2018 (8) TMI 754 - AT - Income Tax

Tribunal overturns Pr.CIT's order, finds AO's inquiries sufficient. Assessee's appeal allowed.

The Tribunal held that the Principal Commissioner of Income Tax's order under Section 263 was not justified as the Assessing Officer had conducted ... Revision u/s 263 - Supervisory jurisdiction of CIT - Scope of Explanation 2 inserted below Section 263(1) - an order which is erroneous and prejudicial to the interest of the Revenue - CIT directed the AO to pass a fresh assessment order - CIT observed that, AO has failed to make adequate inquiries in respect of various issues discussed in the show cause notice - Eligibility of deduction u/s 80IC - non inquiry towards quality control and regulatory approval in relation to R&D expenses on which the assessee has claimed weighted deduction. Held that:- The action of the Revisional Commissioner requires to be objectively justifiable and cannot be a mere ipse dixit. The Pr.CIT ought to have made some elementary inquiry himself to unearth alleged error in the order of the AO which caused prejudice to the Revenue. Instead, the Pr.CIT has merely alleged absence of fuller inquiry and non-application of mind without showing any systematic efforts on his part to support the allegations. We are of the firm view that the Pr.CIT was expected to do more in the totality of the facts and context. Thus, it is difficult to agree with the allegation of the Pr.CIT on any of the issues raised in the show cause notice and the revisional Order. The Pr.CIT has drawn support from newly inserted Explanation 2 below Section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation being clarificatory would not lead to dilution of the basic requirements of Section 263(1) of the Act. The provisions of Section 263 although appears to be of a very wide amplitude and more particularly after insertion of Explanation 2 but cannot possibly mean that recourse to Section 263 of the Act would be available to the Revisional Authority on each and every inadequacy in the matter of inquiries and verification as perceived by the Revisional Authority. The Revisional action perceived on the pretext of inadequacy of enquiry in a plannery and blanket manner must be desisted from. The powers outlined under s.263 of the Act are extraordinary and drastic in nature and thus cannot be read to hold that an uncontrolled, unguided and uncanalised powers are vested with the competent authority. The powers under s.263 of the Act howsoever sweeping are not blanket nevertheless. The AO cannot be expected to go to the last mile in an enquiry on the issue or indulge in fleeting inquiries. The action of the Revisional Commissioner based on such expectation requires to be struck down. The use of expression ‘which should have been made’ in clause (a) to Explanation 2 to Section 263 of the Act is significant. This impliedly tests the action of AO on the touchstone of reasonableness and rationality in approach. It clearly suggests that context also holds the key in the matter of enquiry. The action of the AO requires to be evaluated contextually. We thus find merit in the plea of the assessee that the Revisional Commissioner is expected show that the view taken by the AO is wholly unsustainable in law before embarking upon exercise of revisionary powers. The revisional powers cannot be exercised for directing a fuller inquiry to merely find out if the earlier view taken is erroneous particularly when a view was already taken after inquiry. If such course of action as interpreted by the Revisional Commissioner in the light of the Explanation 2 is permitted, Revisional Commissioner can possibly find fault with each and every assessment order without himself making any inquiry or verification and without establishing that assessment order is not sustainable in law. The Explanation 2 to Section 263 of the Act do not, in our view, thwart the assessment process in the facts and the context of the case. Consequently, we find that the foundation for exercise of revisional jurisdiction is sorely missing in the present case Revision order set aside and cancelled - Decided in favor of assessee. Issues Involved:1. Validity of the order passed by the Pr.CIT under Section 263 of the Income Tax Act.2. Adequacy of inquiries made by the Assessing Officer (AO) on various expenses and deductions claimed by the assessee.Issue-wise Detailed Analysis:1. Validity of the order passed by the Pr.CIT under Section 263 of the Income Tax Act:The Tribunal examined whether the Pr.CIT rightly assumed jurisdiction under Section 263 of the Act. The Pr.CIT had set aside the AO's order, alleging it was erroneous and prejudicial to the interest of the Revenue due to inadequate inquiries. The Tribunal found that the AO had made substantial inquiries and disallowances, and the Pr.CIT's action was not justified merely on the grounds of perceived inadequacy of inquiries. The Tribunal emphasized that the AO's order should not be struck down lightly without showing it to be erroneous and prejudicial to the interest of the Revenue. The Tribunal concluded that the Pr.CIT's order was not sustainable and set it aside, restoring the AO's order.2. Adequacy of inquiries made by the Assessing Officer (AO) on various expenses and deductions claimed by the assessee:a. Business Advancement Expenses:The Pr.CIT alleged that the AO did not make adequate inquiries regarding the distribution of gift items worth Rs. 24.32 crores. The Tribunal noted that the AO had made detailed inquiries, obtained explanations, and made a 10% disallowance of the total expenses of Rs. 55.14 crores. The AO had also disallowed the entire expenditure of nearly Rs. 26 crores on academic/scientific grants to doctors. The Tribunal found that the AO had applied his mind and made substantial disallowances, and the Pr.CIT's allegation of non-inquiry was unfounded.b. Manufacturing Process and Goods:The Pr.CIT alleged that the AO failed to make meaningful inquiries regarding the manufacturing process and goods being produced at the Baddi and Sikkim units. The Tribunal observed that the AO had verified the eligibility for deductions under Sections 80IC and 80IE, examined the allocation of expenses, and made substantial disallowances. The Tribunal found that the AO had applied his mind and acted reasonably, and the Pr.CIT's allegation was not justified.c. R&D Expenses and Quality Control:The Pr.CIT alleged that the AO did not inquire whether separate expenses were incurred for quality control and regulatory approvals. The Tribunal noted that the AO had verified the expenses, obtained explanations, and made substantial disallowances. The AO had also considered the DSIR's exclusion of certain expenses from the eligible amount for weighted deduction under Section 35(2AB). The Tribunal found that the AO had made adequate inquiries and applied his mind, and the Pr.CIT's allegation was not justified.d. Patent-Related Expenses:The Pr.CIT alleged that the AO did not inquire about the eligibility of patent-related expenses outside India for weighted deduction under Section 35(2AB). The Tribunal found that the AO had disallowed the entire amount of Rs. 475.32 lakhs, along with other substantial disallowances. The Tribunal concluded that the AO had made adequate inquiries, and the Pr.CIT's allegation was unfounded.e. Clinical Research Expenses:The Pr.CIT alleged that the AO did not make inquiries regarding the nature and details of clinical research expenses. The Tribunal found that the AO had verified the expenses, obtained explanations, and made substantial disallowances. The Tribunal concluded that the AO had made adequate inquiries and applied his mind, and the Pr.CIT's allegation was not justified.f. Selling and Publicity Expenses:The Pr.CIT alleged that the AO did not inquire about the eligibility of selling and publicity expenses for deduction. The Tribunal noted that the AO had verified the expenses, obtained explanations, and considered the applicability of CBDT Circular No. 5/2012. The AO had also examined the transfer pricing documentation. The Tribunal found that the AO had made adequate inquiries and applied his mind, and the Pr.CIT's allegation was not justified.Conclusion:The Tribunal concluded that the AO had made adequate inquiries and applied his mind on all the issues raised by the Pr.CIT. The Tribunal found that the Pr.CIT's order under Section 263 was not justified and set it aside, restoring the AO's order. The appeal of the assessee was allowed.