INCOME TAX ACT, 1961

Section 263

Revison under section 263 - Erroneous and prejudicial order - Lack of enquiry on AO's part -

Assessee had taken unsecured loan of Rs. 2 crore from M/s. Oswal Electrical Conductors and paid interest thereon @ 16% p.a. This amount was advanced to M/s. Oswal Cables Pvt. Ltd. where he was a director. On the amount advanced he charged interest @ 9% p.a. Pr. CIT held that the order passed by AO allowing the loss on account of differential interest under the head income from other sources n the absence of balance-sheet/bank statement of relevant period was erroneous and prejudicial to the interest of revenue. Held : Oswal Cables Pvt. Ltd. was having losses and in the year under reference loss was declared at Rs. 2,72,96,742 whereas Oswal Electrical Conductor had declared total income at Rs. 1,21,826 only and profit as per P&L account at Rs. 77,417 only. It was, thus, evident that even after receipt of interest of Rs. 30,08,138 from assessee the profit as per P & L account was shown at Rs. 77,417 and taxes were paid on total income of Rs. 1,21,826 only by the firm M/s. Oswal Electrical Conductor. Whereas, assessee straight way reduced total income to the extent of Rs. 12,56,942. Thus, there did not appear any justification for transaction under reference, as to why funds were routed through assessee. Borrowing funds at 16% and advancing the same at 9% by no rationale established that amounts were borrowed for the purpose of earning any income. Admittedly, interest differential led to lowering of tax liability in the hand of assessee. Such type of arrangement which was devoid of any sound business, rationale could not be accepted on face value. The interest differential, therefore, was to be disallowed. Since, there was no balance sheet/Bank statement of assessee for the relevant period and utilization of the funds borrowed from Oswal Electrical Conductor were not discernible from the details available on record, therefore, absence of proper enquiry by AO rendered the assessment order erroneous as well as prejudicial to the interest of revenue.

Relied:Gee Vee Enterprises (1975) 99 ITR 375 (Del-HC) : 1975 TaxPub(DT) 267 (Del-HC), Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) : 2000 TaxPub(DT) 1227 (SC) and CIT v Jawahar Bhattacharjee (2012) 342 ITR 74 (Gau-Trib) : 2012 TaxPub(DT) 1566 (Gau-Trib).