2019 (9) TMI 1399 - AT - Income Tax

Tribunal upholds Income Tax decision, disallows Electricity Duty payment, stresses Revenue protection

The Tribunal upheld the Principal Commissioner of Income Tax's decision to set aside the assessment order under section 263 of the Income Tax Act, citing ... Revision u/s 263 - Disallowance u/s 40(a)(iib) - Electricity duty u/s. 3(1) of the KSED Act - CIT held that the amount debited towards Electricity Duty u/s. 3(1) of the KSED Act being an exclusive levy on the assessee which is a State Government undertaking by the State Government is to be disallowed u/s. 40(a)(iib) - HELD THAT:- In the present case, the Assessing Officer had not made the disallowance u/s. 40(a)(iib) - Without enquiring, the AO accepted the assessee’s claim. The failure on the part of the AO to make necessary enquiry rendered the assessment order erroneous which also resulted in loss to the revenue. PCIT had observed in his order that the electricity duty u/s. 3(1) of the KSED Act falls under the purview of section 40(a)(iib) of the Act and it is to be disallowed u/s. 40(a)(iib) - order of the PCIT cannot be held as erroneous. The PCIT’s approach was correct. PCIT exercised his power conferred u/s. 263 in setting aside the assessment. AO has not considered the issue relating to the application of section 40(a)(iib) and he had accepted the claim without applying his mind. Hence, the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, as it involves huge amount of tax - PCIT is justified in invoking the provisions of section 263. - Decided against assessee. Issues Involved:1. Legality of the Principal Commissioner of Income Tax (Pr. CIT) setting aside the assessment order under section 263 of the Income Tax Act.2. Applicability of provisions of Section 40(a)(iib) of the Income Tax Act to the Electricity Duty paid by the assessee.3. Whether the Electricity Duty under the Kerala State Electricity Duty Act, 1963 is an exclusive levy on the assessee.4. Appropriateness of the Pr. CIT’s direction to disallow the Electricity Duty amounting to Rs. 43,87,44,000/-.Issue-wise Detailed Analysis:1. Legality of the Pr. CIT setting aside the assessment order under section 263 of the Income Tax Act:The assessee argued that the Pr. CIT erred in setting aside the assessment order dated 26/12/2016, as the twin conditions stipulated under section 263 of the Act, i.e., the assessment order being erroneous and prejudicial to the interests of the Revenue, were not satisfied. The assessee cited the Supreme Court's decision in Malabar Industrial Co. (243 ITR 83) to support this claim. The Tribunal, however, held that the Pr. CIT was within his rights to initiate proceedings under section 263, as the Assessing Officer (AO) had failed to make necessary inquiries regarding the disallowance under section 40(a)(iib), rendering the assessment order erroneous and prejudicial to the interests of the Revenue.2. Applicability of provisions of Section 40(a)(iib) of the Income Tax Act to the Electricity Duty paid by the assessee:The assessee contended that Section 40(a)(iib) was not applicable, as the Electricity Duty under Section 3(1) of the Kerala State Electricity Duty Act, 1963, was not an exclusive levy but applied to all licensees in Kerala. The Tribunal, however, observed that the AO had accepted the assessee’s claim without proper inquiry. The Pr. CIT noted that the Electricity Duty was an exclusive levy on the assessee, a State Government undertaking, by the State Government, and thus fell under the purview of Section 40(a)(iib). The Tribunal upheld the Pr. CIT's view, emphasizing the AO's duty to scrutinize claims and protect Revenue interests.3. Whether the Electricity Duty under the Kerala State Electricity Duty Act, 1963 is an exclusive levy on the assessee:The assessee argued that the duty was not exclusive, as it applied to all licensees in Kerala, including other State Public Sector Undertakings (PSUs). The Tribunal, however, supported the Pr. CIT's finding that the duty was an exclusive levy on the assessee, a State Government undertaking, and thus disallowable under Section 40(a)(iib). The Tribunal cited the Pr. CIT's reliance on various judgments, including CIT vs. Jawahar Bhattacharjee and Malabar Industrial Co. Ltd. vs. CIT, to affirm that the AO's failure to disallow the duty rendered the assessment order erroneous and prejudicial to the Revenue.4. Appropriateness of the Pr. CIT’s direction to disallow the Electricity Duty amounting to Rs. 43,87,44,000/-:The Tribunal noted that the AO had not made the disallowance under Section 40(a)(iib) without proper inquiry. The Pr. CIT correctly observed that the Electricity Duty fell under the purview of Section 40(a)(iib) and was to be disallowed. The Tribunal upheld the Pr. CIT's direction to disallow the duty, emphasizing that the AO's failure to scrutinize the claim resulted in a loss to the Revenue. The Tribunal dismissed the assessee's appeal, affirming the Pr. CIT's invocation of Section 263 and the disallowance of the Electricity Duty.Conclusion:The Tribunal dismissed the assessee's appeal, upholding the Pr. CIT's order setting aside the assessment and directing the disallowance of the Electricity Duty under Section 40(a)(iib) of the Income Tax Act. The Tribunal emphasized the AO's duty to scrutinize claims and protect Revenue interests, affirming that the failure to do so rendered the assessment order erroneous and prejudicial to the Revenue.