APM Industries Ltd. Vs DCIT (ITAT Jaipur)
ITAT Jaipur held that the assessment order passed by AO after considering the information filed during assessment proceedings cannot be said to be erroneous and prejudicial to the interest of the revenue. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue.
Facts- The assessee is a domestic company by name and style ‘APM Industries Ltd.’ and is engaged in manufacture of Man-made Fibres Spun Yarn. The case was selected for scrutiny through CASS cycle under complete category and notice u/s. 143(2) was issued.
Thereafter, PCIT noted various issues have not been verified by AO during the assessment proceedings. Therefore, a show cause notice proposing the revision u/s. 263 of the Act was issued on 16.02.2023. In response the assessee filed written submission online. PCIT noted that the reply of the assessee perused carefully but the same was not found tenable and thus on the all the issue as pointed out in the show cause notice considering the facts on records it was held that the assessment order is liable for revision u/s. 263 of the Act.
Conclusion- The assessment order passed by the AO is after consideration of the information filed during assessment proceedings which is as mentioned by the AO himself in the assessment order and therefore the order cannot not be said to be erroneous and prejudicial to the interest of the revenue even by virtue of explanation 2(a) and 2(b) of Section 263 of the Act and in such a situation, we find that the order of the Id PCIT is bad in law and the Bench does not concur with the findings of the Id. PCIT.
Hon’ble Supreme Court in the case of CIT vs. Max India Ltd has held that the phrase ‘prejudicial to the interests of the Revenue’ in s. 263 of the IT Act, 1961, has to be read in conjunction with the expression ‘erroneous’ order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when the AO adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the AO is unsustainable in law.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This appeal is filed by the assessee aggrieved from the order of the Principal Commissioner of Income Tax, Jaipur-1 [ Here in after referred as Ld. PCIT ] for the assessment year 2018-19 dated 21.03.2023 which in turn arise from the order dated 24.03.2021 passed under section 143(3) read with sections 143(3A) & 143(3B) of the Income Tax Act, by the Assessing Officer, National e-Assessment Centre, Delhi.
2. The assessee has marched this appeal on the following grounds:-
“1. In the facts and circumstances of the case and in law, ld. PCIT has erred in exercising the revisionary powers by passing order u/s 263 of I.T. Act, 1961 dated 21.03.2023 setting aside the order passed u/s 143(3) dated 24.03.2021. The action of ld. PCIT is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the order passed u/s 263.
2. In the facts and circumstances of the case and in law, ld. PCIT has erred in exercising the revisionary powers by passing order u/s 263 of I.T. Act, 1961 dated 21.03.2023 setting aside the order passed u/s 143(3) dated 24.03.2021 without considering the ignoring the facts mentioned in our submission letter dated 17.02.2023.
3. In the facts and circumstances of the case and in law, ld. PCIT has erred in holding that the assessment order passed u/s 143(3) dated 03.2021 is erroneous and prejudicial to interest of revenue. However, the details were duly verified by the ld. AO during the assessment proceedings and the assessment order u/s 143(3) was passed with due application of mind.
4. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing.”
3. The fact as culled out from the records is that the return of income for the A.Y 2018-19 was filed by assessee company on 31.10.2018, declaring total income at Rs. 10,31,88,100/-. Subsequently, the case was selected for scrutiny through CASS cycle under complete category and notice u/s 143(2) was issued electronically on 23.09.2019 & duly served upon the assessee. Thereafter, notice u/s 142(1) along with questionnaire was issued through ITBA/E-filing portal against which the assessee filed details and particulars as requisitioned electronically. The assessee is a domestic company by name and style ‘APM Industries Ltd.’ and is engaged in the manufacture of Man-made Fibres Spum Yarn. On verification of audit report, it is noticed that the auditor in the Tax Audit Report has reported an amount of Rs. 12,87,768/- is disallowable under section 40A(7) on account of provision for payment of gratuity. However, it is noticed that the said amount of provision has not been disallowed by the assessee company in the return of income as reported in Part A-OI of ITR. Therefore, the assessee vide annexure to notice u/s 142(1) of the Act was requested to explain as to why there is lower amount disallowed u/s 40A(7) in ITR (Part A-OI) in comparison to audit report and why the differential amount should not be added to the total taxable income. The assessee company vide its reply dated 18.01.2021 has accepted the discrepancy and stated that they have not disallowed the provision for Rs. 12,87,768/- u/s 40A(7) due to clerical mistake. Accordingly, an amount of Rs. 12,87,768/- added to the total income. Based on these observations the assessment was completed and finally the assessed income of the assessee was determined at Rs. 10,44,75,868/-
