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IN THE INCOME-TAX APPELLATE TRIBUNAL “B” BENCH MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER & SHRI RAJESH KUMAR, ACCOUNTANT MEMBER (Assessment Year 2007-08) Mumbai SEZ Limited DCIT, CC-39. 1st Floor, Jai Centre, 34, P D Mello Road, Vs. Opp. Red Gate, Masjid, Mumbai-400009. PAN: AABCG2739C Appellant Respondent Appellant by : Shri Madhur Agarwal (AR) Respondent by : Shri Kumar Sanjay (CIT-DR) Date of Hearing : 23.05.2018 Date of Pronouncement : 11.07.2018 ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by assessee is directed against the order of ld. Commissioner of Income-tax-III, Mumbai [ld. CIT] passed under section 263 dated 30.03.2012 for Assessment Year 2007-08. The assessee has raised the following grounds of appeal:
l. On the facts and in the circumstances of the case and in law, the learned CIT Central - III erred in initiating the proceedings and passing an order under section 263 of the Income Tax Act, 1961, for the Assessment Year 2007-08 which is ultra virus, illegal and contrary to the provisions of law.
2. The learned CIT Central - III erred in holding that the assessment order passed under section 143(3) of the Income Tax Act is erroneous and prejudicial to the interest of revenue.
3. The learned CIT Central - III erred in forming other opinion on the same issue on which AO has already framed his views (Forming other view then the view of the AO on the same issues which has been discussed).
Mum 2012-Mumbai Sez Limited
The learned CIT Central - III erred in directing for fresh examination with respect to the disallowable expenses under rule 8D(i), 8D(ii) and rule 8D(iii) of Income Tax Rules.
The learned CIT Central - III erred in directing for fresh examination with respect to the business expediency of the Social Welfare Expenses and respective capitalization of the same. 6. The learned CIT Central - III erred in directing for fresh examination with respect to allowability on funds borrowed and advanced to Dharti investments & holdings limited as the rate of Interest received is lower than the borrowing rate. 7. The Order passed by the learned CIT -Central Circle -III is illegal, bad in law, ultra virus and contrary to the provisions of the law and facts and in violation of the principles of natural justice.
Brief facts and of the case are that the assessee-company is engaged in the business of develop and operate infrastructure facilities and development of Special Economic Zones, filed its return of income for Assessment Year 2007-08 on 31.10.2007 declaring total income at Rs. 3,06,61,438/-. The assessment was completed on 31.12.2009 under section 143(3). The Assessing Officer while passing the assessment order made disallowance under section 14A of Rs. 11,26,507/- and held that interest income earned by assessee for Rs. 41.02 Crore as Revenue in nature and liable to be taxed.
The assessment order dated 31.12.2009 was set-aside by ld. CIT vide its order passed under section 263 dated 30.03.2012 holding is erroneous and prejudicial to the interest of Revenue. The ld CIT directed the Assessing Officer to; (i) Examine and decide the amount of expenses disallowable under section 14A r.w. Rule 8D, Mum 2012-Mumbai Sez Limited (ii) Examine Welfare Expenses, if incurred wholly and exclusively for business purpose and can be capitalized toward the work in progress and, (iii) Examine what made the assessee to borrow Rs. 1850 Crore from Bank when these funds were not immediately required by assessee and to examine the decision of assessee in giving Rs. 1505.56 Crore out of borrowed fund (DIHL) on commercial expediency and to further examine whether interest expenses borne by assessee on borrowed fund given to DIHL in work-in-progress.
Therefore, aggrieved by the order of ld. CIT, the assessee has filed the present appeal before us raising the grounds of appeal
as narrated above.
