2025 (6) TMI 1144 - HC - Income Tax

AO's failure to examine 100% depreciation claim on leasehold improvements justifies CIT's revision under section 263

Herbalife International India Pvt. Ltd., Versus The Commissioner Of Income-Tax-I, Bengaluru, Principal Commissioner Of Income-Tax, Bengaluru.

The Karnataka HC upheld the CIT's revision u/s 263, finding the AO's assessment order erroneous and prejudicial to revenue interests. The AO failed to ... Validity of revision u/s 263 - as per CIT AO had not examined the issue of claim of depreciation on leasehold improvements - HELD THAT:- The conclusion drawn both by the CIT (Appeals) and the Tribunal are justified as factual matrix of the case clearly established that there is no such material on records to show that either such material was called for and examined by the AO or filed vide assessee's letter and therefore the order of the Assessing Officer on this issue is both erroneous and prejudicial to the interests of revenue. Assessing Officer did not cause any enquiry to be made in the course of assessment proceedings in respect of the assessee's claim for 100% depreciation on leasehold improvements as there is neither whisper nor mention of this issue either in the assessee's submissions before the AO nor in the order of assessment for AY 2008-09. Decided against assessee. The core legal questions considered in this judgment revolve around the validity and correctness of revisionary proceedings initiated under Section 263 of the Income Tax Act, 1961 ('IT Act') against the order of assessment passed by the Assessing Officer ('AO') for the Assessment Year (AY) 2008-09. Specifically, the issues are:1. Whether the AO had applied his mind and examined the appellant's claim for 100% depreciation on leasehold improvements during the regular assessment proceedings.2. Whether the order passed by the AO allowing 100% depreciation on leasehold improvements was erroneous and prejudicial to the interest of revenue, thereby justifying revision under Section 263.3. Whether the Tribunal and the Commissioner of Income Tax (Appeals) ('CIT(A)') were correct in upholding the revisionary order passed under Section 263.4. The relevance and effect of prior judicial decisions and prior orders in the appellant's own case on similar issues of leasehold improvements and depreciation.5. The significance of rectification proceedings under Section 154 of the IT Act initiated by the AO on the issue of depreciation on leasehold improvements and its bearing on the revisionary proceedings.Issue-wise Detailed Analysis:Issue 1: Whether the AO applied his mind and examined the claim of 100% depreciation on leasehold improvements during assessment proceedingsThe legal framework involves the principle that an assessment order must be passed after proper application of mind by the AO. Section 263 allows revision if the order is erroneous and prejudicial to the interest of revenue, which includes orders passed without application of mind.The CIT(A) and Tribunal relied on the appellant's own admission through its authorized representative during revisionary proceedings that no enquiry or examination was conducted by the AO on the issue of depreciation on leasehold improvements. The AO's order dated 29.10.2012 was silent on this issue, and the documents filed during assessment proceedings (including the letter dated 15.07.2011) did not indicate any enquiry or consideration of the depreciation claim.The Court emphasized that mere disclosure of depreciation claim in tax audit reports or financial statements does not suffice to establish that the AO applied his mind. The absence of any discussion or enquiry on this issue in the assessment order or records is indicative of non-application of mind.Competing arguments by the appellant that the AO had consciously allowed 100% depreciation based on prior years' decisions and that the issue was litigated previously were rejected. The Court held that each assessment year is a separate proceeding and the factual nature of leasehold improvements and depreciation claim may differ, necessitating fresh examination by the AO.Thus, the Court concluded that the AO had not applied his mind or examined the depreciation claim during the assessment proceedings for AY 2008-09.Issue 2: Whether the AO's order allowing 100% depreciation was erroneous and prejudicial to the interest of RevenueThe Court referred to the Supreme Court precedent that an order passed without application of mind or based on incorrect assumptions is erroneous. The phrase 'prejudicial to the interest of revenue' is broad and not confined to actual loss of tax but includes orders that are legally unsustainable or incorrect.Since the AO did not examine the issue, the allowance of 100% depreciation was held to be an incorrect assumption of fact and law, making the order erroneous and prejudicial to revenue. The CIT(A) relied on this principle