Invocation of provisions of section 263 without satisfying twin condition is unsustainable

Manjri Stud Farm Pvt Ltd Vs ACIT (ITAT Mumbai)

ITAT Mumbai held that invocation of provisions of section 263 of the Income Tax Act without satisfying the twin condition i.e. erroneous and prejudicial to the interest of revenue not satisfied. Hence, order passed u/s 263 set aside.

Facts- Post completion of assessment, Pr.CIT invoked provisions of section 263. Pr.CIT mentioned that assessee has claimed deduction u/s. 24(b) of the Act of ₹.11,83,44,908/- and assessee has not furnished documentary evidences in support of its claim during the assessment proceedings. Further, he mentioned that on perusal of notices issued u/s 142(1) dated 30.09.2019 and 10.12.2019, that AO has not raised any query on deduction claimed u/s 24(b) in its return of income. AO did not make any further verification on this issues. He also mentioned that as per the provisions of section 24(b) no deduction is to be allowed to an assessee in absence of the requisite certificate. During assessment proceedings, AO has not made enquiry on account of deduction claimed u/s 24(b) of the Act although the assessee did not furnish a certificate from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee.

Conclusion- The proviso contained in section 24(b) is not applicable to assessee who borrows the capital for the purpose of earing income by letting out the property under the head “income from house property”. Therefore, the interpretation of third proviso to 24(b) in isolation is not proper and we are not inclined to agree with the findings of the Ld. Pr.CIT u/s. 263 of the Act. As per the facts on record, we observe that assessee is in business of construction and letting of the property as well as maintenance of the property, in such combined business, it is normal in the construction business to borrow the capital for the overall business and apportion the same based on the head of income. It is not in dispute that assessee has paid the relevant interest to the bank.

Held that in order to invoke provisions of section 263 of the Act, both conditions has to be satisfied, not just erroneous, even the condition, prejudicial to the revenue. But as per the discussion in the above paragraph we do not agree with the Ld. Pr.CIT that the condition of prejudicial to the interest of the Revenue is satisfied. Therefore, twin conditions as per provisions of section 263 are not satisfied in this case. Hence the order passed u/s.263 is set aside.

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