The argument of the revenue on the basis of Gee Vee Enterprises 99 ITR 375 (Del) that non-making of inquiry by the AO is sufficient to justify action u/s 263 is not acceptable in view of the later decision in Vikas Polymers (Del) where it was held that the fact that the AO has not applied his mind to the issue may mean that the order is erroneous but it does not necessarily mean that the order is also prejudicial to the interests of the revenue. The CIT should apply his mind to the information provided by the assessee in the course of the revisional proceedings and record a finding instead of simply remanding the matter to the AO for examination

The second requirement of s. 41(1) is also not satisfied because in paying the NPV of the sales-tax liability, the assessee has paid the equivalent of the Future Value of the sum. As the sum of Rs. 3,37,13,393 is the NPV of the future sum of Rs.7,52,01,378 and its payment discharges the full liability, there is no remission or cessation of liability by the State Govt. It is a simple case of collecting the amount at net present value which is due later on (principles of s. 63 of the Contract Act applied)

The argument of the revenue that the abnormal debt-equity ratio attracts the “Thin Capitalization Rule” and that the “debt” should be characterized as “equity” for purposes of considering whether interest is deductible is not acceptable. Several countries have detailed “thin capitalization rules” (e.g. Belgium). However, there are no such rules in India though the DTC 2010 has proposed this vide s. 123(1)(f). In the absence of specific “thin capitalization” rules, it is not open to the revenue to characterize debt as equity and disallow the interest (principles in Azadi Bachao Andolan 263 ITR 706 (SC) followed)