M/S PRAGATHI GREEN MEADOWS & RESORTS PVT LTD.,,HYDERABAD vs. ACIT, CIRCLE 16(3), HYDERABAD

The Revenue has filed this Miscellaneous Application requesting the Tribunal to recall the order passed by the Tribunal in dt.26.08.2019 dismissing the appeal of the Revenue on account of low-tax effect despite the reopening was based on audit objections.

The ld. DR referring to the contents of the Miscellaneous Application filed by the Revenue submitted that though the tax effect is below the monetary limit prescribed by the Board, however, the case is covered under exceptional category under section 10(C) of the CBDT Circular No.03/2018 dt.11.07.2018. She accordingly submitted that the order of the Tribunal dismissing the appeal filed by the Revenue on account of low tax effect should be recalled.

The learned counsel for the assessee, on the other hand, has no objection for the same.

Since admittedly, the reopening of the assessment was made on the basis of audit objections, therefore, the case is covered under the exceptional category under section 10(C) of the CBDT Circular 03/2018 dt.11.07.2018. Therefore, a mistake has crept in the order of the Tribunal which requires rectification. We, therefore, recall the order of the Tribunal and the appeal is fixed for hearing today itself. The M.A. field by the Revenue is accordingly allowed.

These are cross appeals. The first appeal is filed by the Revenue and the second one filed by the assessee and are directed against the order dt.27.11.2012 of the Commissioner of Income Tax (Appeals) – V, Hyderabad relating to A.Y. 2007-08. For the sake of convenience, these appeals were heard together and are being disposed of by this common order.

The facts of the case, in brief, are that the assessee is a company engaged in the business of land development and sale. It filed its return of income on 31.10.2007 declaring total income of Rs.6,97,63,240/-. The return was processed under section 143(1) of the Act on 29.09.2008. Subsequently, the Assessing Officer observed from the balance-sheet that the assessee has secured loans i.e., term loan and for vehicle finance from Andhra Bank to an extent of Rs.12.18 crore and also unsecured loans of Rs.58.87 lakhs. The assessee has claimed expenditure of Rs.1.85 crores under the head ‘interest and bank charges’ by debiting the same to the profit and loss account. He further noted that the assessee had also given loans and advances to others including to its sister concerns. Further, on verification, he found that the assessee has advanced a loan of Rs.5,25,14,837/- to one of its sister concerns namely, M/s. Pragathi Kamadhenu Finance Limited. However, no interest income has been offered to tax although it has claimed expenditure of Rs.1,85,54,522/- under the head ‘interest and bank charges’. In view of the above, the Assessing Officer initiated re-assessment

Notice u/s 148 of the Act was issued on 25.02.2011 which was served on assessee on 04.03.2011. Although no return in response to the said notice was filed, however, in response to the statutory notice issued under section 142(1) of the Act, the ld. AR of the assessee appeared before the Assessing Officer from time to time and furnished the information as called for. So far as the question regarding advancing of loan to the sister concern i.e., M/s. Pragathi Kamadhenu Pvt. Limited without charging any interest is concerned, the assessee furnished the following reply which has M/s. Pragathi Green Meadows & Resorts Pvt. Ltd.

However, the Assessing Officer was not satisfied with the arguments advanced by the assessee. He observed that the assessee company has obtained loans from banks for the purpose of its project i.e., development and sale of land. From the details furnished by the assessee, he noted that assessee is paying interest @ 12.75% whereas no interest has been charged from the sister concern M/s. Pragathi Kamadhenu Pvt. Limited. In the absence of any satisfactory explanation given by the assessee, the Assessing Officer computed the interest @ 12.75% on the interest free advances of Rs.5,25,14,827/- and disallowed an amount of Rs.66,95,640/- by making addition of the same to the total income.

In the appeal, the ld.CIT(A) deleted the addition made by the Assessing Officer by observing as under :

Aggrieved with such order of the learned CIT(A), the Revenue is in appeal before us by raising the following ground :

The assessee has also taken the following grounds :

The learned counsel for the assessee referring to the decision of Hon’ble Supreme Court in the case of National Thermal Power Co., Limited Vs. CIT reported in (1998) 229 ITR 383 submitted that the additional ground is purely a legal ground and all material facts are already available on record and no new facts are required to be M/s. Pragathi Green Meadows & Resorts Pvt. Ltd.

Ld. DR on the other hand, objected to the admission of the additional ground raised by the assessee.

After hearing both sides and considering the fact that the additional ground raised by the assessee is purely a legal one and all material facts necessary for adjudication of the ground are already available on record, therefore, the additional ground raised by the assessee is admitted.

