MANAVEEYA DEVELOPMENT & FINANCE PRIVATE LIMITED,HYDERABAD vs. DCIT., CIRCLE-5(1), HYDERABAD

The assessee is a non-banking finance company, filed its return of income for the year under consideration on 12.02.2021 declaring total income of Rs.100,76,99,450/-. The assessment was completed u/sec.143(3) r.w.s.144B of the Income Tax Act [in short "the Act"], 1961 on 18.08.2022 at the returned income. Thereafter, on verification of the assessment record, the Pr. CIT noted that in the computation of total income, the assessee has added back a sum of 4 ITA.No.480/Hyd./2025 Rs.9,87,68,419/- towards interest paid u/sec.94B of the Act out of the total payable interest of Rs.58,56,47,549/- to its AE. The Pr. CIT further noted that the Earnings Before Interest, Taxes, Depreciation and Amortization [in short “EBITDA”] was computed at Rs.162,29,30,433/- for computing the allowable interest u/sec.94B as against the actual EBITDA of Rs.129.26 crores. This omission resulted in excess claim of expenditure towards interest payable to AE u/sec.94B to the tune of Rs.9,69,99,130/- and the Assessing Officer has not verified the issue resulting the order passed by the Assessing Officer is erroneous so far as prejudicial to the interests of the revenue. Accordingly, the Pr. CIT issued show cause notice u/sec.263 of the Act dated 05.11.2024. The assessee filed its reply to the show cause notice and claimed that the discrepancy as pointed out by the Pr. CIT is due to fair value gain of the equity investment as well as the capital gain/profit on sale of equity investment computed based on the fair market value of the investment as against the actual cost of acquisition. The Pr. CIT was not convinced with the reply of the assessee and noted that the assessee in 5 ITA.No.480/Hyd./2025 the Annexure-2 being the statement of disallowance u/sec.94B of the Act has considered the profit on sale of equity investment of Rs.34.50 crores and processing fee received of Rs.4.53 crore, total EBITDA amounting to Rs.162.29 crores, whereas the actual earning before EBITDA has been shown by the assessee of Rs.129.96 crores after adding back Rs.3.3 crores of depreciation and amortization of Rs.67.3 crores on financial cost to the EBITDA of Rs.59.6 crores. Thus, the Pr. CIT noted that the total income does not include the profit on sale of equity investment of Rs.34.50 crores and, therefore, the discrepancy was found in the computation of allowable interest paid to the AE u/sec.94B of the Act and consequently, the order of the Assessing Officer was set-aside with a direction to pass the fresh assessment order, after affording an opportunity of hearing to the assessee.

Before the Tribunal, the learned Authorised Representative of the Assessee has submitted that the assessee has explained the details and facts resulting the difference in computation of EBITDA for the purpose of 6 ITA.No.480/Hyd./2025 allowable interest to the AE u/sec.94B as well as the computation of income and particularly, the capital gain on account of sale of equity shares based on the fair market value of the investment. He has further submitted that the assessee has rightly added back the amount of Rs.9,87,68,419/- u/sec.94B of the Act out of the total interest expenses of Rs.67,51,89,962/-. This difference is due to adjustment made on account of capital gain on sale of investment and another is in respect of arrangement fee. He has further submitted that assessee company is covered by the Ind-AS for the first time this year and according to Ind- AS, profit on sale of investment even though shares are sold during that year has to be adjusted on fair value basis over a period of three years i.e., F.Y. 2017-2018 to 2019-2020. This is a part of transition process to Ind-AS as that year happens to be the first year in which Ind-AS was to be followed by the assessee company. He has thus submitted that once the assessee has computed the allowable interest to the AE u/sec.94B by following the process of Ind-AS, then the order passed by the Assessing Officer accepting the returned

On the other hand, the learned DR has submitted that the assessee has calculated the allowable interest paid to the AE u/sec.94B of the Act by inflating the EBITDA, whereas the actual income shown by the assessee is much less and, therefore, the assessee has claimed excess deduction on account of interest paid to the AE which is in contravention of the provisions of sec.94B of the Act. He has referred to the impugned order and submitted that the Pr. CIT has pointed out the specific discrepancy in the computation of EBITDA for the purpose of calculation of the allowable interest to the AE u/sec.94B as against the actual income shown by the assessee. He has relied upon the Order of the learned Pr. CIT and submitted that the Assessing Officer has not conducted any enquiry on these aspects and, therefore, there is a complete lack of enquiry on the part of 8 ITA.No.480/Hyd./2025 the Assessing Officer while passing the assessment order which renders the assessment order as erroneous in so far as it is prejudicial to the interests of the revenue. She, therefore, submitted that the Pr. CIT has justified in revising the order passed by the Assessing Officer.

We have considered the rival submissions as well as the relevant material on record. The Assessing Officer has accepted the returned income while passing the scrutiny assessment on 18.08.2022 as under :

Though the Assessing Officer referred the notice issued u/sec.142(1) and reply by the assessee, however, nothing has been brought by the assessee before us to show that the Assessing Officer has taken up this particular issue as pointed out by the learned Pr. CIT while invoking the provisions of sec.263 of the Act. The Pr. CIT has issued the show cause notice u/sec.263 of the Act dated 05.11.2024 as under :