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Income Tax Appellate Tribunal, JAIPUR BENCHES “B”, JAIPUR
Before: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 25/JP/2021
ORDER PER: SANDEEP GOSAIN, J.M. The present appeal has been filed by the assessee against the order of the ld. Pr.CIT, Jaipur-1, Jaipur dated 28/03/2021 passed U/s 263 of the Income Tax Act, 1961 (in short, the Act) for the A.Y. 2016-17. The assessee has raised following grounds of appeal: “1. Under the facts and circumstances of the case, order passed by the Ld. PCIT u/s 263 is illegal & bad in law and the same be quashed.
2. The Ld. PCIT has erred on facts and in law in holding that the order passed by the AO allowing the loss on account of differential interest under the head income from other sources in the absence of Balance Sheet/ bank statement of relevant period is erroneous and prejudicial to the interest of revenue ignoring the fact that:-
2 ITA 25/JP/2021_ Puneet Talera Vs PCIT (a) Amount taken from Oswal Electrical Conductor on which interest is paid and amount given to Oswal Cables Pvt. Ltd. on which interest is received was in earlier years and not in the year under consideration. (b) The AO has examined this issue in detail by issue of notice u/s 143(2) dt. 03.07.2017 in as much as the case of assessee was selected for limited scrutiny to examine this issue only and therefore, section 263 cannot be invoked merely because the CIT entertained a different opinion than that of AO.
3. The appellant craves to alter, amend and modify any ground of appeal
4. Necessary cost be awarded to the assessee.”
2. The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic.
The brief facts of the case are that the assessee is Director of M/s Oswal Cables Pvt. Ltd. Return of income was filed on 27/07/2016 declaring total income of Rs.9,93,060/-. The case of assessee was selected for limited scrutiny under CASS. Mandatory notices were issued and served upon the assessee. The AO after making discussion and examination, accepted the income returned by the assessee vide order u/s 143(3) of the Income Tax Act, 1961 (in short, the Act) dated 15/11/2018. By the impugned order, the ld. PCIT set aside the assessment order passed by the AO u/s 143(3) of the Act by holding that 3 ITA 25/JP/2021_ Puneet Talera Vs PCIT the order passed by the AO was erroneous in so far as it is prejudicial to the interests of revenue.
4. Against the order passed by the ld. PCIT, the assessee has preferred the present appeal before the ITAT on the grounds mentioned above.
The main grievance of the assessee relates to challenging the order of the ld. PCIT in passing the order U/s 263 of the Act. In this regard, the ld AR appearing on behalf of the assessee has reiterated the same arguments as were raised before the ld. PCIT and also relied on the written submissions filed before the Bench and the same is reproduced below: 1. It was submitted that the case of the assessee was selected for scrutiny to examine large deduction claimed u/s 57 and assessee was required to furnish details of deduction claimed against income from other sources showing deductibility of such expenses. The same was explained by the assessee along with the required details vide letter dt. 02.06.2018 (PB 5-13) and 04.09.2018 (PB 17-18). Thus, when AO has examined this issue and taken a plausible view, only because Ld. CIT entertained a different view, cannot be a ground for issuing notice u/s 263. In this connection reliance is placed on the following cases:- i. CIT Vs. International Society for Krishna Consciousness (2020) 272 Taxman 534 (Kar.) (HC) ii. Torrent Pharmaceuticals Ltd. Vs. DCIT order dt. 08.08.2018 (Ahd.) (Trib.)
