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2023 (4) TMI 460 - AT - Income TaxRevision u/s 263 - additions towards disallowance of advances written off and capital loss - As per CIT AO has failed to make a complete verification with respect to loss on investment debited to P L A/c in right perspective of law, although, the said loss is in the nature of capital loss, which cannot be allowed as deduction while computing profits and gains from business or profession - HELD THAT - In this case, there is no dispute with regard to the fact that one of the objectives of the assessee s company is to lend and advance money to its subsidiary, group and associate and sister concerns and in line with its objects, the assessee has made investment in the shares of group companies to augment its business. Thus investment made by the assessee in the group companies is in the nature of loans and advances, although, the said investment has been classified as capital, but the real character of the transaction was those akin to loans in a normal course of the business, and thus, any loss on sale of said investment should be treated as business loss but not capital loss and this view is supported by the decision of Electronic Corporation of Tamil Nadu Ltd. 2018 (12) TMI 47 - MADRAS HIGH COURT where it has been clearly held that where Revenue authorities held that claim of loss accruing or assigning as a result on sale of shares was a capital loss not eligible for deduction in computation of business income Amount advanced by the assessee to various industries were towards working capital and real character of transaction was those akin to loan and not equity investment, impugned order deserved to be set aside. In this case, as held by us, it is not a case of lack of enquiry, but it can be at best considered as inadequate enquiry and for this purpose, the powers u/s.263 cannot be exercised. Therefore, assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue and thus, we quashed the order passed by the PCIT u/s.263 - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act. 2. Erroneous and prejudicial assessment order. 3. Classification and treatment of loss on sale of investment. 4. Principles of natural justice and adequate opportunity. Issue-wise Detailed Analysis: 1. Jurisdiction under Section 263 of the Income Tax Act: The appeal challenges the order of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961. The assessee contends that the PCIT erred in assuming jurisdiction under Section 263, arguing that the twin conditions of error and prejudice to the interest of the Revenue were not satisfied. The PCIT's jurisdiction under Section 263 was invoked on the basis that the Assessing Officer (AO) did not make proper inquiries regarding the loss on sale of investments, which was claimed as a revenue loss by the assessee. 2. Erroneous and prejudicial assessment order: The PCIT observed that the AO failed to verify the nature of the loss on sale of investments, which was debited to the Profit and Loss account. The PCIT deemed the assessment order erroneous and prejudicial to the interest of the Revenue because the AO did not add back the capital loss to the business income. The PCIT cited Explanation 2(a) to Section 263, which states that an order is erroneous if it is passed without making necessary inquiries or verification. 3. Classification and treatment of loss on sale of investment: The assessee argued that the investment in M/s. Archaen Chemical Industries Pvt. Ltd. (ACIPL) was made to augment its business, and the loss on sale of this investment should be treated as a business loss. The PCIT, however, concluded that the investment in shares is a capital asset and any loss on its sale should be treated as a capital loss. The PCIT rejected the assessee's reliance on Accounting Standard 13 (AS-13) and judicial precedents, asserting that the treatment under the Income Tax Act cannot be determined by accounting standards. 4. Principles of natural justice and adequate opportunity: The assessee contended that the PCIT did not provide a proper opportunity before passing the revision order, violating the principles of natural justice. The PCIT, however, noted that the AO did not conduct a thorough verification of the loss on investment during the assessment, which warranted the revision under Section 263. Conclusion: The Tribunal, after considering the submissions and relevant judicial precedents, concluded that the AO had indeed examined the issue of loss on sale of investment during the assessment proceedings. The Tribunal noted that the AO had issued multiple notices under Sections 143(2) and 142(1), and the assessee had provided detailed replies and explanations. The Tribunal held that merely because the AO did not discuss the issue in the assessment order does not render the order erroneous or prejudicial to the interest of the Revenue. The Tribunal relied on the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which states that the PCIT cannot revise an assessment order unless it is both erroneous and prejudicial to the interest of the Revenue. The Tribunal also referred to the decision of the Bombay High Court in CIT v. Colgate Palmolive (India) Ltd., which supported the assessee's claim that loss on investment in a subsidiary for business purposes should be treated as a business loss. The Tribunal quashed the order passed by the PCIT under Section 263, allowing the appeal filed by the assessee. Order: The appeal filed by the assessee is allowed, and the order passed by the PCIT under Section 263 of the Income Tax Act is quashed.
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