TaxTMI 
TaxTMI 
2022 (3) TMI 1456
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Ld. Pr.CIT under section 263 of the Income-tax Act, 1961 ('IT Act') is illegal, invalid and not sustainable in law. 2. That on the facts and in the circumstances of the case and in law, the Ld. Pr. CIT grossly erred in passing the order under section 263 even though the assessment order under section 143(3) dated 30th December 2018 passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the interest of the Revenue. 3. That on the facts and in the circumstances of the case and in law, the AO after due examination of the relevant facts having already followed one of the course permissible in law, the Ld. Pr. CIT was unjustified in setting aside the assessment on the issue of disallowance of amount of Rs.1,34,45,166/- under section 35 of the Act and directing the AO to re-adjudicate the same issue after re-examination of the facts. 4. That on the facts and in the circumstances of the case and in law, the AO after due examination of the relevant facts having already followed one of the course permissible in law, the Ld. Pr. CIT was unjustified in setting aside the assessment on the issue of prior period expense on Advertisement....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the A.Y. 2015-16, which is a prior period expense. This expense does not relate to the current year and therefore is to be disallowed. It is noticed that neither the assessee company has considered the same as current year income nor the assessing officer disallowed in his assessment order. AO has passed the impugned assessment order without conducting any enquiries or verifications which should have been made in this case. The assessee furnished its reply on 24.03.2021 before the Ld. PCIT as reproduced in the impugned order, explaining its case against the two issues raised in the SCN corroborating it with the relevant facts and documents. 5. On 27.03.2021, the Ld. PCIT passed the impugned order, inter alia, observing in Para 5 as under: "5. I have considered the facts of the case and the submissions of the assessee. On perusal of the assessment record it is seen that the assessee debited an amount of Rs. 21,95,56,764/- to the profit & loss account. However, the amount admissible u/s. 35 of the act is Rs. 20,61,11,598/- only. In the computation of total income, excess debited amount of Rs. 1,34,45,166/- (i.e. Rs. 21.95,56,764/- - Rs. 20,61,11,598/-) has n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itten submission. Ld. CIT(DR) Shri Sudipta Guha represented the matter for the Revenue. 7. At the outset, Learned Counsel for the assessee submitted that Ld. PCIT has grossly erred in assuming his jurisdiction and initiating proceedings u/s. 263 of the Act since in the assessment order passed by the Ld. AO, he had not only made adequate enquiries but also undertaken necessary verification of the details which were furnished during the course of assessment proceedings and on the basis of which he had taken permissible views. It was further contended that nowhere in the impugned order the Ld. PCIT has held as to how the order of the Ld. AO is erroneous in so far as it is prejudicial to the interest of the revenue. Ld. Counsel also submitted that Ld. PCIT has to establish from the records by giving cogent reasons as to how and why the order of the Ld. AO is erroneous in so far as it is prejudicial to the interest of the revenue before cancelling or setting aside the assessment order. Therefore, according to the Ld. Counsel, neither in law nor on facts, the Ld. PCIT is justified in assuming the jurisdiction u/s 263 of the Act setting aside the order of the Ld. AO to pass a fresh ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ainable. In most cases of alleged "inadequate investigation", it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examinatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s written submissions on 24.03.2021 which is reproduced in the impugned order to explain that the said amount was added back in the computation of income by the assessee itself. To demonstrate the same and for the sake of convenience a break up of amount of Rs. 21,95,56,764/- debited in the P & L A/c as reported in Schedule 19 of the TAR was referred by the Ld. Counsel as under:- Table 1: Details of Scientific Research Expenditure reported in Schedule 19 of TAR S. No. Particulars Amount (Rs.) A Operating Expenses on SR 20,61,11,598 B Depreciation on SR Assets 94,90,862 C SR Assets written off 39,81,203 D Loss on sale of SR Assets 4,295 E Profit on Sale of SR Assets (-)31,194 F TOTAL 21,95,56,764 G Amount allowable u/s. 35 (Schedule 19 of TAR) 20,61,11,598 H Difference [B+C+D+E] 1,34,45,166 *SR= Scientific Research * FS= Financial Statements Ld. Counsel pointed out that items B, C, D & E in the above table were debited in the Profit & Loss A/c under the respective Heads, viz., Depreciation, Assets Written