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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI PAWAN SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2012-13. 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-8, Mumbai [in short ‘Pr. CIT’].
The grounds of appeal filed by the assessee read as under: 1.1 The Ld. Pr.CIT has erred in law and in facts and in circumstances of case in initiating revision proceeding under section 263 of the Act. The said revision proceeding is to be set aside and order passed u/s 263 of the Act is required to be quashed. 1.2. The Ld. Pr.CIT has erred in law and in circumstances of the case in passing order under section 263 of the Act and failed to consider the fact that the order passed u/s 143(3) of The Act ('assessment order') by the Assistant Commissioner of Income Tax, Circle-5(2)(2), Mumbai ('the ACIT) is not erroneous in so far as it is prejudicial to the interests of the revenue. 1.3. The Ld. Pr.CIT ought to have appreciated the fact that the assessment order has been passed by the ACIT after making proper inquiries or verification which should have been made, hence the said assessment order is not erroneous in so far as it is prejudicial to the interests of revenue requiring revision proceeding u/s 263 of the Act. 2.1 The Ld. Pr.CIT has erred in law and in circumstances of the case in setting aside the assessment in respect of finance cost and directing the Assessing Officer (AO) to make a fresh assessment and ignored the fact that the ACIT has allowed the proportionate finance cost after making proper inquiries or verification which should have been made, hence setting aside of assessment and direction for fresh assessment in respect of finance cost in the order u/s 263 of The Act is required to be deleted 2.2. The Ld. Pr.CIT failed to appreciate the fact that disallowance of proportionate finance cost in the assessment order is subject matter of appeal before the Commissioner of Income Tax (Appeals) and as per the provisions of section 263(1) of the Act, the powers of the Ld. Pr.CIT shall extend to such matters as had not been considered and decided in such appeal, hence setting aside of assessment and direction for fresh assessment in respect of finance cost in the order u/s 263 of the Act is required to be deleted. 3.1 The Ld. Pr.CIT has erred in law and in circumstances of the case in setting aside the assessment in respect of other expenses (legal and professional fees) and directing the Assessing Officer (AO) to make a fresh assessment and ignored the fact that the ACIT has allowed the other expenses (legal and professional fees) after making proper inquiries or verification which should have been made, hence setting aside of assessment and direction for fresh assessment in respect of other expenses (legal and professional fees) in the order u/s 263 of the Act is required to be deleted.
3. In a nutshell, the facts are that the assessee filed its return of income for the assessment year (AY) 2012-13 on 29.09.2012 declaring total income of Rs.8,34,23,788/-. The assessment was completed by the Asst. CIT-6(2)(2), Mumbai (hereinafter referred as ‘AO’) u/s 143(3) on 31.03.2012 determining the total income of Rs.20,89,20,460/-. The Pr. CIT, on perusal of the assessment records, found that the said assessment is erroneous as no inquiry, prima facie warranted on facts and circumstances of the case, were made in respect of the following issue: “The assessment was completed submitting that there are absolutely no expenses in connection with the projects which needed to be incurred in the hands of the company as per the sub-contract agreement and inadvertently the following expenditure remained to be disallowed while assessing the assessment income: 1. Finance Cost Rs.12,48,50,462/- 2. Other Expenses (Legal and profession fees) Rs.5,53,35,504/-.” In response to a show cause notice issued by the Pr. CIT on the above issues, the AR of the assessee filed a written submission dated 13.01.2017 which has been extracted at para 6 of the impugned order. However, the Pr. CIT was not convinced with the said reply of the assessee for the reason that as per the clauses of sub-contract entered into by the assessee, all the expenses are borne by the sub-contractor. Further, as these were the only two projects undertaken by the assessee during the impugned assessment year, the Pr. CIT observed that the financial expenses and other expenses debited by the assessee ought to have been disallowed by the AO. Instead, the AO has disallowed only a part of the financial expenses claimed under the head “other expenses”. Further observing that the assessee’s contracts have been sub- contracted to other group concerns and there is hardly any substantial work undertaken by the assessee to directly incur those huge expenses, the Pr. CIT held that there was no justification for the expenses incurred under the head ‘other expenses’ (legal and professional fees) and finance costs and there is no explanation to validate that the expenses were wholly and exclusively for the purpose of business of the assessee. About the rationality of invoking provisions u/s 263 of the Act, the Pr. CIT relied on the decision in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC), Rajalakshmi Mills Ltd. v. ITO (2009) 313 ITR (AT) 182 (Chennai) (SB), Geevee Enterprises v. Addl. CIT (1975) 99 ITR 375 (Del), CIT v. Ralson Enterprises (2007) 288 ITR 322 (SC), CIT v. Hindustan Lever Ltd. (2012) 343 ITR 161 (Bom) , Sri Manjunatheswara Packing Products & Camphor Works (231 ITR 35). Thus the Pr. CIT held that this action of the AO has resulted in prejudice to the interest of revenue within the meaning of section 263 of the Act in as much as the claim of the assessee is allowed in excess and/or income of the assessee has been under assessed. Therefore, he set aside the assessment in respect of finance costs and other expenses (legal and professional fees) and directed the AO to make a fresh assessment in view of the above findings, after giving due opportunity of being heard to the assessee.
