2019 (7) TMI 747 - AT - Income Tax

Revision u/s 263 - notices were issued by Ld. CIT on four issues i.e deduction U/s. 35D; taxability of JVs; depreciation on Plant Machinery and notional gain on capital items (Forex). - Ld. CIT on verification of the assessment records held that the Ld. AO had framed the assessment in the case of the assessee for both the AYs mechanically and without application of mind which is prejudicial to the interest of Revenue. Deduction U/s. 35D - expenses were incurred during the assessment year 2008-09 - alleged that assessee was not an industrial undertaking but Civil Contractor - HELD THAT - Though the assessee has incurred the expenditure during the AY 2008-09 wherein the assessee was not entitled for the claim of deduction U/s. 35D as the assessee was not an industrial undertaking however the Act was amended and the word industrial was omitted by the Finance Act 2008 w.e.f 1/04/2009. The expenditure incurred by the assessee was subsequent to the 31st Day of March 1970. In this situation the assessee has fulfilled all the conditions stipulated under the Act for the residual period viz. AY 2010-11 2011-12 and 2012-13. Therefore there is no reason why the benefit of section 35D should not be allowed to the assessee for the AY 2010-11 to 2012-13. Hence we do not find any error in the order of the Ld. AO for having granted the benefit of deduction U/s. 35.D of the Act for the AY 2010-11 and 2011-12. CIT is not right in his rem to invoke the provisions of section 263 on this count in the case of the assessee for both the relevant AYs. Share of profits from the Joint Ventures - CIT observed that the assessee had reduced the share of profits earned from JV projects while computing it s loss declared in the return of income - CIT opined that the Ld. AO had blindly accepted the version of the assessee without primarily examining the issue whether the profits had been separately assessed or not - HELD THAT - No merit in the order of the Ld. CIT on this issue because the CIT was at liberty to call for any information from the assessee or grant an opportunity to the assessee to furnish any such requisite details. However in the case of the assessee the CIT had simply presumed that the assessee might not have assessed the profits derived from the JV projects separately and therefore invoked the provisions of section 263 which in our view is not appropriate. Therefore we hereby hold that the reason for invoking the provisions of section 263 on this issue is not warranted. Depreciation on Plant Machinery and Notional gain - HELD THAT - As per section 43A any gain or loss on account of changes in rate of exchange of currency shall go in enhancing or reducing the cost of capital asset acquired and shall not be adjusted to the taxable income. Notional gain on capital items (Forex) is notional gain on capital items due to change in foreign currency rates thus gain is not actual gain and moreover it is notional gain on capital items and hence the same is not taxable under Income Tax Act 1961 . CIT without verifying the submissions of the assessee hastily passed orders for the both AYs 2010-11 and 2011-12 which is not appropriate. Therefore we do not find any merit in the action of the Ld. CIT for invoking his powers U/s. 263 of the Act on this issue also. Since all the reasons cited by the Ld. CIT for invoking his powers U/s. 263 of the Act are found to be devoid of merits we hereby quash the order passed by the Ld. CIT U/s. 263 of the Act in the case of the assessee for both the AYs 2010-11 and 2011-12. - Assessee appeal allowed

Summary

Issues:
1. Invocation of powers under Section 263 of the Income Tax Act by Ld. CIT (A).
2. Eligibility for deduction under Section 35D of the Act.
3. Taxability of share of profits earned from Joint Ventures projects.
4. Entitlement for depreciation on Plant & Machinery.
5. Treatment of notional gain on capital items (Forex).

Issue 1: Invocation of powers under Section 263
The Ld. CIT invoked powers under Section 263 of the Income Tax Act for both AYs, alleging that the assessment by Ld. AO was mechanical and without proper application of mind, prejudicial to revenue. The Ld. CIT directed a fresh assessment by examining specific issues.

Issue 2: Deduction under Section 35D
The assessee claimed deduction under Section 35D of the Act for AYs 2010-11 and 2011-12. The Ld. CIT contended that the assessee, being a Civil Contractor, was not an 'industrial undertaking' and thus ineligible for the deduction. However, the Tribunal noted that the Act was amended, omitting 'industrial' from the section, and the assessee fulfilled all conditions for the residual period, allowing the benefit of Section 35D.

Issue 3: Taxability of share of profits from Joint Ventures
The Ld. CIT questioned the treatment of profits earned from Joint Ventures by the assessee. The Tribunal found that the Ld. CIT's presumption that profits were not separately assessed was unfounded, as the Ld. CIT could have sought clarification or evidence from the assessee. The Tribunal held that invoking Section 263 on this issue was unwarranted.

Issue 4 & 5: Depreciation on Plant & Machinery and Notional Gain
The Ld. CIT disallowed depreciation claimed on Plant & Machinery and notional gain on capital items (Forex). The Tribunal observed that the Ld. CIT passed orders hastily without verifying the submissions of the assessee. It held that the Ld. CIT's actions were not appropriate, and there was no merit in invoking Section 263 on these grounds.

In conclusion, the Tribunal found all reasons cited by the Ld. CIT for invoking Section 263 to be devoid of merit and quashed the order for both AYs 2010-11 and 2011-12, allowing the appeals of the assessee. The judgment was pronounced on 12th July 2019.