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Facts
The assessee, engaged in theme-based entertainment destinations, filed a return of Nil income for AY 2021-22. The assessment was completed accepting the returned loss. The PCIT invoked Section 263, setting aside the assessment order, alleging it was erroneous and prejudicial to revenue.
Held
The Tribunal held that the PCIT erred in invoking Section 263. The Assessing Officer had conducted necessary inquiries, and the issues raised by the PCIT were either not applicable to the assessment year or based on a misinterpretation of facts.
Key Issues
Whether the PCIT correctly invoked Section 263 to revise an assessment order when the AO had made due inquiries, and the issues raised were factually incorrect or not applicable to the assessment year.
Sections Cited
143(3), 144B, 263, 142(1)
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Income Tax Appellate Tribunal, MUMBAI BENCH “C” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
This appeal by the assessee is directed against a revisional order dated 03.02.2025 passed by the Learned Principal Commissioner of Income-tax, Mumbai-8 [in short ‗the Ld. PCIT‘], wherein he has set aside the assessment order dated 20.12.2022 passed by the Assessing Officer u/s 143(3) of the Income-tax Act, 1961 (in short ‗the Act‘). The grounds raised by the assessee are reproduced as under:
1 & 2. PCIT erred in passing the order u/s 263 of the Act which is bad in law, illegal, ultra-virus, in excess of and/or in want of jurisdiction and otherwise void.
3. The PCIT erred in holding that the Appellant have made investment N.A. in shares of subsidiaries aggregating to Rs.83,37,62,000/- and hence the interest expense of Rs. 162,17,46,000/- incurred on borrowed fund should have been apportioned to the investments made which works out to the extent of Rs. 12,54,88,000/- the omission by the AO had resulted into under assessment of income.
4. The PCIT erred in holding that the AO have not verified the "Provision for Impairment of Investment of Rs.2280.54 lakhs' and "Provision for Expected Credit Loss on Loans and Advances of Rs. 1215.86 lakhs' which aspect requires verification and disallowance as per law and thereby directed the AO to verify and examine the above issues and pass an afresh assessment order u/s 143(3) of the Act.
Briefly stated, the facts of the case are that the assessee is engaged in the business of development and operation of theme- based entertainment destinations across India, including theme parks, water parks, and other allied activities. For the relevant assessment year, the assessee filed its return of income on 14.03.2022, declaring a total income of ₹Nil, being a case of loss. The assessment was completed under Section 143(3) read with Section 144B of the Income-tax Act, 1961 (hereinafter ―the Act‖) on 20.12.2022, wherein the returned loss of ₹91,99,48,415/- was accepted as such. Subsequently, the Learned Principal Commissioner of Income-Tax (Ld. PCIT), in exercise of powers under Section 263 of the Act, called for the assessment record and, upon examination, observed certain discrepancies. The Ld. PCIT noted that the assessee‘s shareholders‘ funds were reflected in the negative at ₹607.55 crores, while borrowings were reported to the extent of ₹1,077.51 crores. Against such borrowings, the assessee had claimed interest expenditure aggregating to ₹162.17 crores. Further examination revealed that the assessee had made investments amounting to ₹83.36 crores in the subsidiary company Walk Water Properties Pvt. Ltd., and ₹1 lakh in Blue Heaven Entertainment Pvt. Ltd., aggregating to ₹83.37 crores. According to the Ld. PCIT, such investments, being in subsidiaries engaged in real estate activity, were not in furtherance of the assessee‘s core business. It was alleged that these investments were made out of borrowed funds, and accordingly, interest attributable to the said investments should have been disallowed proportionately. On this basis, the Ld. PCIT computed the interest relatable to such investments at ₹12.54 crores and issued a show cause notice under Section 263 of the Act, alleging that the Assessing Officer‘s failure to make this disallowance had resulted in an underassessment of income to that extent.
2.1 In addition, the Ld. PCIT observed that the assessee had made a provision for impairment of investments to the tune of ₹2,280.54 lakhs and a further provision of ₹1,215.86 lakhs towards expected credit loss in respect of loans advanced to related parties. According to the Ld. PCIT, these matters had not been subjected to any scrutiny or inquiry by the Assessing Officer during the course of assessment proceedings.
2.2 In response, the assessee submitted detailed explanations before the Ld. PCIT. It was contended that the Assessing Officer had duly examined the source and purpose of the investments made in the aforementioned subsidiaries, and that the same were not diversions of borrowed capital. It was further clarified that the provisions for impairment and credit losses were not debited to the Profit & Loss Account during the year under consideration, but in the prior assessment year, and thus no disallowance could be contemplated in the current year.
2.3 Despite these submissions, the Ld. PCIT rejected the contentions of the assessee and proceeded to hold that the assessment order was erroneous in so far as it was prejudicial to the interest of the Revenue. Consequently, the Ld. PCIT set aside the original assessment order and directed the Assessing Officer to frame a fresh assessment after carrying out proper inquiries on the aforesaid issues. The relevant part of the Ld. PCIT is reproduced as under:
“8. For invoking provisions of section 263 of the Act, there are twin conditions to be satisfied i.e. i) order passed by the Assessing Officer must be erroneous and (ii) the error must be such that it is prejudicial to the interest of revenue. In the instant case, the assessee has submitted documentary evidences but no genuine details to support its claim with regard to the interest expenses on borrowed funds shall be apportioned to the investments. It is pertinent to mention here that the assessee had made investment in subsidiary Walk Water properties Pvt. Ltd. for Rs. 106, 17, 16,000/- and made provision for impairment of investment for Rs.22,80,54,000/- resulting in net investments of Rs.83,36,62,000/-. Moreover, it was noticed from the balance sheet the assessee had given loans to the related parties for Rs. 12,15,86000/- and made expected credit loss to the extent of Rs. 12, 15,86,000/-. Hence in view of the reasons discussed as above, these interest expenses are to be disallowed and added to the total income of the assessee for the relevant assessment year. The judicial pronouncements relied upon by the assessee are not applicable to the facts of the case given the fact that the AO has not considered the above issues in its entirety and has not brought material on record. As stated earlier the assessment order is brief and cryptic and failure to examine relevant issues defeats the reasons for which the case was selected for scrutiny. On vital issues forming the reasons for CASS scrutiny such as apportionment of interest on investments, loans to related parties, provisions for impairment of expenses and expected credit loss the assessment order is silent without any relevant material on record.
