2025 (10) TMI 578 - AT - Income Tax

Tax authority's s.263 revision upheld: AO's disallowance of goodwill depreciation was erroneous, merits to be decided in pending appeal

CPL Holdings LLP (Successor to CPL Holdings Private Limited) Versus Principal Commissioner of Income Tax, Ahmedabad

ITAT AHMEDABAD upheld the PCIT's exercise of revisionary jurisdiction under s.263, holding that s.263 applies to errors apparent on the record even if ... Revision u/s 263 - Disallowance of depreciation on goodwill - PCIT jurisdiction in respect of an error which is apparent from record - HELD THAT:- The provision of Section 263 of the Act does not preclude the PCIT to exercise his jurisdiction in respect of an error which is apparent from record and could also be subject to rectification under the provisions of Section 154 of the Act. When the case record is called for and examined by the PCIT, any error in the order noticed by him which is prejudicial to the interest of revenue, is subject matter of his revisionary jurisdiction u/s 263 of the Act. Merely because such an error can also be rectified under other provisions viz. u/s 147 or u/s 154 of the Act, does not take away the inherent jurisdiction of the PCIT. Once having noticed the mistake, it is incumbent upon the PCIT to pass order u/s 263 of the Act and issue necessary direction to the AO. Therefore, the plea of the assessee that the Ld. PCIT could not have passed order u/s 263 of the Act in respect of a mistake apparent from record which could be rectified u/s 154 of the Act, cannot be accepted. We cannot preclude the Ld. PCIT from exercising his jurisdiction u/s 263 of the Act, given as per the statute. Whether the order of the AO was erroneous and prejudicial to the internet of the revenue? - In the present case the AO had wrongly disallowed the depreciation on goodwill of Rs. 10,89,82,058/-; as against the claim of Rs. 27,63,20,888/- made by the assessee. Therefore, the order of the AO was not only erroneous but also prejudicial to the interests of the revenue and the Ld. PCIT had rightly exercised his jurisdiction u/s 263 of the Act. As regarding the contention of the assessee that no disallowance in respect of the depreciation on goodwill was called for in view of the judgement of Smifs Securities Limited [2012 (8) TMI 713 - SUPREME COURT] this aspect can be examined in the course of regular appeal against the quantum addition made by the AO. Assessee has already filed an appeal against the addition as made by the AO, which is pending before the ld. CIT(A). If we adjudicate the merit of addition in the present appeal filed by the assessee against the order under Section 263 of the Act, we will be pre-empting the Ld. CIT(A) from taking a decision on this issue in the quantum appeal, which is not desirable. The merit of addition is required to be decided only in the appeal against quantum addition and not in the present appeal. Appeal of the assessee is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner of Income Tax (PCIT) can exercise revisionary jurisdiction under Section 263 of the Income Tax Act in respect of an order of the Assessing Officer that contains a mistake apparent from record which could alternatively be rectified under Section 154. 2. Whether an assessment order is 'erroneous and prejudicial to the interests of the revenue' within the meaning of Section 263 where the Assessing Officer disallowed depreciation on goodwill in principle but, by error in computation, made a lesser addition in the assessment computation than the amount actually disallowed. 3. Whether the correctness on merits of allowing depreciation on goodwill (relying on judicial precedents permitting amortisation/depreciation) can be examined in proceedings under Section 263 or must be left to the appeal against quantum. ISSUE-WISE DETAILED ANALYSIS Issue 1: Jurisdiction under Section 263 vis-à-vis errors rectifiable under Section 154 Legal framework: Section 263 empowers the Commissioner to revise any order if it is 'erroneous' and 'prejudicial to the interests of the revenue.' Section 154 provides for rectification of mistakes apparent from record. Precedent Treatment: The Tribunal distinguished a coordinate-bench decision where the mistake was limited to tax calculation and no error was pointed out in the assessment order itself; that decision held rectification under Section 154 appropriate. The Court noted authorities permitting exercise of Section 263 even where the error might also be susceptible to correction under other provisions, if the order is otherwise erroneous and prejudicial. Interpretation and reasoning: The Tribunal held that the statutory jurisdiction under Section 263 is not ousted merely because the identified error could be corrected under Section 154 (or other provisions). When the PCIT, on calling for the record, notices an error in the assessment order itself that is prejudicial to revenue, the PCIT may exercise revisionary powers and issue directions to