In a recent ruling, the Income Tax Appellate Tribunal ( ITAT ), Mumbai Bench, dismissed an appeal and upheld the order passed by the Principal Commissioner of Income Tax ( PCIT ) under Section 263 of the Income Tax Act. The appeal, concerning the assessment year 2018-19, challenged the revisional jurisdiction exercised by the PCIT, who had found the assessment order to be erroneous and prejudicial to the interests of the revenue.
HBS View Private Ltd., the appellant-assessee, contended that the exercise of jurisdiction under Section 263 was improper, arguing that the twin conditions of “error” and “prejudicial to the interest of revenue” were not fulfilled. The appellant claimed that the expenditures in question, although not claimed in the current year, did not affect the revenue’s interests.
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However, the ITAT, after hearing both sides, upheld the PCIT’s findings. The PCIT had highlighted several lapses in the assessment order, particularly the failure of the Assessing Officer (AO) to verify the genuineness of significant expenditures claimed by the assessee. These included substantial payments for displacement compensation, consultancy fees, lease rent, and interest-bearing funds, among others. The AO had not conducted inquiries to determine whether TDS had been deducted on these payments or whether the expenses were incurred for business purposes.
The PCIT also pointed out that the assessee, despite having interest-bearing funds of Rs. 72.35 crore, had provided interest-free loans of Rs. 16.64 crore to related parties. This led to a recommendation for a disallowance of Rs. 1.64 crore from the claimed interest expense. Additionally, the PCIT noted the lack of documentation for depreciation claims, including invoices for new asset purchases and proof of assets being “put to use.”
The PCIT emphasized that even though the expenditures were not debited to the Profit & Loss Account in the current year, they were reflected in the closing work-in-progress (WIP), which would affect profits in subsequent years. Therefore, the genuineness of these claims, including TDS provisions, needed to be verified in the year the expenses were incurred.
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The ITAT Bench comprised of Sandeep Singh Karhail ( Judicial Member ) and Omkareshwar Chidara ( Accountant Member ), while dismissing the appeal, cited several key judicial precedents supporting the PCIT’s action. These included the Supreme Court’s decisions in Malabar Industrial Co. and Max India Ltd., which set the precedent that an order can be deemed erroneous and prejudicial to the interests of revenue when it fails to conduct proper inquiries. Other supporting decisions cited were Sesa Starlite Ltd. v. CIT , Gee Vee Enterprises v. ACIT, and Venkatakrishna Rice Co. v. CIT . These rulings emphasized that failure to conduct necessary inquiries and verifications by the AO rendered the assessment order erroneous, thereby justifying the revision under Section 263.
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