2025 (7) TMI 767 - HC - Income Tax

PCIT cannot invoke Section 263 jurisdiction at AO's instance, leasehold land exempted from Section 56(2)(x)

PRINCIPAL COMMISSIONER OF INCOME TAX 1 KOLKATA Versus M/s BRITANNIA INDUSTRIES LTD

The Calcutta HC upheld the Tribunal's decision setting aside the PCIT's order under Section 263. The Court held that PCIT incorrectly invoked Section 263 ... Revision u/s 263 - applicability of Section 56(2)(x) on the acquisition of leasehold land and building and disallowance of claim u/s 43B in relation to reversal or write back of provision for liabilities - HELD THAT:- PCIT invoked its jurisdiction u/s 263 of the Act at the instance of the AO, which was incorrect. In this regard, there are several decisions, some of which have also been referred to by Tribunal and as the legal position is well settled, we refrain from referring such decisions. Therefore, the finding of the learned Tribunal that the PCIT could not have invoked its power u/s 263 solely based upon the reference made by the AO is well founded. Valuation of the property and whether section 56(2)(x) of the Act would apply - We are required to examine the facts. The assessee acquired leasehold/free hold land and building for setting up of a mega industrial unit and the Government of Maharashtra had sanctioned several incentives which includes 100% reimbursement made by the assessee company. Therefore, the assessee had not gained in any manner whatsoever from value of the property at a lower value than the value adopted by the Stamp Duty Authority. As seen that the property was valued on scientific basis after conducting due diligence by a registered valuer. That apart, the property was not fully developed and has uneven surfaces and the assessee had to spent substantial money to enable setting up of a mega industrial unit. It is not in dispute that all these facts were placed before the NFAC and they were also disclosed in the notes of the tax audit report and the notes to the computation of income filed along with the return of income and those were scrutinised by the AO. Tribunal has extracted the relevant portion of the notes filed by the assessee before the AO. Therefore, it cannot be stated that the AO did not take into account all the factors and had accepted the plea of the assessee and completed the assessment. Therefore, the PCIT to invoke its power u/s 263 of the Act has to apply its mind to the audit report and record its satisfaction that the twin conditions required to be complied with u/s 263 of the Act have not been satisfied. Income Tax Act has a provision for full value and consideration in certain cases in section 50C of the Act. The very existence of such a provision is a clear indication that the valuation adopted by the Stamp Authorities is not always sacrosanct and power has been given for reference to the valuation authority where the assessee would also be entitled to contest such valuation as the said authority is being treated as an expert on the said subject. Therefore, the Tribunal was fully justified in holding that the PCIT could not have invoked its power under Section 263 of the Act. Though in the show-cause notice it is alleged that these aspects were not taken into consideration by the AO, curiously enough in the order passed under Section 263 of the Act dated 29.3.2023 the PCIT states that the Assessing Officer has not considered these aspects during the course of assessment; he has not made any inquiry on the issue nor did he issue any questionnaire in this regard and also held that the assessee in its reply dated 13.3.2023 did not contradict these facts. This finding rendered by the PCIT in its order dated 29.3.2023 is factually incorrect and the outcome of total non application of mind. Therefore, the finding rendered by the learned Tribunal is fully justified. That apart, while submitting the reply to the show-cause notice the assessee has pointed out section 56(2)(x) of the Act would not apply as the property was acquired by the assessee pursuant to an agreement for sale dated 31.12.2016 and on the said date section 56(2)(x) was not in the statute book as it was inserted with effect from 1.4.2017. Hence, the order passed under Section 263 of the Act was thoroughly failed. Disallowance of claim under Section 43B in relation to reversal or write back of provision for liability - Assessee in its reply dated 13.1.2023 to the show-cause notice issued u/s 263 of the Act after giving all the relevant facts contended that the reversal of a provision which was not allowed as an expense when created by virtue of section 43B of the Act, cannot now be brought to tax upon its reversal/write back and such an action would effectively amount to double addition of the said sum, which is wholly impermissible under law. Therefore, the PCIT was required to consider the explanation offered and take a decision in the matter. On the contrary, PCIT, while passing the order under Section 263 of the Act dated 29.3.2023, miserably failed to render any finding despite the fact that the assessee placed reliance on the decision in the case of PCIT vs. Eveready Industries India Limited [2021 (12) TMI 105 - CALCUTTA HIGH COURT] and, accordingly, set aside the order passed by the Assessing Officer with a direction to the Assessing Officer to examine whether the decision in the case of Eveready Industries India Ltd. would be applicable to the case of the assessee or not after giving due opportunity of being heard to the assessee. The manner in which the PCIT has dealt with this issue is wholly untenable and, therefore, Tribunal was justified in setting aside the order passed by the PCIT on that score. Thus, for all the above reasons, we are of the clear view that the learned Tribunal was right in allowing the assessee’s appeal and setting aside the order passed by the PCIT. Decided against the revenue. ISSUES: Whether the power under Section 263 of the Income Tax Act, 1961 can be invoked when the assessment order is alleged to be erroneous and prejudicial to the interest of the Revenue due to lack of due and proper enquiry and verification'Whether the jurisdiction under Section 263 of the Act can be validly invoked by the Principal Commissioner of Income Tax (PCIT) at the instance of the Assessing Officer'Whether Section 56(2)(x) of the Income Tax Act, 1961 applies to acquisition of leasehold property during the assessment year 2018-19 when there is a difference between the consideration paid and the stamp duty value'Whether reversal or write-back of a provision for liabilities disallowed under Section 43B of the Act results in an excess claim of deduction, and if so, how should it be treated for taxation purposes? RULINGS / HOLDINGS: The Tribunal was justified in quashing the order under Section 263 as the PCIT's invocation of jurisdiction was based solely on the reference made by the Assessing Officer, which is 'incorrect' and contrary to settled legal position; the 'twin conditions' of erroneous order and prejudice to Revenue were not satisfied.The PCIT could not validly invoke jurisdiction under Section 263 merely 'at the instance of the Assessing Officer' without independent satisfaction manifested in the show-cause notice, rendering the exercise of power invalid.Section 56(2)(x) was not applicable to the acquisition of the leasehold property in question because the agreement for sale predated the insertion of Section 56(2)(x) (effective from 1.4.2017), and the valuation adopted by the registered valuer was based on scientific methods and duly considered by the Assessing Officer; thus, the PCIT's order under Section 263 on this ground was unsustainable.The reversal or write-back of a provision disallowed under Section 43B cannot be taxed again as it would amount to 'double addition' which is impermissible under law; the PCIT failed to consider the assessee's explanation and relevant judicial precedent, justifying the Tribunal's setting aside of the PCIT's order on this issue. RATIONALE: The Court applied the statutory framework of Section 263 of the Income Tax Act, which requires that the assessment order must be both erroneous and prejudicial to the Revenue's interest, and that the PCIT must independently form and manifest satisfaction before invoking jurisdiction.The Court recognized the principle that jurisdiction under Section 263 cannot be invoked merely on the Assessing Officer's request, reaffirming settled precedent that the PCIT's satisfaction must be independent and recorded.Regarding valuation and applicability of Section 56(2)(x), the Court considered the effective date of the statutory amendment and valuation principles, noting that the existence of Section 50C indicates that stamp duty valuation is not absolute and can be contested by the assessee through expert valuation.In relation to Section 43B, the Court relied on the principle that expenses disallowed when created cannot be taxed again upon reversal, referencing relevant case law to prevent double taxation, and criticized the PCIT's failure to address this legal position.