2016 (11) TMI 942 - AT - Income Tax

Tribunal upholds business income treatment, disallows section 263 revision

The Tribunal concluded that the Assessing Officer's decision to treat the surrendered income as business income and allow the deduction under section ... Revision u/s 263 - Held that:- Ample queries regarding the nature and source of income were made by the Assessing Officer during the assessment proceedings, which were duly replied to by the assessee. We do not hesitate to hold that even if the Assessing Officer has not mentioned the fact of the surrendered income being business income, specifically in his order, we understand that the Assessing Officer was satisfied to the effect that the income surrendered pertained to the business of the assessee. In view of this, we see that the Assessing Officer had made detailed enquiries and formed an opinion which was not illegal and his opinion is based on material and evidences on record. This is not the case of any error having crept in the order of the Assessing Officer, therefore, the Commissioner of Income Tax was not right in holding the order of the Assessing Officer to be erroneous. For assuming jurisdiction under section 263 of the Act, twin conditions of the order being erroneous as well prejudicial to the interest of the Revenue are to be applied simultaneously. Since we have already recorded that there is no error in the order of the Assessing Officer, the Commissioner of Income Tax cannot assume jurisdiction under section 263 of the Act. Accordingly, we quash the order of the Commissioner of Income Tax passed under section 263 of the Act. - Decided in favour of assessee. Issues Involved:1. Legality of the order under section 263 of the Income Tax Act, 1961.2. Justification of the exclusion of surrendered income from book profits for the purpose of computing partner remuneration.3. Alleged violation of principles of natural justice.Detailed Analysis:1. Legality of the order under section 263 of the Income Tax Act, 1961:The core issue is whether the Commissioner of Income Tax (CIT) was justified in invoking section 263 to revise the assessment order passed under section 143(3). The CIT argued that the Assessing Officer (AO) erroneously allowed the entire deduction without examining the allowability under section 40(b) of the Act. The CIT contended that the AO did not properly scrutinize the surrendered income of Rs. 16 lacs, which was credited to the Profit & Loss Account, and allowed the remuneration to partners based on this inflated book profit. The CIT relied on several judicial pronouncements, including the Gujarat High Court's judgment in Fakir Mohmed Haji Hasan Vs. CIT and the Punjab & Haryana High Court's judgment in M/s Kim Pharma (P) Ltd. Vs. CIT, to support his view that the AO's order was erroneous and prejudicial to the Revenue's interest.2. Justification of the exclusion of surrendered income from book profits for the purpose of computing partner remuneration:The assessee argued that the surrendered income was business income and should be included in the book profits for calculating partner remuneration. The AO had raised specific queries regarding the nature and source of the surrendered income during the assessment proceedings, and the assessee consistently maintained that it was business income. The Tribunal observed that the AO had applied his mind to the issue and allowed the deduction under section 40(b) based on the assessee's explanation. The Tribunal noted that the CIT's reliance on the Gujarat High Court's judgment was misplaced because the AO had accepted the assessee's explanation that the surrendered income was business income, thus satisfying the conditions for deduction under section 40(b).3. Alleged violation of principles of natural justice:The assessee claimed that the CIT violated the principles of natural justice by passing the order under section 263 without affording a reasonable opportunity of hearing. The proceedings were adjourned to 10-04-14, but the order was passed on 27-03-14. The Tribunal did not specifically address this issue in detail, focusing instead on the substantive grounds for quashing the CIT's order.Conclusion:The Tribunal concluded that the AO had made detailed inquiries and formed an opinion based on the material and evidence on record. The AO's decision to treat the surrendered income as business income and allow the deduction under section 40(b) was not erroneous. Therefore, the CIT was not justified in invoking section 263, as the twin conditions of the order being erroneous and prejudicial to the Revenue's interest were not met. The Tribunal quashed the CIT's order under section 263 and allowed the assessee's appeal.Order:The appeal of the assessee is allowed, and the order pronounced in the open court on this 13th day of April, 2016.