ITAT quashes PCIT revision order under section 263 on disputed liabilities pending court adjudication

ITAT Indore quashed PCIT's revision order u/s 263 regarding recognition of Nardana Claim-1 and Nardana Claim-2 liabilities under ICDS. The tribunal held that AO had adequately investigated the matter through specific queries and detailed responses from assessee. Since the liabilities were disputed and pending court adjudication during AY 2018-19, income had not accrued until matters attained finality. Even if two views existed on taxability year, AO's favorable view to assessee cannot be termed erroneous-cum-prejudicial. PCIT failed to establish ICDS violation. Assessment order restored, assessee appeal allowed.

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Issues Involved:

1. Initiation of revision proceedings u/s 263.
2. Treatment of the assessment order as erroneous and prejudicial to the interests of revenue.
3. Inquiry and evidence regarding taxability of the award.
4. Reliance on judicial precedents.
5. Accrual and taxability of the arbitral award.
6. Non-duplication of income taxation.

Summary:

1. Initiation of Revision Proceedings u/s 263:
The assessee contended that the Pr. CIT erred in initiating revision proceedings u/s 263 of the Income-tax Act, 1961, ignoring that the AO had made specific inquiries during the assessment proceedings regarding the year of taxability of the award. The AO, after being satisfied with the replies and evidence provided by the assessee, accepted that the award was not taxable in the assessment year in question.

2. Treatment of Assessment Order as Erroneous and Prejudicial to Revenue Interests:
The Pr. CIT treated the assessment order dated 26.02.2021 passed u/s 143(3) by the National Faceless Assessment Centre, Delhi for A.Y. 2018-19 as erroneous and prejudicial to the interests of revenue. The Pr. CIT concluded that the AO had neither made any inquiry nor had the assessee filed any reply and evidence regarding the taxability of the award shown in Note No. 7 of the audited balance sheet.

3. Inquiry and Evidence Regarding Taxability of the Award:
The assessee argued that the AO had raised detailed queries regarding the liabilities shown as Nardana Claim-1 and Nardana Claim-2 and that the assessee had provided detailed submissions and legal evidence. The AO had accepted the explanations provided by the assessee, indicating that proper inquiries were made.

4. Reliance on Judicial Precedents:
The assessee cited various judicial precedents, including decisions by the Hon'ble Apex Court, High Courts, and Tribunals, which held that an order cannot be revised u/s 263 if the AO had made proper inquiries. The assessee also argued that the Pr. CIT failed to appreciate that the award, which was challenged before the court, would be accrued and liable to tax only in the year when the final order was passed by the court.

5. Accrual and Taxability of the Arbitral Award:
The assessee contended that the award amount should be taxed in the year when the final order of the court was pronounced. The assessee had included the income under the award in the total income of A.Y. 2019-20 when the final order was passed by the court. The assessee argued that if the award was taxed in A.Y. 2018-19, appropriate directions should be given to subtract the same from the total income of A.Y. 2019-20 to avoid double taxation.

6. Non-Duplication of Income Taxation:
The assessee emphasized that the same income cannot be taxed twice, and if the award was taxed in A.Y. 2018-19, it should be subtracted from the total income of A.Y. 2019-20. The Tribunal found that the AO had made specific queries and the assessee had provided detailed replies with documentary evidence. The Tribunal concluded that the AO had conducted sufficient inquiries and that the Pr. CIT's revision order was not sustainable.

Conclusion:
The Tribunal quashed the revision order passed by the Pr. CIT and restored the assessment order passed by the AO. The appeal was allowed, and the order was pronounced in the open court on 12.01.2024.

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