4 ITA 25/JP/2021_ Puneet Talera Vs PCIT iii. PCIT Vs. Om Rudra Priya Holiday Resort Pvt. Ltd. (2019) 184 DTR 378 (Raj.) (HC) iv. CIT Vs. Chemsworth Pvt. Ltd. (2020) 275 Taxman 408 (Kar.) (HC) v. Mudhol Land Holding Company (P) Ltd. Vs. CIT (2014) 110 DTR 209 (Pune) (Trib.) vi. Ambo Agro Products Ltd. Vs. PCIT (2017) 160 DTR 25 (Kol.) (Trib.) 2. It may also be noted that on this issue, AO issued notice u/s 154 dt. 06.03.2020 (PB 19-20) against which assessee filed reply dt. 13.03.2020 (PB 21-23). It appears that AO has not passed any order against this notice. Thus, when this issue was pending u/s 154 before the AO, on the same issue notice u/s 263 issued on 13.03.2021 is bad in law as on the same issue there cannot be two parallel proceedings. For this purpose, reliance is placed on the following cases:- i. CIT Vs. E.I.D. Parry Ltd. (1995) 216 ITR 489 (Mad.) (HC) ii. Berger Paints India Ltd. Vs. ACIT & Ors. (2010) 322 ITR 369 (Cal.) (HC) iii. Sterilite Industries (India) Ltd. Vs. ACIT & Anr. (2011) 79 CCH 453 (Mad.) (HC) iv. Anil Gupta Vs. Assessing Officer (2005) 96 TTJ 798 (Del.) (Trib.) v. Sushil Kumar Jain Vs. ACIT 2016 ITL 3825 (Del.) (Trib.) 3. It may be noted that notice u/s 263 (PB 24-25) was issued for the reason that AO has accepted the explanation of assessee without examining the issue in totality as there are no details about total income declared by M/s Oswal Cables Pvt. Ltd. and M/s Oswal Electrical Conductors and details of shareholders of M/s Oswal Cables Pvt. Ltd. and partner of M/s Oswal Electrical Conductors on record. Though these details are not relevant for the purpose of assessment of the assessee, it has been clarified before the AO that assessee is director of M/s Oswal Cables Pvt. Ltd., M/s Oswal 5 ITA 25/JP/2021_ Puneet Talera Vs PCIT Electrical Conductors is one of its group concerns and the details of directors & shareholders of M/s Oswal Cables Pvt. Ltd. was provided (PB 13). Therefore, it was incorrect on the part of Ld. CIT to allege that assessment proceedings has been completed without examining the issue in totality.
So far as observation of Ld. CIT for treating the order of AO erroneous in so far as it is prejudicial to the interest of revenue for the 3 reasons stated above is concerned, it is submitted that the Ld. CIT himself has accepted that from the ledger account of M/s Oswal Cables Pvt. Ltd. it is evident that opening advance given by the assessee to this company as on 01.04.2015 was Rs.1,98,52,219/- which is out of the opening advance as on 01.04.2015 taken from M/s Oswal Electrical Conductors of Rs.1,92,17,242/-. Thus, the nexus between the advance taken and advance given has been accepted by him. Further when in the previous year the interest paid and interest received has been accepted, there is no reason to take a different view in the year under consideration. The explanation for paying interest @ 16% p.a. to M/s Oswal Electrical Conductors and charging interest @ 9% p.a. from M/s Oswal Cables Pvt. Ltd. was also explained to be because of commercial expediency vide reply dt. 04.09.2018 (PB 17). Whether there is violation of condition of Companies Act or not has no relevance with the computation of total income of assessee or for that matter holding the order of AO erroneous. Further paying interest @ 16% to M/s Oswal Electrical Conductors and charging interest @ 9% from M/s Oswal Cables Pvt. Ltd. has no adverse impact in as much as M/s Oswal Cables Pvt. Ltd. has declared loss in the return even after paying lower interest to the assessee and M/s Oswal Electrical Conductors has declared income in the return after receiving higher interest from the assessee. There is no provision in the law for the tax authority to decide at what rate assessee should charge interest or at what rate it should pay interest as they cannot sit in the arm chair of 6 ITA 25/JP/2021_ Puneet Talera Vs PCIT assessee to direct as to how the assessee should conduct its activities. In this connection reliance is placed on the decision of Hon’ble Supreme Court in case of S.A. Builders 288 ITR 1 and Hero Cycles Pvt. Ltd. vs. CIT 379 ITR 347 where it was held that the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. In view of above, order passed by Ld. CIT u/s 263 is illegal & bad in law and the same be quashed.”
On the other hand, the ld PCIT-DR has vehemently supported the order of the PCIT.
