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Aryan Arcade Ltd. Versus Commissioner of Income Tax-I

2017 (8) TMI 535 - GUJARAT HIGH COURT

Revision u/s 263 - claim of deduction for interest paid on Optionally Fully Convertible Debentures in terms of section 24(b) - debatable issue - Held that:- We find that the petitioner had issued debentures. The funds raised through such debentures were utilised for repayment of past loans. These loans were taken for the purpose of construction of building. This aspect, the petitioner pointed out to the Assessing Officer during the original assessment. Through the accounts the petitioner could e .....

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ticularly, in view of clarification issued by the CBDT. It was therefore, not open for the Commissioner to take such order in revision. - Decided in favour of assessee. - SPECIAL CIVIL APPLICATION NO. 2914 of 2016 - Dated:- 10-8-2017 - MR. AKIL KURESHI AND MR. BIREN VAISHNAV, JJ For The Petitioner : Mr Tushar P Hemani, Advocate And Ms Vaibhavi K Parikh, Advocate For The Respondent : Mr Pranav G Desai, Advocate ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The petitioner has challen .....

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ff). The petitioner's case was taken in scrutiny. One of the issues discussed during the assessment was with respect to the petitioner's claim of deduction for interest paid on Optionally Fully Convertible Debentures ( OFCD for short) in terms of section 24(b) of the Income Tax Act, 1961 ( the Act for short). In the order of assessment dated 21.3.2014, the Assessing Officer did not disturb this claim of the petitioner. To take such order in revision in exercise of powers under section 26 .....

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ou have claimed deduction of municipal taxes of ₹ 1,00,00,000/deduction u/s. 2(i) at the rate of 30 per cent amounting to ₹ 93,88,691/and you have also claimed deduction of ₹ 7,28,00,166/towards payment of interest on debentures which is paid/payable to M/s. I.L.&F.S. Trust Company Limited (Milestone Real Estate Fund0. The I.L.&F.S. Trust Company Limited, to whom the interest on debenture was paid, is a shareholder of your company having 49994 shares out of the total 50 .....

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ayment on loan taken subsequent to the capital borrowed for the purpose of repayment of such capital in respect of property referred to in subsection( 2) of section 23. Subsection( 2) of section 23 refers to property consisting of a house or part of a house which is in the occupation of the owner for the purposes of his own residence. There is no provision in the Act to allow payment of interest on capital borrowed for repayment of earlier borrowed. 4. In this regard, on perusal of the record, i .....

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es of 100 fully paid raising ₹ 25,54,78,300/. (iv) Thereafter, in FY 200910 (AY 201011), your company again issued 14,89,67,078/18% optionally Fully Convertible Debentures of ₹ 1/raising ₹ 14,89,67,079/. The proceeds of these debentures were utilised for repayment of outstanding liability of JPIPL. (v) During the year under consideration, your company has paid/claimed ₹ 7,28,00,166/as interest paid/payable to the fund which has been claimed as expenditure under the head o .....

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n was made to the building during the year in which you had obtained loan of ₹ 14,89,68,078/by way new debentures. (b) The new optionally fully convertible debentures were not used for purchase of property and out of the total interest claimed as deduction, interest to the extent of ₹ 2,68,14,074/( 18% of ₹ 14,89,67,079/) was paid on the new optionally fully convertible debentures of ₹ 14,89,67,078/. 6. From the above discussion, it is clear that you have claimed the inte .....

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construction of property. The Assessing Officer did not examine the issues in the light of the provision of section 24(b) of the IT Act and thus this issue was not properly verified by the Assessing Officer while finalizing the assessment which resulted in the wrongly allowing of interest expenses to the extent of ₹ 2,68,14,074/. 7. The above facts show that the assessment order passed by the Assessing Officer in respect of AY 200607 is erroneous and prejudicial to the interests of the re .....

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e Assessing Officer had examined the entire claim minutely, made necessary inquiries and taken a view which is plausible and, therefore, cannot be disturbed in exercise of revisional powers. They have also contended that the claim of deduction under section 24(b) of the Act was clearly allowable. The amount raised through debentures were utilised for repaying the old loans obtained for the purpose of construction of building and the interest paid on such debentures were therefore, well within th .....

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ers. Counsel further submitted that facts on record would suggest that the amounts raised through issuance of debentures were utilised for repaying the old loans. These loans were utilised for the purpose of construction of building. The interest on debentures was therefore, clearly covered in section 24(b) of the Act. For earlier years, in case of this very assessee, the appellate Commissioner has accepted such stand of the assessee. It would therefore, not be open for another officer of the sa .....

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opposed the petition contending that the order of assessment does not refer to the controversy and, therefore, it cannot be stated that the Assessing Officer had taken any positive view in favour of the assessee. The applicability of section 24(b) of the Act is open to debate. At this stage, therefore, this Court should not interfere. The Commissioner has merely issued a show cause notice. The petitioner would have full innings to take all factual and legal contentions. The Court should therefo .....

