2020 (4) TMI 367 - AT - Income Tax

Revision u/s 263 - default in allowing LTCL by AO - AO has during the course of assessment proceeding only called for routine details and has not delved in detail or made necessary inquiries on the issue of Long Term Capital Loss and investigation on such issues which should have been made - As per CIT AO accepted assessee s submission and did not make any further queries regarding the ownership, actual transfer, delivery/handing over possession etc of the said property - HELD THAT - Without any specific enquiry on the subject by the assessing officer, the assessee has tried to pass off the information about how the said long term capital loss to be carried forward arose under a misleading heading of note on allowability of provision written back . Admittedly the claim of long-term capital loss to be carried forward on account of writing off of advance given for machinery, is itself erroneous, and hence the allowance thereof cannot be legally sustained on the ground that the same is conscious application of mind by AO. Moreover passing off this information under the heading note on allowability of provision of written back is more in nature of misleading than providing proper information. This is because writing off of advances for machinery and claiming the same as long-term capital loss to be carried forward has nothing to do with note on allowability of provision written back . Accordingly, in our considered opinion the submission that there is enquiry and application of mind by the assessing officer is not all sustainable. Hence Ld CIT is quite justified in invoking jurisdiction under section 263 of the income tax act, hence we uphold the order of Id CIT. We note that this is appeal against an order of Ld CIT passed under section 263 of the I-T Act Hence we are confining ourselves to the order passed under section 263 of the I-T Act. - Decided against assessee.

Issues Involved:
1. Validity of the order under section 263 of the Income-tax Act, 1961.
2. Treatment of the carry forward of long-term capital loss.

Detailed Analysis:

1. Validity of Order under Section 263:
The primary issue was whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking section 263 of the Income-tax Act, 1961, to set aside the assessment order passed under section 143(3) by the Deputy Commissioner of Income-tax (DCIT). The assessee argued that the conditions precedent to passing an order under section 263 were not satisfied and that the assessment framed by the DCIT was after due consideration of facts. The PCIT, however, held that the assessment order was erroneous and prejudicial to the interests of the revenue because the AO did not make necessary inquiries into the claim of long-term capital loss.

The PCIT issued a notice under section 263, stating that the assessee's claim of long-term capital loss was erroneous as it was a mere write-off of balances and not a loss arising out of the sale of any rights or asset. The PCIT concluded that the AO had not applied his mind to the issue, making the assessment order erroneous and prejudicial to the revenue. The PCIT cited several case laws to support this conclusion, emphasizing that the AO must make necessary inquiries and verification.

2. Treatment of Carry Forward of Long-Term Capital Loss:
The second issue was the treatment of the carry forward of long-term capital loss aggregating to ?1,33,76,692, which the assessee claimed as a capital loss due to the write-off of an advance given for the acquisition of machinery. The PCIT held that the right to acquire machinery is not a capital asset and that the loss on the right to acquire a capital asset is not eligible to be carried forward as a long-term capital loss. The PCIT further stated that the amount written off was capital itself, given as an advance, and did not arise due to the alienation of any capital asset. The PCIT relied on the decisions of the ITAT, Mumbai, and the Madras High Court, which held that such write-offs do not qualify as long-term capital losses.

The assessee contended that the AO had duly examined the matter and allowed the claim after considering the submission. However, the PCIT found that the AO had only called for routine details and did not delve into the issue of long-term capital loss in detail. The PCIT noted that there was no direct query made by the AO regarding the claim of long-term capital loss, and the AO accepted the assessee's submission without further inquiries.

Tribunal's Decision:
The ITAT upheld the PCIT's order, agreeing that the AO had not made specific inquiries into the claim of long-term capital loss and that the assessment order was erroneous and prejudicial to the interests of the revenue. The Tribunal noted that the assessee's submission under a misleading heading could not be construed as proper inquiry by the AO. The Tribunal emphasized that the claim of long-term capital loss due to the write-off of an advance for machinery was itself erroneous and could not be legally sustained. The Tribunal concluded that the PCIT was justified in invoking jurisdiction under section 263 of the Income-tax Act.

The appeal filed by the assessee was dismissed, and the Tribunal confined its decision to the order passed under section 263, stating that the grounds raised on the merits of the matter were premature and did not require adjudication.

Conclusion:
The ITAT upheld the PCIT's invocation of section 263, setting aside the assessment order due to the AO's failure to make necessary inquiries into the claim of long-term capital loss, which was found to be erroneous and prejudicial to the interests of the revenue.

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