2024 (3) TMI 157 - HC - Income Tax

Tax deductions for non-performing asset provisions and interest rate swaps: s.263 revision quashed as scrutiny enquiries existed.

The dominant issue was whether the CIT validly exercised revisional jurisdiction under s.263 on the ground of inadequate/no enquiry regarding deductions ... Revision u/s 263 - Inadequate or no enquiry - ITAT quashing the order u/s 263 -CIT quashed the assessment order and remitted the matter back to the AO for a de novo adjudication with respect to the two claims for deduction on account of provision for non-performing assets AND claim for deduction on account of interest rate swap. HELD THAT:- Admittedly, in the instant case, the questionnaire dated 02.11.2004, which has been annexed and brought on record in the present appeal, would manifest that the AO had asked for the allowability of the claims with respect to the issues in question. Consequently, the respondent-assessee duly furnished explanations thereof vide replies dated 09.12.2004, 20.12.2004 and 06.01.2005. Thus, it is not a case where no enquiry whatsoever has been conducted by the AO with respect to the claims under consideration. A query was raised during the course of scrutiny which was satisfactorily answered by the assessee but did not get reflected in the assessment order, would not by itself lead to a conclusion that there was no enquiry with respect to transactions carried out by the assessee. See SHRI ASHISH RAJPAL [2009 (5) TMI 18 - DELHI HIGH COURT] Inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act. The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. Rather, in our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit. As discernible from the aforenoted findings of the ITAT that both the claims were duly examined during the original assessment proceedings itself and neither there was any error nor the same was prejudicial to the interests of the Revenue. Thus, the findings of fact arrived at by the ITAT do not warrant any interference of this Court. Decided against revenue. Issues Involved:1. Validity of the ITAT's order quashing the CIT's order u/s 263 of the Income Tax Act.2. Examination of the claims for deduction on account of provision for non-performing assets and interest rate swap.Summary:Issue 1: Validity of the ITAT's Order Quashing the CIT's Order u/s 263 of the Income Tax ActThe Revenue appealed against the ITAT's order dated 23.04.2018, which set aside the CIT's order u/s 263 of the Income Tax Act for AY 2002-03. The CIT had quashed the original assessment order, deeming it erroneous and prejudicial to the Revenue's interest, and remitted the matter to the AO for re-adjudication of two specific claims. The ITAT invalidated the CIT's order, stating that there was no error or prejudice to the Revenue's interest as the AO had duly examined the issues during the original assessment proceedings. The High Court upheld the ITAT's decision, emphasizing that inadequacy of enquiry does not confer revisional power u/s 263 unless there is a lack of enquiry.Issue 2: Examination of the Claims for Deduction on Account of Provision for Non-Performing Assets and Interest Rate SwapThe CIT's order u/s 263 was based on the claims for deduction of Rs. 1114.68 lacs for non-performing assets and Rs. 114.06 lacs for interest rate swap. The AO had initially assessed the respondent-assessee's income at Rs. 87,01,68,210/- after scrutiny. The CIT, however, found the assessment order erroneous and prejudicial to the Revenue's interest, leading to a re-examination by the AO, who disallowed the expenditure as capital in nature. The ITAT found that the AO had indeed examined these issues during the original assessment through detailed questionnaires and replies, and thus, there was no error or prejudice to the Revenue. The High Court concurred, noting that the CIT had failed to point out any specific error in the original assessment order.Legal Principles and Precedents:The High Court referred to several precedents, including CIT v. Sunbeam Auto Ltd., CIT v. Anil Kumar Sharma, and the Supreme Court's decision in Malabar Industrial Co. Ltd., to highlight that mere inadequacy of enquiry does not justify revisional jurisdiction u/s 263. The Court emphasized that the AO's application of mind during the assessment process, even if not detailed in the assessment order, is sufficient to negate the CIT's revisional power.Conclusion:The High Court dismissed the Revenue's appeal, affirming the ITAT's order that the CIT's invocation of jurisdiction u/s 263 was unwarranted as the twin conditions of the assessment order being erroneous and prejudicial to the Revenue's interest were not met. The Court also noted that the CIT's reliance on Umashankar Rice Mill was misplaced in light of the specific conditions outlined in Explanation 2 to Section 263, inserted by the Finance Act, 2015.