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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI N.V VASUDEVAN & MS. PADMAVATHY S
O R D E R Per Padmavathy S, Accountant Member
This appeal is against the order of the Principal Commissioner of Income Tax Bangaluru-3 under section 263 of the income tax act (the act) dated 29/03/2021.
2. The assessee is an individual and engaged in the business of civil contract. For the assessment year 2016-17 assessee filed the return of income on 17/10/2016 returning an income of Rs.1,39,91,370. The return of income was selected for scrutiny for mismatch in turnover as per 26AS and the returned turnover. The Assessing Officer (AO) called for various details and concluded the assessment by estimating an income of 9% on total turnover resulting in an addition of R.19,32,080. The PCIT set aside the order of assessment passed u/s. 143(3) by order dated 29/03/2021 stating that the relevance of interest and depreciation in the assessment and also the deletion of penalty by the AO are erroneous to the interest of the revenue.
Aggrieved by the order of the PCIT the assessee is in appeal before the Tribunal.
The assessee raised the following grounds “1. The order of the learned principal Commissioner of income tax passed under section 263 of the act insofar as it is against the appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the appellant’s case.
The notice issued for initiation of proceedings under section 263 of the act is bad in law 3. The learned CIT is not justified in law in invoking the jurisdiction under section 263 of the act and setting aside the order of the AO as being erroneous and prejudicial to the interest of the revenue which is contrary to facts and the facts and circumstances of the case.
4. The learned CIT is not justified in law in holding that the order passed by the assessing officer is bad in law without appreciating that there was no error in the order passed much less prejudicial to the interest of revenue on the facts and circumstances of the case.
5. The learned CIT failed to appreciate that the provision of section 263 of the act shall be attracted only when the order is both erroneous and prejudicial to the interest of the revenue and since the order passed under section 143(3) of the act was not erroneous much less prejudicial the invoking of section 263 was not warranted on the facts and circumstances of the case. 6. The learned CIT failed to appreciate that the appellant has not returned estimated income under section 44AD of the act in form saral 4S and the return is based on the reasonable estimate alone and thus the depreciation and interest where allowable deduction in computing the income for the year on the facts and circumstances of the case. 7. The learned CIT failed to appreciate that the AO has made inquiries during the course of assessment proceedings and accepted the explanation of non-availability of books to estimate the income on percentage of turnover in view of the above the order of assessment was not erroneous on the facts and circumstances of the case 8. The learned CIT failed to appreciate the details filed before the AO and also the clarifications filed during the course of 263 proceedings to arrive at the erroneous conclusion that the income returned was under section 44AD of the act and thus the order passed was erroneous and prejudicial to the interest of revenue on the facts and circumstances of the case 9. The learned CIT failed to appreciate that the penalty proceedings have been initiated and subsequently dropped
through separate proceedings and no finding on the issue of penalty could have been made in the proceedings initiated for revision of assessment order on the facts and circumstances of the case 10. Without prejudice and not conceding that the penalty issue would not be revised in the current proceedings the learned CIT failed to appreciate that the AO has made a conscious decision to drop the penalty proceedings and the discretion to levy was well within the powers of the AO on the facts and circumstances of the case 11. The appellant craves leave to add, alter, amend, substitute, change and delete any of the Grounds of appeal 12. For the above and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may be allowed and Justice rendered.
During the course of assessment the AO noticed that the assessee did not maintain books of account and in order to filed his return he estimated income before depreciation and interest at 8% on gross receipts as per 26 AS that worked out to Rs. 1,54,56,640. From this the assessee had claimed an expenditure towards depreciation and interest totaling to Rs.19,10,474. The assessee expressed his inability before the AO to give the breakup of direct and indirect expenditure incurred by him to arrive at the estimate of 8% of profit prior to depreciation and interest. The assessee relied on the decision of the Kerala High Court in the case of Samuel Techno trading Co Ltd vs CIT (2010) (37 DTR 386) (KER) where it was held that “even where books of accounts are not maintained section 44AD percentage of 8% can be guideline for estimation of income from civil works though section 44AD is not applicable”
6. The AO proceeded to estimate the income of the assessee as a percentage of gross receipts as per form 26AS in the absence of any evidence furnished by the assessee for expenditure incurred apart from depreciation and interest. The AO estimated the income of the assessee at 9% on turnover of Rs.19,32,08,001 as per 26AS. The AO after taking into account the other details furnished by the assessee allowed depreciation and interest as claimed by the assessee from the profits or estimated.
