M/S N.R.COMPANY,INDORE vs. PR . COMMISSIONER OF INCOME TAX- 3(1), INDORE

Facts as culled out from the orders of the Revenue Authorities are that the assessee firm e-filed its Return of Income on 28/08/2015 at a total Income of Rs. 18,21,580/- on a turnover of Rs. 63,65,000/- and income was offered u/s 44AD of the Income Tax Act 1961 showing profit percentage more than 28%, i.e. much above the limits prescribed u/s 44AD. Further, the case of the assessee firm was selected for scrutiny and notices u/s 142(1) and 143(2) were issued by the Ld. AO to which the compliances were made. Query regarding non-charging of interest on the debit balance of capital account of a partner by the assessee firm was raised by the Ld. AO which was replied 3 NR Co. ITA 101 of 2021 by the assessee and the ld. AO considered the same and assessment order dated 30/11/2017 was passed u/s 143(3) of the Income Tax Act 1961 accepting the returned Income. However, show-cause notice dated 19/03/20 u/s 263 of the Income Tax Act 1961 was issued by the Ld. PCIT-1, Indore on the only issue that an amount of Rs. 98,06,348/- (12% of Rs. 8,17,19,564/- ) on account of Interest @ 12% on Debit balance in partner’s account ( Shri Deepak Kalra) should have been charged by the assessee firm. Accordingly, the ld. PCIT set aside the order of the ld. AO for passing a fresh assessment order only on the above issue.

Being aggrieved, the assessee is in appeal before this Tribunal. Learned Counsel for the assessee submitted that query regarding non-charging of interest on the debit balance of capital account of a partner by the assessee firm was raised by the Ld. AO also, which was replied by the assessee and the same was duly considered by the Ld. AO while finalizing the assessment. The ld. AO had made enquiries with regard to the issue raised and the assessee had given detailed explanation in this regard by a letter 4 NR Co. ITA 101 of 2021 in writing, therefore, the order was passed by the Ld. AO on being satisfied with the explanation of the assessee. Thus, the order of the Ld. AO cannot be said to be erroneous and prejudicial to the interest of the Revenue. Therefore, learned Counsel for the assessee submitted that since the assessee had explained its case from all the sides, the ld. PCIT was not justified in exercising the revisionary powers u/s 263 of the I.T. Act. On the other hand, ld. CIT-DR relied upon the order of the PCIT.

We have considered the rival submissions of both the parties and gone through the material available on the file. We find that on the same issue, the query was raised by the ld. AO which reads as under:

The above query made by the ld. AO was replied by the assessee which reads as under:

Before going further, we would like to reproduce e the Section 263 which reads as under: - Revision of orders prejudicial to revenue. 263. (1) The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation 2—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— 6 NR Co. ITA 101 of 2021 (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

A bare reading of the sec. 263 states that for invoking provisions of section 263 of the Act, twin conditions are required to be fulfilled, viz. the assessment order should be erroneous and secondly, the assessment order should be prejudicial to the interest of revenue. Having gone through rival submissions and the material available on record, we find that query regarding non- charging of interest on the debit balance of capital account of a partner by the assessee firm was raised by the Ld. AO also to which reply was furnished and duly considered by the Ld. AO while finalizing the assessment. We are of the view that for considering the order as erroneous, there must be some prima facie material 7 NR Co. ITA 101 of 2021 on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed . But, in the instant case, we find that the Ld. AO had made the requisite enquiries and the assessee had given the detailed explanation by filing a letter in writing. Therefore, we find force in the contention of the learned Counsel for the assesse that the order was passed by the Ld. AO on being satisfied with the explanation of the assesse and as such, the order of the Ld. AO cannot be said as erroneous. Thus, we are of the view that the order was passed by Ld. AO after making inquiries/verification and therefore it cannot be said that the order passed by the Ld. AO was erroneous. We further find from the copy of ITR along with computation of income of Shri Deepak Kalra for AY 2015-16 filed before us that the ITR and Computation of Income of the partners (filed during the assessment proceedings) reflects that the partners have paid taxes at the maximum rate and thus there is no loss of revenue because even if partners would have paid interest to the assessee firm, their income 8 NR Co. ITA 101 of 2021 and taxes would have been reduced to that extent and there would be no extra gain of revenue to the Department. Further, the learned Counsel for the assessee claimed that the assessee firm did not pay any interest to the creditors of the firm and thus there is no claim of Interest payment. Still, the assessee firm had offered Income u/s 44AD of the Income Tax Act 1961 and the Income offered is much above the prescribed limits as per the provisions of Section 44AD which deserves to be accepted. We find that the Ld. AO has not concluded in the assessment order that the assessee is not eligible for section 44AD or the business undertaken by the assessee is not the eligible business u/s 44AD of the Act. Therefore, the assessee firm was fulfilling all the necessary conditions u/s 44AD of the Act. Thus, the benefit of section 44AD cannot be denied to the assessee firm because Section 44AD begins with a non-obstante clause, overrides other provisions and specifically bars the application of provisions of Section 28 to 43C. Therefore, it is clear that when the assessee has declared his income u/s 44AD, no further addition can be made. This view is supported by the decision of the ITAT, Mumbai 9 NR Co. ITA 101 of 2021 Bench in case of Dena Bank Vs PCIT, Appeal Number : (Mum.) of 2018, Date of order : 23/01/2020.

In view of the above, we are of the view that revision under section 263 by PCIT was not justified as the issues questioned by PCIT were thoroughly examined by ld. AO during the assessment proceedings, and after considering relevant facts and explanations furnished by assessee the ld. AO had chosen to accept the claim of the assessee and hence, the same could not be termed as non- consideration of issues or AO had failed to carry out required enquiries, which ought to have been carried out in accordance with law. Thus, the assessment order passed by AO was neither erroneous, nor prejudicial to the interest of the revenue. Our view is supported by the ratio laid down in the following judicial pronouncements:

Roshan Lal Vegetable Products Pvt. Ltd. v. ITO [2011] 9 ITR (Trib) 431 (Amritsar) in (ITAT- Amritsar).

On consideration of above facts in the light of the judicial pronouncements (supra) and the fact that since the assessee firm has offered income u/s 44AD at much higher profit rate then prescribed, the Ld. AO passed the order after discussing the same issue through requisite query and verification in detail and there is no loss of revenue as the partner was also paying taxes at maximum rate, we quash the revisionary order passed u/s 263 of the Income Tax Act 1961 and restore the original assessment completed on 30/11/2017. All the grounds raised by the assessee are allowed.