2012 (1) TMI 86 - HC - Income Tax

Contract Construction activity - Commissioner exercised revisionary powers u/s 263 on the ground that A.O. had not examined whether the assessee was following completion method or percentage completion method and whether the said expenditure could be claimed as an expense in the A.Y. in question - non-inquiry by the Assessing Officer with regard to squared up loans Tribunal quashed the order of Commissioner on ground that expenditure would be allowed as assessee has commenced business activities Held that - There was error on the part of the A.O. in not making verification and inquiries, regarding both the aspects discussed aforesaid, which were required and the assessment order was prejudicial to the interest of the Revenue. The tribunal has completely ignored the said aspect and has proceeded on an entirely different basis which was not edifice and foundation of the order passed by the CIT u/s 263 of the Act. Order of Tribunal quashing CIT order is set aside Decided in favor of Revenue.

Issues:
1. Appeal against the order of the Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961.
2. Substantial question of law regarding the Tribunal's decision to set aside the order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act.
3. Relevance of execution of perpetual lease deed for commencement of business activities.
4. Allowance of advertisement and publicity expenses in the assessment year.
5. Failure of the Assessing Officer to inquire into fresh loans amounting to a substantial sum.

Analysis:
1. The High Court heard an appeal by the Revenue against the Income Tax Appellate Tribunal's order related to the assessment year 2005-06. The main issue raised was whether the Tribunal was correct in setting aside the order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act.

2. The Tribunal held that the execution of the perpetual lease deed was not crucial for determining if the respondent-assessee had commenced business activities. It emphasized that the primary business activity undertaken by the company was the purchase of a commercial plot for development.

3. The Tribunal quashed the Commissioner's order under Section 263, stating that advertisement and publicity expenses related to the commercial plot should be allowed in the assessment year. It also criticized the Commissioner for not inquiring into squared up loans, highlighting the Assessing Officer's failure in conducting necessary investigations.

4. The Commissioner's decision was based on the lack of disclosure by the assessee regarding the method followed for expenses. The Commissioner noted errors in the Assessing Officer's approach, emphasizing the need for verification and inquiries as per Accounting Standard 7. The High Court found that the Tribunal overlooked these critical aspects in its order.

5. The Commissioner also pointed out the Assessing Officer's oversight in examining substantial fresh loans. The failure to conduct proper inquiries and investigations was deemed prejudicial to the Revenue's interests. The High Court agreed that such omissions made the order erroneous and unsustainable.

6. The High Court ruled in favor of the Revenue, emphasizing that the Assessing Officer needed to re-examine the issues raised by the Commissioner. The Court clarified that any additions to the assessment would depend on the Assessing Officer's findings after considering relevant documents and explanations from the assessee. No opinion was expressed on the justification of potential additions.

7. In conclusion, the High Court answered the substantial question of law in the negative, supporting the Revenue's position against the respondent-assessee. The Court highlighted the importance of proper inquiries and investigations by the Assessing Officer to ensure a fair and accurate assessment process.

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