VISHAL BALVANTRAI AGARWAL,AHMEDABAD vs. THE PR. COMMISSIONER OF INCOME TAX, AHMEDABAD -1, AHMEDABAD

"ी टी.आर. से""ल कुमार, "ाियक सद" एवं "ी मकरंद वसंत महादेवकर, लेखा सद" के सम"। ] ] BEFORE SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं / Year : 2018-19 Vishal Balvantrai Agarwal The Pr.CIT बनाम/ 249 New Cloth Market Ahmedabad-1 v/s. O/S. Raipur Gate Ahmedabad – 380 002 (Gujarat) "थायी लेखा सं./PAN: ADBPA 4462 G (अपीलाथ%/ Appellant) (&' यथ%/ Respondent) Assessee by : Shri Divyakant Parikh, AR Revenue by : Shri Prathvi Raj Meena, CIT-DR सुनवाई की तारीख/Date of Hearing : 18/09/2024 घोषणा की तारीख /Date of Pronouncement: 25/09/2024 आदेश/O R D E R PER SHRI MAKARAND V. MAHADEOKAR, AM:

This appeal by the assessee arises against the order dated 30.03.2023 passed by the Principal Commissioner of Income Tax, Ahmedabad- 1(hereinafter referred to as “PCIT”), under Section 263 of the Income Tax Act, 1961(hereinafter referred to as “the Act”), for the assessment year 2018-19. The assessee challenges the revisionary jurisdiction exercised by the PCIT, setting aside the assessment order dated 12.01.2021 passed by the Assessing Vishal Balvantrai Agarwal vs. The Pr.CIT Asst. Year : 2018-19 Officer ((hereinafter referred to as “AO”) under Section 143(3) read with Sections 143(3A) and 143(3B) of the Act.

Facts of the Case: 2. The assessee, an individual, is a partner in multiple partnership firms. During the assessment year 2018-19, the assessee was a partner in four partnership firms: Vraj Corporations, Vimala Developers, Vishal Spintex, and Venus Denim. The assessee's main income sources included interest income from capital invested in these firms and profits from these firms, which were claimed as exempt under Section 10(2A) of the Act. The assessee filed his return of income on 09.10.2018, declaring a total income of Rs. 36,65,880/-. The assessment was completed under Section 143(3) read with Sections 143(3A) and 143(3B) of the Act on 12.01.2021. 2.1. During the assessment year 2018-19, the assessee earned business income by way of interest of Rs. 3,60,45,261/- from his investments as a partner in the four partnership firms. The assessee also reported a profit of Rs. 1,97,28,100/- from these firms, which was exempt from tax under Section 10(2A) of the Act. Against this interest income, the assessee claimed a deduction of Rs. 3,26,45,179/- under Section 57 of the Act, as interest expenses on borrowed funds. The borrowed funds were utilised as capital contributions in the partnership firms, and the nexus between the borrowed funds and the income earned was claimed to be directly established.

2.2. The assessee's case was selected for limited scrutiny. The scrutiny was limited to the issue of "deduction from income from other sources." During the assessment proceedings, the AO issued notices under Section 142(1) dated Vishal Balvantrai Agarwal vs. The Pr.CIT Asst. Year : 2018-19 22.01.2020 and 11.11.2020, raising specific queries about the deduction claimed under Section 57. In response, the assessee provided detailed submissions along with supporting documents, including the balance sheet, bank statements, ledger accounts of the partnership firms, and details of funds borrowed from various parties. The assessee explained that the borrowed funds were directly utilised for investment in the partnership firms, thereby earning interest income, which was more than the interest expenses incurred. The AO, after considering the submissions and examining the documents, accepted the assessee's claim and passed the order accepting the returned income as assessed income.

3.1. The PCIT raised two primary issues:

(i) Disallowance of Interest Expenses Under Section 57: The PCIT noted that the assessee's balance sheet showed no borrowing or investment figures, questioning the validity of the nexus between the borrowed funds and the interest income claimed under Section 57. The PCIT concluded that the assessee had failed to substantiate that the interest expenses were incurred exclusively for earning income from other sources. As a result, the PCIT held that the interest expenses of Rs. 3,26,45,179/- should have been disallowed and added back to the assessee’s income. Vishal Balvantrai Agarwal vs. The Pr.CIT Asst. Year : 2018-19

(ii) Disallowance Under Section 14A read with Rule 8D: The PCIT observed that the assessee earned exempt income of Rs. 1,97,28,100/- from partnership firms under Section 10(2A) but did not make any disallowance under Section 14A. According to the PCIT, an amount equal to 1% of the investment (Rs. 34,54,952/-) should have been disallowed under Section 14A. The PCIT held that the AO failed to expand the scope of limited scrutiny to address this issue, which rendered the assessment order erroneous and prejudicial to the interests of the revenue.

