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2022 (11) TMI 670 - AT - Income TaxRevision u/s 263 by CIT - eligibility of deduction of construction expenses claimed u/s 37(1) - AO noticed that assessee-firm had claimed provision for construction expenses under the head direct expenses in the profit and loss account as well as in Income Tax Return - HELD THAT - PCIT has not set out as to why this item of provision for expenditure need to be investigated and as to what type of inquiry ought to have conducted by the AO. A mere observation that no proper details have been obtained, cannot be sufficient to come to a conclusion that the AO did not make proper and adequate inquiries which he ought to have made in the given facts and circumstances of this case. In the conclusion we are of the view that none of the reasons set out by the ld PCIT for invoking the jurisdiction u/s 263 of the Act are sustainable. The impugned order of the PCIT has to be quashed for the reason that order of the AO sought to be revised in the impugned order was neither erroneous nor prejudicial to the interest of the revenue for the reason of any lack of inquiry that the AO ought to have made in the given facts and circumstances of the case. We accordingly quash the order passed by PCIT u/s 263 of the Act and allow the appeal of the assessee.
Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act. 2. Allowability of provision for construction expenses under Section 37(1) of the Income Tax Act. 3. Adequacy of inquiry conducted by the Assessing Officer during the assessment proceedings. Detailed Analysis: 1. Jurisdiction under Section 263 of the Income Tax Act: The assessee challenged the correctness of the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, for the assessment year 2017-18. The assessee argued that the PCIT erred in law and facts in assuming jurisdiction under Section 263. The PCIT's jurisdiction was invoked on the grounds that the Assessing Officer (AO) did not make sufficient inquiries regarding the provision for construction expenses claimed by the assessee. 2. Allowability of Provision for Construction Expenses under Section 37(1): The PCIT observed that the provision for construction expenses amounting to Rs.45,22,435/- was not allowable under Section 37 of the Act as it was an unascertainable liability. The PCIT issued a show-cause notice to the assessee, who responded by stating that the provision represented proportionate estimated expenditures apportioned to the units sold and was reversed in the subsequent financial year. The assessee contended that these expenses were actual liabilities incurred and paid at the beginning of the subsequent year, and thus, should be allowed under the accrual system of accounting. The tribunal noted that under the accrual system of accounting, provisions for expenses made with reliable estimates should be allowed. The tribunal provided examples of salary and electricity expenses to illustrate that such provisions, if made with 100% reliability and paid in the subsequent financial year, are permissible under taxation law. The tribunal concluded that the provision for construction expenses made by the assessee was with reliable estimates and paid in the next financial year, hence should be allowed. 3. Adequacy of Inquiry Conducted by the Assessing Officer: The tribunal examined whether the AO conducted adequate inquiries during the assessment proceedings. The AO had issued a notice under Section 142(1) of the Act, asking the assessee to substantiate the provision for construction expenses. The assessee provided responses, including documentary evidence and explanations, which were scrutinized by the AO. The tribunal found that the AO had made sufficient inquiries and applied his mind to the issue, taking a possible view and completing the assessment accordingly. The tribunal referred to the landmark judgment of the Hon'ble Supreme Court in Malabar Industries Ltd. vs. CIT, which established that for the PCIT to exercise revisional jurisdiction under Section 263, the order of the AO must be both erroneous and prejudicial to the interest of the revenue. The tribunal held that the AO's order was neither erroneous nor prejudicial to the interest of the revenue, as the AO had conducted adequate inquiries and adopted a permissible view. Conclusion: The tribunal quashed the order passed by the PCIT under Section 263 of the Act, stating that the AO's order was not erroneous or prejudicial to the interest of the revenue. The tribunal allowed the appeal filed by the assessee, emphasizing that the provision for construction expenses was made with reliable estimates and paid in the subsequent financial year, and the AO had conducted sufficient inquiries during the assessment proceedings. Result: The appeal filed by the assessee was allowed, and the order pronounced on 11/11/2022 by placing the result on the notice board.
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