2016 (3) TMI 289 - AT - Income Tax

Validity of exercising jurisdiction u/s.263 - transfer of capital asset inherited - Held that - In this case before us, the assessment order passed by the AO lacks judicial strength to stand. It is not a case where the order is short but is not supported by judicial strength. It is in this view of the matter that we feel that the learned CIT has correctly exercised his revisional jurisdiction under s. 263. The line of difference between ss. 263 and 264 is that while the former can be invoked to remove the prejudice caused to the State the latter can be invoked to remove the prejudice caused to the assessee. The provisions of s. 263 would lose significance if they were to be interpreted in a manner that prevented the CIT from revising the erroneous order passed by the AO, which was prejudicial to the interest of the Revenue. In fact, such a course would be counter-productive as it would have the effect of promoting arbitrariness in the decisions of the AOs and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the Revenue, are allowed to stand, the consequences would be disastrous in that the honest taxpayers would be required to pay more than others to compensate for the loss caused by such erroneous orders. For this reason also, we are of the view that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind or without making requisite inquiries will satisfy the requirement of the order being erroneous and prejudicial to the interest of the Revenue within the meaning of s. 263. Thus the order passed by Assessing Officer is prejudicial to the interest of the Revenue. Thus, the Ld. CIT is justified in exercising the jurisdiction provided to him u/s.263 of the Act. Accordingly, the legal issue raised by the regarding validity of exercising jurisdiction u/s.263 by CIT is rejected.- Decided against assessee Application of the principle of diversion of income by overriding title - expenditure claimed on transfer of property inherited from the father - cost incurred on acquisition by the successor - Held that - The true test for the application of the rule of diversion of income by an overriding charge is whether the amount sought to be deducted in truth never reached the assessee as his income. Further, obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow; it is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one s own income, which has been received and is since applied. In our view, therefore, the exclusion of the payment made by the assessee, in this case, by applying the principle of diversion of income by overriding title cannot be allowed. However, in our opinion the entailing a cost to the legatee/s if only the cost to the previous owner that would stand to be considered as the cost of acquisition , and there is no scope for adding thereto the cost, if any, incurred on acquisition by the successor, which would be in fact his cost. The same could not be considered as a cost of improvement so as to qualify, for deduction U/s.48 of the Act. Even there is no evidence with regard to expenses like professional fees paid to Shri M.S.Narayanan ₹ 3,20,000/-, Commission paid to Shri N.D.Basavaraja ₹ 4,00,000/- and other expenses ₹ 32,500/-. Hence, these expenses cannot be allowed as a cost to transfer the capital asset. - Decided against assessee

Issues Involved:
1. Validity of invoking Section 263 of the Income Tax Act by the Commissioner of Income Tax (CIT).
2. Deductibility of Rs. 68,02,500 as expenditure in connection with the transfer of property.
3. Application of the principle of diversion of income by overriding title.

Issue-wise Detailed Analysis:

1. Validity of Invoking Section 263 of the Income Tax Act by the Commissioner of Income Tax (CIT):
The CIT invoked Section 263 of the Income Tax Act, 1961, asserting that the assessment order framed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue. The CIT observed that the AO accepted the sale consideration of Rs. 8,11,97,500 instead of Rs. 8,80,00,000 as evidenced by the sale deed. The CIT relied on the judgments in the cases of Ashok Leyland Ltd. Vs Commissioner of Income-tax (260 ITR 599) and Malabar Industrial Company Ltd Vs CIT (243 ITR 83) to support the intervention under Section 263, emphasizing that the AO failed to examine the claim in depth, leading to loss of revenue. The Tribunal upheld the CIT's action, stating that the AO's order was based on an incorrect assumption of facts and lacked proper inquiry, thus justifying the revision under Section 263.

2. Deductibility of Rs. 68,02,500 as Expenditure in Connection with the Transfer of Property:
The assessee claimed Rs. 68,02,500 as expenditure incurred wholly and exclusively in connection with the transfer of property. The CIT disallowed this claim, arguing that the expenses were not incurred in connection with the transfer. The Tribunal examined Section 48 of the Income Tax Act, which outlines the permissible deductions from the full value of consideration received on the transfer of a capital asset. The Tribunal concluded that the payments made to various charities and individuals as per the will of the assessee's father did not qualify as expenditure incurred wholly and exclusively in connection with the transfer. Additionally, the Tribunal found no evidence supporting the expenses like professional fees, commission, and other expenses claimed by the assessee, leading to their disallowance.

3. Application of the Principle of Diversion of Income by Overriding Title:
The assessee argued that the payments made as per the will amounted to a diversion of income by overriding title, thus deductible. The Tribunal referred to the Supreme Court's decision in CIT, Bombay City II v. Sitaldas Tirathdas (41 ITR 367), which clarified that only amounts diverted before reaching the assessee as income could be deducted. The Tribunal found that the payments made by the assessee were obligations to be discharged after the income was received, thus not qualifying for deduction under the principle of diversion of income by overriding title. The Tribunal emphasized that the payments were an application of income rather than a diversion before it reached the assessee.

Conclusion:
The Tribunal dismissed the appeal, affirming the CIT's invocation of Section 263 and disallowing the claimed deductions. The Tribunal held that the AO's order was erroneous and prejudicial to the interest of the Revenue, and the claimed expenses did not qualify as deductions under Section 48 or the principle of diversion of income by overriding title. The order was pronounced on February 10, 2016, in Chennai.

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