7. The AO also initiated the penalty proceedings u/s. 271A on the assessee for not maintain books of accounts. But later deleted the same relying on the decision of the jurisdictional High Court in the case of CIT vs Babu Reddy (2010) 38 DTR147 (KAR).
8. The PCIT initiated proceedings u/s. 263 stating that grant of depreciation and interest was not in accordance with the provisions of section 44AD(2). The PCIT also stated that the non-levy of penalty for not maintaining books of accounts u/s. 271A has resulted in loss of revenue. The PCIT concluded that the order of the AO is erroneous by stating that even though section 44AD is not claimed to be applicable to the assessee the AO should have noticed that allowance of depreciation and interest distort the net profit. On the issue of non-levy of penalty for not maintaining books of accounts the PCIT stated that the facts of assessee is distinguishable from the case relied by the assessee in the case of Babu Reddy (supra) where it is not the case where no books of accounts maintained at all but books were not maintained in the prescribed format. The PCIT after hearing the assessee set aside the assessment order u/s. 143(3) with the direction to pass a de novo assessment.
9. Aggrieved by the order of the PCIT the assessee is in appeal before the Tribunal.
The learned AR made the following submissions
(i)) The assessee is not covered under the provisions of section 44AD since the receipts or more than one crore which the learned. PCIT failed to appreciate.
(ii) The AO has made detailed verification in respect of the turnover achieved and the order of assessment was passed after accepting that fact that the assessee had not offered income u/s. 44AD of the act and upon application of mind and proper appreciation of facts (please refer page 64 of paperbook).
(iii) The order passed by the AO was a speaking order and there was no reason to interfere with the order by way of revision when the AO has made enquiries and accepted the documents filed during the course of scrutiny assessment which is neither erroneous not prejudicial to the interests of the revenue.
(iv) The PCIT revised the assessment only on the belief formed by him that the AO has allowed depreciation and interest on the income computed u/s.44AD by the AO is erroneous on prejudicial to the interests of the revenue whereas the revision is done on the sole reason of difference of opinion of the AO and the PCIT.
(v) The penalty u/s.271A is deleted by the AO after due consideration of the submissions of the assessee and the reliance placed on the decision of jurisdictional court in the case of Babu Reddy (supra). The same decision is quoted by the PCIT in a different manner to hold that the AO’s order deleting the penalty is erroneous and prejudicial to the interest of the revenue. When two views are possible in the interpretation of a judicial pronouncement, the impugned assessment order cannot be termed as prejudicial to the interest of the revenue.
The learned DR relied on the order of the PCIT
We heard the rival submissions and perused the materials on record. Before proceeding further, we may refer to the celebrated decision of Hon'ble Supreme Court rendered in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 109 Taxman 66/243 ITR 83 (SC), wherein the scope of revision proceedings u/s 263 has been explained succinctly by Hon'ble Supreme Court as under:-
"5. To consider the first contention, it will be apt to quote Section 263(1) which is relevant for our purpose:—
Revision of orders prejudicial to revenue.—(1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i). the order of the AO sought to be revised is erroneous; and(ii) it is prejudicial to the interests of the revenue. If one of them is absent -- if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue-- recourse cannot be had to section 263(1) of the Act."
7. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying
the principles of natural justice or without application of mind. The phrase prejudicial to the interests of the revenue is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jainand Another [31 ITR 872], the High Court of Karnataka in Commissioner of Income-tax, Mysore v. T. Narayana Pai [98 ITR 422], the High Court of Bombay in Commissioner of Income-tax v. Gabriel India Ltd. [203 ITR 108] and the High Court of Gujarat in Commissioner of Income-tax v. Smt. Minalben S. Parikh [215 ITR 81] treated loss of tax as prejudicial to the interests of the revenue.
"** ** ** **
The phrase prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO 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 has resulted in 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. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the AO accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi Vs. Commissioner of Income-tax [67 ITR 84] and in Smt. Tara Devi Aggarwal v. Commissioner of Income-tax, West Bengal [88 ITR 323]."
The Hon’ble Supreme Court has clearly laid down that both the conditions, viz., the assessment order is erroneous and further it is prejudicial to the interests of revenue are required to be satisfied for the purpose of revision u/s.263 of the Act. It was further held that "Every loss of revenue as a consequence of an order of AO 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 has resulted in 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.
We will have to examine the facts of the present case to see whether the order passed by the AO is both erroneous and prejudicial to the interest of the revenue warranting a revision u/s.263 of the Act. The assessee is a civil contractor and for the year under consideration the total receipts as per form 26AS is Rs. 19,32,08,001/-. The assessee is not covered under the provisions of section 44AD. The assessee was not maintaining books of accounts and had details of only interest and depreciation. The assessee adopted ‘net wealth method’ which the assessee claimed to be an accepted method as per Board Circular Number F.No2/48/68 (Inv.) dated 26.02.1969. The assessee had estimated the income at 8% of total receipts before interest and depreciation. The AO during the course assessment acknowledged these facts and by drawing reference from section 44AD concluded the assessment estimating the profit of the assessee at 9%. The AO further allowed interest and depreciation on this estimate. The AO has clearly mentioned the fact that section 44AD is not applicable to the assessee. The AO has also stated that since the assessee is unable to provide the details of expenses incurred and not maintaining any books of accounts is proceeding to estimate the profit at 9%.
We notice that the PCIT has considered the action of the AO as erroneous and prejudicial to the interest of the revenue stating that interest and depreciation is not allowed on the profit estimated u/s.44AD. This is not the correct facts of the case, as the assessee has clearly submitted that 44AD is not applicable to him and this fact has been acknowledged by the AO in his order. The PCIT has substituted his view with that of the AO to state that the deduction of interest and depreciation is allowed u/s.44AD by the AO and concluded the order of the AO as erroneous. The learned AR drew our attention to para 4 and 5 of the AO’s order where the AO has clearly acknowledged that the assessee has used the % specified in 44AD and that the said section is not applicable in assessee’s case. It is because of this reason the AO has adopted a higher % for estimation viz., 9% which fact is not correctly noticed by the PCIT.
The PCIT has also misinterpreted the reliance placed by the assessee and considered by the AO in the case of Sammurai Techno Trading Co Ltd (supra). The reliance was placed to the extent where the court held that “even where books of accounts are not maintained section 44AD percentage of 8% can be guideline for estimation of income from civil works though section 44AD is not applicable” (emphasis applied)
The PCIT had stated that when reliance is placed on this decision on the applicability of 44AD then the assessee ought not to have claimed interest and depreciation and the AO should have allowed the claim. This is a gross misconception on the part of the PCIT, since the assessee had relied on the decision only to justify the applicability of 8% as a profit estimate even when section 44AD is not applicable in his case. The AO though accepted the estimation proceeded to enhance the % to 9% after considering the facts and the details furnished. The Hon’ble Delhi High Court in the case of PCIT vs M/S BRAHMA CENTRE DEVELOPMENT PVT. LTD (ITA 116/2021 & ITA 118/2021) has held that 11.1. Therefore, the error should be one that is not debatable or a plausible view. Section 263 of the Act invests a power of revision in a superior officer and therefore, by the very nature of the power, does not allow for supplanting or substituting the view of the AO. The appreciation of material placed before the AO is, exclusively within his domain which cannot be interdicted by a superior officer while exercising powers u/s. 263 of the Act only on the ground that if he had appraised the said material, he would have come to a different conclusion.
