Every loss of Revenue as a Consequence of Order of AO cannot be Treated as Prejudicial to Interests of Revenue: ITAT Quashes Revision order u/s 263 of Income Tax Act [Read Order]

The Jaipur Bench of Income Tax Appellate Tribunal (ITAT) has quashed the revision order under Section 263 of the Income Tax Act 1961, holding that every loss of revenue as a consequence of the order of the Assessing officer (AO) could not be treated as prejudicial to the interest of revenue.

The assessee, APM Industries Ltd was a domestic company engaged in manufacture of manmade fibres spun yarn. For the year under consideration, the assessee filed a return of income on 31/10/2018. The case was selected for complete scrutiny and as per the assessment order, the main issues for examination were – (i) Duty Drawback (ii) ICDS compliance and adjustment and (iii) disallowance under Section 40A(7) ofIncome Tax Act (gratuity provision).

During the course of assessment proceedings, in compliance to the notice issued, the assessee furnished the information/details requisitioned by the Assessing Officer. After considering the details and information filed, the Assessing Officer assessed the total income, by making addition being provision for payment of gratuity disallowable.

Subsequently, proceedings under Section 263 of the Income Tax Act, were initiated by the Commissioner of Income-tax (PCIT) on the ground that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interest of revenue inasmuch Assessing Officer failed to examine the issues related to (i) disallowance of interest under Section 40a(ia) of Income Tax Act , (ii) duty drawback, (iii) sale of scrap, (iv) disallowance under Section 14 A and (v) reconciliation of figures of expenses shown in the audit report in form No. 3 CD and that shown in the Income Tax return etc.

PCIT held that the assessment order passed by the Learned Assessing Officer was erroneous and prejudicial to the interest of revenue. The PCIT set-aside the assessment order passed by the Assessing Officer.

S. L. Poddar, on behalf of the assessee submitted that the PCIT had not pointed any defects in the detailed replies filed by the assessee and had not substantiated that the order was termed as erroneous or prejudicial to the interest of the revenue. on the issue she had not placed on record as to why the submission and details placed on record fulfil the twin condition so as to prove the order to be erroneous and prejudicial to the interest of the revenue.

Monisha Choudhary,on behalf of the revenue submitted that the case of the assessee was selected for complete scrutiny flagging the three issues to be examined. As regards the mismatch on figure of sale of scrap and TCS under Section 206C of the Income Tax Act the assessee had not furnished the details. Even on the issue of disallowance of interest under Section 14A of Income Tax Act  he relied upon the detailed finding of the PCIT.

The two-member Bench of S. Seethalakshmi, (Judicial Member) and Rathod Kamlesh Jayantbhai,(Accountant Member)  noted that the assessment order passed by the AO was after consideration of the information filed during assessment proceedings which was as mentioned by the AO himself in the assessment order and therefore the order could 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 Income Tax Act.

The Bench quashed the impugned order relying upon the Supreme Court decision in the case of CIT vs. Max India Ltd which 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.”

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