We have heard the ld. Counsels of both the parties and have perused the material placed on record. We have also deliberated upon the decisions cited in the orders passed by the authorities below as well as cited before us and we have also gone through the orders passed by the revenue authorities. As per the facts of the present case, we observed that the assessee is a director in M/s Oswal Cables Pvt. Ltd. He filed his return of income on 27.07.2016 showing income from salary at Rs.24 lacs, income from other sources at (Rs.12,56,942/-) and after claiming deduction u/s 80C at Rs.1,50,000/-, total income was shown at 7 ITA 25/JP/2021_ Puneet Talera Vs PCIT Rs.9,93,060/-. The case of assessee was selected for limited scrutiny vide notice u/s 143(2) dated 03.07.2017 to examine following issue:-
“Whether the deduction against income from other sources has been correctly shown in the return of income” Thereafter, vide notice dated 14.05.2018 issued u/s 142(1), the AO required the assessee to furnish details of deduction claimed against income from other sources and to show the clear nexus between income earned and expenses claimed against such income. The assessee vide reply dated 02.06.2018 which are at page Nos. 5 to 14 of the paper book, has submitted that he has taken unsecured loan of Rs.2 crore from M/s Oswal Electrical Conductors and paid interest thereon of Rs.30,08,138/- @ 16% p.a. This amount is advanced to M/s Oswal Cables Pvt. Ltd. where he is a director. On the amount advanced he has charged interest of Rs.17,46,777/- @ 9% p.a. There is clear nexus between loan advanced and unsecured loans taken, thus, interest expense is allowable u/s 57 against the interest income. The assessee also submitted justification for payment of interest @ 16% p.a. and charging of interest @ 9% p.a. with supportive documents. The AO again vide notice dated 28.08.2018 issued u/s 142(1) of the Act required the assessee to furnish detailed reply on whether the deduction against income from other sources has been correctly shown in the return of 8 ITA 25/JP/2021_ Puneet Talera Vs PCIT income. The same was replied by the assessee vide letter dated 04.09.2018. The AO after examining all these details/ explanation furnished by the assessee accepted the income declared by the assessee u/s 143(3) dated 15.11.2018. Thereafter, the AO issued notice u/s 154 r.w.s. 143(3) of the Act dated 06.03.2020 which are available at page Nos. 19-20 of the paper book, on the ground that assessee has paid interest of Rs.30,08,138/- @ 16% p.a. whereas he has received interest of Rs.17,46,777/- @ 9% p.a. on the same amount. Thus, excess claim of interest paid of Rs.12,61,361/- is disallowable. In response to same assessee file detailed reply vide letter dated 13.03.2020 which are available at page Nos. 21-23 of the paper book.
We observed that the AO has not passed any order against notice issued by him u/s 154 of the Act. However, Ld. PCIT issued show cause notice u/s 263 dated 13.03.2021 on the same issue stating that there are no details about the total income declared by M/s Oswal Cables Pvt. Ltd. and M/s Oswal Electrical Conductors, details of shareholders of M/s Oswal Cables Pvt. Ltd. and partner of M/s Oswal Electrical Conductors on record. Hence, the order passed by AO was prejudicial to the interest of revenue. The Ld. PCIT, however, held that the order passed by AO is erroneous in so far as it is prejudicial to the interest of revenue and therefore, set aside the order by giving the following findings:-
9 ITA 25/JP/2021_ Puneet Talera Vs PCIT (a) The amounts were borrowed from the firm prior to 01.04.2015 and against which the loan was given to the said company prior to 01.04.2015. There is no balance sheet on record and there is no bank statement of the assessee of the relevant period and therefore, direct nexus of amount borrowed from the firm with the amount advance to the company is not evident. Even presuming so, interest expenditure u/s 57 of the Act is allowable if it is expended wholly and exclusively for the purpose of making or earning such income. (b) It is submitted by A/R that since Oswal Cables Pvt. Ltd. can accept loan from Director only, hence, the loan has been provided by the assessee being a Director. In this regard if a loan is given by a Director, he is also required to furnish a declaration as per Companies Act, 2013 to the effect that amount has not been given out of funds acquired by him by borrowing or accepting loan from others. In the present case this condition does not appear to be followed as the assessee has advanced loan to the company out of borrowed funds.
(c) M/s Oswal Cables Pvt. Ltd. has declared loss at Rs.2,72,96,742/- whereas M/s Oswal Electrical Conductors has declared total income at Rs.1,21,826/- and profit as per P&L A/c at Rs.77,417/-. Even after receipt of interest of Rs.30,08,138/- from the assessee, profit has been shown at Rs.77,417/- and taxes are paid on total income of Rs.1,21,826/- only whereas assessee has straight away reduced the total income to the extent of Rs.12,56,942/-. Thus, there does not appear any justification for the transaction under reference as to why funds were routed through assessee. By borrowing funds at 16% and advancing the same at 9% by no rationale establishes that the amounts were borrowed for the purpose of earning any income. The interest differential has led to the lowering of tax liability in the hands of assessee which needs to be disallowed.
