2022 (2) TMI 490 - AT - Income Tax

Revision u/s 263 by CIT - case was selected for scrutiny and assessment was completed - As per CIT donation of ₹ 2 lakhs was wrongly allowed by the AO without examining the deduction u/s. Rule 7A(2) - HELD THAT - Section 263 empower the PCIT to initiate section 263 proceedings where the AO either takes a wrong decision without considering the material on record or he takes a decision without making proper enquiry and that such enquiry was prima facie warranted. If the PCIT was of the opinion that there was no proper enquiry by the AO and the AO accepted the various claims of the assessee mentioned in his order without conducting further enquiry with regard to the genuineness of the claim of the assessee and it is incumbent on the part of the AO to come to an independent conclusion that various expenditure claimed by the assessee were laid out wholly and exclusively for the purpose of business of the assessee. In the present case, as seen from the assessment order, the AO closed his eyes on the issues raised by the PCIT for the reasons best known to him and accepted the deduction claimed by the assessee in his return of income. Though AO is required to make necessary enquiries himself regarding the various claims of the assessee, he failed to do so. Therefore, the issues dealt by the PCIT were within his powers to invoke the provisions of section 263 of the Act where such enquiry was prima facie warranted. In view of the above, we are of the opinion that the ld. PCIT was justified in invoking the provisions of section 263. Deduction under Rule 7A(2) - Admittedly, the PCIT remitted the issues relating to prior period expenses, interest receivable from Karnataka Cashew Development Board, amount spent on bamboo plantation, interest on loan to Mysore Paper Mills Ltd., agricultural Income tax recoverable from Govt. of Karnataka and sundry balance written off as bad debts to the AO for reconsideration as there was no enquiry from the AO on this issues. However, with regard to deduction under Rule 7A(2), he has mentioned that even if the AO finds that finds that the actual allowable deduction is ₹ 7,09,58,595, he shall restrict the deduction to ₹ 6,46,03,000 which is the amount allowed in the original assessment order. In our opinion, the allowability of deduction is to the extent of claim made in the original assessment order of ₹ 6,46,03,000. However, he has not denied this deduction, but only remitted the issue to reconsider the allowability of deduction under Rule 7A(2). Being so, even on this issue there is no error by the PCIT in giving such a direction to the AO. AO is directed to re-examine the entire issues dealt with by the PCIT in his order in accordance with law after giving adequate opportunity of being heard to the assessee. The AO shall not be influenced by any of the observations of the PCIT on merits in his order. However, the AO should not allow the deduction under Rule 7A(2) more than the claim made in the original assessment order. With these observations, we confirm the order of the PCIT. - Decided against assessee.

Summary

Issues Involved:
1. Legality of assuming jurisdiction by the PCIT under section 263 of the Income-tax Act.
2. Deduction claimed under Rule 7A(2) of the Income-tax Rules.
3. Prior period expenses.
4. Expenses written off.

Issue-wise Detailed Analysis:

1. Legality of Assuming Jurisdiction by the PCIT under Section 263 of the Income-tax Act:
The appellant argued that the PCIT erred in concluding that the assessment order passed by the AO was erroneous and prejudicial to the interest of the Revenue without proper demonstration. The appellant contended that the AO had conducted due verification and allowed the claims after being satisfied with the explanations provided. The appellant cited the Supreme Court judgment in Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC) to support their argument that the PCIT cannot substitute his own conditions where the AO has taken a conscious decision after due verification.

The tribunal noted that the PCIT can exercise revision proceedings under section 263 if the order of the AO is erroneous and prejudicial to the interests of the revenue. The tribunal found that the AO failed to make necessary enquiries regarding the various claims of the assessee, and thus, the PCIT was justified in invoking the provisions of section 263 of the Act.

2. Deduction Claimed under Rule 7A(2) of the Income-tax Rules:
The appellant argued that the deduction of ?7,09,58,595 was claimed under Rule 7A(2), but only ?6,46,03,000 was claimed in the return of income, hence there was no prejudice to the Revenue. The appellant provided detailed calculations and explanations for the claimed amount, including the capital work in progress of the Rubber Replanting project.

The tribunal observed that the PCIT remitted the issue to the AO for reconsideration and directed that the allowable deduction should not exceed the amount claimed in the original assessment order of ?6,46,03,000. The tribunal upheld the PCIT's direction to re-examine the allowability of the deduction under Rule 7A(2) without being influenced by the PCIT's observations on merits.

3. Prior Period Expenses:
The appellant contended that the prior period expenses of ?74,702 were crystallized during the assessment year 2015-16 and thus claimed in that year. The appellant argued that there was no prejudice to the Revenue as the tax rates remained the same for both years.

The tribunal noted that the PCIT remitted the issue to the AO for reconsideration as there was no enquiry from the AO on this matter. The tribunal upheld the PCIT's direction to the AO to re-examine the issue in accordance with the law.

4. Expenses Written Off:
The appellant provided explanations for various expenses written off, including interest receivable from Karnataka Cashew Development Corporation, amount spent on bamboo plantation, interest on loan to Mysore Paper Mills Ltd., agricultural income tax recoverable from the Government of Karnataka, and sundry balances written off as bad debts. The appellant argued that these write-offs were allowable as bad debts or trade expenditures and hence there was no error or prejudice to the Revenue.

The tribunal noted that the PCIT remitted these issues to the AO for reconsideration as there was no enquiry from the AO on these matters. The tribunal upheld the PCIT's direction to the AO to re-examine these issues in accordance with the law.

Conclusion:
The tribunal confirmed the order of the PCIT, directing the AO to re-examine the issues raised by the PCIT in accordance with the law and after giving adequate opportunity of being heard to the assessee. The appeal by the assessee was dismissed.