2023 (2) TMI 812 - HC - Income Tax

Revision u/s 263 - Exemption u/s 11 - depreciation made in the return - distinction between lack of inquiry and inadequate inquiry - difference between purported incomplete or inadequate verification or no verification whatsoever by the assessing office - HELD THAT - As it is not gainsaid by the Revenue that the respondent-assessee has been following the practice of claiming depreciation in earlier years as that is claimed in the present year under assessment. There is no denial of fact by the Income Tax Department that the assessee is consistently claiming the depreciation as application of income without making the claim u/s 11 of the IT Act at the time of acquisition or purchase of assets as application of income. Mere statement in the appeal filed by the Revenue before this Court that no documentary evidence is submitted by the assessee in support of its claim cannot be countenanced in view of categorical finding of fact by the AO as also the learned ITAT that the assessee-respondent did furnish statements, documents and details as sought for in compliance of notice issued for assessment u/s 143 of the IT Act before the Assessing Officer. Therefore, such finding of fact falsifies the statement of the Revenue in paragraph 7 of the appeal that no documentary evidence is submitted by the assessee in support of its claim . Thus, the view of the Tribunal in allowing the Assessee-Respondent s appeal on the principle of consistency cannot, in the present facts, be faulted with. Proceeding initiated by the Commissioner of Income Tax (Exemption), Hyderabad by exercise of power under Section 263 of the IT Act is not tenable either on facts or in law, the learned ITAT has rightly quashed the consequential proceedings and orders allowing claim of depreciation on the assets. Interpretation of statutory provision and views expressed by different Courts qua dispute sought to be raised by initiating proceeding for revision - Revisional Authority- CIT (E) in his order, while exercising power under Section 263 placed reliance on a decision of Grama Vidiyal Trust 1985 (10) TMI 67 - GUJARAT HIGH COURT without mentioning anything as to how there was factual similitude with that of the case of the respondent-assessee. Since the Revisional Authority has mechanically sought to apply the decision of learned ITAT in Grama Vidiyal Trust (supra) without application of mind, the impugned Order passed in exercise of power of suo motu revision stands vitiated.

Summary

Issues Involved:
1. Justification of ITAT in quashing the notice and revisionary order under Section 263 of the Income Tax Act, 1961.
2. Sufficiency of enquiry by the Assessing Officer regarding the claim of depreciation.
3. Validity of ITAT's decision concerning reassessment proceedings.
4. Allowance of depreciation on assets whose cost was previously allowed as application of income under Section 11.

Issue-wise Detailed Analysis:

1. Justification of ITAT in Quashing the Notice and Revisionary Order under Section 263:
The High Court examined whether the ITAT was justified in quashing the notice and the revisionary order issued by the CIT (Exemptions) under Section 263 of the Income Tax Act, 1961. The CIT (E) had issued a show cause notice and passed an order on 31.03.2021, considering the assessment order erroneous and prejudicial to the interests of revenue because the depreciation claimed by the charitable trust was allegedly not permissible. The ITAT quashed the CIT (E)'s order, citing a lack of adequate opportunity for the respondent to present material and the CIT (E)'s failure to conduct a minimal enquiry before concluding that the Assessing Officer's order was erroneous. The High Court upheld ITAT's decision, emphasizing that the CIT (E) must conduct a minimal enquiry before exercising power under Section 263 and must provide reasonable opportunity to the assessee, which was not done in this case.

2. Sufficiency of Enquiry by the Assessing Officer:
The High Court analyzed whether the Assessing Officer conducted sufficient enquiry during the assessment proceedings under Section 143(3). The ITAT found that the Assessing Officer had issued a notice under Section 142(1) and had verified the details and documents submitted by the assessee, including the claim for depreciation. The ITAT noted that the assessee had consistently claimed depreciation as application of income in previous years, and the Assessing Officer had followed the "rule of consistency." The High Court supported the ITAT's finding that the Assessing Officer had made sufficient enquiry and that the CIT (E) could not have set aside the assessment order without conducting further enquiry.

3. Validity of ITAT's Decision Concerning Reassessment Proceedings:
The High Court addressed whether the ITAT was correct in quashing the consequential reassessment proceedings and orders. The ITAT had quashed the reassessment proceedings initiated under Section 143(3) read with Section 263, citing that the original assessment was not erroneous and that the CIT (E) had not provided adequate opportunity to the assessee. The High Court upheld the ITAT's decision, reiterating that the CIT (E) had acted in undue haste and without proper enquiry, thereby violating principles of natural justice.

4. Allowance of Depreciation on Assets:
The High Court examined whether the ITAT was correct in allowing depreciation on assets whose cost was previously allowed as application of income under Section 11. The ITAT had distinguished the case of Grama Vidiyal Trust and found that the respondent-assessee had not claimed the cost of assets as application of income at the time of purchase but had claimed depreciation consistently. The High Court referred to various judicial precedents, including decisions of the Supreme Court and High Courts, which supported the allowance of depreciation on such assets. The High Court concluded that the ITAT was correct in its decision to allow the claim of depreciation, following the principle of consistency.

Conclusion:
The High Court dismissed the appeal filed by the Income Tax Department, upholding the ITAT's decision to quash the revisionary order under Section 263 and the consequential reassessment proceedings. The court emphasized the necessity of minimal enquiry by the CIT (E) before exercising revisionary powers and the importance of providing adequate opportunity to the assessee. The court also affirmed the allowance of depreciation on assets whose cost had been previously allowed as application of income, following the principle of consistency.