2023 (4) TMI 629 - AT - Income Tax

Revision u/s 263 - AO has not discussed in the final assessment order about the additions proposed in the draft assessment order - Dispute of PCIT is that had the FAO accepted the submissions of the assessee made in response to the draft assessment order, the generally accepted principles while framing the assessment order, is to discuss the issue chronologically and then pass the judgement whether or not the assessee s submission is acceptable and if it is acceptable whether it is in accordance with law - HELD THAT - We defer from the above observation of the ld. PCIT. When the reply of the assessee is not in accordance with law, then only it will be reflected in the assessment order describing; what was the proposal, what was the reply and as to how the reply of the assessee was found not in accordance with law. Naturally, when the AO considered the reply of the assessee was in accordance with law, he has described in the final assessment order and just because the AO has not elaborately discussed the addition proposed in the draft assessment order, reply of the assessee, whether the reply is in accordance with law, etc. the final assessment order cannot be held that as erroneous and prejudicial to the interest of the Revenue. Under the above facts and circumstances of the case, we are of the opinion that the order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of Revenue. Thus, the revision order passed by the ld. PCIT under section 263 of the Act is quashed.Appeal filed by the assessee is allowed.

Summary

Issues involved:
The judgment involves the issue of interest expense disallowance due to interest-free advances given to group companies, and the subsequent revision under section 263 of the Income Tax Act, 1961.

Interest Expense Disallowance:
The assessee company filed its return of income for the assessment year 2018-19 admitting income of NIL, with the case selected for limited scrutiny. The ld. PCIT noted that the assessee claimed interest expense but did not charge/earn any interest on advances given to group companies, leading to a proposed disallowance of proportionate interest. The assessee argued that the advances were made out of interest-free funds, supported by ledger accounts and confirmations. The ld. PCIT served a show cause notice, and the assessee submitted detailed replies. The issue was not considered in the assessment order, leading the ld. PCIT to set aside the assessment order and direct a reassessment.

Revision under Section 263:
The ld. PCIT observed that the final assessment order was silent on the issue of interest payment disallowance, which was part of the scrutiny assessment proceedings. The ld. PCIT set aside the assessment order, stating it was erroneous and prejudicial to the revenue's interest. The assessee appealed, arguing that the order was not erroneous as the Assessing Officer had considered the issue during assessment proceedings and dropped the proposed additions after examining the details provided by the assessee. The Tribunal held that the final assessment order need not detail all aspects discussed during scrutiny, and the Assessing Officer's acceptance of the assessee's reply did not render the order erroneous or prejudicial to revenue.

Conclusion:
The Tribunal quashed the revision order under section 263, stating that the Assessing Officer's decision to drop the proposed additions after considering the assessee's reply was valid. The Tribunal emphasized that the absence of detailed discussion on proposed additions in the final assessment order did not make it erroneous or prejudicial to revenue. Therefore, the appeal filed by the assessee was allowed, and the revision order was set aside.