Therefore the conclusion of the PCIT that the order passed by the AO is erroneous is not tenable as the assumption of the PCIT that the AO has estimated the profits by applying the provisions of section 44AD and allowed interest and depreciation on the estimated profit, is not correct interpretation of AO’s order.
We will now consider the issue of the AO dropping the penalty proceedings initiated u/s.271B for non-maintenance of books of accounts being erroneous and prejudicial to the interest of the revenue. The AO initiated the penalty proceedings u/s.271B since the assessee was not maintaining books of accounts. The assessee contended this before the AO by placing reliance on the decision of Babu Reddy (supra) where it was held that -
“When no prescribed format has been issued by the revenue, the maintenance of the books of accounts as far as the civil contract business is concerned in the manner in which the books of accounts were maintained by the assessee, could not be found fault with and accordingly, has allowed the appeal filed by the assessee”
The assessee quoted this specific para of the decision before the AO (page 71 of paper book) to claim that the assessee’s case is covered by the above decision. The AO dropped the proceedings accepting the contention of the assessee. The PCIT distinguished the applicability of the facts of the said case to assessee. The PCIT stated that –
The assessing officer initiated penalty proceedings u/s 271A in the assessment order. Subsequently, the penalty was dropped relying on the decision of CIT Vs. Babu Reddy (2010) 38 0TR147 (Kar). I have gone through the decision of the Hon'ble High Court. The decision of Hon'ble Karnataka High Court is distinguishable on facts of the case and in fact is not applicable to the assessee. The above case related to an assessee who maintained books of accounts. To quote from the judgment:
"pursuant to the notice issued to the assessee, a reply was given that the books were maintained in the usual course of computations and that penalty could not be levied. The Assessing Officer, however held that the accounts were not maintained in the prescribed format and accordingly levied penalty."
In page 8 of the order, Hon'ble High Court observes "This is not a case where no books were maintained at all". The issue was books of accounts were not maintained in the prescribed format. Since no prescribed format has been issued by Revenue, "various sectors as stated in the said section are entitled to maintain books of accounts in terms of nature of the business or profession. ......”
In the instant case the assessee has submitted in his return of income itself that he has not maintained books of accounts. Therefore, the decision of the A.O. to drop the penalty proceedings based on this judgment is perverse. This is not a situation where
two views are possible on one judicial order. It is a case where a non-applicable court order has been applied stating that it is applicable, and the penalty proceedings were dropped. The only presumption possible is that the assessing officer has not has not read the court order in its entirety The decision to drop the penalty proceedings based on d non- applicable court decision is erroneous. It has caused loss of revenue.
The learned AR submitted that the AO has dropped the penalty proceedings accepting the submissions made by the assessee with proper application of mind. The learned AR alternatively contended that the PCIT should have passed a separate order for revision u/s.263 for the penalty proceedings dropped by the AO and hence prayed that the consolidated order u/s.263 is bad in law. The learned DR relied on the order passed by the PCIT where he has clearly distinguished the Babu Reddy’s (supra) case and therefore submitted that the revision order u/s.263 should be upheld
We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in the case of Siddappa B.T vs PCIT in dated 24.03.2022 has considered the similar issue and held as under:-
“15. With regard to the observation of Ld. PCIT that the dropping of penalty u/s 271A of the Act was on wrong appreciation of the judgment of the High Court, the Ld. A.R. contended that the Ld. PCIT should have passed separate order on this issue. However, the Ld. A.R. did not cite any authority in support of his contention. In any case we notice that the Ld. PCIT has given opportunity to the assessee in this regard. Accordingly, we do not find it necessary to interfere with observations made by Ld. PCIT on the second issue.”