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2022 (11) TMI 442 - AT - Income TaxRevision u/s 263 by CIT - As per CIT grant of depreciation and interest was not in accordance with the provisions of section 44AD(2) - HELD THAT - PCIT has considered the action of the AO as erroneous and prejudicial to the interest of the revenue stating that interest and depreciation is not allowed on the profit estimated u/s.44AD. 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. 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. 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., 9% 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 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 9% 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. Penalty proceedings initiated u/s.271B for non-maintenance of books of accounts being erroneous and prejudicial to the interest of the revenue - As relying on the case of Siddappa 2022 (4) TMI 535 - ITAT BANGALORE we do not find it necessary to interfere with the observations of the PCIT on the issue of dropping the penalty proceedings initiated by the AO. Appeal of the assessee allowed.
Issues Involved:
1. Validity of the notice issued for initiation of proceedings under section 263 of the Income Tax Act. 2. Justification of the Principal Commissioner of Income Tax (PCIT) in invoking jurisdiction under section 263. 3. Assessment of whether the Assessing Officer (AO)'s order was erroneous and prejudicial to the interest of the revenue. 4. Consideration of the applicability of section 44AD of the Income Tax Act. 5. Examination of the AO's decision to allow depreciation and interest. 6. Review of the AO's decision to drop penalty proceedings under section 271A for non-maintenance of books of accounts. Issue-wise Detailed Analysis: 1. Validity of the Notice Issued for Initiation of Proceedings under Section 263: The assessee contended that the notice issued for initiation of proceedings under section 263 was bad in law. The Tribunal did not find merit in this argument, as the notice was issued in accordance with the provisions of the Income Tax Act, giving the assessee an opportunity to be heard. 2. Justification of the PCIT in Invoking Jurisdiction under Section 263: The PCIT invoked section 263, stating that the AO's order was erroneous and prejudicial to the interest of the revenue. The Tribunal referred to the Supreme Court’s decision in Malabar Industrial Co. Ltd. v. CIT, which clarified that both conditions—erroneous and prejudicial to the interest of the revenue—must be met for section 263 to be invoked. The Tribunal found that the PCIT's invocation of section 263 was based on a misinterpretation of facts and law. 3. Assessment of Whether the AO's Order was Erroneous and Prejudicial to the Interest of the Revenue: The Tribunal examined whether the AO's order was erroneous and prejudicial to the interest of the revenue. The AO had estimated the assessee's income at 9% of the turnover and allowed depreciation and interest. The PCIT argued that this was erroneous as per section 44AD. However, the Tribunal found that section 44AD was not applicable to the assessee, as the turnover exceeded one crore. The AO had acknowledged this and made a higher estimation of 9%, which was a permissible view. Therefore, the AO's order was not erroneous. 4. Consideration of the Applicability of Section 44AD of the Income Tax Act: The assessee's receipts exceeded one crore, making section 44AD inapplicable. The AO had correctly noted this and estimated the income at 9%. The PCIT's contention that the AO applied section 44AD was found to be incorrect. The Tribunal upheld the AO's approach of using section 44AD as a guideline for estimation without actually applying it. 5. Examination of the AO's Decision to Allow Depreciation and Interest: The PCIT argued that the AO erroneously allowed depreciation and interest on the estimated income, which should not have been allowed under section 44AD. The Tribunal clarified that since section 44AD was not applicable, the AO's decision to allow depreciation and interest was within his discretion and not erroneous. 6. Review of the AO's Decision to Drop Penalty Proceedings under Section 271A for Non-Maintenance of Books of Accounts: The AO had initiated penalty proceedings under section 271A but later dropped them, relying on the decision in CIT vs Babu Reddy. The PCIT argued that this decision was misapplied. The Tribunal found that the AO had exercised his discretion appropriately based on the facts and judicial precedents. However, the Tribunal upheld the PCIT's observations on this issue, following the precedent set by the Tribunal in similar cases. Conclusion: The Tribunal partly allowed the appeal, finding that the AO's order was not erroneous or prejudicial to the interest of the revenue concerning the estimation of income and allowance of depreciation and interest. However, the Tribunal upheld the PCIT's observations regarding the dropping of penalty proceedings under section 271A. The appeal was thus partly allowed, with the order pronounced on 4th May 2022.
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