Income Tax Appeal v. Oral Judgment (Per Abhay Ahuja, J

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 397 OF 2018 The Pr. Commissioner of Income Tax-14, MumbaiRoom No. 469, 4[th] Floor, Aayakar Bhavan,M. K. Road, Mumbai 400 020.…Appellant Versus Shivshahi Punarvasan Prakalp Ltd.5[th] Floor, Griha Nirman Bhavan,Bandra (E), MumbaiPAN : AAACS1590C…Respondent ****** Mr. Suresh Kumar for the Appellant. Mr. Nishant Thakkar a/w Ms. Jasmin Amalsadvala i/by Mint &Confreres for the Respondent. ****** CORAM: DHIRAJ SINGH THAKUR AND ABHAY AHUJA, JJ. DATE : 5[th] AUGUST, 2022 ORAL JUDGMENT (Per Abhay Ahuja, J.) :- .This is an appeal filed under Section 260-A of the Income TaxAct, 1961 (‘the Act’) by the Appellant-revenue impugning the orderdated 16[th] January, 2017 passed by the Income Tax Appellate Tribunal(‘ITAT/Tribunal’) in Appeal No.3314/Mum/2011 for the assessmentyear 2006-07 thereby allowing the appeal filed by the Respondent-assessee. The Tribunal set aside the order dated 31[st] March, 2011 of thejurisdictional Commissioner of Income Tax exercising powers underSection 263 of the Act holding the assessment order dated 16[th] itxa-397.18.docDecember, 2008 as erroneous and prejudicial to the interest of therevenue, as it allowed the claim for deduction made by the assessee inrespect of the following :- (i) Deduction under Section 36(1)(vii) of the Act with respect to write off of interest receivable of Rs.6,01,84,862/- forgone underthe One Time Settlement (‘OTS’) entered into by the assesseewith its borrowers andthe One Time Settlement (‘OTS’) entered into by the assesseewith its borrowers and (ii) Deduction under Section 36(1)(iii) of the Act with respect to Interest expenditure of Rs.2,49,53,390/- incurred with respect toborrowings made for the slum rehabilitation project at Dindoshi.borrowings made for the slum rehabilitation project at Dindoshi. 2.Earlier, the assessee had filed its return of income for theprevious year relevant to assessment year 2006-07 on 11[th] November,2006. The case was selected for scrutiny and assessment order dated28[th] December, 2011 came to be passed under Section 143(3) of theAct. On 18[th] March, 2011, the Department issued a notice underSection 263 calling upon the assessee to show cause as to why theorder under Section 143(3) dated 16[th] December, 2008 should not betreated as erroneous and prejudicial to the interest of revenue. Theassessee responded by a detailed reply, in nuce, stating that the itxa-397.18.doc Assessing Officer had during the original assessment proceedingenquired into various issues including the aforesaid two issues andformed an opinion as to the correctness of the claim made by theassessee. The Commissioner by his order dated 31[st] March, 2011rejected the submissions of the assessee. The relevant portion of the order of the Commissioner is quoted as under :- itxa-397.18.doc Assessing Officer had during the original assessment proceedingenquired into various issues including the aforesaid two issues andformed an opinion as to the correctness of the claim made by theassessee. The Commissioner by his order dated 31[st] March, 2011rejected the submissions of the assessee. The relevant portion of the order of the Commissioner is quoted as under :- “4.I have carefully considered the submissions made by theassessee and have also gone through the case records for theassessment year 2006-2007. On examination of the records. It isseen that the assessee was never called upon to explain the lossunder OTS of Rs. 6.01,84,862/- debited to the profit and lossaccount under the head ‘Administration & Other expenses'. Therecords do not contain the copy of the One Time SettlementScheme under which the assessee is stated to have givenconcession to private developers only in respect of the outstandinginterest. Vide letter dated 15.09.2008, the authorizedrepresentative has furnished certain details in support of thereturn of income and at Sr. No. 26 of the said letter. It is mentionedthat details of the amount of interest receivable & written offunder One Time Settlement Scheme are enclosed. However thesaid details are not found enclosed in the record. The AssessingOfficer has also not verified as to how the interest written off hasbeen offered as income in the earlier years. The Assessing Officerhas also not examined as to whether the interest expenses of Rs.2,49,53,390/- on Dindoshi project was allowable as deduction u/s36(1)(iii) or was required to be capitalized to the WIP of the saidproject.” 3.Being aggrieved, the assessee carried the matter to the Tribunal. The Tribunal vide its order dated 16[th] January, 2017 allowed the appealof the assessee and set aside the order of the Commissioner underSection 263 of the Act. Paragraphs 8, 8.1 and 8.2 of the said order are relevant and are usefully quoted as under :- “8.The first issue in respect of which the Commissioner ofIncome Tax has exercised the jurisdiction u/s 263 of the Act relatesto the loss under OTS amounting to Rs.6,01,84,862/-. We notedfrom pages 1 to 3 of the paper book that the assessee has duly filedthe details regarding the OTS. The Assessing Officer has issued thenotice to the assessee u/s 142(1). In the said notice at Item No. 34,the Assessing Officer has specially raised the following query: "34. Details of bad debts as to when the income on suchtransaction was offered to tax, evidences regarding efforts made bythe assessee company to recover the debts and evidences of writeoff of the same in the books of account.” 