C/SCA/2914/2016 JUDGMENT IN 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 1 Whether Reporters of Local Papers may be allowed to see judgment ? 2 To be referred to Reporter or not ? 3 Whether their Lordships wish to see fair copy of judgment ? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India or any order made thereunder? ARYAN ARCADE LTD....Petitioner(s) Versus COMMISSIONER OF INCOME TAX - I....Respondent(s) Appearance: MR TUSHAR P HEMANI, ADVOCATE for Petitioner(s) No. 1 MS VAIBHAVI K PARIKH, ADVOCATE for Petitioner(s) No. 1 MR PRANAV G DESAI, ADVOCATE for Respondent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV Page 1 of 16 HC-NIC Page 1 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT Date : 10/08/2017 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. petitioner has challenged notice dated 23.11.2015 issued by Commissioner of Income tax seeking to take petitioner's assessment for assessment year 2011 2012 in revision. 2. Brief facts are as under. petitioner is company registered under Companies Act and is engaged in business of developing and renting immovable property including shopping complex and malls. For assessment year 2011 2012, petitioner had filed return of income declaring loss of Rs.5.08 crores (rounded off). petitioner's case was taken in scrutiny. One of issues discussed during assessment was with respect to petitioner's claim of deduction for interest paid on Optionally Fully Convertible Debentures ( OFCD for short) in terms of section 24(b) of Income Tax Act, 1961 ( Act for short). In order of assessment dated 21.3.2014, Assessing Officer did not disturb this claim of petitioner. To take such order in revision in exercise of powers under section 263 of Act, Commissioner issued impugned notice which reads as under : Upon perusal of assessment records of AY 2011 12 in your case, it is seen that order u/s. 143(3) of Act was passed by Assessing Officer on 21.03.2014 without Page 2 of 16 HC-NIC Page 2 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT making any addition and income was assessed at loss of Rs.5,09,33,735/ as disclosed in return of income. 2. On verification of records, it is revealed that you have shown net rent receipt of Rs.4,12,95,938/ and out of same, you have claimed deduction of municipal taxes of Rs.1,00,00,000/ deduction u/s. 2(i) at 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. I.L.&F.S. Trust Company Limited, to whom interest on debenture was paid, is shareholder of your company having 49994 shares out of total 50,000 paid up share of your company. 3. On perusal of details submitted during course of assessment proceedings, it is seen that interest expense of Rs.7,28,00,166/ has been claimed u/s.24(b), income chargeable under head of income from house property shall be computed after making deduction of interest on borrowed capital where property has been acquired, constructed, repaired, renewed or reconstructed from borrowed capital. proviso below section allows interest payment on loan taken subsequent to capital borrowed for purpose of repayment of such capital in respect of property referred to in sub section(2) of section 23. Sub section(2) of section 23 refers to property consisting of house or part of house which is in occupation of owner for purposes of his own residence. There is no provision in Act to allow payment of interest on capital borrowed for repayment of earlier borrowed. 4. In this regard, on perusal of record, it is further noticed that: Page 3 of 16 HC-NIC Page 3 of 16 Created On Sat Aug 12 10:45:33 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). entire cost of Construction alongwith cost of land was borne by JPIPL. (ii) IL & FS Milestone Fund 1 (a Venture Capital Fund) purchased entire shares from JPIPL on 29.03.2008 and trustees of Fund become owner of 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 2009 10 (AY 2010 11), your company again issued 14,89,67,078/ 18% optionally Fully Convertible Debentures of Rs.1/ raising Rs.14,89,67,079/ . proceeds of these debentures were utilised for repayment of outstanding liability of JPIPL. (v) During year under consideration, your company has paid/claimed Rs.7,28,00,166/ as interest paid/payable to fund which has been claimed as expenditure under 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 2009 10. 5. deduction of interest on optionally fully convertible debentures each fully paid of Rs.1/ was not allowable expenditure due to following reasons : (a) interest paid on loan taken for purchase of property in allowable expenditure u/s. 24(ii) of Act. In your case, it can be seen from statement of fixed assets that no addition was made to building during year in which you had obtained loan of Rs.14,89,68,078/ by way new debentures. Page 4 of 16 HC-NIC Page 4 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT (b) new optionally fully convertible debentures were not used for purchase of property and out of total interest claimed as deduction, interest to extent of Rs.2,68,14,074/ (18% of Rs.14,89,67,079/ ) was paid on new optionally fully convertible debentures of Rs.14,89,67,078/ . 