SHRI NARESH AGARWAL,ALWAR vs. PRINCIPAL COMMISSIONER OF INCOME TAX, ALWAR

PER BENCH :

These two appeals by the assessee are directed against two separate orders of ld. Principal CIT, Alwar both dated 22.03.2018 passed under section 263 of the I.T. Act for the assessment years 2013-14 and 14-15 respectively. The assessee has raised the common grounds in these appeals. The ground raised for the assessment year 2013-14 are reproduced as under :-

“ 1. The order passed by the ld. PCIT u/s 263 is illegal and bad in law.

2 ITA Nos. 699 & 700/JP/2018 Shri Naresh Agarwal, Alwar.

circumstances are also identical leading to the revision order under section 263 of

the Act, therefore, for the purpose of hearing, these two appeals were clubbed

together and are being disposed off by this composite order. The appeal for the

assessment year 2013-14 is taken as a lead case for the purposes of describing the facts on the issues. The assessee filed his return of income on 30th July, 2013

declaring total income at Rs. 11,96,470/- and losses of the current year to be carried

forward Rs. 1,57,580/-. The AO completed the assessment under section 143(3) on 10th February, 2016 accepting the returned income declared by the assessee.

Subsequently on examination of the record, the Principal CIT found that the order

passed by the AO is erroneous and prejudicial to the interest of the revenue due to

lack of making proper enquiry/examination in respect of the deduction on account of

interest paid amounting to Rs. 19,26,409/- as against interest receipt of Rs.

6,08,668/- resulting in loss of Rs. 13,17,741/- which was allowed by the AO.

3 ITA Nos. 699 & 700/JP/2018 Shri Naresh Agarwal, Alwar.

Further, the balance sheet of the assessee reflects increase in unsecured loans

amounting to Rs. 1,44,63,110/- and the genuineness of these loans were not

supported by any evidence. Thirdly, an advance of Rs. 10,00,000/- has been shown

in the balance sheet to one Shri Banwari Lal Meena but the details of interest

received do not reveal any income received from him. Similarly, the assessee has

shown loan repayments to Shri Kapoor Chand Jain of Rs. 8,50,000/- and Kapoor

Chand Jain Booking of Rs. 5,70,000/- respectively but the same stand outstanding in

the balance sheet. Finding all these discrepancies on record, the ld. Pr. CIT issued a show cause notice dated 7th February, 2018 under section 263. In response, the

assessee filed reply dated 15.03.2018 and claimed deduction on account of interest

paid on borrowed funds as an allowable expenditure under section 37(1) as well as

under section 57(iii) of the Act. The other issues raised by the ld. Pr. CIT in the

show cause notice were also explained by the assessee. The ld. Pr. CIT after considering the reply, set aside the order passed by the AO dated 10th February,

2016 being erroneous and prejudicial to the interest of the revenue on account of

not making proper enquiry of facts/material and directed the AO to pass the

assessment order afresh after considering the observations of the ld. Pr. CIT on

these issues.

assessment order it is clear that the assessee has produced all the relevant details

before the AO which were examined and considered by the AO and on his

satisfaction, the claim of the assessee was allowed. Thus it is not a case of non-

conduct of enquiry by the AO but when the AO was satisfied with the claim, she has

4 ITA Nos. 699 & 700/JP/2018 Shri Naresh Agarwal, Alwar.

accepted without giving any detailed or elaborate finding on the issues. The ld. A/R

has further contended that once the AO has satisfied with the claim, then there was

no requirement of giving any detailed finding on these issues. Therefore, once the

AO has conducted proper enquiry, then the ld. Pr. CIT cannot exercise his power

under section 263 merely because the AO has not passed an elaborate order. The ld.

A/R has further submitted that even there was an audit objection on these issues

which were subject matter of section 263 and the AO issued a show cause notice dated 21st July, 2017 which was subsequent to the assessment order was passed.

The assessee replied the said show cause notice vide letter dated 10.08.2017 and

after examination of the issues, the AO did not agree with the audit objections

raised on these issues. Thus the ld. A/R has submitted that the ld. Pr. CIT has

initiated the proceedings under section 263 on the basis of the audit objections

raised by the audit party which were already considered by the AO and did not

agree with these objections. Thus once the AO has taken a possible view, then the

ld. Pr. CIT cannot invoke the provisions of section 263 merely because he did not

agree with the view taken by the AO. The ld. A/R has also referred to the details of

the interest paid by the assessee as well as the interest received from various parties

as well as the partnership firm in which the assessee is a partner and also from the

company in which the assessee is a director and thus it is clear that the assessee

was earning interest from the partnership firm on the capital in the partnership

which is declared as income under Chapter-5D as business income. The interest

paid against the said income is claimed as business expenditure whereas the interest

paid in respect of the loan amount used for giving advances and loan which is

5 ITA Nos. 699 & 700/JP/2018 Shri Naresh Agarwal, Alwar.

offered to tax as income from other sources was claimed under section 57(iii) of the

