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Income Tax Appellate Tribunal, “A” BENCH KOLKATA
Before: SHRI SANJAY GARG & SHRI GIRISH AGRAWAL
Present for: Appellant by : Shri S. M. Surana, Advocate Respondent by : Shri Devi Saran Singh, CIT, DR Date of Hearing : 21.11.2022 Date of Pronouncement : 20.02.2023 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the revision order of Ld. Pr. CIT, Kolkata-1 vide Order No. ITBA/REV/F/REV5/2021- 22/1041241407(1) dated 22.03.2022 passed u/s. 263 of the Income- tax Act, 1961 (hereinafter referred to as the “Act”), against the assessment order by ACIT, Circle-8(2), Kolkata u/s. 143(3) of the Act dated 28.11.2019.
Grounds raised by the assessee are reproduced as under:
“l. For that the revision order passed by the Ld. PCIT is bad in law as well as on facts.
P P products Pvt. Ltd. AY 2017-18 2 For that the Ld. PCIT erred in setting aside the assessment order wherein the assessment order passed by the Ld. AO is neither erroneous nor prejudicial to the interest of the revenue.
For that even otherwise, the Issues In respect of which the assessment order has been set aside were not subject matter of reasons for which the case was selected limited scrutiny.
4. For that the Ld. PCIT erred in setting aside the assessment order in respect of interest income received from bank whereas the interest was received from bank and correct Income was accounted for by the assessee which was also verifiable from Form No. 26AS.
5. For that the Ld. PCIT erred in setting aside the assessment order in respect of "finance cost" paid to bank whereas the entire payment was made to the bank for various credit facilities availed by the assessee from bank and all the ledgers in support of the same were submitted before the Ld. pelT and no discrepancies whatsoever have been found therein to suggest that the assessment order passed by the Ld. AO is erroneous or prejudicial to the interest of the revenue.
6. For that under the facts and circumstances of the case, the revision order passed by the Ld. PCIT is liable to be quashed.
7. For that the appellant craves leave to add, alter or withdraw an grounds of appeal on or before hearing of the appeal.”
3. From the perusal of the above grounds, there are particularly two issues which have been raised for assumption of jurisdiction u/s. 263 of the Act and passing the impugned order thereon. The two issues relate to, first being reporting of correct income of interest received from bank vis-à-vis as appearing in Form 26AS. The second issue relates to ‘finance cost’ paid by the assessee to bank on various credit facilities vis-a-vis the quantum of borrowings.
Brief facts of the case as culled out from records are that assessee is engaged in the business of trading of plastic granules. It filed its return of income on 27.10.2017 which was subsequently revised on 21.11.2017 reporting total income of Rs.8,10,75,760/-. Case of the assessee was P P products Pvt. Ltd. AY 2017-18 selected for scrutiny under CASS for which statutory notices were issued and duly served on the assessee, who complied with the same by filing the documents through e-filing portal. Owing to submissions made by the assessee and material placed on record, the returned income of the assessee was accepted as assessed income for completing the assessment.
4.1. Subsequently, Ld. PCIT called for and examined the assessment records. From the perusal of this, he observed that operating cost claimed by the assessee is not true and the same might have been disallowed and added back to the total income. In this respect, he observed that case was selected for scrutiny due to ‘reduction in profit due to ICDS’. Ld. Pr. CIT observed that the total borrowing was of Rs.2.90 Cr. which included Rs.2.25 Cr. towards long term borrowing and Rs.0.66 Cr. towards short term borrowing, as on 31.03.2017. He also observed that trade payables and other was at Rs.42.64 Cr. Ld. Pr. CIT observed that assessee had charged Rs.2.60 Cr. as finance cost against total of its borrowing of Rs.2.90 Cr. in addition to claim of bank charges of Rs.34.12 lakh and interest expenses of Rs.98.47 lakh. He thus observed that there was an under assessment of Rs.2,60,30,465/-, in the assessment order, having tax effect of Rs.1.14 Cr.
