2021 (1) TMI 78 - AT - Income Tax

Revision u/s 263 - Interest on capital of partners remuneration to partners - HELD THAT - There is no change in the rate of interest clause in the supplementary deed dated 30th March 2012 and such interest has been allowed in the past on that basis and also in the immediately preceding assessment year i.e. 2013-14 where the order was passed u/s 143(3). Further, the salary paid to the partners is within the limit prescribed u/s 40(b)(v) which is as per the original deed dated 4th February, 2008. Even otherwise also on the basis of supplementary partnership deed dated 30th March, 2012 effective from 1.4.2012 i.e relevant to assessment year 2013-14 the salary to partners has been allowed at ₹ 13,20,000/- in the order passed u/s 143(3). We find no reason as to why the AO shall again go through the same when the salary paid to the partners is in consonance with the salary paid in assessment year 2013-14. Correctness of computation of capital gain - Cost of improvement and the cost of properties for computation of LTCG is concerned, we find these are already shown in the balance sheet since assessment year 2001-02 which is not in dispute. Therefore, once the assessee sells these properties during impugned assessment year there was no necessity for the AO to again re-examine the cost of purchase and cost of improvement once those were accepted in the past years u/s 143(3) proceedings. So far as the Deposits and withdrawals in the capital account of the partners are concerned, we find these are already recorded in the books of accounts which were produced before the AO who has examined the same on test check basis and has passed the order u/s 143(3). Therefore it cannot be said that the order passed by the AO is erroneous and prejudicial to the interest of the revenue on this issue. It is the settled proposition of law that for invoking jurisdiction u/s 263 of the Act the twin condition namely that a) the order is erroneous and (b) the order is prejudicial to the interest of the revenue must be satisfied. In the instant case the order may be prejudicial to the interest of revenue but certainly cannot be called as erroneous. We, therefore, find force in the arguments of the Ld. Counsel for the assessee that the Ld. PCIT(A) has exceeded his jurisdiction by invoking the provision of section 263 of the Act for the impugned assessment year. We, therefore, set aside the order of the Ld. PCIT and the grounds raised by the assessee are allowed.

Issues Involved:
1. Validity of the order passed by the AO under section 143(3) of the I.T. Act.
2. Examination of salary and interest payments to partners.
3. Verification of long-term capital gain computation.
4. Examination of deposits and withdrawals in the partners' capital accounts.

Issue-Wise Detailed Analysis:

1. Validity of the Order Passed by the AO:
The assessee contested the validity of the order passed by the AO under section 143(3) of the I.T. Act, arguing that it was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal agreed with the assessee, stating that the AO had indeed examined the books of accounts, bills, and vouchers during the assessment proceedings. The Tribunal emphasized that the extent of enquiry is the prerogative of the AO and that merely because the AO did not discuss the issue in the assessment order, it cannot be said that the issue remained un-enquired.

2. Examination of Salary and Interest Payments to Partners:
The PCIT had set aside the AO's order, asserting that the AO did not properly examine the salary and interest payments to partners, especially considering a supplementary partnership deed. The Tribunal found that the supplementary deed dated 30th March 2012, effective from 1.4.2012, was already examined in the assessment year 2013-14, where the salary and interest paid to the partners were accepted. The Tribunal noted that the interest clause had not changed in the supplementary deed and that the salary paid to the partners was within the limit prescribed under section 40(b)(v) of the Act. Therefore, the Tribunal concluded that the AO had adequately examined this issue.

3. Verification of Long-Term Capital Gain Computation:
The PCIT had directed the AO to re-examine the computation of long-term capital gain, particularly the cost of improvement claimed by the assessee. The Tribunal observed that the properties were purchased in the assessment year 2001-02 and the cost of improvement was declared in the same year. These costs were consistently shown in the balance sheet and accepted in past assessments under section 143(3). Consequently, the Tribunal found no necessity for the AO to re-examine these costs during the impugned assessment year, as they were already verified and accepted in prior years.

4. Examination of Deposits and Withdrawals in the Partners' Capital Accounts:
The PCIT had raised concerns about the AO not properly examining the deposits and withdrawals in the partners' capital accounts. The Tribunal noted that the copies of the partners' capital accounts were furnished to the AO during the assessment proceedings and that the AO had verified these details. The Tribunal highlighted that the deposits were very small and less than the amount of withdrawals, and that the partners were withdrawing only from their credit balances. Therefore, the Tribunal concluded that the AO had adequately examined this issue as well.

Conclusion:
The Tribunal found that the order passed by the AO was not erroneous and that the PCIT had exceeded his jurisdiction by invoking the provisions of section 263 of the I.T. Act. The Tribunal set aside the order of the PCIT and allowed the grounds raised by the assessee, thereby allowing the appeal filed by the assessee. The judgment emphasized the distinction between "lack of enquiry" and "inadequate enquiry," and upheld that the AO had conducted sufficient examination of the relevant issues.

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