Advocate Akhilesh Kumar Sah
BEFORE PASSING AN ORDER UNDER SECTION 263 PRINCIPAL COMMISSIONER OR COMMISSIONER OF INCOME TAX HAS TO MAKE HIS/HER OWN ENQUIRY
Subject to its Explanations, section 263(1) of the Income Tax Act, 1961 (‘Act’)states that the Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
More recently, in PCIT, New Delhi vs. Delhi Airport Metro Express Pvt. Ltd. [ITA No. 705/2017, decided on 05.09.2017], the short question raised by the Revenue was whether the ITAT was justified in setting aside the order of the Principal Commissioner of Income Tax (‘PCIT’) passed under Section 263 of the Act in respect of AY 2011-12 setting aside the original assessment order dated 31.122013 passed by the Assessing Officer (‘AO’) under Section 143 (3) of the Act.
The brief facts in the above-mentioned case were that the Assessee being a Concessionaire of the Airport Metro Express Project of the Delhi Metro Rail Corporation Ltd. (‘DMRC’) under a Build-Operate-Transfer (‘BOT’) Scheme, had accepted the concession for a period of 30 years. During the AY in question, the Assessee claimed depreciation of Rs. 112,29,74,447/- on fixed assets of Rs. 1560,48,17,189/- @ 50% of the eligible depreciation rates since, during the AY in question, the assets were used for less than 180 days. The AO framed the assessment under Section 143 (3) of the Act allowing depreciation as claimed by the Assessee.
The case of the Revenue was that the assets were developed under the BOT scheme and the Assessee was not eligible to claim depreciation as it was not the owner of the assets. The Revenue contended that the land for the project was handed over by the DMRC to the Assessee as Concessionaire without actual transfer of ownership. The design and construction of the basic structure was also done by the DMRC.
The case of the Assessee was that during the AY in question it had purchased and installed plant and machinery and such plant and machinery was legally owned by it. It was further contended that since such assets were used for the purposes of Assessee’s business, it was entitled to claim depreciation under Section 32 of the Act.
The PCIT, in exercise of powers under Section 263 of the Act, issued a show cause notice (SCN) dated 16.03.2015 to the Assessee pointing out that if the value of these fixed assets were to be amortized evenly over a period of 30 years, the amount to be amortized would only be Rs. 52,01,60,572/- for each year. Therefore, the depreciation allowed to the Assessee was in excess by Rs. 60,28,13,875 and, to that extent, the order passed by the AO was prejudicial to the interest of the Revenue. In reply to the SCN, the Assessee took the stand that, during the AY in question, it “had purchased the assets from independent vendors, out of its own funds for setting up the project.”
Thereafter order dated 30.03.2016 was passed by the PCIT.
The learned Judges of the Delhi High Court observed that for the purposes of exercising jurisdiction under Section 263 of the Act, the conclusion that the order of the AO is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimal inquiry. In fact, if the PCIT was of the view that the AO did not undertake any inquiry, it became incumbent on the PCIT to conduct such inquiry. All that PCIT had done in the order was to refer to the Circular of the CBDT and conclude that “in the case of the Assessee company, the AO was duty bound to calculate and allow depreciation on the BOT in conformity of the CBDT Circular 9/2014 but the AO failed to do so. Therefore, the order of the AO is erroneous insofar as prejudicial to the interest of revenue”. In the considered view of the Court, this can hardly constitute the reasons required to be given by the PCIT to justify the exercise of jurisdiction under Section 263 of the Act. In the context of the present case if, as urged by the Revenue, the Assessee has wrongly claimed depreciation on assets like land and building, it was incumbent upon the PCIT to undertake an inquiry as regards which of the assets were purchased and installed by the Assessee out of its own funds during the AY in question and, which were those assets that were handed over to it by the DMRC. That basic exercise of determining to what extent the depreciation was claimed in excess has not been undertaken by the PCIT. He had exercised the second option available to him under Section 263 (1) of the Act by sending the entire matter back to the AO for a fresh assessment. That option, in the considered view of the Court, can be exercised only after the PCIT undertakes an inquiry himself in the manner indicated herein before. That was` missing in the present case.
Finally, the Delhi High Court held in respect of the appeal, that the ITAT was not in error in setting aside the order of the PCIT under Section 263 of the Act, no substantial question of law arose herein.