JAI SALASAR BALAJI INDUSTRIES(P)LTD,KOLKATA vs. ACIT, KOLKATA

In reply to the said showcause notice, the assessee stated that the ld. AO has examined the details about the loans taken and given during the year, which were called for by the AO in the assessment proceedings and complete details of loans given to the related parties were provided. The ld. AO after examining the details properly and making full examination of the facts took a plausible view that the interest charged on loan is allowable. It was also submitted that requisite details and submissions were called for by the AO and, therefore, it is not a case of lack of enquiry or inadequate enquiry. Before the ld. Pr. CIT it was submitted that the assessee company had mixed funds both interest bearing as well as interest free funds and the loan given to the related parties are less than the interest free fund available with the assessee company. However, the ld. Pr. CIT was not satisfied with the submission of the assessee. The ld. Pr. CIT observed that the concern of the AO behind calling for the details given to the related parties was only to the issue of non-deduction of TDS by the assessee on some expenses and brought the same to tax as per the provisions of Income Tax Act. The ld. Pr. CIT further observed that the ld. AO failed to examine/verify the above mentioned issue referred in the showcause notice referred under section 263 of the Act and, therefore, the order of the AO is erroneous insofar as prejudicial to the interest of the revenue. Directions were given to the AO to confine his enquiries and 4 Assessment Year: 2018-19 Jai Salasar Balaji Industries (P) Ltd. verifications only to the issue mentioned in para 2 of the impugned order.

Aggrieved the assessee is now in appeal before this Tribunal challenging the assumption of juri iction u/s 263 of the Act by the ld. Pr. CIT as well as on merits contending that the ld. AO has examined the issue in detail and taken a plausible view and, therefore, the order of the ld. AO is neither erroneous nor prejudicial to the interest of the revenue.

The ld. Counsel for the assessee referred to the replies filed before the AO in response to notice under section 142(1) of the Act, statement of year -wise availability of interest free funds for AY 2018- 19 and also statement of loan given to the related parties. Reference was also made to the assessment order under section 143(3) of the Act of the immediately preceding assessment year i.e. AY 2017-18 framed on 20/12/2019 placed at pages 76-82 of the paper book where also the assessee’s claim of interest expenditure was allowed. The ld. Counsel for the assessee relied on the following judgements:-  PCIT vs. Shreeji Prints (P.) Ltd. (2021) 130 taxmann.com 294  PCIT vs. Well Wisher Constructions P. Ltd. (2019) 106 taxmann.com 260  ITO vs. Arambagh Co-operative Agriculture and Rural Bank Development Ltd. [2022] 145 taxmann.com 107  Hill Queen Investment (P.) Ltd. vs. PCIT [2021] 127 taxmann.com 682  PCIT vs. S N Tradelinck (P.) Ltd. [2022] 145 taxmann.com 73  CIT vs. Meerut Roller Flour Mills (P.) Ltd. [2019] 110 taxmann.com 170  CIT vs. Ansal Housing & Constructions Ltd. [2014] 45 taxmann.com 223  DCIT vs. Texmaco Ltd. [2017] 83 taxman.com 5  CIT vs. Beekons Industries Ltd. [2023] 149 taxmann.com 383  PCIT vs. Basti Sugar Mills Co. Ltd. [2018] 98 taxmann.com 401

On the other hand, the ld. D/R vehemently argued heavily relying on the detail finding of the ld. Pr. CIT stating that the assessee has claimed huge expenditure of interest and has applied the interest bearing funds for giving loans to related parties without charging any interest. Further he stated that had the AO carried out necessary enquiry, then the said claim of the assessee would not have been allowed.

We have heard rival contentions and perused the records placed before us and carefully gone through the decisions referred to by ld. Counsel for the assessee. The assessee is in appeal assailing the order of ld. Pr. CIT for wrongly assuming juri iction u/s 263 of the Act and further, erred in holding the assessment order dated 13/03/2021 u/s 143(3) of the Act as erroneous and prejudicial to the interests of the Revenue. The only issue referred to in the impugned order is regarding the allowability of interest expenditure claimed on the unsecured loans. The ld. Pr. CIT has observed that the assessee has taken huge unsecured loans and has claimed interest paid thereon as expenditure but has not applied those funds for the purpose of business but has given free loans to its related parties and since no interest has been charged by the assessee company on the major portion of the loans given to its related parties, the proportionate amount of interest expenditure deserves to be disallowed.

Before proceeding to examine the issues stated above, we find that the provision of Section 263 of the Act has direct bearing on the 6 Assessment Year: 2018-19 Jai Salasar Balaji Industries (P) Ltd. issue raised before us, therefore, it is pertinent to take note of this section which reads as under: "263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation- In computing the period of limitation for the purposes of sub- section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded."

