ITAT Mumbai quashes Pr.CIT's revision under section 263 on interest deduction under section 36(1)(iii) finding AO applied mind

ITAT Mumbai held that Pr.CIT's revision u/s 263 regarding deduction u/s 36(1)(iii) was unjustified. The AO had called for information on interest expenses, loans and advances, and accounting methods, demonstrating application of mind. The AO's decision represented one possible view based on available information. Since the AO conducted verification and enquiry, and the assessee responded to queries raised, the twin conditions of being erroneous and prejudicial to revenue were not satisfied. ITAT set aside Pr.CIT's order and allowed the appeal.

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Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Assessment order's alleged erroneous and prejudicial nature to the interest of the revenue.
3. Allowability of deduction claimed under Section 36(1)(iii) of the Income Tax Act.
4. Adequacy of enquiry conducted by the Assessing Officer (AO).
5. Disallowance of interest expenses.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act:
The Principal Commissioner of Income Tax (Pr.CIT) exercised jurisdiction under Section 263, holding that the assessment order dated 15.02.2021, passed under Section 143(3) of the Income Tax Act, was erroneous and prejudicial to the interest of the revenue. The Pr.CIT issued a revision notice under Section 263, citing that the AO failed to disallow the entire interest expense of Rs. 9369.28 lakh, leading to an under-assessment of Rs. 3710.64 lakh.

2. Assessment Order's Alleged Erroneous and Prejudicial Nature:
The Pr.CIT found the AO's order erroneous and prejudicial to the revenue's interest due to the inadequate disallowance of interest expenses. The AO had accepted the assessee's suo moto disallowance of Rs. 5658.64 lakh under Section 36(1)(iii) but did not disallow the remaining interest expense, which the Pr.CIT deemed should have been disallowed entirely as the borrowed capital was used for non-business purposes.

3. Allowability of Deduction Claimed under Section 36(1)(iii):
The assessee argued that the AO had duly considered and verified the facts regarding the allowability of the deduction under Section 36(1)(iii). The AO had issued notices under Sections 143(2) and 142(1), and the assessee had provided detailed responses, including financial statements, tax audit reports, and supporting documents. The AO, after verification, accepted the loss as per the return of income filed.

4. Adequacy of Enquiry Conducted by the AO:
The Pr.CIT contended that the AO had not made adequate enquiries regarding the allowability of the interest expense deduction. However, the assessee maintained that the AO had conducted a thorough verification process, including issuing multiple notices and receiving comprehensive responses from the assessee. The Tribunal noted that the AO had applied his mind to the facts and taken a possible view, which should not be disturbed merely because the Pr.CIT held a different opinion.

5. Disallowance of Interest Expenses:
The Pr.CIT argued that the entire interest expense of Rs. 9369.28 lakh should have been disallowed since the borrowed capital was not used for earning taxable income. The assessee, however, demonstrated that it had sufficient interest-free funds to cover the interest-free loans and that the remaining funds were used for business purposes. The assessee had already made a suo moto disallowance of Rs. 5658.64 lakh under Section 36(1)(iii), which was deemed reasonable by the AO.

Conclusion:
The Tribunal found that the AO had conducted a proper enquiry and taken a possible view based on the information provided by the assessee. The Pr.CIT's order under Section 263 was deemed unjustified as it did not meet the twin conditions of being erroneous and prejudicial to the interest of the revenue. The Tribunal relied on various judicial precedents, including the decisions of the Hon'ble High Courts and the Supreme Court, which clarified that an order could not be considered erroneous merely because the Pr.CIT disagreed with the AO's view. Consequently, the Tribunal set aside the Pr.CIT's order and allowed the assessee's appeal.

Separate Judgment:
The Tribunal also addressed a similar appeal (ITA No. 1207/Mum/2023) for the same assessment year, involving identical facts and issues. The decision rendered in ITA No. 1208/Mum/2023 was applied mutatis mutandis, and the appeal was similarly allowed.

Final Order:
The appeals filed by the assessee were allowed, and the Pr.CIT's orders under Section 263 were set aside. The Tribunal pronounced the order in the open court on 31.01.2024.

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