MAHESHCHAND GUPTA, GANDHIDHAM V. PR. CIT, RAJOT-1, RAJKOT

ITA 44/RJT/2022

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 1522 (ITAT-RAJKOT)
• Duration Of Justice: 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2017-2018
• Appeal Filed On: 02-03-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Revision of order; Salary income; Question of law; Revenue expenditure; TDS; Rule 8D; Set aside
• Section: 263; 143(3); 142(1); 14A; 143(2); 69A; 2(A); 22

Judgement Text

आयकर अपील य अ धकरण, राजकोट यायपीठ, राजकोट । IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER आयकर अपील सं./I. T. A. No. 44/Rjt/2022 ( नधा रण वष / As s e s s m e n t Y e ar 2 01 7 - 1 8 ) Sh ri Maheshchand Gup ta, Plot No.8, Kian Hou se, Gand hidham, Kutch-37020 1. बनाम/ Vs. Pr. C. I. T. , Rajkot-1, Rajko t. थायी लेखा सं. /जीआइआर सं. /PAN/GI R No. : ABZPG6745 J (अपीलाथ /Appellant) ( यथ / Respondent) अपीलाथ ओर से / Appellant by : Shri Mehul Ranpura, A.R यथ क ओर से/Respondent by : Shri Sanjeev Jain, CIT. D.R. स ु नवाई क तार ख / D a t e o f H e a r i n g 29/06/2022 घोषणा क तार ख /D a t e o f P r o n o u n c e m e n t 01/07/2022 आदेश / O R D E R PER BENCH: The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Principal Commissioner of Income Tax, Rajkot-1, dated 18/01/2022 arising in the matter of assessment order passed under s. 263 of the Income Tax Act, 1961 (hereinafter referred to as "the Act") relevant to the Assessment Year (A.Y.) 2017-18. ITA No.90/RJT/2022 A.Y.2017-18 - 2 - 2. The only interconnected issue raised by the assessee is that the learned Principal CIT erred in holding the assessment framed under section 143(3) of the Act as erroneous insofar prejudicial to the interest of Revenue on account of non- verification. 3. The brief facts are that the assessee in the present case is an individual and filed the return of income declaring an income of Rs. 76,20,000.00 under the head salary, house property, business/profession and other sources. The PCIT on examination of the case records found that the assessee has claimed an expense of Rs. 66,86,001.00 representing the interest on the borrowed fund from the bank and other persons which was claimed as deduction under the provisions of section 57(iii) of the Act against the income shown under the head other sources amounting to / 1,04,17,355.00. According to the learned PCIT the deduction under section 57(iii) of the Act can be claimed if it has been incurred exclusively for the purpose of the earning of such income. There was no documentary evidence brought on record by the assessee to establish the fact that the interest expense was incurred in the earning of income shown under the head other sources. As such the Ld. PCIT observed certain facts as detailed below: i. The assessee in his balance sheet has shown investment in the property amounting to / 84,78,910.00 and assessee has not brought anything on record suggesting that the borrowed fund was not utilized for making the investment in such property. ii. There was the contribution made by the assessee in the capital of the partnership firm which was capable of generating the income which is exempt under section 10(2A) of the Act. As such the exempted income from the partnership firm was subject to the disallowance of the expenses under the provisions of section 14A read with rule 8D of Income Tax Rule. ITA No.90/RJT/2022 A.Y.2017-18 - 3 - iii. There were loans and advances provided by the assessee to four parties without charging any interest from them. Thus, the assessee on one hand is incurring interest expenses and on the other hand, it is providing interest-free loans and advances. If the interest-free loans and advances would not have been given, the interest burden on the assessee would have certainly been reduced. iv. The assessee has made investments in shares of various companies amounting to / 1,29,49,688.00 which is capable of generating the exempted income in the form of dividend. 4. In view of the above, the learned PCIT was of the view that the assessee has diverted his interest-bearing fund in providing interest-free loans and advances /investment in the shares/ firm and the properties. Had the borrowed fund not have been diverted in the impugned investments, there would have been less amount of borrowed fund which would have certainly resulted less amount of interest expenses. However, the AO during the assessment proceedings failed to verify all these facts. Accordingly, the PCIT initiated the proceedings under section 263 of the Act vide show cause notice dated 29-09-2021. 5. The assessee in response to such show cause notice submitted that he has shown positive income under the head other sources which evidences that the borrowed fund was utilized exclusively for the purpose of earning the interest income. 6. The assessee also contended that there was sufficient interest-free fund available with him. Thus the allegation that borrowed fund has been used for any other purpose other than the purpose of earning the income from other sources is devoid of any merit. ITA No.90/RJT/2022 A.Y.2017-18 - 4 - 7. However, the ld. PCIT rejected the contention of the assessee by observing that that the assessee has failed to establish the nexus between the interest expenses viz a viz income shown under the head other sources based on the documentary evidence. It was also pointed out that the assessee is paying interest at a higher rate than the income by way of interest. There was no justification furnished by the assessee for charging less amount of interest than the cost of interest incurred by him. However, the AO during the assessment proceedings failed to carry out the necessary verification of the facts as discussed above. Accordingly, the ld. PCIT was of the view that the order passed by the AO was erroneous insofar prejudicial to the interest of revenue on account of non- verification whether interest expense has been incurred in the earning of income from other source. Thus, the learned PCIT held the assessment framed under section 143(3) of the Act as erroneous insofar prejudicial to the interest of Revenue. 