4.2. The second issue raised as observed by Ld. Pr. CIT relate to charging of interest u/s. 234B of the Act which was subsequently dropped in the impugned revisionary proceedings.
P P products Pvt. Ltd. AY 2017-18 4.3. The third issue which was observed by the Ld. Pr. CIT relate to disclosure of interest income and TDS thereon by netting off the credit of interest income of Rs.35.12 lakh with the interest expenses of Rs.26.14 lakh. He thus, observed that interest income of Rs.35.12 lakh could have been concealed by netting off resulting into an under assessment of Rs.26.14 lakh (35.12 – 8.90) with consequential tax effect of Rs.11,49,475/-. A show cause notice was issued u/s. 263 of the Act, as Ld. Pr. CIT was satisfied that it is a case of erroneous assessment in so far as prejudicial to the interest of the revenue.
Before us Shri S. M. Surana, Advocate appeared for the assessee and Shri Devi Saran Singh, CIT, DR appeared for the revenue.
Ld. Counsel has placed on record a paper book containing 278 pages. On the first issue relating to quantum of borrowing cost claimed by the assessee, Ld. Counsel referred to the audited financial statement, more particularly, the statement of profit and loss for the year ended 31.03.2017 and pointed to finance cost reported at Rs.3,92,90,011/-, details of which are presented in Note No. 24, forming part of financial statement, placed at page 25 of the paper book. The details of financial cost reported in Note 24 is tabulated as under:
P P products Pvt. Ltd. AY 2017-18 6.1. Ld. Counsel referred to the reply furnished by the assessee dated 21.05.2019 before the Ld. AO, in the course of assessment proceeding against notice u/s. 142(1) and submitted that all the details relating to short term borrowings, current liabilities, long term loans and various credit facilities availed by the assessee were furnished along with relevant documents and explanations. Ld. Counsel stated that all these details were furnished before the Ld. AO who had examined and verified the same. After having satisfied with the claim of assessee, it was rightfully allowed by the Ld. AO. Ld. Counsel submitted that all these details were furnished in the revisionary proceeding against the show cause notice issued by the Ld. Pr. CIT vide reply dated 03.03.2022.
6.2. From the details of borrowing cost, Ld. Counsel pointed that Ld. Pr. CIT has misconstrued the details of finance cost which contains two components, viz., (a) towards interest expenses and (b) towards bank charges and commission. The amount of Rs.2,60,30,465/- reported under the sub- head, ‘bank charges and commission’ as borrowing cost and Rs.34,13,144/- as other bank charges, both are in respect of letter of credit facility availed by the assessee. The borrowing cost and other bank charges having paid as bank charges on letter of credits by RBI and SBI on behalf of the assessee. These costs and charges include bank charges, commission, ECB charges, processing fees, P&T charges, Usance charges, stamp papers, forward contract cancellation charges and forward contract charges, all of which relates to P P products Pvt. Ltd. AY 2017-18 credit facility availed against letter of credits. It was thus, submitted that amount of Rs.2,94,43,609/- are bank charges and commission towards letter of credits which the Ld. Pr. CIT has misconstrued as interest expenses against the total borrowing of Rs.2.90 Cr. as on 31.03.2017.
6.3. The correct fact as reported in audited financial statement and corroborated from the documentary evidence is that following costs towards interest expenses for working capital, buyers’ credit and unsecured loan is of Rs.98,46,402/- only. For this, all the ledger accounts were also placed on record. Ld. Counsel also referred to the statement of import made during the year by the assessee for which the credit facility of Letter of Credit (LC) were utilised by the assessee. The said details are placed in the paper book at pages 51 to 61. He also submitted that it is not a case where the borrowing and loans as well as availment of credit facility towards import made by the assessee against the issue of letter of credits by the bank is reflected as trade payables under the head sundry creditors which has been duly reported in the audited financial statements. In this respect, credit summary of the sundry creditors is also placed on record, wherefrom the net balance payable towards sundry creditors for which letter of credit facility has been availed is Rs.38,45,31,057/-. It is placed in the paper book page at 71 and 72.
