2019 (4) TMI 1777 - AT - Income Tax

Revision u/s 263 - Addition u/s 40A(3) - HELD THAT - As per the provisions of section 263 of the Act, the CIT / PCIT on exerciser jurisdiction u/s 263 of the Act, if he consider that the order passed by the Assessing officer is erroneous in so far as it is prejudicial to the interest of Revenue. It has been held time and again by various Courts of law including the Hon'ble Apex Court of the country that for exercise of jurisdiction u/s 263 of the Act, the twin conditions must be satisfied i.e. (i) the order passed by the Assessing officer is erroneous, and; (ii) it must be prejudicial to the interest of Revenue. If any of the twin conditions is absent, the Commissioner cannot exercise jurisdiction u/s 263 of the Act. The order passed by the Assessing officer since cannot be said to be erroneous, hence, the Ld. PCIT was not authorised to invoke his powers u/s 263 of the Act and cancel the assessment order. Therefore, the order passed by the Ld. PCIT is quashed on this score alone. Even on merits, assessee has invited our attention to the trading account of the assessee for the year ended on 31.3.2012 i.e. for the assessment year under consideration to show that the assessee during the year did not make any sales. That all the payments / expenditure during the year was part of the closing stock (work in progress). That since there was no sales made during the year, hence, there was no question of booking any expenditure against any profit or loss against any sales. That since the assessee has not claimed any expenditure during the year, hence, there was no question of disallowance of any expenditure under the provisions of section 40A(3) of the I.T. Act. Since the assessee did not claim any expenditure during the year, no disallowance of expenditure can be made even under the provisions of section 40A(3) of the Act. Therefore, the order passed by the Assessing officer even on merit cannot be said to be prejudicial to the interest of Revenue. In view of the above discussion, the order passed by the Ld. PCIT u/s 263 is not sustainable in the eyes of law and the same is accordingly quashed. Appeal of the assessee is hereby allowed.

Summary

Issues:
1. Condonation of delay in filing the appeal
2. Merits of the case regarding disallowance of expenditure under section 40A(3) of the Income-tax Act, 1961

Condonation of Delay:
The appeal was filed against the order of the Pr. Commissioner of Income Tax-2, Chandigarh under section 263 of the Act. The delay of 265 days in filing the appeal was explained by the assessee due to wrong professional advice given by their earlier counsel. The counsel failed to advise on the maintainability of the appeal against the order under section 263. The application for condonation of delay was supported by an affidavit and referred to decisions of the Tribunal where delays were condoned due to similar circumstances. The Tribunal considered the explanation, lack of appearance by the earlier counsel, and the decisions cited, ultimately condoning the delay in the interest of justice.

Merits of the Case - Disallowance of Expenditure:
The Pr. Commissioner set aside the assessment order for the year under consideration, directing the Assessing officer to disallow certain expenditures under section 40A(3) of the Act. The Pr. Commissioner noted cash payments made by the assessee exceeding the limit specified in the section. The assessee contended that no sales were made during the year, and all payments were part of closing stock, hence no expenditure was claimed against profit or loss. The Assessing officer's order was challenged on the grounds that the limited scrutiny was only for unsecured loans, and no fault was found in that aspect. The Tribunal held that since no expenditure was claimed, disallowance under section 40A(3) was not warranted. The order of the Pr. Commissioner under section 263 was quashed on this ground, and the appeal of the assessee was allowed.

In conclusion, the Tribunal allowed the appeal of the assessee, quashing the order passed under section 263 of the Act, both on the grounds of condonation of delay in filing the appeal and on the merits of disallowance of expenditure under section 40A(3).