off, Profit/Loss on Sale of Assets. The relevant extracts of the Financial Statements for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d after being satisfied that the excess sum had been added back to the total income the assessment was completed u/s. 143(3) of the Act. It was stated by the Ld. Counsel that the Ld. AO had issued notice u/s. 142(1) dated 08.10.2018 and required the assessee to furnish the complete details on "any other amount allowed as deduction" which inter alia included the claim of Scientific Research Expenditure. The Ld. AO had also required the assessee to furnish the details of expenditure claimed during the year along with opening and closing balances reconciliation of the earlier year and current year. All the details were furnished before the AO by letters dated 20.11.2018 and 03.12.2018 forming part of the Paper Book, which were examined by the Ld. AO. The Ld. Counsel thus submitted that the Ld. AO had gone through the Tax Audit Report, income-tax return and submissions made in response to the notices and has taken a plausible view after due verification and examination. 10. In respect of the second issue raised by the Ld. PCIT in the show cause notice (supra) relating to claim of Rs. 9,89,485/- debited towards advertisement in the Profit & Loss A/c, as prior period expenses, which d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he claim of the vendor. The dispute was however settled in the subsequent financial year and the assessee agreed to pay a certain amount of compensation. The said payment was claimed as deduction in the subsequent year in which the liability was created in the books. The AO however disallowed the said expense holding it to be expenditure pertaining to the earlier year. On appeal, the Hon'ble High Court held that since the assessee was following the mercantile system of accounting, the assessee could claim the deduction of the liability created in its books based on the admission of liability. The Court held that the assessee had agreed to pay the compensation only in the previous year relevant to the assessment year in question and created that liability in its books. It was therefore held that the assessee would be entitled to the deduction of liability to pay in the year in which liability is created in its books. Attention was further invited to the decision of the co-ordinate bench of ITAT Ahemdabad in the case of Patwa Kinariwala Electronics v. Dy. CIT [1998] 96 Taxman 192 (Ahd) (Mag). In this case, it had been held that the expenses pertaining to earlier years, which were qua....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eneral or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120; (b) "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,- (a) the order is passed without making inquiries or verification wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r of the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue, he/she is bound to give an opportunity of being heard to the assessee by issuing a show cause notice pointing out the reasons for arriving at such a consideration that action u/s 263 is required on a particular issue. The PCIT has to conduct an inquiry as he may deem fit and after hearing the assessee, he/she will pass the order as deem fit. iv. The PCIT can annul or enhance or modify the assessment as a result of inquiry conducted and hearing the assessee by directing the Assessing Officer for a fresh assessment or to make such enquiries as he/she deem necessary. 15. At this stage, before considering the multi-fold contentions of the Ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the Ld. PCIT taken u/s 263 of the Act. The co-ordinate bench of ITAT Mumbai in the case of Mrs. Khatiza S. Oomerbhoy v. ITO, Mumbai reported in [2006] 101 TTJ 1095 (Mum) analyzed in detail, various authoritative pronouncements including the decision of Hon'ble Supreme Court in the case of M....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T of his revisionary powers u/s 263 of the Act. Therefore, let us first look at the rightful exercise of revisionary powers by the Ld. PCIT for which we have to examine whether the order of the Assessing Officer found fault by the Ld. PCIT is erroneous in so far as it is prejudicial to the interest of the Revenue. 16.1 For that, let us take the guidance of judicial precedence laid down by the Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. vs. CIT (supra) wherein their Lordships have held that twin conditions needs to be satisfied by the CIT before exercising revisionary jurisdiction u/s 263 of the Act. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. 16.2 In the following circumstances, the order of the AO can be held to be erroneous order, that is - (i) order of Assessing Officer was passed on an incorrect assumption of fact; or (ii) incorrect application of law; or (iii) order of Assessing Officer is in violation of the principle of natural justice; or (iv) order passed by the Assessing Officer is without application of mind; or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ited amount of Rs. 1,34,45,166/- (i.e. Rs. 21,95,56,764 - Rs. 20,61,11,598) has not been added back to the total income. 