The Cochin Bench of the Income Tax Appellate Tribunal ( ITAT ) while adjudging an Income Tax Appeal held that an Income Tax Assessment by the Assessing Officer ( AO ) has to be both, erroneous and prejudicial to the interest of the Revenue to warrant proceedings under Section 263 of the Income Tax Act, 1961.
The present Appeal was lodged by Kool Home Builders, a Kochi-based construction company against an Order passed by the Principal Commissioner of Income Tax -1 (PCIT), Kochi regarding the financials of the Appellant for the Assessment Year (A.Y.) 2017-18.
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The Appeal was admitted by the ITAT after condoning a 434-day delay in filing by the Assessee after being convinced of sufficient cause which prevented the Assessee from filing the Appeal within the stipulated time period.
Upon examination of the Assessee’s assessment records, the PCIT found that the assessee has claimed deduction of capital expenditure amounting to Rs.1,20,87,830/- and Rs.80,51,962/-, which had not been verified by the AO during the assessment proceedings. It was on this basis that the PCIT held the Assessment to be erroneous and prejudicial to the interest of the Revenue.
Authorized Representative (AR) appearing for the Revenue, Sanjit Kumar Das contended before ITAT that once the disputed expenses have been capitalized by the Assessee without any claim of deduction by the Assessee, even if the order is presumed erroneous, it cannot be deemed prejudicial to the interest of the Revenue.
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The two-member Bench of ITAT, Cochin comprised by Waseem Ahmed, Accountant Member and Soundararajan K., Judicial Member observed that proceedings under Section 263 of the Income Tax Act, 1961 can be initiated only upon the fulfilment of twin conditions of being erroneous and prejudicial to the interest of the Revenue.
However, the Bench observed that it has been proved that the Assessee has already capitalized the disputed expenses, the same being reflected in their books of accounts without claiming the benefit of deduction of the impugned expenses in their Profit and Loss (P&L) Account. In such an event, even if the Order by the AO is deemed erroneous, it cannot be held ‘Prejudicial to the Interest of the Revenue’
In light of the observation, ITAT quashed the proceedings under Section 263 in view of the failure of PCIT to establish fulfilment of the twin conditions
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