Revision u/s 263 upheld as AO had not formed any opinion but erroneously allowed the capital expenses as revenue causing a clear prejudice – High Court
ABCAUS Case Law Citation:
ABCAUS 2422 (2018) 07 HC
The instant appeal was filed by the assesseee against the order of the Income Tax Appellate Tribunal (ITAT) by upholding the revision order u/s 263 of the Income Tax Act, 1961 (the Act) wherein the CIT had held that that electricity charges for the period prior to the purchase was capital expenditure.
The substantial question of law framed in the memorandum of appeal was whether the appellate tribunal was justified in sustaining the order of the Commissioner of Income Tax when it was accepted by the Tribunal that all the relevant details were before the assessing officer while completing the assessment under Section 143(3) of the Income Tax Act?
The assessee had purchased a premises with plant and machinery with an electricity connection. After 5 years, the assessee settled, pending electricity dues for the period prior to the purchase, under One Time Settlement Scheme. The assessee claimed the electricity expenses as revenue expenditure, which was accepted as per the assessment order, but later suo motu revised by CIT under Section 263 of the Act.
The revision order on this issue was affirmed by ITAT by holding that electricity charges for the period prior to the purchase was capital expenditure.
Before the Hon’ble High Court the assessee contended that when out of two possible views, one was taken by the Assessing Officer (AO), there could be no suo motu revision under Section 263, for reason of the Commissioner having a different opinion.
It was also submitted that there is any discernible erroneous finding, since the revenue expenditure as claimed by the assessee was possible, for reason of the expenditure being incurred in the subject year though for prior dues of electricity charges. The assessee also submitted that there was no prejudice caused to the Revenue, insofar as even if the expenditure was treated as capital, definitely the assessee would be entitled to depreciation and the very same amount would be set off against the profits of the assessee.
The Revenue contended that there was nothing in the assessment order to show that an opinion had been formed by the AO. The Tribunal had also specified the same and affirmed the order of suo motu revision. It was further contended that the assessment order was erroneous and the expenditure for prior period electricity charges cannot be treated as a revenue expenditure; which if so treated would cause prejudice to the Revenue.
The Hon’ble High Court observed that the assessee had purchased the plant and machinery for utilisation in its business, that too long before the electricity charges were demanded from the assessee. The demand was settled by the assessee, since otherwise the same would be a charge created on the plant and machinery as also on the property. Only to avoid such distress on the property, the assessee settled the dues of the prior owner.
The Hon’ble High Court opined that the electricity charges paid was the hidden cost of the plant and machinery, which the assessee was not aware of at the time of purchase. When the demand was raised; for further utilisation of the plant and machinery, it was necessitated that the prior charges be paid up, which necessarily would be a capital expenditure and not a revenue expenditure.
The Hon’ble High Court observed that the Hon’ble Supreme Court had held that though each and every mistake or error cannot be deemed to be an erroneous finding, an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous.
The Hon’ble High Court observed that in the assessment order there was no discussion by the AO of having accepted the claim of the assessee that the remittance of prior electricity charges under One Time Settlement Scheme was a revenue expenditure. The fact that the specific claim along with the demand letter received was produced before the AO would not mean that the AO had come to a conclusion as to whether the claim was allowable as a revenue expenditure.
The Hon’ble High Court opined that the AO erroneously did not disallow electricity charges paid; claimed as revenue expenditure, erroneously assuming that the charges are for the subject year. There is hence erroneous assumption of facts and wrong application of law. It cannot also be said that the claim raised as revenue expenditure is a plausible view, for the reasoning already supplied by us that the electricity charges for the period prior to sale was a hidden cost which had to be settled by the assessee after the sale. There was an erroneous decision entered into by the AO which could have been revised under Section 263, provided there was a prejudice caused to the Revenue.
The Hon’ble High Court opined that mere fact that capital expenditure could be claimed as depreciation cannot avoid the prejudice caused to the Revenue. First of all, the capital expenditure could be claimed as depreciation only in the course of a period of years. Then it would depend upon whether there was any profit earned by the assessee in the subsequent years. Further the question whether prejudice is caused had to be examined on the tax liability for the subject year and not the anticipated claims that could arise in the future years which again is dependent on various elastic factors.
The Hon’ble High Court held that in the instant case, there was clear prejudice caused to the revenue and the appeal was rejected.
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