M/S.MAHOGANY LOGISTICS SERVICES PVT. LTD.,MADURAI V. PCIT, MADURAI-1

ITA 1631/CHNY/2024

AI Insights

The case involves Mahogany Logistics Services Private Limited, which appealed against the order of the Principal Commissioner of Income Tax (PCIT), Madurai. The PCIT had revised the assessment order for the assessment year 2018-19 under section 263 of the Income Tax Act, 1961, claiming it was erroneous and prejudicial to the interest of the Revenue. The original assessment had allowed a significant interest expenditure on non-convertible debentures (NCDs) issued for investing in sister concerns, which the PCIT later questioned. The Tribunal's decision focused on whether the Assessing Officer had adequately examined the claims during the original assessment, leading to the dismissal of the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 713092 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-07-2025
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Assessment Year: 2018-2019
• Other Referred Cases: CIT v. MAX India Ltd., Malabar Industrial Co. Ltd. v. CIT, Dawjee Dadabhoy and Co. V. S.P. Jain, Venkata Krishna Rice Co. V. CIT, Mukur Corporation, Gabriel India Ltd., S.A. Builders v. CIT, Virtusa Consulting Services (P.) Ltd. v. DCIT, Arvee International v. Addl. CIT, CIT v. Jawahar Bhattacharjee
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S. SENTHIL KUMARAN
• Assessee Lawyers: N.V. BALAJI
• Keywords: Set aside; Business income; Difference of opinion; Change of opinion; Depreciation; Commercial expediency; Principle of natural justice; TDS
• Section: 143(3); 142(1); 263; 37; 28; 2; 37(1); 40(a)(ia)

Judgement Text

"आयकर अपीलीय अिधकरण, ’ए’ Ɋायपीठ, चेɄई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI ŵी एस.एस. िवʷनेũ रिव, Ɋाियक सद˟ एवं ŵी एस.आर. रगुनाथॎ, लेखा सद˟ क े समƗ Before Shri S.S. Viswanethra Ravi, Judicial Member & Shri S.R. Raghunatha, Accountant Member आयकर अपील सं./I.T.A. No.1631/Chny/2024 िनधाŊरण वषŊ/Assessment Year: 2018-19 M/s. Mahogany Logistics Services Private Limited, 10, Jawahar Road, Chokkikulam, Madurai 625 002. [PAN:AAFCD8781R] Vs. The Principal Commissioner of Income Tax-1, Madurai. (अपीलाथŎ/Appellant) (ŮȑथŎ/Respondent) अपीलाथŎ की ओर से / Appellant by : Shri N.V. Balaji, Advocate ŮȑथŎ की ओर से/Respondent by : Shri S. Senthil Kumaran, CIT सुनवाई की तारीख/ Date of hearing : 30.04.2025 घोषणा की तारीख /Date of Pronouncement : 28.07.2025 आदेश /O R D E R PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER: This appeal filed by the assessee is directed against the order dated 30.03.2024 passed by the ld. Principal Commissioner of Income Tax 1, Madurai under section 263 of the Income Tax Act, 1961 [“Act” in short] for the assessment year 2018-19. 2. Brief facts of the case are that the assessee company [earlier known as M/s. DRSR Logistics Services Private Limited] filed its return of income for the AY 2018-19 claiming loss of ₹.31,28,98,436/- under Printed from counselvise.com I.T.A. No.1631/Chny/24 2 section 139(9) of the Act. The case was selected for complete scrutiny under CASS for the reason to verify the low income in comparison to high loans/investments in shares, lower amount of disallowance under section 40(a)(ia) and demand raised under section 201 of the Act for non- deduction and short deduction of TDS. The Assessing Officer completed the scrutiny assessment under section 143(3) r.w.s. 144B of the Act dated 25.08.2021 by disallowing ₹.9,26,75,342/- under section 40(a)(ia) of the Act being 30% of ₹.30,89,17,808/-. 3. From the balance sheet of the assessee, the ld. PCIT noted that the assessee held investments aggregating to ₹.299,50,47,000/- in two firms viz., M/s. Dinram Logistics Services LLP and M/s. DRSR Advisory Services LLP by stating, that they are its sister concerns. As the assessee company had no own funds to make such investments, it issued non-convertible debentures (NCD) for funds for investment in firms. The assessee debited to the Profit & Loss account of ₹.30,89,17,808/- towards interest on debentures used for ‘investments’ in the above firms. The assessee neither charged any interest nor admitted any income of the above investment. According to the ld. PCIT, is not allowable since the claim of interest is contingent in nature nor earned any interest income nor business income on the investments made in the Printed from counselvise.com I.T.A. No.1631/Chny/24 3 firms, held the interest expenditure of ₹.30,89,17,808 debited to the P & L account is not allowable under section 36 of the Act. By observing no material on record to show that the assessee had derived any business benefit by investing/advancing the interest free amounts to its sister concern, the entire interest expenditure claimed by the assessee for the investments are liable to be disallowed under section 37 of the Act. After considering the detailed explanations of the assessee, the ld. PCIT recorded his observations from para 7 to 10 and held that the assessment order passed under section 143(3) r.w.s. 144B of the Act dated 16.09.2021 is erroneous in so far it is prejudicial to the interest of the revenue and accordingly, set aside the assessment order and directed the Assessing Officer to pass a fresh assessment after making necessary enquiries and verification including the observations made at para 7 to 9 of the revision order passed under section 263 of the Act dated 30.03.2024. Not satisfied with the impugned order, the assessee is in appeal before the Tribunal. 