ITAT allows partial appeal against revision u/s 263 on interest inquiry but upholds 80IA deduction eligibility

The ITAT Rajkot partially allowed the assessee's appeal against revision u/s 263. The tribunal held that the AO failed to conduct proper inquiry regarding non-accrual of interest on outstanding advances, despite substantial interest receipts in preceding years on similar advances. The assessee could not provide supportive evidence justifying why interest was not charged during the assessment year. However, regarding deduction u/s 80IA, the tribunal found the assessee eligible for the deduction as they had started eligible business operations from 2007-08 and properly claimed deduction within the prescribed timeframe. The Pr. CIT's order was upheld on the interest issue but not on the 80IA deduction matter.

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Issues Involved:
1. Jurisdiction and validity of the order under section 263 of the Income Tax Act.
2. Accrued interest on advances given to Sanman Holding Pvt. Ltd.
3. Deduction under section 80IA(5) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of the Order under Section 263:
The assessee challenged the order passed by the Pr. Commissioner of Income Tax (Pr. CIT) under section 263 of the Income Tax Act, claiming it was without jurisdiction and bad in law. The Pr. CIT held that the assessment order under section 143(3) was erroneous and prejudicial to the interest of the revenue due to lack of proper investigation and verification by the Assessing Officer (AO) on two issues: accrued interest on advances and the quantum of deduction allowable under section 80IA(5).

2. Accrued Interest on Advances Given to Sanman Holding Pvt. Ltd.:
The Pr. CIT observed that the assessee had not offered accrued interest for taxation on a deposit of Rs. 350 crores given to Sanman Holding Pvt. Ltd., despite following the mercantile system of accounting. The assessee argued that the company Sanman Holding Pvt. Ltd. was amalgamated with Tanti Holding Pvt. Ltd., and due to financial constraints, no provision for interest payment was made. The Pr. CIT found that the AO had not verified or inquired into this matter during the assessment, making the assessment order erroneous and prejudicial to the revenue's interest.

The Tribunal upheld the Pr. CIT's order on this issue, noting that the AO did not make any inquiry or verification regarding the non-accrual of interest, despite the history of interest receipt in the preceding year. The Tribunal directed the AO to complete the assessment after examining this issue as per the law.

3. Deduction under Section 80IA(5) of the Income Tax Act:
The Pr. CIT held that the AO allowed the deduction under section 80IA without considering the unabsorbed depreciation and losses from the eligible undertaking incurred in preceding years. The assessee argued that the initial assessment year for claiming the deduction was 2011-12, and there was no carry forward of unabsorbed depreciation or loss as of 01-04-2010. The Tribunal agreed with the assessee, citing the CBDT circular No. 1 of 2016, which clarified that the assessee could choose the initial assessment year for claiming the deduction under section 80IA. The Tribunal found that the AO had correctly allowed the deduction as there was no brought forward loss or unabsorbed depreciation in the initial assessment year.

Conclusion:
The Tribunal partly allowed the assessee's appeal. It upheld the Pr. CIT's order regarding the issue of accrued interest on advances, directing the AO to re-examine this matter. However, it did not uphold the Pr. CIT's order on the deduction under section 80IA, agreeing with the assessee's position that the deduction was correctly claimed and allowed by the AO. The Tribunal emphasized that the AO's order was not erroneous or prejudicial to the revenue's interest on this issue.

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