Act. The ld. A/R has referred to the computation of total income and submitted that

the assessee has properly bifurcated the interest income and receipt from the

partnership firm against the capital of the assessee as business income and,

therefore, the expenditure to the extent of the borrowed fund introduced in the

partnership firm as capital was claimed as business expenditure. The rest of the

interest expenditure is claimed against the income from other sources. He has

further submitted that the entire record and details were available in the assessment

record and, therefore, it is not a case of the claim which is not permissible under the

law. In support of his contention, he has relied upon the following decisions :-

CIT vs. Max India Ltd. 295 ITR 282 (SC) Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC) Honda Motorcycle & Scooters India Pvt. Ltd. vs. PCIT 53 CCH 241 (Trib.)(Del.) order dated 26.06.2018. GE Capital Services India vs. ACIT 52 CCH 372 (RTrib)(Del.) order dated 23.04.2018.

3.1. On the other hand, the ld. D/R has submitted that it is apparent from the

assessment order that the AO has accepted the returned income of the assessee in a

summary manner and by passing a snap shot assessment order without conducting

any enquiry on the issues. He has referred to Explanation-2 to section 263(1) of the

Act and submitted that after the amendment and introduction of the Explanation-2

the lack of proper enquiry renders the order of the AO as erroneous as well as

prejudicial to the interest of the revenue. The ld. D/R has further contended that

6 ITA Nos. 699 & 700/JP/2018 Shri Naresh Agarwal, Alwar.

the AO has not conducted any enquiry in the context of the time period for which

the loan was taken and given by the assessee as well as allowability of the claim

under section 57(iii) of the Act. Merely acceptance of the claim without conducting

any enquiry is a clear case of lack of enquiry as the AO should have conducted while

passing the assessment order. He has relied upon the impugned order of the ld. Pr.

CIT.

February, 2016 as under :-

“ Assessment Order

The assessee has filed his return of income on 30.07.2013 declaring total income of Rs. 12,05,000/-. The return was processed u/s 143(1) of Income Tax Act, 1961 on 10.05.2013. The case was selected under scrutiny through CASS and notice u/s 143(2) was issued on 05.09.2014. The preliminary query letter was issued on 30.10.2014. In compliance to these notices, Sh. Ravindra Shah, CA and A/R of the assessee attended the hearing time to time and filed the details which are placed on record. The case is discussed with him.

The assessee is partner in M/s. Ajanta Plastic Industries and M/s. Vishal Agencies and has shown interest from these firms. The assessee is deriving salary from M/s. Nangalwala Impex Pvt. Ltd and M/s. Zibaa Builders Pvt. Ltd. Apart from these, the assessee has declared income from house property, capital gain and income from other sources.

During the year under consideration the assessee has earned income from above said sources as mentioned. After examining relevant details/documents and after discussion returned income of Rs. 12,05,000/- as declared by the assessee is hereby accepted.

Assessed u/s 143(3) of the Income Tax Act 1961. The Income Tax computation form generated from the software system of the department, giving therein the details of tax, interest, credit for prepaid taxes etc., forms part of this order, is attached herewith.

7 ITA Nos. 699 & 700/JP/2018 Shri Naresh Agarwal, Alwar.

Sd/- ( Asmita Pathak ) Income-tax Officer, Ward 1(1), Alwar. “ Place : Alwar Dated :

Thus it is clear that the AO accepted the returned income in the summary

proceedings whereas there are multiple transactions of loans taken by the assessee

as well as given by the assessee. The ld. Pr. CIT has given the details at pages 4 &

5 of the impugned order as under :-

Interest Received (All amounts in Rupees)

