The main legal point established in the judgment is that the Assessing Officer's inquiry into the claims made by the assessee under Section 36(1)(vii) and Section 36(1)(iii) of the Income Tax Act, 1961, and the court's interpretation of the legal provisions of Section 263, including the implications of the insertion of Explanation 2 with effect from 1st June, 2015.

JUDGMENT :

ABHAY AHUJA, J.

1. This is an appeal filed under Section 260-A of the Income Tax Act, 1961 (‘the Act’) by the Appellant-revenue impugning the order dated 16th January, 2017 passed by the Income Tax Appellate Tribunal (‘ITAT/Tribunal’) in Appeal No. 3314/Mum/2011 for the assessment year 2006-07 thereby allowing the appeal filed by the Respondentassessee. The Tribunal set aside the order dated 31st March, 2011 of the jurisdictional Commissioner of Income Tax exercising powers under Section 263 of the Act holding the assessment order dated 16th December, 2008 as erroneous and prejudicial to the interest of the revenue, as it allowed the claim for deduction made by the assessee in respect 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 under the One Time Settlement (‘OTS’) entered into by the assessee with its borrowers.

(ii) Deduction under Section 36(1)(iii) of the Act with respect to Interest expenditure of Rs. 2,49,53,390/- incurred with respect to borrowings made for the slum rehabilitation project at Dindoshi.

2. Earlier, the assessee had filed its return of income for the previous year relevant to assessment year 2006-07 on 11th November, 2006. The case was selected for scrutiny and assessment order dated 28th December, 2011 came to be passed under Section 143(3) of the Act. On 18th March, 2011, the Department issued a notice under Section 263 calling upon the assessee to show cause as to why the order under Section 143(3) dated 16th December, 2008 should not be treated as erroneous and prejudicial to the interest of revenue. The assessee responded by a detailed reply, in nuce, stating that the Assessing Officer had during the original assessment proceeding enquired into various issues including the aforesaid two issues and formed an opinion as to the correctness of the claim made by the assessee. The Commissioner by his order dated 31st March, 2011 rejected 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 the assessee and have also gone through the case records for the assessment year 2006-2007. On examination of the records. It is seen that the assessee was never called upon to explain the loss under OTS of Rs. 6.01,84,862/- debited to the profit and loss account under the head Administration and Other expenses. The records do not contain the copy of the One Time Settlement Scheme under which the assessee is stated to have given concession to private developers only in respect of the outstanding interest. Vide letter dated 15.09.2008, the authorized representative has furnished certain details in support of the return of income and at Sr. No. 26 of the said letter. It is mentioned that details of the amount of interest receivable & written off under One Time Settlement Scheme are enclosed. However the said details are not found enclosed in the record. The Assessing Officer has also not verified as to how the interest written off has been offered as income in the earlier years. The Assessing Officer has also not examined as to whether the interest expenses of Rs. 2,49,53,390/- on Dindoshi project was allowable as deduction u/s 36(1)(iii) or was required to be capitalized to the WIP of the said project.”

3. Being aggrieved, the assessee carried the matter to the Tribunal. The Tribunal vide its order dated 16th January, 2017 allowed the appeal of the assessee and set aside the order of the Commissioner under Section 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 of Income Tax has exercised the jurisdiction u/s 263 of the Act relates to the loss under OTS amounting to Rs. 6,01,84,862/-. We noted from pages 1 to 3 of the paper book that the assessee has duly filed the details regarding the OTS. The As