CIT can exercise Revisionary Jurisdiction only the Assessment Order is Erroneous & Prejudicial to the Interest of Revenue; ITAT Kolkata [Read Order]

ITAT

The Income Tax Appellate Tribunal, Kolkata division has recently declared that CIT can exercise revisionary jurisdiction under section 263 of the Income Tax Act, 1961 only when the order passed by the Assessing officer is erroneous and prejudicial to the interest of the revenue. The Tribunal was considering an appeal filed by the assessee invoking a question that whether the ld CIT is justified in invoking revisionary jurisdiction u/s 263 of the Act in the facts and circumstances of the case.

The assessee on 15.11.2006, filed the return of income for the Asst Year 2006-07 declaring total income of Rs. 65,831/- after adjusting brought forward business and depreciation loss of Rs. 1,42,209/- under normal provisions of the Act and declaring book profit u/s 115JB of the Act of Rs. 4,52,412/-. The assessment was completed u/s 143(3) of the Act on 3.7.2008 determining the total income 66,672/- under normal provisions of the Act after making disallowance u/s 14A of the Act in the sum of Rs. 841/- and determining the book profit u/s 115JB of the Act at Rs. 4,53,253/-. In the said assessment proceedings, the ld AO on perusal of profit and loss account including its schedules, directed the assessee to file the details of other income. The assessee filed the details stating that other income comprises of dividend income of Rs. 82,876/- , profit on sale of units of mutual fund of Rs. 1,40,176/- and profit on sale of derivatives of Rs. 16,950/- through portfolio management scheme (PMS) of Prudential ICICI Asset Management Company Limited. It was also stated by the assessee that the assessee had disclosed the other income earned through PMS other than dividend income, under the head ‘income from business’. This plea of business income has been accepted by the ld AO while completing the assessment u/s 143(3) of the Act on 3.7.2008. Later this assessment was sought to be reopened u/s 147 of the Act on ground that claim of assessee on insurance amounting to Rs. 2,28,780/- is apparently ineligible and a claim of depreciation on assets also not allowable as there was no business during that year.

In the re-assessment proceedings, the ld AO observed that keyman insurance premium is eligible for deduction as per CBDT Circular No. 762 dated 18.2.1998. However, in respect of depreciation, he observed that the same was claimed on assets such as air-conditioner, furniture, electrical fitting etc along with a car. The assessee claimed to have used the car for business purpose as well as in connection with new business venture. However, the ld AO observed that the claim is not fully substantiated that the car was entirely used for business and accordingly made proportionate disallowance of depreciation of Rs. 80,192/- and completed the reassessment u/s 147 / 143(3) of the Act on 30.11.2011.

The ld CIT issued show cause notice dated 22.3.2013 seeking to revise the assessment framed u/s 147/143(3) of the Act in as much as the ld AO had granted deduction towards keyman insurance of Rs. 2,28,780/- and allowed depreciation on assets as used for business purposes in the sum of Rs. 59,228/- instead of disallowing the same, which in the opinion of the ld CIT are not allowable for want of business being carried on by the assessee during the year under appeal.

Before the Tribunal the assessee maintained that it is primarily engaged in the business of trading in shares, mutual funds and derivatives and during the financial year 2005-06 relevant to Asst Year 2006-07, it had earned profit on sale of units of mutual fund of Rs. 1,40,176/- and profit on sale of derivatives of Rs. 16,950/- through portfolio management scheme (PMS) of Prudential ICICI Asset Management Company Limited which are purely business income of the assessee and assessed as such in the original 143(3) proceedings by the ld AO.

While deciding the matter, the Tribunal observed that the jurisdiction of the ld CIT u/s 263 of the Act can be exercised only when he finds that the order of the ld AO which is sought to be revised u/s 263 of the Act was erroneous and prejudicial to the interest of the revenue. The law is well settled that failure of the ld AO to make an enquiry which he ought to have made before concluding the assessment, in the given set of facts and circumstances of the case, renders his order erroneous and prejudicial to the interest of the revenue.

The Division Bench comprising of Shri. Viswanethra Ravi (Judicial Member) and Shri. Balaganesh (Accounting Member) pointed out that in the instant case, the ld AO had accepted the profit on sale of mutual funds and derivatives to be assessed under the head ‘income from business’ which is also accepted by the ld CIT. The ld AO had allowed the claim of deduction towards keyman insurance premium in the sum of Rs. 2,28,780/- by placing reliance on the CBDT Circular No. 762 dated 18.2.1998 which is binding on him. The ld AO though had reopened the assessment initially on the pretext that there was no business carried on by the assessee and accordingly keyman insurance premium and depreciation are not allowable business expenditure, was thoroughly convinced on the fact that the assessee was carrying on business and allowed the deduction towards keyman insurance premium by placing reliance on the CBDT Circular No. 762 dated 18.2.1998 which Circular is actually binding on him. However, he proceeded to disallow the portion of the claim of depreciation on car as not used for business purposes as assessee had not substantiated the usage of the same for the purpose of business. These facts go to prove beyond doubt that the ld AO had duly applied his mind on the aspect as to whether the assessee had indeed carried on any business during the year or not. It is not in dispute that the ld AO had allowed the claim of other administrative expenses as allowable business expenditure. Hence it could be safely concluded that the ld AO had indeed made requisite enquiry in the given set of facts and circumstances of the case and had taken a judicious view on the entire issue. Hence his order cannot be termed as erroneous within the meaning of section 263 of the Act.

While concluding, the learned member added that “we find that even the ld CIT had not disturbed the claim of administrative expenses to be allowed under the head ‘income from business’. Hence either way, no prejudice is caused to the interest of the revenue by the order of the ld AO. Hence the twin conditions required for section 263 of the Act are not satisfied.”

Read the full text of the order below.

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