8.1In reply thereto, the assessee vide his letter dated12/12/2008 submitted the details of write off and also how theincome on such transaction was offered to tax. This fact isapparent from page Nos. 11, 16, 17 and 21 to 24 of the paper book.Similarly, in respect of second issue i.e. claim of interestexpenditure, we noted that the Assessing Officer made thefollowing query: "26.In case, interest expenditure is claimed, details thereof mustinclude name of the person to whom paid, rate ofinterest, amount of interest, period for which paid and copy ofaccount of such person in your books.” 8.1In reply thereto, the assessee vide his letter dated12/12/2008 submitted the details of write off and also how theincome on such transaction was offered to tax. This fact isapparent from page Nos. 11, 16, 17 and 21 to 24 of the paper book.Similarly, in respect of second issue i.e. claim of interestexpenditure, we noted that the Assessing Officer made thefollowing query: "26.In case, interest expenditure is claimed, details thereof mustinclude name of the person to whom paid, rate ofinterest, amount of interest, period for which paid and copy ofaccount of such person in your books.” 8.2In reply thereto, the assessee vide his letter dated 15[th]September, 2008 gave the details in respect of the interest as wellas drawn the addition of the Assessing Officer to Schedule-O,interest on Dinoshi Site as appearing at pages 19 & 20 of thepaper book. This proves that the Assessing Officer was dulyinformed by the assessee during the course or hearing in respect ofthe loss on OTS as well as claim of interest in respect of DindoshiSite. This is not a case where the Assessing Officer has not madethe inquiry and completed the assessment just accepting the returnfiled by the assessee. In our opinion, the CIT cannot enter into theshows of the Assessing Officer if the Assessing Officer has takenone of the possible views. Until and unless the view taken by theAssessing Officer is unsustainable in law, the CIT cannottake action u/s 263 of the Act holding that the order passed by theAssessing Officer to be erroneous. Prior to insertion of theExplanation 2 with effect from 01/06/2015, it is the prerogative of the Assessing Officer to determine what inquiries he wants to makewhile completing the assessment. If the Assessing Officer has madethe inquiry and duly considered the evidence as submitted and onthe basis of such inquiry he has taken the view in favour of theassessee, that does not empower the CIT to invoke the jurisdictionu/s 263 of the Act unless the view taken by the Assessing Officer isunsustainable in law. If the Assessing Officer has not carried outany inquiry in respect of these points, it cannot be said that theorder passed is erroneous as due process of law have not beenfollowed. From the show cause notice of the CIT, it is apparent thatthe CIT(A) has treated the order to erroneous as well as prejudicialto the interest of the Revenue as the Assessing Officer has allowedthe excessive relief by allowing the loss under OTS amounting toRs.6,01,84,862/- and interest on Dindoshi Site amounting toRs.2,49,53,390/- as revenue expenditure while they relate to theprojects under work-in- progress and hence, required to becapitalized. Learned counsel for the assessee relied in this regardon certain decisions also and submitted that inadequacy of theinquiry according to whims and caprice did not give jurisdiction tothe CIT to invoke the provisions of section 263 and set aside theassessment. The impugned case is not lack of inquiry.” 4.Aggrieved by the aforementioned order of the Tribunal, therevenue is in appeal before us proposing the following questions assubstantial questions of law :- 5. “A.Whether on the facts and circumstances of the case and inlaw, the Tribunal was justified in holding that the CIT was notcorrect in law in exercising the jurisdiction u/s. 263 withoutappreciating the fact that the Assessing Officer passed the orderwithout proper enquiry, resulting in an incorrect assumption of factand an incorrect application of law thereby making the order ofAO erroneous and also prejudicial to the interest of the revenue? B.Whether on the facts and circumstances of the case and inlaw, the Tribunal was justified in holding that lack of enquirypursuant to notice u/s 142(1) amounts to inadequacy of inquiry bythe A.O.?” Mr. Suresh Kumar, learned counsel for the Appellant-revenue 5. “A.Whether on the facts and circumstances of the case and inlaw, the Tribunal was justified in holding that the CIT was notcorrect in law in exercising the jurisdiction u/s. 263 withoutappreciating the fact that the Assessing Officer passed the orderwithout proper enquiry, resulting in an incorrect assumption of factand an incorrect