SVL Limited, CHENNAI V. ACIT,CORPORATE CIRCLE(92), CHENNAI

ITA 423/CHNY/2022

AI Insights

The case involves M/s.SVL Ltd., which appealed against the order of the PCIT, Chennai-3, under section 263 of the Income Tax Act, 1961, for the assessment year 2017-18. The PCIT had set aside the AO's assessment order, directing a re-assessment on the issue of disallowance of proportionate interest amounting to Rs.42,75,56,455/-, which was allegedly diverted to group companies. The Tribunal examined whether the PCIT's revision was justified, focusing on whether the AO had adequately investigated the financial transactions and their implications under the Income Tax Act.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 127921 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 15-03-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 25-05-2022
• Other Referred Cases: CIT Central Vs. Max India Ltd, CIT Vs. Future Co-op, Resources Ltd., Sutures India P.Ltd. VS CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Revision of order; Earning of tax free income; Proportionate interest; TDS; Set aside
• Section: 263; 142(1)

Judgement Text

आयकर अपील सं./ITA No.423/Chny/2022 िनधा रण वष /Assessment Year: 2017-18 M/s.SVL Ltd., Shriram House, 1 st Floor, No.4, Burkit Road, T.Nagar, Chennai-600 017. v. The Asst. Commissioner- of Income Tax, Corporate Cirlce-6(2), Chennai. [PAN: AAACS 7696 D] (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओर से/ Appellant by : Mr.B.Sivaraman, Adv. यथ क ओर से /Respondent by : Dr.R.Mohan Reddy, CIT सुनवाई क तारीख/Date of Hearing : 16.03.2023 घोषणा क तारीख /Date of Pronouncement : 19.05.2023 आदेश / O R D E R PER MANJUNATHA.G, AM: This appeal filed by the assessee is directed against the order of the Principal Commissioner of Income Tax, Chennai-3, passed u/s.263 of the Income Tax Act, 1961, dated 29.03.2022 and pertains to assessment year 2017-18. 2. The assessee has raised the following grounds of appeal: 1. The order of the Pr.CIT u/s.263 dated 29.03.2022 is against law and facts of the case. 2. The Pr. CIT erred in setting aside the assessment to the file of the AO on the issue of interest disallowance and directing the AO to disallow proportionate interest of Rs.42,75,56,455/- in respect of amount diverted to group companies. आयकर अपीलीय अिधकरण, ‘ए’ यायपीठ, चे ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH: CHENNAI ी वी. दुगा राव, माननीय ाियक सद एवं ी मंजूनाथा .जी, माननीय लेखा सद के सम BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER AND SHRI MANJUNATHA. G, HON’BLE ACCOUNTANT MEMBER ITA No.423/Chny/2022 :: 2 :: 3. The Pr.CIT erred in passing order u/s.263 without specifically mentioning whether the order is a direction to the AO to disallow proportionate interest of Rs.42,75,56,455/- or to consider the issue of disallowance of proportionate interest after giving opportunity of bearing heard to the assessee, giving room for different interpretations. 4. The Pr. CIT erred in taking the amount of interest to be disallowed at Rs.42,75,56,455/- assuming that the loans were outstanding for the whole year overlooking the fact that the loans were not outstanding for the whole year and the appellant had submitted to the Pr.CIT the ledger account of the companies in the course of proceedings u/s 263. 5. The Pr. CIT erred in holding that the order passed by the AO is erroneous and prejudice to the interest of revenue. 6. The Pr. CIT erred in not appreciating the fact that in the course of scrutiny asst. proceedings the appellant had filed (a) details of unsecured loans (b) loans and advances (c) large squared up loans and (d) large increase in unsecured loans in response to the notices u/s.142(1) dated 5.10.2019 and 30.11.2019 and the AO has considered the same and has not disallowed interest and, therefore, the Pr. CIT has no jurisdiction for initiation of proceedings u/s 263 in the light of the following decisions. (a) CIT Central Vs. Max India Ltd, (166 Taxman 188) [SC] (b) CIT Vs,Future Co-op, resources Ltd. (132 Taxmann.com 173) Bombay HC (c) Sutures India P,Ltd. VS CIT (273 Taxman 112) Karnataka HC For these and other grounds that may be adduced before or at the time of hearing the Hon'ble ITAT may be pleased to cancel the order u/s 263. 