2023 (4) TMI 375 - AT - Income Tax

Revision u/s 263 by CIT - whether AO order is erroneous or prejudicial to the interest of the revenue? - various incomes in the profit and loss account having been claimed as deduction in the statement of total income - PCIT, has taken up the issue of income from guarantee commission, Fair Value Gain on financial instruments at FVTPL, interest income on redeemable financial instruments and gain on extinguishment of financial liability, on the ground that although those items of income have been credited into profit and loss account, but in the statement of total income reduced from the income - HELD THAT - AO had issued notice u/s. 143(2) and called for various details for which the assessee has submitted relevant books of accounts, tax audit reports, notes on accounts and statement of total income. AO had also issued one more notice u/s. 143(2) of the Act on 27.09.2019 and specifically called for various details in respect of claim of any other amount allowable as deduction in schedule BP, details about share premium and ICDS compliance and adjustment. For which, the assessee has filed a detailed note and explained each entry passed in compliance with IND-AS Standards and how such entries have been negated in the statement of total income, which is not affecting taxable income for the impugned assessment year. All issues questioned by the Pr. CIT including the issue of securities premium has been thoroughly examined by the Assessing Officer during assessment proceedings and after being satisfied with explanation furnished by the assessee, the AO has completed the assessment. Therefore, it cannot be said that the Assessing Officer has not verified the issue which he ought to have been verified in light of explanation 2 to section 263 Income has to be computed as per the provisions of the Income Tax Act, 1961 and the ICDS principles. In the books of accounts, an Assessee may be following any other Standard as may be prescribed by the Statute governing the Assessee. ICDS being fundamental in nature, shall be applicable for computing the income under the heads Profits Gains from Business or Profession Income from other sources. Further, to the answer to question no. 5, CBDT clarified very clearly that ICDS shall apply for computation of taxable income under the head Profits Gains from Business or Profession irrespective of the Accounting Standards adopted by the companies ie., either Accounting Standards or Ind-AS. In this case, the assessee has rightly followed IND-AS standards for the purpose of disclosure of financial assets and liabilities whereas computed income for the purpose of income tax in compliance with ICDS standards which is clearly evident from the entries passed in the books and negated in the statement of total income. Further, the entry in the books which was made on a hypothetical income which did not materialized and the entry was reversed in the next year, then it could not be brought to tax as income because only real income can be brought to tax as held by the Hon ble Supreme Court in the case of CIT vs Bokaro Steel Ltd 1998 (12) TMI 4 - SUPREME COURT As assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue. It was only the PCIT has exercised his powers and set aside the assessment order u/s. 263 of the Act, without recording any reasons as to how and why the assessment order is erroneous which caused prejudice to the interest of the revenue. PCIT, has simply set aside the issue to the Assessing Officer for further verification, without pointing out how issues discussed in their order passed u/s., 263 of the Act is caused prejudice to the interest of the revenue. PCIT is erred in invoking jurisdiction u/s. 263 of the Act and set aside the assessment order passed by the Assessing Officer u/s. 143(3) dated 31.12.2019 and thus, we quash order passed by the PCIT u/s. 263 of the Act. Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the Principal Commissioner of Income-tax (Pr. CIT) passing an order under section 263.
2. Lack of enquiry under Explanation 2 to section 263.
3. Direction to verify reduction in profit and de-recognition of income by applying ICDS provisions.
4. Taxability of security premium under section 56(2)(vii)(b).
5. Verification of correct business loss.

Summary:

1. Legality of the Principal Commissioner of Income-tax (Pr. CIT) passing an order under section 263:
The assessee argued that the Pr. CIT's order under section 263 directing the Assessing Officer (AO) to modify the assessment order was illegal, bad in law, and void. The Tribunal found that the AO had conducted thorough enquiries and considered all relevant submissions and details provided by the assessee during the assessment proceedings. Therefore, the assessment order was neither erroneous nor prejudicial to the interest of the revenue.

2. Lack of enquiry under Explanation 2 to section 263:
The Pr. CIT held that there was a lack of enquiry by the AO under Explanation 2 to section 263. However, the Tribunal observed that the AO had issued detailed notices under sections 142(1) and 143(2) and had received comprehensive responses from the assessee. The AO had examined the issues in light of the relevant facts and applicable provisions of the Act. Thus, the Tribunal concluded that the AO had conducted adequate enquiries, and the assessment order was not erroneous.

3. Direction to verify reduction in profit and de-recognition of income by applying ICDS provisions:
The Pr. CIT directed the AO to verify the reduction in profit and de-recognition of income by applying ICDS provisions. The Tribunal noted that the assessee had adopted IND-AS standards and had passed notional entries in compliance with these standards. These entries were negated in the computation of total income as per ICDS provisions. The Tribunal found that the AO had considered these details and explanations during the assessment proceedings, and there was no error in the AO's order.

4. Taxability of security premium under section 56(2)(vii)(b):
The Pr. CIT directed the AO to verify the taxability of security premium under section 56(2)(vii)(b). The Tribunal observed that there was no fresh issue of equity shares during the relevant financial year, and the increase in share premium was due to notional entries passed as per IND-AS provisions. The Tribunal concluded that the provisions of section 56(2)(vii)(b) were not applicable, and the AO's order was not erroneous.

5. Verification of correct business loss:
The Pr. CIT directed the AO to verify the correct business loss. The Tribunal found that the AO had examined the reconciliation of brought forward business losses and had accepted the assessee's claim after considering the relevant facts. Therefore, the AO's order was not erroneous.

Conclusion:
The Tribunal quashed the order passed by the Pr. CIT under section 263, holding that the assessment order passed by the AO was neither erroneous nor prejudicial to the interest of the revenue. The appeal filed by the assessee was allowed.