4. Before us, the Ld. counsels of the assessee submit that the Pr. CIT was wrong in holding that finance costs and legal and professional fees, which warranted on facts and circumstances of the case had not been inquired into and the claim of the assessee has been allowed by the AO without inquiry during the assessment proceedings, despite the detailed submissions made by the assessee before the AO as a reply to notice u/s 142(1) and elaborate discussion made by the AO on finance costs in the assessment order. It is explained that as far as the finance expenses are concerned the AO had apportioned the cost of finance expenses in the ratio of investment activity and construction activity. The detailed order was passed after considering the explanation of the assessee. Thus the Ld. counsels submit that the AO has applied his mind to the facts of the case as opposed by the Pr. CIT, who merely held that all the costs were to be borne by the sub-contractors, the said amounts need to be disallowed. It is further stated that a mere summary observation stating that all expenses were to be borne by the sub-contractor cannot be applied to costs that are indirect and incurred by the assessee itself like the professional and legal fees and finance costs, as these expenses are not directly deployed with the conduct of the business of the assessee to be borne by sub-contractors but are inherent to the company itself. The assessee cannot pass on interest costs on funds borrowed and professional legal expenses incurred by it to the sub-contractor. However, all expenses directly incurred in the execution of the said projects were borne by the sub-contractor. Thus the Ld. counsels submit that as the very basis for holding the order being prejudicial to the interest of revenue in the 263 proceedings fails, the order u/s 263 is liable to be quashed. Referring to the decision in CIT v. Fashhions P. Ltd. (2017) 398 ITR 603 (HC) (606 & 607), CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom)(HC)( 117), the Ld. counsels argue that the AO’s action cannot be termed as erroneous simply because the Commissioner does not agree with his conclusions. Further, relying on the decision in MOIL India Ltd. v. CIT (2017) 396 ITR 244 (Bom), it is stated by them that where the disallowance is made on an ad-hoc percentage basis, the exercise of jurisdiction u/s 263 of the Act by the Commissioner is not sustainable and when there is discussion for disallowance of claim and if there is no discussion for allowability of the claim, after making inquiry, the order cannot be revised. Also relying on the decision in CIT v. Nirav Modi (2017) 390 ITR 292 (Bom) and the SLP on it filed by the Revenue being dismissed by the Hon’ble Supreme Court, the Ld. counsels submit that : “Nor can Revisional power be exercised for directing a fuller inquiry to find out if the view taken is erroneous, when a view has already been taken after inquiry. This power of Revision can be exercised only where no inquiry as required under the law is done. It is not open to enquire in case of inadequate inquiry.” The Ld. counsels also rely on the decision in CIT v. Reliance Communication Ltd. [2017] 396 ITR 217 (Bom.) (HC) (220), CIT v. Reliance Communication Ltd. [2017] 244 Taxman 55 (SC), Rajalakshmi Mills Ltd. v. CIT (2009) 121 ITD 343 (Chennai) (SB) (Trib), Geevee Enterprises v. Add. CIT (1975) 99 ITR 375 (Delhi) (HC), CIT v. Ralson Inds. (2007) 288 ITR 322 (SC), CIT v. Hindustan Lever Ltd. (2012) 343 ITR 161 (Bom) (HC), CIT v. Shree Manjunatheware Packing Products and Comphor (1998) 231 ITR 53 (SC).
5. On the other hand, the Ld. DR relies on the decision in CIT v. Goetze (India) Ltd. (2014) 44 taxmann.com 138 (Del), wherein it is held that “where as per the finding recorded by the Commissioner, view taken by the Assessing Officer was not correct, erroneous and was prejudicial to the interests of the revenue, then order of the Commissioner could not be set aside on the ground that two views were possible or probable.” Further, reliance is placed by him on the decision in M/s Crompton Greaves Ltd. v. CIT by the ITAT ‘C’ Bench Mumbai in and ITA No. 2836/Mum/2014 for AY 2007-08.
