DCIT CC 6(4), MUMBAI vs. MUMBAI SEZ LTD, MUMBAI

This appeal has been filed by the revenue against the order dated 16.02.2017 passed by the Commissioner of Income Tax (Appeals)-54 (for short ‘the CIT(A), Mumbai, for the assessment year 2007-08, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) r.w.s 263 of the Income Tax Act, 1961 (for short the ‘Act’).

Brief facts of the case are that the assessee company engaged in the business of setting up and operate infrastructure facilities, filed its return of income for the assessment year under consideration declaring the total income of Rs. 3,06,61,438/-. The assessment was completed u/s 143 (3) of the Act and the AO determined the taxable income of the assessee at Rs. 44,20,28,420/-. Assessment Year: 2007-08

Subsequently, the CIT Central, vide order dated 30.03.2012 passed u/s 263, set aside the assessment and directed the AO to re-examine the following issues and passed order afresh: a) Examine and decide amount of expenses disallowable under rule 8D(i), 8D(ii) and under rule 8D(iii) of income tax rules and will decide as such disallowable expenses can be allowed as deduction or can be capitalized towards work-in-progress. b) Examine whether social welfare expenses are incurred wholly and exclusively for the purpose of business and whether these expenses can be capitalized towards work-in=progress. c) Examine what made the assessee to borrow Rs. 185.00 crore from Banks when these funds were not immediately required by the assessee and will also examine how it can be said that the decision of the assessee to give Rs. 1505.56 crore out of these fund to M/s DIHL is decision taken on account of commercial expediency. He will examine whether interest expenses borne by the assessee on borrowed funds given to M/s DIHL can be capitalized towards work-in-progress in the case of the assessee.”

In compliance thereof, the AO issued notices u/s 143 (2) and 142 (1) of the Act. In response to the said notices, the authorized representative of the assessee appeared before the AO and filed written submissions. The AO after hearing the assessee reduced the capital work-in-progress holding that the assessee has wrongly capitalized an amount of Rs. 73,14,200/- towards social welfare expenses, Rs. 1,79,24,895/- disallowance u/s 14A and Rs. 12,62,19,359/- differential rate of interest. The AO accordingly determined the total income of the assessee at Rs. 44,11,71,913/-. The assessee challenged the assessment order passed by the AO u/s 143 (3) read with section 263 of the Act before the Ld. CIT (A), who after hearing the assessee partly allowed the appeal. However, confirmed the action of the AO in making disallowance to the extent of Rs. 96,03,789/- u/s 14A read with rule 8D, upheld the action of AO to disallow social welfare expenditure and further confirmed the action of AO in Assessment Year: 2007-08 disallowing the capitalization of differential interest to the extent of Rs. 12,62,19,359/- 5. The revenue has challenged the impugned order passed by the Ld. CIT (A) on the following effective ground:-

The Ld. Departmental Representative (DR) fairly admitted that the Tribunal has set aside the order passed by the Ld. CIT u/s 263 of the Act directing the AO to re-examine the issues in question.

At the outset, the Ld. counsel for the assessee submitted that the ‘B’ Bench of the Mumbai Tribunal has allowed the appeal filed by the assessee against the order passed by the CIT u/s 263 of the Act, in assessee’s appeal for the assessment year under consideration. Since, the Tribunal has set aside the order passed by the CIT directing the AO to re- examine the issue regarding i) capitalizing the disallowance under rule 8D, ii) social welfare expenses and iii) interest expenses borne by the assessee on borrowed funds, the assessment order passed u/s 143 (3) read with section 263 of the Act relating to the said issues, the present grounds of appeal