2023 (8) TMI 78 - AT - Income Tax

Revision u/s 263 by CIT - no or inadequate enquiry - assessee had revised its return of income for claiming Employee Stock Compensation Expenses (ESOP expenses) which was not claimed in the original return of income - Principal CIT held that the assessee had claimed expenses which were not included in the current year s expenses and booked in the books of accounts through profit and loss account and AO ought to have verified/investigated the issue and ought to have disallowed the same - HELD THAT - As from the records we observe that during the course of assessment, the AO called for details with respect to the claim of ESOP expenses and the assessee filed various replies to the queries raised by the assessing officer, during the course of assessment proceedings. We observe that this is not a case where there was an omission on part of the AO to examine this aspect of ESOP expenses at all. AO had put a specific queries before the assessee during the course of assessment by way of issuance of various notices and had taken assessee s replies on record. As in the instant facts, there is no specific finding that the aforesaid expenses are not genuine or that there was any irregularity with respect to the aforesaid claim of ESOP expenses. So, in our view, this is not a case where no enquiry has been made by the assessee officer during the course of assessment proceedings. As held by various Courts, Principal CIT cannot in 263 proceedings set aside an assessment order merely because he has a different opinion in the matter. Sec 263 of the Act does not visualise a case of substitution of the judgment of the Principal CIT for that of the AO, who passed the order unless the decision is held to be wholly erroneous. Principal CIT, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-visit the entire assessment and determine the income himself at a higher figure. We thus find no error in the order of Ld. AO so as to justify initiation of 263 proceedings in the instant case. The Grounds of appeal raised by the assessee are thus allowed.

Summary

Issues Involved:
1. Whether the Principal CIT erred in revising a scrutiny assessment order that was neither erroneous nor prejudicial to the interest of revenue.
2. Whether the ESOP expenses claimed by the assessee were properly verified and allowable under the law.
3. Whether the Principal CIT correctly invoked revisional jurisdiction under Section 263 of the Act.

Summary:

Issue 1: Revision of Scrutiny Assessment Order
The assessee challenged the Principal CIT's revision of a scrutiny assessment order for the Assessment Year 2018-19, arguing that the order was neither erroneous nor prejudicial to the interest of revenue. The Principal CIT had set aside the assessment order, claiming that the AO failed to verify the ESOP expenses properly.

Issue 2: Verification and Allowability of ESOP Expenses
The Principal CIT observed that the assessee had claimed ESOP expenses of Rs. 4,95,78,999/- in the revised return, which were not included in the original return. The Principal CIT alleged that these expenses were allowed by the AO without proper verification. The assessee argued that the AO had made a complete enquiry during the assessment proceedings, providing detailed responses and documentation, including sample Form 16s and details of equity shares allotted under the ESOP scheme. The assessee maintained that the ESOP expenses were genuine and allowable under the law, supported by judicial precedents.

Issue 3: Invocation of Revisional Jurisdiction under Section 263
The Tribunal noted that the AO had issued multiple notices and received detailed responses from the assessee regarding the ESOP expenses. The Tribunal held that an inquiry made by the AO, considered inadequate by the Principal CIT, does not make the order erroneous. The Tribunal emphasized that it is the AO's prerogative to decide the extent of the inquiry. The Principal CIT cannot impose his own understanding of the extent of inquiry under Section 263. The Tribunal cited various judicial precedents, including the Delhi High Court's distinction between lack of inquiry and inadequate inquiry, and concluded that the AO had made sufficient inquiries.

Conclusion:
The Tribunal found no error in the AO's order and held that the Principal CIT's invocation of Section 263 was unjustified. The appeal of the assessee was allowed, and the Tribunal set aside the Principal CIT's order.

Result:
The appeal of the assessee is allowed.