6. From above discussion, it is clear that you have claimed interest of Rs.7,28,00,166/ under head of income from house property of which, interest expense of Rs.2,68,14,074/ pertained to debentures issued during FY 2009 10 during which there was no purchase or addition to property. interest expense to extent of Rs.2,68,14,074/ therefore, is not in accordance with provision of section 24(b) of IT Act because funds which have been raised by way of convertible debentures cannot be said to have been used for purpose of construction of property. Assessing Officer did not examine issues in light of provision of section 24(b) of IT Act and thus this issue was not properly verified by Assessing Officer while finalizing assessment which resulted in wrongly allowing of interest expenses to extent of Rs.2,68,14,074/ . 7. above facts show that assessment order passed by Assessing Officer in respect of AY 2006 07 is erroneous and prejudicial to interests of revenue. Therefore, I hereby initiate proceedings u/s 263 of Act with view to pass suitable order. Before passing of such order, you are hereby given opportunity of being heard in matter. In this connection, you are requested to attend this office on 08.12.2015 at 3.30 pm alongwith your written submission. 3. petitioner opposed said show cause notice under detailed communication (Annexure D) in which Page 5 of 16 HC-NIC Page 5 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT petitioner contended inter alia that during scrutiny assessment, Assessing Officer had examined entire claim minutely, made necessary inquiries and taken view which is plausible and, therefore, cannot be disturbed in exercise of revisional powers. They have also contended that claim of deduction under section 24(b) of Act was clearly allowable. amount raised through debentures were utilised for repaying old loans obtained for purpose of construction of building and interest paid on such debentures were therefore, well within purview of section 24(b) of Act. Reference was made to various decisions of this Court as well as Supreme Court. When Commissioner did not drop revisional proceedings, petitioner filed this petition. 4. Learned counsel for petitioner submitted that Assessing Officer had examined claim minutely during scrutiny assessment. He having made necessary inquiries and come to conclusion which was plausible, Commissioner could not have exercised revisional powers. Counsel further submitted that facts on record would suggest that amounts raised through issuance of debentures were utilised for repaying old loans. These loans were utilised for purpose of construction of building. interest on debentures was therefore, clearly covered in section 24(b) of Act. For earlier years, in case of this very assessee, appellate Commissioner has accepted such stand of assessee. It would therefore, not be open for another officer of same rank to take 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 Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT provision contained in section 24(1)(vi) of Act, it was clarified that if second borrowing has really been used merely to repay original loan and this fact is proved to satisfaction of Income tax Officer, interest paid on second loan would also be allowed as deduction. 5. On other hand, learned counsel Shri Pranav Desai for department opposed petition contending that order of assessment does not refer to controversy and, therefore, it cannot be stated that Assessing Officer had taken any positive view in favour of assessee. applicability of section 24(b) of Act is open to debate. At this stage, therefore, this Court should not interfere. Commissioner has merely issued show cause notice. petitioner would have full innings to take all factual and legal contentions. Court should therefore, not interfere in exercise of writ jurisdiction. He relied on affidavit in reply filed by respondent to contend that petitioner company had created clever device to avoid payment of tax. 6. From perusal of impugned show cause notice, it can be gathered that objection of Commissioner is to deduction of sum of Rs.2.68 crores (rounded off) paid by company by way of interest on debentures. According to him, company had issued Rs. 25.54 crores debentures and thereby raised fund of Rs.25.54 crores. Later on, in financial year 2009 2010, company had similarly issued Rs.14.89 crores debentures, raising further fund of Rs.14.89 crores. These debentures were utilised for repayment of outstanding liability of Page 7 of 16 HC-NIC Page 7 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT JP Infrastructure Private Ltd. which had borne cost of construction and cost of land. During year under consideration, company had claimed deduction of interest expenditure of Rs.7.28 crores against 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 financial year 2009 2010 i.e. relevant to assessment year 2010 2011. According to Commissioner, debentures were not used for purpose of purchase of property and, therefore, interest of Rs. 2.68 crores paid on such debentures was not allowable deduction. He pointed out that such debentures were raised during financial year 2009 2010 during which there were no purchase or addition to property. According to him therefore, claim was not in accordance with section 24(b) of Act since funds could not be said to have been used for purpose of construction of property. 