2022 (3) TMI 471 - AT - Income Tax

Revision u/s 263 by CIT - Period of limitation - Reopening of assessment against assessee concluded - HELD THAT - As first order u/s 143 (3) of the act was passed by AO on 25th of March 2015. Subsequently the case was reopened and reassessment order u/s 143 (3) read with Section 147 of the act was passed on 31 December 2018. Therefore, apparently if the learned PCIT would like to revise the order passed u/s 143 (3) of the act which was passed on 25th of March 2015, the time limit set under the provisions of Section 263 (2) of the act would expire on 31st of March 2017. If the principal Commissioner of income tax points that order passed u/s 143 (3) read with Section 147 of the act passed on 31 December 2018 is erroneous, then the order u/s 263 could have been passed up to 31st of March 2021. In the present case the order u/s 263 of the act was passed on 31st of March 2021. Therefore, apparently the issues that have been covered in order passed u/s 143 (3) of the act but are not part of reopened proceedings, cannot be subject to revision u/s 263 of the income tax act by this order. As we have already stated that the time limit for revising the issues involved in the original assessment order has already expired on 31/3/2017, therefore the revision on the above issues namely (1) the consideration of loss on repossessed vehicle is bad debts and not in the business loss, (2) disallowance of unpaid leave encashment u/s 43B (f) of the act is beyond the powers of the ld PCIT u/s 263 of the act. Therefore without looking into the merits of the case, we hold that the order of the learned PCIT is not sustainable on the above 2 issues. Revisional powers u/s 263 with respect to the deduction claimed u/s 36 (1) (viii) - whether the correct lease rental income has been reduced by the assessee and ld AO in computing the income from long-term finance or not - Gross lease rental income and Arrears of lease Income should have been reduced for working out the long-term finance income. The expenditure of interest should not have been reduced from gross lease income. AO has not at all verified the above adjustment made while arriving at lease income. Therefore it is apparent that the AO has not made necessary enquiries with respect to the computation of deduction u/s 36 (1) (viii) of the act with respect to what amount of lease rent should be reduced from the long-term finance income of the assessee to arrived at deduction u/s 36 (1) (viii) of the act. This inquiry is just and proper, and should have been made by the ld AO. With respect to the inclusion of interest on income tax refund considered both by the assessee as well as by the learned assessing officer as part of long-term finance income of the assessee, the assessee itself agreed that there is an error and it should not have been included in the long-term finance income of the assessee. Therefore on both these issues AO has failed to make any enquiries to examine whether the correct lease rental income as well as interest on income tax refund should have been included in the long-term finance income of the assessee for working out deduction u/s 36 (1) (viii) of the act. Hence, on both these issues, we do not find any infirmity in the order of the learned principal Commissioner of income tax in invoking jurisdiction u/s 263 of the income tax act. Accordingly the action of the learned principal Commissioner of income tax u/s 263 of the act is confirmed to that extent only. Computation of the long-term finance income of the assessee for working out deduction u/s 36 (1) (viii) - CIT has revised the order of the learned assessing officer holding it to be erroneous as the learned assessing officer has failed to apply his mind with respect to the computation of the long-term finance income qua reduction of lease rental income as well as interest income from income tax refund. Even otherwise there is no decision of the learned CIT A on these issues, therefore it cannot be said that the learned Commissioner of Income Tax (Appeals) has considered and decided the issue of whether the lease rental income and interest income on income tax refund is part of the long-term finance income of the assessee or not. Therefore, this argument of the learned authorised representative stands rejected. In the result we hold that the learned principal Commissioner of income tax is correct in setting aside the assessment order passed u/s 143 (3) rws 147 of the Act dated 31-12-2018 by passing an order u/s 263 of the income tax act with respect to the deduction claimed u/s 36 (1) (viii) of the act for excluding the correct amount of lease rental income and interest income on income tax refund for working out long-term finance income of the assessee. With respect to the issue of repossessed vehicles to be treated as bad debts and non-disallowance of unpaid leave encashment, as already held above the order of the learned principal Commissioner of income tax is not sustainable in law. Therefore on these two issues the order of the learned principal Commissioner of income tax is quashed. - Decided in favour of assessee in part.

Summary

Issues Involved:
1. Consideration of loss on repossessed vehicles as bad debts and not as a business loss.
2. Non-disallowance of unpaid leave encashment.
3. Deduction claimed under section 36(1)(viii) of the Income-tax Act.

Detailed Analysis:

1. Consideration of Loss on Repossessed Vehicles as Bad Debts and Not as a Business Loss:
The Pr. Commissioner of Income-tax (Pr. CIT) held that the loss on repossessed vehicles claimed by the appellant as a business loss should be treated as bad debts. The Pr. CIT argued that since this loss, along with other bad debts, did not exceed the credit balance allowed under section 36(1)(viia) for the previous assessment year, it was not allowable and should be added to the total income. The appellant contended that this issue was already examined and allowed as a business loss in preceding assessment years and that the Pr. CIT's revision was time-barred under section 263(2). The Tribunal held that the revision on this issue was beyond the powers of the Pr. CIT as it was part of the original assessment order and not the reassessment order, making the revision time-barred.

2. Non-disallowance of Unpaid Leave Encashment:
The Pr. CIT observed that the unpaid leave encashment amount was not fully disallowed by the Assessing Officer (AO), rendering the assessment order erroneous and prejudicial to the interests of the revenue. The appellant argued that only the amount debited to the Profit & Loss (P&L) account was disallowed, and the balance amount, which was not routed through the P&L account, was not claimed and hence should not be disallowed. The Tribunal agreed with the appellant that this issue was covered in the original assessment order and therefore, the revision was time-barred.

3. Deduction Claimed under Section 36(1)(viii):
The Pr. CIT identified errors in the computation of the deduction under section 36(1)(viii). The AO had not reduced the full lease rental income and had included interest on income tax refunds in the long-term finance income. The appellant contended that the net lease income was correctly reduced and that the interest on income tax refunds was inadvertently included and could be rectified under section 154. The Tribunal found that the AO had failed to make necessary inquiries regarding the correct lease rental income and interest on income tax refunds. Therefore, the Pr. CIT was correct in invoking jurisdiction under section 263 for this issue. However, the Tribunal noted that the matter was already under appeal before the CIT(A), and thus, the Pr. CIT could not revise this part of the assessment.

Conclusion:
The Tribunal partly sustained the Pr. CIT's order under section 263 for the deduction claimed under section 36(1)(viii) regarding the correct lease rental income and interest on income tax refunds. However, it quashed the Pr. CIT's order on the issues of repossessed vehicles and unpaid leave encashment, as these were part of the original assessment and time-barred for revision. The appeal of the appellant was thus partly allowed.