Failure by AO to Verify Key Issues During Reassessment: ITAT Upholds PCIT’s order [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the order of the Principal Commissioner of Income Tax ( PCIT ), finding that the Assessing Officer ( AO ) failed to verify key issues during reassessment, leading to an erroneous and prejudicial order.

FLsmidth Pvt. Ltd,appellant-assessee,filed its return for A.Y. 2014-15 on 30.11.2014, declaring Rs. 35,34,10,370/-, revised later to Rs. 57,25,24,130/-. The AO passed an order on 28.02.2018, assessing income at Rs. 61,28,16,850/-, with additions for Transfer Pricing (TP) adjustment (Rs. 3,71,56,870/-) and section 14A disallowance (Rs. 31,35,846/-).

The AO reopened the assessment under section 147 but accepted the revised return without further additions. The reopening was based on claims related to capital gain, exchange fluctuation loss, set-off of brought forward losses, and unearned revenue, which the AO argued led to income escapement.

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The PCIT, after reviewing the assessment order, found several key issues that the AO had not addressed, making the order erroneous and prejudicial to the revenue. These included failing to treat the difference in ‘unearned revenue’ as taxable income, using the incorrect 1987-88 inflation index for capital gains, not adding back the non-allowable exchange fluctuation loss, incorrectly setting off Rs. 7,49,50,348/- in brought forward losses, not examining the provision for doubtful trade receivables, and allowing excess exempt income under section 10 of the Act.

The assessee’s counsel argued that the issues raised by the Ld. PCIT had already been addressed by the A.O. during proceedings under sections 143(3) and 147. The counsel noted that the unearned revenue was examined by the Ld. CIT(A) in A.Y. 2011-12, which ruled it didn’t accrue as income. Regarding set-off of losses, the counsel submitted relevant returns for A.Y. 2011-12 and 2012-13. On foreign exchange fluctuation gain, the counsel referred to the Supreme Court ruling in Woodward Governor India.

For stamp duty indexation, the counsel relied on Explanation 3 to Section 48 and a Mumbai ITAT ruling. On doubtful trade receivables, the provision had been disallowed in the original assessment. Lastly, the counsel confirmed that only domestic dividend income was exempt under section 10(34), and foreign dividend income was taxed.

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The two member bench comprising Aby.T.Varkey (Judicial Member) and Jagadish(Accountant Member) after considering the rival submissions and reviewing the record, upheld the PCIT’s order, which deemed the AO’s assessment under section 147 of the Act erroneous and prejudicial to the interest of revenue. The AO had reopened the assessment to verify the computation of long-term capital gain on the sale of land but failed to verify key details, such as the registration charges paid in 2011 instead of 1987-88.

The PCIT found that the A.O. had not conducted the necessary verification before accepting the assessee’s computation. The ITAT agreed with the PCIT’s direction to the AO to verify the claim and pass a fresh order.

In short the appeal filed by the assessee was dismissed.

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