application of law thereby making the order ofAO erroneous and also prejudicial to the interest of the revenue? B.Whether on the facts and circumstances of the case and inlaw, the Tribunal was justified in holding that lack of enquirypursuant to notice u/s 142(1) amounts to inadequacy of inquiry bythe A.O.?” Mr. Suresh Kumar, learned counsel for the Appellant-revenue itxa-397.18.docrelies upon the order of the Revisional Commissioner. He draws theattention of this Court to paragraph 4 of the said order (quoted above)to submit that from the records it was observed that the assessee wasnever called upon to explain the loss under OTS debited to the profitand loss account under the head ‘Administration & other expenses’.That the records did not contain a copy of OTS scheme under whichthe assessee is stated to have given concession to private developersonly in respect of outstanding interest, nor any details with respect tothe amount of interest receivable and written off under the OTS werefound on record. He submits that the Assessing Officer in the originalassessment under Section 143(3) has also not verified as to how theinterest written off has been offered as income in the earlier years norhas the Assessing Officer examined as to whether the interest expensesof Rs.2,49,53,390/- on the Dindoshi project was allowable as deductionunder Section 36(1)(iii) or was required to be capitalised to the Work-in-Progress of the said project. 6.Mr. Suresh Kumar relies upon the order of the RevisionalCommissioner to submit that the order dated 16[th ]December, 2008under Section 143(3) is both erroneous and prejudicial to the interest ofrevenue and urges that the order of cancellation of the assessment order itxa-397.18.docby the learned Commissioner and direction for a fresh assessment berestored by this Court. 7.Mr. Nishant Thakkar, learned counsel for the assessee wouldsubmit that the appeal does not raise any substantial question of law inas much as the Tribunal has returned a finding of fact that theAssessing Officer duly enquired into the claim of loss on OTS as wellas on the claim of interest in respect of Dindoshi site. He refers toparagraph 8.2 of the impugned order. He submits that this finding offact has not been challenged by the revenue. Learned counsel submitsthat once an enquiry had been made during the assessment proceedinginto the claim, insufficient or inadequate enquiry or improper enquiry,would not be a ground to invoke powers under Section 263 of the Act.Learned counsel submits that this is not a case of no enquiry. He reliesupon the following decisions in support of his contention :- (i)Commissioner of Income-Tax v/s. Sunbeam Auto Ltd., (2011)332 ITR 167 (Delhi).332 ITR 167 (Delhi). (ii)Commissioner of Income-Tax v/s. Chandan Magraj Parmar, 285 Taxman 565 (Bombay).285 Taxman 565 (Bombay). (iii)Commissioner of Income-Tax v/s. M/s. Shreepati Holdings & Finance Pvt. Ltd., (ITXA No.1879 of 2013)(Bom.).Finance Pvt. Ltd., (ITXA No.1879 of 2013)(Bom.). (iv)Commissioner of Income-Tax v/s. Future Corporate Resources Ltd., 284 Taxman 122 (Bombay).Ltd., 284 Taxman 122 (Bombay). 8.Mr. Thakkar further submits that the view taken by the Assessing (i)Commissioner of Income-Tax v/s. Sunbeam Auto Ltd., (2011)332 ITR 167 (Delhi).332 ITR 167 (Delhi). (ii)Commissioner of Income-Tax v/s. Chandan Magraj Parmar, 285 Taxman 565 (Bombay).285 Taxman 565 (Bombay). (iii)Commissioner of Income-Tax v/s. M/s. Shreepati Holdings & Finance Pvt. Ltd., (ITXA No.1879 of 2013)(Bom.).Finance Pvt. Ltd., (ITXA No.1879 of 2013)(Bom.). (iv)Commissioner of Income-Tax v/s. Future Corporate Resources Ltd., 284 Taxman 122 (Bombay).Ltd., 284 Taxman 122 (Bombay). 8.Mr. Thakkar further submits that the view taken by the Assessing itxa-397.18.docOfficer in allowing deduction with respect to the loss of / write off ofinterest receivables under the OTS as well as in respect of the interestattributable to the Dindoshi site was a possible view and therefore oncean officer has taken a possible view, the powers under Section 263 ofthe Act cannot be exercised in as much as a possible view cannot be anerroneous view prejudicial to the interest of the revenue. Learnedcounsel relies upon the following decisions in support of hiscontention:- (i)Commissioner of Income-Tax (Central), Ludhiana v/s. Max India Ltd., 295 ITR 282 (SC). (ii)Commissioner of Income-Tax v/s. M/s. Shreepati Holdings & Finance Pvt. Ltd. (supra)Finance Pvt. Ltd. (supra) 9.Learned counsel for the assessee would therefore submit that the appeal deserves to be dismissed as it does not raise any substantialquestion of law. 10.We have heard Mr. Suresh Kumar, learned counsel for theAppellant-revenue and Mr. Nishant Thakkar, learned counsel for theassessee and with their able assistance, we have perused the papers andproceedings in the matter. 