6.4. In the course of hearing, Ld. Counsel placed reliance on the decision of Hon’ble High Court of Delhi in the case of ITO
P P products Pvt. Ltd. AY 2017-18 Vs. D. G. Housing Projects Ltd. 343 ITR 329 on the aspect of application of mind by the ld. PCIT on the records of the case. This aspect of application of mind by the CIT has been succinctly dealt by the Hon’ble Delhi High Court in the judgment of DG Housing Finance Co. Ltd. [2012] 20 taxmann.com 587 (Del).
6.4.1. While adverting on the issue, Hon’ble High Court held that the CIT has to come to the conclusion and himself decide that order is erroneous, by conducting necessary enquiry, if required and necessary before the order u/s 263 of the Act is passed. In such cases, the order of the AO will be erroneous because the order passed is not sustainable in law and the said finding must be recorded by CIT who cannot remand the matter to the assessing officer to decide whether the findings recorded are erroneous. 6.4.2. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/enquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the AO, making the order unsustainable in law. 6.4.3. In some cases, possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the AO had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the AO to conduct further enquiries without a finding that the order is erroneous, the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In such matters, to remand the matter/issue to the AO would imply and mean that the CIT has P P products Pvt. Ltd. AY 2017-18 not examined and decided whether or not the order is erroneous but has directed the AO to decide the aspect/question. 6.4.4. The Hon'ble Court further held that this distinction must be kept in mind by the CIT while exercising jurisdiction u/s 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged “inadequate investigation”, it will be difficult to hold that the order of the AO, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/enquiry himself. The order of the AO may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the AO to decide whether the order was erroneous. This is not permissible. An order is erroneous, unless the CIT holds and records reason why it is erroneous. Therefore, CIT must after recording reasons, hold that order is erroneous. The jurisdictional pre-condition stipulated is that CIT must come to the conclusion that the order is erroneous and is unsustainable in law. 6.4.5. It was further observed by the Hon’ble High Court that the material, which the CIT can rely up on includes not only the records as it stands at the time when the order in question was passed by the AO but also records as it stands at the time of the examination by the CIT. Nothing prohibits CIT from collecting and relying new/additional material which evidence to show and state that the order of the AO is erroneous. 6.5. In the present case before us, we note that what the Ld. Pr. CIT has recorded in para 2 is his prima facie observation for invoking the revisionary proceedings to issue the show cause notice u/s. 263.
P P products Pvt. Ltd. AY 2017-18 Assessee made exhaustive submission bringing relevant facts which are verifiable from the records. Ld. Pr. CIT himself failed to apply his mind on the same and directed to pass a fresh assessment order which is contrary to the decision given by Hon’ble High Court of Delhi (supra).
In respect of second issue relating to reporting of interest income, Ld. Counsel submitted that assessee has earned interest income from bank and from others amounting to Rs.1,12,15,593/-, all of which has been duly reported in Form 26AS and has been offered to tax in the return. Ld. Counsel stated that interest income was arrived at Rs.8.98 lakhs by netting of the credit and debit figures i.e. interest income of Rs.35.12 lakh and interest expenses of Rs.26.14 lakhs, which was done by the bank itself. In respect of interest income, it was submitted by the assessee that interest received is of Rs.1,12,15,593/-, details of which are placed on record and reconciled with Form 26AS. Thus, there was no discrepancy in reporting of the credit interest income in the return by the assessee. Ld. Counsel stated that revisionary order passed by Ld. Pr. CIT is without making inquiries or verification on his own accord for which all the details and documents were placed before him. The basis arrived at by Ld. Pr. CIT in passing the impugned revisionary order is devoid of any merits and baseless by misconstruing the verifiable facts, details of which are placed on record. He thus, submitted that the assessment order is not erroneous and is not prejudicial to the interest of revenue. Therefore, the impugned order passed u/s. 263 of the Act ought to be quashed.
