STHAPTHYA BUILDCON PVT. LTD.,,AHMEDABAD vs. THE DCIT, WARD-4(1)(1),, AHMEDABAD

आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Pr. Commissioner of Income Tax-4, Ahmedabad dated 16/03/2018 ( in short “Ld.CIT”) arising in the matter of assessment order passed under s. 263 of the Income Tax Act, 1961 (here-in- after referred to as "the Act") dt. 11/03/2016 relevant to the Assessment Year 2013-2014.

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The assessee has raised the following ground of appeal.

3.1 The AO accordingly completed the assessment u/s 143(3) of the Act, at a total income of Rs. 68,19,850.00 under normal computation of income and the book profit u/s 115JB of the Act was determined at Rs. 84,74,996.00.

3.2 Before coming to the specific issue raised under section 263 of the Act, it is pertinent to note the brief history of the facts of the case. The assessee in the earlier years was a partnership firm which was subsequently converted

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into private limited company. The erstwhile firm in the earlier year has paid a sum of Rs. 41,05,08,000.00 to the official liquidator in connection with the purchase of land under auction. But, such purchase deal of the assessee could not materialize due to some dispute which travelled right up to the Hon’ble Apex court. As such, the Hon’ble Apex court directed the official liquidator to return the amount to the assessee along with the amount of interest. Thus The assessee (now a private limited company) has received the amount of interest for Rs. 15,25,79,596.00 in the year under consideration in pursuance to the direction of the Hon’ble Apex Court. The assessee has shown impugned amount of interest as business income and claimed certain expenses against such interest income. These expenses are as follows:

(i) Project Development Expenses Rs. 912.69 Lacs (ii) Interest Expenses Rs. 525.04 Lacs (iii) Other Expenses Rs. 38.38 Lacs

3.3 Now, coming to the issue on hand, the Ld. PCIT noticed that the order framed by the AO u/s 143(3) of the Act was erroneous and prejudicial to the interest of revenue by observing that there was no commercial activity carried out by the assessee during the year under consideration. Therefore the expenses claimed against the impugned interest income needs to be capitalized according to the provision of section 37 of the Act. As such, the learned PCIT was also of the view that such expenses cannot be claimed as deduction against the impugned interest income as there was no direct nexus between the so-called interest income viz a viz the expenses as discussed.

3.4 As per the ld. PCIT, the AO while framing the assessment order u/s 143(3) of the Act did not consider the above issues in his assessment order and also did not conduct the proper enquiries. Thus the Ld. PCIT accordingly issued notice u/s 263 of the Act to the assessee.

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Interest Rs.6,84,59,951/- Legal & Professional Fees Rs.1,96,26,775/- Travelling Expenses Rs.21,38,161/- Administrative Expenses Rs.10,44,068/- Rs.9,12,68,955/-

4.1 The assessee also claimed that such expenses were incurred against the impugned interest income and this fact was duly brought to the notice of the AO during the assessment proceedings.

4.2 The assessee also submitted that the amount given to the official liquidator was out of the borrowed fund on which the interest expense was incurred and shown as the pre-operative expenditure. Therefore, the impugned interest expenses have direct nexus against the impugned interest income.

4.3 As the matter was under the litigation, therefore the expenses were incurred on account of advocate fees, travelling and other administrative expenditure.

4.4 In view of the above, the assessee claimed that all the expenses were incurred in connection with such interest income and therefore the same is eligible for deduction under section 37 of the Act.

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Being aggrieved by the order of the Ld. PCIT, the assessee is in appeal before us.

(1) Earlier there is an order u/s 143(3) dated 11-03-2016, PB Pg. 16 to 19 wherein the addition in reference to loans and advances made but no interest charged and therefore notional interest disallowed. (2) Therefore, there is notice u/s 263 dated 06-03-2018 wherein, in Para 2 there is reference of ledger account filed and Profit & loss account filed. In this SCN, it said that there is various expenditure debited which is set off against interest income arid therefore the same is not allowable and therefore the earlier order passed is subjected to action u/s 263. In a SCN, there is no such allegation made that manner in which the order passed by the AO u/s 143(3) earlier dated 11- 032016 is erroneous. In this notice it is simply stated that, there is "under assessment" and therefore, the earlier order passed is erroneous. How the order is erroneous has not been brought to the notice. (3) The assessee has objected to CIT vide later dated 12-03-2019, at Pg. 57-59 wherein reference was given to AO notice u/s 142(1) dated 14-12-2015 at PB-I, Pg. 5 an also dated 17-12-2015 reply at PB-II Pg. 1-2. The reference was also given to reply dated 01-03-2016 at PB-1 Pg. 8-9. The copy of AO letter dated 14-09-2015 as per PB-1 Pg. 1-4 and Para20,32 as well as query raised by AO in letter dated 14- 12-2015 at PB-I Pg. 5 Para 2(iii). The reply of the assessee dated 22-12-2015 at PB-I Pg. 6-7 in reference to AO SCN dated 14-12-2015.