4. The ld. AR Shri N.V. Balaji, Advocate submits that ground No. 1 raised by the assessee is general in nature and requires no adjudication. 5. He submits that grounds No. 2, 3, 4 & 5 read with ground No. 14 may be heard together challenging the validity of jurisdiction to initiate Printed from counselvise.com I.T.A. No.1631/Chny/24 4 proceedings under section 263 of the Act. The ld. AR drew our attention to page 8 of the PCIT’s order, by referring to provisions under section 263 of the Act, submits that based on the language employed under section 263 of the Act, the powers of the PCIT/CIT is to revise any order passed by the Assessing Officer provided such order is erroneous and prejudicial to the interest of Revenue. He argued that the two-fold conditions are to be cumulatively satisfied for revision under section 263 of the Act. In the absence of the two-fold conditions, in the order of the Assessing Officer, the revisionary powers conferred under section 263 of the Act cannot be exercised by the PCIT/CIT. He refers to decision of the Hon’ble Supreme Court in the case of CIT v. MAX India Ltd. 295 ITR 282 (SC) and also in the case of Malabar Industrial Co. Ltd. v. CIT 243 ITR 83 (SC), submits, while referring to Malabar Industrial Co. Ltd. (supra) and vehemently argues that if one of the two conditions above is absent, i.e., (i) if the order of the Assessing Officer is erroneous, but, it is not prejudicial in the interest of Revenue or if it is not erroneous, but, it is prejudicial to the interest of Revenue, the recourse cannot be exercised under section 263 of the Act. He refers to many case law, which were relied on before the ld. PCIT in the case of Dawjee Dadabhoy and Co. V. S.P. Jain 31 ITR 872 (Cal HC), Venkata Krishna Rice Co. V. CIT 163 ITR 129 (Mad HC), Mukur Corporation 111 ITR 312 (Guj HC) and Gabriel India Ltd. 203 ITR 108 Printed from counselvise.com I.T.A. No.1631/Chny/24 5 (Bom HC). He argued that every loss of Revenue as a consequence of order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. 6. The ld. AR submits that the observations of the ld. PCIT that accrued interest of non convertible debentures (NCD in short) is a provision and any provision cannot be allowed, is not correct for the reason that as per ‘ICDS 1 – accounting Policies’ accrual of expenses is a fundamental accounting principle and the assessee has rightly provided for accrued interest expense which is an expenditure allowed to be claimed as deduction. He submits that the details in respect of charge created in the form of asset while issuing secured NCDs were furnished in the financial statement in its submission as well as detailed note along with documentary evidence in relation to the assets held by the company was provided in response to the notice under section 142(1) of the Act. The assessee also provided all the details regarding mode of payment in respect of issue of NCDs and investments in the firm. Further, list of debenture holders with PAN at the time of issue of NCDs with date of issue of NCDs were provided as Annexure 5. Further, the details regarding income not offered on loan advanced to M/s. Dinram Logistics Services and commercial expediency in investment in the subsidiaries Printed from counselvise.com I.T.A. No.1631/Chny/24 6 were furnished vide submission in response to the notice under section 142(1) of the Act. Likewise, the details regarding secured loan availed from KKR India Financial Services P. Ltd., such as, PAN/address of the lender, dates of receipts of loan, mode of payment of loan amount by the lender, security provided for availing the loan, loan agreement, etc. were also provided vide Annexure 5. He vehemently argued that having giving full details before the Assessing Officer during the course of scrutiny proceedings, the Assessing Officer on his satisfaction, no further clarification was raised in this regard. He submits that no specific adjustment was made for the interest expenses by the Assessing Officer and any change in the position adopted by the Assessing Officer after due scrutiny and examination of the facts again will constitute as ‘change of opinion’ and the same cannot be basis for initiating proceedings under section 263 of the Act and relied on the decision of the jurisdictional High Court in the case of Virtusa Consulting Services (P.) Ltd. v. DCIT in T.C.A. No. 997 of 2018 [442 ITR 385 (Mad). He submits that the view of the ld. PCIT, that the Assessing Officer has not made any enquiry is absolutely vague and referred to page 29 of the appeal memo, being assessment order passed by the Assessing Officer after conducting enquiries/called for details, details were produced and assessment was completed and therefore, the findings of the ld. PCIT in this regard is Printed from counselvise.com I.T.A. No.1631/Chny/24 7 erroneous and not sustainable. He argued that assumption of jurisdiction under section 263 of the Act by the ld. PCIT is void ab initio. 