7. fact that this issue was examined by Assessing Officer during scrutiny assessment, is not possible to doubt. petitioner has produced note filed before 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). assessee company was incorporated on 04th November, 2004. entire share capital of assessee company was owned by J.P. Infrastructure Pvt. Ltd (JPIPL). Page 8 of 16 HC-NIC Page 8 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT assessee purchased land at Rajkot and started construction of building which is to be used as commercial mall. construction of mall was shown as capital work in progress alongwith cost of land. entire cost of land and construction was funded by JPIPL and same was shown as current liabilities in balance sheet. IL&FS Milestone Fund 1 ( scheme of SEBI registered Venture Capital Fund Milestone Real Estate Fund) ( IL&FS ) has purchased entire share capital of assessee from JPIPL and its nominee shareholders to become 100% shareholder by 29/03/2008. construction of mall was continued and assessee had incurred further cost of construction. additional cost of construction was funded by assessee through issue of Optionally Fully Convertible Debentures (OFCDs) to its shareholder IL&FS. assessee commenced its activity of renting of various units in mall and earned rental income. During financial year 2009 10, assessee further issued OFCDs of Rs.14,89,67,078/ to its shareholder to repay outstanding liability of JPIPL. assessee submits that unsecured loans obtained during year on issue of OFCDs were utilized for purpose of repayment of outstanding existing liability which was obtained for purpose of construction of building by JPIPL. assessee submits that interest paid on borrowed money for purpose of repayment of existing liability is allowable as deduction in computing income from house property as per provisions of section 24(b) of Income tax Act, 1961 (the Act) assessee submits that unsecured loan taken from IL&FS in form of OFCDs were utilized for purpose of constructions of house property and repayment of amount due to JP Infrastructure Pvt. Ltd. Therefore, Page 9 of 16 HC-NIC Page 9 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT assessee submits that interest on OFCDS of Rs.7,28,00,166/ for AY 2010 11 and for AY 2011 12, was correctly claimed under section 24(ii) of Act. assessee submits that OFCDS were fully utilized for purpose of construction of property and repayment of earlier liability taken for purpose of constructions of property and therefore, interest on OFCDs allowed to be deducted under section 249ii) of Act. 8. It was after examination of such representation of petitioner that Assessing Officer passed order of assessment and allowed claim of interest of Rs.7.28 crores observing that : 2. assessee company is engaged in business of renting of immovable property in shopping mall i.e. Central Stage Mall, Rajnagar Cross Road, Nana Mauva main road, Rajkot. During year under consideration assessee company has shown income of Rs.5.44 crores including rental income of Rs.4.12 crores whereas company paid interest of Rs.7,28,00,166/ . Details regarding income received, details of TDS in form of 26As expenses incurred, unsecured loan, etc. have been verified during 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 Assessing Officer did examine this claim during assessment. He accepted assessee's stand canvased through note that sum of Rs.14.89 crores raised by issuing debentures was utilised to repay outstanding liability of JP Infrastructure Private Ltd. Thus unsecured loans obtained during year by issuance of debentures were Page 10 of 16 HC-NIC Page 10 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT utilised for purpose of repayment of outstanding existing liability. It was obtained for purpose of construction of building and therefore, interest on such debentures was allowable deduction in terms of section 24(b) of Act while computing income from house property. fact that Assessing Officer did not elaborate this issue in year of assessment would be of no consequence. 10. Division Bench of this Court in case of Rayon Silk Mills v. Commissioner of Income tax reported in (1996) 221 ITR 155 was examining challenge of assessee to order by Commissioner in which in exercise of revisional powers, he had directed Income Tax officer to hold certain inquiry on issue which according to Commissioner, Income Tax officer had not examined. assessee argued that merely because order of assessment does not discuss issue at length, would not mean that no inquiry was made. Court accepted contention and held that Assessing Officer having made inquiry but without detail reference in order, Commissioner was not correct in directing fresh inquiry. It was however, clarified that Court did not mean to lay down law that whenever inquiry into any aspect of assessment has been made, that cannot be subject matter of proceedings under section 263 of Act. Even in such case, if Commissioner is of opinion that Income Tax officer has passed order which is erroneous and prejudicial to interest of Revenue, he can certainly have recourse to powers under section 263 of Act. Page 11 of 16 HC-NIC Page 11 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT 11. In case of Commissioner of Income tax v. Nirma Chemicals Works P. Ltd. reported in (2009) 309 ITR 67 (Guj), Division Bench had observed as under : 22. contention on behalf of revenue that assessment order does not reflect any application of mind as to eligibility or otherwise u/s. 80 I of Act requires to be noted to be rejected. assessment order cannot incorporate reasons for making/granting claim of deduction. If it does so, assessment order would cease to be order and become epic tome. reasons are not far to seek. Firstly, it would cast almost impossible burden on Assessing Officer, considering workload that he carries and period of limitation within which order is required to be made; and, Secondly, order is appealable order. appeal lies, would be filed, only against