M/S ARENA ENTERPRISES ,MUMBAI vs. PRINCIPLE COMMISSIONER OF INCOME TAX, , MUMBAI-17

Ld. Pr.CIT is of the opinion that Assessing Officer did not ask for bifurcation of expenses added as expenses considered separately to find

(A.Y: 2017-18) M/s. Arena Enterprise out whether all expenses related to house property have been added including interest and finance charges which have been reduced while computing income from house property. According to him, it appears that some of the expenses related to house property, leaving a clear possibility that some of the expenses related to house property might have been claimed in profit and loss account and not added back. The Assessing Officer completed the assessment allowing claim made by the assessee.

(A.Y: 2017-18) M/s. Arena Enterprise 6. In response, assessee filed detailed submissions to the above said notice. For the sake of clarity, it is reproduced below: - “1. Disallowance of amount of Rs. 14,20,62,285/-. A. It is mentioned in the notice that the learned AO did not ask and verify for the voluntary disallowance of Rs. 14,26,67,2857- in the Computation of Income. In this regard, we invite your attention to the Computation of Income wherein disallowance is made under the head Income from Business of Rs. 14,26,67,285/-. Details of this voluntary disallowance, as required, are now filed herewith. On perusal of same your good self will find that these expenses were pertaining to Income From House Property and hence, were disallowed under the head Business Income and the same were claimed under the Income From House Property. Thus, the assessee has rightly claimed the following deduction from Income From House Property.

2. Interest on construction loan of Rs. 12,56,18,936/- The assessee has claimed interest u/s 24 as these loans were utilised for the construction of the building which yields rental income to the assessee. On perusal of expenses related to House Property Income disallowed in the Computation of income, you will notice that the expenses share pertaining to the rented premises of Rs. 14,21,216/- and depreciation on Furniture & Fixtures of Rs. 5,27,133/-stands disallowed as these expenditure are not allowable under the head Income From House Property. Thus, the Computation of Income discloses all allowable/disallowable which are correctly computed and offered for income.

2. Interest paid to Partners B. It is mentioned in the notice that the assessee firm has paid interest to partners at the rate of 18% pa. whereas as per the Partnership Deed, para 17 mentions that it is agreed by and between the parties here to that simple interest at the rate of 12% pa. or at such other rate as may be mutually agreed upon or prescribed u/s 40(b) shall be payable by partnership on the amount standing to the credit of the capital, current, loan A/C of the partners.

(A.Y: 2017-18) M/s. Arena Enterprise It is also mentioned that the assessing officer has allowed the assessee's claim of interest to partners at the rate of 18% p.a. without considering the above terms mentioned in the Partnership Deed and without verifying the facts in this regard. In nutshell, in your opinion, the Assessing officer allowed interest at the rate of 18% p.a. on partners capital instead of 12% p.a. as provided in the Partnership Deed. In this regard, we would like to invite your attention to Profit & Loss A/C and the Computation of Income wherein no such deduction is claimed by the assessee firm being interest paid to Partners. The P & L A/C reveals the figure of Interest at Rs. 14, 23,40,006/- This interest is paid to the bank & other loan parties from whom loan was taken for construction of the building. Details of interest paid & received were already filed in the scrutiny assessment proceedings vide letter dated 05/09/2019 as per point no. 31-j. Also, there appears no credit in the Partners Capital A/C regarding interest paid. Thus, from the above said explanation it is evident that the assessee firm has not claimed any interest paid to partners.

7. Further, assessee vide letter dated 21st March, 2022 submitted as under: - “1. The Assessee filed its Return of Income for AY 2017-18. 2. The same was selected for scrutiny u/s. 143(3). 3. During the assessment proceedings, the AO called for several details in its Notice u/s. 142(1) and in response to the same the Assessee filed detailed submissions. 4. On perusal of the Notice u/s. 142(1) dated 03-09-2019, it can be seen from Point No. 11, 12 and 13, wherein the Assessing Officer had specifically called for details pertaining to Secured and Unsecured Loans, in a particular format and had also called for (A.Y: 2017-18) M/s. Arena Enterprise Confirmations and other supporting documents etc. The tax auditor had already mentioned the transactions pertaining to related party u/s 40(a)(2b) and the same were already furnished to the AO during assessment proceedings.

5. In response thereto, the Assessee filed an online response dated 11-10- 2019 and provided for all the details called for along with the details of Interest paid of Rs. 14,23,40,007/- (partwise breakup).

(A.Y: 2017-18) M/s. Arena Enterprise 10. Thus it is clear that the AO had correctly applied his mind to the facts and circumstances of the case and thereafter took a conscious decision to allow the interest claim.

