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IN THE INCOME-TAX APPELLATE TRIBUNAL “A” BENCH MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER (Assessment Year 2012-13) M/s Lhotse Developers & Traders DCIT, Ward 12(3)(2) Pvt. Ltd., Raheja Chambers, Room No. 363, Aayakar Linking Road, Santaxruz (West), Vs. Bhavan, M.K. Road, Mumbai-400054. Mumbai-20. PAN: AABCL0079N Apellant Respondent Appellant by : Shri Nishit Gandhi (AR) Respondent by : Shri R.P. Meena (CIT-DR) Date of Hearing : 02.05.2018 Date of Pronouncement : 31.07.2018 ORDER PER PAWAN SINGH, JUDICIAL MEMBER;
The instant appeal by assessee under section 253 of the Income-tax Act (the Act) is directed against the order of ld. Principal Commissioner of Income-Tax-12 [ld. PCIT], Mumbai dated 31.03.2017 passed under section 263 for Assessment Year 2012-13. The assessee has raised the following grounds of appeal:
The Learned PCIT erred in facts, in law and under the circumstances of case by 1 a) Incorrectly initiating revision proceedings u/s 263 of Income Tax Act. b) Erred in making revision in Assessment Order passed u/s 143(3) dt.09.02.2015 merely by observing that assessee has made irregular adjustment of interest income against WIP with consequent under assessment of Rs.1,08,74,428/-. c) The Learned PCIT incorrectly opined that assessment made is erroneous without bringing on record any satisfactory reason or evidence on record before initiating proceeding, hence, revision proceeding u/s 263 initiated is required to be cancelled / annulled.
- M/s Lhotse Developers & Traders Pvt. Ltd. d) The Learned PCIT fail to appreciate that the Assessment Order passed u/s 143(3) by AO is made after considering all the facts, and application of mind by AO in allowing the deduction of interest expenses, hence, order passed u/s 143(3), cannot be said to be erroneous. 2 a) Incorrectly observed that interest expenses amounted to Rs.1,08,74,428/- should be capitalized without appreciating the fact that interest paid on amount borrowed is not used for construction / business, hence no amount of interest is required to be capitalized under the law. b) The Learned PCIT fail to appreciate that interest income earned on loan advanced out of borrowed fund is assessed under income from other sources and interest expenses is deductible u/s 57(iii) of Income Tax Act, hence it cannot be capitalized. c) The Learned PCIT fail to appreciate the provision of Sec.36(1)(iii) of Income Tax Act in observing interest expenses is capital expenses and interest income is revenue receipts and failed to appreciate that amount borrowed is not used for business and same is used for advancing loan to M/s B. Raheja Properties Ltd, hence interest expenses is deductible as it has direct nexus. d) The Learned fail to appreciate the basic condition of provision of Section 36(1)(iii) & 57(iii) of Income Tax Act. e) The Learned PCIT erred in directing AO to disallow interest expenses Rs.2,79,72,158/- instead of Rs.1,08,74,428/- as balance amount of Rs.1,70,97,730/- already disallowed in order passed u/s 143(3) dt.09.02.2015. Appellant submit that - i) Amount borrowed is not used for construction business. ii) The interest paid on borrowed fund is utilized for advancing loan to party and interest earned having direct nexus with interest expenses and hence it is deductible u/s 57(iii) of Income Tax Act from interest income.
Brief facts of the case are that assessee-company is engaged in the business of developer/real estate developer, filed its return of income for relevant Assessment Year on 29.09.2012 declaring loss of Rs. 2,28,13,164/-. The return was selected for scrutiny and the assessment was completed on 09.02.2015 under section 143(3) of the Act. The Assessing Officer while passing the assessment order disallowed interest expenses of Rs. 1,70,97,370/-. The Assessing Officer made the assessment of total M/s Lhotse Developers & Traders Pvt. Ltd. income of assessee on loss of Rs. 57,15,434/-. Subsequently, the assessment was revised by ld. PCIT vide its order dated 31.03.2017. The ld PCIT on examination of record of the assessment took his view that there is irregular adjustment of interest income against work in progress with consequent under assessment of interest income of Rs. 1,08,74,428/-, thereby the assessment order is erroneous and prejudicial to the interest of justice. The ld. PCIT issued show cause notice under section 263 dated 27.03.2017. The assessee filed its reply dated 30.03.2017 along with certain enclosures. In the reply the assessee contended that the cost incurred by assessee on interest expenses has rightly been allowed by Assessing Officer after proper verification and examination of the facts.
The Assessing Officer passed the assessment order after application of mind on the facts brought on record; therefore, the assessment order is neither erroneous nor prejudicial to the interest of justice. The contention of the assessee was not accepted by the ld. PCIT and set-aside the assessment order dated 09.02.2015 to the limited extent and direct the Assessing Officer to assess income of Rs. 1,08,74,428/- under the head “Income from Other Sources” and disallowed the entire interest expenses of Rs. 2,79,72,158/-. The Assessing Officer was also directed to capitalize the disallowed interest to work-in-progress (WIP) after proper verification. Hence, aggrieved by the order of ld. PCIT, the assessee has filed the present appeal before us. 3 M/s Lhotse Developers & Traders Pvt. Ltd.