Considering the facts and circumstance of the case, the assessment order passed u/s. 143(3) r.w.s. 144B of the Income-tax Act, 1961 dated 20.12.2022 is hereby set aside on the above issues outlined relating to interest expenses on borrowed funds to be apportioned to the investments and impairment of investments and expected credit loss with a direction to pass fresh order in accordance with the law and after making necessary enquiries and providing adequate opportunity to the assessee in accordance with the principles of natural justice.”
We have heard the rival submissions advanced by the learned counsel for the parties and perused the materials placed on record, including the Paper Book comprising pages 1 to 206, filed on behalf of the assessee. The challenge in the present matter pertains to the validity of the revisional order passed by the Ld. PCIT under Section 263 of the Act, whereby the Ld. PCIT held the assessment order passed by the Assessing Officer under Section 143(3) r/w Section 144B of the Act as erroneous in so far as it is prejudicial to the interests of the Revenue. The impugned revision order is based on two grounds:
(i) That the investment made by the assessee in its subsidiaries—namely Walk Water Properties Pvt. Ltd. (₹83,36,62,000/-) and Blue Heaven Entertainment Pvt. Ltd. (₹1,00,000/-)—was sourced from borrowed funds, and since the subsidiaries were engaged in real estate activities, the said investments were not for the purpose of the assessee‘s business. Consequently, a proportionate disallowance of interest expenses to the extent of ₹12,58,88,000/- was warranted but omitted by the Assessing Officer.
(ii) That the Assessing Officer failed to make any inquiry with regard to the provision for impairment of investment amounting to ₹2,280.54 lakhs and provision for expected credit loss of ₹1,215.86 lakhs in respect of loans extended to related parties.
3.1 On the First Issue, upon examination of the records and the Paper Book, we find that the Assessing Officer had, in fact, conducted inquiries during the assessment proceedings. The Assessing Officer, by way of notice dated 05.08.2022 issued under Section 142(1) of the Act (at pages 52–54 of the Paper Book), sought detailed clarifications from the assessee, including information on the nature of business, source of income, details of borrowings and interest payments, investment in unlisted equities, and the source thereof. In response, the assessee furnished detailed submissions (Paper Book pages 55–57), disclosing that the investments in the aforementioned subsidiaries were made in earlier years, and not during the assessment year under consideration. Additionally, the assessee produced sanction letters for loans (Paper Book pages 61– 132) and explained that the investment in Walk Water Properties Pvt. Ltd. was effected through a conveyance deed dated 29.09.2014, whereby surplus land was transferred to the wholly owned subsidiary for a consideration of ₹10,575.66 lakhs, which was discharged by way of share allotment. The conveyance deed substantiating this transaction is placed at pages 163–186 of the Paper Book. From the above, it is evident that the said investment was not made from borrowed funds but through transfer of a capital asset, and hence, the allegation that borrowed funds were diverted for non-business purposes does not hold. In this context, we are guided by the judgment of the Hon‘ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [(2000) 243 ITR 83 (SC)], which held that for an order to be revised under Section 263, it must be both ―erroneous‖ and ―prejudicial to the interests of the Revenue.‖ A mere difference of opinion or failure to express reasoning in a particular manner does not meet the statutory threshold. In the present case, the Assessing Officer did make due inquiry and considered the source and nature of investment. The Ld. PCIT‘s finding that the assessment was erroneous on account of non- inquiry is factually untenable and legally unsustainable.
4. As regards the Second Issue of provision for impairment of investments and expected credit loss, the Ld. PCIT alleged that the Assessing Officer failed to inquire into the same. However, the assessee has demonstrated by reference to its audited balance sheet for the year ending 31.03.2020 (Paper Book page 193), that both these provisions were recognized in the immediately preceding assessment year (A.Y. 2020–21) and not during the year under consideration. This is further corroborated by the profit and loss statement (Paper Book page 32) and notes to accounts (Paper Book pages 25–27), which reflect that no such expenditure was claimed in the current assessment year. Therefore, the Assessing Officer had no occasion or reason to examine these issues for the year in question. When an expenditure is not claimed and does not impact the computation of income for the year under assessment, the absence of inquiry cannot ipso facto render the assessment erroneous or prejudicial. As held by the Hon‘ble Delhi High Court in CIT v. Sunbeam Auto Ltd. [(2011) 332 ITR 167 (Del)], an assessment order cannot be revised under Section 263 merely because it is not elaborate in its reasoning, if the Assessing Officer has applied his mind to the issue at hand.
In light of the above analysis, we are of the considered view that the conditions precedent for invoking jurisdiction under Section 263 of the Act—namely, that the assessment order must be both erroneous and prejudicial to the interest of the Revenue—are not satisfied in the present case. The allegations of the Ld. PCIT are contrary to the factual matrix and not supported by any legal precedent. Accordingly, the impugned revisional order passed by the Ld. PCIT under Section 263 of the Act is hereby quashed and set aside. The grounds raised by the assessee stand allowed.
In the result, the appeal of the assessee is allowed for statistical purposes.