2018 (10) TMI 1443 - AT - Income Tax

Revision u/s 263 - entitled for deduction u/s 80IA/80IC - disallowance of depreciation - Held that - If we consider the facts and circumstances of the present case, then it would reveal that the assessee is entitled for deduction under section 80IA/80IC. The moment depreciation is being disallowed, it will be added to the total income of the assessee, and accordingly enhanced deduction would be given to the assessee. Therefore, order of the Commissioner is not sustainable on this issue. The assessee has raised specific plea before the Commissioner also, but without recording any logical finding the Commissioner just simply ignored it. He observed that it was not relevant in the present context, whereas, fulfillment of one of the conditions, which was very much relevant. No doubt the AO has issued a questionnaire inviting explanation of the assessee with regard to the details of the assets added in the block of assets. But he failed to conduct an inquiry whether the plant was put to use or not installed in the first half for granting of depreciation. As far as contentions of the assessee that proceedings had merged with proceedings pending before the ld.CIT(A) relating to computation of deduction admissible under section 80IA/IC is concerned, we are of the view that both the issues are separate issues. The eligible profit for grant of deduction under section 80IA/80IC could have many components viz. rental income, interest income, scrap sales, job charges whose exclusion or inclusion would lead to a controversy, which might be pending before CIT(A). How, the resolving of that controversy would give an idea to the ld.CIT that the issue of depreciation deserves to be examined and certain depreciation has to be disallowed to the assessee. This is a peripheral issue, not directly linked which could be construed as merged in that proceeding. No merit in this fold of contentions. Perusal of the show cause issued under section 263 does not indicate that it was issued on the instructions of audit report. It was issued on application of independent mind upon the record. The auditor could be an informer. Had it been treated as gospel truth and action under section 263 is being taken, then, the assessee would be justified. But where on an information of the auditor or from any other source, the competent authority, applied his independent mind and then taken action under section 263, then such action would not be declared illegal on the ground that it was taken on the auditor s objection. The requirement under the law is that on the information come to the possession of the competent authority ought to be construed by him and mind should be applied independently. It should not be under tutelage of any other authority. Therefore, we reject all other alternative contentions of the assessee. However on non-fulfillment of twin conditions, i.e. no prejudice is being caused to the Revenue on account of grant of deprecation, we allow this ground of appeal and quash the order passed under section 263 of the Income Tax Act, 1961. - Decided in favour of assessee.

Issues Involved:
1. Legitimacy of the action under section 263 of the Income Tax Act, 1961.
2. Alleged failure of the Assessing Officer (AO) to conduct proper inquiries and verification.
3. Impact of the disallowance of depreciation on the assessee's eligible profit for deduction under section 80IA/80IC.
4. Whether the issue of depreciation had merged with other issues pending before the CIT(A).
5. Whether the initiation of proceedings under section 263 was based on an audit objection or independent assessment.

Issue-wise Detailed Analysis:

1. Legitimacy of the action under section 263:
The principal issue revolves around whether the Commissioner of Income Tax (CIT) was justified in taking cognizance under section 263 of the Income Tax Act, 1961, and setting aside the assessment order with a direction to make a fresh assessment. The CIT formed an opinion that the assessment order was erroneous and prejudicial to the interests of the Revenue, necessitating action under section 263. The Tribunal noted that the CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue, and both conditions must be fulfilled for section 263 to be invoked.

2. Alleged failure of the AO to conduct proper inquiries and verification:
The CIT observed that the AO had allowed depreciation at the rate of 80% on certain assets without proper inquiry into whether these assets were operational independently before the installation of certain parts in the latter half of the year. The Tribunal acknowledged that the AO had issued a questionnaire and obtained details from the assessee but failed to conduct an inquiry on whether the plant was put to use or not. This lack of inquiry rendered the AO's order erroneous.

3. Impact of the disallowance of depreciation on the assessee's eligible profit for deduction under section 80IA/80IC:
The assessee argued that disallowance of depreciation would be revenue-neutral because the eligible profit for deduction under section 80IA/80IC would increase correspondingly. The Tribunal agreed with this contention, noting that the moment depreciation is disallowed, it will be added to the total income, enhancing the deduction under section 80IA/80IC. Therefore, there was no prejudice to the Revenue, and the CIT's order was not sustainable on this issue.

4. Whether the issue of depreciation had merged with other issues pending before the CIT(A):
The assessee contended that the issue of depreciation had merged with the computation of eligible profit for deduction under section 80IA/80IC, which was pending before the CIT(A). The Tribunal rejected this contention, stating that the issues were separate and had no direct link. The eligible profit for deduction under section 80IA/80IC could involve various components, and resolving those controversies would not provide insight into the depreciation issue.

5. Whether the initiation of proceedings under section 263 was based on an audit objection or independent assessment:
The assessee argued that the proceedings under section 263 were initiated based on an audit objection. However, the Tribunal found that the show cause notice did not indicate it was issued on the instructions of an audit report. The CIT had applied his independent mind upon the record, and the action under section 263 was not taken solely based on the auditor's objection.

Conclusion:
The Tribunal concluded that the CIT's order under section 263 was not justified as there was no prejudice to the Revenue due to the revenue-neutral nature of the disallowance of depreciation. Consequently, the Tribunal quashed the order passed under section 263 of the Income Tax Act, 1961, and allowed the appeal of the assessee.

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