M/S. JENIOUS CLOTHING PVT LTD,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME TAX, (OSD) RANGE-4(1), BENGALURU

This appeal by the assessee is against the order dated 8.2.2018 of the Principal Commissioner of Income-tax, Bengaluru-4, Bengaluru [‘Pr.CIT’ for short] passed u/s. 263 of the Income-tax Act, 1961 [the Act] in relation to assessment year 2014-15.

The assessee is a company engaged in the business of manufacture and trading in ready-made garments. For the AY 2014-15 the assessee filed return of income declaring a total loss of Rs.13,32,979. Assessment was completed by the Assessing Officer (AO) u/s.143(3) of the Act, by reducing from the returned loss the interest on Income-tax refund which was not shown as income by the Assessee. The order of assessment u/s. 143(3) dated 8.12.2016 was passed by the AO.

The Pr. CIT in exercise of his powers u/s. 263 of the Act was of the view that the aforesaid order of assessment was erroneous and prejudicial to the interests of revenue for the following reasons:-

In reply to the aforesaid show cause notice, the assessee submitted that the AO made enquiries with regard to the interest payment of Rs.54,44,791 before completing the assessment. On the interest amount of Rs.51,44,79I/- the Auditors noticed that there were delays in the payments of VAT by the Assessee with respect to the transactions relating to the Financial Years 2011-12, 2012-13, 2013-14 and in accordance with the provisions of Section 36 etc., of KVAT Act, 2003, interest liability up to 31.03.2014 at the above figure of Rs.51.44 lakhs would accrue. Therefore provision was made in the books of accounts for the assessment year 2014-15 accordingly. Thus claim was made based on the accrual of liability. This surfaced at the time of the final audit of the accounts and was noticed and quantified by Auditors only at that time and therefore as this was identified in relation to the accounting year 31.03.2014, immediately on coming to know of the liability, quantification of the same entry was made in the books of account and the claim for deduction was in accordance with law. and therefore it was an admissible claim. It was pointed out that statement of P&L account for the year ending 31.3.2014 certified by Auditors in their report including the details of interest payments and interest receivables, amongst other things, was available on record. Such details filed also included ledger of interest paid to others which is classified as indirect expenses in the P&L account.

The Pr. CIT, however, did not accept the submissions made on behalf of the assessee. Firstly, he held that the AO did not make proper and adequate enquiries in respect of provision made for interest on delayed VAT payments and interest payments to Others without deducting tax at source. The Pr. CIT also held that as per the provisions of section 43B of the Act, any payment by way of tax is allowable as a deduction only on actual payment basis and since VAT is a statutory payment, that can be allowed only on actual payment basis. He held that the provision for interest on delayed payment of VAT allowed by the AO without verification of actual payment was contrary to the provisions of section 43B of the Act. Regarding interest paid to Others, he held that the AO failed to verify and make enquiries whether these interest payments would attract TDS provisions. The Pr. CIT therefore concluded that the AO failed to make enquiries which he ought to have made and therefore the order of assessment was erroneous and prejudicial to the interests of revenue. He set aside the assessment with a direction to the AO to examine the issues and redo the assessment afresh as per law, after affording reasonable opportunity of being heard to the assessee.

Aggrieved by the order of Pr.CIT, the assessee is in appeal before the Tribunal.

The first submission of the ld. counsel for the assessee was that the AO made proper enquiries with regard to the interest expenses debited to the P&L account. In this regard, our attention was drawn to the show cause notice u/s. 142(1) of the Act by the AO dated 29.6.2016 wherein specific query was raised regarding details of interest paid on bill discounting, details of interest paid to Others and TDS proof. He also pointed out that in reply to the aforesaid notice, the assessee had replied on 8.7.2017 and gave details of the indirect expenses which includes interest expenses. Our attention was drawn to the following description as contained in the ledger of indirect expenses and the interest expenses:-

The next submission of the ld. Counsel was that in the show cause notice, the Pr.CIT never sought to invoke provisions of section 43B of the Act, but justified his conclusion that the order of the AO was erroneous by invoking those provisions in the impugned order. It was averred by the ld. Counsel for the assessee that assessee was never put on notice regarding invoking the provisions of section 43B. His submission was that the impugned order has to be held as bad in law as it has been passed without affording opportunity of being heard to the assessee on the issue of applicability of section 43B.

The ld. DR relied on the order of Pr.CIT.

We have considered the rival submissions. A perusal of the order passed u/s. 143(3) dated 8.12.2016 shows that the AO has not discussed anything about the prior period expenses of Rs.51,44,791 or as to whether the TDS obligations would arise on payment of interest to the extent of Rs. 14,08,273/- and if so whether the sums claimed as deduction should be disallowed u/s.40(a)(ia) of the Act. It is no doubt true that in the show cause notice u/s. 142(1) dated 29.6.2016, the AO has called for details of interest paid to Others and TDS proof. It is also true that the assessee in reply to show cause notice has given the details of interest liability on delayed remittances which were in relation to earlier assessment year. The fact that these documents were filed by itself will not be sufficient to hold that the AO applied his mind with regard to prior period expenses on account of interest. Therefore, we are of the view that the Pr. CIT was justified in invoking the provisions of section 263 as there was a failure on the part of AO to make proper and adequate enquiries. Such failure is sufficient to invoke the provisions of section 263 of the Act. For this conclusion, we derive support from the decision of the Hon’ble Delhi High Court in the case of Gee Vee Enterprise vs Addl. CIT (1975) 99 ITR 375 (Delhi). To this extent, the order of Pr. CIT u/s. 263 is sustained.

However, we are of the view that the observations of the Pr. CIT with regard to the applicability of section 43B are uncalled for since no such stand was taken by the Pr.CIT in the show cause notice u/s. 263 of the Act and the assessee was not put to notice on the applicability of this provision either in the show cause notice u/s.263 of the Act or during the proceedings u/s.263 of the Act. The decision of the Hon’ble Supreme Court in the case of Amitabh Bachchan, 384 ITR 200 (SC) will not be applicable to the facts of the present case for the reason that in that case in the course of 263 proceedings, the assessee was put on notice on the issue which was part of the show cause notice issued u/s. 263 of the Act. As we have already discussed, in the present case, no such notice was given by the Pr.CIT. Accordingly, we modify the order of Pr. CIT u/s. 263 of the Act with regard to applicability of section 43B and these observations are quashed. We, however, uphold the order of Pr. CIT on this issue of failure to make proper, necessary and required enquires while completing assessment u/s.143(3) of the Act, with regard to the issues set out in the show cause notice issued u/s.263 of the Act.

In the result, the appeal by the assessee is partly allowed.