4. We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The ld. AR of the assessee submits that the assessment order passed by assessing officer is neither erroneous nor prejudicial to the interest of justice. The assessing officer passed the assessment order after making full-fledged inquries and passed order thereafter. The assessing officer examined the disallowance of section 14A and disallowed as sum of Rs. 11,26,507/- after invoking Rule 8D, though the provisions of Rule 8D are not applicable for the assessment year under consideration, as held by Hon’ble Bombay High Court in Godrej and Boyce Manufacturing Company Ltd. (328 ITR 108). Moreover, the disallowance made by the assessing officer was subject matter of appeal before ld. CIT(A) on the appeal filed by the assessee. Hence, the ld CIT has ITA No. 3429 Mum 2012-Mumbai Sez Limited no jurisdiction to revise the order on this issue. In respect of second issue related to examine the decision of assessee in giving Rs. 1505.56 Crore out of borrowed fund (DIHL) it was submitted that the assessing officer raised the quarry during the assessment proceedings and taken a possible view, therefore, the decision of the assessing officer is possible view and the same cannot be branded as erroneous. For third issue related with Social Welfare Expenses, the ld. AR submits that the assessee incurred the expenses for the treatment of the needy people in the area, where the assessee is establishing SEZ. And it was rightly allowed by assessing officer. It was submitted that Social welfare expenses are allowable expenses in view of the Supreme Court decision in Sri Venkata Satyanarayan Rice Mill Contractors Co Vs CIT [1997] 223 ITR 101 (SC) and Madras High Court in CIT Vs Velumanickum Lodge [2009] 317 ITR 338 (Mad). In support of his submission related with the validity of order under section 263 the ld AR for the assessee relied on the decision of Hon’ble Bombay High Court in CIT Vs Gabriel India Ltd [1993]203 ITR 108 (Bom), Delhi High Court in CIT Vs Leisure Wear Export Ltd.[2012] 341 ITR 166(Delhi), 5. On the other hand the ld. DR for the revenue supported the order of ld. CIT. the ld DR further submits that the Hon’ble Apex Court in Malabar Industrial Company Ltd Vs CIT [2000] 243 ITR 83 (SC) has explained the scope of section 263 of the Act, wherein it was held that the order passed 4 Mum 2012-Mumbai Sez Limited by assessing officer is erroneous if not made in accordance with law or passed without making proper inquiry. The ld. DR submits that in case, due to an erroneous order of the assessing officer, the revenue is losing tax lawfully payable by a person; it will certainly be prejudicial to the interest of revenue. For the issue related with the social welfare expenses the ld. DR submits that no quarry was raised by assessing officer. And in respect of remaining two issues the assessing officer has not gone deeply on the issues, in accordance with Explanation 2 of section 263. In the rejoinder submissions the ld. AR submits that the ld CIT has not invoked Explanation 2 in its order and the assessing officer passed the order after full inquiry.
6. We have considered the rival submission of the parties and have gone through the orders of the assessing officer passed under section 143(3) dated 31.12.2009, which was revised by ld. Commissioner in its order dated 30.03.2012 under section 263, impugned before us. The ld. Commissioner vide his show cause notice dated 09.11.2011, proposed to revise the assessment order on three, which consist of disallowance under section 14A, expenses of Rs. 60,40,238/- incurred on social welfare expenses and on interest expenses of Rs. 132.56 Crore paid over and above interest charged on the loan Given to Dharti Investment and holding Limited. The assessee filed its detailed reply vide reply dated on 16.12.2011 and on 13.01.2012. In the reply the assessee contended that the assessing officer made disallowance under section 14A read with Rule8D 5 ITA No. 3429 Mum 2012-Mumbai Sez Limited for Rs.11,26.507/- and that the assessee has filed appeal before CIT(A). For issue related with social welfare expenses the assessee contended that the expenses were incurred for the needy people of the locality in the area where the assessee is establishing SEZ, which was rightly allowed by assessing officer. For third issue related with interest expenses of Rs. 132.56 Crore, the assessee contended that he funds borrowed from banks and financial institute on long term basis, the amount was lying idle with the assessee, pending utilization thereof for the purpose of acquisition of land. The assessee parked the idle fund for intervening period so as to minimize the cost of borrowing and reduce the loss by increasing the revenue. The assessee earned interest on such lending which is nothing but stop gap arrangement. It was further contended that the interest on such short term lending is bound to be lower than the interest expenditure incurred by assessee from the banking and financial institute. The average cost of borrowing is 8.5% and the income earned on parking surplus fund is 6.5%. Therefore, expenditure incurred on such borrowing was has been claimed to be capitalized and partly set off against the interest income. The contention of the assessee was not accepted by ld. CIT.
The ld. CIT concluded that the assessee has capitalized all the expenses including interest paid on the borrowed capital on the pretext that its business is not setup. As per the provision of section 14A expenses incurred to earn exempt income are not allowable under the Income tax Act. The 6 Mum 2012-Mumbai Sez Limited assessing officer has not examined this issue. The assessee has claimed that the interest free funds are more than the investment made and the income from some investments is not tax free. The ld. CIT directed the assessing officer to examine and decide the amount of expenses disallowable under section 14A r.w. Rule 8D. We have noted that the assessing officer while passing assessment order under section 143(3) made disallowance of Rs. 11,26,507/-. The assessing officer made disallowance by invoking the provisions of Rule 8D. The ld AR for the assessee while making submissions submitted that the disallowance under section 14A read with Rule8D was challenged in appeal before ld CIT(A). This fact is not controverted by ld. DR while making his submission. Therefore, in our view, as per clause (c) of Explanation 1, of section 263 the ld. CIT has no jurisdiction to revise the disallowance under section 14A. Hence, the assessee is succeeded on this issue.