3. The brief facts of the case are that the assessee company, M/s.SVL Ltd., filed its return of income for the AY 2017-18 on 31.10.2017 declaring ‘Nil’ total income. The case has been selected for scrutiny under ‘complete category’ and the assessment has been completed u/s.143(3) of the Income Tax Act, 1961 (in short “the Act") on 24.12.2019 and determined total income at Rs.NIL by making additions towards disallowance of expenditure in relation to exempt income u/s.14A r.w.r.8D of the Income Tax Rules, 1962 (in short “the Rules") and disallowance u/s.36(1)(va) of the Act, towards belated payment of employees’ contribution to PF & ESI. 4. The case has been, subsequently, taken up for revision proceedings by the PCIT, Chennai-3, and notices u/s.263 of the Act, dated 01.03.2022 was issued and served on the assessee. In the said show cause notice, the ITA No.423/Chny/2022 :: 3 :: PCIT had taken up three issues for revision proceedings and according to the PCIT, the assessment order passed by the AO u/s.143(3) of the Act, dated 24.12.2019, is erroneous in so far as it is prejudicial to the interest of the Revenue, because, the AO has failed to carry out required enquires he ought to have been carried out in light of Explanation-2 to Sec.263 of the Act, on the issue of allowability of increase in provision made for premium on Non-Convertible Debentures (in short “NCDs"), non- verification of allowability of interest paid on borrowed capital for diversion of interest bearing funds to group companies and non-application of mind in respect of allowability of interest expenditure u/s.40(a)(ia) of the Act, for non-compliance of relevant TDS provisions. According to the PCIT, although, the assessee has made provision for premium on NCDs, which is not allowable expenditure being contingent in nature, the AO has failed to decide the same while computing assessment. The PCIT further noticed that the assessee has paid interest on borrowed capital and also diverted huge interest bearing funds to group companies, but the AO has failed to disallow proportionate interest in respect of amount diverted to the group companies. Further, although, the assessee has deducted TDS on the interest, but there was a short deduction and this fact has not been verified by the AO. Therefore, the PCIT opined that for three reasons, the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue and thus, called upon the assessee to file its objections, if any, for proposed revision. ITA No.423/Chny/2022 :: 4 :: 5. In response, the assessee submitted that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue, because, all the three issues taken up for revision proceedings, has been thoroughly examined by the AO during the course of assessment proceedings, which is evident from the fact that the AO had issued notices u/s.143(2) & 142(1) of the Act, on various dates, for which, the assessee has filed complete details in respect of provision made for premium on NCDs, disclosure on loans & advances given to group companies, and also compliance of TDS provision in respect of interest payment. The AO after considering relevant facts has chosen not to make any addition in respect of these three items, and thus, it cannot be said that the AO has not applied his mind to relevant provisions of the Act, which caused prejudice to the interest of the Revenue. 6. The PCIT after considering relevant submissions of the assessee and also taken note of various details filed by the assessee during revision proceedings, dropped proposed revision of assessment proceedings in respect of provision made for premium on NCDs on the ground that the said expenditure is genuine in nature. The PCIT had also dropped proposed revision of assessment in respect of non-deduction of TDS on interest payments. However, in respect of disallowance of proportionate interest on diversion of interest bearing funds to group companies, the PCIT for the reasons stated in their order dated 29.03.2022, set aside the assessment order passed by the AO u/s.143(3) of the Act, dated 24.12.2019 with a ITA No.423/Chny/2022 :: 5 :: direction to re-do the assessment in light of discussions given in 263 order. Aggrieved by the order of the PCIT, the assessee is in appeal before us. 7. The Ld.Counsel for the assessee