Gujarat High Court
Aryan Arcade Ltd vs Commissioner Of Income Tax - I on 10 August, 2017
Author: Akil Kureshi
Bench: Akil Kureshi, Biren Vaishnav
C/SCA/2914/2016 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 2914 of 2016
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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ARYAN ARCADE LTD....Petitioner(s)
Versus
COMMISSIONER OF INCOME TAX - I....Respondent(s)
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Appearance:
MR TUSHAR P HEMANI, ADVOCATE for the Petitioner(s) No. 1
MS VAIBHAVI K PARIKH, ADVOCATE for the Petitioner(s) No. 1
MR PRANAV G DESAI, ADVOCATE for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
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Date : 10/08/2017
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. The petitioner has challenged a notice dated 23.11.2015 issued by the Commissioner of Incometax seeking to take the petitioner's assessment for the assessment year 2011 2012 in revision.
2. Brief facts are as under. The petitioner is a company registered under the Companies Act and is engaged in the business of developing and renting the immovable property including shopping complex and malls. For the assessment year 20112012, the petitioner had filed return of income declaring loss of Rs.5.08 crores (rounded off). 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 263 of the Act, the Commissioner issued impugned notice which reads as under :
"Upon perusal of the assessment records of AY 201112 in your case, it is seen that an order u/s. 143(3) of the Act was passed by the Assessing Officer on 21.03.2014 without Page 2 of 16 HC-NIC Page 2 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT making any addition and the income was assessed at a loss of Rs.5,09,33,735/ as disclosed in the return of income.
2. On verification of the records, it is revealed that you have shown net rent receipt of Rs.4,12,95,938/ and out of the same, you have claimed deduction of municipal taxes of Rs.1,00,00,000/ deduction u/s. 2(i) at the rate of 30 per cent amounting to Rs.93,88,691/ and you have also claimed deduction of Rs.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 50,000 paid up share of your company.
3. On perusal of details submitted during the course of assessment proceedings, it is seen that the interest expense of Rs.7,28,00,166/ has been claimed u/s.24(b), income chargeable under the head of "income from house property" shall be computed after making deduction of interest on borrowed capital where the property has been acquired, constructed, repaired, renewed or reconstructed from the borrowed capital. The proviso below the section allows interest payment 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, it is further noticed that: Page 3 of 16 HC-NIC Page 3 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT
(i) Your company was incorporated on 4th November 2004 and its entire share capital was owned by JP Infrastructure Private Ltd (JPIPL). The entire cost of Construction alongwith cost of land was borne by JPIPL.
(ii) IL & FS Milestone Fund1 (a Venture Capital Fund) purchased entire shares from JPIPL on 29.03.2008 and trustees of the Fund become owner of the assessee company.
(iii) Your company had issued Rs.2,54,783/ 18% Optionally Fully Convertible Debentures of 100 fully paid raising Rs.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 Rs.1/ raising Rs.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 Rs.7,28,00,166/ as interest paid/payable to the fund which has been claimed as expenditure under the head of income from house property. This included interest of Rs.2,68,14,074/ payable on debentures of Rs.14,89,67,078/ issued during FY 200910.
5. The deduction of interest on optionally fully convertible debentures each fully paid of Rs.1/ was not an allowable expenditure due to following reasons :
(a) The interest paid on loan taken for purchase of property in an allowable expenditure u/s. 24(ii) of the Act.
In your case, it can be seen from the statement of fixed assets that no addition was made to the building during the year in which you had obtained loan of Rs.14,89,68,078/ by way new debentures.
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(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 Rs.2,68,14,074/ (18% of Rs.14,89,67,079/) was paid on the new optionally fully convertible debentures of Rs.14,89,67,078/.
6. From the above discussion, it is clear that you have claimed the interest of Rs.7,28,00,166/ under the head of income from house property of which, interest expense of Rs.2,68,14,074/ pertained to debentures issued during FY 200910 during which there was no purchase or addition to the property. The interest expense to the extent of Rs.2,68,14,074/ therefore, is not in accordance with the provision of section 24(b) of the IT Act because the funds which have been raised by way of convertible debentures cannot be said to have been used for the purpose of 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 Rs.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 revenue. Therefore, I hereby initiate proceedings u/s 263 of the Act with a view to pass a suitable order. Before passing of such order, you are hereby given an opportunity of being heard in the matter. In this connection, you are requested to attend this office on 08.12.2015 at 3.30 pm alongwith your written submission."