7. On merits, the ld. AR submits that the assessee has borrowed loans to make investments in sister concerns/group companies engaged in the business of acting as executors, administrators, management consultancy & advisory service providers, etc. similar to the business carried on by its holding company, i.e. the assessee. He argued that such investments were made by the assessee for strategic purposes in the best interest for the overall growth of the group company. He submits that the assessee incurred a sum of ₹.33,66,70,195/- on account of interest expenses on such borrowed funds out of which ₹.30,89,17,808/- relating to NCDs and ₹.2,77,52,387/- relates to short term borrowings. He submits that in the scrutiny proceedings, the Assessing Officer disallowed 30% of interest expenditure to an extent of ₹.9,26,75,342/-. He submits that section 36(1)(iii) of the Act provides deduction for the amount of interest paid in respect of capital borrowed for the purpose of business or profession and placed reliance in the case of S.A. Builders v. CIT 288 ITR 1 (SC). He submits that the expression “for the purpose of business” is wider than the expression “for the purpose of earning profits”. The “commercial expediency” depends upon the wisdom of the businessman Printed from counselvise.com I.T.A. No.1631/Chny/24 8 whether a particular expenditure is required to be incurred. The provisions under section 37 of the Act does not curtail or prevent a company from incurring an expenditure which they feels and wants to incur “for the purpose of business”. Further, the expenditure incurred may be direct or may even indirectly benefit the business in the form of better profit, growth, etc. and such expenditure is “wholly and exclusively” for the purpose of business. 8. He submits that the main requirement of section 36(1) of the Act is that the interest amount which is sought to be deducted in computing business income under section 28 of the Act should be in respect of capital, which is borrowed “for the purpose of business”. He argued that in the present case, the said borrowings were availed for the purpose of business and deduction of interest amount must be made from profits and gains of business. 9. The ld. DR Shri S. Senthil Kumaran, CIT submits that the ld. PCIT rightly held that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interest of Revenue. He referred to the provisions under section 263 of the Act and submits that the ld. PCIT called for records and examining the same, held that the Assessing Officer completed the assessment proceedings without making enquiries and Printed from counselvise.com I.T.A. No.1631/Chny/24 9 verifications. The ld. PCIT, having found so, consequently directed the Assessing Officer to examine the issue of allowability of interest expenditure and decide the issue as per law. The ld. DR submits that by such findings of the ld. PCIT, no prejudice is caused to the assessee in appearing before the Assessing Officer and filing full details for his verification. He vehemently argued that the said interest expenditure is not crystallized and the ld. PCIT rightly held that there is no business expediency to claim deduction under section 36(1) of the Act. Further, there was no examination at all under section 37(1) of the Act. He referred to the assessment order and submits that the Assessing Officer, inspite of selecting the case under complete scrutiny conducted only enquiries with reference to section 40(a)(ia) of the Act. He submits that the decision in the case of S.A. Builders v. CIT (supra) is not applicable in the present case for the reason that the assessee advanced entire borrowed funds to its sister concern and argued vehemently that there is no business expediency at all. 10. The ld. DR, while referring to para 8 of the impugned order, argued no examination has been done in respect of the claim made by the assessee and the ld. PCIT rightly directed the Assessing Officer to examine the issue of allowability of the said interest expenses. The ld. DR Printed from counselvise.com I.T.A. No.1631/Chny/24 10 drew our attention to the decision of the Hon’ble High Court of Gauhati in the case of CIT v. Jawahar Bhattacharjee 341 ITR 434 (Gauhati FB) and argued the case of assessment based on wrong assumption of facts, on incorrect application of law, without due application of mind or without following principles of natural justice are not beyond scope of section 263 of the Act. Further, he drew our attention to the order of the Mumbai benches of ITAT in the case of Arvee International v. Addl. CIT 101 ITD 495 and argued mere allegation that the Assessing Officer has taken a view in the matter will not put the matter beyond the purview of section 263 of the Act unless the view so taken by the Assessing Officer is judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. He argued that in the present case, no view was taken by the Assessing Officer and since no view has been taken by the Assessing officer, the above such two cases law are applicable. The ld. DR prayed to dismiss the ground raised by the assessee. 