2017 (12) TMI 308 - AT - Income Tax

Revision u/s 263 - allowable business expenses - training expenses incurred on the director of the Appellant company - Held that - In this case, the expenses were incurred for formal education leading to formal degree being MBA awarded in favour of Mr Arnav Kasliwal director of the Appellant company , the expenses were incurred by the assessee which definitely required greater scrutiny by the AO before allowing the same as business expenses of the assessee and to see that mandate of Section 37(1) is satisfied . Since, relevant and tangible material was not placed before the AO by the assessee during the course of assessment proceedings u/s 143(3) r.w.s. 143(2), the opinion formed by the AO could not have been proper in the absence of relevant material on record as the AO could not have made proper verifications. Even, the course content of the said course was not produced before the AO despite been asked by the AO during the course of assessment proceedings u/s 143(3) r.w.s. 143(2). Thus, in the absence of relevant and vital information as detailed above, the AO could not have made proper verifications which ought to have been made to have come to the conclusion that these are business expenses allowable u/s 37(1) being incurred wholly and exclusively for the purposes of business of the assessee, which has certainly rendered AO assessment order as erroneous as well prejudicial to the interest of Revenue amenable to interference by learned Pr. CIT by invocation of revisionary powers u/s 263 as the said expenses stood allowed as business expenses despite being absence of relevant and tangible material on record before the AO. Thus CIT has rightly invoked the provision of Section 263 - Decided against assessee.

Summary

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act, 1961.
2. Verification and allowability of training expenses incurred on the director.
3. Jurisdiction of Principal Commissioner of Income Tax (Pr. CIT) to revise the assessment order.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act, 1961:
The appeal was filed by the Assessee against the order dated 30.03.2017 passed by the Pr. CIT under Section 263 of the Income Tax Act, 1961. The Assessee contended that the Pr. CIT erred in invoking Section 263 despite the fact that a scrutiny assessment had been completed by the Income Tax Officer (ITO) under Section 143(3). The Pr. CIT issued a show cause notice on 29.10.2015, stating that the assessment was erroneous and prejudicial to the interest of the revenue due to improper verification of training expenses amounting to ?29,80,200/- incurred on the director’s education at the University of Pennsylvania, USA.

2. Verification and Allowability of Training Expenses Incurred on the Director:
The Pr. CIT observed that the expenses incurred towards tuition fees, rent, clinical fee, health insurance, and recreation fee for the undergraduate studies of the director were allowed as business expenses without proper verification by the AO. The Pr. CIT noted that the director, Mr. Arnav Kasliwal, was only 18 years old when he was appointed as a director, and the expenses incurred were for his undergraduate education, not training related to the business. The Assessee argued that these expenses were business expenses allowable under Section 37(1) of the Act, as they were incurred for the business purposes of the company. However, the Pr. CIT found that the AO failed to make proper enquiries and did not apply his mind to the relevant material before allowing the claim, making the assessment order erroneous and prejudicial to the interest of the revenue.

3. Jurisdiction of Principal Commissioner of Income Tax (Pr. CIT) to Revise the Assessment Order:
The Assessee argued that the Pr. CIT had no jurisdiction to invoke Section 263 as the AO had already examined the issue. The Assessee also contended that the Explanation 2 to Section 263, inserted by the Finance Act, 2015, could not be invoked retrospectively. The Tribunal observed that the AO did not make proper verification of the expenses and that the material placed before the AO was not sufficient to conclude that the expenses were business expenses. The Tribunal held that the Pr. CIT rightly invoked Section 263, as the AO’s assessment order was erroneous and prejudicial to the interest of the revenue due to the lack of proper enquiry and verification.

Conclusion:
The Tribunal dismissed the Assessee’s appeal, affirming the Pr. CIT’s order under Section 263. The Tribunal concluded that the AO’s assessment order was erroneous and prejudicial to the interest of the revenue, as the AO failed to make proper verification of the training expenses claimed by the Assessee. The Tribunal upheld the Pr. CIT’s direction to the AO to verify the details of the director’s training expenditure and to frame a fresh assessment de novo.