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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI AMARJIT SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2013-14. The appeal is directed against the order u/s 263 of the Income Tax Act 1961, (the ‘Act’) passed by the Pr. Commissioner of Income Tax-5, Mumbai [in short ‘Pr. CIT’].
The grounds of appeal
filed by the assessee read as under:
1. A. On the facts and in the circumstances of the case and in law the Ld. Pr. CIT erred in invoking the provisions of Sec. 263 of I.T. Act, 1961 and treating the assessment order passed u/s 143(3) dated 14.03.2016 as erroneous/prejudicial to the interest of the revenue.
Mags Finvest Pvt. Ltd. B. The Ld. Pr. CIT erred in rejecting the objections of the appellant filed on 27.02.2018 and ignoring the evidence placed on record. C. The Ld. Pr. CIT erred in applying the provisions of proviso to Sec. 36(1)(iii) in respect of interest paid on acquisition of asset not appreciating the fact that upto AY 2015-16 the proviso was applicable to interest paid on borrowing for extension of existing business or profession which is not the position in appellant’s case. D. The appellant submits that since there is no extension of business the proviso has no application to the fact and circumstances of the case as such the order u/s 263 need to be cancelled.
Briefly stated, the facts are that the assessee-company purchased capital asset, namely Samudra Mahal Flat during AY 2012-13 for Rs.38,93,05,977/-. The balance sheet reflected fresh loan of Rs.5,00,00,000/- from Barclays Bank and outstanding loan of Rs.14,32,13,207/- from HDFC Bank. The Pr. CIT has observed that the interest on loan amounting to Rs.1,88,14,539/- debited by the assessee as mentioned in Note 18 under the head other expenses should have been disallowed in view of the proviso to section 36(1)(iii) of the Act. As per him, the failure on the part of the AO to conduct proper inquiry with a view to examine the application of the proviso to section 36(1)(iii) in the present case rendered the assessment order erroneous in so far as it is prejudicial to the interests of the revenue within the meaning of section 263 of the Act. Having gone through the reply of the assessee to the show cause notice, the Pr. CIT held that the issue of allowability of interest expenses vis-a-vis the provisions contained in section36(1)(iii) are required to be investigated, which was not carried out by the AO during the assessment. As the assessment order was passed without Mags Finvest Pvt. Ltd. Pr. CIT held that the provisions contained in clause (a) of Explanation 2 to section 263(1) are clearly attracted in the present case. Therefore, invoking the provisions of section 263 of the Act, he set aside the assessment order dated 14.03.2016 and directed the AO to pass a fresh order after making necessary inquiry to the issue as observed by him and after allowing reasonable opportunity to the assessee.
Before us, the Ld. counsel of the assessee files a Paper Book (P/B) containing (i) copy of audited annual accounts for year ended 31st March 2013, (ii) copy of computation of income for AY 2013-14, (iii) copy of acknowledgement of return of income for AY 2013-14, (iv) copy of letter dated 21.09.2018 and 28.09.2018 requesting for hearing sheet, (v) copy of hearing, (vi) copy of notice dated 13.07.2015 issued u/s 143(2), (vii) copy of submission letter made to AO dated 09.07.2015, (viii) copy of notice dated 05.10.2015 issued u/s 142(1) and 143(2), (ix) copy of submission letter made to AO dated 16.10.2015, (x) copy of submission letter made to AO dated 03.02.2016, (xi) copy of notice dated 05.02.2018 issued u/s 263 (xii) copy of reply letter dated 24.02.2018 made to CIT and (xiii) copy of ITAT order dated 14.07.2017 passed against 263 order for AY 2012-13. The Ld. counsel further submits that the assessee vide agreement dated 31.03.2011 purchased a flat at Samudra Mahal for Rs.38,93,05,977/-. The stamp duty on the purchase was paid on 31.03.2011. The assessee took the possession of the flat and put it to use on or about in the month of April 2011. The assessee took a loan of Mags Finvest Pvt. Ltd. Rs.20 crore from HDFC Bank Ltd. and during the year it took additional loan of Rs.5 crore from Barclays Bank. The interest on the loan started from April 2011 in respect of loan from HDFC Bank i.e. after the date on which the assessee took possession of the flat. The ledger account of interest paid on loan for the year under consideration was referred to. Thus it was stated that proviso to section 36(1)(iii) has no application to the facts and circumstances of the case and as such the entire interest needs to be allowed as a revenue expenditure. Also it is stated that the assessee had filed all the details on the above before the AO and the order u/s 263 is not called for as the AO has completed the assessment after inquiry and verification and examination of all the details.
