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Facts
The assessee filed an appeal against the order of the Pr.CIT who set aside the assessment order and directed the AO to pass a fresh assessment. The Pr.CIT based his revisionary power under section 263 on two issues: disallowance of interest on borrowed funds used for interest-free loans and discrepancy in legal and professional fees.
Held
The Tribunal held that the Pr.CIT's order was unjustified and a violation of natural justice as it ignored the assessee's explanations without proper deliberation. The Pr.CIT failed to deal with the assessee's contentions and the DR could not point out any infirmity in the explanation.
Key Issues
Whether the Pr.CIT erred in invoking revisionary powers under section 263 by ignoring the assessee's explanation on interest disallowance and professional fees without proper justification.
Sections Cited
263, 143, 144C(3), 144B, 69C
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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTA & Ms.SUCHITRA R. KAMBLE
PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER
The above appeal has been filed by the assessee against order passed by the Ld.Pr.Commissioner of Income Tax-1, Ahmedabad [hereinafter referred to as “ld.Pr.CIT] dated 14.03.2024 by exercising jurisdiction under section 263 of the Income Tax Act, 1961 ("the Act" for short) vide which, the ld.Commissioner set aside the assessment order of the AO passed under section 143 read with sections 144C(3)/144B of the Act relating to the assessment year 2017-18 and directing the AO to pass a fresh assessment order as per the directions contained in the 263 order.
The grounds raised
by the assessee are as under: “1. In law and in the facts and circumstances of the case, the order passed by Ld. Pr. CIT, Ahmedabad-1 u/s 263 of the Income tax Act is ab initio void being bad in law.
2. On the facts and circumstances of the case, the learned Pr. CIT erred in setting aside the assessment order dated 20/09/2021 passed by the faceless assessing officer u/s 143(3) r.w.s.144C(3) r.w.s. 144B of the Income- Tax Act, and directing the faceless assessing officer to pass a fresh Assessment Order.
3. On the facts and circumstances of the case, the learned Pr. CIT erred in invoking revisionary power provided u/s 263 in setting aside the order passed by NFAC (National Faceless assessment center).
4. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.”
We have heard contentions of both the parties. We have carefully gone through the order of the ld.Pr.CIT and we find that the impugned order passed is grossly unjustified, against all principles of natural justice for the reason that the ld.Pr.CIT has completely ignored the explanation furnished by the assessee before him in support of its contentions, which is reproduced in the order also, and without dealing with the same, has gone on to pass the order under section 263 of the Act, finding the assessment order passed in the case of the assessee to be erroneous causing prejudice to the Revenue.
Elaborating on the same, we have noted that in the present case, the jurisdiction to revise the order of the AO passed in the case of the assessee in the impugned order was assumed by the ld.Pr.CIT noting that the AO failed to examine the issue of disallowance of interest pertaining to the interest bearing loans used for the purpose of advancing interest free loans by the assessee. The ld.Pr.CIT noted from the record that while the assessee had borrowed funds to the tune of Rs.26,19,78,904/- paying interest thereon of Rs.2,05,40,844/- all of which was claimed as expenses by the assessee and allowed by the AO. The assessee was also noted to have made interest free loans to the tune of Rs.5,39,80,000/-. The ld.Pr.CIT was of the view that there was a diversion of interest bearing funds for non-business purpose, which the AO had failed to examine and had therefore wrongly allowed the assessee’s entire claim of interest of Rs.2,05,40,844/-. He also noted that there was a discrepancy in the amount of legal and profession charges reported by the assessee in the tax audit report of Rs.84,58,450/- and that reflected in the profit & loss account to the tune of Rs.68,45,601/-. The case of the ld.Pr.CIT was that the assessee accordingly had incurred expenditure to the difference of the same amounting to Rs.13,12,849/- out of the books, and this issue also remained unexamined by the AO though the facts were clearly revealed from the records. His noting in this regard are at para-2 of his order as under:
“2. On perusal of records, it is seen that the assessee has raised interest liability of Rs.2,05,40,844/- on the borrowed funds of Rs.26,19,78,904/-. On the other hand, assessee has lent interest free loan of Rs.5,39,80,000/-. Thus, there is diversion of interest bearing funds for non-business purpose. Further, it is also noticed that the assessee has claimed professional and legal fees of Rs.68,45,601/- in the profit and loss account, wherein in clause 34(a) of the Audit Report, the auditors of the assessee has certified that payments towards professional fess and legal fees u/s Rs.84,58.450/-. The assessee has not disclosed professional fees to the of Rs. 13,12,849/- (Rs.84,58,450 - Rs.68,45,601) in the profit and loss account The Assessing Officer has not verified these issues. Therefore, the order of A.O. was found erroneous and prejudicial to the interest of the Revenue.
The order of the ld.Pr.CIT reveals that the assessee duly furnished the explanation with regard to both the issues .With regard to the disallowance of interest relating to funds utilized for giving interest free funds, the assessee had contended that it had sufficient own interest free funds for the said purpose to the tune of Rs.18,19,90,119/- for advancing the interest free loan of Rs.5.39 crores. The assessee had also submitted that all its interest bearing
“4. In response thereto, the assessee has submitted its reply, which is verified and placed on records. The assessee has submitted that no fresh funds were obtained during the year under consideration and the company was having sufficient reserves of Rs.18,19,90,119 to grant interest free loan to its subsidiary. The assessee further submitted that interest bearing loan substantially utilized for the business purpose and interest free loan and reserve and surpluse was utilized for providing interest free loan.
On the issue of legal and professional fees, the assessee had clarified that the amount reflected in the tax audit report of Rs.81.58 lakhs included the heads like audit fees, connectivity charges etc. which were not included in the legal and professional fees of Rs.68,45,601/- shown in the profit & loss account, but were shown separately in the books of the assessee. A break up to this effect was also furnished to the ld.Pr.CIT. This facts are recorded at para-4. Of his order as under: 4.1 On the issue of Legal and professional fees, the assessee has submitted that amount of Rs.81 58,450/- on which TDS was deducted contains figures from various heads like audit fees, connectivity charges etc. The assessee has submitted break up of various expenses so as to substantiate the expenditure of Rs.84,58,448/-”
At para 5 to 5.2 of his order, the ld.Pr.CIT reproduced the explanation of the assessee, but without considering the same, and without deliberating as to how he found no merit in the explanation of the assessee, he still goes on to hold that the assessment order was erroneous causing prejudice to the Revenue for the reason for which he assumed jurisdiction under section 263 of the Act i.e. in the case of disallowance of interest as per the Ld.Pr.CIT, the AO should have disallowed the interest and in the case of legal and professional charges, since there was a difference in the amounts of expenditure as reflected in the profit & loss account and the tax audit report, the It is patently clear that despite the assessee furnishing an explanation with respect to both the issues before it, the ld.Pr.CIT has completely ignored the same, and has not given any reason therefor for rejecting such explanation of the assessee, and passed order under section 263 of the Act, holding the assessment order passed by the AO to be erroneous causing prejudice to the Revenue.
The ld.DR before us was unable to point out from the entire order of the ld.Pr.CIT as to where and how he had dealt with the contention of the assessee; nor he was able to point out any blatant infirmity in the explanation of the assessee.
In the light of the same, we are unable to uphold the order of the ld.Pr.CIT, finding the same having been passed in gross violation of the principles of natural justice, without considering the explanation furnished by the assessee before him.
In view of the same, the order passed by the ld.Pr.CIT under section 263 of the Act is quashed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 2nd April, 2025 at Ahmedabad.