Loading judgment…
Facts
The assessee claimed interest expenses of Rs. 77,50,005/- against interest income of Rs. 74,72,666/-, resulting in a loss. The Assessing Officer (AO) allowed this deduction in the assessment order under Section 147. The Principal Commissioner (Pr.CIT) invoked revisionary powers under Section 263, holding the assessment order erroneous and prejudicial to the revenue.
Held
The Tribunal held that the Pr.CIT erred in invoking Section 263. The Pr.CIT's finding that the AO failed to examine the interest expenses under Section 57(iii) was not supported by the record. The issue of genuineness, raised by the Pr.CIT based on TDS deduction, was not a valid ground for revision under Section 263.
Key Issues
Whether the Pr.CIT was justified in invoking revisionary powers under Section 263 to direct the AO to re-examine interest expenses, when the original assessment order was not erroneous or prejudicial to the revenue based on the grounds raised by the Pr.CIT.
Sections Cited
147, 144B, 57(iii), 263, 263 (Explanation-2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTA & SHRI T.R. SENTHIL KUMAR
आदेश आदेश/O R D E R आदेश आदेश
PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER
The above appeal has been filed by the assessee against order passed by the Ld.Pr.Commissioner of Income-1, Ahmedabad [hereinafter referred to as “ld.Pr.CIT”] dated 27.03.2024 in exercise of revisionary power under section 263 of the Income Tax Act, 1961 ("the Act" for short) pertaining to Assessment Year 2017-18.
The grounds raised by the assessee are as under:
1.1 The Order U/s.263 passed on 27-03-2024 by Pr.CIT.Ahmedabad-1, A'bad (for short Pr. CIT) for AY 2017-18 holding that assessment order passed u/s.147 r.w.s. 144B dated 31.03.2022 for the A.Y. 2017-18 was erroneous and prejudicial to the interest of the revenue is wholly illegal, unlawful and against the principles of natural justice. 2.1 The Id. Pr. CIT has grievously erred in law and or on facts in holding that the order of assessment u/s 147 rws 144B passed on 31.03.2022 by AO accepting the deduction of interest expenses u/s 57(iii) was erroneous and prejudicial to the interest of the revenue. 2.2 That the in the facts and circumstances of the Id. Pr. CIT ought not to have invoked the powers of revision u/s 263 and thereby held that deduction of interest expenses u/s 57(iii) allowed by AO was without verification and ought not to have allowed it. 3.1 The Id. NFAC has grievously erred in law and or on facts in holding that the provision of Explanation-2 to sec.263 was attracted in the facts of the case. 3.2 That the in the facts and circumstances of the Id. Pr. CIT ought not to have directed AO to pass a fresh order of fresh assessment order in respect of deduction of interest expenses u/s 57(iii) as per the observations made in the impugned order by him.
A perusal of the order of the ld.Pr.CIT reveals that on the basis of records before him, he found the assessment order passed in the case of the assessee under section 147 of the Act to be erroneous causing prejudice to the Revenue, for not having made any addition for the specific reasons for which reopening was resorted to.
The ld.Pr.CIT notes that the specific reasons for reopening the case of the assessee is that the assessee had returned loss of Rs.2,77,339/- under the head “income other sources” after claiming deduction of interest expenses of Rs.77,50,005/- against interest income of Rs.74,72,666/-. The assessment order passed under section 147 of the Act, copy of which was part of the said appeal set, filed before us, reveals that the reasons for reopening was the assessee having returned loss under the head “income from other sources” on account of interest income earned, having claimed huge interest expenses against the same, and further noting that as per section 57(iii) of the Act, this interest expenses were allowable only when they were incurred for the purpose of earning interest income. Therefore, clearly the case of the assessee was reopened to ensure the assessee’s claim of interest expenses was in accordance with section 57(iii) of the Act. Therefore, the case of the ld.Pr.CIT was that the assessee’s claim of interest expenses was not examined by the AO in the light of the provisions of section 57(iii) of the Act, while passing his order under section 147 of the Act, allowing the entire claim of interest expenses.
The finding of the ld.Pr.CIT however, we find, while holding the assessment order erroneous, is on totally different ground. The ld.Pr.CIT notes from the submissions of the assessee, that he has verified that the assessee has submitted a list of payment of interest. As per the audit report, he notes, that the assessee has also deducted TDS on interest of Rs.52,18,267/-, but thereafter, he goes on to note, that the AO has not verified whether the recipients have offered the interest income in their respective income tax returns, and therefore to verify the said facts, he restores the issue back to the AO. His finding in this regard are at para-5 of his order as under: 5. I have carefully and thoroughly gone through submission of the assessee. It is a blatant fact that the assessee has received interest income from Bank FD etc., amounting to Rs.74,72,666/-. Against this interest income, the assessee has claimed interest expense of Rs.53,29,267/- being interest paid to others. On verification of the submission of the assessee, it is seen that the assessee has submitted a list of payment of interest. Further, at clause 34(a) of Audit report, it is reported that the assessee has deducted IDS on interest of Rs.52,18,267/-. However, the A.O. has not verified the details of recipients/payee and their PAN. The A.O. has not verified as to whether, the recipients have offered interest income in their respective ITR. The issue of interest payment is restored to the file of the AO for limited purpose of verification. The A.O. is directed to verify as to whether the recipients have offered interest income in their respective ITR, if it is found so, the A.O. may not disallow such interest income 57(iii) of the Act. If it is found otherwise, the A.O. is directed to disallow only those interest expenses which have not been offered by respective recipients. With these findings, the assessment order stands modified accordingly.
4 6. Clearly his finding of error vis a vis allowance of claim of interest expenses to the assessee is with regard to its genuineness and noting doubts about the genuineness he goes to state that if the said expenses are not found genuine they are to be disallowed u/s 57(iii) of the Act.
The Ld.PCIT, we find has completely misdirected himself in his finding of error in the order of the AO. While he finds the order erroneous for the AO not having examined claim of the assessee to interest expenses against interest income earned, in terms of section 57(iii) of the Act, the scope of which is to allow only those expenses incurred wholly and exclusively to earn income, the error found by him actually relates to genuineness of the said expenses, which is not the concern of section 57(iii) of the Act. The Ld.PCIT records no error in the order with regards to eligibility of claim of interest expenses u/s 57(iii) of the Act.
Moreover, even from the standpoint of genuineness, considering the facts noted by him, we find there is no error found by the Ld.PCIT . He notes the assessee to have deducted TDS on interest expenses of Rs.52.14 lakhs and thereafter directs the AO to verify whether the interest expenses have been returned to tax by the recipients of the same.
When the only fact noted by him is of TDS having been deducted on the interest expenses, how does it by any way create any doubt on the genuineness of the claim , we fail to understand. In fact there is no doubt about the genuineness of the claim of interest expenses also. He has only directed the AO to verify further, which the Ld.PCIT, we hold, has no power to do u/s 263 of the Act. Section 263 of the Act
In the present case therefore, we find that there is no error found by the Ld.PCIT in the order passed in the case of the assessee u/s 147 of the Act, vis-a-vis allowability of claim of interest expenses either in terms of section 57(iii) of the Act, for which purpose the case of the assessee was initially reopened, or for that matter with respect to the genuineness of the claim.
The order passed by the ld.Pr.CIT, we hold, is not sustainable in law and is accordingly set aside.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 27th February, 2025 at Ahmedabad.