4. On culmination of the assessment proceeding the ld. PCIT called for the assessment records for examination. On examination the ld. PCIT noted the assessee had claimed interest expenses of Rs. 4,08,08,396/-. Out of this amount, interest paid to schedule banks is of Rs. 18,60,978/-. Thus, the balance amount of interest paid of Rs. 3,89,47,418/- was liable to TDS u/s. 194A of the Act. Therefore, as per provision of section 40(a)(ia) of the Act, 30 % of this amount which comes to Rs. 1,05,52,530/- was liable to be disallowed. The ld. PCIT further observed that the assessee received duty drawback of Rs. 2,37,355/-. However, there is no evidence on record that this amount has been offered to tax as business income u/s. 28 of the Act. The ld. PCIT also noted that the assessee had sold scrap of Rs. 2,35,97,690/- on which TDS has been made u/s. 206C of the Act. However, assessee shown sale of scrap of Rs. 2,02,58,204/- only in its profit and loss account of ITR. As such there is an under disclosure of sales of scrap by Rs. 33,39,,666/- which should have been added to the total income. She further noted from the ITR and details submitted by the assessee, that the assessee had declared exempted income of Rs. 16,80,179/- in the form of dividend on investments in equity / mutual funds and against which assessee claimed an expenditure of Rs. 2,64,488/- for earning this exempt income and have disallowed the same u/s. 14A of the Act in the computation of income. However, no details have been furnished as to how this amount was computed. In absence of computation of this expenditure the correct amount of disallowance u/s. 14A of the Act was required to be calculated in the manner as provided u/r 8D of the Income Tax Rules. She further noted that the figures disclosed in ITR and that reported by the statutory auditor in form 3CD are not tallying. Specifically, the figures reported in clause 34(a) of form 3CD are not tallying with the respective expenses shown in the ITR. All these issues have not been verified by the ld. AO during the assessment proceedings. Therefore, a show cause notice proposing the revision u/s. 263 of the Act was issued on 16.02.2023. In response the assessee filed written submission online on 18.02.2023. The ld. PCIT noted that the reply of the assessee perused carefully but the same was not found tenable and thus on the all the issue as pointed out in the show cause notice considering the facts on records, she holds a view that the issues has not been verified by the ld. AO in the assessment proceedings based on the observation on facts recorded in para 8 of the his order and the finally vide para 9 & 10 she hold that the assessment order is liable for revision u/s. 263 of the Act. The relevant part of the observations the ld. PCIT is reproduced here in below :
“9. As discussed above, the Assessing Officer failed to apply his mind and failed to invoke the applicable provisions of law. This in turn has resulted in passing of an erroneous order by the Assessing Officer in the case due to non-application of mind to relevant material and an incorrect assumption of facts which is prejudicial to the interest of the revenue and hence liable for revision under section 263 of the Income Tax Act. The Hon’ble Supreme Court in the case of Malabar Industrial Limited V/S CIT 243 ITR it has held as under-
“…. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.”
10. Considering all the facts and circumstances of the case and for the reasons discussed above. the assessment order dated 24.03.2021 for A.Y. 2018-19 passed by the AO is held erroneous in so far as it is prejudicial to the interest of the revenue for the purpose of section 263 of the Act. The said order has been passed by the Assessing Officer in a routine and casual manner without applying the applicable sections of the Act. The Assessing Officer has not verified the details which were required to be verified under the scope of scrutiny. The order of the Assessing Officer is, therefore, liable to revision under the explanation (2) clause (b) and clause (a) of section 263 of the Income Tax Act, 1961. The assessment order is set aside to be made afresh in the light of the observation made in this order. The AO is required to make necessary verification in respect of the observations made in this order after allowing reasonable opportunity to the assessee.”
5. Feeling dissatisfied from the order of the PCIT, the assessee preferred the present appeal on the grounds as reproduced here in above challenging the order of the PCIT passed u/s. 263 of the Act. Apropos to the ground so raised by the assessee the ld. AR appearing on behalf of the assessee has placed reliance on their written submission which is extracted in below;
“BRIEF FACTS OF THE CASE AND SUBMISSION:→
The assessee is a domestic company engaged in manufacture of manmade fibres spun yarn. For the year under consideration, the assessee filed return of income declaring total income of Rs.10,31,88,100/- on 31/1 0/201 8. The case was selected for complete scrutiny and notice u/s 143(2) was issued on 23/09/2019. As per the assessment order, the main issues for examination were – (i) Duty Drawback (ii) ICDS compliance and adjustment and (iii) disallowance u/s 40A(7) (gratuity provision). During the course of assessment proceedings, notice u/s 142(1) along with query letter was issued, requiring the assessee to furnish certain details/information. In compliance to the notice issued u/s 142(1), the assessee furnished the information/details requisitioned by the Learned Assessing Officer. After considering the details and information filed, the Learned Assessing Officer assessed the total income at Rs. 10,44,75,870/-, vide order u/s 143(3) read with Sec. 1 43(3A) and 1 43(3B) of the IT Act, 1961 dated 24/03/2021., by making addition of Rs.12,87,768/-, being provision for payment of gratuity disallowable u/s 40A(7). Copy of the assessment order is available on Paper Book Page No.1-3.