From perusal of the record, we observed that the ld. Pr.CIT has dealt with the issue in para No. 5 of his order and for ready reference, we reproduce the same as under:
10 ITA 25/JP/2021_ Puneet Talera Vs PCIT “5. I have gone through the reply filed by the AR as well as material available on record. It is seen that the return of income was filed in this case on 27.07.2016 declaring therein total Income of Rs. 9,93,060/-. Assessee has declared income from salary at Rs. 24,00,000/- and income from other sources at (-) Rs. 12.56,942/-. Besides, interest form SB account at Rs. 1,275/- and interest from IT refund at Rs. 3,144/-. Assessee has shown interest income from Oswal Cables Pvt. Ltd. at Rs. 17,46,777/-. Against total interest income of Rs. 17,51,196/- assessee has claimed interest expenses being interest paid to Oswal Electrical Conductor @ 16% amounting to Rs. 30,08,138/-. Thus net loss of Rs. 12,56,942/-has been declared under the head income from other sources. The said loss has been set off against salary income and total income is declared after claiming deduction under Chapter VIA at Rs. 9,93,060/-. It is seen from the ledger account of Oswal Cables Pvt. Ltd. that the amount advanced to the said company by the assessee is appearing as opening balance of Rs. 1,98,52,219/- as on 01.04.2015 and during the year further amounts aggregating to Rs. 24,14,000/- were advanced and there were repayments from the said company aggregating to Rs. 47,25,000/-. After crediting interest of Rs. 17,46,777/- the closing balance of the account is shown at Rs. 1,91,13,318/-. The ledger of Oswal Electrical Conductor shows that the opening credit balance of the said firm was at Rs. 1,92,17,242/- as on 01.04.2015 which after re-payment of Rs. 19,00,000/- & other credit entries of interest etc. closing balance is increased to Rs. 2,03,57,717/-. It thus appears that the amounts were borrowed from the firm prior to 01.04.2015 and against which the loan was given to the said company prior to 01.04.2015. There is no balance sheet on record and there is no Bank statement of the assessee of the relevant period and therefore direct nexus of amount borrowed from the firm with the amount advance to the company is not evident. Even presuming so, interest 11 ITA 25/JP/2021_ Puneet Talera Vs PCIT expenditure u/s 57 of the Act is allowable if it is expended wholly and exclusively for the purpose of making or earning such income. It is submitted by the AR that since Oswal Cables Pvt. Ltd. can accept loan from Director only, hence, the loan has been provided by the assessee being a Director. In this regard if a loan is given by a Director, he is also required to furnish a declaration as per Companies Act, 2013, to the effect that amount has not been given out of funds acquired by him by borrowing or accepting loans from others. In the present case this condition does not appear to be followed as the assessee has advanced loan to the company out of borrowed funds. Admittedly Oswal Cables Pvt. Ltd. is having losses and in the year under reference loss is declared at Rs. 2,72,96,742/- whereas Oswal Electrical Conductor has declared total income at Rs. 1,21,826/- only and profit as per P&L account at Rs. 77,417/- only. It is, thus, evident that even after receipt of interest of Rs. 30,08,138/- from the assessee the profit as per P&L account is shown at Rs. 77,417/- and taxes are paid on total income of Rs. 1,21,826/- only by the firm M/s Oswal Electrical Conductor. Whereas, assessee has straight way reduced the •total income to the extent of Rs. 12,56,942/-. Thus, there does not appear any justification for the transaction under reference, as to why funds were routed through assessee. By borrowing funds at 16% and advancing the same at 9% by no rationale establishes that the amounts were borrowed for the purpose of earning any income. Admittedly interest differential has lead to the lowering of tax liability in the hand of the assessee. Such type of arrangement which is devoid of any sound business rationale cannot be accepted on face value. The interest differential therefore needs to be disallowed. Since, there is no balance sheet/ Bank statement of the assessee for the relevant period and utilization of the funds borrowed from Oswal Electrical Conductor are not discernible from the details available on record, AO shall carry 12 ITA 25/JP/2021_ Puneet Talera Vs PCIT out this exercise and quantify the interest allowable/disallowable accordingly.”
