Revision proceedings u/s. 263 cannot be invoked without giving reasons for setting aside assessment order

Agarwals Health Care Limited Vs PCIT (ITAT Chennai)

ITAT Chennai held that invoking the revisionary powers under section 263 of the Income Tax Act without giving any reasoning for setting aside the assessment order and merely directing AO verification without any basis is unjustifiable.

Facts- The appeal of assessee is as against the revision order passed by the PCIT u/s.263 of the Act contesting that he failed to satisfy the twin conditions i.e., for order passes by the AO u/s.143(3) of the Income Tax Act, is erroneous insofar as prejudicial to the interest of Revenue, which is sine qua non to invoke the powers u/s.263 of the Income Tax Act

Conclusion- The plain language of the provision is more than abundantly clear that it is not every error or mistake that should induce the PCIT to resort to exercise the powers u/s.263 of the Act. Where the factual matrix shows that it is a marginal situation and when by a careful and cautious judgment the AO has considered the issue in hand, the exercise of the power u/s.263 of the Act by the PCIT is not proper. For invoking the revisionary powers u/s.263 of the Act, it is necessary for the PCIT to state in what manner he consider the assessment order as erroneous and prejudicial to the interest of Revenue and what the basis and material for such conclusion.

Held that the PCIT must give his own reasons for being satisfied that the order passed by the AO is erroneous and prejudicial to the interests of Revenue and this provision postulates a scrutiny by PCIT of all the relevant facts for holding that the order is erroneous and is also prejudicial to the interest of Revenue. In the present case none is the finding qua that and PCIT has not given any reasoning for setting aside the assessment order and directing the AO verification without any basis.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

These appeals by the assessee are arising out of the Revision orders passed by the Principal Commissioner of Income-Tax Chennai-1, in ITBA/REV/F/REV5/2023-24/1063611564(1) & 1063309473(1) dated 29.03.2024& 24.03.2024. The assessments were framed by the National e-Assessment Centre, Delhi for the assessment years 2017-18 & 2018-19 u/s.143(3) r.w.s.143(3A) & 143(3B) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide orders dated 05.04.2021 & 16.04.2021 respectively.

2. The only common issue in these two appeals of assessee is as against the revision order passed by the PCIT u/s.263 of the Act that he failed to satisfy the twin conditions i.e., for order passes by the AO u/s.143(3) of the Act, is erroneous insofar as prejudicial to the interest of Revenue, which is sine qua non to invoke the powers u/s.263 of the Act on the following two issues:-

i) Setting aside the assessment order passed u/s.143(3) by the AO for verification in regard to disallowance on loss of sale of assets.

ii) Setting aside the assessment order passed u/s.143(3) by the AO for verification in regard to disallowance u/s.14A of the Act.

2.The facts and circumstances in both the years and the groundson which the PCIT exercises revisionary power u/s.263 of the Act are identical in both the years and grounds raised are also identical except the quantum and hence, we will take the facts from assessment year 2017-18 in ITA No.1407/CHNY/2024 and will decide the issue.

4. Briefly stated facts are that the assessee company filed its return of income declaring a loss of Rs.16,17,52,473/- on 30.11.2017 which was processed by the CPC, Bengaluru u/s.143(1) of the Act. Subsequently, the assessee’s case was selected for limited scrutiny on the following issues:-

The AO completed assessment and passed order u/s.143(3) r.w.s. 143(3A) & 143(3B) of the Act vide order dated 05.04.2021. Subsequently, the PCIT issued show-cause notice for revising the assessment u/s.263 of the Act vide dated 12.01.2024 to examine the following issues:-

“3. In this case the records were called for & examined. It is seen that:-

3.1 Assessee has received exempt income of Rs.26,98,000 being dividend. As per rule 8D(2), an amount equal to 1% of annual average of monthly averages of the opening and closing balance of the value of investments should of the value of investments should e disallowed as expenditure incurred for earning exempt income.

Average of investments: 35,95,30,000 + 74,55,32,000 = 1,10,50,62,000/2 = 55,25,31,000 1% of average investments = 55,25,310/-

3.2 Disallowance to be made = 26,98,000/- (restricted to exempted income)

3.3 While scrutinizing from 3CA an amount of Rs.1,13,16,189 being loss on sale on assets being capital expenditure, which needs to be disallowed. These aspects were not considered at the time of framing of assessment.”

The PCIT accordingly passed revision order u/s.263 of the Act dated 28.03.2024 directing the AO to verify the following two issues i) disallowance u/s.14A of the Act & ii) loss on sale of assets. Aggrieved, assessee preferred appeal before the Tribunal.

5. Before us, the ld.counsel for the assessee first of all drew our attention to the facts regarding the disallowance on the issue of exempt income and consequent disallowance of expenses relatable to exempt income. The ld.counsel for the assessee, Shri R.
Sivaraman, Advocate stated that the assessee has earned exempt income amounting to Rs.26,97,926/- in the form of dividend income from its subsidiary and associated enterprises and claimed the same as exempt u/s.10(34) of the Act. The assessee then took us through the relevant extract of financial statements evidencing dividend income earned for the relevant assessment year 2017-18, which are enclosed in assessee’s paper-book. The ld.counsel drew our attention to the computation of taxable income for the relevant assessment year wherein, he pointed out, that the assessee has duly disallowed the expenses incurred towards aforesaid exempt income amounting to Rs.34,17,729/- as per the provisions of section 14A r.w.rule 8D of the Income Tax Rules, 1962 (hereinafter the ‘Rules’). The ld.counsel stated that the assessee company has disallowed an amount which is greater than the exempt income itself earned, hence he urged that there is no cause of error in the order of assessment so as to give raise to loss to the Revenue which cause prejudice to the Revenue.

