2023 (6) TMI 1426 - AT - Income Tax

Revision u/s 263 - As per CIT income from interest on FD was required to be added to the total income of the assessee under the head income from other source as no inquiry was made by the Assessing Officer during the assessment proceedings and not routed through Profit Loss account and the same was directly shown in the Balance Sheet as Capital Fund, under the head Reserve and Surplus -assessee claimed the exemption u/s 10(20) HELD THAT - PCIT has directed to the assessing officer to examine those issues as may have been already considered by the assessing officer, and those issues were not the subject matter of revision proceedings u/s 263 by ld PCIT, hence such direction given by ld PCIT is bad in law. On merits, the solitary grievance of ld DR for the Revenue is that interest on fixed deposit is assessable under the head income from other sources , and such interest income has been earned by the assessee, by way of making fixed deposit, from the surplus and unutilized contribution received from its members. Therefore, as per ld DR contribution received from members is exempted from tax u/s 10(20) of the Act, and not the interest on fixed deposit which was earned by the assessee by parking the exempted contribution in the bank by way of fixed deposit and said interest on fixed deposit was not routed through profit and loss account therefore it is a violation of the accounting principles. We do not agree with the proposition canvassed by ld DR for the Revenue. First of all, the bare section 10(20) of the Act, it self includes income from other sources . Interest income on fixed deposit is to be shown under the head income from other sources, however, such interest income, as per assessee, is to be utilized for achieving the main object of the assessee, hence it is exempted under section 10(20) of the Act. Said interest on fixed deposit was not routed through profit and loss account therefore it is a violation of the accounting principles - We agree with Ld. DR for the Revenue that there is violation of accounting principles reason being the interest being a revenue receipt should be routed through profit and loss account. However, at the same time, we also note that there is no loss to the revenue. Had such interest income been routed through profit and loss account, then also it would have been exempted from income tax u/s 10(20) - We do agree that there is violation of accounting principles but there is no avoidance of true tax liability. The assessee is working within the four corners of the Income Tax Act and just because the assessee has not followed correct principle of accounting does not mean that assessee is engaged in tax evading practices. Hon ble Supreme Court in the case of Malabar Industries 2000 (2) TMI 10 - SUPREME COURT held that this phrase i.e. prejudicial to the interest of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the AO is unsustainable in law . The impugned order of the PCIT has to be quashed for the reason that order of the AO sought to be revised in the impugned order was neither erroneous nor prejudicial to the interest of the revenue for the reason of any lack of inquiry that the AO ought to have made in the given facts and circumstances of the case - Decided in favour of assessee.

Issues Involved:
1. Initiation of proceedings under Section 263 of the Income Tax Act, 1961.
2. Assumption of jurisdiction under Section 263.
3. Alleged violation of natural justice principles.
4. Claim of the order being a 'change in opinion.'
5. Verification of interest on FD and its treatment in the balance sheet.
6. Inquiry and verification by the Assessing Officer (AO).
7. Setting aside the assessment order without demonstrating its erroneous nature.

Issue-wise Detailed Analysis:

1. Initiation of Proceedings under Section 263:
The assessee challenged the initiation of proceedings under Section 263 by the Principal Commissioner of Income Tax (PCIT), arguing that the proceedings were unjustified and unreasonable. The tribunal noted that the PCIT initiated the proceedings based on the observation that the AO did not make necessary inquiries regarding the interest on FD amounting to Rs. 4,21,54,142, which was directly shown in the balance sheet as Capital Fund under Reserves and Surplus instead of being routed through the Profit and Loss account.

2. Assumption of Jurisdiction under Section 263:
The assessee contended that the PCIT erroneously assumed jurisdiction under Section 263. The tribunal examined whether the conditions for invoking Section 263 were met, specifically whether the AO's order was erroneous and prejudicial to the interest of the revenue. The tribunal concluded that the AO had indeed examined the issue during the assessment stage, and the interest income was exempt under Section 10(20) of the Act, thus the AO's order was neither erroneous nor prejudicial to the revenue.

3. Alleged Violation of Natural Justice Principles:
The assessee argued that the principles of natural justice were violated as the grounds for initiating action under Section 263 were not mentioned in the show cause notice. The tribunal found that the PCIT had provided a detailed show cause notice discussing the facts and the proposed remedial action, thus there was no violation of natural justice.

4. Claim of the Order being a 'Change in Opinion':
The assessee claimed that the order under Section 263 was merely a 'change in opinion.' The tribunal noted that the PCIT's action was based on the observation that the AO did not make necessary inquiries regarding the interest on FD. However, since the AO had already examined the issue and the interest income was exempt under Section 10(20), the tribunal agreed that the PCIT's order was a change in opinion and thus not justified.

5. Verification of Interest on FD and its Treatment in the Balance Sheet:
The PCIT assumed that the AO had not verified the interest on FD amounting to Rs. 4,21,54,142, which was shown in the balance sheet as Capital Fund under Reserves and Surplus. The tribunal found that the interest income was exempt under Section 10(20) and that the AO had examined this issue during the assessment proceedings. Therefore, the AO's treatment of the interest income was correct.

6. Inquiry and Verification by the Assessing Officer (AO):
The PCIT claimed that the AO passed the assessment order without making necessary inquiries or verification. The tribunal noted that the AO had issued notices under Section 142(1) and obtained relevant documents and evidence from the assessee. Therefore, the AO had conducted the necessary inquiry, and the PCIT's claim was unfounded.

7. Setting Aside the Assessment Order without Demonstrating its Erroneous Nature:
The PCIT set aside the assessment order, directing the AO to pass a fresh order after considering the issues discussed. The tribunal found that the AO had already examined the issues, and the interest income was exempt under Section 10(20). Thus, the assessment order was not erroneous or prejudicial to the revenue, and the PCIT's direction was unjustified.

Conclusion:
The tribunal quashed the PCIT's order under Section 263, concluding that the AO's order was neither erroneous nor prejudicial to the interest of the revenue. The appeal filed by the assessee was allowed, and the tribunal emphasized that the interest income on FD was exempt under Section 10(20) and had been correctly treated by the AO. The tribunal also noted that accounting principles cannot override the provisions of the Income Tax Act.

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