11.The Respondent assessee is engaged in the business ofdevelopers in slum rehabilitation schemes. As noted above, the itxa-397.18.docAssessing Officer had pursuant to the assessment proceedings underSection 143(3) of the Act had allowed assessee’s claim for deductionmade by assessee, in respect of the interest of receivables ofRs.6,01,84,862/- under Section 36(1)(vii) of the Act which was forgoneunder the OTS entered into by the assessee with its borrowers andwritten off, and the deduction in respect of the interest expenditure ofRs.2,49,53,390/- incurred with respect to the borrowings made for theslum project at Dindoshi under Section 36(1)(iii) of the Act. TheCommissioner had thereafter issued a notice dated 18[th] March, 2011under Section 263 stating that the said expenses were required to becapitalised to the respective projects; that the omission by theAssessing Officer to capitalise the said expenses resulted in underassessment of income by Rs.8,51,38,252/-. Therefore asking theassessee to show cause as to why the said order under Section 143(3)dated 16[th] December, 2008 passed by the Assessing Officer should notbe treated as erroneous and prejudicial to the interest of the revenueand be set aside for fresh assessment. We observe that the assesseefiled detailed response by saying that both these issues had alreadybeen dealt with by the Assessing Officer who had formed an opinion asto the correctness of the claim made by the assessee and therefore to hold that the same was erroneous, was untenable. 12.Before proceeding further, it would be apposite to set out theprovisions of Section 263 prior to insertion of Explanation 2 asapplicable to Assessment Year 2006-07 as under :- hold that the same was erroneous, was untenable. 12.Before proceeding further, it would be apposite to set out theprovisions of Section 263 prior to insertion of Explanation 2 asapplicable to Assessment Year 2006-07 as under :- “263. Revision of orders prejudicial to revenue.—(1) ThePrincipal Chief Commissioner or Chief Commissioner or PrincipalCommissioner or Commissioner may call for and examine therecord of any proceeding under this Act, and if he considers thatany order passed therein by the Assessing Officer is erroneous inso far as it is prejudicial to the interest of the revenue, he may,after giving the assessee an opportunity of being heard and aftermaking or causing to be made such inquiry as he deems necessary,pass such order thereon as the circumstances of the case justify,including an order enhancing or modifying the assessment, orcancelling the assessment and directing a fresh assessment. Explanation 1.—For the removal of doubts, it is hereby declaredthat, for the purposes of this sub-section,— (a) an order passed on or before or after the 1st day of June, 1988by the Assessing Officer shall include— (i) an order of assessment made by the Assistant Commissioner orDeputy Commissioner or the Income Tax Officer on the basis of thedirections issued by the Joint Commissioner under Section 144-A; (ii) an order made by the Joint Commissioner in exercise of thepowers or in the performance of the functions of an AssessingOfficer conferred on, or assigned to, him under the orders ordirections issued by the Board or by the Principal ChiefCommissioner or Chief Commissioner or Principal DirectorGeneral or Director General or Commissioner authorised by theBoard in this behalf under Section 120; (b) “record” shall include and shall be deemed always to haveincluded all records relating to any proceeding under this Actavailable at the time of examination by the Principal ChiefCommissioner or Chief Commissioner or Principal Commissioneror Commissioner; (c) where any order referred to in this sub-section and passed bythe Assessing Officer had been the subject-matter of any appealfiled on or before or after the 1st day of June, 1988, the powers ofthe Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extendedto such matters as had not been considered and decided in suchappeal.” 13.Explanation 2 to Section 263 which was inserted by the Finance Act, 2015 with effect from 1[st] June, 2015 is quoted as under :- “Explanation 2.—For the purposes of this section, it is herebydeclared that an order passed by the Assessing Officer[or theTransfer Pricing Officer, as the case may be,] shall be deemed tobe erroneous in so far as it is prejudicial to the interests of therevenue, if, in the opinion of the Principal Chief Commissioner orChief Commissioner or Principal Commissioner orCommissioner, - (a) the order is passed without making inquiries or verificationwhich should have been made; (b) the order is passed allowing any relief without inquiring intothe claim; (c) the order has not been made in accordance with any order,direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decisionwhich is prejudicial to the assessee, rendered by the jurisdictionalHigh Court or Supreme Court in the case of the assessee or anyother person.” (emphasis supplied) 14.This explanation empowers the CIT with effect from 1[st] June, 2015 to invoke Section 263, if in the opinion of the Principal CIT/CIT - (a) the order is passed without making inquiries orverification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with anyorder, direction or instruction issued by the Board undersection 119; or (c) the order has not been made in accordance with any order,direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decisionwhich is prejudicial to the assessee, rendered by the jurisdictionalHigh Court or Supreme Court in the case of the assessee or anyother person.” (emphasis supplied) 14.This explanation empowers the CIT with effect from 1[st] June, 2015 to invoke Section 263, if in the opinion of the Principal CIT/CIT - (a) the order is passed without making inquiries orverification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with anyorder, direction or instruction issued by the Board undersection 119; or (d) the order has not been passed in accordance with anydecision which is prejudicial to the assessee, rendered by thejurisdictional High Court or Supreme Court in the case of theassessee or any other person. 