(A.Y: 2017-18) M/s. Arena Enterprise SUBMISSIONS: ERRONEOUS Order+ PREJUDICIAL to Interest of Revenue 13. S.263 of the Income Tax Act confers powers on the CIT which are in the nature of supervisory powers in order to protect the interest of the Revenue. The CIT is empowered to call for and examine the records of any proceeding under the Act. He can then exercise his powers in revision, if he is satisfied that any order passed by the AO is erroneous and prejudicial to the interest of the Revenue. The Supreme Court has held that both these elements 'erroneous' and 'prejudicial to the interests of the Revenue' - must be satisfied for having recourse to S.263 (Malabar Industrial Co. 243 ITR 83).

14. An order is said to be 'erroneous' when it is passed without application of mind, and where the AO, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case and proceeds with undue haste CIT v. Jawahar Bhattacharjee [2012] 341 ITR 434 (Gauhati) (HC) (FB).

15. An Order can be said to be prejudicial to the interest of the Revenue, in which (i) Income has been under assessed (ii) Loss has been over assessed (iii) Income has been assessed at a lower rate (iv) Excessive loss, deductions, allowances and reliefs have been allowed to the Assessee 16. On perusal of the assessment proceedings, it is evident that the Assessee had filed detailed replies, which included the details of the rate of interest paid to various parties, and therefore the information was very much on record and it is only after due verification, that the Assessing Officer had raised further queries regarding the Unsecured Loans and other issues pertaining to the same.

18. Thus we humbly submit that the Assessment Order passed is not erroneous.

(A.Y: 2017-18) M/s. Arena Enterprise 19. Without prejudice, we would like to submit that in the show cause notice your Honour is desirous of applying the provisions of section 40A(2)(b) on the ground that the Fair Market Rate (being the Bank Rate of 10% p.a.), is much lower than rate of interest which is paid to the Specified Persons (i.e. 18% p.a.). We would like to submit that the provisions of section 40A(2)(b) are not applicable to the facts and circumstances of this case and therefore no addition can be made thereunder and consequently there is no loss to the revenue and therefore the provisions of section 263 do not apply. (i) It is evident from the computation of income that the Interest expenditure has been claimed under the provisions of Income from House Property u/s. 24(b) to which the provisions of section 40A(2)(b) do no apply. (ii) The Bank Rate cannot be treated as Fair Market rate, since the rate of interest given by the Bank is generally lower in comparison to the loans procured from private parties. The rate of interest paid to the bank cannot be compared with the interest paid to the related party because of the bank security, which is not given in the case of the lenders, who are private parties. Learned AR further contended that the rate of interest paid to the bank against the security is 10% and, hence, interest to the related party to 18% without any security, cannot be considered excessive keeping in view the market condition. (iii) The Assessee has paid interest @18% to other non- related parties also which please note. Details of Interest paid along with rate of interest are resubmitted for your reference.

20. It is for these reasons mentioned above that, it does not in any manner whatsoever prove that the Order passed by the AO is PREJUDICIAL TO THE INTEREST OF THE REVENUE, as it would not result in any addition even if the matter is sent back to the Assessing Officer.

21. In absence of any finding that there is loss of revenue, interference under section 263 is not justified. CIT v. G. R. Thangamaligai [2003] 259 ITR 129 (Mad.) (HC).

(A.Y: 2017-18) M/s. Arena Enterprise 22. It is hereby submitted that the Order of the Assessing Officer is neither erroneous nor prejudicial to the interests of the Revenue and hence, the Commissioner of Income Tax cannot assume jurisdiction under section 263 (1) of the Act.

(A.Y: 2017-18) M/s. Arena Enterprise 9. From perusal of records, it is evident that no query has been made by the Assessing Officer regarding interest paid to persons specified u/s.40A(2)(b) at a higher rate than the prevailing market rate. The assessee in it's submissions has claimed that "Assessee has paid interest @18% to other non-related parties" and also that "Interest expenditure has been claimed under the of provisions of Income from House Property u/s. 24(b) to which the provisions of section 40A(2)(b) do not apply" which also needs verification at the end of the Assessing Officer.

(A.Y: 2017-18) M/s. Arena Enterprise specified u/s 40A(2)(b) of the Act and pass the assessment order denovo after due verifications after giving proper opportunity of being heard to the assessee and pass a speaking order.

