The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that is trite law that in order to invoke Section 263, the assessment order must be erroneous and also prejudicial to revenue, also impugned revisionary proceedings invoked under section 263 of the Act cannot be upheld.
The assessee, TATA Teleservices, is a company and is engaged in providing cellular telecommunication communication services to its subscribers. For the year under consideration, the assessee e-filed its return of income on 26/11/2015 declaring a loss of Rs. 475,90,34,534. The return of income filed by the assessee was selected for complete scrutiny and notice under section 143(2) of the Act was issued and served on the assessee.
Thereafter, notices under section 142(1) of the Income Tax Act along with a detailed questionnaire were issued and served on the assessee. The Assessing Officer (AO) vide order dated 26/12/2017 passed under section 143(3) of the Act concluded the scrutiny assessment proceedings and assessed the total income of the assessee at a loss of Rs.317,09,44,630.
Subsequently, vide notice dated 26/02/2020 issued under Section 263 of the Income Tax Act, the learned PCIT initiated revisionary proceedings on the basis that Marked To Market (“MTM”) loss claimed by the assessee and allowed vide assessment order passed under section 143(3) of the Act is of capital nature and therefore should not be allowed as it directly relates to capital expenses.
The Principal Commissioner of Income Tax (PCIT) further alleged that the assessee itself claims MTM loss but does not offer any MTM gains. Accordingly, the PCIT alleged that since the aforesaid aspects have not been enquired into by the AO the assessment order is erroneous and prejudicial to the interest of the Revenue.
In response thereto, the assessee submitted that the AO after due examination of facts, details, and information submitted by the assessee, during the assessment proceedings, allowed the MTM loss claimed by the assessee. Further, the assessee submitted that the financial statements of the assessee documented the treatment given to MTM loss and the same is in accordance with the guidelines on accounting for derivatives issued by the Institute of Chartered Accountants of India, which prescribes that the company provides a loss in respect of all outstanding derivative contracts in the balance sheet on MTM basis and any gains arising on such MTM are not recognised as income.
The PCIT vide impugned order did not agree with the submissions of the assessee and held that the loans in respect of which the assessee claimed MTM loss are of enduring nature and therefore the MTM loss is capital in nature and should not have been allowed as it was directly related to capital expenses.
Further, the PCIT held that the AO has not discussed the issue of allowability of MTM loss in the assessment order nor it has recorded the reasons for accepting assessee’s submission.
After hearing both the parties, the tribunal held that it is trite law that in order to invoke Section 263, the assessment order must be erroneous and also prejudicial to revenue, and if one of the limbs is absent, i.e., if the order of the AO is erroneous but is not prejudicial to Revenue or if it is not erroneous but is prejudicial to Revenue, recourse cannot be had to Section 263 of the Income Tax Act. Since the MTM loss of Rs.9.29 crore was duly reversed in the subsequent year and has been offered to tax, therefore, there is no prejudice to the Revenue. Therefore, the impugned revisionary proceedings invoked under Section 263 of the Act cannot be upheld and thus, are set aside
The two-member bench consisting of G.S Pannu (President) and Sandeep Singh Karhail (Judicial member) held that the revisionary proceedings have been found to be without jurisdiction and thus the impugned order passed by the learned PCIT under Section 263 of the Income Tax Act has already been set aside, the tribunal expressed no findings and the same is left open. Thus the appeal was allowed.
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