2016 (11) TMI 1360 - AT - Income Tax

Tribunal Quashes Tax Order, Upholds AO's Decisions

Indian Farmers Fertilizers Co-Operative Ltd. Versus Principal Commissioner of Income-Tax

The Tribunal quashed the Principal Commissioner of Income-tax's order under Section 263, as the Assessing Officer had conducted proper inquiries and taken ... Revision u/s 263 - Held that:- In respect of both the issues, i.e., allowing credit of deemed taxes paid on dividend in Oman as well as capitalisation of interest under section 36(1)(iii) detailed enquiries as well as verification have been made by the Assessing Officer. Further it is also not the case of the learned Principal Commissioner of Income-tax that the order is not in accordance with any instruction/direction issued by the Board or is not in accordance with any decision of the honourable Delhi High Court or the apex court of India. Accordingly the order passed by the Assessing Officer cannot be regarded as deemed to be erroneous or prejudicial to the interests of the Revenue under Explanation 2 of the Act. In view of the above, we hold that the impugned order passed by the learned Principal Commissioner of Income-tax under section 263 of the Income-tax Act is without jurisdiction and not sustainable in law. - Decided in favour of assessee Issues Involved:1. Jurisdiction under Section 263 of the Income-tax Act.2. Tax credit on dividend income under Double Taxation Avoidance Agreement (DTAA) between India and Oman.3. Capitalization of interest expenditure under Section 36(1)(iii) of the Income-tax Act.Issue-wise Detailed Analysis:1. Jurisdiction under Section 263 of the Income-tax Act:The Principal Commissioner of Income-tax (PCIT) assumed jurisdiction under Section 263, asserting that the Assessing Officer (AO) did not conduct proper inquiries or apply his mind, thus making the order erroneous and prejudicial to the interests of the Revenue. The Tribunal found that the AO had conducted detailed inquiries and had a plausible view supported by consistent treatment in previous years. The Tribunal cited the Supreme Court's principles in Malabar Industrial Co. Ltd. v. CIT, stating that an order can be revised under Section 263 only if it is erroneous and prejudicial to the interests of the Revenue, which was not the case here. The Tribunal quashed the PCIT's order, emphasizing that the AO's view was one of the permissible views in law.2. Tax Credit on Dividend Income under DTAA between India and Oman:The PCIT challenged the AO's allowance of tax credit for dividend income received by the assessee from OMIFCO, Oman, under Article 25(4) of the DTAA. The PCIT argued that the AO did not verify the legal value of the letters issued by the Secretary General of Taxation, Oman, and doubted the intent of the tax exemption granted under Omani law. The Tribunal found that the AO had thoroughly examined the issue, including the provisions of the DTAA and the Omani tax laws, and had validly allowed the tax credit. The Tribunal cited the case of Kribhco, where a similar issue was decided in favor of the assessee, affirming that the exemption was designed to promote economic development. The Tribunal held that the AO's view was consistent with past assessments and supported by the Omani tax authorities' clarifications, thus quashing the PCIT's order.3. Capitalization of Interest Expenditure under Section 36(1)(iii) of the Income-tax Act:The PCIT directed the AO to examine the applicability of the proviso to Section 36(1)(iii) regarding the capitalization of interest expenditure. The PCIT doubted that part of the interest expenditure pertained to investments not connected with the business. The Tribunal found that the AO had made detailed inquiries and examined the entire block of fixed assets, capital work-in-progress, and the manner of claiming depreciation. The assessee had sufficient interest-free funds to cover the investments, and the AO had capitalized a portion of the borrowing costs as per the accounting policies. The Tribunal held that the AO had applied his mind and followed a consistent accounting policy, thus quashing the PCIT's order on this issue as well.Conclusion:The Tribunal quashed the PCIT's order under Section 263, holding that the AO had conducted proper inquiries, applied his mind, and taken a plausible view consistent with past assessments. The Tribunal affirmed the AO's allowance of tax credit for dividend income under the DTAA and the capitalization of interest expenditure under Section 36(1)(iii). The Tribunal emphasized the principles of consistency and the necessity of detailed inquiries before invoking Section 263.