The learned counsel for the assessee, at the outset, submitted that it is an undisputed fact that the case of the assessee was reopened on the basis of audit objections. Referring to page nos.1 and 2 of the paperbook filed by the Revenue, the learned counsel for the assessee drew the attention of the Bench to the same and submitted that at the behest of the Revenue Audit Party vide letter dt.08.06.2010, the Assessing Officer has reopened the assessment. Referring to the letter dt.09.07.2012 issued by the office of the CIT- IV, Hyderabad to the Principal Director of Audit (Central), Saifabad, Hyderabad, the learned counsel for the assessee drew the attention of the Bench to the same and submitted that the Department has accepted the objections raised by the Revenue Audit Party and has stated that the Assessing Officer has taken necessary remedial action by passing order u/s 143(3) r.w.s. 147 of the Act on 07.12.2011.

Referring to the decision of Hon’ble Supreme Court in the case of Indian Eastern Newspaper Society Vs. CIT reported in (1979) 2 Taxman 197 (SC), he submitted that Hon’ble Supreme Court in the said decision has held that the view expressed by internal audit party on a point of law cannot be regarded as “information” for the purposes of initiating proceedings under section 147(b) of the Act. Referring to the decision of Hon’ble Karnataka High Court in the case of CIT Vs. GMR Holdings Pvt. Limited reported in 407 ITR 439, he submitted that the Hon’ble High Court has held that re-assessment proceedings under section 147/148 of the Act could not be undertaken on a mere change of opinion or audit objection raised by the internal auditors of the Department. Referring to the decision of Mumbai Bench of the Tribunal in the case of Lionbridge Technologies Pvt. Limited Vs. ACIT in ITA 610/Mum/2018 order dt.27.05.2020 for A.Y. 2008-09, he submitted that the Tribunal in the said decision has held that re-assessment proceedings on the basis of an audit objection is not valid. He accordingly submitted that since admittedly the re- assessment proceedings were initiated on the basis of internal audit party objections, the re-assessment proceedings are not valid and therefore, the re-assessment proceedings should be quashed.

So far as the merit of the case is concerned, the learned counsel for the assessee heavily relied on the order of learned CIT(A).

The ld. DR on the other hand strongly challenged the arguments advanced by the learned counsel for the assessee. She submitted that the report of the internal audit party constitutes an M/s. Pragathi Green Meadows & Resorts Pvt. Ltd.

So far as the merit of the case is concerned, she submitted that when admittedly, the assessee has advanced interest free loans to sister concerns, therefore, the Assessing Officer was fully justified in charging interest @ 12.75% which the assessee is paying to the banks for availing the loan.

We have considered the rival arguments made by the sides, perused the orders of Assessing Officer and the learned CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the re-assessment proceedings were initiated on the basis of objections raised by the audit internal party which read as under :

We further find in compliance to the objections raised by the audit party, the CIT-IV, Hyderabad has addressed a letter to the Principal Director of Audit (Central), Saifabad, Hyderabad, stating that the objections raised have been settled, the contents of which read as under :

From the above, it is crystal clear that the re-assessment proceedings were initiated on the basis of audit objections. We find the Hon’ble Supreme Court in the case of Indian and Eastern Newspaper (supra) has held that the opinion of internal audit party of the Income Tax Department on a point of law cannot be regarded as “information” within the meaning of section 147(b) of the Act, 1961. We find the Hon’ble Karnataka High Court in the case of GMR Holdings Pvt. Limited (supra), while deciding an identical issue has held that re-assessment proceedings u/s 147/148 of the Act cannot be undertaken on a mere change of opinion or audit objection raised by the internal auditors of the Department. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Lionbridge Technologies Pvt. Limited (supra). The various other decisions relied upon by the learned counsel for the assessee also support his case to the proposition that re-assessment proceedings cannot be initiated on the basis of audit objections.

In view of the above discussion, we hold that the re- assessment proceedings initiated on the basis of audit objection are not valid in law and accordingly, the re-assessment proceedings are quashed. Since we quash the re-assessment proceedings initiated by the Assessing Officer on the basis of the audit objections, therefore, the grounds raised by the Revenue challenging the deletion on merit become academic in nature and therefore, are not being adjudicated.

In the result, the appeal filed by the assessee is allowed and the appeal filed by the Revenue is dismissed.

To sum up, the Miscellaneous Application filed by the Revenue is allowed and the appeal filed by the Revenue is dismissed and the appeal filed by the assessee is allowed.