TMI Blog2017 (1) TMI 1144X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was used only in sales made to Metal Alloys. It might have been used for other business needs of Meera Impex. The ld.Commissioner failed to take note of the fact that the assessee was holding a capital of ₹ 415.90 lakhs and noninterest bearing funds of ₹ 60.37 lakhs. These two amounts itself can take care of, if any outstanding balance was available towards M/s.Metal Alloys Corporation. These facts have been highlighted in the written submission filed before the ld.Commissioner. The ld.Commissioner failed to take cognizance of these facts in right perspective. We are of the view that the ld.Commissioner was not justified in taking action under section 263 of the Income Tax Act, 1961, therefore, we allow the appeal of the assessee - ITA No.47/RJT/2011, ITA NO.701/RJT/2014 - - - Dated:- 20-1-2017 - SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER For The Assessee : Shri M.J. Ranpura, CA For The Revenue : Shri Yogesh Pandey, CIT-DR ORDER PER RAJPAL YADAV, JUDICIAL MEMBER: ITA No.47/RJT/2011 is directed at the instance of the assessee against the order of the ld.Commissioner dated 10.1.2011 passed under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed in his proprietorship concern. The assessee had salary income of ₹ 60,000/- per month from M/s.Metal Alloys Corporation i.e. partnership concern. Thus, the ld.Commissioner was of the view that the assessee ought to have earned interest income from M/s.Metal Alloys Corporation and by forgoing the alleged interest income assessee has allowed M/s.Metal Alloys Corporation a higher income which is exempt from tax. On the other hand, the assessee has borne unnecessary interest expenditure. According to the ld.Commissioner the AO has not conducted proper inquiry, and therefore, the assessment order is erroneous and prejudicial to the interest of the Revenue. He issued a show cause notice under section 263 of the Act and invited explanation of the assessee as to why the assessment order be not set side on this ground. In response to the query of the ld.Commissioner the assessee filed reply. Relevant part of the assessee s letter has been reproduced in para-3 of the impugned order. We deem it appropriate to take note the reply given by the assessee as well as finding recorded by the ld.Commissioner. They read as under: 3. Therefore, a show cause notice u/s 263 was issued to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any finance out of interest bearing funds. In the light of the above we submit that the matter about the payment of interest vis-d-vis Income from the firm was clearly considered. Assessment is not prejudicial to the interest of revenue and does not call for any action u/s 263 of the Act. 4. The contention of the AR of the assessee has been considered at length and is found to be unacceptable. Though the AO made a query about the source of investments in partnership firms, there is nothing on records to suggest that he went into the details and carried out proper inquiry. He apparently did not go into the details of the issue and merely accepted the submission of the assessee without any application of mind and proper verifications. The same is further vindicated by the submission of the assessee narrated above wherein the assessee himself has accepted that the sum of ₹ 44817116/- payable by M/s. Metal Alloys Corporation (a unit claiming deductions u/s. 10B) to the proprietary concern of the assessee is on account of goods sold by M/s. Meera Impex, proprietary concern of the assessee, to M/s, Metal Alloys Corporation during FY 2005-06 (Rs, 11311086/-) and FY 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s.Metal Alloys Corporation as well as M/s.Meera Impex as proprietorship concerns and due to this, order was recalled. He further contended that in pursuance of the ld.Commissioner s order, the ld.AO has made disallowance of ₹ 43.78.l571/- out of interest expenditure. This disallowance was challenged by the assessee before the ld.CIT(A) and the ld.CIT(A) has deleted the disallowance. The order of the ld.CIT(A) is being impugned by the Revenue. In order to explain as to how no interest expenditure could be disallowed, he drew our attention towards the finding of the ld.CIT(A). He further contended that the ld.AO has carried out proper inquiry before accepting the accounts of the assessee. The assessee has demonstrated as to how funds have been given to M/s. M/s.Metal Alloys Corporation. He pointed out that at the end of the accounting year, total amount receivable by the assessee in the books of M/s.Metal Alloys Corporation was of ₹ 7,45,05,836/- which contains a sum of ₹ 2,96,88,720/- which is an investment and duly reflected in personal books of Mukesh Kanakhara. The assessee has duly disclosed this fact before the ld.Commissioner. The remaining amount is ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt made by the Assistant Commissioner or Deputy Commissioner or the Incometax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263. (i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between lack of inquiry and inadequate inquiry . If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of lack of inquiry , that such a course of action would be open . 