8. Being aggrieved by the order of the learned PCIT, the assessee is in appeal before us. 9. The learned AR before us filed a paper book running from pages 1 to 41 and contended that all the necessary details about the source of income under the head other sources and corresponding claim of interest expenses were furnished during the assessment proceedings. It was also pointed out by the learned AR for the assessee that case of the assessee was, inter-alia, selected under limited company to verify the deduction claimed against the income from other sources. The learned AR in support of his contention drew our attention on page 16 of the paper book where the notice issued under section 143(2) was placed. 9.1 The learned AR further contended that there was the notice, under section 142(1) of the Act, issued upon the assessee dated 28-01-2019 requiring him to furnish the claim of deduction under section 57 of the Act. The relevant extract of ITA No.90/RJT/2022 A.Y.2017-18 - 5 - the notice issued under section of 142(1) is placed on pages 22 of the paper book. Likewise, the learned AR further drew out attention on page 25 and 26 of the paper book where the notice under section 142(1) of the Act dated 17 th June 19 was placed requiring the assessee to furnish the details/ supporting documents of the expenses against the income shown under the head house property. 9.2 The learned AR also drew our attention on the explanation furnished by the assessee during the assessment proceedings dated 2 nd February 19 which is placed on pages 28 of the paper book. 9.3 Likewise, the ld. AR also drew our attention on the reply made to the AO during the assessment proceedings vide letter dated 22 nd July 2019 which is placed on page 29 of the paper book. 10. On the contrary, the learned DR vehemently supported the order of the authorities below. 11. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the assessment order has been passed by Ld. AO without making inquiries or verification with respect to the expenditures claimed under section 57 (iii) of the Act against the income from other sources. 11.1 An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary ITA No.90/RJT/2022 A.Y.2017-18 - 6 - powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgments by various Hon’ble High Courts in this regard. 11.2 Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. The relevant observation of Hon’ble Delhi High Court reads as under: “12. ..... There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. ——— From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax 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 visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer 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 Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material 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. 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the ITA No.90/RJT/2022 A.Y.2017-18 - 7 - Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.” 11.3 The Hon’ble Bombay High Court in case of Gabriel India Ltd. [1993] 203 ITR 108 (Bom), discussed the law on this aspect in length in the following manner: “The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi- judicial controversies as it must in other spheres of human activity. 11.4 The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:- “20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provison shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.” 11.5 The Hon’ble Supreme Court in recent case of Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates*[2019] 106 taxmann.com 31 ITA No.90/RJT/2022 A.Y.2017-18 - 8 - (SC), held that where Pr. CIT passed a revised order after making addition to assessee's income under section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of such on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee's income. The Principal Commissioner passed a revised order under section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee's on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee's on-money transactions and Tribunal, thus, set aside the revised order passed by Commissioner. The Hon’ble High Court upheld Tribunal's order. The Hon’ble Supreme Court while dismissing the SLP filed by the Department held as under:- “We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee's on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed” 11.6 The Supreme Court in the another recent case of Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd[2020] 114 taxmann.com 545 (SC), dismissed the Revenue’s SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law, with the following observations: “Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere with the view of the Tribunal. The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ought to have so held in the order of revision. There was simply no necessity to ITA No.90/RJT/2022 A.Y.2017-18 - 9 - remand the proceedings to the Assessing Officer when no further inquiries were called for or directed” 11.7 From an analysis of the above judicial precedents, the principle which emerges is that the phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an 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 interests of the revenue, for example, when an Assessing Officer adopts one of the course permissible in law and it has resulted in loss of revenue; or where two views are possible and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order causing prejudice