Revisional Jurisdiction Can't Be Invoked For Inadequacy Of Enquiry By AO: Delhi High Court

The Delhi High Court has held that the inadequacy of the inquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Income Tax Act.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that the claims were duly examined during the original assessment proceedings themselves, and neither there was any error nor was the same prejudicial to the interests of the department.

The respondent-assessee is a non-banking financial company (NBFC) engaged in the business of providing finance to industry, trade, etc. through hire purchases, leases, and loans. The respondent-assessee filed its income tax return for the concerned AY on October 31, 2002, declaring its total income to the tune of Rs. 65,41,08,720. The ITR filed by the respondent-assessee was processed under Section 143(1). Subsequently, a notice under Section 143(2) was issued on March 28, 2003, intimating that the case of the respondent-assessee had been selected for scrutiny.

In pursuance of the proceedings under Section 143(3), an assessment order was passed in which the income of the assessee was assessed at Rs. 87,01,68,210.

However, the CIT, while exercising the power of revision of orders that are erroneous and prejudicial to the interest of the Revenue as per Section 263 of the Act, quashed the assessment order and remitted the matter back to the AO for a de novo adjudication with respect to the two claims. Firstly, the claim for deduction of Rs. 1114.68 lacs on account of provision for non-performing assets. Secondly, the claim for deduction of Rs. 114.06 lacs on account of the interest rate swap.

The AO adjudicated the two issues afresh and held that the expenditure of Rs. 2,28,35,593 was capital in nature, and the same was consequently disallowed.

The assessee preferred an appeal before the CIT (A), which came to be dismissed. The appeal was rejected on the grounds that the claim of the respondent-assessee with respect to the loss of Rs. 2,28,35,593 being normal business loss during the concerned AY was unsustainable. The expenditure was in relation to the protection of any higher payment of the principal amount and not due to any interest payable on such a loan raised in foreign exchange.

The assessee appealed before the ITAT, challenging the order passed by the CIT under Section 263. The ITAT invalidated the order of the CIT. The ITAT held that there was no error or prejudice to the interest of the Revenue as no deduction on account of provision for non-performing assets was allowed to the respondent-assessee. The interest rate swap was an actual loss, and only the net loss of Rs. 114.05 lacs after setting the gain of the interest rate swap was claimed as a deduction. Both issues were duly examined by the AO via questionnaire, to which replies were duly furnished by the assessee.

The department contended that the ITAT erred in setting aside the revisional order under Section 263 as the AO had failed to record any finding with respect to the above-mentioned two issues in the assessment order. There is nothing on record that could signify due application of mind on the part of the AO while allowing the claims of the respondent-assessee. The revisional authority has rightly held that the AO has failed to make any inquiry and merely accepted the version of the respondent-assessee.

The assessee contended that since the AO was not completely satisfied with the replies submitted by the respondent-assessee with respect to the notice, the AO made an addition considering that the assessee had already disallowed Rs. 7,60,76,105 in its computation of total income. The AO has passed the assessment order after diligently carrying out the assessment, and there is no reason to assail the same on the pretext of non-application of mind.

The court, while dismissing the appeal of the department, held that every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income Tax Officer adopted one of the courses permissible in law and it resulted in a loss of revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law.

Counsel For Appellant: Prashant Meharchandani

Counsel For Respondent: Sachit Jolly

Case Title: PCIT Versus M/S Clix Finance India Pvt. Ltd.

Citation: 2024 LiveLaw (Del) 279

Case No.: ITA 1428/2018

Click Here To Read The Order