Facts of the Case

The assessee filed his return of income for Assessment Year 2018-19 and the assessment was completed by the Assessing Officer. The Principal Commissioner of Income Tax invoked revisionary jurisdiction under Section 263 on the ground that the assessee had allegedly wrongly claimed depreciation, car insurance and car loan interest aggregating to ₹1,12,423 against income purportedly returned under Section 44AD, and had also claimed expenditure of ₹2,34,442 towards forfeiture of earnest money deposit, which according to the PCIT was capital in nature. A show cause notice under Section 263 was issued, and the assessee submitted detailed explanations contesting the factual and legal basis of the proposed revision. Despite the submissions, the PCIT set aside the assessment and directed the Assessing Officer to reframe the assessment.

Issues Involved

Whether the Principal Commissioner was justified in invoking jurisdiction under Section 263 when the assessee had not claimed the alleged deductions, whether forfeiture of earnest money deposit incurred in the course of business could be treated as capital expenditure, and whether the twin conditions of the assessment being erroneous and prejudicial to the interest of the Revenue were satisfied.

Petitioner’s Arguments

The assessee contended that he had never returned any income under Section 44AD nor claimed depreciation, car insurance or car loan interest in either the original return filed under Section 139 or the return filed pursuant to Section 148. It was argued that the factual premise on which the PCIT initiated revision was incorrect. With regard to forfeiture of earnest money deposit, the assessee submitted that the EMD was paid in the ordinary course of business for participation in coal e-auctions conducted by Eastern Coalfields Limited and that forfeiture thereof constituted a revenue expenditure. It was further submitted that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue.

Respondent’s Arguments

The Revenue supported the order of the PCIT and contended that the Assessing Officer had failed to examine the claims properly, rendering the assessment erroneous and prejudicial to the interest of the Revenue, thereby justifying invocation of Section 263.

Court Order / Findings

The ITAT Kolkata held that the findings recorded by the PCIT regarding alleged claim of deductions under Section 44AD were factually incorrect, as the assessee had not claimed such deductions nor returned income under Section 44AD. The Tribunal further held that forfeiture of earnest money deposit paid for participation in coal e-auctions was incurred in the normal course of business and constituted revenue expenditure, and therefore could not be treated as capital in nature. The Tribunal observed that the Assessing Officer had taken a plausible view based on facts on record and that the assessment was neither erroneous nor prejudicial to the interest of the Revenue. Relying on the decision of the Supreme Court in Malabar Industrial Co. Ltd. vs. CIT, the Tribunal held that the jurisdiction under Section 263 had been wrongly invoked.

Important Clarification

The Tribunal clarified that revision under Section 263 can be exercised only when both conditions, namely that the assessment order is erroneous and prejudicial to the interest of the Revenue, are cumulatively satisfied. Mere disagreement with the view taken by the Assessing Officer or incorrect factual assumptions cannot justify revisionary action. Business-related forfeiture of earnest money deposits cannot be mechanically treated as capital expenditure.

Final Outcome

The appeal filed by the assessee was allowed, and the order passed by the Principal Commissioner of Income Tax under Section 263 of the Income-tax Act for Assessment Year 2018-19 was quashed as invalid in law.

Source Link- https://itat.gov.in/public/files/upload/1767782094-uKeCbk-1-TO.pdf

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