11. Heard both the parties and perused the material available on record. We note that the argument of the ld. AR that all details relating to the issue on hand were furnished before the Assessing Officer in the scrutiny proceedings and after thorough examination, the Assessing Printed from counselvise.com I.T.A. No.1631/Chny/24 11 Officer accepted the contention of the assessee in incurring interest expenditures on borrowed funds which were invested in sister concerns. We note that the said assessment order is at page No. 29 of the appeal memo and on perusal of the same, we find that no discussion whatsoever made by the Assessing Officer whether the said expenditure is allowable under the law or not. The only discussion made by the Assessing Officer is with reference to non-deduction of TDS for violation of section 193 of the Act and proceeded to disallow 30% of the impugned interest expenditure. The said discussion, which clearly shows that there was no enquiry at all regarding admissibility of said interest expenditure under the provisions of the Act. On perusal of para No. 7 of the impugned order, as rightly pointed out by the ld. DR, the ld. PCIT clearly held that there was no enquiry in the proper perspective except for disallowance under section 40(a)(ia) of the Act. Therefore, the contention of the ld. AR that the Assessing Officer made due enquiry and no specific adjustment was made by the Assessing Officer with reference to the interest expenditure incurred, is not acceptable, therefore, the argument of revision under section 263 of the Act is not maintainable as the opinion of the ld. PCIT constitute a change of opinion, is rejected. The ld. AR placed reliance on the decision of the Hon’ble Supreme Court in the case of S.A. Builders (supra) for the purpose of the impugned interest expenditure is allowable Printed from counselvise.com I.T.A. No.1631/Chny/24 12 as the borrowed funds advanced to its sister concerns. On careful reading of the said decision, we note that the Hon’ble Supreme Court was pleased to hold that the interest on borrowed loans has to be allowed when the assessee advances it to a sister concern depending upon the facts and circumstances of the respective case, however, in the present case, the said examination was not at all done by the Assessing Officer in respect of the allowability of said interest expenditure. Therefore, we hold the decision of the Hon’ble Supreme Court in the case of SA Builders (supra) is not applicable. Further, the ld. AR placed reliance on the decision of the Hon’ble High Court of Madras in the case of Virtusa Consulting Services Pvt. Ltd. (supra), which is at page No. 18 of the paper book, on careful reading of the same, we note that the Hon’ble High Court of Madras was pleased to hold that there is discussion made by the Assessing Officer with regard to the details called for from the assessee, the reply submitted by them, as seen from assessment order that the order has been passed by the Assessing Officer with application of mind with a speaking order, not accepting deduction as claimed by the assessee, but, reworking the same. In the present case, as discussed above, there was no discussion at all by the Assessing Officer regarding the admissibility of said interest expenditure, therefore, we are of the opinion that the decision of the Hon’ble High Court of Madras in the case Printed from counselvise.com I.T.A. No.1631/Chny/24 13 of Virtusa Consulting Services Pvt. Ltd. (supra) is not applicable. Therefore, the contention of the ld. AR that the opinion of the ld. PCIT under 263 proceedings is the change of opinion, is not acceptable. 12. The ld. DR relied on the decision in the case of Arvee International v. Addl. CIT (supra), wherein, the Mumbai Benches of the Tribunal observed as under: 19. We are unable to accept the aforesaid submission of the learned Counsel for two other reasons also. First reason is that the view so taken by the Assessing Officer without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction under Section 263. Second reason is that it is not the taking of any view that will take the matter outside the scope of Section 263. The view taken by the Assessing Officer should not be a mere view in vacuum but a judicial view. It is well established that the Assessing Officer being a quasi- judicial authority cannot take a view, either against or in favour of the assessee/revenue, without making proper inquiries and without proper examination of the claim made by the assessee in the light of the applicable law. In Gruh Finance Ltd. v. Jt. CIT , the argument against the initiation of proceedings under Section 147/148 that the claim for depreciation has been considered and hence cannot be disallowed on mere change of opinion was rejected because there was no conscious consideration of the