2020 (2) TMI 247 - AT - Income Tax

Tribunal Confirms Reassessment Due to Incomplete Inquiry by AO, Dismisses Assessee's Appeal for Service Tax Input Write-Off.

The Tribunal upheld the Pr.CIT's invocation of Section 263, determining that the AO's failure to conduct necessary inquiries into the service tax input ... Revision u/s 263 - whether the AO before concluding the Assessment did make any enquiry on this aspect? - service tax input written off allowability - HELD THAT:- Assessee could not substantiate before us as to how the AO made enquiries on this issue before concluding the assessment, except by pointing out that all facts were laid before the AO and it can be presumed that he had taken note of this aspect while concluding the assessment. The fact that the AO himself initiated proceedings u/s.154 of the Act to rectify error apparent on record on the aspect of having allowed service tax input written off as a deduction goes to show that he had while completing the Assessment not enquired or was not conscious of the merits of the claim for deduction of the aforesaid sum while computing income. The law is well settled that if there is a failure on the part of AO to make an enquiry on the issue which calls for an enquiry, that by itself will render the order of assessment erroneous and prejudicial to the interests of the revenue. We need not examine the arguments of the learned counsel for the Assessee in this regard because Explnation-2 is only a deeming provision and if on facts it is found that the AO did not make any enquiries before concluding the assessment on the question whether service tax input written off can be allowed as a deduction in computing income from business, there is no need to take recourse to the deeming provisions. As far as the merits of the claim made by the learned counsel for the Assessee that the service tax input written off is an allowable deduction, he relied on the decision of Delhi ITAT in the case of Maruti Suzuki Ltd. [2015 (9) TMI 20 - ITAT DELHI]. We do not think it necessary to deal with the merits of the claim of the Assessee as the same will be examined by the AO in the set aside proceedings. We, however, make it clear that the observations of the CIT in paragraphs 6 & 7 of the impugned order with regard to correctness of the claim of the Assessee regarding deductibility of the sum in question are not warranted because the jurisdiction u/s.263 of the Act is invoked on the ground that the AO failed to make necessary enquiry which he ought to have made before completing the assessment. The aforesaid observations in the impugned order should not therefore have any effect in the set aside proceedings before the AO and the subsequent appellate authorities. - Decided against assessee. Issues Involved:1. Whether the Assessing Officer (AO) failed to conduct adequate inquiries regarding the service tax input receivable written off.2. Whether the Principal Commissioner of Income-tax (Pr.CIT) was justified in invoking jurisdiction under Section 263 of the Income-tax Act, 1961.3. Whether the service tax input written off qualifies as an admissible expenditure under Section 37(1) of the Act.4. Whether the service tax input written off can be allowed as a business loss under Section 28 of the Act.5. Applicability of Explanation 2 to Section 263 of the Act.Detailed Analysis:1. Adequacy of AO's Inquiries:The Pr.CIT observed that the AO did not make any inquiries regarding the service tax input receivable written off in the Profit & Loss (P&L) account. The AO's failure to conduct adequate inquiries on this aspect rendered the assessment order erroneous and prejudicial to the interests of the revenue. The Tribunal noted that the AO did not raise any queries about the service tax input written off in the notices issued under Sections 143(2) and 142(1) of the Act. The Tribunal concluded that the AO failed to make necessary inquiries, thereby justifying the Pr.CIT's invocation of Section 263.2. Justification for Invoking Section 263:The Pr.CIT invoked Section 263, asserting that the AO's order was erroneous and prejudicial to the interests of the revenue due to the lack of inquiry into the service tax input written off. The Tribunal upheld this invocation, referencing the legal principle that an order is erroneous if the AO fails to make necessary inquiries. The Tribunal cited the case of Gee Vee Enterprises vs. DCIT, emphasizing that the AO's role includes investigation and that failure to inquire justifies the Pr.CIT's revisionary powers under Section 263.3. Admissibility of Service Tax Input Written Off under Section 37(1):The assessee argued that the service tax input written off should be allowed as a deduction under Section 37(1) of the Act, as it was incurred wholly and exclusively for business purposes. The Pr.CIT, however, found that the AO did not examine this claim. The Tribunal did not delve into the merits of this claim, stating that the AO should examine it during the set-aside proceedings. The Tribunal also noted that the Pr.CIT's observations on the merits of the claim should not influence the AO's fresh assessment.4. Service Tax Input Written Off as Business Loss under Section 28:The assessee contended that the service tax input written off should be allowed as a business loss under Section 28. The Pr.CIT dismissed this claim, stating that the AO failed to make inquiries on this aspect. The Tribunal did not address the merits of this contention, leaving it to be examined by the AO in the fresh assessment.5. Applicability of Explanation 2 to Section 263:The assessee argued that Explanation 2 to Section 263, introduced by the Finance Act, 2015, was not applicable to the assessment year 2014-15. The Tribunal stated that it need not examine this argument as the AO's failure to make inquiries was sufficient to invoke Section 263 without recourse to the deeming provisions of Explanation 2.Conclusion:The Tribunal upheld the Pr.CIT's invocation of Section 263, agreeing that the AO's failure to inquire into the service tax input written off rendered the assessment order erroneous and prejudicial to the interests of the revenue. The Tribunal dismissed the assessee's appeal and directed the AO to re-examine the issues afresh, ensuring that the Pr.CIT's observations do not influence the new assessment.