15.Prior to insertion of the Explanation 2 with effect from 1[st] June, 2015, it was the prerogative of the Assessing Officer to determine whatinquiries he wanted to make while completing the assessment. If theAssessing Officer had made the inquiry and duly considered theevidence as submitted and on the basis of such inquiry if he had taken a view in favour of the assessee, then the CIT could not invokejurisdiction under Section 263 of the Act unless the view taken by theAssessing Officer was unsustainable in law. If the Assessing Officerhad carried out any inquiry in respect of the points, it could not be saidthat the order passed was erroneous as due process of law had not beenfollowed. From the show cause notice of the CIT, it is apparent that theCIT(A) has treated the order to be erroneous as well as prejudicial tothe interest of the Revenue as in his view the Assessing Officer hasallowed excessive relief by allowing the loss of interest under OTS ofRs.6,01,84,862/- and interest on Dindoshi Site of Rs.2,49,53,390/- as itxa-397.18.docrevenue expenditure whereas according to him they relate to theprojects under work-in- progress and were required to be capitalized.Learned counsel for the assessee has relied in this regard on certaindecisions submitting that inadequacy of the inquiry according to whimsand caprice does not give jurisdiction to the CIT to invoke theprovisions of section 263 to set aside the assessment and that the orderimpugned was not a case of lack of inquiry. 16.No doubt clause (a) of Explanation 2 to Section 263 deems anorder to be erroneous and prejudicial to the interest of the revenue incase the order is passed without making enquiries or verification whichshould have been made in the opinion of the Principal Commissioneror Commissioner. As noted, this Explanation is prospective and isapplicable with effect from 1[st] June, 2015. In the case of the assessee,we note that show cause notice was issued on 18[th] March, 2011invoking the jurisdiction u/s 263 i.e. prior to the insertion ofExplanation 2. When the show cause notice was issued, neither clause(a) nor the Explanation 2 were on the statute book. Insertion ofExplanation 2 with effect from 1[st] June, 2015 makes it clear that theorder will not be erroneous and prejudicial to the interest of theRevenue if the order is passed without making inquiry or verification itxa-397.18.docwhich should have been made in the opinion of the CIT. This is not acase of lack of inquiry, though it may be a case of inadequacy ofinquiry. In our opinion, inadequacy of the inquiry does not givejurisdiction to the CIT to invoke the provisions of section 263 prior tothe insertion of Explanation 2. 17.The Tribunal has with respect to the two claims recorded itsfindings in paragraphs 8 and 8.1. itxa-397.18.docwhich should have been made in the opinion of the CIT. This is not acase of lack of inquiry, though it may be a case of inadequacy ofinquiry. In our opinion, inadequacy of the inquiry does not givejurisdiction to the CIT to invoke the provisions of section 263 prior tothe insertion of Explanation 2. 17.The Tribunal has with respect to the two claims recorded itsfindings in paragraphs 8 and 8.1. 18.From the Tribunal order, we note that the Respondent companyhad financed private developers in the financial year 1998-1999 whohad undertaken slum redevelopment projects. It lent money at the rateof 17.5% interest per annum which was charged on an accrual basisand offered as income. The developer faulted in the repayment of loanand in the payment of interest. The rate of interest started falling andthe company announced the OTS Scheme under which concession wasgiven to the developers only in respect of outstanding interest providedthey promise to clear the outstanding principal. It is under this schemethat the outstanding interest was forgone under the OTS scheme andwritten off as bad debts in accordance with the decision of the SupremeCourt in case of T.R.F. Ltd. v/s. CIT, 323 ITR 397. We note that theOTS was announced and the interest receivable which arose from itxa-397.18.doc financing activity was written off as remission of interest. 