Order held erroneous but not prejudicial despite depreciation allowed at higher rate

Order held erroneous but not prejudicial despite depreciation allowed at higher rate because there was no taxable income on account of business loss

In a recent case, the ITAT has held that the assessment order though erroneous was not prejudicial to the Revenue despite depreciation allowed at higher rate because there was no taxable income on account of business loss.

ABCAUS Case Law Citation:
ABCAUS 3859 (2024) (02) ITAT

In the instant case, the assessee had challenged the order passed by the PCIT u/s 263 of the Income Tax Act, 1961 (the Act) in holding the assessment framed under section 143(3) of the Act was erroneous insofar prejudicial to the interest of revenue.

The appellant assessee was a private limited company and engaged in the activity of the power industry. The assessee in the year under consideration had claimed depreciation on the Windmill at the rate of 80% on the value of the Windmill which was also allowed by the Assessing Officer (AO) in the assessment framed under section 143(3) of the Act.

However, the PCIT on examination of the assessment records held that the depreciation on the Windmill was at 15% as specified under the provisions of law but the assessee had claimed depreciation at the rate of 80% on the value of the Windmill.

According to the PCIT there was an error of law with respect to the rate of depreciation at which the assessee had claimed depreciation in the assessment order framed under section 143(3) of the Act. But the AO without applying correct provision of law had allowed the depreciation at the rate of 80% on the value of the Windmill.

Thus, the PCIT concluded that the assessment framed by the AO under section 143(3) of the Act was erroneous insofar prejudicial to the interest of revenue. Accordingly, the learned PCIT directed the AO to make the fresh assessment as per the provisions of law and after giving opportunity to the assessee.

Before the Tribunal, the assessee contended that to attract the provisions of section 263 of the Act, twin conditions as specified under section 263 of the Act should be satisfied i.e. the order should be erroneous and prejudicial to the interest of revenue. If any of the conditions are missing, the assessment order cannot be termed as erroneous insofar prejudicial to the interest of revenue.

It was further pointed out that even assuming that the correct rate of depreciation was 50% on the value of the Windmill, then also there was no tax liability accruing upon the assessee. In other words, at the most the assessment order can be termed as erroneous but there was no loss to the revenue. It is for the reason that even the depreciation was claimed at the rate of 15%, the assessee was not liable to make any payment of income tax on account of losses and unabsorbed depreciation.

The Tribunal noted that even the depreciation was allowed to the assessee at the rate of 15% in the year in dispute, there was no taxable income in the hands of the assessee on account of business loss. Thus, it can be safely held that there can be an error in the assessment order but the same cannot be termed as prejudice to the interest of revenue. It is for the reason that in either of the cases, there was no positive taxable income of the assessee.

The Tribunal further observed that even in the subsequent assessment years, when the Windmill was sold out by the assessee, there was no positive income chargeable to tax arising to the assessee despite even if the depreciation was calculated at the rate of 15% on the value of the windmills. The necessary details about the taxable income of the assessee in either of the cases were available in the order of the PCIT.

The Tribunal held that the twin conditions in the given facts and circumstances have not been satisfied. Accordingly, it held that there cannot be any revision under the provisions of section 263 of the Act in the assessment framed under section 143(3) of the Act.

The Tribunal quashed the revision order passed under section 263 of the Act and ground of appeal of the assessee was allowed.

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