2025 (8) TMI 189 - AT - Income Tax

Section 263 Revision Upheld for AO's Failure to Verify Expenses and Apply TDS Provisions Properly

ITAT Mumbai upheld the revision under section 263, finding that the AO committed an error prejudicial to the revenue by failing to verify the genuineness ... Validity of Revision u/s 263 - whether twin conditions of “error” and prejudicial to the interest of revenue’ were fulfilled or not? - HELD THAT:- AO has not verified the genuineness of expenditure claimed to have been incurred in this assessment year and (even though not debited to P&L A/c, but included in the closing WIP). The assessee has furnished details of sales and marketing expenses bifurcation only, but no evidence of payments made, deduction of TDS, whether incurred for the purpose of business etc. were not provided. Claim of expenditure is “Work-in-Progress” crystallized in this year as “WIP” which is being carried forward to set off against the profit in the subsequent years. So, it has the bearing on “profits” and there would be effect in subsequent years, and in subsequent years, the assessee’s claim would be the same does not pertain to the current year. Hence, whenever the claim is made, amounts are reflected in books of account, the genuineness, applicability of Income Tax provisions are to be examined in that year, eg., if TDS is to be done, it cannot be done in subsequent years as claimed by appellant company. It is not disputed that the Ld. AO has not examined the applicability of TDS Provisions, did not conduct any enquiries about the claims of payment like Displacement compensation to the extent of Rs. 6.64 cr., lease rent payment and its genuineness. Similarly, disallowance of interest to the extent of interest free loans given to related parties was also not made by ld. AO. The genuineness of claim of depreciation was also not examined. PCIT has given full opportunity to the appellant to explain all these aspects, took their explanation into consideration and categorically held in the para-III of order u/s 263 that Ld. AO failed to examine these issues mentioned in the notice and also in view of Explanation 2 of clause (a) and (b), it is held that twin conditions of “error” and “prejudicial to the interest” were satisfied as per the law laid down in the decisions of “Malabar Industrial Co [2000 (2) TMI 10 - SUPREME COURT] and “Max India Ltd.” [2007 (11) TMI 12 - SUPREME COURT]. The Finance Act, 2015, inserted an explanation -2 to section 263 of IT Act w.e.f. 01.06.2015 and CBDT in Circular No. 19 of 2015 dated 27.11.2015 has explained the interpretation of “Erroneous in so far as it is prejudicial to the interest of Revenue”, as if the order was passed by ld. AO without conducting enquiries and making verification which should have been done - Decided against assessee. ISSUES: Whether the revisional jurisdiction exercised under section 263 of the Income Tax Act was correctly invoked.Whether the twin conditions of 'error' and 'prejudicial to the interest of Revenue' were fulfilled in the assessment order.Whether the Assessing Officer adequately verified the genuineness and deductibility of claimed expenses and other claims such as depreciation, interest, and work-in-progress.Whether failure to conduct enquiries and verification by the Assessing Officer amounts to an erroneous order prejudicial to the interest of Revenue.Whether the explanation 2 inserted to section 263 by the Finance Act, 2015, and related CBDT Circular No. 19 of 2015, clarifies the scope of revisional jurisdiction in cases of non-verification. RULINGS / HOLDINGS: The revisional jurisdiction under section 263 was correctly exercised as the Assessing Officer's order was 'erroneous in so far as it is prejudicial to the interest of Revenue' due to failure to conduct necessary enquiries and verification.The twin conditions of 'error' and 'prejudicial to the interest of Revenue' were satisfied because the Assessing Officer did not verify the genuineness of significant expenditures, depreciation claims, interest disallowance, and work-in-progress, which have a bearing on profits and tax liability.The Assessing Officer failed to examine whether TDS was deducted on payments such as displacement compensation, consultancy fees, and lease rent, and did not disallow interest on interest-free loans to related parties, which warranted revision.The claim of depreciation was not supported by documentary proof of asset acquisition and use, and work-in-progress was not verified despite its materiality in the builder's accounts under the 'percentage completion method.'The explanation 2 to section 263 and CBDT Circular No. 19 of 2015 confirm that an order passed without conducting enquiries and verification that ought to have been done is 'erroneous' and prejudicial to the interest of Revenue, justifying revision under section 263. RATIONALE: The Court applied the statutory framework of section 263 of the Income Tax Act, including the amendment by the Finance Act, 2015, and the interpretative guidance from CBDT Circular No. 19 of 2015.Precedents from the Supreme Court and various High Courts were relied upon, including 'Malabar Industrial Co.' and 'Max India Ltd.,' establishing that failure to conduct necessary enquiries and verification renders the assessment order erroneous and prejudicial.The Court emphasized that the genuineness and applicability of claimed expenses and deductions must be examined in the year they are reflected in the books, including compliance with TDS provisions.The Court noted that the Assessing Officer's failure to verify key claims such as displacement compensation, consultancy fees, lease rent, depreciation, interest on loans, and work-in-progress constituted an error warranting revision.The Court affirmed the principle that the revisional power under section 263 is to be exercised where the order is erroneous and prejudicial, especially when enquiries that should have been made were omitted, as supported by multiple judicial decisions cited.