On the other hand, the Ld. DR submits that the Pr. CIT has rightly passed the order u/s 263 as the allowability of interest expenses vis-a- vis the provisions contained in section 36(1)(iii) has not been examined by the AO.
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. During the course of hearing, we asked the Ld. counsel of the assessee to clarify whether the details as called for by the AO vide letter dated 05.10.2015 issued u/s 142(1) of the Act (page 24-25 of the P/B) was filed by the appellant. In response to it, the Ld. counsel replies that partial details to Question No. 5 could be filed by the assessee and no details were filed in response to Question No. 7.
Mags Finvest Pvt. Ltd. We may mention here that Question No. 5 of the Annexure to notice u/s 142(1) refers to details of expenditure debited to the profit and loss account under the head ‘other expenses’ above Rs.50,000/-. Question No. 7 relates to the complete details of Samudra Mahal flat shown in the fixed asset schedule along with copy of agreement; details in respect of WIP added during the year of Rs.64,55,699/- and details regarding the deployment of funds for carrying out the work. In the instant case the Pr. CIT has passed an order u/s 263 relating to the application of proviso to section 36(1)(iii) which pertain to interest on loan amounting to Rs.1,88,14,539/- on purchased capital asset namely Samudra Mahal flat. As mentioned above, the assessee has failed to file the details regarding Samudra Mahal flat asked by the AO vide Question No. 7 of the Annexure to notice u/s 142(1) dated 05.10.2015. Therefore, the order passed by the Pr. CIT is not to be interfered with. We may mention here that a same issue arose before the ITAT ‘B’ Bench, Mumbai in assessee’s own case for AY 2012-13 in ITA No. 3034/Mum/2017. The Tribunal held as under: “4. We have heard the rival contentions and perused relevant material on record. At this stage, without delving much deeper into the merits of the assessee’s claim, the only question to be decided by us is whether the twin conditions of the quantum order being erroneous and prejudicial to the interest of the revenue are fulfilled or not so as to justify invocation of Section 263 ?
5. The reason cited by Ld. CIT to invoke the same are that the Ld. AO failed to make the interest disallowance u/s 36(1)(iii) as the same was relatable to acquisition of the property not put to use during the year. Prima facie, it appears that the assessee has suffered similar disallowance u/s 36(1)(iii) in AY 2014-15 and the assessment for that year forms the basis for invocation of Section 263 in the impugned AY. The assessee claims that the asset was put to use during April, 2011 when the same was given to the director but a perusal of the financial statements for impugned AY reveals that no depreciation has been claimed against the same. The Ld. AR has also not explained the reason for similar disallowance in AY 2014-15.
6. A perusal of the documents placed in the paper book reveal that although the Ld. AO called for the details of acquisition of property, details of loans obtained, interest thereupon etc. but it nowhere examined the issue that whether the asset was, in fact, put to use during the impugned AY and whether there was any extension of existing business. We find that the issue is nowhere discussed in the Assessment order. Prima facie, the Ld. AO has failed to examine the issue from this perspective. Moreover, the issue of Loan processing charges was neither inquired in any of the questionnaire nor delved upon by Ld. AO anywhere. 7. Proceeding further, we also note the deeming fiction created by newly inserted Explanation 2 to Section 263 as inserted by Finance Act, 2015 w.e.f. 01/06/2015. As per clause (a) of Explanation 2, the order of Ld. AO shall be deemed to be erroneous and prejudicial to the interest of the revenue where the order has been passed without making inquiries or verification which should have been made. In the instant case, we already note that the Ld. AO has not made any inquiry so as to find out whether the proviso to Section 36(1)(iii) was applicable to the assessee or not and therefore, the deeming fiction of law applies to the instant case.