3.2. The PCIT rejected the assessee’s submissions dated 13.03.2023, wherein the assessee contended that the AO had conducted a detailed inquiry, raised specific queries, and considered all relevant facts before concluding that the interest expenses were allowable. The assessee also argued that disallowance under Section 14A was beyond the scope of limited scrutiny, and the net interest income being positive precluded any disallowance under Section 14A. The PCIT concluded that the AO had failed to make adequate inquiries and had not applied his mind properly while allowing the interest expenses under Section 57. The PCIT also found fault with the AO for not considering the disallowance under Section 14A, which the PCIT argued could have been examined by expanding the scope of scrutiny with the competent authority's approval. Based on these observations, the PCIT set aside the assessment order passed under Section 143(3) and directed the AO to conduct a fresh assessment, specifically examining the issues of the allowability of interest expenses under Section 57 and the disallowance under Section 14A of the Act, read with Rule 8D of Income Tax Rules, 1962.

3. Aggrieved by the order of the PCIT, the assessee is in appeal before us with following grounds of appeal: Vishal Balvantrai Agarwal vs. The Pr.CIT Asst. Year : 2018-19 5

1. The learned CIT has erred in law and on facts in passing an order u/s 263, setting aside the assessment order passed by the learned AO u/s 143(3), r.w.s. 143(3A) & 143(3B) of the Act, with direction to make fresh assessment, which was neither erroneous nor prejudicial to the interest of revenue. The conditions of section 263 having not been satisfied the learned CIT has no jurisdiction to invoke provisions of section 263. It be so held now and the order passed by CIT under section 263 be cancelled.

3. The learned CIT has erred in law and facts in not accepting the contention of the assessee raised vide letter dated 16.03.2023. Stating that the assessee's case is selected for limited scrutiny assessment under, E- assessment scheme 2019 for the issue "deduction from income from other source", and hence Suo moto revisional power under section 263 cannot be exercised on the issue not covered by the 'Limited Scrutiny', when the AO could not have possible examined such issue. The issue of disallowance u/s 14A read with rule 8B was not the issue under limited scrutiny and hence to find fault with the assessment order of the AO on this ground is beyond the scope of provisions of section 263 of the Act. It be so held now.

4. The learned CIT has erred in law and facts in not accepting the detail submissions dated 13.03.2023 stating that the provisions of section 14A cannot be invoked if net interest income offered is surplus as held by the jurisdictional High Court, and other court of laws. The assessee has declared interest income from partnership firms amounting to Rs 3,60,45,261/-, whereas interest expenses claimed are Rs 3,26,45,179/-. Net interest offered for tax is Rs 34,00,082/-. It be so held now.

5. The learned CIT has erred in law and facts is holding that the assessee has not declare interest income of Rs. 3,60,45,281/- from partnership firms Vishal Balvantrai Agarwal vs. The Pr.CIT Asst. Year : 2018-19 along with share of profit aggregating Rs. 1,97,28,100/-, which is claimed as exempt u/s 10(2A) of the Act. It be so held now.

6. The learned CIT has erred in law and facts in not verifying the details submitted by the assessee such as Balance sheet, details of funds borrowed from various parties, bank statements, utilizations of funds in respective firm, copies of ledger accounts of partnership firm etc. to prove the direct nexus of the utilization of borrowed funds. The learned CIT failed to appreciate the fact that without borrowing of funds the assessee could not have earned interest income from partnership firms. Thus, there is direct nexus of expenses incurred for earning the income as required by provisions of section 57 or section 28 of the Income Tax Act. It be so held now.

7. The order of learned CIT u/s 263 is wholly unjust, illegal, invalid and bad in law. The learned CIT ought to have dropped the revision proceedings erroneously initiated by him. It be so held now, and order passed by CIT under section 263 be cancelled. The appellant craves leave to add, amend, alter, edit, delete, modify or change any of the grounds appeal at the time of or before the hearing of the appeal.

7.1. In Sahyadri Agencies Ltd. vs. PCIT, the Hon’ble Kerala High Court dealt with whether the PCIT can invoke Section 263 in the context of limited scrutiny when the AO failed to examine certain transactions due to the assessee’s non-cooperation during assessment proceedings. The Court emphasised that the PCIT’s powers are supervisory, allowing intervention where the AO’s lack of verification results in an erroneous and prejudicial order. Paragraph 4.1 of the Sahyadri judgment noted: “The Commissioner further noticed that due to the assessee’s non-cooperation during assessment proceedings, the Assessing Officer did not verify the details regarding the applicability of provisions of Section 56(2)(viib) and Section 68 of the Act and these transactions undertaken by the assessee company during the relevant Financial Year.”

