2023 (2) TMI 1109 - AT - Income Tax

Revision u/s 263 - Scope of audit objection - licence fee payments to the Municipal Corporation, Ambala during the year under consideration was not properly verified by the AO - HELD THAT - The assessee, in this case, has been subjected to multiple litigation only because of non-settlement of audit objection. Firstly, the audit party mistook the figures and held that 2/3 of the expenditure was a deferred revenue expenditure which was to be disallowed. However, the said objection was not admitted by the Assessing Officer. Since, the said audit objection was not settled by the audit party, therefore, the assessee was subjected to reassessment proceedings. Even no addition was made in the reassessment proceedings and the Assessing Officer time and again wrote letters to the CCIT to settle the audit objection. However, since the ITO(Audit) did not agree to settle the objection, the ld. PCIT initiated the revision proceedings u/s 263 of the Act stating that the expenditure pertained to the earlier year as against earlier objection that the 2/3 of the total expenditure booked on account of the municipal fees was not allowable being deferred revenue expenditure. Even, since the assessee had to litigate as the agreement did not mature and arbitration award has been passed, about which the assessee has claimed that the award amount will be offered for taxation. Any expenditure incurred by the assessee has also to be deducted and to be allowed. The assessee explained that the agreement with municipal corporation was entered on 28.02.2011 and that no amount was incurred in the financial year 2010-11 and the expenditure was rightly booked in the year 2011-12, therefore, we do not find justification on the part of the ld. PCIT in exercising his revision jurisdiction u/s 263 of the Act in this case. The entire exercise seems to have been done because of audit objection only. Since, the Assessing Officer had duly enquired about the matter and was satisfied with the explanation given by the assessee, the ld. PCIT, in our view, has wrongly exercised his revision jurisdiction on the issue which is nothing but change of opinion, that too, at the instance of audit party. In this case, even the AO did not admit to the audit objections rather requested to settle the audit objection. Therefore, the revision jurisdiction exercised by the ld. PCIT cannot be held to be justified. The revision order passed u/s 263 of the Act is, therefore, quashed. Appeal of assessee allowed.

Summary

Issues:
1. Revision jurisdiction under section 263 of the Income Tax Act regarding the claim of license fee payments.
2. Proper verification and investigation of the license fee claim by the Assessing Officer.
3. Disallowance of license fee payments as direct expenditure.
4. Settlement of audit objections and its impact on assessment proceedings.
5. Justification of exercising revision jurisdiction based on audit objections.

Issue 1: Revision Jurisdiction under Section 263
The appeal was against the Principal Commissioner of Income Tax's order under section 263 of the Income Tax Act, challenging the action taken regarding the claim of license fee payments by the assessee. The revision jurisdiction was exercised by the PCIT based on the inadequacy of verification and investigation by the Assessing Officer.

Issue 2: Proper Verification and Investigation
The PCIT observed that the Assessing Officer had not thoroughly examined the claim of license fee payments to the Municipal Corporation, Ambala. The PCIT highlighted that the Assessing Officer did not adequately verify the claim, leading to the initiation of revision proceedings under section 263.

Issue 3: Disallowance of License Fee Payments
The PCIT held that the license fee payments claimed by the assessee were not allowable as direct expenditure. The PCIT argued that the payments were actually outstanding disputed claims/recoverables and should have been reflected in the balance sheet under specific categories, rather than being claimed as direct expenditure in the profit and loss account.

Issue 4: Settlement of Audit Objections
The audit objections raised regarding the license fee payments led to a series of events, including reassessment proceedings and correspondence between the Assessing Officer and the CCIT to settle the objections. The failure to resolve the audit objections prompted the PCIT to initiate revision proceedings under section 263.

Issue 5: Justification of Exercising Revision Jurisdiction
The PCIT's decision to exercise revision jurisdiction based on the audit objections was questioned in the appeal. The Tribunal found that the PCIT's intervention was unwarranted as the Assessing Officer had already considered and accepted the explanations provided by the assessee. The Tribunal concluded that the PCIT's revision order was unjustified and quashed it, allowing the appeal of the assessee.

The judgment highlighted the importance of thorough verification and investigation by tax authorities, the impact of audit objections on assessment proceedings, and the need for justifiable grounds to exercise revision jurisdiction under the Income Tax Act.