2016 (5) TMI 340 - AT - Income Tax

Tribunal sets aside Commissioner's orders under Section 263, restores original decisions

The Tribunal allowed the assessee's appeals, setting aside the Commissioner's orders under Section 263 for both assessment years. The original Assessing ... Jurisdiction under section 263 - order erroneous and prejudicial to revenue - allowability of additional depreciation for installation of wind electric generators by a manufacturer - accounting treatment of obsolete stores and spares - revenue write off versus capitalization and adjustment to WDV - assessment officer's possible view versus change of opinion by revising authority - requirement of opportunity of hearing / show cause notice for matters to be revised under section 263Allowability of additional depreciation for installation of wind electric generators by a manufacturer - jurisdiction under section 263 - order erroneous and prejudicial to revenue - assessment officer's possible view versus change of opinion by revising authority - Allowability of additional depreciation claimed for wind mills in A.Y. 2009-10 and whether the Commissioner rightly invoked powers under section 263 to revise the assessment on this ground. - HELD THAT: - The Tribunal examined whether the A.O.'s allowance of additional depreciation was an incorrect application of law or an incorrect assumption of fact such as would render the assessment order 'erroneous and prejudicial' for purposes of revision under section 263. The Tribunal noted and applied the ratio in Malabar Industrial Co. Ltd. that both conditions (erroneousness and prejudice) must co exist and that an incorrect application of law or wrong assumption of fact may attract section 263. However, the Tribunal found that the A.O.'s decision to allow additional depreciation was supported by the judgment of the Jurisdictional High Court in Diamines and Chemicals Ltd., which followed the Madras High Court decision in VTM Ltd., establishing that a manufacturer installing wind electric generators could claim additional depreciation. Because the A.O.'s view was a possible view backed by binding judicial precedent, it did not amount to an erroneous order prejudicial to revenue warranting revision under section 263. [Paras 15, 16, 17]The Commissioner had no jurisdiction to revise the assessment on this ground; the A.O.'s allowance is sustained and the Commissioner's observation is set aside.Accounting treatment of obsolete stores and spares - revenue write off versus capitalization and adjustment to WDV - assessment officer's possible view versus change of opinion by revising authority - jurisdiction under section 263 - order erroneous and prejudicial to revenue - Allowability of write off of obsolete stores and spares in A.Y. 2009-10 (and the analogous issue in A.Y. 2010-11) and whether the Commissioner could invoke section 263 on the ground that the A.O. failed to examine capitalization/WDV implications. - HELD THAT: - The Tribunal reviewed the record showing that the A.O. had specifically called for details, examined the company's accounting policy and supporting annexures, and accepted the assessee's explanation that items below a specified value were charged to P&L on consumption and that obsolete items were written off as per an approved policy. The Commissioner had proceeded on assumptions (that the spares were capitalized or that purchases had already been debited to P&L causing double deduction) without displacing the A.O.'s factual verification. Where the A.O.'s conclusion is a possible view reached after verification of records and supported by the company's documented policy and replies, the revisional jurisdiction under section 263 cannot be exercised merely because the Commissioner holds a different view. The Tribunal also noted authorities emphasizing the need to disclose issues in the show cause notice and not raise fresh matters in the final revision order; however, on the facts here the Tribunal concluded the A.O. had examined the matter and reached a possible view. [Paras 18, 19, 20, 21, 26]The Commissioner's revision on account of obsolete stores and spares is set aside; the A.O.'s assessment is upheld as a possible view taken after verification.Requirement of opportunity of hearing / show cause notice for matters to be revised under section 263 - jurisdiction under section 263 - order erroneous and prejudicial to revenue - Whether the Commissioner could direct disallowance in A.Y. 2010-11 of gratuity provision on the basis of the auditor's report where no deduction had been allowed in the return because the assessee had already disallowed the amount under section 43B. - HELD THAT: - The Tribunal found that the assessee had already not claimed the disputed gratuity amount in computing total income for the year (the amount was disallowed under section 43B), so there was no positive allowance in the assessment that could be characterized as erroneous and prejudicial. The Commissioner's attempt to direct the A.O. to disallow under section 40A(7) was unsustainable when no deduction had been claimed; any apprehension about future claims is to be examined in the year of such claim. The Tribunal therefore held that there was no basis to treat the assessment as erroneous and prejudicial on this ground. [Paras 25, 28, 29, 30, 31]The Commissioner's direction to disallow the gratuity provision cannot be sustained; the revision is set aside and the A.O.'s assessment is restored.Final Conclusion: Both appeals by the assessee are allowed: the orders of the Commissioner under section 263 are set aside and the assessments framed by the Assessing Officer for A.Y. 2009-10 and A.Y. 2010-11 are restored. Issues Involved:1. Jurisdiction of the Commissioner under Section 263 of the Income Tax Act.2. Allowability of additional depreciation on windmills.3. Allowability of write-off of obsolete stores and spares.4. Disallowance of provision for payment of gratuity under Section 40A(7) of the Income Tax Act.Issue-wise Detailed Analysis:1. Jurisdiction of the Commissioner under Section 263:The assessee challenged the jurisdiction of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, asserting that the CIT erred in invoking these powers. The Tribunal examined whether the CIT had rightly assumed power under Section 263, referencing the Supreme Court's decision in Malabar Industrial Co. Ltd. 243 ITR 83, which states that the CIT must be satisfied that the order of the Assessing Officer (AO) is both erroneous and prejudicial to the interests of the revenue.2. Allowability of Additional Depreciation on Windmills:The CIT contended that the AO's allowance of additional depreciation on windmills was erroneous and prejudicial to the revenue. However, the Tribunal noted that this issue was covered in favor of the assessee by the Gujarat High Court's decision in Diamines and Chemicals Ltd., which allowed additional depreciation on wind electric generators for an assessee engaged in manufacturing chemicals. The Tribunal concluded that the AO's decision was supported by judicial precedent and thus not erroneous or prejudicial to the revenue.3. Allowability of Write-off of Obsolete Stores and Spares:The CIT argued that the AO had not adequately examined the write-off of obsolete stores and spares, making the assessment order erroneous and prejudicial. The Tribunal found that the AO had made specific inquiries and verified the details provided by the assessee, including the company's policy and accounting treatment for obsolete stores. The Tribunal held that the AO had taken a possible view, and the CIT's invocation of Section 263 was not justified. The Tribunal cited the Delhi High Court's decisions in Ashish Rajpal and Contimeters Electricals Pvt. Ltd., emphasizing the need for the CIT to provide the assessee an opportunity to respond to all issues considered erroneous.4. Disallowance of Provision for Payment of Gratuity under Section 40A(7):For the assessment year 2010-11, the CIT noted that the provision for payment of gratuity was not allowable under Section 40A(7) as per the auditor's report. However, the Tribunal observed that the assessee had already disallowed the provision under Section 43B in the statement of total income. The Tribunal found that the CIT's direction to disallow the provision under Section 40A(7) was unnecessary since no deduction had been claimed. The Tribunal concluded that the CIT's apprehension about future claims could be addressed in the relevant year, not the current one.Conclusion:The Tribunal set aside the CIT's orders under Section 263 for both assessment years and restored the AO's original orders. The appeals filed by the assessee were allowed, and the Tribunal pronounced the order in open court on 31-03-2016.