referring to various documents submitted that the assumption of jurisdiction by the PCIT on the issue of disallowance of proportionate interest in respect of loans & advances given to sister concerns, is illegal and opposed to fact, because, in order to invoke jurisdiction u/s.263 of the Act, the PCIT must satisfy himself that assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. In this case, the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue, because, the issue has been thoroughly examined by the AO in light of financial statements filed by the assessee along with relevant explanation in respect of loans borrowed from various banks & financial institutions and also loans & advances given to group companies. Just because, the AO has not specifically discussed the issue in the assessment order, it cannot be said that the AO has not verified the issue and also not applied his mind on the issue at the time of assessment proceedings. In this regard, he relied upon by the decision of the Hon’ble Supreme Court in the case of CIT (Central), Ludihiana v. Max India Ltd., reported in 166 Taxman 188 (SC). 8. The ld.CIT-DR, Dr.R.Mohan Reddy, supporting the order of the PCIT submitted that the PCIT has brought out clear facts to the effect that the assessment order passed by the AO is erroneous in so far as it is prejudicial ITA No.423/Chny/2022 :: 6 :: to the interest of the Revenue on the issue of diversion of interest bearing funds to group companies without charging any interest, even though, the assessee has paid huge interest on borrowed funds from banks & financial institutions. The AO failed to examine the issue in light of relevant provisions which rendered the assessment order passed by the AO to be erroneous in so far as it is prejudicial to the interest of the Revenue, and thus, assumption of jurisdiction by the PCIT is in accordance with law and their orders should be upheld. 9. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The provisions of Sec.263 empower the PCIT to revise the assessment order, in case, if he satisfies that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. In the present case, on perusal of facts available on record, we find that the PCIT set aside the assessment order on the issue of disallowance of proportionate interest expenditure for diversion of interest bearing funds to group companies. We find that the reasons given by the PCIT is on sound footing, because, issue has not been examined by the AO in light of relevant provisions of the Act, to ascertain whether borrowed funds have been diverted to give loans & advances to group companies or not? Although, the AO has called for certain details, including financial statements, but there was no specific question on the issue of loans & advances given to group companies in light of huge interest paid by the assessee on borrowed funds from banks & ITA No.423/Chny/2022 :: 7 :: financial institutions, which rendered assessment order passed by the AO on the issue of disallowance of proportionate interest is erroneous in so far as it is prejudicial to the interest of the Revenue. In our considered view, it is a case of complete lack of enquiry, because, as per provisions of Explanation-2 to Sec.263 of the Act, in case, order passed without making enquiries or verifications which should have been made, then said order can be definitely considered as erroneous order of the AO, which caused prejudicial to the interest of the Revenue. Therefore, we are of the considered view that there is no error in the reasons given by the PCIT to set aside the assessment order on the issue of disallowance of proportionate interest on diversion of interest bearing funds to group companies, and thus, we are inclined to uphold the order of the PCIT passed u/s.263 of the Act, and dismiss the appeal filed by the assessee. 10. In the result, appeal filed by the assessee is dismissed. Order pronounced on the 19 th day of May, 2023, in Chennai. Sd/- (वी. दुगा राव) (V. DURGA RAO) याियक सद य/JUDICIAL MEMBER Sd/- (मंजूनाथा.जी) (MANJUNATHA.G) लेखा सद य/ACCOUNTANT MEMBER चे ई/Chennai, दनांक/Dated: 19 th May, 2023. TLN आदेश क ितिलिप अ ेिषत/Copy to: 1. अपीलाथ /Appellant 3. आयकर आयु"/CIT 5. गाड फाईल/GF 2. यथ /Respondent 4. िवभागीय ितिनिध/DR