Tribunal quashes order under Section 263, finding original assessment not erroneous. Assessee's appeal allowed.

The Tribunal quashed the order passed under Section 263, stating that the original assessment order was not erroneous or prejudicial to the interest of the revenue. The appeal filed by the assessee was allowed, and the decision was pronounced in the open court on 21.05.2021.

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Issues Involved:

1. Validity of proceedings under Section 263 of the Income Tax Act, 1961.
2. Examination of issues during the assessment proceedings.
3. Applicability of Section 153C and limitation period.
4. Examination of expenses, depreciation, and credits.
5. Applicability of Section 2(22)(e) on inter-corporate deposits.
6. Disallowance of proportionate interest on advances to sister concerns.
7. Jurisdiction and procedural compliance by the Assessing Officer (AO).

Detailed Analysis:

1. Validity of Proceedings under Section 263:

The assessee challenged the validity of the proceedings under Section 263 on the grounds that the Principal Commissioner of Income Tax (PCIT) initiated proceedings based on incorrect facts and failed to appreciate that all issues were examined during the assessment proceedings. The Tribunal found merit in the assessee's arguments, stating that the PCIT did not provide a clear basis for holding the assessment order as erroneous and prejudicial to the revenue. The Tribunal emphasized that the PCIT must conduct further inquiries and not merely set aside the order for de novo assessment.

2. Examination of Issues During Assessment Proceedings:

The Tribunal noted that the AO had issued a detailed questionnaire during the assessment proceedings and the assessee had provided comprehensive replies with documentary evidence. The AO had disallowed certain expenses and determined the total loss after making necessary inquiries. The Tribunal found that the AO had acted as an investigator and adjudicator, and his order could not be termed as erroneous merely because the PCIT had a different opinion.

3. Applicability of Section 153C and Limitation Period:

The Tribunal observed that the year of search for the assessee was AY 2014-15, as determined in the assessee’s own case for AY 2012-13. The assessment should have been framed by the AO having jurisdiction after the cases were centralized, i.e., the AO of Central Circle-I, Faridabad. Since the assessment order was passed by the DCIT, Central Circle-I, Gurgaon, it was held to be without jurisdiction. Additionally, the assessment order was barred by limitation as it was passed after the expiry date of 31.03.2016.

4. Examination of Expenses, Depreciation, and Credits:

The Tribunal found that similar expenses and depreciation were allowed in preceding assessment years and that the assessee had not completely stopped its business activities. The vehicles were in the name of the company, and depreciation was inevitable. The AO had made inquiries regarding the credits received from Mr. Vinod Ambawatta, and the assessee had provided all necessary details to prove the genuineness of the transactions.

5. Applicability of Section 2(22)(e) on Inter-Corporate Deposits:

The Tribunal agreed with the assessee that all inter-corporate deposits were given in preceding years and that the assessee had received deposits in the current year. The AO, in the order passed subsequent to the 263 order, did not make any addition under Section 2(22)(e) or disallow any depreciation on finance costs.

6. Disallowance of Proportionate Interest on Advances to Sister Concerns:

The Tribunal noted that most of the advances were given in preceding years and no disallowances were made in those assessments. The assessee had sufficient own capital and free reserves to cover the interest-free advances, and therefore, the AO's order was not erroneous.

7. Jurisdiction and Procedural Compliance by the AO:

The Tribunal held that the AO's order was without jurisdiction as it was passed by the wrong AO and was barred by limitation. The AO did not issue the mandatory notice under Section 153C and did not obtain prior approval from the JCIT before passing the order for the impugned assessment year. Consequently, the order passed under Section 263 was also held to be bad in law.

Conclusion:

The Tribunal quashed the order passed under Section 263, stating that the original assessment order was not erroneous or prejudicial to the interest of the revenue. The appeal filed by the assessee was allowed, and the decision was pronounced in the open court on 21.05.2021.

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