CIT can exercise powers u/s 263 despite assessee’s appeal on that or some other aspect if the same was the subject matter of AO’s order, if in his opinion, it was erroneous-High Court
ABCAUS Case Law Citation:
ABCAUS 2119 (2017) (11) HC
The assessee was aggrieved by the order of the Tribunal upholding that order passed by CIT under section 263 of the Income Tax Act, 1961 (Act).
Important Case Laws Cited/relied upon by the parties:
Malabar Industrial Co. Ltd. vs Commissioner of Income Tax 243 ITR 83 (SC)
Commissioner of Income Tax vs Max India Ltd 295 ITR 282 (SC)
Commissioner of Income Tax v Sunbeam Auto Ltd 332 ITR 167 (Del)
Commissioner Of Income Tax vs Printers House(1998) 233 ITR 666
Commissioner Of Income Tax vs Ratilal Bacharilal & Sons (2006) 282 ITR 457
Commissioner of Income Tax v Aruba Mills 1998 (231) ITR 50 (SC)
Commissioner of Income tax v Amitabh Bacchan 2016 SCC Online SC 484
Brief Facts of the Case:
During the course of scrutiny assessment of the assessee a special audit of the assesse’s accounts was directed, under Section 142(2A) of the Act. The special auditor’s report provided elaborate comments, inter alia, in connection with the terms of reference for special audit framed by the AO, concerning the following issues: (i) reconciliation of fixed assets and depreciation thereon, (ii) arm’s length nature of transactions entered into with related parties, and (iii) compliance with provisions of Chapter XVIIB of the Act relating to tax deduction at source and effect of noncompliance thereof.
The AO, after considering the special auditor’s report completed assessment under Section 143(3) of the Act by making appropriate disallowances in the light of the special audit.
The assessee contested the AO’s order before CIT-(A) who decided the issue with respect to disallowance of depreciation on capitalization of reinstallation costs of fixed assets and disallowance in respect of transactions with group concerns in favour of the assesse. The CIT (A), further, granted partial relief to the assessee in respect of disallowance made under Section 40(a) (ia) of the Act.
Later on, a show cause notice under Section 263 was issued by the Commissioner, alleging that there was variation in cost of fixed assets, which aspect had not been verified or examined by the AO while framing assessment under section 143(3) of the Act. In response to the show-cause notic,e the assessee filed its replies, resisting the move to revise the completed assessments; the appellant also pointed that since the original order of the AO had merged with that of the CIT (A), after the disposal of appeal, the re-appraisal under Section 263 was unwarranted.
However, the CIT made an order u/s 263, setting aside the original assessment order framed under section 143(3) of the Act, holding the same to be erroneous and prejudicial to the interests of the Revenue and directing the AO to reconsider the issue of depreciation, applicability of TDS provisions, Benchmarking of transactions with group companies u/s 40A(2).
The assessee’s appeal to the ITAT was rejected. The Tribunal held that the assessment was concluded by the AO without making adequate enquiries with respect to variation in cost of fixed assets and accordingly, order passed by the Respondent under Section 263 of the Act was upheld. As regards issues concerning applicability of TDS provisions on expenditure claimed by the assessee and benchmarking of transactions with group concerns, the Tribunal set aside the order of the CIT, holding that no opportunity was provided to the assessee regarding those issues and accordingly, directed the Respondent to pass fresh order in respect thereof after providing reasonable opportunity to the assessee.
Contention of the Appellant Assessee:
It was contended that each of the issues which were sought to be re-opened, were the subject matter of scrutiny in the original assessment order, it could not be said that such an assessment order was prejudicial to the interests of the revenue and erroneous in law. The AO went through the special audit report. The assessment was a scrutiny assessment under Section 143 (3). That order of the AO had merged with the appellate order of the CIT(A).Thus Thus, if there was any concern with respect to the AO’s order, that stood addressed and became final upon application of mind at the appellate stage.
It was argued that the order of the CIT under Section 263 could not be upheld under any circumstance and the ITAT, in refusing to set it aside, compounded the error. It was particularly stressed that the issues in addition to the one relating to depreciation were not part of the show cause notice and could not have been made the subject matter of revision; furthermore, no opportunity of hearing was granted by the Commissioner
Contentions of the Respondent Department:
The Revenue pointed out that the provision of second explanation to Section 263 (1) empowers Commissioners to issue notice where any order passed by the Assessing Officer had been the subject matter of any appeal.
Regarding the question of dealing with issues that were not the subject matter of show cause notice was concerned, it was pointed out that the previous judgments of the Court and several other High Court have now been overruled. The Supreme Court has held that the failure to issue notice on any particular issue does not vitiate the exercise of power under Section 263, as long as the assessee is heard and given opportunity.
Observations made by the High Court:
The Hon’ble High Court observed that as far as the exercise of power under Section 263 was concerned, the issue stood concluded, in the light of the amendment with effect from 1989, by insertion of Explanation (c) to Section 263 (1). The non-consideration of the larger claim of depreciation and the consideration of only a part of it by the assessing officer, who did not go into the issue with respect to the whole amount, was an error, that could be corrected under Section 263. The judgment of the Supreme Court was decisive in that the provision of Section 263 (1) Explanation (c) was introduced to cater to precisely this kind of mischief.
The Hon’ble High Court opined that the ruling of the Supreme Court is decisive; it upholds the power of the Commissioner to consider all aspects which were the subject matter of the AO’s order, if in his opinion, they are erroneous, despite the assessee’s appeal on that or some other aspect.
All questions framed were answered in the negative, against the assessee and the appeal was dismissed.