2021 (2) TMI 1025 - AT - Income Tax

Tribunal rules in favor of assessee, setting aside PCIT's order under Section 263.

The Tribunal set aside the Principal Commissioner of Income Tax's order under Section 263, ruling in favor of the assessee. It held that the Assessing ... Revision u/s 263 - allowability or otherwise of the losses booked on account of revaluation of nonconvertible debentures and of futures & options - HELD THAT:- In cases where there is inadequate enquiry but Lack of enquiry, again the Ld. CIT must give and record the finding that the order/enquiry made is erroneous. In the decision DG HOUSING PROJECTS LTD [2012 (3) TMI 227 - DELHI HIGH COURT] it was also observed by the Hon’ble Court that the income tax officer in this case had made enquiries in regard to the nature of expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. Claim was allowed by AO on being satisfied with the explanation of the assessee. Such decision of the AO cannot be held to be erroneous simply because in his order he did not make an allowable discussion in that regard. In the given case of the assessee, we notice that assessee has filed the financial statement along with relevant notes to accounts. AO after verification of the return of income and notes to account, he sought certain clarification which was properly submitted by the assessee in writing. Ld. CIT observes that the note submitted by the assessee is nothing but notes forming part of accounts. AO has merely accepted those explanation without applying his mind completed the assessment. It is fact on record that the issue under consideration is not a new issue came up afresh in this assessment year, we notice that similar issue was came up in the earlier assessment year and the coordinate bench has decided the issue on merit as well. In our considered view the learned CIT is not appreciated the fact that AO has applied one of the possible view in this case. DR submitted that the case of the assessee falls under explanation – 2 in section 263 of the Act and further relied in the case of Crompton Greaves Ltd [2016 (2) TMI 169 - ITAT MUMBAI] - The issue under consideration is, whether the AO has passed the order without enquiries or verification which he should have made. In this case, the assessee has filed the financial statement alongwith the notes and also findings of ITAT in the earlier Assessment Year. AO seeks clarification on those issues. The assessee responds to the query and files certain information. AO considers the same to complete the assessment and he takes the view that the claim of the assessee is proper. Therefore, it shows that AO has verified the issue. Whether it is adequate enquiry or not is the issue. The explanation 2(a) is applicable when no enquiries were made and it is proved on record that AO has made certain enquiry, therefore, for the improper enquiries, the explanation 2(a) is not applicable. Therefore, this line of argument is rejected. Moreover, if the notes to account is clear and explains the case of the assessee, the AO need not have to enquire further. Accordingly, the order passed u/s 263 is set aside and the grounds raised by the assessee are allowed. Issues Involved:1. Applicability of Section 263 of the Income Tax Act.2. Allowability of Marked to Market (MTM) loss on Non-Convertible Debentures (NCD).3. Allowability of MTM loss on Futures and Options (F&O).4. Jurisdiction and procedural correctness of the Principal Commissioner of Income Tax (PCIT) in invoking Section 263.Issue-wise Detailed Analysis:1. Applicability of Section 263 of the Income Tax Act:The PCIT invoked Section 263, stating that the assessment order dated 30.01.2014 was erroneous and prejudicial to the interest of the revenue. The PCIT observed that the Assessing Officer (AO) had not conducted appropriate inquiries regarding the MTM losses on NCDs and F&O. The PCIT argued that the AO accepted the assessee's claims without proper verification, which warranted the invocation of Section 263. The assessee contended that the AO had made inquiries and that the order could not be termed erroneous merely because the AO did not elaborate on the issues in detail. The Tribunal noted that the AO had sought clarifications from the assessee, who provided detailed explanations. The Tribunal concluded that the AO had applied his mind and decided the issue, thus the invocation of Section 263 was not justified.2. Allowability of MTM Loss on Non-Convertible Debentures (NCD):The PCIT observed that the losses on NCDs were notional and contingent in nature, thus not deductible under the Income Tax Act. The assessee argued that the losses were recognized as per Accounting Standard 30 (AS-30) and were allowable under the mercantile system of accounting. The Tribunal noted that the AO had considered the assessee's explanations and allowed the claim, indicating that the AO had applied his mind. The Tribunal also referred to the assessee's earlier years' cases where similar issues were decided in favor of the assessee, reinforcing that the AO's decision was one of the possible views.3. Allowability of MTM Loss on Futures and Options (F&O):The PCIT held that the losses on F&O were speculative in nature and not allowable under Section 73 of the Act. The assessee contended that as a non-banking financial company, Section 73 was not applicable, and the losses were allowable as they were held as stock-in-trade. The Tribunal observed that the AO had sought and received detailed explanations from the assessee, indicating that the AO had made inquiries and applied his mind. The Tribunal concluded that the AO's decision to allow the losses was a possible view and not erroneous.4. Jurisdiction and Procedural Correctness of PCIT in Invoking Section 263:The Tribunal emphasized that for Section 263 to be invoked, the order must be both erroneous and prejudicial to the interest of the revenue. The PCIT must provide a finding that the AO's order is unsustainable in law. The Tribunal found that the AO had made inquiries and applied his mind, and the PCIT had not quantified how the AO's order was prejudicial to the revenue. The Tribunal referred to the decision in the case of D.G Housing Projects, which stated that the PCIT must record a finding of error and prejudice before invoking Section 263. The Tribunal concluded that the PCIT's order was not sustainable as it did not meet the criteria for invoking Section 263.Conclusion:The Tribunal set aside the PCIT's order under Section 263, concluding that the AO had made necessary inquiries and applied his mind while allowing the assessee's claims. The Tribunal allowed the assessee's appeal, holding that the AO's order was not erroneous or prejudicial to the interest of the revenue. The Tribunal emphasized that the PCIT must provide a clear finding of error and prejudice to invoke Section 263, which was not done in this case.