The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has, recently in an appeal filed before it, quashed the revisional order against Lakme.
The aforesaid observation was made by the Mumbai ITAT, when, an appeal was filed before it by the assessee, as against the order of the Principal Commissioner of Income Tax, Mumbai [CIT], dated 27.03.2022 for the A.Y.2017-18.
The ground of the assessee’s appeal being that on the facts and in the circumstances of the case and in law, the PCIT has erred in holding that the order of assessment under section 143(3) insofar as the allowance of EDP expenses of Rs 2,84,82,194 and Royalty expenses of Rs 2,77,23,272 are concerned, are erroneous and prejudicial to the interest of the revenue, the brief facts of the case were that, the assessee had filed its return of income for A.Y. 2017-18 on 30.11.2017, declaring the total income of ₹.NIL.
The case was selected for Scrutiny under CASS, and assessment was completed under Section.143(3) of Income-tax Act, 1961, on 28.12.2019, assessing the total income at ₹.1,47,45,062/, after addition on account of disallowance of depreciation on goodwill to the tune of ₹.24,41,40,229/- and provisions for doubtful debts of ₹.45,79,000/-. Also, the Pr.CIT, Mumbai, while perusing the assessment records, observed that the assessee had claimed EDP expenses to the extent of ₹.2,84,82,194/- in its Profit and Loss Account.
Further, he observed that, Assessing Officer failed to disallow the said expenditure by treating it as capital expense and thereby allowed depreciation, if any, as per the provisions of section 32 of the Income Tax Act. He also observed that the assessee had debited an amount of ₹.2,77,23,272/, in its Profit and Loss Account under the head ‘Royalty’.
He observed that a careful examination of the Tax Audit Report would indicate that TDS under Section. 194J in respect of Fees paid for Technical Services has been shown, and that no TDS in respect of Royalty having been made and paid, is shown in Column No.34A of the Tax Audit Report. Therefore, he was of the opinion that the scope of disallowance at 30% of such Royalty under Section.40(a)(ia), has not been explored.
He observed that prima facie it appears that such expenditure appears to be in nature of capital expenditure and therefore, disallowance under Section.37(1), ought to have been examined. He observed that the Assessing Officer neither made disallowance under Section.40(a)(ia) or under Section.37(1), nor examined the claim, and that the Assessing Officer, in not making proper verification of the facts, thereby failed to make correct assessment of the total income for the year under consideration, which is erroneous as well as prejudicial to the interests of the revenue.
In view of the above observation, a show cause notice under Section 263, dated 12.03.2022, was issued to the assessee, proposing to revise the order under Section 143(3). And in response, the AR of the assessee submitted the relevant information through ITBA portal.
After considering the submissions of the assessee, the Pr.CIT however, rejected the submissions of the assessee and observed that the Assessing Officer has allowed deduction of ₹.2,84,82,194/- on account of EDP expenses, without verifying as to whether it is capital expenditure or revenue expenditure.
He added that the Assessing Officer had not conducted any inquiry about the allowability of EDP expenses or capitalization thereof. Further, he observed that assessee has paid royalty, but as per return of income, it is not discernible whether the TDS has been done on royalty expenses.
He added that it was imperative on the part of the Assessing Officer to verify TDS on royalty expenses claimed, and since TDS on royalty expenses is not discernible from the return/Tax Audit Report, it was required to be disallowed, and therefore that, the Assessing Officer should have conducted inquiry into this, which, he has not done.
By relying on the amended provisions of section 263(1) Explanation 2 clause (a) of the Income Tax Act and relying on the decision of the Supreme Court in the case of Smt. Tara Devi Agarwal and also Rampyari Devi Saraogi , he therefore treated the order passed by the Assessing Officer as erroneous and prejudicial to the interest of the revenue, and accordingly directed the Assessing Officer to reframe the assessment order denovo, after conducting all necessary enquiries and verifications as warranted on facts of the case and also after giving opportunity of being heard to the assessee.
And, it is being aggrieved by the same, that the assessee is presently in appeal before Tribunal.
Hearing the opposing contentions of both sides as presented by Shri Nishant Thakkar & Ms. Jasmin Amalsadvala, on behalf of the assessee, and by Smt. Shailja Rai, on behalf of the Revenue, the Mumbai ITAT observed:
“It is brought to our notice that the Hon’ble Bombay High Court in the case of Pr.CIT v. TATA AIG General Insurance Co. Ltd., has allowed the claim of EPD expenditure as revenue expenditure. Considering the above decision and also various verifications made by the Assessing Officer on royalty clearly indicates that Assessing Officer has taken one of the possible views. Therefore, in our considered view Ld.Pr.CIT has not clearly brought on record how the assessment passed under Section. 143(3) of the Act is erroneous and prejudicial to the interest of the revenue.”
“After considering the detailed submissions of the assessee, Ld.Pr.CIT abruptly completed the order under Section. 263 of the Act by merely remitting the issue back to the file of the Assessing Officer without giving any finding on the issues raised by him in notices issued under Section. 263 of the Income Tax Act”, the coram of Kuldip Singh, the Judicial Member, and S. Rifaur Rahman, the Accountant Member added.
Thus, the ITAT held: “Accordingly, we are inclined to set-aside the order passed under Section. 263 of the Act. In the result, appeal filed by the assessee is allowed”
Subscribe Taxscan Premium to view the Judgment
Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates
