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2018 (2) TMI 507 - AT - Income TaxRevision u/s 263 - deduction u/s 80P allowability - change of opinion - allowability under section 40A(9), section 37(1) and diversion by overriding title - revision permissible merely on audit objection - rule of consistency - Held that - Deduction claimed under chapter VIA is held to be allowable for the year under consideration. This shows clearly that claim of deduction under section 80P has been examined and thereafter, it has been allowed. We are therefore of the view that in absence of any specific query/discussion/examination by the AO and in absence of any specific finding in the assessment order as having examined the claim of the assessee regarding general and education reserve and the provision for gratuity, it cannot be said that there is a change of opinion when such an opinion has not been formed at the first place. Therefore, we are unable to accede to the contention of the ld AR regarding change in opinion. It is a case where we find that there is no due and proper application of mind by the AO. The AO having reproduced the entries of general and education reserve as appearing in the profit/loss appropriation account, should have applied his mind to determine firstly, whether the entries in the profit/loss appropriation account, which are below-the-line entries in the accounting parlance, are allowable at first place in the hands of the assessee and secondly, what is the nature and purpose of these reserve and how the same are allowable and under what provisions of the Act. We donot find anything on record to suggest that the issue has been examined in the past from the perspective of section 40A(9). Hence, the above said contention of the ld AR regarding rule of consistency cannot be accepted. As we refer to the provisions of section 263 which provides that the ld Pr CIT may call for and examine the record of any proceedings under this Act in the instant case, it is not disputed that the revenue audit memo is part of the records. CIT has examined the assessment records as well as revenue audit memo available on record and after examining the same and providing a detailed reasoning in the revision order come to a conclusion that the assessment order passed under section 143(3) is erroneous and prejudicial to the interest of the Revenue. It is therefore not a question of borrowed satisfaction on the part of the ld Pr CIT wherein merely on account of revenue audit memo, she has initiated the proceedings under section 263. Rather she has examined the records and independently applied her mind and has come to a conclusion that the assessment order is erroneous and prejudicial to the interest of the revenue. The decisions relied upon by the ld AR are rendered in the peculiar facts of the case and are distinguishable. Regarding the arguments of the ld AR on merit regarding allowability under section 40A(9), section 37(1) and diversion by overriding title, we believe that the same can be examined by the AO and the assessee shall be free to raise the same before the AO. To this extent, we modify the directions of the ld Pr CIT and the same should be read to the effect that claim of the assessee regarding the claim of the deduction towards the transfer to general reserve, education reserve and the provisions for gratuity should be examined afresh as per law after providing reasonable opportunity to the assessee.
Issues Involved:
1. Invocation of Section 263 of the Income Tax Act. 2. Validity of the assessment order dated 13.12.2013. 3. Allowability of deductions under Sections 40A(9) and 37(1) of the Income Tax Act. 4. Jurisdictional validity of the Principal CIT’s order. Detailed Analysis: 1. Invocation of Section 263 of the Income Tax Act The Principal CIT invoked Section 263, holding the assessment order dated 13.12.2013 as erroneous and prejudicial to the interest of the Revenue. The assessee argued that the invocation was contrary to the provisions of law and facts, and thus, the order under Section 263 should be quashed. The Tribunal found that the AO did not apply due diligence in examining the allowability of the reserves transferred to the General Reserve, Education Reserve, and Provision for Gratuity. Thus, the order was deemed erroneous and prejudicial to the Revenue’s interest. 2. Validity of the Assessment Order Dated 13.12.2013 The assessee contended that the Principal CIT wrongly set aside the assessment order despite specific findings by the AO and claimed it was a mere change of opinion. The Tribunal noted that there was no specific query or examination by the AO regarding the general and education reserves and the provision for gratuity. The lack of examination and application of mind by the AO rendered the assessment order erroneous. 3. Allowability of Deductions under Sections 40A(9) and 37(1) of the Income Tax Act The Principal CIT disallowed the deductions claimed by the assessee under Section 40A(9) for contributions to General Reserve, Education Reserve, and Provision for Gratuity, stating that these were not allowable under the Income Tax Act. The Tribunal found that the Principal CIT provided clear reasoning for her decision, and the AO failed to examine the nature and purpose of these reserves. The Tribunal directed the AO to re-examine the deductions under Sections 40A(9) and 37(1) and the concept of diversion by overriding title. 4. Jurisdictional Validity of the Principal CIT’s Order The assessee argued that the Principal CIT’s action was based on an audit objection and lacked independent application of mind. The Tribunal held that the Principal CIT examined the assessment records and the audit memo, provided detailed reasoning, and independently concluded that the assessment order was erroneous and prejudicial to the Revenue. The Tribunal rejected the contention that the action under Section 263 was impermissible merely on an audit objection. Conclusion The Tribunal concluded that the AO did not apply due diligence in examining the allowability of the reserves, making the assessment order erroneous. The Principal CIT provided clear reasoning for her decision, and the Tribunal directed the AO to re-examine the deductions claimed by the assessee. The appeal was disposed of with directions to the AO to provide a reasonable opportunity to the assessee for re-examination of the claims.
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