19.From a perusal of paragraph 8 with respect to the issue relatingto loss under OTS, we observe that Tribunal has recorded a finding thatthe assessee has duly filed the details regarding OTS (in support theTribunal refers to pages 1 to 3 of the paper book); that the AssessingOfficer had issued notice to the assessee under Section 142(1), where atItem No. 34, the Assessing Officer had raised the following query :- “34.Details of bad debts as to when the income on suchtransaction was offered to tax, evidences regarding efforts madeby the assessee company to recover the debts and evidences ofwrite off of the same in the books of account.” 20.It is recorded that, in reply, the assessee had vide letter dated 12[th] December, 2008 submitted the details of write off and how suchtransaction was offered to tax. The Tribunal records that these facts areapparent from page nos.11, 16, 17 and 21 to 24 of the paper book. Inother words, the Assessing Officer in the 143(3) proceedings, hadcalled for particulars of interest and considered the allowability of theamount. 21.With respect to the issue regarding claim of interest expenditurepertaining to the Dindoshi site, we observe from paragraph 8.1 of theTribunal order that the Assessing Officer made the following query :- itxa-397.18.doc “26.In case, interest expenditure is claimed, details thereof mustinclude name of the person to whom paid, rate of interest, amountof interest, period for which paid and copy of account of suchperson in your books.” 22.The assessee in reply dated 15[th] September, 2008 statedly gavedetails of interest on Dindoshi site recorded by the Tribunal asappearing at pages 19 and 20 of the paper book. That the Dindoshiproject was substantially complete at a total cost of Rs.84,11,46,207/-out of which the cost of Rs.80.09.14.261/- had already been incurredand since the project had achieved substantial progress, borrowingcosts, capitalization of interest ceased as per AS-16. It is contendedthat it is not the case of the revenue that the borrowings were not madefor the purposes of business but that the interest should be capitalized.Learned counsel for the Respondent has drawn our attention to Section36(1)(iii) of the Act to submit that the only condition for allowance inrespect of interest is that the capital should have been borrowed for thepurpose of business. It is submitted that the concept of capitalizationof interest under Section 36(1)(iii) is applied only in case where anasset is acquired for extension of an existing business and theborrowings were used for creation of stock in trade and that therefore,interest was allowable on merits as well. 23.These are findings of fact by the Tribunal which is the highest itxa-397.18.docfact finding authority. No material has been brought to our noticecontroverting the same nor do we find any perversity in the saidfindings. We observe that the Assessing Officer had called forparticulars of interest. The Tribunal clearly records in paragraph 8.2that this is not a case where the Assessing Officer has not made inquiryand blindly accept the return filed by the assessee. The AssessingOfficer has called for particulars at the time of the scrutiny ofassessment proceedings, received the reply and following the principlesof natural justice, passed an assessment order expressing his opinion inthe matter. Once this is done, then the Commissioner cannot impose/substitute his opinion on the view taken by the Assessing Officer to saythat the said assessment order is erroneous and prejudicial to theinterest of the revenue. The Revisional CIT cannot substitute his viewupon the view of the Assessing Officer if the Assessing Officer hastaken one of the possible/plausible views, unless Assessing Officer’sview is unsustainable in law. 24.We are supported by the view of the Apex Court in the case ofCommissioner of Income-Tax (Central), Ludhiana v/s. Max IndiaLtd. (supra) where it has been observed that where two views arepossible and the Income Tax Officer has taken one view with which the itxa-397.18.doc Commissioner does not agree, it cannot be treated as an ordererroneous and prejudicial to the interest of the revenue unless the viewtaken by the Assessing Officer is unsustainable in law. Paragraph 2 ofthe said decision is apt and is quoted as under :- “2.At this stage we may clarify that under para 10 of thejudgment in the case of Malabar Industrial Co. Ltd. (supra) thisCourt has taken the view that the phrase "prejudicial to theinterest of the revenue" under section 263 has to be read inconjunction with the expression "erroneous" order passed by theAssessing Officer. Every loss of revenue as a consequence of anorder of the Assessing Officer cannot be treated as prejudicial tothe interest of the revenue. For example, when the Income-tarOfficer adopted one of the courses permissible in law and it hasresulted in loss of revenue; or where two views are possible andthe Income-tax Officer has taken one view with which theCommissioner does not agree, it cannot be treated as anerroneous order prejudicial to the interest of the revenue, unless-the view taken by the Incometax Officer is unsustainable inlaw. ...” (emphasis supplied) 25.This Court in case of Commissioner of Income-Tax v/s. M/s. Shreepati Holdings & Finance Pvt. Ltd. (supra) while striking downan order under Section 263 has observed in paragraph 6 as under :- “6.We find that that there is no prescribed formula underSection 88E of the Act to determine the quantum of the rebatethereunder. Therefore the same has to be computed on areasonable and scientific manner by the Assessing Officer.Further the impugned order has placed reliance upon the decisionof this Court in CIT Vs. Gabriel India Ltd. wherein this Courtheld that the order cannot be held to be erroneous merely becauseaccording to the CIT, the order should have been written moreelaborately or for substituting the view of the Assessing Officerwith that of the CIT. The Court held that merely because the CIT had a different view from that reached by the Assessing Officerwould not by itself make the view of the Assessing Officererroneous. To be an erroneous order it must be in breach of law. Itis axiomatic that jurisdiction under Section 263 of the Act canonly be exercised on cumulative satisfaction of the twin conditionsviz. Of the order being erroneous in law and the order beingprejudicial to the interest of the revenue. Thus in this case, one ofthe two conditions precedent to exercise jurisdiction underSection 263 of the Act viz. Order being erroneous in law is notsatisfied.” (emphasis supplied) had a different view from that reached by the Assessing Officerwould not by itself make the view of the Assessing Officererroneous. To be an erroneous order it must be in breach of law. Itis axiomatic that jurisdiction under Section 263 of the Act canonly be exercised on cumulative satisfaction of the twin conditionsviz. Of the order being erroneous in law and the order beingprejudicial to the interest of the revenue. Thus in this case, one ofthe two conditions precedent to exercise jurisdiction underSection 263 of the Act viz. Order being erroneous in law is notsatisfied.” (emphasis supplied) 26.In the case of Commissioner of Income-Tax v/s. Chandan Magraj Parmar (supra) this Court has observed as under :- “7.When it is not disputed that the land concerned wouldnot fall under the definition of capital asset, the question ofany capital gains arising also will not arise. Moreover, wealso find that the ITAT has come to a factual finding that theAO has raised queries with regard to the claim of capital gainon transfer of land, Respondent vide its reply dated31/01/2014 furnished the details in respect of distance ofagricultural land from municipal limits, record of populationas per last census and the AO after considering the reply ofRespondent, accepted the claim of Respondent. The ITAT hasgiven a finding that the claim of capital gain was accepted byAO after necessary inquiry and the order under Section143(3) of the Act was passed. It is true that the AO has notpassed any written detailed order while accepting theexplanation of capital gains of Respondent but the fact is AOhad raised queries and Respondent has given detailed replymeans the AO has passed this order after making necessaryinquiries. We agree with the view of the ITAT that the order ofthe AO cannot be branded as erroneous merely because theorder does not contain the details which PrincipalCommissioner feels should have been included. The PrincipalCommissioner cannot decide how elaborate an order of theAO should be. Where the AO, during the scrutiny assessmentproceedings, has raised a query which was answered by the Assessee to the satisfaction of the AO but the same was notreflected in the AO by him, the Commissioner cannotconclude that no proper inquiry with respect to the issue wasmade by the AO and enable him to assume jurisdiction underSection 263 of the Act. ...” (emphasis supplied) 27.Paragraph 7 of the decision in the case of Commissioner ofIncome-Tax v/s. M/s. Shreepati Holdings & Finance Pvt. Ltd. (supra) is also usefully quoted as under :- “7.Moreover the CIT in exercise of powers under Section 263of the Act directed the Assessing Officer to redetermine the rebateallowable under Section 88E of the Act after holding that thesame needs more careful examination on the part of the AssessingOfficer. This itself indication of the fact that this is not the case oflack of enquiry, but at the highest it can be a case of inadequateenquiry. It is settled position in law that inadequate enquiry byitself would not justify invoking the jurisdiction under Section 263of the Act unless the order is erroneous. In the present facts, theCIT has not exercised jurisdiction under Section 263 of the Act onthe ground that the order is erroneous. We find that the impugnedorder has correctly applied the principles laid down by this Courtin Gabriel(I) Ltd. (supra). Accordingly, the question asformulated does not give rise to any substantial question of law.Thus not entertained.” (emphasis supplied) 28.In Commissioner of Income-Tax v/s. Future Corporate Resources Ltd.(supra), this Court observed that revision can only beexercised where no enquiry as required under law is carried out and inthe case of inadequate enquiry by the Assessing Officer his ordercannot be reviewed. Paragraph 6 of the said order is quoted as under :- (emphasis supplied) 28.In Commissioner of Income-Tax v/s. Future Corporate Resources Ltd.