2023 (11) TMI 988 - AT - Income Tax

PCIT's revision order under section 263 quashed for inadequate hearing and already disallowed interest expenses

Vishal Diamonds Pvt. Ltd. Versus The PCIT-5, Mumbai

ITAT Mumbai quashed PCIT's revision order u/s 263 regarding interest expenses and loan genuineness examination. The tribunal found that AO had already ... Revision u/s 263 - As per CIT claim of interest expenses had been allowed erroneously by the AO and also has not examined genuineness and creditworthiness of the fund borrowed for advancing loan - HELD THAT:- We find that the Ld. PCIT has no where asked for examination of the genuineness or creditworthiness of the funds borrowed for advancing. During the course of the hearing on 19.07.2013 and 24.08.2013, the Ld. DR was asked to furnish necessary evidence in support that opportunity of being heard was given to the assessee on the issue of genuineness of examination of the borrowed fund. During hearing dated 04.09.2023, the Ld. DR filed a copy of the relevant folder of the Ld. PCIT including order sheet and submitted that as per the record no such opportunity was appeared to be have given. In aforesaid circumstances of the case, the order u/s 263 passed by the Ld. PCIT cannot be sustained. Since, we find that on the first issue, the Assessing Officer has already made disallowance of the interest and therefore, order cannot be revised on that count . In absence of any opportunity provided by the Ld. PCIT on the second issue, the assessment order cannot be revised on the second issue also therefore, on both these counts, order of the Ld. PCIT cannot be sustained. Accordingly, we quash the order passed u/s 263 of the Act by the Ld. PCIT. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the revisional power under section 263 could be exercised in respect of interest expense of Rs. 73,18,356/- where the Assessing Officer in the assessment order had already disallowed total expenses of Rs. 73,54,549/- (which included the said interest) by invoking section 14A read with Rule 8D. 2. Whether the revisional order under section 263 predicated on non-examination of genuineness and creditworthiness of borrowed funds (used for advancing loans) is sustainable when the revisioning authority did not specifically raise that issue in the show-cause notice or afford an opportunity to the assessee to meet that specific allegation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of revision on account of interest expense where AO had already disallowed total claimed expenses Legal framework: Section 263 permits the Principal Commissioner/Commissioner to call for and examine records of an assessment and, if the order is found to be erroneous and prejudicial to the interests of revenue, to revise it. The AO's findings in the assessment order determine whether any prejudicial error remains to be corrected. Precedent treatment: The Court relied on the principles governing section 263 (including the requirement that an order must be erroneous and prejudicial) and on the accepted approach that revision cannot be exercised to achieve what the AO has already effectively done. Interpretation and reasoning: The Tribunal examined the assessment record and noted that the Assessing Officer, while computing disallowance under Rule 8D, had restricted the disallowance to the extent of expenses shown in the profit & loss account and had disallowed Rs. 73,54,549/-, which subsumed the interest component of Rs. 73,18,356/-. Because the AO had already disallowed the claimed expense in the assessment order passed under section 143(3), there was no remaining prejudicial error relating to allowance of that interest for the PCIT to correct under section 263. Ratio vs. Obiter: Ratio - where an AO has already disallowed an item of expenditure in the assessment order, a revisional order under section 263 cannot be sustained to disallow the same item anew as being erroneously allowed; there is no prejudicial error left for revision on that point. Obiter - general observations on the correctness of Rule 8D application beyond the facts of this case. Conclusion: Revision under section 263 could not be sustained on the ground of alleged erroneous allowance of interest expenses because the AO had already disallowed the total claimed expenses including that interest in the assessment order. Issue 2 - Requirement of specific show-cause or opportunity when revision proposes to examine genuineness/creditworthiness of borrowed funds Legal framework: Section 263 does not require issuance of a specific show-cause notice confined to particular grounds as a precondition for initiating revisional proceedings; however, principles of natural justice require that the assessee be afforded a full opportunity of hearing on matters relied upon by the revisional authority before finalizing revision. Precedent treatment (followed): The Tribunal followed the Supreme Court's pronouncement that while the revisional authority commonly issues a notice indicating reasons, the statute does not mandate a narrowly worded show-cause as a jurisdictional precondition; nonetheless a full opportunity to controvert the relevant facts must be afforded before finalizing the revision. Interpretation and reasoning: The revisional notice issued did generally identify that interest expense was to be disallowed because no income was offered from loans and advances; it did not, however, expressly state that the PCIT proposed to examine the genuineness and creditworthiness of the funds borrowed for advancing loans. The Tribunal inspected the record and order-sheet and found no evidence that the assessee was given an opportunity to meet allegations concerning genuineness or creditworthiness (including examination under section 133(6) of third parties). Given that the PCIT's final revisional order rested, in part, on the ground that the AO failed to examine genuineness and creditworthiness, the absence of any prior notice to the assessee on that specific issue - and absence of opportunity to respond - rendered the revision procedurally infirm on this ground. Ratio vs. Obiter: Ratio - while a specific show-cause limited to a particular issue is not statutorily required, the revisional authority must afford the assessee an opportunity to meet any new or specific factual/credibility allegations (such as genuineness and creditworthiness) on which revision is proposed; failure to do so vitiates the revision to that extent. Obiter - remarks on normal practice of indicating reasons in a revisional notice and on scope of matters a revisional authority may consider. Conclusion: The revision under section 263 was unsustainable insofar as it set aside the assessment for want of alleged non-examination of genuineness/creditworthiness, because no opportunity was given to the assessee to meet that specific allegation; consequently the revisional order cannot be sustained on this ground. Cross-reference and overall conclusion Both issues were interrelated: the first (disallowance of interest) was substantively addressed by the AO in the assessment order and therefore did not furnish a valid ground for revision; the second (genuineness/creditworthiness of borrowed funds) was a distinct factual contention relied upon by the revisional authority but was not put to the assessee for response. Applying the statutory requirement of an opportunity to be heard (as articulated by higher authority) and reviewing the assessment record, the Tribunal concluded that the revisional order under section 263 could not be sustained on either count and therefore quashed the revision and allowed the appeal.