2019 (11) TMI 691 - AT - Income Tax

Validity of exercise of jurisdiction u/s 263 - whether the AO has conducted an enquiry on these two issues i.e. applicability of provisions of section 40A(3) as well as allowability of deduction u/s 80C? - HELD THAT - We find that though the AO has passed a very lengthy order running into 43 pages, however, the issue of applicability of section 40A(3) as well as the correctness of the claim of deduction under section 80C were not taken up for verification by the AO. Thus the assessment order is completely silent on these issues and there is nothing on record to suggest that the AO has even raised any query on these two issues. Thus, the case of the assessee falls in the category of complete lack of enquiry on these two issues. Therefore, we do not find any merit or substance in ground no. 1 of the appeal of the assessee. The lack of enquiry on the part of the AO renders the assessment order erroneous in so far as prejudicial to the interests of the revenue. Accordingly, the exercise of jurisdiction under section 263 of the IT Act is valid and proper. Disallowance u/s 40A(3) in respect of the payment made in cash - HELD THAT - Once the assessee has filed the return of income declaring the income based on the business results shown in the books of account then the AO is required to examine the correctness of the return of income and claim of the assessee in the context of business results shown as per the books of account. The assessee did not claim the applicability of the provisions of section 44AD either before the AO or before the ld. PCIT. Even otherwise, this plea of the assessee is also required to be verified based on the relevant facts as recorded in the books of account. Therefore, merely because the turnover of the assessee for the year under consideration is less than the limit provided under section 44AD, would not preclude the PCIT to exercise his jurisdiction under section 263 regarding violation of provisions of section 40A(3). The payment of cash for purchase of plots of land shown as stock-in-trade is not in dispute, therefore, the explanation furnished by the assessee are required to be examined in the light of the relevant provisions of the Act and Rules. Though the ld. PCIT has observed that the cash payment is not allowable under section 40A(3), however, we direct the AO to verify the explanation of the assessee and then decide the issue of disallowance under section 40A(3) Disallowance of deduction under section 80C - HELD THAT - Since the assessee has now filed the receipt of payment of premium towards Life Insurance which was not filed either before the AO or before the ld. PCIT, therefore, we direct the AO to consider the claim of deduction under section 80C after verification of the payment of life insurance premium. Accordingly the impugned order of the ld. PCIT is modified.

Summary

Issues Involved:
1. Validity of exercise of jurisdiction under section 263.
2. Disallowance under section 40A(3) of the Income Tax Act.
3. Disallowance of deduction under section 80C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Exercise of Jurisdiction under Section 263:
The assessee challenged the revision order passed by the Principal Commissioner of Income Tax (PCIT) under section 263, arguing that the original assessment order under section 143(3) was neither erroneous nor prejudicial to the interest of the Revenue. The assessee contended that the Assessing Officer (AO) had examined the books of account and relevant records before passing the assessment order. The assessee relied on various judicial precedents, including the Hon'ble Supreme Court's decision in Malabar Industrial Co. Ltd. vs. CIT, asserting that the PCIT cannot invoke section 263 merely because he disagrees with the AO's view. The Revenue argued that there was a complete lack of enquiry by the AO on the issues of section 40A(3) and section 80C, rendering the assessment order erroneous and prejudicial to the interests of the Revenue. The Tribunal held that the AO had not conducted any enquiry on these issues, and thus, the PCIT's exercise of jurisdiction under section 263 was valid and proper.

2. Disallowance under Section 40A(3):
The PCIT noted that the assessee made cash payments for the purchase of plots, which should have been disallowed under section 40A(3). The assessee argued that the case was covered under section 44AD, and since the declared profit was more than 8% of the turnover, no further disallowance was warranted. Alternatively, the assessee claimed that the cash payments were made due to business exigencies. The Tribunal observed that the assessee had not claimed the applicability of section 44AD before the AO or PCIT and that this plea required verification. The Tribunal directed the AO to verify the explanation regarding the cash payments and decide the issue of disallowance under section 40A(3) accordingly.

3. Disallowance of Deduction under Section 80C:
The PCIT disallowed the deduction claimed under section 80C for tuition fees, as the AO had allowed it without verification. The assessee later submitted evidence of a life insurance premium payment, which was not presented to the AO or PCIT. The Tribunal directed the AO to verify the payment of the life insurance premium and consider the claim of deduction under section 80C accordingly.

Conclusion:
The Tribunal upheld the PCIT's exercise of jurisdiction under section 263 due to the lack of enquiry by the AO on the issues of section 40A(3) and section 80C. The Tribunal directed the AO to verify the explanations and claims regarding the disallowance under section 40A(3) and the deduction under section 80C. The appeal of the assessee was partly allowed.