KUMAR URBAN DEVELOPMENT P LTD,PUNE vs. PRINCIPAL COMMISSIONER OF INCOME-TAX-4, PUNE

This is an appeal filed by the assessee directed against the order of ld. Pr. Commissioner of Income Tax- 4, Pune (‘the PCIT’) dated 31.03.2021 for the assessment year 2015-16.

Briefly, the facts of the case are that the appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of promoters and developers of the properties. The return of income for the assessment year 2015- 16 was filed on 31.10.2015 declaring total income of Rs.Nil. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle-14, Pune (‘the Assessing Officer’) vide order dated 29.12.2017 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at total income of Rs.55,37,02,640/-. The returned income, inter-alia includes the disallowance of interest u/s 36(1)(iii) of Rs.38,87,38,952/-. However, the said addition was undergone change in the proceedings vide order dated 22.01.2018 u/s 154 to Rs.32,39,72,372/-. The said amount was arrived at by the Assessing Officer by applying 14% of interest on the amount of loans and advances made to sister concern. The said rate of interest of 14% is arrived at by average value of rate of interest paid by the appellant on the loans availed by the appellant-company. 3. Subsequently, the ld. PCIT on examination of the assessment records found that the disallowance of interest worked out by the Assessing Officer at the rate of 14% on loans and advances made to the sister concern of Rs.231,40,88,373/- is without any justification, as the appellant had raised the borrowed funds at interest rate 12% to 19%. Further, the ld. PCIT also found that the Assessing Officer had not considered the item appears under head “loans and advances” towards land as the interest bearing funds were utilized for non-business purposes. Based on this observation, the ld. PCIT formed an opinion that the assessment order passed by the Assessing Officer u/s 143(3) dated 29.12.2017 is erroneous and prejudicial to the interests of the Revenue and, accordingly, proposed to revise the assessment order by issuing the show-cause notice u/s 263 on 11.09.2018. In response to show-cause notice, the appellant filed a detailed explanation vide letter dated 16.12.2017 stating that during the course of assessment proceedings, the appellant had furnished the complete details of advances for properties of Rs.58,98,18,075/- and also demonstrated that these advances were made for the business purposes. The Assessing Officer having examined the complete details submitted by the appellant had chosen not to make any addition, as Assessing Officer was satisfied that when the advances are made for the business purposes, the question of disallowance u/s 36(1)(iii) does not arise.

As regards to the rate of interest to be applied on the loans and advances made to the sister concern, it is submitted that the Assessing Officer adopted 14% rate of interest after due consideration of the fact that the appellant had paid interest on the loans borrowed ranging from 8% to 20%. Without prejudice to the above, it is finally submitted that the assessment order cannot be termed as erroneous and prejudicial to the interests of the Revenue, inasmuch as, the Assessing Officer took the plausible view after application of mind during the course of assessment proceedings. It is submitted that the Assessing Officer was not expected to record the finding on each and every aspect of verification carried out by him during the course of assessment proceedings. It was further submitted that the assessment was made in accordance with law and same cannot be termed as erroneous.

Without prejudice to the above, it is submitted that the ld. PCIT cannot exercise the power of revision in respect of matter which is subject matter of appeal before the CIT(A). The ld. PCIT due consideration of the explanation filed held that the Assessing Officer had not examined the issue of advance for properties, despite the fact that there is very high increase in the amount of Rs.7,33,35,050/- to Rs.58,98,18,075/-. Similarly, the ld. PCIT held that when the assessee had borrowed funds at the interest rate ranging from 9% to 12%, the average rate comes to 15.5% as against 14% adopted by the Assessing Officer for the purpose of disallowing the interest on the loans and advances made to sister concerns. Finally, the ld. PCIT held that since the Assessing Officer had failed to conduct enquiries on the above items, the assessment order passed is erroneous and prejudicial to the interests of the Revenue and, accordingly, set-aside the assessment order to the file of the Assessing Officer with direction to pass afresh assessment order in accordance with law after giving an opportunity of being heard to the assessee. 6. Being aggrieved, the appellant is in appeal before us in the present appeal. 7. The ld. AR submits that during the course of assessment proceedings, the Assessing Officer had examined all the issue which are subject matter of revision by the ld. PCIT. He submitted that during the course of assessment proceedings, in response to query by the Assessing Officer, the details of advances for properties were furnished by the appellant vide letter dated 16.12.2017 received in 21.12.2017 which are placed at page no.70 to 72 of the Paper Book, wherein it was clearly mentioned that the advances were made for the purchase of properties as per the details furnished therein. Having considered this fact, the Assessing Officer had chosen not to make any addition. As regards, the disallowance of interest u/s 36(1)(iii) in respect of loans and advances made to sister concerns, it was submitted that out of total interest debited to the P&L Account of Rs.46 crores, an amount of Rs.8 crores disallowed by the Assessing Officer himself, under the provisions of section 14A of the Act. The Assessing Officer made a disallowance of interest u/s 36(1)(iii) on the ground that the interest bearing funds were diverted for non- business purposes, made a disallowance of Rs.38 crores by adopting 14% rate of interest on the loans and advances of Rs.231,40,88,373/- vide order dated 22.01.2018 passed u/s 154 of the Act. He further submitted that the issue of disallowance of interest u/s 36(1)(iii) is subject matter of appeal before the ld. CIT(A), who vide order dated 30.03.2022 had deleted the said interest on the ground that the interest-free funds far exceeds the loans and advances made to sister concern. He also filed the copy of the order of ld. CIT(A) before us. He submitted that the ld. CIT(A) had wrongly assumed that the interest paid was borrowed ranging from 12% to 19% as against the fact that the appellant had paid the rate ranging from 8% to 20% as evident from page no.57 of the Paper Book.

