PR. COMMISSIONER OF INCOME TAX vs. M/S OM RUDRA PRIYA HOLIDAY RESORT PVT. LTD.

Facts

The Principal Commissioner of Income Tax (PCIT), Kota, appealed against an order of the Income Tax Appellate Tribunal (ITAT) dated December 20, 2018. The ITAT had allowed the appeal of M/s Om Rudra Priya Holiday Resort Pvt. Ltd. (the assessee) and set aside an order passed by the PCIT under Section 263 of the Income Tax Act, 1961. The assessment year in question is 2013-14. The assessee, following the mercantile system of accounting, had its total income assessed at Nil by an order under Section 143(3) on March 14, 2016. The PCIT believed this order was erroneous and prejudicial to the revenue due to a discrepancy in the valuation of fixed assets. Specifically, the fixed assets were declared and accepted at Rs. 2,20,03,275, while a bank's surveyor-cum-valuer had valued them at Rs. 3.52 crore in a certificate dated October 2, 2012. The PCIT noted a significant difference between the assessee's recorded investment (Rs. 2,69,26,206 including land) and the valuer's certificate (Rs. 3.52 crore excluding land, leading to a total of Rs. 4,01,22,931 including land). The PCIT felt the assessing officer (AO) failed to properly consider this valuation certificate and should have referred the matter to the Departmental Valuation Officer (DVO) under Section 142A.

Held

The High Court held that the Tribunal was justified in setting aside the order passed by the PCIT under Section 263. The Court found that the Tribunal had analytically examined all arguments and noted that the AO had indeed made inquiries. The AO had issued a query letter requesting details of fixed asset additions and supporting documents, including the valuation report. The assessee had provided a valuation report dated May 14, 2013, and also submitted documents related to the term loan from the bank, including the project report. The Tribunal concluded that the project report submitted with the bank was an estimated future cost, not the actual cost incurred. The Court agreed with the Tribunal's finding that the AO was satisfied with the cost of fixed assets as recorded in the books of accounts, which was supported by a valuation report. The Court emphasized that the project report could not constitute the actual cost of construction once the assessee had recorded the actual cost, which was verified by the AO. The Court further noted that the PCIT was not sure about the correctness of the cost of construction and had set aside the AO's order solely for the purpose of referring the matter to the DVO. The Court reiterated the principle that if the AO has taken one of the possible views permissible in law, the PCIT cannot invoke Section 263 simply because he disagrees with the AO's view. The Court cited the Supreme Court judgment in Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax, Kerala State, to clarify that not every loss of revenue is prejudicial to the interest of the revenue, especially when the AO has taken a view that is sustainable in law. Therefore, the appeal filed by the Revenue was dismissed.

Key Issues

1. Whether the Tribunal was justified in setting aside the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, on the ground that the Assessing Officer's (AO) order was erroneous and prejudicial to the interest of the revenue. The Revenue contended that the Tribunal erred in setting aside the PCIT's order. It argued that the Tribunal wrongly considered the work completion certificate as a project report filed with the bank for a loan. The Revenue asserted that the AO never made inquiries regarding the actual investment in construction or referred the matter to the DVO for valuation, despite a significant difference between the valuation in the work completion certificate and the amount recorded in the assessee's books. The Revenue also argued that the Tribunal failed to consider judgments from the Calcutta, Madras, and Gauhati High Courts. The Revenue relied on the project report dated May 28, 2011, which estimated the cost at Rs. 2.26 crores, and the work completion certificate dated October 2, 2012, which valued the construction cost at Rs. 3.53 crores, highlighting that the AO did not make proper inquiries regarding these valuations. The Assessee, as per the Tribunal's findings, argued that the AO had made all necessary inquiries. The Tribunal noted that the AO had issued a query letter requesting details of fixed asset additions and supporting documents, including the valuation report. The assessee had produced a valuation report dated May 14, 2013, and also submitted documents related to a term loan from Baroda Rajasthan Gramin Bank, including the sanction letter and project report. The Tribunal concluded that the project report was merely an estimated future cost and not the actual cost incurred, which was recorded in the books and verified by the AO.