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 assessment proceedings, the AO vide show cause notice dated 20.03.2015 asked the assessee to substantiate and explain the expenditure debited in the P&L account under the head finance cost of Rs.12,48,50,462/- is wholly and exclusively made for the purpose of business. In response to it, the assessee vide its submission dated 25.03.2015 and 27.03.2015 explained to the AO that it had incurred interest expenditure of Rs.12,48,50,462/- on the amount borrowed from M/s SREI Infrastructure Finance P. Ltd. (SREI). Also the assessee referred to its submission dated 27.01.2015, wherein it claimed to furnish the details of interest paid along with TDS made. Having considered the submission of the assessee, the AO found the same not tenable on the ground that section 36(1)(iii) of the Act refers to the deduction of such interest which are in respect of capital borrowed for the purpose of business and profession. Making a distinction between business and investment, the AO worked out the finance cost applied in investment activities as under: Cost of construction Rs.158,53,50,802/- Investment Rs.50,00,30,000/- Taking note of the fact that the cost of construction and investment activity are in the ratio of 3:1, the AO attributed 25% of the finance cost to the investment activity. Accordingly, the AO disallowed an amount of Rs.3,12,12,615/-, apportioned towards the investment activity. The AO added back an amount of Rs.3,12,12,615/- to the total income of the assessee being not related to business activity. Thus the AO after examination of the documents/evidence filed by the assessee has disallowed the above amount.
In the case of Goetze (India) Ltd. (supra), it is held that where an Assessing Officer took a view but said view was not correct, erroneous as per findings recorded by the Commissioner, along with finding that order passed by the Assessing Officer was prejudicial to interests of revenue, then order of Commissioner could not be set aside on the ground that two views were possible or probable. In the instant case, as mentioned earlier, the AO considering the ratio of 3:1 between cost of construction and investment activity, made apportionment of Rs.3,12,12,615/- towards investment activity and disallowed the same. In the order u/s 263 the Pr. CIT has not recorded any finding that the above calculation made by the AO is not correct, erroneous and prejudicial to the interests of revenue. As mentioned earlier the only ground on which the proceedings u/s 263 was initiated refer to the argument that there are absolutely no expenses in connection with the projects which needed to be incurred in the hands of the company as per the sub-contract agreement, which is general in nature. Thus the case of the assessee is distinguishable from the decision in Goetze (India) Ltd. (supra) relied on by the Ld. DR. We find that the other decision relied on by the Ld. DR in M/s Crompton Greaves Ltd. (supra) has been recalled by the Tribunal. We are of the considered view that the ratio laid down the following decisions is squarely applicable in the present case. In the case of Reliance Communication Ltd. (supra), it is held that where assessee raised funds by way of FCCBs and the Assessing Officer made detailed inquiries about genuineness and creditworthiness of actual subscribers to such FCCBs in terms of section 68, mere fact that AO did not make any reference to said issue in the assessment order, would not entitle the Commissioner to pass a revisional order. The SLP filed by the Revenue against the above order has since been dismissed by the Hon’ble Supreme Court in CIT v. Reliance Communication Ltd. (2016) 76 taxmann.com 226 (SC). In the case of Nirav Modi (supra), it is held that where the Assessing Officer, after making proper and detailed inquires, took a view that the amount received by the assessee as gift from his relatives was a genuine transaction, impugned revisional order passed by the Commissioner directing the AO to inquire into capacity of donors and to decide about genuineness of gift afresh, was not sustainable. The SLP filed by the Revenue against the above order has since been dismissed by the Hon’ble Supreme Court in CIT v. Nirav Modi (2017) 77 taxmann.com 15 (SC). In the case of MOIL Ltd. (supra), it is held by the Hon’ble Bombay High Court that where Assessing Officer allowed corporate social responsibility expenditure along with some other claims without specifically mentioning about corporate social responsibility expenditure in assessment order, the Commissioner could not invoke revisional jurisdiction holding that order was passed without making any inquiry in respect of allowability of claim of corporate social responsibility.
In the instant case, in response to notice u/s 142(1), the assessee filed details of interest expenses and rent expenses, legal and professional fees and general expenses vide letter dated 27.01.2015. The said details comprised of party wise details of interest expenditure, legal and professional fees along with details of TDS thereon. The assessee further filed copy of terms of loans between the company and SREI. Also it filed before the AO, during the course of assessment proceedings, working of total allocable project cost incurred in all the projects and the basis of apportionment of the same to the company. As mentioned earlier after proper examination, the AO disallowed Rs.3,12,12,615/- u/s 36(1)(iii) of the Act. In response to the query raised by the AO, the assessee has filed details of other expenses as mentioned above. Therefore, following the ratio laid down in the decision in MOIL Ltd., Nirav Modi, Reliance Communication Ltd. narrated hereinabove, we set aside the order u/s 263 dated 31.03.2017 passed by the Pr. CIT.