7.2. The non-consideration of the effect of these transactions due to a lack of inquiry constituted an omission that justified invoking Section 263 in case of Sahyadri Agencies Ltd.. The factual matrix in the present case is different and therefore, the reliance placed by the DR in the case of Sahyadri Agencies Ltd. is distinguished. When the AO fails to conduct an inquiry into specific aspects of the case, especially when prompted by incomplete or non- cooperative behaviour from the assessee, the PCIT is within his rights to revise the order to address such omissions. Vishal Balvantrai Agarwal vs. The Pr.CIT Asst. Year : 2018-19 7.3. In the present case, unlike in Sahyadri Agencies, the AO conducted a detailed inquiry during the assessment proceedings. In contrast to the facts in Sahyadri Agencies, where the AO did not verify key aspects due to non- cooperation, the present case demonstrates that the AO engaged in a detailed examination within the permissible scrutiny limits. The PCIT’s intervention appears to stem from a difference of opinion rather than any substantive omission by the AO. The AO issued notices under Section 142(1) specifically querying the deduction claimed under Section 57. The assessee responded promptly and cooperatively by providing all relevant details, including balance sheets, bank statements, details of borrowed funds, and ledger accounts of partnership firms. The AO thoroughly examined these submissions and applied his mind to the issue, concluding that the interest expenses were allowable. The inquiry conducted was within the scope of the limited scrutiny as mandated, and there was no failure on the part of the AO to verify the nexus between the interest expenses and the income earned.

7.4. While the PCIT’s powers under Section 263 are broad, these powers do not allow an arbitrary expansion beyond the limited scrutiny scope without clear evidence of the AO’s omission or error. The exercise of revisionary powers under Section 263 of the Act cannot be a tool to expand the scope of scrutiny unless the order passed by the AO shows a clear lack of inquiry into the issues flagged under the limited scrutiny or those directly related. The mere non-examination of a tangential issue does not make the order erroneous. In the present case, the AO conducted a detailed inquiry based on the information provided by the assessee, satisfying the condition that the AO had exercised due diligence within the scope of the limited scrutiny. The decision to allow the deduction under Section 57 was based on the available Vishal Balvantrai Agarwal vs. The Pr.CIT Asst. Year : 2018-19 evidence. As per the Supreme Court’s dictum in Malabar Industrial Co. Ltd. vs. CIT, for an order to be revised under Section 263 of the Act, it must be both erroneous and prejudicial to the interest of the Revenue. The PCIT has failed to demonstrate that the AO’s order was fundamentally flawed. The mere disagreement with the AO’s view does not make it erroneous, nor has any tangible prejudice to the Revenue been established.

7.5. We have considered the judicial precedents relied on by the AR and noted that the allowability of expenditure under Section 57(iii) does not depend on whether the income was actually earned but on whether the expenditure was laid out wholly and exclusively for the purpose of earning income. In the present case, the AO allowed the interest expenses after verifying the submissions. The Co-ordinate Bench of the Tribunal, in case of Mayank Ratibhai Patel, held that if the nexus between the borrowed funds and the income earned is established, the interest expenses are allowable. The AO, in this case, conducted a similar verification based on the documents submitted by the assessee and took a permissible view. The PCIT’s attempt to revisit the same issue constitutes a mere change of opinion, which is not permissible under Section 263 of the Act. The Hon’ble High Court of Punjab and Haryana, in case of Hero Cycles Ltd., held that a deduction cannot be denied merely because it has been claimed under an incorrect head, provided the overall tax impact remains neutral. In the present case, the AR argued that even if the deduction was claimed under a different head, the PCIT’s interference was unwarranted as the AO had considered all the relevant factors and the claim was ultimately tax neutral. Vishal Balvantrai Agarwal vs. The Pr.CIT Asst. Year : 2018-19 7.6. Numerous judicial precedents, including the judgement of Jurisdictional High Court in case of Nirma Credit and Capital Pvt. Ltd. (Tax Appeal No. 514 of 2017) have held that Section 14A cannot be invoked when the interest income earned is greater than the interest expenditure, resulting in a net taxable income, and where the primary purpose of borrowing was not to generate exempt income. The assessee placed reliance on the decision of Nirma Credit and Capital Pvt. Ltd. in the submission before PCIT, which was not considered by the PCIT. In the present case, the interest income earned from the partnership firm exceeds the interest paid on the borrowed funds. Therefore, in line with these judicial precedents, we conclude that the PCIT’s contention that the order is prejudicial to the interest of the Revenue is not justified and cannot be sustained.

7.7. In light of the above analysis and judicial precedents, it is evident that the AO conducted a proper inquiry and took a reasonable view within the scope of limited scrutiny. The conditions required to invoke Section 263, namely, the order being erroneous and prejudicial to the interest of the Revenue, are not satisfied in this case. Therefore, the revisionary order passed by the PCIT is unjustified and is accordingly quashed. Accordingly, the appeal of the assessee is allowed.