2022 (5) TMI 1128 - AT - Income Tax

Revision u/s 263 - interest and depreciation is not allowed on the profit estimated u/s.44AD - as per CIT relevance of interest and depreciation in the assessment and also the deletion of penalty by the AO are erroneous to the interest of the revenue - AO proceeded to estimate the income of the assessee as a percentage of gross receipts as per form 26AS in the absence of any evidence furnished by the assessee for expenditure incurred apart from depreciation and interest - AO estimated the income of the assessee at 10% on turnover as per 26AS - AO also initiated the penalty proceedings u/s. 271A on the assessee for not maintain books of accounts but later deleted the same - HELD THAT - This is not the correct facts of the case, as the assessee has clearly submitted that 44AD is not applicable to him and this fact has been acknowledged by the AO in his order. The PCIT has substituted his view with that of the AO to state that the deduction of interest and depreciation is allowed u/s.44AD by the AO and concluded the order of the AO as erroneous. The learned AR drew our attention to para 4 and 5 of the AO s order where the AO has clearly acknowledged that the assessee has used the % specified in 44AD and that the said section is not applicable in assessee s case. It is because of this reason the AO has adopted a higher % for estimation viz., 10% which fact is not correctly noticed by the PCIT. PCIT has also misinterpreted the reliance placed by the assessee and considered by the AO in the case of Sammurai Techno Trading Co Ltd. 2009 (11) TMI 938 - KERALA HIGH COURT PCIT had stated that when reliance is placed on this decision on the applicability of 44AD then the assessee ought not to have claimed interest and depreciation and the AO should have allowed the claim. This is a gross misconception on the part of the PCIT, since the assessee had relied on the decision only to justify the applicability of 8% as a profit estimate even when section 44AD is not applicable in his case. The AO though accepted the estimation proceeded to enhance the % to 10% after considering the facts and the details furnished. Therefore the conclusion of the PCIT that the order passed by the AO is erroneous is not tenable as the assumption of the PCIT that the AO has estimated the profits by applying the provisions of section 44AD and allowed interest and depreciation on the estimated profit, is not correct interpretation of AO s order. AO dropping the penalty proceedings initiated u/s.271B for non-maintenance of books of accounts being erroneous and prejudicial to the interest of the revenue - As decided in case of Siddappa B.T 2022 (4) TMI 535 - ITAT BANGALORE with regard to the observation of Ld. PCIT that the dropping of penalty u/s 271A of the Act was on wrong appreciation of the judgment of the High Court, the Ld. A.R. contended that the Ld. PCIT should have passed separate order on this issue. However, the Ld. A.R. did not cite any authority in support of his contention. In any case we notice that the Ld. PCIT has given opportunity to the assessee in this regard. Accordingly, we do not find it necessary to interfere with observations made by Ld. PCIT on the second issue We notice that the Hon ble Tribunal has held a similar view in the case of K R Mahesh vs PCIT 2022 (1) TMI 682 - ITAT BANGALORE Respectfully following the decision of the coordinate bench of the tribunal we do not find it necessary to interfere with the observations of the PCIT on the issue of dropping the penalty proceedings initiated u/s.271A by the AO - Appeal of assessee partly allowed.

Summary

Issues Involved:
1. Validity of the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act.
2. Applicability of Section 44AD to the assessee.
3. Allowance of depreciation and interest by the Assessing Officer (AO).
4. Deletion of penalty proceedings initiated under Section 271A by the AO.

Detailed Analysis:

1. Validity of the Order Passed by the PCIT Under Section 263:
The assessee challenged the order of the PCIT on multiple grounds, arguing that the order was opposed to law, natural justice, and facts of the case. The PCIT had set aside the AO’s assessment order, claiming it was erroneous and prejudicial to the interests of the revenue. The Tribunal referred to the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which clarified that for an order to be revised under Section 263, it must be both erroneous and prejudicial to the interests of the revenue. The Tribunal concluded that the PCIT’s assumption that the AO had applied Section 44AD incorrectly was not tenable as the AO had clearly acknowledged that Section 44AD was not applicable to the assessee.

2. Applicability of Section 44AD to the Assessee:
The Tribunal noted that the assessee's total receipts were over one crore, making Section 44AD inapplicable. The AO had estimated the income at 10% of the turnover, acknowledging that Section 44AD was not applicable. The PCIT’s assumption that the AO had applied Section 44AD was incorrect. The Tribunal emphasized that the AO had adopted a permissible course in law, and the PCIT could not substitute his view for that of the AO.

3. Allowance of Depreciation and Interest by the AO:
The AO had allowed depreciation and interest from the estimated profits. The PCIT argued that this was erroneous as per Section 44AD(2). However, the Tribunal found that the AO had not applied Section 44AD but had used it as a guideline for estimating profits. The Tribunal cited the Kerala High Court's decision in Samuel Techno Trading Co Ltd vs CIT, which allowed using Section 44AD as a guideline even when it was not directly applicable. Therefore, the AO’s allowance of depreciation and interest was justified.

4. Deletion of Penalty Proceedings Initiated Under Section 271A:
The AO had initiated penalty proceedings under Section 271A for non-maintenance of books of accounts but later dropped them, relying on the Karnataka High Court’s decision in CIT vs Babu Reddy. The PCIT argued that the AO’s reliance on this decision was misplaced as the facts were distinguishable. The Tribunal, however, upheld the PCIT’s view, noting that the AO’s decision to drop the penalty proceedings based on a non-applicable court decision was erroneous. The Tribunal referenced its earlier decisions in similar cases, affirming that the PCIT’s observations on this issue were valid.

Conclusion:
The Tribunal partly allowed the appeal of the assessee. It upheld the AO’s estimation of income and allowance of depreciation and interest, rejecting the PCIT’s revision on these grounds. However, it agreed with the PCIT’s observations regarding the erroneous deletion of penalty proceedings under Section 271A. The Tribunal’s decision was pronounced on May 4, 2022.