3.1 The notice dated 14-09-2015, relevant PB page 3, para 20, wherein, the assessee was requested to submit, "interest bearing fund diverted for non- bearing purposes and again at PB page 4, para 33, specific query was

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raised in reference to the Auditor's notes (PB Page 51) regarding payment made and nature of transaction. Therefore, the inquiry has been made.

3.2 Again, notice dated 14-12-2015 at PB page 5, wherein the specific query was raised in para 2(i) and also para 2(iii) wherein the details of project development expenditure has been asked for. The reply dated 17-12- 2015 filed on 22-12-2015 is placed on record at PB Page 6-7 wherein, all the details required has been submitted from para 1 to 4 and more particularly para 3 and 4. 3.3 One more submission dated 01-03-2016 has also been submitted as per page 8-9 wherein, based on Auditor's notes (PB Page 51), various details has been submitted and thereafter, the AO has passed the order u/s 143(3) which is dated 11-03-2016 as enclosed at page 16 to 19. Ongoing through the same order, again the disallowance of interest expenditure has also been made which itself shows that the assessing officer has applied his mind to allow the rest of the interest which is obviously pertaining to the business of the assessee. (4) The reference can be given to disclosure made by statutory auditor at PB Pg. 50, Para 10, and also PB Pg. 51, Notes 12(i) and 12(ii). (5) The details bifurcation of project development expenditure was also filed before AO as per PB-I Pg. 60, 66. Attention is also drawn to submission dated 17- 12-2015 to AO at PB-II Pg. 1-2 wherein the nature of project development expenditure is as per chart Pg. 25 and supporting ledger account from Pg. 26-36. In fact. CIT has given reference to this ledger file and also Profit & Loss account in his SCN dated 06-03-2018 as reproduced by him in the order dated 16-03-2018 Pg. 2-3. Therefore, the same material he wants to use to apply section 263. (6) Regarding "Change of Opinion" and earlier order after application of mind, we relied upon the following judgments.

(a) Hitendra Nanavati, Ahmedabad ITAT in 135 TTJ 17, regarding change of opinion, various decisions including Gabrial India and others has been referred in para 2.1 as well as in para 3 and 4.2. the difference between "lack of inquiry", "inadequate inquiry" has been discussed in para 4.3 and Malabar Industrial has been discussed in para 4.4 along with R. K. Construction, Gujarat 313 ITR 65 has also been referred in para 4.6, Arvind Jewelers 259 ITR 502 (Guj.) at para 4.7. The finding is as per para 5 of the judgment. (b) Rajesh Chandrakant Shah HUF, Pune ITAT, 102 Taxmann.com 428, wherein, it is held that the provision of sec. 263 cannot be invoked merely on asking of AO or proposal initiate by AO to substitute his original opinion and sec. 263 cannot be allowed to be misused by AO to super impose their opinion different from one taken at the time of the original assessment The