On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in 8 Assessment Year: 2018-19 Jai Salasar Balaji Industries (P) Ltd. various judgments relevant for judging the action of the ld. Pr. CIT taken u/s 263. 10. Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC) has laid down following ratio with regard to provisions of section 263 of the Act: “There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue - Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC)”. [Emphasis Supplied]

Hon’ble Apex Court in the case of CIT vs. Max India Limited as reported in 295 ITR 0282 has held that:

Hon'ble Madhya Pradesh High court in the case of CIT vs. Associated Food Products (P) Ltd as reported in 280 ITR 0377 has held that:

In the light of the provisions of section 263 of the Act and a settled position of law, powers u/s 263 of the Act can be exercised by the Pr. Commissioner/Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and also prejudicial to the interest of the Revenue. By 'erroneous' is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Thus, where there are two possible views and the Assessing Officer

This view is further supported by the decision of the Hon'ble Gujarat High Court in the case of Shri Prakash Bhagchand Khatri in Tax Appeal No. 177 with Tax Appeal No.178 of 2016, wherein the Hon'ble Gujarat High Court was seized with the following substantial question of law: "Whether the Tribunal is right in law and on facts in upholding the order passed by the CIT under section 263 of the Act on merits and still storing the issue of allowability of deduction under section 54 of the Act to the file of Assessing Officer even though the working of allowability of deduction under section 54F is available in the order under section 263 which is not disputed by the assessee before ITAT."

We find that the Hon'ble Delhi High Court in the case of CIT vs. Anil Kumar reported in 335 ITR 83 has held that where it was discernible from record that the A.O has applied his mind to the issue in question, the ld. CIT cannot invoke section 263 of the Act merely because he has different opinion. Relevant observation of the High Court reads as under:

We find the Hon'ble Delhi High Court in the case of Vikas Polymer reported in 341 ITR 537 has held as under: “We are thus of the opinion that the provisions of s. 263 of the Act, when read as a composite whole make it incumbent upon the CIT before exercising revisional powers to: (i) call for and examine the record, and (ii) give the assessee an opportunity of being heard and thereafter to make or cause to be made such enquiry as he deems necessary. It is only on fulfilment of these twin

Since in the instant case the A.O. after considering the various submissions made by the assessee from time to time and has taken a possible view, therefore, merely because the DIT does not agree with the opinion of the A.O., he cannot invoke the provisions of section 263 to substitute his own opinion. It has further been held in several decisions that when the A.O. has made enquiry to his satisfaction and it is not a case of no enquiry and the DIT/CIT wants that the case could have been investigated/ probed in a particular manner, he cannot assume juri iction u/s 263 of the Act. In view of the above discussion, we hold that the assumption of juri iction by the DIT u/s 263 of the Act is not in accordance with law. We, therefore, quash the same and grounds raised by the assessee are allowed."

The ITAT in the case of Mrs. Khatiza S. Oomerbhoy vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon'ble Supreme Court in 12 Assessment Year: 2018-19 Jai Salasar Balaji Industries (P) Ltd. the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263: “(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law (vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. (vii) The AO exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion. (viii) The CIT, before exercising his juri iction under s. 263 must have material on record to arrive at a satisfaction. (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.”

Apart from above stated broader principles, one more principle needs to be added in view of the judgment of Hon’ble Delhi High Court in the case of ITO vs. D.G. Housing Projects Ltd. [2012] 343 ITR 329 (Delhi) that the ld. CIT has to examine and verify the issue himself and give a finding on merits and form an opinion on merits that the 13 Assessment Year: 2018-19 Jai Salasar Balaji Industries (P) Ltd. order passed by the AO is erroneous and prejudicial to the interest of the Revenue. Relevant extract is reproduced below: “In the present case, the findings recorded by the Tribunal are correct as the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that "order passed by the Assessing Officer may be erroneous". The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order passed by the Assessing Officer was erroneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent’s computation figures but he had reservations. The CIT in the order has recorded that the consideration receivable was examined by the Assessing Officer but was not properly examined and therefore the assessment order is "erroneous". The said finding will be correct, if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of the Revenue. In latter cases, the CIT has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. In the second set of cases, CIT cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not.”