disallowances which assessee feels aggrieved with. 12. Thus when Assessing Officer had made proper inquiry and taken definite view, it would be open for Commissioner to exercise revisional powers only if it is found that order is erroneous and prejudicial to interest of Revenue. If view adopted by Assessing Officer is plausible view, 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, Supreme Court observed as under : bare reading of this provision makes it clear that prerequisite to exercise of jurisdiction by Commissioner suo motu under it, is that order of Page 12 of 16 HC-NIC Page 12 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT Income tax Officer is erroneous in so far as it is prejudicial to interests of Revenue. Commissioner has to be satisfied of twin conditions namely (i) order of Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to interests of Revenue. If one of them is absent if order of Income Tax Officer is erroneous but is not prejudicial to Revenue or if it is not erroneous but is prejudicial to Revenue recourse cannot be had to section 263(1) of Act. There can be no doubt that provision cannot be invoked to correct each and every type of mistake or error committed by Assessing Officer, it is only when order is erroneous that section will be attracted. incorrect assumption of facts or incorrect application of law will satisfy requirement of order being erroneous. In same category fall orders passed without applying principles of natural justice or without application of mind. phrase prejudicial to interests of Revenue is not expression of art and is not defined in 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 assessee's claim and objection of Commissioner. Though in affidavit in reply dated 11.3.2016, angle of tax evasion is sought to be brought in, in notice for revision basic premise was simple, namely, that amount of Rs. 14.89 crores was raised by issuing debentures during financial year 2009 2010. During such period there was no purchase or addition to property. According to Commissioner, interest paid on such debentures would not fall within section 24(b) of Act. He also referred to Page 13 of 16 HC-NIC Page 13 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT proviso below said section which allowed interest payment on loan taken subsequent to capital borrowed for purpose of repayment of such capital. This however, would apply to properties referred to in sub section(2) of section 23 which is house or part of house in occupation of owner for purpose of his own residence. In precise terms, Commissioner's viewpoint was that debentures may have been utilised for repayment of loans which were utilised for purpose of construction of property, nevertheless, since such funds were not directly utilised for purpose of construction, interest on such borrowings would not be deductible. 14. Under clause(b) of section 24, while computing income chargeable under head Income from house property , assessee would get deduction in case property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital on amount of any interest payable on such capital. 15. Before this amendment by Finance Act of 2000 with effect from 1.4.2001, similar provision was found in clause (vi) of sub section(1) of section 24. language of existing clause (b) of section 24 and clause (vi) of sub section(1) of section 24 are para materia. It was in this context that CBDT in its above noted circular dated 20.8.1969 had clarified position as under : 1. Section 24(i)(vi) provides that where property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, amount of any Page 14 of 16 HC-NIC Page 14 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT interest payable on such capital shall be allowed as admissible deduction in compensation of income from said property. 2. question has been raised whether in case where fresh loan has been raised to repay original loan taken for above purpose, interest payable in respect of second loan would also be admissible as deduction under section 24(1)(vi). 3. matter has been considered by Board and it has been decided that if second borrowing has really been used merely to repay original loan and this fact is proved to satisfaction of Income tax officer, interest paid on second loan would also be allowed as deduction under section 24(1)(vi). 16. To summarise, we find that petitioner had issued debentures. funds raised through such debentures were utilised for repayment of past loans. These loans were taken for purpose of construction of building. This aspect, petitioner pointed out to Assessing Officer during original assessment. Through accounts petitioner could establish precise correlation between debentures and repayment of past loans. This aspect, Commissioner has not controverted in notice for revision. Assessing Officer after examining issue accepted assessee's claim for deduction under section 24(b) of Act even with respect to interest paid on debentures which were utilised for repayment of past loans used for purpose of construction of building. view of Assessing Officer was certainly plausible, particularly, in view of clarification issued by CBDT. It was therefore, not open for Commissioner to take such Page 15 of 16 HC-NIC Page 15 of 16 Created On Sat Aug 12 10:45:33 IST 2017 C/SCA/2914/2016 JUDGMENT order in revision. 17. impugned notice dated 23.11.2015 is set aside. 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 Sat Aug 12 10:45:33 IST 2017 Aryan Arcade Ltd. v. Commissioner of Income-tax-I