2009 (1) TMI 886 - HC - Income Tax

Reference u/s 256 (2) - gift of copyright of a book by the father - received royalty income and claimed expenses - AO allowed the expenses to the extent of 50% of the royalty income - Whether ITAT was justified in quashing the order of CIT u/s 263 specially when the assessee has not maintained any account and there is no material on record to show that enquiry was made regarding the genuineness of expenditure incurred? - HELD THAT - On going through the statement of the case and other relevant materials this court finds that ITAT set aside the order of the CIT u/s 263 on appreciation of a pure question of fact that AO had undertaken and held reasonable enquiry by calling for explanations from the assessee and in view of such finding it interfered with the order of CIT who had erroneously come to a finding that no enquiry was held by AO. Thus there being materials on record to show that enquiry was made regarding the expenditure claimed this court is of the view that ITAT was justified in quashing the order of the CIT. The reference is answered accordingly.

Summary

Issues:
1. Interpretation of Section 263 of the Income Tax Act regarding quashing of Commissioner's order.
2. Validity of claiming expenses against royalty income.
3. Adequacy of enquiry by the Assessing Officer.

Analysis:
1. The High Court was tasked with interpreting Section 263 of the Income Tax Act in a case where the Commissioner sought to reassess an assessment made by the Assessing Officer. The primary question was whether the Income Tax Appellate Tribunal was justified in quashing the Commissioner's order under Section 263. The Tribunal found that the Assessing Officer had indeed conducted a reasonable enquiry by seeking explanations from the assessee, thereby justifying the quashing of the Commissioner's order.

2. The case involved the validity of claiming expenses against royalty income received by the assessee. The Commissioner contended that the royalty amount was a gift from the father of the assessee, making it ineligible for any deduction for expenditure. However, the assessee argued that the gift was not of a specific royalty amount but of the copyright of a book. The Tribunal considered the actions required to earn royalty income from the copyright, such as revising the book, and concluded that the expenses claimed were justified, especially after the assessee provided necessary documentation.

3. Another issue in the case was the adequacy of the enquiry conducted by the Assessing Officer before allowing expenses against the royalty income. The Commissioner alleged that there was no enquiry regarding the genuineness of the expenditure claimed. However, the Tribunal reviewed the materials and letters considered by the Assessing Officer and found that a proper enquiry had indeed been conducted. Consequently, the Tribunal ruled in favor of the assessee, leading to the reference and Tax case before the High Court.

In conclusion, the High Court analyzed the facts and materials presented, ultimately upholding the decision of the Income Tax Appellate Tribunal to quash the Commissioner's order under Section 263. The Court found that there was sufficient evidence to demonstrate that the Assessing Officer had conducted a reasonable enquiry, justifying the allowance of expenses against the royalty income. The reference was answered in favor of the assessee based on these considerations.