We observed from perusal of the impugned order that the assessee has declared income from salary at Rs. 24,00,000/- and income from other sources at (-) Rs. 12,56,942/-. Besides, interest form SB account at Rs. 1,275/- and interest from IT refund at Rs. 3,144/-. Assessee has shown interest income from Oswal Cables Pvt. Ltd. at Rs. 17,46,777/-. Against total interest income of Rs. 17,51,196/- assessee has claimed interest expenses being interest paid to Oswal Electrical Conductor @ 16% amounting to Rs. 30,08,138/-. Thus net loss of Rs. 12,56,942/- has been declared under the head income from other sources. The said loss has been set off against salary income and total income is declared after claiming deduction under Chapter VIA at Rs. 9,93,060/-. It is seen from the ledger account of Oswal Cables Pvt. Ltd. that the amount advanced to the said company by the assessee is appearing as opening balance of Rs. 1,98,52,219/- as on 01.04.2015 and during the year further amounts aggregating to Rs. 24,14,000/- were advanced and there were repayments from the said company aggregating to Rs. 47,25,000/-. After crediting interest of Rs. 17,46,777/- the closing balance of the account is shown at Rs. 1,91,13,318/-. The ledger of Oswal Electrical Conductor shows that the opening credit balance of the said firm was at Rs. 1,92,17,242/- as on 01.04.2015 which after re-payment of Rs. 13 ITA 25/JP/2021_ Puneet Talera Vs PCIT 19,00,000/- and other credit entries of interest etc. closing balance is increased to Rs. 2,03,57,717/-. It thus appears that the amounts were borrowed from the firm prior to 01.04.2015 and against which the loan was given to the said company prior to 01.04.2015. There is no balance sheet on record and there is no Bank statement of the assessee of the relevant period and therefore direct nexus of amount borrowed from the firm with the amount advance to the company is not evident. Even presuming so, interest expenditure u/s 57 of the Act is allowable if it is expended wholly and exclusively for the purpose of making or earning such income. It was submitted by the ld. AR that since Oswal Cables Pvt. Ltd. can accept loan from Director only, hence, the loan has been provided by the assessee being a Director. In this regard if a loan is given by a Director, he is also required to furnish a declaration as per Companies Act, 2013 to the effect that amount has not been given out of funds acquired by him by borrowing or accepting loans from others. In the present case this condition does not appear to be followed as the assessee has advanced loan to the company out of borrowed funds.
Admittedly, Oswal Cables Pvt. Ltd. is having losses and in the year under reference loss is declared at Rs. 2,72,96,742/- whereas Oswal Electrical Conductor has declared total income at Rs. 1,21,826/- 14 ITA 25/JP/2021_ Puneet Talera Vs PCIT only and profit as per P&L account at Rs. 77,417/- only. It is, thus, evident that even after receipt of interest of Rs. 30,08,138/- from the assessee the profit as per P&L account is shown at Rs. 77,417/- and taxes are paid on total income of Rs. 1,21,826/- only by the firm M/s Oswal Electrical Conductor. Whereas, assessee has straight way reduced the total income to the extent of Rs. 12,56,942/-. Thus, there does not appear any justification for the transaction under reference, as to why funds were routed through assessee. By borrowing funds at 16% and advancing the same at 9% by no rationale establishes that the amounts were borrowed for the purpose of earning any income. Admittedly interest differential has led to the lowering of tax liability in the hand of the assessee. Such type of arrangement which is devoid of any sound business rationale cannot be accepted on face value. The interest differential therefore needs to be disallowed. Since, there is no balance sheet/ Bank statement of the assessee for the relevant period and utilization of the funds borrowed from Oswal Electrical Conductor are not discernible from the details available on record. We draw strength from the decision as relied by the ld. Pr.CIT in the case of M/s Gee Vee Enterprises 99 ITR 375 (Delhi High Court) wherein it was held by the Hon’ble Court that the Assessing officer (AO) is not only an adjudicator but also an investigator, and failure of the AO to conduct the 15 ITA 25/JP/2021_ Puneet Talera Vs PCIT required inquiring and accepting the statement of the assessee without due verification renders the order erroneous as well as prejudicial to the interests of the revenue. Absence of proper inquiring by the AO would render the assessment order erroneous as well as prejudicial to the interest of revenue. We also draw strength from the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs CIT 243 ITR 83, wherein it was held that an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category falls order passed without applying the principles of natural justice or without application of mind. In the case of CIT vs Jawahar Bhattacharjee 342 ITR 0074 (Gauhati High Court)in which the appeal was allowed and held that the Commissioner had clearly concluded that the order was erroneous and pre-judicial to the interests of revenue and called for exercise of revisional jurisdiction showing that the order of the AO suffered from non-application of mind.
From perusal of the assessment order, we observed that the A.O. has simply accepted the returned income filed by the assessee mentioning the fact that “after discussion and examination, income of the assessee for the A.Y. 2016-17 in the status of individual is assessed read with Section 143(3) of the Income Tax Act, 1961 at Rs.
16 ITA 25/JP/2021_ Puneet Talera Vs PCIT 9,93,060/-.” The order passed by the A.O. was not in accordance with law and it is prejudicial to the Revenue. The submissions of the ld. AR and the case laws relied by him is not found tenable at the facts of the present case. Therefore, considering the totality of facts and circumstances as well judicial pronouncements referred above, we found no error or illegality in the order passed by the ld. Pr.CIT U/s 263 of the Act and we uphold the same.
In the result, this appeal of the assessee is dismissed. Order pronounced in the open court on 06th September, 2021.
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