2022 (3) TMI 1456 - AT - Income Tax

Tribunal quashes Income Tax order; jurisdiction not validly assumed, assessment not erroneous.

The Tribunal quashed the Principal Commissioner of Income Tax's order under section 263 of the Income-tax Act, ruling that the jurisdiction was not ... Revision u/s 263 by CIT - disallowance of amount u/s 35 and claim debited towards advertisement in the Profit & Loss A/c, as prior period expenses, which deserves to be disallowed - HELD THAT:- As on perusal of the observations and finding/direction given by the Ld. PCIT shows that no examination and verification has been done by the Ld. PCIT before arriving at the consideration of holding assessment order being erroneous in so far as it is prejudicial to the interest of the revenue. PCIT in the present case has not carried out any enquiry of his own and has merely set aside the assessment to the file of the AO to re-examine the issue of claim of advertisement expenses alleged to be held as prior period expenses. Therefore, it is contrary to the guidelines as mandated in the Hon'ble Delhi High Court decision in the case of ITO v. DG Housing Projects Ltd. [2012 (3) TMI 227 - DELHI HIGH COURT]. Accordingly, the consideration arrived at by the Ld. PCIT invoking provisions of section 263 is not justified and cannot be sustained under the facts and circumstances of the present case. We find that Ld. PCIT has taken note of the amendment made in section 263 w.e.f. 01.06.2015. This amendment relates to Explanation 2 inserted in section 263 of the Act. The co-ordinate bench has dealt with Explanation 2 as inserted by the Finance Act, 2015 in the case of Narayan Tatu Rane v. Income Tax Officer [2016 (5) TMI 1162 - ITAT MUMBAI] to hold that the said Explanation cannot be said to have overridden the law as interpreted by the Hon'ble Delhi High Court in DG Housing Projects Ltd (supra), according to which the Ld. PCIT has to conduct an enquiry and verification to establish and show that the assessment order is unsustainable in law. Also further held that the intention of the legislature could not have been to enable the Ld. PCIT to find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law, since such an interpretation will lead to unending litigation and there would not be any point of finality in the legal proceedings. The opinion of the Ld. PCIT referred to in section 263 of the Act has to be understood as legal and judicious opinion and not arbitrary opinion. On the two issues considered by the Ld. PCIT in the impugned order, no action u/s 263 of the Act is justifiable which cannot be sustained under the facts and circumstances of the present case and judicial precedents dealt herein above. We, therefore, quash the impugned order u/s 263 of the Act and allow the grounds raised by the assessee. Issues Involved:1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income-tax Act, 1961.2. Alleged erroneous and prejudicial assessment order regarding the disallowance of Rs. 1,34,45,166/- under section 35 of the Act.3. Alleged erroneous and prejudicial assessment order regarding the disallowance of Rs. 9,89,485/- as prior period expense on Advertisement.Detailed Analysis:Issue 1: Jurisdiction of the PCIT under Section 263The assessee challenged the jurisdiction assumed by the PCIT under section 263 of the Act, arguing that the assessment order passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal noted that for invoking section 263, the PCIT must satisfy two conditions: the order must be erroneous and prejudicial to the interest of the Revenue. The Tribunal emphasized that the PCIT must record satisfaction based on material on record and cannot act arbitrarily. The Tribunal cited several judicial precedents, including the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT and the Delhi High Court's decision in DG Housing Projects Ltd., to support its conclusion that the PCIT's jurisdiction was not validly invoked in this case.Issue 2: Disallowance under Section 35 of the ActThe PCIT noted that the assessee debited Rs. 21,95,56,764/- in the Profit & Loss Account, but the amount admissible under section 35 of the Act was Rs. 20,61,11,598/-. The PCIT alleged that the excess amount of Rs. 1,34,45,166/- was not added back to the total income. The assessee contended that this amount was indeed added back in the computation of income. The Tribunal examined the financial statements and computation of income and found that the assessee had added back the excess amount. The Tribunal observed that the AO had conducted enquiries and verified the details during the assessment proceedings. The Tribunal concluded that the PCIT did not provide any material to show that the AO's order was erroneous or prejudicial to the Revenue. The Tribunal held that the PCIT's action under section 263 on this issue was not justified.Issue 3: Disallowance of Prior Period Expense on AdvertisementThe PCIT noted that the assessee debited Rs. 9,89,485/- under the head advertisement in the Profit & Loss Account, which pertained to the previous financial year and should have been disallowed. The assessee explained that the expense related to invoices from 'Linkedin' for advertisement expenses, which were crystallized and paid in the current year due to the receipt of necessary documents from the non-resident vendor. The Tribunal observed that there was no revenue implication since the tax rate was the same in both years. The Tribunal also noted that the PCIT did not conduct any enquiry or verification before concluding that the AO's order was erroneous. The Tribunal held that the PCIT's action under section 263 on this issue was not justified.Conclusion:The Tribunal quashed the PCIT's order under section 263 of the Act, concluding that the PCIT did not validly assume jurisdiction and that the AO's assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The appeal of the assessee was allowed.