2019 (12) TMI 743 - AT - Income Tax

Revision u/s 263 - Administrative CIT had sought to revise this order passed u/s.154 on the ground that the assessee had violated the provisions of Section 79 due to change in shareholding pattern which fact has not been noticed or enquired by the ld. AO while granting benefit of set off of brought forward losses of earlier years - HELD THAT - It could be safely concluded that assessee had duly brought to the notice of the ld. AO about the scheme of amalgamation, about the scheme being approved by the Hon ble High Court, about the shareholding pattern post amalgamation etc as detailed hereinabove. These facts were duly considered by the AO both in the original assessment proceedings as well as in the proceedings u/s.154 of the Act. Hence, having considered those facts and the ld. AO have taking a view thereon, the logical conclusion that could be drawn is that the AO ad taken one of the possible views on the matter, which cannot be the subject matter of revisionary jurisdiction u/s. 263 of the Act by the ld. CIT. Hence, it could be safely concluded that the order of the ld. AO could not be construed as erroneous. Denial of set off of brought forward losses of earlier years against the income of the assessee for the year under consideration - HELD THAT - The issue is directly settled in favour of the assessee in the case of CLP Power India (P) Ltd. vs. DCIT 2018 (4) TMI 1282 - ITAT AHMEDABAD as find considerable merits in the plea on behalf of the assessee that section 79 has not application in the absence of change in beneficial voting power. This being so, we see no error in the order of the AO on this score. This apart, once these facts were brought to the notice of Pr.CIT, the Pr.CIT ought to have appreciated the case of the assessee objectively in perspective and could not shrink his sacrosanct obligations and resort to simply set aside a completed assessment on non-existent ground. Thus, the prerequisites of section 263 are not satisfied. CIT had directed the ld. AO to directly disallow the benefit of set off of losses of earlier years against the income of current year on the ground that assessee had not complied with provisions of Section 79 of the Act, ignoring the various arguments made by the assessee before him, which are part of the paper book and the materials available on record. Moreover, we find that the ld CIT should have made proper enquiries on the impugned issue before reaching to such conclusion in the light of materials available on record and decided case laws thereon, which he had failed to do so in the instant case. Once he directs the ld AO to make certain disallowance, the ld AO is bound by that and the assessee would not get any chance to adjudicate the issue on merits. In this factual background, we had to address the issue on merits also and adjudicate the issue hereinabove. We find that the ld. CIT had only tried to substitute his opinion on the facts and circumstances of the case in the opinion of the ld. AO. This is not permissible in the revisionary jurisdiction u/s.263 - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of Order under Section 263 of the Income Tax Act.
2. Denial of carry forward and set off of losses and unabsorbed depreciation pursuant to the provisions of Section 79 of the Income Tax Act.

Detailed Analysis:

1. Validity of Order under Section 263 of the Income Tax Act:
The primary issue raised by the assessee was the validity of the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act. The PCIT had deemed the order dated 21 February 2018, passed by the Deputy Commissioner of Income Tax (DCIT) under Section 154 of the Act, as erroneous and prejudicial to the interests of revenue. The assessee contended that the DCIT's order was neither erroneous nor prejudicial to the revenue's interest and thus, the revision by the PCIT was incorrect and bad in law. The assessee sought to strike down the impugned order passed under Section 263 by the PCIT.

The Tribunal examined the shareholding pattern of the assessee company before and after the amalgamation approved by the Hon’ble Bombay High Court. It was observed that Rustic Canyon, LLC held 42.19% directly and 57.81% indirectly through Trac Holding, LLC, thus beneficially holding 100% of the shares even after the amalgamation. The Tribunal noted that Section 79 mandates that shares should be beneficially held by existing shareholders, which was complied with by the assessee. Therefore, the order of the AO was in accordance with the law, and there was no error that could be attributed to it. Consequently, the revisionary jurisdiction under Section 263 by the PCIT was not justified.

2. Denial of Carry Forward and Set Off of Losses and Unabsorbed Depreciation:
The second issue involved the denial of carry forward and set off of losses and unabsorbed depreciation amounting to INR 18,11,68,666 pursuant to the provisions of Section 79 of the Act. The PCIT held that the assessee was not entitled to carry forward and set off the losses from earlier years in the current assessment year due to a change in the shareholding pattern, which was not noticed or enquired by the AO. The PCIT directed the AO to disallow the benefit of set off of brought forward losses of earlier years.

The Tribunal found that the AO had considered all relevant facts regarding the scheme of amalgamation and the shareholding pattern during the original assessment proceedings and the proceedings under Section 154. The AO had taken one of the possible views on the matter, which cannot be the subject matter of revisionary jurisdiction under Section 263 by the PCIT. The Tribunal cited various decisions of Hon’ble High Courts and Hon’ble Supreme Court to support this conclusion.

On merits, the Tribunal referred to the decision of the Ahmedabad Tribunal in the case of CLP Power India (P) Ltd. vs. DCIT, where it was held that the beneficial ownership did not change hands despite the transfer of shares. The Tribunal also cited the decision of the Hon’ble Karnataka High Court in the case of CIT vs. AMCO Power Systems Ltd., which stated that the voting power of the holding company did not reduce to less than 51% due to the control over the subsidiary. The Tribunal concluded that there was no violation of provisions of Section 79 in the assessee’s case, and the AO's order was not erroneous.

The Tribunal noted that the PCIT had failed to make proper enquiries and had only substituted his opinion for that of the AO, which is not permissible under Section 263. The Tribunal quashed the revisionary jurisdiction invoked by the PCIT and allowed the grounds raised by the assessee.

Conclusion:
The Tribunal held that the PCIT erred in invoking revisionary jurisdiction under Section 263 of the Act and quashed the same. The appeal of the assessee was allowed, and the order pronounced in the open court on 04/09/2019.