The second issue revised by ld. CIT relates to social welfare expenses of Rs. 60,40,238/-. We have noted that no quarry was raised by the assessing officer while passing assessment order under section 143(3). The assessee has not place any material before us to substantiate if any inquiry was made by assessing officer during assessment. However, the ld AR for the assessee in support of his submissions relied on the decision of Hon’ble Apex Court in Sri Venkata Satyanarayan Rice Mill Contractors Co Vs CIT [1997] (supra and Madras High Court in CIT Vs Velumanickum Lodge 7 ITA No. 3429 Mum 2012-Mumbai Sez Limited (supra). In Sri Venkata Satyanarayan Rice Mill Contractors Co. the Hon’ble Apex Court held that contribution to Public welfare fund, whether voluntarily or at the instance of authorities for public cause in public interest not opposed to public policy is allowable expenditure. Further in CIT Vs Velumanickum Lodge (supra) Madras High Court held that construction of Hockey Stadium by assessee with a view for the use of Public at large and for generating goodwill and such construction is not prohibited by law, therefore, allowable under section 37 of the Act.
Considering the contention of ld. AR for the assessee and the legal position mentioned above, we are in agreement with the contention of ld. AR that the expenses incurred on Social welfare are allowable expenses. However, as this issue was not examined by assessing officer during assessment.
Therefore, in principal we allowing this issue in favour of assessee and direct the assessing officer to verify the facts and the expenses and allow relief to the assessee. Needless to direct that the assessing officer shall grant opportunity to the assessee to furnish the details and evidences thereof.
The other/ last issue revised by ld. CIT relates to securing loan at higher rate of interest and lending at lower rate to DIHL and capitalized as work in progress in absence of commercial expediency. We have noted that during the assessment the assessing officer. Mum 2012-Mumbai Sez Limited
Hon’ble Supreme Court in Malabar Industrial Co Ltd (supra) has laid down the following principal;
“ 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 Mum 2012-Mumbai Sez Limited 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.” Hon’ble Jurisdictional High Court in case of CIT Vs Gabrial 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 judgement 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 Mum 2012-Mumbai Sez Limited 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 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”.
The Hon’ble Delhi High Court in DIT Vs Jyoti Foundation [2013] 38 taxmann.com 180 (Delhi) while distinguishing the order passed after proper inquiry and without inquiry held that the orders which are passed without inquiry or investigation are treated as erroneous and prejudicial to the interest of revenue, but orders which are passed after inquiry or investigation on the issues are not per se or normally treated as erroneous and prejudicial to the interest of revenue. Because the revisionary authority feels and opines that further inquiry or investigation was required or deeper or further scrutiny should be undertaken, the Commissioner must record a 11 Mum 2012-Mumbai Sez Limited finding that the order made is erroneous. This can happen if an inquiry and verification is conducted by Commissioner and he is able to establish and show the error or mistake made by assessing officer, making the order unsustainable in law. An order of remit cannot be passed by ld. Commissioner to ask the assessing officer to decide if the order is erroneous.
In view of the above legal position, now, we are shall examine and peruse the assessment order. The perusal of assessment order reveals that during the assessment proceedings the assessing officer examined and investigated the inventories of Capital work in progress (per Schedule ‘D’). The assessing officer vide questions dated 30.11.2009 asked the assessee to explain (i) interest income of Rs.41.02 Crore, (ii) dividend Rs.9.60 Crore and (iii) profit on sale of investment of Rs. 53.71 Crore and show cause as to why items No. (i) & (ii) should not be taxed under income from other sources. The assessee in its reply contended that the assessee has borrowed funds from various banks which were utilized by the assessee for inter corporate deposit on which the assessee has earned interest income of Rs. 41.02 Crore. Similarly the assessee company earned dividend income of Rs. 9.60 Crore. The said income has been reduced from the work in progress in the balance sheet as the assessee has not commenced the revenue operation during the year. The dividend income has been claimed as exempt income and Investment income is offered as investment income. 12 ITA No. 3429 Mum 2012-Mumbai Sez Limited The assessing officer not accepted the contention of the assessee. The assessing officer treated the interest income of Rs.41.02 Crore as of revenue in nature and taxed it accordingly. In our view the assessing officer called the necessary details and after examining taxed it accordingly. The mare facts that in the view of ld. CIT, the assessing officer has not examined the issue in a particular way are not correct. The Hon’ble Jurisdictional High Court in CIT Vs Gabriel India (1993) 203 ITR 108 (Bom) held that if the assessing officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner of Income Tax for that of the ITO, who passed the order, unless the decision is held to be erroneous.
Cases may be visualized where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the Commissioner with power to re- examine the accounts and determine the income himself at a higher figure. 13 Mum 2012-Mumbai Sez Limited We have noted that the ld. CIT has not given any finding that order passed by assessing officer is erroneous. The ld CIT held that issue of non- capitalization of interest, not required to be borne by assessee, will have revenue affect in future as and when capital work in progress is sold or at the time of claiming depriciation. Thus, in our view the twin condition order prescribed under section 263 are not satisfied. The assessing officer has taken a reasonable and possible view. Therefore, the assessee also succeeded on this issue.
In the result the appeal of the assessee is partly allowed.
Order pronounced in the open court on 11.07.2018.