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various decision cited is as per para 4.1 and finding is as per para 7 and onwards. (c) CIT v/s. Kohinoor Foods Ltd. 414 ITR 249, Delhi High Court as per relevant Pg. 255 in which the decision of, DG Housing 343 com 369 ITR 14(DEL), Globas Info com 369 ITR 14(DEL) has been referred and followed. (d) Narayan Tatu Rane, Mumbai ITAT, 70 Taxmann.com 227 in reference to "Explanation 2(a}", even after this explanation, it is held that no fishing or roving inquiry is permitted which is as per para 12 of the judgment. (e) Gujarat High Court, Amit Corporation 21 Taxmann.com 64, AO has already considered the issue at large after raising the query and therefore, it is held that there is no scope of applying sec. 263. (f) Smt. Manita, Delhi ITAT in ITA No. 3432/2019 dated 12-07-2019, relevant para 6, wherein decision of Sunbeam Auto Ltd. 332 ITR 167 (Del) and further stated that "Explanation 2" cannot be invoked in reference to inadequate inquiry and decision of D. G. Housing 343 ITR 329 (Del), finding is as per para 6 of the judgment and at page 10 of the judgement, it is held that "Explanation 2" is not applicable to the facts of the case. (g) Gujarat High Court in Aryan Arcade, 84 Taxmann.com 293, the contention is as per para 4 of the judgement and finding is as per para 10 wherein, the decision of Gujarat High Court in Rayon Silk 221 ITR 155, it is held that merely because the order of the assessment does not discus the issue at length, it would not mean that no inquiry was made. Finding is as per para 13 of the judgment. (h) The decision of Torrent Pharmaceuticals Ltd., Ahmedabad ITAT reported in 173 ITD 130 has also taken similar view regarding change of opinion.

Therefore, the action taken v/s 263 is itself bad in law and liable to be quashed.

6.1 The Ld. AR in view of the above submitted that the order passed by the AO cannot be held as erroneous insofar prejudicial to the interest of Revenue on account of non-verification of the facts stated above.

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judgment of Hon’ble Karnataka High Court in the case of CIT Vs. Namdari Seeds reported in 203 taxman 421.

8.1 However, we note that the AO during the assessment proceedings has required the assessee to furnish the details of the expenses claimed against the impugned interest income in the notice issued under section 142(1) of the Act. The relevant extract of the notice issued under section 142(1) of the Act is reproduced as under:

iii) Pl.furnish the details of following treated as project development expenses. a. Interest (Finance charges) b. Legal & Professional Charges alongwith TDS details c. Travelling expenses. d. Administrative expenses. iv) Please furnish the details of interest and Finance charges of Rs.5,25,04,447/- and Other expenses of Rs.38,37,556/-

8.2 We also find that the assessee in response to the above notice has made the submissions as detailed under:

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Travelling expenses Rs.21,38,161/- Administrative expenses Rs.10,44,068

8.3 In view of the above, we hold that the assessment order was framed under section 143(3) of the Act after due verification by the AO. Accordingly, we are of the view that the order of the AO cannot be held as erroneous insofar prejudicial to the interest of Revenue on account of non-verification of the facts as stated above.

8.4 In holding so, we draw support and guidance from the judgment of the Hon’ble Supreme court in the case of Malabar Industrial Co Ltd Vs. CIT reported in 109 Taxman 66 wherein it was held as under: “In the instant case, the Commissioner noted that the ITO passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the ITO failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appeared that the resolution passed by the board of the appellant-company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the ITO was erroneous was irresistible. Therefore, the High Court had rightly held that the exercise of the jurisdiction by the Commissioner under section 263(1) was justified.”

8.5 We also place our reliance on the judgment of Hon’ble Jurisdictional High Court in the case of CIT Vs. Amit Corporation reported in 21 taxmann.com 64 wherein it was held as under: 5. We are of the opinion that the Tribunal committed no error. When, during the course of framing of the assessment, the Assessing Officer had access to all the records of the assessee, after pursuing such record the Assessing Officer framed the assessment, such assessment could not have been re-opened in exercise of revision power under Section 263 of the Act for making further inquiries. In the facts of the case, in our opinion, Tribunal rightly interfered with such order. No question of law arises. Tax Appeal is, therefore, dismissed.

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8.6 We also place our reliance on the judgment of Hon’ble Jurisdictional High Court in the case of CIT Vs. Arvind Jewellers reported in 259 ITR 502 wherein it was held as under: “ it was the finding of fact given by the Tribunal that the assessee had produced relevant material and offered explanation in pursuance of the notices issued under section 142(1) as well as section 143(2) and after considering those materials and explanation, the ITO had come to a definite conclusion. The Commissioner did not agree with the conclusion reached by the ITO. Section 263 did not empower him to take action on these facts to arrive at the conclusion that the order passed by the ITO was erroneous and prejudicial to the interest of the revenue. Since the material was there on record and the said material was considered by the ITO and a particular view was taken, the mere fact that different view could be taken, should not be the basis for an action under section 263 and it could not be held to be justified.”