the AO. The critical inquiry is whether the AO's order is erroneous and prejudicial to revenue, not whether an alternative rectification mechanism exists. Ratio vs. Obiter: Ratio - Section 263 jurisdiction is available even where the error is apparent and could be rectified under Section 154; availability of alternative remedy does not oust revisionary power. Obiter - commentary distinguishing factual matrix of the cited coordinate-bench decision on calculation errors. Conclusion: PCIT was entitled to exercise jurisdiction under Section 263 despite the existence of Section 154 as an alternative remedy, where the error affected the assessment order itself and was prejudicial to revenue. Issue 2: Whether the AO's order was erroneous and prejudicial where addition in computation differed from the disallowance recorded Legal framework: The threshold for invoking Section 263 requires the impugned order to be both erroneous and prejudicial to the revenue. A discrepancy between the AO's recorded conclusion and the computation in the assessment can constitute an error apparent from record. Precedent Treatment: The Tribunal relied on the principle that factual misstatements or computational discrepancies in the assessment order which result in lesser addition than warranted can render the order prejudicial; prior Tribunal authority dealing with mere calculation errors (where no error in the assessment order was pointed out) was found distinguishable. Interpretation and reasoning: The Tribunal found undisputed facts that the assessee claimed a certain amount of depreciation on goodwill, the AO recorded disallowance of depreciation but the computation in the assessment reflected only a part of that disallowance by mistake. This mismatch constituted an error in the assessment order itself. Since the error led to a lower addition than appropriate, it was prejudicial to revenue. The PCIT's detection of that mistake on calling for records and consequent exercise of revisionary power was therefore proper. Ratio vs. Obiter: Ratio - A mismatch between an AO's express disallowance and the computation which results in a lesser addition is an error apparent from record and, if prejudicial, justifies revision under Section 263. Obiter - observations on factual distinctness from cases where only tax computation (and not the assessment order) contained errors. Conclusion: The AO's order was erroneous and prejudicial because of the discrepancy between the stated disallowance and the computation; the PCIT rightly set aside the assessment order under Section 263 and directed a fresh/rectified assessment. Issue 3: Whether merits of depreciation on goodwill should be adjudicated in Section 263 proceedings Legal framework: Section 263 proceedings are supervisory and directed to correctness of the order; adjudication of disputed facts/merits is generally the domain of assessment proceedings and appeals therefrom. Appellate remedy lies against quantum additions before the Commissioner (Appeals) and onward to the Tribunal. Precedent Treatment: The Tribunal referred to Supreme Court authority and Tribunal practice that merits of additions should not ordinarily be decided in revisionary proceedings when an appeal against quantum is pending. Interpretation and reasoning: The Tribunal declined to entertain the assessee's contention on the admissibility of goodwill depreciation (including reliance on higher court precedent allowing depreciation) within the Section 263 appeal, because doing so would pre-empt the appellate forum (CIT(A)) which already had the quantum appeal pending. The Tribunal emphasised that Section 263 is concerned with whether the AO's order was erroneous and prejudicial, not with re-adjudicating substantive controversies that are pending on appeal. Ratio vs. Obiter: Ratio - Merits of disputed additions should be adjudicated in the appeal against quantum and not in revision proceedings under Section 263; revision should not pre-empt appellate adjudication on merits. Obiter - reference to the specific precedent relied upon by the assessee to contest disallowance; the Tribunal indicated that such merits can be examined in the pending quantum appeal. Conclusion: The Tribunal will not decide the substantive correctness of allowing depreciation on goodwill in the Section 263 appeal; that issue remains for determination in the appeal against quantum additions. Overall Disposition Because the assessment order contained an apparent error in respect of the quantum of addition (AO's disallowance inconsistent with the computation) that was prejudicial to revenue, and because the PCIT is not precluded from exercising revisionary jurisdiction where an error could also be rectified under Section 154, the revision under Section 263 was valid. The Tribunal upheld the PCIT's order setting aside the assessment and directing the AO to pass a fresh order; the merits of the goodwill-depreciation claim are to be decided in the pending appeal on quantum.