Name of person to whom Opening Amount lent/ Balance Interest Rate money lent balance as on repaid during received for of 01.04.2012 the year (+ -) the year inter est Nangalwal Impex Pvt. Ltd. 1,04,89,313 (-) 80,33,000 24,56,313 2,78,164 15% (Assessee is a director) Golden Vegpro Ltd. 21,86,007 1,33,721 23,19,728 3,43,222 15% Zibra Builders Pvt. Ltd. 1,93,06,838 24,00,000 2,7,06,838 37,24,864 18% (Assessee is a director) Ajanta Plastic Industries 49,15,426 (-) 60,41,698 (-) 11,26,272 3,95,400 12% (Partner’s capital Vishal Agencies 2,43,949 28,21,000 30,64,949 2,13,202 12% (Partner’s Capital) BOB 24,313 - 24,313 7,950 UBI 2,188 (-) 2,188 - 42 BOB, Delhi 19,654 (-) 5,925 13,727 534 BOB, HC 6,10,505 (-) 6,09,1001, 1,405 HDFC Bank 27,956 (-) 27,956 - Total 3,78,26,149 (-) 93,65,146 2,84,61,100 49,63,444 Interest Paid (All amounts in Rupees) Name of person from Opening Amount Balance Interest Rate of whom money borrowed balance as on borrowed/ paid for the interest 01.04.2012 repaid during year the year (+ -) Amit Jain 2,00,000 - 2,00,000 24,000 12% Ashok Kumar Jain 20,00,000 - 20,00,000 2,40,000 12% Bombay Electricals 5,00,000 5,00,000 - 58,500 12% Ganpati Traders 10,00,000 - 10,00,000 1,20,000 12% Kranti Chand Jain HUF 2,00,000 - 2,00,000 24,000 12% Kranti Chand Jain 2,00,000 - 2,00,000 24,000 12% Meenakshi Jain 2,00,000 - 2,00,000 24,000 12% Preeti Tomer 4,00,000 - 4,00,000 60,000 15%

8 ITA Nos. 699 & 700/JP/2018 Shri Naresh Agarwal, Alwar.

Ram Singh 5,00,000 2,00,000 7,00,000 92,500 15.6% Sheetal Jain 2,00,000 - 2,00,000 24,000 12% Shushila Agarwal 6,50,000 (-) 1,50,000 5,00,000 76,438 15% Vishal Agencies 1,07,02,272 - 1,07,02,272 19,26,409 18% (Partner’ OD) LIC Loan 1,15,000 - 1,15,000 10,350 9% LIC Loan 3,22,000 - HDFC Loan 2,03,95,832 (-) 11,96,891 1,91,98,941 22,28,677 12.75% Total : 3,72,63,104 (-) 16,46,891 3,56,16,213 52,32,874

As it is evident from the above details that there are various transactions of loans

given by the assessee as well as capital introduced in the old partnership firms by

using the borrowed funds from various parties as well as from the partnership firm.

Thus the assessee has borrowed the fund from the partnership firm M/s. Vishal

Agencies in the category of over-drawing and at the same time a capital of Rs.

28,21,000/- was also introduced in the same firm. This is not a newly formed firm

but this is an old partnership firm and, therefore, it is not an initial introduction of

capital by the partners. Further, we find that the AO while passing the assessment

order has not raised even a query about the allowability of the interest under section

57(iii) of the Act. There is no such query raised either in the notice issued under

section 142(1) or otherwise and, therefore, even if the details filed by the assessee

were considered by the AO but if the same are not examined in the context of

allowability of the claim under section 57(iii), then the case would certainly fall in the

category of complete lack of enquiry on a particular issue of allowability of the claim

of interest expenditure under section 57(iii) of the Act. Further, the details revealed

that the assessee has received the interest @ 12% from M/s. Vishal Agencies, the

partnership firm as against the interest charged by the same firm from the assessee

@ 18%, hence there is a difference of 6% in the interest received and paid by the

9 ITA Nos. 699 & 700/JP/2018 Shri Naresh Agarwal, Alwar.

assessee. All these aspects were not even examined by the AO. Further, there is no

bar for considering the audit objections by the ld. Pr. CIT if the audit objection

reveals certain relevant and crucial facts about the allowability of the claim.

Therefore, we do not find any substance or merit in the contention of the ld. A/R on

this point as it is clear that it is a case of lack of enquiry particularly on the issue of

allowability of the claim under section 57(iii) of the Act. Thus the order of the AO

suffers from error so far as it is prejudicial to the interest of the revenue. Hence the

ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act and directed

the AO to conduct a proper enquiry on this issue. As regards the other issues raised

by the ld. Pr. CIT in the show cause notice, those were not specifically discussed in

the impugned order as the assessee explained some of the issues which were

factually found to be correct. Accordingly, we restrict the fresh adjudication of the

matter only on the issue of allowability of the claim under section 57(iii) of the Act,

to that extent the impugned orders of ld. Pr. CIT is upheld.

Order pronounced in the open court on 03/08/2018.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 03/08/2018. Das/

10 ITA Nos. 699 & 700/JP/2018 Shri Naresh Agarwal, Alwar.

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