to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law, or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind. 11.8 Now in the facts of the case before us, we note that the AO during the course of assessment proceedings has made enquiries on this issue and after consideration of written submissions filed by the assessee and documents / evidence placed on record, and then framed the assessment under section 143(3) of the Act. First of all, we note that the case of the assessee was selected under limited scrutiny to verify the salary income and the deduction against income from other sources. This fact can be verified from the notice issued under section 143 (2) of the Act placed on page 16 o f the paper book. 11.9 Likewise, there were enquiries raised by the AO during the assessment proceedings in the notice issued under section 142(1) of the Act by the AO and the reply made by the assessee against such notice. i. Notice dated 28-01-2019: ITA No.90/RJT/2022 A.Y.2017-18 - 10 - You are further informed that, your case has been selected for Limited Scrutiny for the reason ”Large deduction claimed u/s.57, Large difference in total taxable income shown in Annexure II of TDS return of employer in Form 24Q and that shown in ITR” you are requested to furnish the following details: A) Large deduction claimed u/s.57: 1. Please submit details regarding incomes from other sources in given format. 2. Please provide the details of expenditure claimed under section 57 against the head income from other sources. 3. Please provide the copy of ledgers of all such expenditures. 4. Please submit the supporting documents/proof of payments made. 5. Furnish details regarding TDS deducted for the expenses/payments on which TDS was applicable, in given format. ii. Notice dated 17-06-2019: You are required to explain with supporting documents how the interest paid for loans taken is directly attributable to the interest income earned from the loans given i.e you are required to prove the direct correlation with loan given and loans taken as per the requirement of 57(iii) of Income Tax Act, 1961. You are required to prove the correlation with ledgers of loans taken date-wise and loan given date-wise highlighted in bank statements. iii. Reply dated 02-02-2019 Details of income from other sources is given vide Annexure G-1. Details of expenditure claimed u/s.57 is given vide Annexure G-2. Details of income received under other sources like Dividend, interest on saving A/C, Interest on FDR, Interest on I.T Refund, Interest received on Bond and other interest are given vide Annexure G-3. Details of interest paid to Kotak Mahindra Bank Ltd, Yes Bank Term Loan a/c. Interest paid to others, copy of ledger account of Consultant Fees, Bank Charges, Legal and Professional Fees are enclosed vide Annexure G-4. iv. Reply dated 22-07-2019 I have also attached annexure which shows the amount of interest paid on various loans taken during F.Y. 2016-17. Total interest paid is Rs.66,60,006/-. The same chart shows amount of Interest received from the various persons to whom loans are given. From the attached annexure you will observe that out of Rs.5,40,56,070/- (loan taken) on which interest is paid and Rs.8,28,93,679/- is given to various persons on which interest is charged. My investmen in partnership firm namely Rishi Kiran Roadlines as a partner is Rs.70,02,145/-. As per partnership deed partners are not entitled to receive any interest on capital contributed by them. In this you will appreciate that entire amount of loans taken on interest are either given to various person as loan and interest is earned or substantial amount is invested in partnership business where I have earned remuneration. 11.10 Similarly, we also note that the assessee furnished the details of the interest income viz a viz the interest expenses along with the rate of interest received and paid which are placed on pages 31 to 32 of the paper book. ITA No.90/RJT/2022 A.Y.2017-18 - 11 - 11.11 From the above it is revealed that it is not the case that the AO has not made any enquiry. Indeed the Pr. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of expenditures claimed under section 57(iii) of the Act. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the AO had made enquiries and after consideration of material placed on record accepted the genuineness of the claim of the assessee. 11.12 At this juncture, it is also important to note that the learned PCIT in his order passed under section 263 of the Act has made reference to the explanation 2 of section 263 of the Act. It was attempted by the learned PCIT to hold that there were certain necessary enquiries which should have been made by the AO during the assessment proceedings but not conducted by him. Therefore, on this reasoning the order of the AO is also erroneous insofar prejudicial to the interest of revenue. In this regard, we make our observation that the learned PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice dated 29-09-2021 about the same. Therefore, the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus, on this count the learned PCIT erred in taking the recourse of such provisions while deciding the issue against the assessee. Secondly, the learned PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 of the Act. 11.13 In view of the above and after considering the facts in totality, we hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue. Thus, the revisional order passed by ITA No.90/RJT/2022 A.Y.2017-18 - 12 - the learned PCIT is not sustainable and therefore we quash the same. Hence the ground of appeal of the assessee is allowed. 12. In the result, the appeal filed by the assessee is allowed This Order pronounced in Open Court on 01/07/2022. Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER Rajkot, Dated 01/07/2022 manish