Discrepancy in Net Profit Figures: ITAT Quashes Pr. CIT’s Revision Order due to Prior AO Inquiry [Read Order]

The Hyderabad Bench of Income Tax Appellate Tribunal (ITAT) quashed the revision order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263, citing that the Assessing Officer (AO) had already conducted an inquiry into the alleged discrepancy in net profit figures.

Lycos Internet Ltd, appellant-assessee,filed its return on September 29, 2012, declaring nil income after claiming a deduction under Section 10AA and setting off depreciation loss. It reported a book profit of ₹32,82,86,986 under Section 115JB. The assessment under Section 143(3) was completed on March 29, 2016, determining total income at ₹3,37,52,244 under normal provisions.

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Later, the Pr.CIT found a discrepancy in the net profit figures—₹59,84,33,318 in the annual report but ₹32,82,86,986 in the return. The Pr. CIT noted possible exclusion of the US Branch’s profit and cited the India-USA Double Taxation Avoidance Agreement(DTAA), stating such income was taxable in India. Since the AO had not verified this, the order was deemed erroneous and prejudicial to the Revenue.

A show-cause notice under Section 263 was issued on December 20, 2017. The assessee argued that the AO had examined the issue, but the Pr. CIT disagreed and set aside the assessment, directing a reassessment after verifying the discrepancies.

Aggrieved by the decision of the Pr.CIT the assessee appealed before the tribunal.

Read More:Revisionary Powers u/s 263 of Income Tax Act not prevails if AO Conducts Inquiry and Verification during Assessment: ITAT quashes Revision Order

The tribunal found that the Pr. CIT invoked Section 263 due to a discrepancy in net profit figures between the assessee’s Annual Report and ITR-6. The Pr. CIT suspected that the US branch’s profit was excluded, which should have been taxed in India under the India-US DTAA, but no tax payment evidence was found.

The assessee objected, but the Pr. CIT did not address the concerns and set aside the assessment. However, the appellate tribunal noted that the AO had already examined financial records, issued notices, and received detailed submissions, including Profit & Loss(P&L) statements and audit reports. The US subsidiary was a separate tax entity, and its income was taxed abroad.

Since the AO had conducted an inquiry and the Pr. CIT did not show any revenue loss, the Tribunal found the revision unjustified. It also noted that including the US branch’s income would have qualified for a tax rebate under the DTAA.

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The ITAT ruled that since the income was assessed under Section 115JB, any discrepancy in profit should have been adjusted accordingly. However, the Pr. CIT did not determine whether this discrepancy needed to be added to the book profit.

The two member bench comprising Vijay Pal Rao (Vice President) and Madhusudan Sawdia (Accountant Member) noted that the AO had conducted an inquiry, so the case did not involve a complete lack of investigation. It held that an order could not be set aside just because the Pr. CIT had a different view, especially when the AO had examined the relevant details.

Since the Pr. CIT did not establish that the AO’s decision was unsustainable in law or resulted in a revenue loss, the ITAT found the revision order unjustified and quashed it.

In short,the appeal filed by the assessee was allowed.

To Read the full text of the Order CLICK HERE

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