8.7 We also note that the explanation 2 to section 263 of the Act inserted by the Finance Act, 2015 authorizing the Ld. PCIT to hold the order of the AO as erroneous insofar prejudicial to the interest of Revenue even enquiries were made by the AO but not in the manner in which the same should have been made. In this regard, we find that the case before us pertains to the A.Y. 2012-13 and impugned explanation to Section 263 of the Act was applicable w.e.f. 01.06.2015. Therefore, in our considered view the provision as specified in explanation 2 to section 263 of the Act cannot be applied for the year under consideration. In holding so, we find support and guidance from the order of this Tribunal in the case of torrent pharmaceutical Ltd. Vs DCIT reported in 97 taxmann.com 671 wherein it was observed as under: “9. The Pr.CIT has drawn support from newly inserted Explanation 2 below Section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue. It is on this basis, the assessment order passed by the AO under section 143(3) of the Act has been set aside with a direction to the AO to pass a fresh assessment order. It will be therefore imperative to dwell upon the impact of Explanation 2 for the purposes of Section 263 of the Act. 9.1 The aim and object of introduction of aforesaid Explanation by Finance Act, 2015 was explained in CBDT Circular No. 19/2015 [F.NO.142/14/2015-TPL], Dated 27-11-2015 which is reproduced hereunder:

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'53. Revision of order that is erroneous in so far as it is prejudicial to the interests of revenue. 53.1 The provisions contained in sub-section (1) of section 263 of the Income-tax Act, before amendment by the Act, provided that if the Principal Commissioner or Commissioner considers that any order passed 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 an enquiry pass an order modifying the assessment made by the Assessing Officer or cancelling the assessment and directing fresh assessment. 53.2 The interpretation of expression "erroneous in so far as it is prejudicial to the interests of the revenue" has been a contentious one. In order to provide clarity on the issue, section 263 of the Income-tax Act has been amended to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner.— (a) the order is passed without making inquiries or verification which, should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. 53.3 Applicability: This amendment has taken effect from 1st day of June, 2015.'”

8.8 Besides the above, we also find that the impugned explanation 2 to section 263 of the Act cannot over rule the law interpreted by various courts. The courts as discussed above have held that the initiation of proceedings under explanation 2 to section 263 of the Act on the ground of non-enquiry is not sustainable in the event when the inquiry was conducted by the AO during the assessment proceedings though may be inadequate. In this regard, we find support and guidance from the order of Mumbai Tribunal in the case of Narayan Tatu Rane vs. ITO reported in 70 taxmann.com 227 wherein it was held as under: “19. The law interpreted by the High Courts makes it clear that the Ld Pr. CIT, before holding an order to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the assessing officer is erroneous, the Ld Pr. CIT should have shown that the view taken by the AO is unsustainable in law. In the instant case, the Ld Pr. CIT has failed to do so and has simply expressed the view that the assessing officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the Ld

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Pr. CIT is not in accordance with the mandate of the provisions of sec. 263 of the Act. The Ld Pr. CIT has taken support of the newly inserted Explanation 2(a) to sec. 263 of the Act. Even though there is a doubt as to whether the said explanation, which was inserted by Finance Act 2015 w.e.f. 1.4.2015, would be applicable to the year under consideration, yet we are of the view that the said Explanation cannot be said to have over ridden the law interpreted by Hon'ble Delhi High Court, referred above. If that be the case, then the Ld Pr. CIT can find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law and order for revision. He can also force the AO to conduct the enquiries in the manner preferred by Ld Pr. CIT, thus prejudicing the independent application of mind of the AO. Definitely, that could not be the intention of the legislature in inserting Explanation 2 to sec. 263 of the Act, since it would lead to unending litigations and there would not be any point of finality in the legal proceedings. The Hon'ble Supreme Court has held in the case of Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 that there must be a point of finality in all legal proceedings and the stale issues should not be reactivated beyond a particular stage and the lapse of time must induce repose in and set at rest judicial and quasi- judicial controversies as it must in other spheres of human activity. 20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.”

8.9 Similarly, we also note that the case law referred by the ld. DR in the case of Namdari seeds(supra) is not applicable to the present facts of the case as it is non-jurisdictional High Court whereas the issue is covered in favor of the assessee by the Jurisdictional High Court as discussed above.

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Order pronounced in the Court on 25/11/2019 at Ahmedabad.

-Sd- -Sd- (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 25/11/2019 manish