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2024 (9) TMI 1627 - AT - Income TaxRevision u/s 263 - primary contention of the PCIT was that the AO failed to disallow unpaid leave salary u/s 43B and did not verify the claim of depreciation and additional depreciation on fixed assets - HELD THAT - Upon examining the facts, it is evident that the AO had thoroughly reviewed the relevant details during the assessment proceedings. The Tax Audit Report, specifically Column 26(i)(A)(b), clearly indicated that the unpaid leave salary was disclosed as a liability and not claimed as a deduction. Only the amount paid was claimed in the profit and loss account, which was appropriately considered by the AO. This explanation was corroborated by detailed submissions, including ledger accounts and prior years' computations provided to the PCIT, demonstrating that there was no duplication of deductions. As regards depreciation, AO reviewed the audited financial statements and the Tax Audit Report, particularly Form 3CD, which detailed all additions to fixed assets and the corresponding depreciation claimed. The auditor, had certified these claims, confirming their accuracy and compliance with the provisions of the Act. The purpose of the Tax Audit under section 44AB of the Act is to ensure that financial records and claims are thoroughly verified by an independent professional, providing a reliable basis for the AO to rely upon. If the AO is expected to recheck all the details already certified by the auditor, especially when there are no specific qualifications or adverse remarks in the audit report, it would undermine the very purpose of the audit under section 44AB - AO appropriately relied on the certified audit report, as intended by law, and no further verification was necessary in absence of any discrepancies noted by the auditor. AO s acceptance of the depreciation claim was fully justified and in line with the principles underlying the audit provisions. For invoking jurisdiction u/s 263, it must be established that the assessment order is both erroneous and prejudicial to the interest of the revenue. In the present case, the AO s order was based on a conscious examination of the records, and no substantive errors were pointed out by the PCIT that would indicate any failure in the verification process. The assessee s argument that even if the unpaid leave salary and additional depreciation were disallowed, the resulting tax effect would be NIL due to the large available deduction u/s 80IA is relevant. The gross total income before deduction u/s 80IA was Rs. 12,04,36,098/-, and the available deduction under Section 80IA was Rs. 17,43,55,892/-. Thus, the taxable income would still remain NIL, demonstrating that there is no prejudice to the revenue. The absence of proper inquiry led to an assessment order lacking the basic elements of scrutiny expected of the AO. Conversely, in present case under adjudication, the AO did not overlook critical details; instead, the alleged issues were evaluated, and decisions were made based on certified records. The PCIT s contention that further inquiry was needed was speculative and not supported by any specific evidence of actual errors. In case of Kandi Friends Educational Trust 2013 (10) TMI 1224 - PUNJAB AND HARYANA HIGH COURT the lack of inquiry raised significant questions about whether the income of the trust was properly exempt under Section 11 of the Act, directly impacting the tax liability. In present case, the potential disallowances would not impact the tax liability due to the extensive section 80IA deduction available, making the order not prejudicial to the revenue in any practical sense. PCIT s revisionary action was futile as the enhanced profits, even if added back, would be fully offset by the remaining section 80IA deduction. Thus, the conditions of being erroneous and prejudicial to the revenue under Section 263 are not satisfied - Appeal filed by the assessee is allowed.
Issues Involved:
1. Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking Section 263 of the Income Tax Act, 1961, to set aside the assessment order. 2. Whether the Assessing Officer (AO) failed to disallow unpaid leave salary under Section 43B of the Act. 3. Whether the AO failed to verify the claim of depreciation and additional depreciation on fixed assets. Issue-wise Detailed Analysis: 1. Invocation of Section 263 by PCIT: The PCIT invoked Section 263, arguing that the assessment order was erroneous and prejudicial to the interest of the revenue. The PCIT held that the AO's failure to make proper inquiries led to a potential loss of tax revenue. The assessee contended that the conditions for invoking Section 263 were not met as the assessment order was neither erroneous nor prejudicial to the revenue. The AO had conducted a detailed scrutiny, and the assessment was completed after making specific additions. The Tribunal found that the AO had thoroughly reviewed the relevant details during the assessment proceedings, and no substantive errors were pointed out by the PCIT that would indicate a failure in the verification process. Therefore, the Tribunal quashed the PCIT's order, holding that the conditions of being erroneous and prejudicial to the revenue under Section 263 were not satisfied. 2. Disallowance of Unpaid Leave Salary under Section 43B: The PCIT held that the AO failed to disallow unpaid leave salary under Section 43B of the Act. The assessee argued that the unpaid leave salary of Rs. 74,67,276/- was disclosed as a liability and not claimed as a deduction. Only the amount of Rs. 29,35,991/-, which was actually paid, was claimed in the profit and loss account. The Tribunal found that the AO had appropriately considered this explanation, corroborated by detailed submissions, including ledger accounts and prior years' computations provided to the PCIT. Therefore, the Tribunal held that the AO's acceptance of the unpaid leave salary was justified and in line with the principles underlying the audit provisions. 3. Verification of Depreciation and Additional Depreciation on Fixed Assets: The PCIT contended that the AO did not verify the claim of depreciation and additional depreciation on fixed assets. The assessee argued that the AO had reviewed the audited financial statements and the Tax Audit Report, which detailed all additions to fixed assets and the corresponding depreciation claimed. The auditor's certification validated that the depreciation was correctly claimed according to the Act. The Tribunal found that the AO appropriately relied on the certified audit report, and no further verification was necessary in the absence of any discrepancies noted by the auditor. The Tribunal held that the AO's acceptance of the depreciation claim was justified. Conclusion: The Tribunal concluded that the PCIT's order to reassess was futile and without prejudice to the revenue. The Tribunal allowed the appeal of the assessee and quashed the order of the PCIT, holding that the conditions for invoking Section 263 were not satisfied. The Tribunal emphasized that the assessment order was based on a conscious examination of the records, and no substantive errors were pointed out by the PCIT that would indicate any failure in the verification process. The Tribunal also noted that the potential disallowances would not impact the tax liability due to the extensive Section 80IA deduction available, making the order not prejudicial to the revenue in any practical sense.
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