2013 (5) TMI 609 - AT - Income Tax

Jurisdiction power u/s 263 by CIT(A) - CIT(A) directing AO to disallow deduction of brokerage expenses - Held that - On the basis of the documents placed on record before the CIT and also here the service charges are claimed in the course of regular business transactions for helping the assessee in sale of the property and 2% commission is reasonable when compared to the other quotations placed on record. Further, there is no prejudice caused to the Revenue as the same amount was offered to tax in the hands of the M/s. Ovira Logistics Pvt. Ltd. therefore, unable to agree with the findings of the CIT and his direction in this regard to disallow the entire amount. Claim of depreciation allowed by the AO was found to be not correct as there being a business loss even current year s depreciation was not liable to be set off against STCG and the same is liable to be carried forward - Held that - With reference to the issue of claim of unabsorbed depreciation and the findings of the CIT order of the CIT is erroneous in the eyes of law. As the AO did examined the claim of depreciation and allowed set off according to the provisions of the Act. The CIT s reliance on section 32(2) is not only misleading and wrong but also against the provisions of sections 70 & 71 which allows such set off. As decided CIT vs. RPIL Signalling Systems Ltd. 2008 (9) TMI 583 - Madras High Court wherein held that the assessee was entitled to set off the unabsorbed depreciation brought forward against the capital gains. There is no need to discuss provisions of sections 70, 71 & 32(2) elaborately as the CIT erred in coming to the conclusion that current year s depreciation cannot be allowed to be set off against capital gains. Therefore the observations and directions of the CIT are against the provisions of law itself. Thus no hesitation in cancelling the order u/s 263 and allowing the grounds raised by the assessee.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Disallowance of brokerage expenses.
3. Set off of current year and brought forward depreciation against capital gains.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act, 1961:
The primary contention was whether the Commissioner of Income Tax (CIT) was justified in assuming jurisdiction under Section 263, which allows revision of orders prejudicial to the interest of the revenue. The assessee argued that the basic conditions for issuing notice under Section 263 were not satisfied and that the Assessing Officer's (AO) order was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal found that the AO had examined the relevant details during the assessment proceedings, and the CIT's invocation of Section 263 was not justified. The Tribunal concluded that the CIT's order was erroneous in law.

2. Disallowance of Brokerage Expenses:
The CIT directed the AO to disallow brokerage expenses of Rs. 35,26,400/- paid to M/s. Ovira Logistics Pvt. Ltd., a company holding 99% shares of the assessee company. The CIT opined that the AO had not examined the reasonableness and adequacy of the expenses paid to the specified person under Section 40A(2)(b). The Tribunal noted that the assessee had disclosed the relationship and the brokerage payment in its Director's Report and Audit Report, and the AO was aware of these transactions. The Tribunal found that the brokerage payment was reasonable and in line with market rates, and there was no tax evasion as the income was duly offered to tax by M/s. Ovira Logistics Pvt. Ltd. The Tribunal held that the CIT's direction to disallow the brokerage expenses was not justified.

3. Set off of Current Year and Brought Forward Depreciation Against Capital Gains:
The CIT concluded that the current year's depreciation and brought forward depreciation could not be adjusted against capital gains, contrary to the provisions of the Income Tax Act. The CIT relied on Section 32(2), which he interpreted to mean that depreciation could only be set off against business profits. However, the Tribunal noted that the AO had correctly allowed the set off of unabsorbed depreciation against capital gains as per Sections 70 and 71 of the Act. The Tribunal referenced the case of CIT vs. RPIL Signalling Systems Ltd. (328 ITR 283), where it was held that unabsorbed depreciation could be set off against capital gains. The Tribunal found the CIT's interpretation erroneous and upheld the AO's original order allowing the set off.

Conclusion:
The Tribunal found that the CIT's order under Section 263 was not justified on both counts - disallowance of brokerage expenses and the set off of depreciation against capital gains. The Tribunal canceled the CIT's order and allowed the appeal filed by the assessee. The order was pronounced in the open court on 10th May 2013.