2021 (7) TMI 347 - HC - Income Tax

Court affirms Tribunal, rejects appeals on interest adjustment against project expenditure.

The High Court upheld the Tribunal's decision, dismissing the appeals as no substantial question of law arose for consideration. The Court found that the ... Revision u/s 263 - whether the interest earned by the assessee against fixed deposits had any nexus with the real estate project undertaken by it? - ITAT set aside revision orders of CIT - HELD THAT:- Having regard to the submitted documents, it cannot be said that the enquiry or verification was not carried out by the AO. A perusal of paragraphs of the impugned orders passed by the Tribunal would show that findings of fact concerning the enquiry made by the AO have been recorded. We find it difficult to agree with the ld. DR that there was no enquiry conducted by the Ld. Assessing Officer by putting any specific question to the assessee as to the treatment given to the interest. As a matter of fact, the reason for the difference in the amount as per Form 26AS and ITR was due to the interest received from the banks that was duly accounted and considered in the financial statements of the company and was adjusted against the project expenditure. The very fact that pursuant to the scrutiny when the Ld. Assessing Officer proposed charging the interest amount received to tax, the very same explanation was offered by the assessee and was accepted by the Assessing Officer. We are, therefore, of the considered opinion that it is not a case of no enquiry and as a matter of fact, it was specifically brought to the notice of the Ld. 7 Assessing Officer that the interest earned was adjusted against the project expenditure. Whether or not an AO has carried out an enquiry or verification, all that the Court is required to ascertain is as to whether the AO applied his mind? - The fact that the AO has not given reasons in the assessment order is not indicative, always, of whether or not he has applied his mind. Therefore, scrutiny of the record, is necessary and while scrutinising the record the Court has to keep in mind the difference between lack of enquiry and perceived inadequacy in enquiry. Inadequacy in conduct of enquiry cannot be the reason based on which powers under Section 263 of the Act can be invoked to interdict an assessment order. 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 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'. See ANIL KUMAR SHARMA [2010 (2) TMI 75 - DELHI HIGH COURT] Order as erroneous and is prejudicial to the interests of the revenue - The error should be one that is not debatable or a plausible view. Section 263 of the Act invests a power of revision in a superior officer and therefore, by the very nature of the power, does not allow for supplanting or substituting the view of the AO. The appreciation of material placed before the AO is, exclusively within his domain which cannot be interdicted by a superior officer while exercising powers under Section 263 of the Act only on the ground that if he had appraised the said material, he would have come to a different conclusion. [See Parashuram Pottery Works Co. Ltd. v. ITO,[1976 (11) TMI 1 - SUPREME COURT] ] Whether AO received a response to his query about the adjustment of interest, in the concerned AYs, against inventory? - We are of the opinion that, since the Tribunal has returned a finding of fact that there was indeed an enquiry carried out by the AO as to the nexus between the funds invested in fixed deposits (on which interest was earned) and the real estate project undertaken by the assessee, no interference is called for by the Court. In the instant cases, it was not as if the funds were surplus and therefore invested in a fixed deposit. The funds were received for the real estate project and while awaiting their deployment, they were invested in a fixed deposit which generated interest. This fits in with the dicta of the Supreme Court in Bokaro Steels Case [1998 (12) TMI 4 - SUPREME COURT] and Indian Oil Panipat Power [2009 (2) TMI 32 - DELHI HIGH COURT], NTPC Sail Power [2012 (10) TMI 524 - DELHI HIGH COURT], and Jaypee DSC Ventures [2011 (3) TMI 309 - DELHI HIGH COURT] In our view, we need not detain ourselves and examine as to whether Clause (a) and (b) of Explanation 2 appended to Section 263 of the Act could have been applied to the AYs in issue, since on facts, it has been found by the Tribunal that an enquiry was, indeed, conducted by the AO. - Decided in favour of assessee. Issues Involved:1. Whether the interest earned by the assessee against fixed deposits had any nexus with the real estate project undertaken by it.2. Whether the Assessing Officer (AO) conducted an enquiry or verification regarding the interest earned.3. Whether the Principal Commissioner of Income Tax (PCIT) could invoke powers under Section 263 of the Income Tax Act, 1961.4. Whether the Tribunal erred in reversing the PCIT's orders.Detailed Analysis:Issue 1: Nexus Between Interest Earned and Real Estate ProjectThe core issue was whether the interest earned by the assessee from fixed deposits had any nexus with the real estate project. The assessee argued that the interest earned on fixed deposits had an intrinsic and inseparable nexus with the real estate project being undertaken. This was because the funds raised for the project were temporarily parked in fixed deposits, and the interest earned was adjusted against the project expenditure.Issue 2: Enquiry or Verification by AOThe AO had indeed conducted an enquiry regarding the interest earned on fixed deposits. The record showed multiple instances where the AO sought clarifications from the assessee. For instance, on 11.08.2016, the assessee's chartered accountants responded to queries regarding the exclusion of interest from the category 'income from other sources.' Similarly, in response to a notice dated 14.09.2017, the assessee clarified that the interest earned was adjusted against the project expenditure due to its nexus with the real estate project. The Tribunal found that the AO had made enquiries and was satisfied with the explanations provided by the assessee.Issue 3: Invocation of Powers Under Section 263The PCIT invoked Section 263, arguing that the AO's assessment orders were erroneous and prejudicial to the interests of the revenue. However, the Tribunal found that the AO had conducted an enquiry and that the view taken by the AO was a possible view. The Tribunal held that inadequacy in the conduct of enquiry could not be a reason to invoke Section 263. The Tribunal cited various judgments to support this view, including 'Commissioner of Income-tax vs. Sunbeam Auto Ltd.' and 'Commissioner of Income-tax vs. Anil Kumar Sharma.'Issue 4: Tribunal's Reversal of PCIT's OrdersThe Tribunal reversed the PCIT's orders, finding that the AO had conducted an enquiry and that the interest earned on fixed deposits was correctly adjusted against the project expenditure. The Tribunal distinguished the judgments cited by the revenue, such as 'Tuticorin Alkali Chemicals & Fertilizers Limited v. CIT,' by noting that those cases did not involve a finding of fact regarding the nexus between the funds and the business project. The Tribunal applied the principles from 'CIT v. Bokaro Steels Limited' and 'Indian Oil Panipat Power Consortium Ltd. vs. Income-tax Officer,' which supported the assessee's treatment of interest as capital receipt.Conclusion:The High Court upheld the Tribunal's decision, dismissing the appeals and concluding that no substantial question of law arose for consideration. The Court found that the AO had conducted a proper enquiry and that the interest earned on fixed deposits was correctly adjusted against the project expenditure. The Court also noted that the PCIT could not supplant his views with those of the AO under Section 263. Therefore, the Tribunal's reversal of the PCIT's orders was justified.