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ebentures and thereby raised fund of ₹ 25.54 crores. Later on, in the financial year 2009-2010, the company had similarly issued ₹ 14.89 crores debentures, raising further fund of ₹ 14.89 crores. These debentures were utilised for repayment of the outstanding liability of JP Infrastructure Private Ltd. which had borne the cost of construction and the cost of land. During the year under consideration, the company had claimed deduction of interest expenditure of ₹ 7.28 cror .....

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uring the financial year 2009-2010 during which there were no purchase or addition to the property. According to him therefore, the claim was not in accordance with section 24(b) of the Act since the funds could not be said to have been used for the purpose of construction of property. 7. The fact that this issue was examined by the Assessing Officer during the scrutiny assessment, is not possible to doubt. The petitioner has produced a note filed before the Assessing Officer during such assessm .....

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he construction of the mall was shown as capital work in progress alongwith cost of land. The entire cost of land and construction was funded by JPIPL and the same was shown as current liabilities in the balance sheet. IL&FS Milestone Fund1 ( a scheme of SEBI registered Venture Capital FundMilestone Real Estate Fund) ( IL&FS ) has purchased entire share capital of the assessee from JPIPL and its nominee shareholders to become the 100% shareholder by 29/03/2008. The construction of the ma .....

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essee submits that the unsecured loans obtained during the year on issue of OFCDs were utilized for the purpose of repayment of outstanding existing liability which was obtained for the purpose of construction of the building by the JPIPL. The assessee submits that the interest paid on the borrowed money for the purpose of repayment of existing liability is allowable as deduction in computing income from house property as per provisions of section 24(b) of the Incometax Act, 1961 (the Act) The a .....

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aken for the purpose of constructions of property and therefore, interest on OFCDs allowed to be deducted under section 249ii) of the Act. 8. It was after examination of such representation of the petitioner that the Assessing Officer passed the order of assessment and allowed the claim of interest of ₹ 7.28 crores observing that : 2. The assessee company is engaged in the business of renting of immovable property in a shopping mall i.e. Central Stage Mall, Rajnagar Cross Road, Nana Mauva .....

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s of sundry creditors and debtors etc are filed. 9. It can thus be seen that the Assessing Officer did examine this claim during the assessment. He accepted the assessee's stand canvased through the note that sum of ₹ 14.89 crores raised by issuing the debentures was utilised to repay the outstanding liability of JP Infrastructure Private Ltd. Thus the unsecured loans obtained during the year by issuance of debentures were utilised for the purpose of repayment of outstanding existing l .....

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the assessee to an order by the Commissioner in which in exercise of revisional powers, he had directed the Income Tax officer to hold certain inquiry on an issue which according to the Commissioner, the Income Tax officer had not examined. The assessee argued that merely because the order of assessment does not discuss the issue at length, would not mean that no inquiry was made. The Court accepted the contention and held that the Assessing Officer having made the inquiry but without detail ref .....

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recourse to powers under section 263 of the Act. 11. In case of Commissioner of Incometax v. Nirma Chemicals Works P. Ltd. reported in (2009) 309 ITR 67 (Guj), the Division Bench had observed as under : 22. The contention on behalf of the revenue that the assessment order does not reflect any application of mind as to eligibility or otherwise u/s. 80I of the Act requires to be noted to be rejected. An assessment order cannot incorporate reasons for making/granting a claim of deduction. If it do .....

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oper inquiry and taken a definite view, it would be open for the Commissioner to exercise revisional powers only if it is found that the order is erroneous and prejudicial to the interest of the Revenue. If the view adopted by the Assessing Officer is a plausible view, the Commissioner would not substitute his opinion with that of Assessing Officer. In case of Malabar Industrial Co. Ltd. v. Commissioner of Income Tax reported in (2000) 243 ITR 83, the Supreme Court observed as under : A bare rea .....

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e Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenuerecourse cannot be had to section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of ord .....

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, an angle of tax evasion is sought to be brought in, in the notice for revision the basic premise was simple, namely, that amount of ₹ 14.89 crores was raised by issuing the debentures during the financial year 2009-2010. During such period there was no purchase or addition to the property. According to the Commissioner, interest paid on such debentures would not fall within section 24(b) of the Act. He also referred to the proviso below the said section which allowed the interest payment .....

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s were not directly utilised for the purpose of construction, interest on such borrowings would not be deductible. 14. Under clause(b) of section 24, while computing income chargeable under the head Income from house property , the assessee would get deduction in case the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital on the amount of any interest payable on such capital. 15. Before this amendment by the Finance Act of 2000 with effect from 1.4. .....

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