17.2 The Ld. Counsel of the assessee made exhaustive submissions in the course of hearing before us and took us through the material placed on record to verify that the assessee while computing its income from business did add back the amount of Rs. 21,95,56,764/- debited in the Profit and Loss A/c against its claim of Rs. 20,61,11,598/- as reflected in Schedule 19 of the Tax Audit Report. We find that it is an issue purely on facts which is verifiable from the records of the assessee. Examination and verification of the financial statements vis-à-vis the computation of income of the assessee in this regard which are all on record, brings out the correct set of facts on the issue in hand. It is observed from the impugned order that the Ld. PCIT merely reproduced the exhaustive tabulated details submitted by the assessee but did not dwell on the same by giving observations on his examination of the details and data, to point out how and what was erroneous in respect of the claim made by the assessee towards scientific research expenses u/s 35 of the Act ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ision of Hon'ble Bombay High Court in the case Gabriel India Ltd. [1993] 203 ITR 108 (Bom) wherein it is observed as under (page 113) - " . . . From a rending of sub-section (1) of section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is 'erroneous in so far as it is prejudicial to the interests of the Revenue'. It is not an arbitrary or unchartered power, it can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction." [Emphasis supplied by us] 17.3 Further, we find that it is not a case where t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r u/s 263 of the Act is passed. In such cases, the order of the AO will be erroneous because the order passed is not sustainable in law and the said finding must be recorded by CIT who cannot remand the matter to the assessing officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/enquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the AO, making the order unsustainable in law. In some cases, possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the AO had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the AO to conduct further enquiries without a finding that the order is erroneous, the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dings and before the Ld. PCIT had submitted evidences in support of adding back the amount of Rs. 21,95,56,764/- debited by it in the Profit & Loss A/c towards scientific research expenditure. Therefore, the consideration arrived at by the Ld. PCIT invoking provisions of section 263 of the Act on the first issue is not justified and cannot be sustained under the facts and circumstances of the present case. 18. The second issue on which the assessment order has been treated as erroneous which has caused prejudice to the interest of the revenue relates to claim of deduction towards advertisement expenses in the Profit & Loss A/c for which the Ld. PCIT noted in his SCN (supra) that Schedule 27(b) of the TAR reveals that the assessee company has debited Rs. 9,89,485/- under the head advertisement in the Profit & Loss A/c which pertains to F.Y. 2014-15 relating to the A.Y. 2015-16, which is a prior period expense. This expense does not relate to the current year and therefore is to be disallowed. It is noticed that neither the assessee company has considered the same as current year income nor the assessing officer disallowed in his assessment order. 18.1 On this issue also the Ld....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 263 w.e.f. 01.06.2015. This amendment relates to Explanation 2 inserted in section 263 of the Act. The co-ordinate bench of Mumbai ITAT has dealt with Explanation 2 as inserted by the Finance Act, 2015 in the case of Narayan Tatu Rane v. Income Tax Officer [2016] 70 taxmann.com 227 (Mum) to hold that the said Explanation cannot be said to have overridden the law as interpreted by the Hon'ble Delhi High Court in DG Housing Projects Ltd (supra), according to which the Ld. PCIT has to conduct an enquiry and verification to establish and show that the assessment order is unsustainable in law. The co-ordinate bench of Mumbai ITAT has further held that the intention of the legislature could not have been to enable the Ld. PCIT to find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law, since such an interpretation will lead to unending litigation and there would not be any point of finality in the legal proceedings. The opinion of the Ld. PCIT referred to in section 263 of the Act has to be understood as legal and judicious opinion and not arbitrary opinion. 20. On....