P P products Pvt. Ltd. AY 2017-18 8. Per contra, Ld. CIT, DR placed reliance on the order of Ld. Pr. CIT. He pointed to the observations made by Ld. Pr. CIT that assessee did not offer any reason for the high borrowing cost of Rs.3.92 Cr. as against the borrowed money of Rs.2.94 Cr. He submitted that no prejudice is caused to the Revenue since Ld. Pr. CIT has directed the ld. AO to examine the issue afresh and pass the assessment order accordingly.
We have carefully considered the rival contentions and perused the material available on record. On the first issue relating to high borrowing cost vis-à-vis the amount of borrowed money, admittedly, it is a fact on record that assessee has made detailed disclosure of its finance cost during the year under consideration by way of Note no. 24 forming part of the financial statement for the year. We note that this finance cost of Rs.3.92 Cr. has two components, (a) interest expenses of Rs.98.94 Cr. (b) bank charges and commission for Rs.2.94 Cr. The component of bank charges and commission are all in respect of buyers’ credit, availed by the assessee against the issue of LCs for its import purchase. The import purchase outstanding as on 31.03.2017 are reported as sundry creditors/trade payables which forms part of current liabilities and not the borrowed money. We also take note of the fact that assessee has furnished all the details in respect of expenses incurred by it on letter of credits against its import purchase, which the Ld. Pr. CIT has failed to consider and examine or caused to have examined them before arriving at the conclusion to pass the impugned revisionary order. The long term and short
P P products Pvt. Ltd. AY 2017-18 term borrowings outstanding at the end of the year as reported in the audited financial statements at Rs.2.90 Cr. and the trade payables are at Rs.40.45 Cr. Against these two components, the total finance cost claimed by the assessee is of Rs.3.92 Cr. All these facts are verifiable from the material placed on record.
9.1. Further, in respect of second issue relating to reporting of interest income by the assessee wherein the bank itself has done the netting of interest income against the interest expenses though the assessee has reported the interest income of Rs.1,12,15,593/-. There is no under assessment of the interest income as observed by the assessee since interest income earned has been reconciled with Form 26AS. Assessee had furnished comprehensive details in respect of the above two issues which is tabulated as under:
P P products Pvt. Ltd. AY 2017-18
From the above factual matrix of the issue raised by the ld. PCIT, we find that he has not applied his mind to arrive at a consideration which is erroneous in so far as prejudicial to the interest of the revenue, for passing the impugned order u/s 263 of the Act. We observe that in the course of proceedings u/s 263 of the Act before the Ld. PCIT, assessee had furnished the relevant details and explained the issues raised through the show cause notice issued by the Ld. PCIT, supporting its contentions by corroborative documentary evidences. It is well settled law that for invoking the provisions of P P products Pvt. Ltd. AY 2017-18 section 263 of the Act, both the conditions that the order must be erroneous and prejudicial to the interest of revenue needs to be satisfied. This ratio stands laid down by various Hon'ble Courts.
For this, let us take the guidance of judicial precedence laid down by the Hon’ble Apex Court in the case of Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordships have held that twin conditions need to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and in so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii) Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; [because AO has to discharge dual role of an investigator as well as that of an adjudicator] then in aforesaid any of the events, the order passed by the AO can be termed as erroneous order. Looking at the second limb as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue, one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the AO. Their Lordships held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does
P P products Pvt. Ltd. AY 2017-18 not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.
We find that the issue in the present case is purely on facts which are verifiable from the records of the assessee placed on record. Examination and verification of the audited financial statement i.e. Balance sheet and P&L Account of the assessee. Perusal of the ledger account and the details of imports made by the assessee tabulated in the paper book, reveals the correct state of affairs in respect of the two issues raised in the impugned revisionary proceeding for which, both the Ld. Pr. CIT and the Ld. CIT, DR could not bring any material to controvert the said verifiable factual position.
Accordingly, on the two issues raised by the Ld. Pr. CIT in the revisionary proceeding, no action u/s. 263 of the Act is justifiable which in our considered view cannot be sustained under the facts and circumstances of the present case, hereinabove. We, therefore, quash the impugned order u/s. 263 of the Act.
In the result, appeal of the assessee is allowed.