2021 (2) TMI 232 - HC - Income Tax

Revision u/s 263 - allowability of the expenditure and carry forward of the losses - ITAT quashed the order of CIT - HELD THAT - According to us, this is not a case where the Commissioner has not concluded that the order of the AO in the aforesaid circumstance was not erroneous or that it was not prejudicial to the interest of the Revenue. The only reason the Commissioner has used the expression prima facie is that the Commissioner, intended to offer the assessee a reasonable opportunity of being heard by the AO, in the course of a detailed inquiry accompanied by due application of mind by the AO, in pursuance of a remand order. This is also not a case where the Commissioner failed to undertake inquiry in the course of the exercise of revisional jurisdiction. It is only in pursuance to such inquiry that the Commissioner recorded a categorical finding that the assessee had not even claimed any fees from M/s. Paradeep Phosphates Ltd. in respect of any alleged technical or management services rendered by it. This is not a case of some plausible view but this is a case where the decision was a result of non-application of mind to the materials on record. Taking into consideration the reasoning of the CIT, we feel that the ITAT was not justified in interfering with the CIT's order, since, the twin conditions prescribed under Section 263 of the said Act were fulfilled. Besides, the CIT, by the impugned order, had quite fairly, granted the assessee an opportunity of being heard whilst directing the AO to verify the claim of the assessee in respect of the allowability of the expenditure and carry forward of the loss in accordance with law. In similar circumstances in the case of Daniel Merchants P. Ltd. 2017 (12) TMI 476 - SUPREME COURT upheld that order of the Commissioner which had directed the AO to carry a thorough and detailed inquiry. Decided in favour of the Revenue and against the assessee.

Summary

Issues Involved:
1. Justification of ITAT in allowing the appeal filed by the assessee under Section 263.
2. Determination of whether the order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue.

Detailed Analysis:

Issue I: Justification of ITAT in Allowing the Appeal Filed by the Assessee Under Section 263

3. The assessee filed a return for AY 2009-10 declaring a total loss of ?1,78,57,950/-. The case was selected for scrutiny, and the AO added ?2,31,010/- as income from other sources while accepting the business losses of ?1,78,57,950/- to be carried forward.

4. The Commissioner of Income Tax invoked Section 263, set aside the AO's order, and directed a fresh assessment to verify the allowability of the expenditure and carry forward of the losses.

5. The ITAT set aside the Commissioner’s order, leading to the present appeal by the Revenue.

6. The Revenue argued that the AO's order was erroneous and prejudicial to its interest as the assessee did not carry out any business during the relevant year and incorrectly allowed the carry forward of losses.

7-10. The assessee contended that it was engaged in business activities and the AO’s findings were correct. The assessee also argued that the Commissioner did not conclusively find the AO’s order erroneous but only “prima facie erroneous” and did not conduct a thorough inquiry.

11. The court noted that the AO accepted the assessee's business expenses without proper verification, which indicated non-application of mind and justified the Commissioner’s invocation of Section 263.

Issue II: Determination of Whether the Order Passed by the AO Was Erroneous and Prejudicial to the Interest of the Revenue

12-15. The AO treated ?2,31,010/- as income from other sources and disallowed related expenses. However, the AO accepted business expenses of ?2,84,09,850/- without verifying the nexus with business activities, indicating non-application of mind.

16-17. The court found that the AO failed to inquire into the explanation provided by the assessee and merely accepted the expenses, which was erroneous and prejudicial to the Revenue.

18-20. The court referenced Malabar Industrial Co. Ltd. to support that incorrect assumptions or non-application of mind by the AO justify revisional jurisdiction under Section 263. The AO’s order allowed carry forward of losses without proper inquiry into the business activities, causing a revenue loss.

21. The Commissioner’s use of “prima facie” indicated the need for a detailed inquiry by the AO, which justified the remand order.

22-23. The court distinguished this case from others cited by the assessee, emphasizing that the AO’s order lacked any discussion or inquiry, unlike the cases where plausible views were taken.

24-27. The court cited various judgments supporting the necessity of inquiry by the AO and the Commissioner’s right to invoke Section 263 when such inquiry is lacking.

28-29. The court referenced Amitabh Bachchan’s case, where the Supreme Court upheld the Commissioner’s revisional jurisdiction for lack of proper inquiry by the AO.

30. The court concluded that the ITAT was not justified in interfering with the Commissioner’s order, as the AO’s order was erroneous and prejudicial to the Revenue, fulfilling the conditions under Section 263.

31. The court set aside the ITAT’s order, answering the substantial questions of law in favor of the Revenue, directing the AO to make a fresh order after giving the assessee a reasonable opportunity of being heard.

32. The appeal was allowed with no order as to costs.