Mechanical approval under search assessment law vitiates assessments when sanction lacks application of mind; retrospective curative provision cannot ...
The Commissioner of Income Tax (CIT) invoked Section 263 to revise the Assessing Officer's (AO) order, disallowing the amount paid on termination of an agreement, considering it as capital expenditure, and disallowing the amount paid on termination of a License and Supply Agreement, considering it as liquidated damages/penalty u/s 37. The key points are: The AO failed to conduct proper inquiries before allowing the expenditure as revenue, such as verifying the commercial expediency, terms of novated agreements, liability for termination fees, and accounting treatment. Explanation 2 to Section 263, effective from 01/06/2015, deems an AO's order erroneous if proper inquiries or verification were not made, prejudicing revenue interests. Since the AO's order was passed on 31/01/2018, Explanation 2 applies. The termination charges of Rs. 340.45 crores paid under the Asset Purchase Agreement were for purchasing assets, constituting capital expenditure, not revenue expenditure. The liquidated damages of Rs. 6.19 crores paid for terminating the License and Distribution Agreement were not incurred wholly and exclusively for the assessee's business, hence disallowed u/s 37. The ITAT dismissed the assessee's grounds, upholding the CIT's revision order.
The Commissioner of Income Tax (CIT) invoked Section 263 to revise the Assessing Officer's (AO) order, disallowing the amount paid on termination of an agreement, considering it as capital expenditure, and disallowing the amount paid on termination of a License and Supply Agreement, considering it as liquidated damages/penalty u/s 37. The key points are: The AO failed to conduct proper inquiries before allowing the expenditure as revenue, such as verifying the commercial expediency, terms of novated agreements, liability for termination fees, and accounting treatment. Explanation 2 to Section 263, effective from 01/06/2015, deems an AO's order erroneous if proper inquiries or verification were not made, prejudicing revenue interests. Since the AO's order was passed on 31/01/2018, Explanation 2 applies. The termination charges of Rs. 340.45 crores paid under the Asset Purchase Agreement were for purchasing assets, constituting capital expenditure, not revenue expenditure. The liquidated damages of Rs. 6.19 crores paid for terminating the License and Distribution Agreement were not incurred wholly and exclusively for the assessee's business, hence disallowed u/s 37. The ITAT dismissed the assessee's grounds, upholding the CIT's revision order.
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