2023 (4) TMI 91 - AT - Income Tax

Tribunal overturns PCIT order, finding Assessing Officer's limited scrutiny sufficient. No lack of enquiry or prejudice.

Asian Box Corporation Versus The Pr. CIT, Income Tax-1, Rajkot

The Tribunal set aside the order passed by the PCIT under section 263 of the Act, finding that the Assessing Officer had conducted a limited scrutiny ... Revision u/s 263 - as per PCIT it is not clear what was the purpose for which interest bearing loan was taken and where the same was utilized - AO has not verified the aspect of the “correct amount of interest expenditure which was claimed against interest income” - interest bearing funds utilized by the assessee to earn interest income on loans and deposits to an extent and the remaining portion of interest bearing loan was not utilized for the purpose of earning interest by the assessee - HELD THAT:- Assessment of the assessee was taken up under “limited scrutiny” under CASS for verifying the following CASS reasons “large deduction claimed under Section 57, higher turnover reported in Service Tax Return as compared to ITR”. Accordingly, the very purpose of initiating assessment proceedings under “limited scrutiny assessment” was with a view to examine large deduction claimed u/s 57. Notice was issued by the AO on 04.03.2019 u/s 142(1) in which a specific query was put forth to the assessee regarding the claim of deduction u/s 57 asking for details of expenditure claimed u/s 57 against the head “income from other sources”. Assessee had filed reply in which he had given details of interest expenditure claimed by the assessee during the year under consideration. Therefore, it cannot be stated that there was any lack of enquiry or non-application of mind by the AO in respect of justification for expenses claimed by the assessee u/s 57 - Also in the immediate preceding year similar claim of interest deduction was allowed to the assessee under Section 36(1)(iii) and hence taking into consideration the above fact the AO did not make any addition on this aspect. We are of the considered view that there is neither any lack of enquiry by the A.O. during the course of assessment proceeding and nor there is any prejudice which has been caused to the Department looking into the instant set of facts. Accordingly we are directing that the 263 order passed by the Ld. PCIT is liable to be set-aside. Appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED Whether the exercise of power under Section 263 is justified on the ground that the Assessing Officer failed to verify the correct amount of interest expenditure claimed under Section 57, constituting a lack of enquiry and rendering the assessment order erroneous and prejudicial to the interests of revenue. Whether the Principal Commissioner of Income Tax was justified in setting aside the assessment order and directing de novo assessment/verification specifically with respect to allowability of deduction claimed under Section 57(iii) (interest expenditure) when the Assessing Officer had initiated limited scrutiny proceedings and had sought and received specific information. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Section 263 revision on ground of 'lack of enquiry' by the Assessing Officer regarding interest expenditure claimed under Section 57. Legal framework: Section 263 empowers revision where an assessment order is found to be erroneous and prejudicial to the interests of revenue; such power is exercisable only where there was lack of proper enquiry/application of mind or a mistake in fact/law causing prejudice. Precedent Treatment: No judicial precedent was relied upon or applied in the judgment for this specific factual matrix; the Tribunal examined statutory scheme and record to determine existence of lack of enquiry. Interpretation and reasoning: The Tribunal examined the assessment record and found that the case was selected under 'limited scrutiny' specifically on CASS reasons including 'large deduction claimed under Section 57.' The Assessing Officer issued notice under Section 142(1) with an express item requesting details of expenditures claimed under Section 57, and the assessee furnished a detailed reply giving particulars and explanations about the interest expenditure and its use. The Assessing Officer in the assessment accepted the explanation (and in the preceding year the interest had been allowed under Section 36(1)(iii)). Given the express selection for limited scrutiny, specific queries served, and detailed responses furnished, the Tribunal concluded there was no absence of enquiry or non-application of mind by the Assessing Officer on the questioned aspect. Ratio vs. Obiter: Ratio - where the Assessing Officer initiates limited scrutiny on a specified CASS reason, issues a specific notice seeking details on that reason, and receives substantive replies, the mere later assertion in a revision order that there was a lack of verification does not, without more, establish that the original assessment was erroneous and prejudicial to revenue for purposes of Section 263. Obiter - observations on the acceptability of treating inadvertent misclassification of interest between heads (Section 57 vs Section 36(1)(iii)) as not prejudicial where allowance would be permissible under correct head, to the extent relevant to prejudice analysis. Conclusions: The Tribunal held that the revision under Section 263 was not justified on the ground of lack of enquiry; the Assessing Officer had carried out the relevant enquiry by issuing targeted notices under Section 142(1) and considering the detailed replies, hence the requirement for invoking Section 263 was not satisfied. Issue 2: Whether the Principal CIT was correct in setting aside the assessment and directing re-verification/de-novo assessment of interest expenditure (deduction under Section 57) when the Assessing Officer accepted the claim and prior year treatment supported such allowance under Section 36(1)(iii). Legal framework: Section 263 requires the revisional authority to satisfy itself that the original assessment is erroneous and prejudicial; setting aside is permissible only where the defect is such that the assessment cannot stand. The legal test focuses on error/prejudice and sufficiency of enquiry by AO. Precedent Treatment: The Tribunal relied upon factual record rather than external authorities; precedent principles implicit in Section 263 jurisprudence (error + prejudice + lack of adequate verification) guided the analysis. Interpretation and reasoning: The Tribunal considered that the Assessing Officer had specifically examined the claim in limited scrutiny, requested documentary evidence and ledgers, and the assessee explained that interest was incurred for business purposes and ought to be allowable under Section 36(1)(iii) though it was claimed in the return under Section 57 by inadvertence. The Tribunal also noted that the same treatment was given in the immediately preceding year by the AO after due verification. On these facts the Tribunal found no material showing the assessment to be erroneous or prejudicial that would warrant setting aside and directing fresh verification under Section 263. Ratio vs. Obiter: Ratio - where the AO has examined a claim pursuant to a targeted limited scrutiny selection, sought and considered relevant documents and explanations, and there is contemporaneous precedential treatment (prior year allowance), the revisional authority cannot simply set aside the assessment under Section 263 absent demonstrable error or prejudice. Obiter - commentary that inadvertent misclassification between heads, if substantively allowable under another provision, mitigates prejudice to revenue. Conclusions: The Tribunal held that the Principal CIT erred in setting aside the assessment and directing de novo verification; there was neither lack of enquiry nor prejudice to revenue, and therefore the Section 263 order was to be set aside. Cross-reference between issues The analysis of Issue 1 (absence of enquiry) and Issue 2 (power to set aside assessment) is interlinked: the Tribunal's finding that the AO had rightly carried out targeted verification under limited scrutiny was dispositive of the revisional power under Section 263, leading to the conclusion that setting aside the assessment was unjustified. Final Disposition On the assessed facts - selection under limited scrutiny, specific Section 142(1) queries on Section 57 deductions, detailed replies by the assessee, and prior year allowance under Section 36(1)(iii) - the Tribunal concluded that the revisionary order under Section 263 was without merit and set it aside; appeal allowed in favour of the assessee on this ground.