We have heard the submissions of the ld. Authorized Representative (AR) of the assessee and the ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The ld. AR of the assessee submits that during the assessment, the Assessing Officer raised the proper queries related with the secured and unsecured loan and their utilization vide notice dated 08.07.2014 under section 142(1) of the Act.
The Assessing Officer also required the name and address of the parties to whom the loan were advanced and amount of interest charged. The assessee vide its reply dated 03.02.2015 furnished all the details before the Assessing Officer. The Assessing Officer after considering the submission of the assessee passed the assessment order. The Assessing Officer had taken a possible view. The assessment order passed by Assessing Officer is neither erroneous nor prejudicial to the interest of Revenue. In support of his submission, the ld. AR of the assessee submitted four propositions.
In first proposition the ld AR for the assessee submits that while framing the Assessment under section 143(3) the Assessing Officer (AO) has adopted one of the possible views then the order passed by him cannot be treated as erroneous or prejudicial to the interests of the Revenue and the CIT could not revise the same u/s 263 of the Act. In support of his submission the ld. AR for the assessee relied on the decision of Hon’ble Apex Court in Malabar Industrial Co. Ltd. Vs CIT (2000) 243ITR 83 (SC). The ld PCIT is not empower to revise the Assessment order on an 4 M/s Lhotse Developers & Traders Pvt. Ltd. issue which is debatable and relied on the case law in CIT v/s Max India Ltd. (2007) 295 ITR 282 (SC).
For second proposition the ld. AR for assessee submits the Assessee had borrowed loans for the purpose of construction of plant / building and the construction work was suspended due to litigation, etc. and such monies were invested in fixed deposit, any interest earned on such fixed deposits would be reduced from the cost of the plant / building. In support of his submission the ld. AR for the assessee relied on the decision of Indian Oil Panipat Power Consortium Ltd. Vs ITO (2009) 315ITR 255 (Delhi) and NTPC Sail Power Co. P. Ltd. Vs CIT (2012) 210 Taxman 358 (Delhi).
For third proposition the ld. AR for the assessee submits that while exercising powers of revision U/S 263 of the Act, the CIT is not empowered to direct the AO to frame an assessment in a particular manner or to give specific directions as regards the taxability of certain items. In support of his submission the ld. AR for the assessee relied on the decision of Shri Kirit Vrajlal Babaria Vs DCIT (ITA No. 2939/ M /2010), ACIT Vs Manas Salt Iodosation Industries P. Ltd. (2015) 381 ITR (Trib) (Gauhati) and Development Construction and Allied Services (India) P. Ltd. v/s ITO (2011) 132 ITD 118 (Mumbai).
For forth proposition the ld AR for the assessee submits that assessment order cannot be revised under section 263 of the Act merely on the ground that in the opinion of the ld PCIT, the Assessing officer carried out 5 M/s Lhotse Developers & Traders Pvt. Ltd. insufficient enquiries or that a further probe should have been made by the Assessing Officer or that as per ld PCIT some more revenue could have been fetched based on a different opinion entertained by the Ld PCIT. In support of his submission the ld. AR for the assessee relied on the decision in CIT Vs Nirav Modi (2017) 390 ITR 292 (Bom) [SLP in the above case has been dismissed holding that there are no reasons to entertain the SLP reported in (2017) 244 Taxman 194 (SC)] and MOIL Vs CIT (2017) 396 ITR 244 (Bom), CIT Vs Vikas Polymers (2012) 341 ITR 537 (Delhi) and CIT Vs Krishna Capbox P. Ltd. (2015) 372 ITR 310 (Allahabad). 8. On the other hand the ld. DR for the revenue supported the order of ld. PCIT. The ld. DR for the revenue submits that the assessee borrowed the funds for Hyderabad Project. The part of the amount was given by the assessee to third party on the pretext of advance. The advance was not given for the purpose of business. The interest income was not examined by assessing officer in a particular manner. The interest rate was not examined by assessing officer. Therefore, the order passed by assessing officer is not only erroneous but prejudicial to the interest of revenue. In support of his submission the ld. DR for the revenue relied on the decision of Gauhati High Court in CIT Vs Jawahar Bhattacharjee [2012] 20 taxmann.com 652 (Gauhati). 9. We have considered the rival submission of the parties and have gone through the order of the authorities below. Before discussing the facts of 6 ITA No.2811/M/17- M/s Lhotse Developers & Traders Pvt. Ltd. the present case and the issue raised, we may refer the scope of section 263 as laid down by Hon’ble Supreme Court in Malabar Industrial Co Ltd (supra);
“ A bare reading of section 263 of the Act 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the CIT suo moto under it, is that the order of ITO is erroneous, so far as it is prejudicial to the interest of revenue. The CIT has to be satisfied twin conditions, namely (1), the order of AO sought to be revised is erroneous and (2) it is prejudicial to the interest of revenue. If one of them is absent- if the order of ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue – recourse cannot be had to section 263 (1 ) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of fact or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principle of natural Justice or without application of mind. The ‘phrase prejudicial to the interest of revenue’ is not an expression of art and is not defined in the Act. Understood it is ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the act is to levy and collect tax in accordance with the provision of the act and this task is entrusted to the revenue. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of revenue. The phrase prejudicial to the interest of revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO, cannot be treated as prejudicial to the interest of revenue, for example, when an ITO, adopted one of the course permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of revenue. Unless the view taken by ITO is unsustainable in law.”