3. The petitioner opposed the said show cause notice under a detailed communication (AnnexureD) in which the Page 5 of 16 HC-NIC Page 5 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT petitioner contended interalia that during the scrutiny assessment, the 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 the purview of section 24(b) of the Act. Reference was made to various decisions of this Court as well as Supreme Court. When the Commissioner did not drop the revisional proceedings, the petitioner filed this petition.
4. Learned counsel for the petitioner submitted that the Assessing Officer had examined the claim minutely during the scrutiny assessment. He having made the necessary inquiries and come to the conclusion which was plausible, the Commissioner could not have exercised revisional powers. 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 same rank to take a different view. Heavy reliance is placed on CBDT circular no. 28 dated 20.08.1969 in which in context of similar Page 6 of 16 HC-NIC Page 6 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT provision contained in section 24(1)(vi) of the Act, it was clarified that if second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the Incometax Officer, the interest paid on the second loan would also be allowed as a deduction.
5. On the other hand, learned counsel Shri Pranav Desai for the department 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 therefore, not interfere in exercise of writ jurisdiction. He relied on the affidavit in reply filed by the respondent to contend that the petitioner company had created a clever device to avoid payment of tax.
6. From the perusal of the impugned show cause notice, it can be gathered that the objection of the Commissioner is to the deduction of a sum of Rs.2.68 crores (rounded off) paid by the company by way of interest on debentures. According to him, the company had issued Rs. 25.54 crores debentures and thereby raised fund of Rs.25.54 crores. Later on, in the financial year 20092010, the company had similarly issued Rs.14.89 crores debentures, raising further fund of Rs.14.89 crores. These debentures were utilised for repayment of the outstanding liability of Page 7 of 16 HC-NIC Page 7 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT 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 Rs.7.28 crores against the income head of "Income from house property", which included interest of Rs.2.68 crores payable on debentures of Rs.14.89 crores issued during the financial year 2009 2010 i.e. relevant to the assessment year 20102011. According to the Commissioner, the debentures were not used for the purpose of purchase of property and, therefore, the interest of Rs. 2.68 crores paid on such debentures was not an allowable deduction. He pointed out that such debentures were raised during the financial year 20092010 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 assessment in which it was stated as under :
"Short note on borrowed fund utilized for construction of house property and interest paid thereon is allowable as deduction under section 24(ii) of Income Tax Act, 1961 (the Act).
The assessee company was incorporated on 04th November, 2004. The entire share capital of the assessee company was owned by J.P. Infrastructure Pvt. Ltd (JPIPL). The Page 8 of 16 HC-NIC Page 8 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT assessee purchased land at Rajkot and started construction of a building which is to be used as a commercial mall. The 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 Fund Milestone 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 mall was continued and the assessee had incurred further cost of construction. The additional cost of construction was funded by the assessee through issue of Optionally Fully Convertible Debentures (OFCDs) to its shareholder IL&FS.
The assessee commenced its activity of renting of various units in the mall and earned rental income. During the financial year 200910, the assessee further issued OFCDs of Rs.14,89,67,078/ to its shareholder to repay the outstanding liability of JPIPL. The assessee 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 Income tax Act, 1961 (the Act) The assessee submits that unsecured loan taken from IL&FS in the form of OFCDs were utilized for the purpose of constructions of house property and repayment of amount due to JP Infrastructure Pvt. Ltd. Therefore, the Page 9 of 16 HC-NIC Page 9 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT assessee submits that interest on OFCDS of Rs.7,28,00,166/ for AY 201011 and for AY 201112, was correctly claimed under section 24(ii) of the Act. The assessee submits that OFCDS were fully utilized for the purpose of construction of property and repayment of earlier liability taken 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 Rs.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 main road, Rajkot. During the year under consideration the assessee company has shown income of Rs.5.44 crores including rental income of Rs.4.12 crores whereas the company paid interest of Rs.7,28,00,166/ . Details regarding income received, details of TDS in the form of 26As expenses incurred, unsecured loan, etc. have been verified during the course of assessment proceedings. Confirmation of depositors, ledger of interest expenses, copy of bank account statements, contra accounts 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 Rs.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 Page 10 of 16 HC-NIC Page 10 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT utilised for the purpose of repayment of outstanding existing liability. It was obtained for the purpose of construction of building and therefore, interest on such debentures was an allowable deduction in terms of section 24(b) of the Act while computing the income from house property. The fact that the Assessing Officer did not elaborate this issue in the year of assessment would be of no consequence.
