2023 (8) TMI 759 - AT - Income Tax

Tribunal upholds CIT(A) decisions on IT Act sections, dismisses revenue's appeal

ACIT-2 (1) Versus SMS Shivnath Infrastructure Pvt Ltd. Durg.

The Tribunal upheld the CIT(A)'s decisions to delete the disallowance under section 80IA and proportionate interest under section 36(1)(iii) of the IT ... Benefit of deduction u/s 80IA - portion of the interest attributable on the bank loan used for granting of ICD for which no interest was either stipulated or being charged was added back to the income by the assessee suo moto - According to CIT(DR), CIT(A) was wrong in not considering the correct view taken by the AO that the interest on borrowed loan which was not used for the business is not an allowable expenditure and is required to be disallowed and added to the income of the appellant - HELD THAT:- As on perusal of the computation of the total income of the assessee it is observed that the interest attributable to the ICD loan extended by the assessee to its associate concern was added back to the taxable income since the same has no connection with the eligible business of the assessee, this was correct and acceptable as per law. Contention of the AO that this was a colourable device to enhance the eligible profit of the company, which falls under the ambit of sub-section 10 of section 80IA cannot be accepted or subscribed to, because, if the interest expenditure incurred on funds granted as loan to the associate company are not added back to the taxable income of the company, it would have been a reduction of the taxable income, which would lead to a wrong or inaccurate presentation of the facts by the assessee. This was also according to the instructions issued by CBDT vide its Circular 37/2016 - The same has also confirmed by the PCIT by dropping the revisionary proceedings u/s 263 on this issue. Thus, the contention of the revenue that the deduction claimed by the assessee was excessive by disallowance of the interest to increase the eligible profit u/s 80IA, so as to claim higher amount of deduction u/s 80IA than the same is available ordinarily on eligible business, is unsustainable. CIT(A) had correctly, appropriately and categorically decided the issue, thus we found no infirmity in the order of Ld CIT(A), the same deserves to be upheld and we do so. Validity of Revision u/s 263 - fresh issue raised - HELD THAT:- PCIT has raised a fresh issue which was neither a part of the notice under section 263 nor it was confronted to the assessee at any point of time during the proceeding’s u/s 263. The new issue raised was to examine working of taxable income under the provisions of section 115JB after taking into consideration of provisions of Company Act 1956, it was restored to the files of AO to adjudicate again after providing opportunity of being heard to the assessee. A fresh issue without hearing the assessee or causing the assessee to make its submissions on the same is against the principle of natural justice. Considering the facts of the case and respectfully following the judicial principle coming out from the case of Universal Music India Pvt. Ltd [2022 (4) TMI 1081 - BOMBAY HIGH COURT] and various judgments, an action taken by the Ld PCIT against the assessee without confronting it to submit its response or defence to the query raised, without giving an opportunity of being heard is illegal and in contravention to the principle of natural justice. Such action is not permissible in revisionary proceedings u/s 263, thus we are of the considered opinion that the order passed u/s 263 deserves to be quashed and we do so. Thus, we allow the appeal of the assessee. Issues Involved:1. Deletion of disallowance of Rs. 13,90,58,404/- under section 80IA of the IT Act.2. Deletion of disallowance of proportionate interest on non-interest bearing inter-corporate deposits under section 36(1)(iii) of the IT Act.3. Justification of CIT(A)'s concurrent power under section 250(4) of the IT Act.4. Erroneous nature of the CIT(A) order in law and facts.5. New issue raised by PCIT under section 263 without giving notice to the assessee.Summary:Issue 1: Deletion of Disallowance under Section 80IAThe revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 13,90,58,404/- made by the AO from the eligible income under section 80IA of the IT Act. The AO had disallowed this amount, arguing that the interest expenditure was not related to the eligible business as the funds were diverted to an associate concern as interest-free loans. The CIT(A) found that the assessee had correctly added back the interest attributable to the inter-corporate deposit (ICD) to the taxable income, as it was not related to the eligible business. The CIT(A) also relied on judicial pronouncements and CBDT Circular No. 37/2016, which clarified that disallowances related to business activities should enhance the profits of the eligible business for deduction purposes. The Tribunal upheld the CIT(A)'s decision, stating that the AO's contention was unsustainable and the CIT(A) had correctly applied the law.Issue 2: Deletion of Disallowance of Proportionate InterestThe revenue also contested the CIT(A)'s deletion of the disallowance of proportionate interest on non-interest bearing inter-corporate deposits under section 36(1)(iii) of the IT Act. The AO had argued that the interest on borrowed funds used for non-business purposes should be disallowed. The CIT(A) found that the assessee had correctly excluded the interest related to the ICD from the eligible business profits. The Tribunal agreed with the CIT(A), noting that the assessee's actions were in line with legal provisions and judicial precedents.Issue 3: CIT(A)'s Concurrent Power under Section 250(4)The revenue argued that the CIT(A) had overstepped its concurrent power under section 250(4) of the IT Act by allowing the deduction under section 80IA. The CIT(A) had concluded that the assessee's computation of eligible business profits was correct and in compliance with the law. The Tribunal upheld the CIT(A)'s decision, stating that the CIT(A) had appropriately exercised its power and the AO had not provided credible evidence to support its disallowance.Issue 4: Erroneous Nature of CIT(A) OrderThe revenue claimed that the CIT(A)'s order was erroneous in law and on facts. The Tribunal found no infirmity in the CIT(A)'s order, stating that the CIT(A) had correctly interpreted and applied the relevant legal provisions and judicial precedents.Issue 5: New Issue Raised by PCIT under Section 263The assessee appealed against the PCIT's order under section 263, which raised a new issue regarding the calculation of book profits under section 115JB without giving notice to the assessee. The Tribunal found that the PCIT had violated the principles of natural justice by not providing the assessee an opportunity to respond to the new issue. Citing judicial precedents, the Tribunal quashed the PCIT's order, stating that the revisionary proceedings were invalid as they were conducted without proper notice and opportunity for the assessee to be heard.Conclusion:The Tribunal dismissed the revenue's appeal in ITA No. 87/RPR/2017 and allowed the assessee's appeal in ITA No. 107/RPR/2016, upholding the CIT(A)'s decisions and quashing the PCIT's order under section 263.