Subsequently, proceedings u/s 263 of the IT Act, 1961 were initiated by the Pr. Commissioner of Income-tax-1, Jaipur by issuance of show-cause notice on the ground that the assessment order dated 24/3/2022 passed by the Learned Assessing Officer is erroneous and prejudicial to the interest of revenue inasmuch the Learned Assessing Officer failed to examine the issues related to (i) disallowance of interest u/s 40a(ia), (ii) duty draw back, (iii) sale of scrap, (iv) disallowance u/s 14 A and (v) reconciliation of figures of expenses shown in the audit report in form No. 3 CD and that shown in the IT return etc. In reply to the show-cause notice, the assessee furnished a detailed reply dated 17/2/2023, stating therein that the assessee has duly deducted TDS on interest expenses and no disallowance was called for. The maximum part of payment of interest was on term loan to banks and cash-credit facilities, on which provisions of TDS were not applicable. It was further submitted that the duty draw back claim has been duly considered as income in ITR and no addition was required. It was also submitted that income from sale of scrap has been duly considered and no addition was required. It was submitted that the assessee has duly complied with the provisions of Sec., 14 A r.w.r 8D and voluntarily made disallowance of Rs. 2,64,488/- u/s 14 A and no disallowance u/s 14 A was required. In respect of the issue of mismatch of figures reported in audit report in form No. 3 CD vis-à-vis ITR, details and chart were furnished and it was stated that there was no mismatch in the figures reported in audit report and the figures shown in ITR. It was, therefore, submitted that the assessment order has been passed with due application of mind and the same is not erroneous and prejudicial to the interest of revenue and no action u/s 263 is warranted. A copy of the reply dated 17/2/2023 along with annexures is available on Paper Book Page No.4-15. However, the Learned Pr. CIT did not accept the submissions made by the assessee and passed order u/s 263 on 24/03/2021, holding that the assessment order passed by the Learned Assessing Officer is erroneous and prejudicial to the interest of revenue. The Pr. CIT has set-aside the assessment order passed by the Learned Assessing Officer to be framed afresh after making necessary verification with regard to the observations made in the order u/s 263.
The Learned PCIT has erred in exercising the revisionary powers u/s 263 as the assessment order has been passed by the Learned Assessing Officer with due application of mind and after duly considering the details and reply submitted by the assessee. Therefore, the action of the Learned CIT in exercising the revisionary powers u/s 263 and holding the assessment order passed by the Learned Assessing Officer as erroneous and prejudicial to the interest of revenue is unlawful, illegal, unjust and arbitrary. The same is assailed as under, discussing the individual grounds :-
Ground No.1
In the facts and circumstances of the case and in law, the Learned PCIT has erred in exercising the revisionary powers by passing order u/s 263 of the IT Act, 1961 dated 21/03/2023 setting aside the order passed u/s 143(3) dated 24/3/2021. The action of the Learned PCIT is illegal, unjustified, arbitrary and against the facts of the case. Relief may kindly be granted by quashing the order passed u/s 263.
Ground No.2
In the facts and circumstances of the case and in law, the Learned PCIT has erred in exercising the revisionary powers by passing order u/s 263 of the IT Act, 1961 dated 21/03/2023 setting aside the order passed u/s 143(3) dated 24/3/2021 without considering and ignoring the facts mentioned in our submission letter dated 17/02/2023.
Ground No.3
In the facts and circumstances of the case and in law, the Learned PCIT has erred in holding that the assessment order passed u/s 143(3) dated 24/03/2021 is erroneous and prejudicial to the interest of revenue. However, the details were duly verified by the Learned Assessing Officer during the assessment proceedings and the assessment order u/s 143(3) was passed with due application of mind.
Grounds No.1, 2, & 3 are taken together and discussed hereunder :- In this case, the Learned PCIT has passed order under section 263 on 21/03/2023 setting aside the order of the learned Assessing Officer passed on 24/3/2021. While passing the order u/s 263, the Learned PCIT has specified the following items on which the order of the Learned Assessing Officer has been found erroneous and prejudicial to the interest of revenue.
(i) Disallowance u/s 40(a)(ia) on account of non-deduction of tax u/s 1 94A on payment of interest ;
(ii) Duty draw-back of Rs.2,37,335/- has remained untaxed ;
(iii) Sale of scrap of Rs.2,35,97,690/- have been understated by Rs.33,39,666/-.
(iv) Disallowance u/s 14A on investments yielding exempt income has not been considered.A sum of Rs. 1,50,03,512/- required to be disallowed u/s 14A as per the working of Learned PCIT.
(v) Mismatch of figures reported in form No. 3 CD and those in the books of accounts
It is submitted that the objections raised and issues specified by the Learned PCIT have arisen on account of non-consideration of the reply of the assessee submitted under letter dated 17/02/2023. The Learned PCIT has not appreciated the facts submitted by the assessee in this letter. The approach of the Learned PCIT is quite confusing and discouraging.
The issues raised by the Learned PCIT are discussed as under :-
(i) Disallowance u/s 40(a)(ia) on account of non-deduction of tax u/s 1 94A on payment of interest ;
It is submitted that in response to the show-cause notice issued by the Pr CIT on 16/2/2023, requiring assessee to explain why disallowance u/s 40a(ia) @ 30% should not be made on account of non-deduction of tax u/s 1 94A on payment of interest of Rs.3894741 8/-. In response to the show-cause notice, the assessee has submitted a detailed reply and the relevant part thereof is quoted below :-
