,

to ascertain whether borrowed funds have been diverted to give loans &

advances to group companies or not? Although, the AO has called for

certain details, including financial statements, but there was no specific

question on the issue of loans & advances given to group companies in light

of huge interest paid by the assessee on borrowed funds from banks &

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financial institutions, which rendered assessment order passed by the AO

on the issue of disallowance of proportionate interest is erroneous in so far

as it is prejudicial to the interest of the Revenue. In our considered view,

it is a case of complete lack of enquiry, because, as per provisions of

Explanation-2 to Sec.263 of the Act, in case, order passed without making

enquiries or verifications which should have been made, then said order

can be definitely considered as erroneous order of the AO, which caused

prejudicial to the interest of the Revenue. Therefore, we are of the

considered view that there is no error in the reasons given by the PCIT to

set aside the assessment order on the issue of disallowance of

proportionate interest on diversion of interest bearing funds to group

companies, and thus, we are inclined to uphold the order of the PCIT passed

u/s.263 of the Act, and dismiss the appeal filed by the assessee.

Order pronounced on the 19th day of May, 2023, in Chennai.

Sd/- Sd/- (वी. दुगा� राव) (मंजूनाथा.जी) (MANJUNATHA.G) (V. DURGA RAO) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 19th May, 2023. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�/CIT 5. गाड� फाईल/GF 2. ��यथ�/Respondent 4. िवभागीय �ितिनिध/DR