materials which were on record. As already stated earlier, no material was placed before the Assessing Officer at the assessment stage on the basis of which he could take any view. The assessee has also not been able to show to us that any inquiry was made by the Assessing Officer in this regard. Therefore mere allegation that the Assessing Officer has taken a view in the matter will not put the matter beyond the purview of Section 263 unless the view so taken by the Assessing Officer is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. The judicial view taken by the Assessing Officer may perhaps place the matter outside the purview of Section 263 unless it is shown that the view so taken by the Assessing Officer contains some apparent error of reasoning or of law or of fact on the face of it. 13. On perusal of the above, we note that in the present case, the view taken by the Assessing Officer regarding non-deduction of TDS and making disallowance under section 40(a)(ia) of the Act is not judicial view Printed from counselvise.com I.T.A. No.1631/Chny/24 14 consciously based upon proper inquiries and appreciation of all relevant factual and legal aspects of the case with reference to allowability of interest expenditure. Therefore, the finding of the Mumbai Tribunal in the case of Arvee International v. Addl. CIT (supra) is applicable to the present case. 14. Further, the ld. DR placed on record the decision of Full Bench of Hon’ble High Court of Gauhati in the case of CIT v. Jawahar Bhattacharjee (supra), wherein, the Hon’ble High Court of Gauhati (FB) has held as under: 23. Accordingly, we hold that Daga Entrade P. Ltd. lays down correct law and the same is not in conflict with the earlier order of this Court in Rajendra Singh. Jurisdiction under Section 263 can be exercised whenever it is found that the order of assessment was erroneous and prejudicial to the interest of the Revenue. Cases of assessment order passed on wrong assumption of facts, on incorrect application of law, without due application of mind or without following principles of natural justice are not beyond the scope of Section 263 of the Act. 15. On careful reading of the relevant part above, we note that in the present case, the Assessing Officer proceeded to disallow 30% for violation of non-deduction of TDS instead of examining whether the interest expenditure is allowable or not. Therefore, respectfully following the decision of the Hon’ble High Court of Gauhati [Full Bench], we hold the Assessing Officer passed assessment order on wrong assumption of facts, an incorrect application of law and without due application of mind. Printed from counselvise.com I.T.A. No.1631/Chny/24 15 Thus, we find no infirmity in the revision order passed under section 263 of the Act in holding that the assessment order dated 25.08.2021 is erroneous and prejudicial to the interest of the Revenue. 16. The assessee stated that the interest has been claimed at the rate of 10% on the NCDs on provisional basis, which is of a minimum percentage ranging from 10% to 18% as per debenture agreement. The ld. PCIT has rightly invoked the provisions of section 263 of the Act and the Assessing Officer failed to examine the issue of allowability of expenditure based on the provisions made on an estimate basis without any certainty of rate of interest payable. Further, the Assessing Officer has verified only the applicability of section 40(a)(ia) of the Act on account of non-deduction of TDS under the provisions of the Act on the interest expenditure claimed and has made disallowance, in the opinion of the ld. PCIT, the Assessing Officer has failed to verify the allowability of expenditure under the provisions of the Act, but, concentrated only on the issue of non-deduction of TDS. Therefore, the order of the Assessing Officer is, in our opinion erroneous and prejudicial to the interest of the Revenue. Further, we are not concurring with the argument of the ld. AR in respect of carry forward loss of current year which has been reversed in the assessment year 2021-22 due to operation of section 79 of the Act. Printed from counselvise.com I.T.A. No.1631/Chny/24 16 Therefore, the impact of claiming an ineligible expenditure in the impugned assessment year cannot be compensated with by reversing current year carry forward loss in future assessment year due to operation of section 79 of the Act. In view of the above reasons, the invoking of section 263 of the Act by the ld. PCIT cannot be found faulted with. Therefore, ground No. 2 to 5 and 14 are dismissed. 17. The ld. AR submits that ground Nos. 6 to 13 may be treated as argued and accordingly treated as argued. 18. In the result, the appeal filed by the assessee is dismissed. Order pronounced on 28th July, 2025 at Chennai. Sd/- Sd/- (S.R. RAGHUNATHA) ACCOUNTANT MEMBER (S.S. VISWANETHRA RAVI) JUDICIAL MEMBER Chennai, Dated, 28.07.2025 Vm/- आदेश की Ůितिलिप अŤेिषत/Copy to: 1. अपीलाथŎ/Appellant, 2.ŮȑथŎ/ Respondent, 3. आयकर आयुƅ/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय Ůितिनिध/DR & 5. गाडŊ फाईल/GF. Printed from counselvise.com "