Now, in light of the above judicial pronouncements and the provisions of u/s 263 of the Act let us examine the issue raised in order passed under section 263 of the Act, which relates to not charging interest on loans given to related parties. We observe that the assessee company has outstanding unsecured loans to the tune of Rs.115.94 Crores, taken from body corporate and as on 31/03/2018, loans were given to related parties amounting to Rs.54.50 Crores and to others at Rs.13.35 Crores. Assessee company has advanced a sum of Rs.53.13 Crores as interest free loan to related parties out of the total loan of Rs.54.50 Crores. Now, the first observation of the ld. Pr. CIT is 14 Assessment Year: 2018-19 Jai Salasar Balaji Industries (P) Ltd. that the ld. Assessing Officer has not examined these transactions. It is stated by the ld. Pr. CIT in the impugned order that no enquiry has been conducted on this issue by the ld. Assessing Officer. Before us, the ld. Counsel for the assessee has referred to the reply filed in response to notice under section 142(1) of the Act, dt. 10/02/2021 placed at pages 13 to 15 of the paperbook. On perusal of the above reply, we note that the unsecured loan was taken from M/s. Jai Balaji Jyoti Steels Limited, in the earlier years and as on 31/03/2018, outstanding balance was Rs.94.88 Crores. Since the assessee did not deduct tax at source on the interest payment, the same was offered for disallowance u/s 40(a)(ia) of the Act. Further at para 2 of the above referred reply, the assessee has given the reason for not charging the interest during the year from the related parties on the loans given. It is submitted that in the earlier years assessee has been charging interest on such loans given to related parties. However, since the related parties were facing financial difficulties and were not in a position to pay even the principal amount, the assessee stopped charging interest on the loan advanced. It is not in dispute that the loans have been given to the related parties which are sister concern or part of the same group as that of the assessee company. The details of the loans given to the related parties for the year under appeal is as follows:-

From the above details, we notice that major loans have been advanced in the preceding year and during the year under consideration only a sum of Rs.1.36 Crores approx, have been advanced to related parties in other words almost 97% of the loans to related parties have also been advanced in the previous year. Further, we notice that in the immediately preceding year i.e., 2017-18 also, assessee’s case was subjected to scrutiny proceedings under section 143(3) of the Act and vide order dt. 20/12/2019, the income for Assessment Year 2017-18 was assessed at ‘Nil’ and the ld. Assessing Officer made addition of Rs.16,24,647/- and the carry forward loss amounted to Rs.9,81,25,022/-. Thus, we notice that in the preceding are also these transactions have been scrutinised and have been accepted by the Assessing Officer and for the year under appeal since a very small amount of advance was given during the year and the 16 Assessment Year: 2018-19 Jai Salasar Balaji Industries (P) Ltd. detailed reply was filed by the assessee, the ld. Assessing Officer after making proper application of mind had accepted the reasoning given by the assessee in the said reply and, therefore, it is not a case of no enquiry because the ld. Assessing Officer has raised specific questions about the issue of unsecured loans taken and given during the year and not charging of interest thereon on some loan advanced to which a specific reply has been given by the assessee and, therefore, since proper enquiries have been conducted by the Assessing Officer, the impugned revisionary proceedings carried out by the ld. Pr. CIT, is beyond its juri iction. Thus on this legal ground itself, the order under section 263 of the Act, deserves to be quashed.

Even on merits also, assessee has filed the statement of year - wise availability of interest free funds which is placed at page 30 of the paper book and the same is extracted below:-

From perusal of the above chart, the position of interest free funds available with the assessee as at the close of each year has been depicted right from FY 2013-14 till FY 2017-18. It has been contended by the ld. Counsel for the assessee that the interest free funds available for the year under appeal are much more than the loan given to the related parties. The figures mentioned in the above chart are stated to be as per the audited financial statements. It clearly indicates that as on 31/03/2018, assessee had Rs. 1,54,14,54,745/- of interest free fund available with it against which only Rs. 53,12,96,10/- has been given as loan to related parties. Therefore, on one hand the loans have been given to related parties in the normal course of business and on the other hand, assessee has also filed details to indicate that apart from the unsecured loans assessee has other funds available for giving loans to the related parties and, therefore, there is no prejudice caused to the revenue authorities and if such interest free available funds are available with the assessee then proportionate disallowance of interest expenditure on the loans given to related parties is not sustainable. For this proposition we find support from the following decisions:-  DCIT vs. Texmaco Ltd. [2017] 83 taxman.com 5 Held that the assessee had sufficient funds of its own to advance the loan to the sister concern. It is also a fact that the assessee had 50 per cent shares in NHL and later on it amalgamated with the assessee. The assessee has submitted during the appellate proceedings that there was deficiency of electricity and it has entered into an agreement to use the electricity to be produced by NHL electric project. Therefore, there was commercial interest of the assessee in NHL for advance of the money. Thus, disallowance of interest was to be deleted.

Therefore, since ld. Pr. CIT erred in invoking the provisions of Section 263 of the Act on issues raised in the show cause notice on a wrong assumption and since ld. AO has carried out necessary investigation and examination of the issue raised in show cause notice

In the result, the appeal filed by the assessee is allowed as per the terms indicated above. Order pronounced in the Court on 25th August, 2023 at Kolkata. (SONJOY SARMA) ACCOUNTANT MEMBER Kolkata, Dated 25/08/2023 *SC SrPs

""यथ" / The Respondent 3. संबंिधत आयकर आयु" / Concerned Pr. CIT 4. आयकर आयु" अपील ( ) / The CIT(A)- 5. िवभागीय "ितिनिध ,आयकर अपीलीय अिधकरण, कोलकाता/DR,ITAT, Kolkata, 6. गाड" फाई/ Guard file.