10. In the case of Gee Vee Enterprise vs. Commissioner of Income Tax reported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint that for business purpose of sister concern, the assessee should not incur interest expenditure. In other words, grievance of the ld.Commissioner is that the assessee has arranged his affairs in the proprietorship concern vis- -vis partnership in such a manner where at the cost of proprietorship, partnership was allowed to earn more income which is tax free, and therefore, a prejudice has been caused to the Revenue. In his next fold of grievance, he has demonstrated that the AO has not conducted proper inquiry. We do not find any merit in both fold of proposition conceived by the ld.Commissioner for setting aside assessment order. It is pertinent to mention that the AO has carried out inquiry. The assessee has specifically pleaded in the written submission filed before the ld.CIT. Hon ble Delhi High Court has considered somewhat similar aspect in the case of ITO Vs. D.G.Housing Projects Ltd., reported in 243 ITR 329. It is pertinent to take note of observation of the Hon ble Delhi High Court, which reads as under: 18. This distinction must be kept in mind by the Commissioner of Income-tax while exercising jurisdiction under Section 263 of the Act and in the absence of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... probably ld.Commissioner would be justified. A reading of the impugned order would suggest that the ld.Commissioner has a particular idea in his mind as to how the assessee should conduct his business, and if by doing business in any other manner, the assessee has been avoiding payment of tax, then that manner should be depreciated which is not in consonance with the spirit of law. Revenue cannot force the assessee as to how business has to be done. This impression will be clear from the following facts. The assessee has highlighted before the ld.Commssioner that M/s.Meera Impex had sold scrap of ₹ 3.36 crores to M/s.Metal Alloys Corporation. There was a business relationship. Most of the credit balance in the accounts is on account of sales made by M/s.Meera Impex. If any investment has been made that was made out of personal books and duly reflected. It was not from interest bearing funds. This argument has been jettisoned by the ld.Commissioner by making a reference of total business vis- -vis sundry debtors. Both the issues are altogether non-comparables, specifically by making reference in terms of percentage. How it can be alleged that total unsecured loans taken by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra Impex), is engaged in the business of trading of non-ferrous metals, computer peripherals manufacturing of brass parts and it had 'sold scrap of ₹ 3,36,94,932/- to the partnership firm M/s. Metal Alloys Corporation. Out of the total closing balance of ₹ 4,48,17,116/-, there is opening balance of ₹ 2,06,42,185/-, therefore the increase in amount refers to sales made as reduced by realization of sales. Thus the transactions between M/s.Meera Impex and M/s. Metal Alloy Corporation are business transactions and the profit element is covered in the sales. The account further reveals that as against the total debit of ₹ 6.78 cr. the appellant received ₹ 2.31 cr. leaving closing balance of ₹ 4.48 cr. which includes the debit sales to the tune of ₹ 3.37 cr. Thus the net debit balance in the form of alleged advances remains at ₹ 1.11 cr. (4.48 cr.- 3.37 cr.). On the other hand, investment of ₹ 2,96,88,720/- in M/s. Metal Alloy Corporation was made from personal books of account for which the appellant had sufficient interest free funds at his disposal. It is seen from the appellant's personal balance Nneet that, he was havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s disallowed interest expenditure on the ground that the assessee has used borrowed funds for non-business purpose i.e. by diverting funds to M/s.Metal Alloys Corporation. Though jurisdiction of the AO has been infused by virtue of the order passed under section 263 of the Act, we have already quashed that order and the subsequent proceedings became redundant by virtue of our finding recorded on the appeal of the assessee. Even otherwise, for academic purpose, it is to be considered that our order may be reversed before higher authorities, then relevancy of Revenue s appeal would be there. Considering the dispute with that angle, we upheld the order of the ld.CIT(A) extracted (supra), and we do not find any merit in the appeal of the revenue, because the assessee has demonstrated the availability of interest free funds with him. Therefore, we do not find any merit in the appeal of the Revenue. It is dismissed. 16. In the result, the appeal of the assessee is allowed. Order of the ld.CIT dated 10.1.2011 passed under section 263 of the Income Tax Act, 1961 is quashed. The appeal of the Revenue is dismissed. Order pronounced in the Court on 20th January, 2017 at Ahmedabad. - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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