5.1 As regards to second issue, in regard to disallowance of loss on sale of assets, the ld.counsel explained that the assessee company has incurred loss on sale of assets amounting to Rs.1,13,16,189/-and the same being capital in nature was disallowed by the assessee company while computing taxable income for the relevant assessment year and the disallowance on loss of sale of assets was duly disclosed in the return of income filed for the relevant assessment year and the appropriate disclosure was also made in the TAR filed for the relevant assessment year. Hence, there is no cause for PCIT to revise the assessment. There is no error in the assessment order nor it is prejudicial to the interest of Revenue.

6. On the other hand, the ld.CIT-DR only supported the revision order.

7. We have heard rival contentions and gone through the facts and circumstances of the case. We have gone through the PCIT’s order and noted that on account of disallowance u/s.14A of the Act, he has noted the facts and his observation as under:-

“5. Disallowance u/s 14A: As per the Balance Sheet it is seen that the assessee has received exempt income to the tune of Rs.34,17,729/-. As per CBDT Circular No.5/2014, an amount equal to 1% of annual average of monthly averages of the opening and closing balance of the value of investments should be disallowed as expenditure incurred for earning exempt income. Therefore, it was proposed that disallowance needs to be made to the extent of Rs.26,98,000/-.

5.1 The assessee has submitted that it had duly made a disallowance computed as per the computation method prescribed under Rule 8D of the IT Rules amounting to INR34,17,729 under clause 8 – “Expenses debited to profit and loss account which relate to exempt income” under the head “Schedule BP- Computation of income from business or profession” of the income tax return filed. The assessee has also submitted that any further disallowance will lead to double disallowance. This needs consideration and verification by the AO.”

We noted that the PCIT has simpliciter carried out unnecessary exercise without analyzing that the assessee has received the exempt income to the tune of Rs.26,97,926/- as against assessee itself has made disallowance of expenses relatable to exempt income to the extent of Rs.34,17,729/- which is greater than the exempt income itself. Even otherwise, the PCIT has not noted any error in the assessment order or any prejudice caused to the Revenue by the assessment order. There is no iota of any finding on the above subject and cannot be inferred from the above reproduced para 5 & 5.1 from the order of PCIT. Further for revising the assessment, the PCIT has to give a clear cut finding that the order passed by the AO u/s.143(3) of the Act suffers from the twin conditions i.e., erroneous insofar as prejudicial to the interest of Revenue, which is sine qua non to invoke the powers u/s.263 of the Act.

7.1 Coming to next issue on loss of sale of assets, admittedly during the relevant assessment year the assessee company had incurred loss on sale of assets amounting to Rs.1,13,16,189/- and the same being capital in nature was disallowed by the assessee company while computing taxable income for the relevant assessment year and moreover, the disallowance of this loss on sale of assets was duly disclosed in the return of income filed for the relevant assessment year and appropriate disclosure was made in TAR filed by the assessee for the relevant assessment year. Even the PCIT in his order noted this fact in para 6 as under:-

“6. Loss on sale of assets: The assessee company has claimed that it has correctly disallowed the loss on sale of assets being capital in nature amounting to Rs.1,13,16,189/- in the Computation of Income. Hence, it is claimed that this issue stands explained. This also needs consideration and verification by the AO.”

We noted that the PCIT has nowhere recorded finding of fact that the assessment order is erroneous insofar as prejudicial to the interest of Revenue and once this twin conditions is not mentioned or not probed, the PCIT has no power to exercise powers u/s.263 of the Act for revising the assessment.

7.2 We, after going through the provisions section 263 of the act and facts of present case, are of the view that the factual matrix stares in the face of the record in the light of the legal requirement of a satisfaction that for invoking the powers u/s.263 of the Act, necessarily presupposes the statutory satisfaction that although there is some error with regard to the completed assessment but the order passed by the officer has to be erroneous insofar as prejudicial to the interest of the Revenue. The plain language of the provision is more than abundantly clear that it is not every error or mistake that should induce the PCIT to resort to exercise the powers u/s.263 of the Act. Where the factual matrix shows that it is a marginal situation and when by a careful and cautious judgment the AO has considered the issue in hand, the exercise of the power u/s.263 of the Act by the PCIT is not proper. For invoking the revisionary powers u/s.263 of the Act, it is necessary for the PCIT to state in what manner he consider the assessment order as erroneous and prejudicial to the interest of Revenue and what the basis and material for such conclusion. Though the provisions of section 263 of the Act vests power in PCIT in subjective terms, but even when an enactment vests discretion in any authority saying, “if it appears”, “if he satisfied”, “if he considers necessary”, that does not mean that it is a matter only of subjective satisfaction and such authority has not to judge the circumstances in an objective manner. In view of this discussion, we are of the view that the PCIT must give his own reasons for being satisfied that the order passed by the AO is erroneous and prejudicial to the interests of Revenue and this provision postulates a scrutiny by PCIT of all the relevant facts for holding that the order is erroneous and is also prejudicial to the interest of Revenue. In the present case none is the finding qua that and PCIT has not given any reasoning for setting aside the assessment order and directing the AO verification without any basis. Hence, on both counts, we quash the revision order passed by the PCIT and allow the appeal of assessee.

8. Since the facts and circumstances and the issue raised in assessment year 2018-19 in ITA No.1408/CHNY/2024 are similar to assessment year 2017-18 in ITA No.1407/CHNY/2024, taking a consistent view, we quash the revision order passed by the PCIT and allow the appeal of the assessee.

9. In the result, both the appeals filed by the assessee are allowed.

Order pronounced in the open court at the time of hearing on 1st August, 2024 at Chennai.