11. Aggrieved, assessee preferred appeal before us raising following grounds in its appeal: - “On the facts and circumstances of the case and in law: Erroneous & Prejudicial Order: A. Bifurcation of Expenses amongst different heads (i) The learned CIT has erred in issuing a notice u/s. 263 with respect to the bifurcation of expenditures claimed under the head Business Income' and 'Income from House Property', although the expenses incurred are genuine in nature and the bifurcation between the two heads would not in any manner whatsoever make the Assessment Order, erroneous and prejudicial to the interest of the revenue. (ii) The learned CIT failed to take into consideration that all details, supporting to the claim of the expenditures incurred, were submitted before the lower authorities, who after due verification has allowed the claim under the respective heads of income. The learned CIT cannot substitute his mind to that of the Assessing Officer and the Assessment Order passed cannot be termed as 'erroneous and prejudicial to Interest of Revenue' in as much as the Assessing Officer has passed the order after application of his mind and moresoever there is no loss to the revenue, if the expenditure is allowed as deduction under the head House Property or Business Income. B. Addition u/s, 40A(2)(b) (i) The learned CIT has erred in issuing a notice u/s. 263 which is void and without jurisdiction, seeking to revise the Asst. Order, although the same is not erroneous and not prejudicial to the interest of the Revenue, since the Interest expenditure incurred, has been claimed as a deduction u/s. 24(b) and the proposed application of Section 40A(2)(b) is not applicable and thus the (A.Y: 2017-18) M/s. Arena Enterprise condition that the order should be both erroneous and prejudicial is not satisfied and hence the Order is invalid, illegal and unlawful. (ii) The Learned CIT erred in applying the provisions of section 40A(2)(b) to the Interest rate paid on Unsecured Loans, although the same are not applicable, since the deduction has been claimed u/s, 24(b) under the head Income from House Property', and consequently the order is not prejudicial to the interest of the Revenue. (iii) The learned CIT has completely and erroneously ignored the fact, that all evidence were duly submitted before the Assessing Officer, who after due verification and after having correctly applied his mind has passed the Assessment Order u/s. 143(3). The Assessee has fully and truly disclosed all material facts necessary at the time of assessment. (iv) The learned CIT failed to take into consideration that the facts and circumstances of the case are similar to the earlier years, where the Assessee's claim has been fully allowed and therefore he ought to have followed the principles of consistency.”

(A.Y: 2017-18) M/s. Arena Enterprise assessee has explained the voluntary disallowance made in the computation of income and Ld. Pr.CIT itself has accepted that the claim made by the assessee is as per law and at the same Ld. Pr.CIT has not brought on record what is the prejudicial to the interest of the Revenue.

(A.Y: 2017-18) M/s. Arena Enterprise asked to submit source of funds in the hands of the lender and reasons for the lender for not charging interest in case of interest free loans. Further, in the same notice assessee was asked to furnish details of loans and advances outstanding at the beginning of the year as per the format enclosed.

(A.Y: 2017-18) M/s. Arena Enterprise 17. Further, he brought to our notice Page No. 43 and 44 of the Paper Book wherein details of interest paid to others and interest paid to relatives were submitted before the Assessing Officer. He brought to our notice that assessee has paid interest to relatives @18% and he brought to our notice that assessee also paid the interest @18% to others. He submitted that it clearly shows that assessee has taken loans @18% and also paid the loans at 18% there is no prejudicial to the interest of the Revenue.

(A.Y: 2017-18) M/s. Arena Enterprise any verification. Further, he brought to our notice Page No. 25 of the Paper Book and he brought to our notice the opening balance of unsold units and closing balance of unsold units remain the same amount and assessee has declared income from CAM @ ₹.2.18 crores and he submitted that assessee has claimed various expenses which are common in nature and Assessing Officer has allowed all those expenditures without proper verification particularly he brought to our notice interest paid expenditure which is one of the major expenditure claimed by the assessee and no enquiry was conducted by the Assessing Officer. He relied on the orders passed u/s. 263 of the Act.

(A.Y: 2017-18) M/s. Arena Enterprise initiated by the Ld. Pr.CIT holding that Assessing Officer has not verified and by relying on the Explanation 2(a) of the section 263 of the Act, we are inclined to accept the revision proceedings with the observation that the Assessing Officer has not verified on this aspect of interest payment to related parties itself makes the revision proceedings proper. It is brought to our notice that provisions of section 40A(2)(b) are not applicable in the given case since interest paid is claimed u/s. 24(b) of the Act. This submission also goes to prove that Assessing Officer has not verified properly whether the interest claimed by the assessee falls under which head of income. Therefore, the ground raised by the assessee are partly allowed and we hold that the initiation of the proceedings u/s. 263 of the Act is proper.

Order pronounced in the open court on 01st December, 2022