2015 (10) TMI 2772 - AT - Income Tax

Validity of proceedings u/s. 263 - HELD THAT - We find the Hon ble Madras High Court in the case of Sakti Charities 2000 (2) TMI 75 - MADRAS HIGH COURT has held that revisional power is not meant to correct every error of fact. The power of revision should not be exercised for purpose of directing the AO to hold another investigation. When the order of the CIT does not indicate as to how the order of the ITO was erroneous and prejudicial to the interest of the revenue, the CIT lacks the jurisdiction to revise the order of the AO. Since the assessee in the instant case has furnished full details as called for by the AO during the course of assessment proceedings and since the order of the CIT is silent as to how the order of the AO is erroneous and prejudicial to the interest of the revenue, therefore, in view of the above decisions cited we are of the considered opinion that the Ld.CIT was not justified in setting aside the order passed u/s.143(3) r.w.s. 144C(13) of the I.T. Act by invoking the provisions of section 263. We, therefore, set aside the same. The grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Validity of proceedings initiated under Section 263 of the Income Tax Act.
2. Examination of the Assessing Officer's (AO) order for errors and prejudice to the interest of the revenue.
3. Specific points of contention regarding the AO's failure to verify certain items in the balance sheet and profit and loss account.

Detailed Analysis:

1. Validity of Proceedings Initiated under Section 263:
The primary issue revolves around the validity of the proceedings initiated by the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act. The CIT issued a notice under Section 263, arguing that the AO's order was prejudicial to the interest of revenue due to the lack of verification of certain items in the balance sheet and profit and loss account. The assessee contended that the CIT's notice and subsequent order did not specify how the AO's order was erroneous and prejudicial to the revenue. The assessee argued that all necessary details were provided to the AO during the assessment proceedings, and the AO's order was passed after due consideration of these details.

2. Examination of the AO's Order for Errors and Prejudice to the Interest of the Revenue:
The CIT's order highlighted several points where the AO allegedly failed to conduct necessary inquiries, such as the verification of damages crystallized during the year, recalculated useful life of assets, and deferred tax liability. The CIT argued that these failures rendered the AO's order erroneous and prejudicial to the revenue. The assessee countered this by providing detailed explanations and documentary evidence to show that all relevant details were indeed furnished and considered by the AO. The Tribunal noted that the AO had made inquiries and obtained explanations from the assessee on various aspects, including damages, depreciation, and other financial details.

3. Specific Points of Contention:
- Damages Crystallized During the Year: The CIT contended that the AO did not verify the damages of Rs. 5,79,02,756/- paid to the parent company, which were crystallized during the year. The assessee provided detailed notes and explanations in their return of income and before the Dispute Resolution Panel (DRP), indicating that these damages were ordinary business expenditures and had been appropriately accounted for.

- Recalculated Useful Life of Assets: The CIT raised concerns about the recalculated useful life of computers, peripherals, office equipment, and intangibles, resulting in a loss of Rs. 19,32,848/-. The assessee demonstrated that the recalculated depreciation was added back in the computation of income and that the depreciation claimed under the Income Tax Act was not disputed by the CIT.

- Deferred Tax Liability: The CIT questioned the AO's verification of the deferred tax liability of Rs. 10,92,888/-. The assessee clarified that this amount was a balance sheet item and not claimed as a deduction, providing detailed notes in the financial statements.

The Tribunal concluded that the AO had made necessary inquiries and obtained sufficient details from the assessee. The CIT's order did not explicitly state how the AO's order was erroneous and prejudicial to the revenue. The Tribunal referred to various judicial precedents, including decisions from the Punjab & Haryana High Court and the Bombay High Court, which emphasized that the CIT must clearly state the basis for considering an AO's order as erroneous and prejudicial to the interest of the revenue.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, setting aside the CIT's order under Section 263. It held that the CIT was not justified in invoking the provisions of Section 263, as the AO had duly considered all relevant details and passed the assessment order after proper inquiry. The Tribunal emphasized that the CIT's order lacked specific reasons to demonstrate how the AO's order was erroneous and prejudicial to the revenue.