10. The Division Bench of this Court in case of Rayon Silk Mills v. Commissioner of Incometax reported in (1996) 221 ITR 155 was examining the challenge of 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 reference in order, the Commissioner was not correct in directing fresh inquiry. It was however, clarified that the Court did not mean to lay down the law that whenever an inquiry into any aspect of the assessment has been made, that cannot be the subject matter of proceedings under section 263 of the Act. Even in such a case, if the Commissioner is of the opinion that the Income Tax officer has passed an order which is erroneous and prejudicial to the interest of the Revenue, he can certainly have recourse to powers under section 263 of the Act.
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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 does so, an assessment order would cease to be an order and become an epic tome. The reasons are not far to seek. Firstly, it would cast an almost impossible burden on the Assessing Officer, considering the workload that he carries and the period of limitation within which an order is required to be made; and, Secondly, the order is an appealable order. An appeal lies, would be filed, only against disallowances which an assessee feels aggrieved with."
12. Thus when the Assessing Officer had made proper 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 reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Page 12 of 16 HC-NIC Page 12 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT Incometax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions namely (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent - if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue recourse 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 order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
The phrase "prejudicial to the interests of the Revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax."
13. In this context, we may revert back to the assessee's claim and objection of the Commissioner. Though in the affidavit in reply dated 11.3.2016, 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 Rs. 14.89 crores was raised by issuing the debentures during the financial year 20092010. 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 Page 13 of 16 HC-NIC Page 13 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT the proviso below the said section which allowed the interest payment on loan taken subsequent to capital borrowed for the purpose of repayment of such capital. This however, would apply to properties referred to in sub section(2) of section 23 which is a house or part of a house in the occupation of the owner for the purpose of his own residence. In precise terms, the Commissioner's viewpoint was that the debentures may have been utilised for repayment of loans which were utilised for the purpose of construction of the property, nevertheless, since such funds 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 1.4.2001, similar provision was found in clause (vi) of subsection(1) of section 24. The language of the existing clause (b) of section 24 and clause (vi) of sub section(1) of section 24 are paramateria. It was in this context that the CBDT in its abovenoted circular dated 20.8.1969 had clarified the position as under :
"1. Section 24(i)(vi) provides that where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any Page 14 of 16 HC-NIC Page 14 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT interest payable on such capital shall be allowed as an admissible deduction in the compensation of income from the said property.
2. A question has been raised whether in a case where a fresh loan has been raised to repay the original loan taken for the above purpose, the interest payable in respect of the second loan would also be admissible as a deduction under section 24(1)(vi).
3. The matter has been considered by the Board and it has been decided that if the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the Incometax officer, the interest paid on the second loan would also be allowed as a deduction under section 24(1)(vi)."
16. To summarise, 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 establish the precise correlation between the debentures and repayment of past loans. This aspect, the Commissioner has not controverted in the notice for revision. The Assessing Officer after examining the issue accepted the assessee's claim for deduction under section 24(b) of the Act even with respect to interest paid on debentures which were utilised for repayment of past loans used for the purpose of construction of the building. The view of the Assessing Officer was certainly plausible, particularly, in view of clarification issued by the CBDT. It was therefore, not open for the Commissioner to take such Page 15 of 16 HC-NIC Page 15 of 16 Created On Wed Aug 16 07:30:20 IST 2017 C/SCA/2914/2016 JUDGMENT order in revision.
17. The impugned notice dated 23.11.2015 is set aside. The petition is allowed and disposed of.
(AKIL KURESHI, J.) (BIREN VAISHNAV, J.) raghu Page 16 of 16 HC-NIC Page 16 of 16 Created On Wed Aug 16 07:30:20 IST 2017