(supra), this Court observed that revision can only beexercised where no enquiry as required under law is carried out and inthe case of inadequate enquiry by the Assessing Officer his ordercannot be reviewed. Paragraph 6 of the said order is quoted as under :- “6.Mr. Tejveer Singh in fairness agreed that the law is veryclear and inasmuch as if there are two possible views and theAssessing Officer has chosen one of the possible views then thereis no reason to exercise power of revision and revisional powerscannot be exercised for directing a full inquiry to find out if thatview taken after an inquiry is erroneous. Moreover, the power ofrevision can only be exercised where no inquiry as required underthe law is carried out and even in case of inadequate inquiry bythe Assessing Officer, the order of the Assessing Officer could notbe reviewed.” (emphasis supplied) 29.The Delhi High Court in case of Commissioner of Income-Tax v/s. Sunbeam Auto Ltd. (supra) struck down the order under Section263 observing in paragraph 12 as follows :- “12.We have considered the rival submissions of the counsel onthe other side and have gone through the records. The first issuethat arises for our consideration is about the exercise of power bythe Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for therevenue was that while passing the assessment order, theAssessing Officer did not consider this aspect specifically whetherthe expenditure in question was revenue or capital expenditure.This argument predicates on the assessment order whichapparently does not give any reasons while allowing the entireexpenditure as revenue expenditure. However, that by itself wouldnot be indicative of the fact that the Assessing Officer had notapplied his mind on the issue. There are judgments galore layingdown the principle that the Assessing Officer in the assessmentorder is not required to give detailed reason in respect of eachand every item of deduction, etc. Therefore, one has to see fromthe record as to whether there was application of mind beforeallowing the expenditure in question as revenue expenditure.Learned counsel for the assessee is right in his submission thatone has to keep in mind the distinction between "lack of inquiry"and "inadequate inquiry". If there was any inquiry, eveninadequate, that would not by itself, give occasion to theCommissioner to pass orders under section 263 of the Act, merelybecause he has different opinion in the matter. It is only in cases itxa-397.18.doc of "lack of inquiry", that such a course of action would beopen....” (emphasis supplied) 30.Therefore, once the Assessing Officer has raised queries whichthe assessee may not have answered fully then to say that this is a caseof no enquiry cannot be permitted. What Section 263 covered prior toinsertion of Explanation 2 was a case of no enquiry but not a case ofinadequate enquiry. 31.However, as noted above, with the introduction of Explanation 2with effect from 1[st] June, 2015 even cases of inadequate or improperenquiry may be covered albeit not for the assessment year in question. 32.In this appeal, we are concerned with the assessment year 2006-07. Prior to the insertion of Explanation 2, it was the prerogative of theAssessing Officer to determine what enquiry he wants to make whilecompleting the assessment. We have already observed that an enquirywas made by the Assessing Officer and the assessment order passed.Therefore, the CIT could not invoke jurisdiction under Section 263 asthe view taken by the Assessing Officer was a possible/plausible view.It was only if the Assessing Officer had not made any enquiry then itcould be said that the order passed was erroneous. This is not a case oflack of enquiry though it may be a case of inadequate enquiry. 32.In this appeal, we are concerned with the assessment year 2006-07. Prior to the insertion of Explanation 2, it was the prerogative of theAssessing Officer to determine what enquiry he wants to make whilecompleting the assessment. We have already observed that an enquirywas made by the Assessing Officer and the assessment order passed.Therefore, the CIT could not invoke jurisdiction under Section 263 asthe view taken by the Assessing Officer was a possible/plausible view.It was only if the Assessing Officer had not made any enquiry then itcould be said that the order passed was erroneous. This is not a case oflack of enquiry though it may be a case of inadequate enquiry. itxa-397.18.docInadequacy of enquiry as elucidated above does not give jurisdiction tothe CIT to invoke provisions of Section 263 prior to the insertion ofExplanation 2. In our view, the Explanation 2 does not help therevenue in as much as the same is prospective and applicable witheffect from 1[st] June, 2015. 33.In our opinion, therefore, the order of the Tribunal cannot befaulted with. There is no error apparent nor any perversity in thefindings of the Tribunal. The appeal does not raise any substantialquestion of law and is dismissed. No costs. [ABHAY AHUJA, J.] [DHIRAJ SINGH THAKUR, J.] Digitally signedBIPINby BIPINDHARMENDERDHARMENDERPRITHIANIPRITHIANIDate: 2022.08.1914:32:07 +0530