2023 (6) TMI 107 - AT - Income Tax

Revision u/s 263 - AO has not verified the expenditure claimed by the assessee particularly EDP expenditure and royalty - HELD THAT - We observe from the financial statements submitted before us that assessee has more or less claimed similar amount in the current Assessment Year compared to previous assessment year. It is brought to our notice that AO has issued various notices u/s. 143(2) and 142(1) and collected the various informations relating to TDS deduction on royalty payments as well as EDP expenses. It is not the case wherein AO has not made any enquiry, however, he has carried out enquiries but he failed to discuss the same in the Assessment Order. AO has carried out certain verification, therefore the provisions of section 263 in particular Explanation 2 cannot be invoked in the present case. Various verifications made by the Assessing Officer on royalty clearly indicates that Assessing Officer has taken one of the possible view. Therefore, in our considered view Ld.Pr.CIT has not clearly brought on record how the assessment passed u/s. 143(3) of the Act is erroneous and prejudicial to the interest of the revenue. - Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the EDP expenses should be treated as capital expenditure or revenue expenditure.
2. Whether the royalty expenses should be disallowed under section 40(a)(ia) for non-deduction of TDS and whether these expenses are capital or revenue in nature.
3. Validity of the order passed under section 263 of the Income Tax Act, 1961.

Judgment Summary:

1. EDP Expenses:
The Principal Commissioner of Income Tax (Pr.CIT) observed that the assessee claimed EDP expenses amounting to Rs. 2,84,82,194/- as revenue expenditure, which were allowed by the Assessing Officer (AO) without proper verification. The Pr.CIT opined that these expenses, being enduring in nature, should have been treated as capital expenditure. The assessee contended that the EDP expenses were for license fees, maintenance charges, and rental charges for IT equipment, which facilitated efficient business operations without creating any enduring benefit. The assessee cited various judicial precedents, including the Supreme Court's ruling in Empire Jute Co. Ltd. vs CIT, to argue that these expenses should be treated as revenue in nature. The Tribunal noted that the AO had indeed made inquiries and collected relevant information, and thus, the Pr.CIT's invocation of section 263 was not justified.

2. Royalty Expenses:
The Pr.CIT noted that the assessee debited Rs. 2,77,23,272/- as royalty expenses without deducting TDS, which should have led to disallowance under section 40(a)(ia). The assessee clarified that TDS was deducted under section 194J on these payments, as evidenced in the tax audit report and supporting documents. The Tribunal found that the AO had verified the TDS compliance and royalty payments, and the Pr.CIT's assertion of non-verification was incorrect. The Tribunal also referenced the Bombay High Court's decision in PCIT vs. TATA AIG General Insurance Co. Ltd., which treated similar expenses as revenue in nature.

3. Validity of Section 263 Order:
The Tribunal observed that the AO had made adequate inquiries and verifications regarding both EDP and royalty expenses. The Pr.CIT's order under section 263, directing a de novo assessment, was deemed unjustified as it failed to establish how the AO's order was erroneous and prejudicial to the interests of the revenue. The Tribunal highlighted that mere inadequate inquiry does not warrant revision under section 263, especially when the AO had taken a possible view based on available information.

Conclusion:
The Tribunal set aside the order passed under section 263, allowing the appeal filed by the assessee. The Tribunal concluded that the AO had conducted sufficient inquiries and the Pr.CIT's order lacked a clear basis for treating the AO's assessment as erroneous and prejudicial to the revenue's interests. The appeal was allowed, and the order under section 263 was quashed.