Without prejudice to the above, it is contended that the ld. PCIT ought not to have exercised the power of revision, inasmuch as, the issues which are sought to be revised by the ld. PCIT found part of subject matter of appeal before the ld. CIT(A). In support of this proposition, he relied upon the decision of the Hon’ble Madras High Court in the case of Smt. Renuka Philip vs. ITO, 101 taxmann.com 119 (Madras) and the decision of the Hon’ble Allahabad High Court in the case CIT vs. Vam Resorts & Hotels (P.) Ltd., 111 taxmann.com 62 (Allahabad).

On the other hand, ld. CIT-DR submits that the Assessing Officer had not conducted any enquiry, as to what is the correct rate of interest to be adopted for the purpose of computing the amount of disallowance u/s 36(1)(iii), as well as true nature of the transaction of advances for property of Rs.58,98,18,075/-. The Assessing Officer without examining any details, as well as without due application of mind had passed the assessment order. Thus, it was pleaded that the PCIT was justified in exercising the power of revision.

We heard the rival submissions and perused the material on record. The Parliament had conferred the power of revision on the Commissioner of Income Tax u/s 263 of the Act in case the assessment order passed is erroneous and prejudicial to the interests of revenue. In order to invoke the power of revision, the above two conditions are required to be satisfied cumulatively. References in this regard can be made to the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT, 243 ITR 83 (SC) and in the case of CIT vs. Max India Ltd., 295 ITR 282 (SC). The error in the assessment order should be one that it is not debatable or plausible view. In a case where the Assessing Officer examined the claim, took one of the plausible views, the assessment order cannot be termed as an “erroneous”.

Now, we shall examine the facts of the present case in order to ascertain whether or not the Assessing Officer had conducted proper enquiries with regard to the items sought to be revised by the ld. PCIT. As regards to the advance of the properties, it is an admitted position that during the course of assessment proceedings, the appellant had furnished details of advances for properties of Rs.58,98,18,075/-. No doubt the assessment order is silent as to the fact that the Assessing Officer had verified this item i.e. advances for properties. Nevertheless, there is nothing on record triggering enquiry into this item or to substantiate that this transaction is something else and nor the ld. PCIT had referred to any material on record justifying the revision. There is no gainsaying that the power of revision can be exercised by the ld. PCIT based on the opinion formed by himself. The revision based on the subjective opinion of the ld. PCIT cannot be sustained in the eyes of law. As observed by us, there was no existence of facts and circumstances on the base of which the ld. PCIT had formed an opinion that an enquiry is warranted into the item appearing under the head “Advance for properties”. In the circumstances, we are of the considered opinion that the opinion formed by the ld. PCIT that assessment order is erroneous for the fact that the Assessing Officer had not caused any enquiry into items “advance for purchase of properties” is based on no evidence. In such circumstances, it can be said that the ld. PCIT had not applied his mind or did not honestly form his opinion.

As regards to the issue of average rate of interest to be adopted for the purpose of computing amount of disallowance u/s 36(1)(iii) on the loans and advances made to the sister concern, it is an admitted position that the question of disallowance u/s 36(1)(iii) is not subject matter of revision, but the rate to be adopted for the purpose of computing the amount of disallowance u/s 36(1)(iii) of the Act. During the course of assessment proceedings, the appellant had categorically stated that the average rate of interest is only 14% as the appellant had borrowed the funds at the rate of interest ranging from 8% to 20%. The appellant had also filed the details such as name of the lenders and rate of interest etc as evident from page no.57 of the Paper Book. Therefore, it cannot be said that the Assessing Officer had adopted rate of interest @ 14% without making any enquiry as to the average rate of interest at which the loans were borrowed by the appellant company.

Be that as it may, as things stand today, the question of disallowance u/s 36(iii) does not arise for the reason that the addition made by the Assessing Officer came to be deleted by the ld. CIT(A) on appeal. Therefore, the issue as to what is the correct rate of interest to be adopted had become academic. In the circumstances, the order of revision passed by the ld. PCIT cannot be sustained in the eyes of law. Since, we held that the order of revision cannot be sustained in the eyes of law, we need not delve into the issue of doctrine of merger and the applicability of the decision of the Hon’ble Madras High Court in the case of Smt. Renuka Philip vs. ITO, 101 taxmann.com 119 (Madras) and the decision of the Hon’ble Allahabad High Court in the case CIT vs. Vam Resorts & Hotels (P.) Ltd., 111 taxmann.com 62 (Allahabad). In the circumstances, the issue raised by the assessee-company in the present appeal stands allowed.

In the result, the appeal filed by the assessee stands allowed. Order pronounced on this 02nd day of August, 2022.