- M/s Lhotse Developers & Traders Pvt. Ltd. Hon’ble Jurisdictional High Court in case of CIT Vs Gabriel India Ltd 203 ITR 108 (Bom), held that “The power of suo moto revision under subsection (1) of section 263 of the Act is in the nature of supervisory direction and can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the CIT to exercise the power of revision under this sub section viz ( 1) the order should be erroneous and ( 2) by virtue of the order being erroneous prejudice must have been caused to the interest of the revenue. And order cannot be termed as erroneous unless it is not in accordance with law. If ITO. Act in accordance with law. Make certain assessment; the same cannot be branded as erroneous by the CIT simply because according to him, the order should have been written more celebratory. This section does not visualise a case of substitution of the judgment of the CIT for that of the ITO, who passed the order, unless the decision is held to be erroneous. This is may be visualised where the ITO while making the assessment examines the accounts, makes enquiries, applied his mind to the facts and circumstances of the case and determine the income either by accepting the accounts for by making some estimate himself. The CIT on perusal of records, may be of opinion that the estimate made by the officer concerned was on the lower side and left to the CIT, he would have estimated the income at a higher figure than one determine by the ITO. That would not vest the CIT with power to re-examine the accounts and determine the income himself at the higher figure. This is because ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous, simply because the CIT does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the CIT the order in question is prejudicial to the interest of revenue. But that by itself would not be enough to vest the CIT with the power to suo moto revision because the 1st requirement, namely that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interest of the revenue, then the power of suo moto revision cannot be exercised. And - M/s Lhotse Developers & Traders Pvt. Ltd. every erroneous order cannot be subject matter of revision because the 2nd requirement must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully eligible has not been imposed or that by the application of the relevant statue, on an incorrect or incomplete interpretation, a lesser tax than what was just has been imposed. When exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have material on record to satisfy in that regard. If the action of the authorities challenged before the court, it would be open to the courts to examine whether relevant objective factors were label from the records called for and examined by such authority”.
Further Hon’ble Apex Court in CIT Vs Max India Ltd (supra) held that the phrase "prejudicial to the interest of the revenue" under section 263 has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when the Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law.
In view of the above legal position, now, we shall consider and examine the issues on which the assessment order was revised. The perusal of the assessment order passed under section 143(3) dated 09/02/2015 clearly M/s Lhotse Developers & Traders Pvt. Ltd. shows that the assessing officer while passing the assessment order, the assessing officer examined and raised the inquiry with regard to the payment of interest paid should not be capitalized toward the work in progress. The assessee furnished its reply dated 03.02.2015. In the reply the assessee specifically contended that the borrowing cost are not to be capitalized on the project when the development of the project is interrupted on extended period. The assessee further contended that the assessee suspended the construction activity due to slow down in the real estate; the borrowing cost is claimed as business expenses as the borrowing are for the business purpose and the same is allowable. After considering the reply of the assessee the assessing officer disallowed net of the interest received Rs.1,70,97,730/- (Rs.2,79,72,158 – Rs. 1,08,74,428/-). Therefore, the assessing officer examined the issue and disallowed interest of Rs.1,70,97,730/-. The assessing officer has adopted one of the courses permissible in law. Hence, the order may be prejudicial to the interest of revenue but not erroneous. Therefore, the twin condition as enunciated under section 263 is not fulfilled. Considering the above factual and legal discussion narrated above the assessee succeeded on the first proposition placed by ld. AR for the assessee. As we are convinced with the first contention of the ld. AR for the assessee, therefore, the other alternative submission raised by him becomes academic. - M/s Lhotse Developers & Traders Pvt. Ltd.
The case law relied by ld. DR for the revenue in Gauhati High Court in CIT Vs Jawahar Bhattacharjee (supra) is not helpful to the revenue; in that case the assessing officer allowed the long term capital gain on the sale of shares without making quarries and examining the issue. The assessing officer failed to make such enquiry as was usually expected in a fact situation. However, in the case in our hand, the assessing officer examined the issue, applied his mind and disallowed the interest expenses. In the result the grounds of appeals raised by the assessee are allowed.
In the result, appeal filed by assessee is allowed.
Order pronounced in the open court on 31.07.2018.