and held the assessment order liable to revision.The appellant's reliance on prior favorable orders and judicial decisions was held to be immaterial since the facts and nature of leasehold improvements differ year to year, and the AO's failure to examine the issue afresh rendered the order erroneous.Issue 3: Whether the revisionary proceedings under Section 263 were valid and correctly upheld by the Tribunal and CIT(A)Section 263 empowers the Commissioner to revise an order if it is erroneous and prejudicial to revenue. The CIT(A) and Tribunal found that the AO's order was passed without application of mind on the depreciation issue, fulfilling the criteria for revision.The appellant contended that the revision was based on an objection by the Audit Department without independent application of mind by the Commissioner. The Court rejected this argument, holding that the Commissioner's satisfaction was based on the admitted facts and the silent assessment order, which justified revision.The Tribunal also observed that the AO's failure to make enquiry or call for relevant material on the depreciation claim further supported the revision. The appellant's contention that the issue was debatable and hence not a mistake apparent from record was also rejected since the AO's non-examination itself constituted an error.Issue 4: Effect of prior judicial decisions and earlier orders in appellant's own case on leasehold improvementsThe appellant relied on earlier favorable orders from the Tribunal and CIT(A) in prior assessment years and judicial precedents to argue that the claim for 100% depreciation was well-established and accepted.The Court clarified that each assessment year is distinct and the factual nature of leasehold improvements may vary. Prior decisions do not preclude fresh examination by the AO. The CIT(A) and Tribunal rightly held that the AO's failure to examine the issue in the present year cannot be cured by prior favorable orders.Therefore, reliance on prior decisions was held to be of no consequence in the absence of proper examination in the current assessment year.Issue 5: Relevance of rectification proceedings under Section 154 initiated by the AOThe appellant argued that the AO had initiated rectification proceedings under Section 154 to correct excess depreciation allowed, and subsequently did not proceed with rectification as the issue was not a mistake apparent from record, implying that the AO had applied mind.The Court noted that rectification proceedings are separate and distinct from revision under Section 263. The Tribunal correctly observed that the rectification proceedings were not before it and could not be considered in the revision appeal.Moreover, the AO's decision not to rectify did not amount to an examination or application of mind during the original assessment proceedings. The Court held that the rectification proceedings did not negate the fact that the AO had not examined the depreciation claim during assessment.Significant Holdings:'An incorrect assumption of facts and an incorrect application of law will satisfy the requirement of the order being 'erroneous'. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax.''The Assessing Officer has not examined and not applied his mind in respect of allowability of rate of depreciation on leasehold improvements. By not examining or by non-application of mind on the part of the AO, the assessment order is not only erroneous but also prejudicial to the interest of revenue.''The order of assessment for Assessment Year 2008-09 is completely silent on the issue of depreciation on leasehold improvements. The Assessing Officer has neither made any enquiry nor applied his mind in respect of the issue before us.''The nature of expenditure on leasehold improvements may be different in each year and the same was not examined by the assessing officer. Similarly, the other decisions relied upon by the assessee will also be of no consequence as the facts of each case have to be considered separately.''Passing of an order of assessment is the prerogative of the Assessing Officer. The assessee has no control over the Assessing Officer for passing the order of assessment in a particular/specific manner, but if the discussion is not discernible from the order of assessment, then in order to ascertain whether the Assessing Officer has applied his mind or not, the higher forums can go through the show cause notice; if issued by the Assessing Officer and the reply given by the assessee.'The Court's final determination was to dismiss the appellant's appeal and uphold the revisionary order under Section 263, concluding that the AO's order allowing 100% depreciation on leasehold improvements was erroneous and prejudicial to the interest of revenue due to non-application of mind and lack of enquiry. The revisionary proceedings were validly initiated and correctly upheld by the CIT(A) and Tribunal.