Loading judgment…
Facts
The assessee challenged a revisional order passed by the Principal CIT under Section 263, which set aside its assessment for the AY 2021-22. The Pr. CIT found the assessment order erroneous and prejudicial to the revenue due to the Assessing Officer's alleged lack of enquiry regarding capital gain from mutual fund sales, revaluation gains, and profits from asset sales, which were reduced from business income but not properly taxed. The assessee contended that the Assessing Officer had conducted proper enquiries during the original assessment.
Held
The Tribunal upheld the Principal CIT's order, noting that the Assessing Officer had failed to conduct proper enquiries on the crucial aspects identified by the Pr. CIT, such as the classification of capital gains (mutual funds vs. immovable property) and the treatment of revaluation gains on mutual funds. The Tribunal found a complete lack of enquiry on these issues by the Assessing Officer, rendering the original assessment order erroneous and prejudicial to the revenue, despite the possibility of a bonafide mistake by the assessee.
Key Issues
Whether the Principal Commissioner of Income Tax was justified in invoking revisional jurisdiction under Section 263 of the Income Tax Act, 1961, on the grounds that the Assessing Officer failed to conduct proper enquiries regarding the assessee's claims of capital gains from mutual fund sales, revaluation gains, and profits from asset sales, thereby making the assessment order erroneous and prejudicial to the revenue's interest.
Sections Cited
10(34), 10(35), 14A, 32, 37, 43(6), 115-O, 142(1), 143(3), 144B, 263
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
PER VIJAY PAL RAO, VICE PRESIDENT :
1. This appeal by the Assessee is directed against the revision order dated 26.03.2025 of Principal Commissioner of Income Tax, Tirupati, passed u/sec.263 of the Income Tax Act [in short "the Act"], 1961, for the assessment year 2021-2022.
2 ITA.No.791/Hyd./2025 2. The assessee has raised the following grounds :
1. “The Order of the Ld. Principal Commissioner of Income Tax, Tirupati, is without jurisdiction and is not based on facts and circumstances of the case. Hence the same is bad in law and the decision of Ld. Principal Commissioner of Income Tax, Tirupati needs to be reversed.
2. The Ld. Principal CIT, Tirupati erred in invoking the revisionary jurisdiction under Sec 263 of the Income Tax Act 1961 by stating that the Assessment Order is erroneous and prejudicial to the interests of the revenue. The Assessment order passed by the Assessing officer does not satisfy the statutory twin conditions prescribed under section 263 of the Act, viz., (1) that the assessment order is erroneous; and (ii) that the assessment order is prejudicial to the interest of Revenue, which are to be cumulatively satisfied.
3. The Ld. Principal CIT, Tirupati failed to conclude that the Assessment Order is both erroneous and prejudicial to the interests of the revenue. The Ld. Principal CIT. Tirupati, based on suspicion, invoked the Revisionary jurisdiction under Sec 263, which is bad in law.
4. The Ld. Principal CIT, Tirupati failed to appreciate that the subject matter of gain on sale of investments and revaluation gain arising on mutual funds has already been considered by the Ld. AO during the course of assessment proceedings and hence the Assessment order is not prejudicial to the interests of the revenue.
5. The appellant therefore prays the hon'ble Income Tax Appellate Tribunal to i) Uphold the fact that the Assessment Order is neither erroneous nor prejudicial to the interests of the revenue ii) Set-aside the Order of the Principal Commissioner of Income Tax passed under Sec 263 of the Income Tax Act 1961.
6. The appellant craves leave to add, amend, alter, modify, substitute, abridge and/or rescind any or all of the above grounds with the kind 3 ITA.No.791/Hyd./2025 permission of the Hon'ble Tribunal at any time either before or on the date of hearing.”
3. The assessee company filed its return of income for the year under consideration on 14.02.2022 declaring total income of Rs.910,50,74,140/-. The scrutiny assessment u/sec.143(3) r.w.s.144B of the Income Tax Act, 1961 was completed on 27.12.2022 at a total income of Rs.927,76,95,193/-. Thereafter, on examination of the assessment record, the Pr. CIT noted certain discrepancies in respect of capital gain from sale of mutual fund which was reduced from the net profit of business income to be considered separately. However, not offered to tax separately under the Head “Capital Gain”. Similarly, the fair valuation gain on investment in mutual fund and profit from sale of asset were also subtracted from the net profit from business, but not admitted as income under any head of income. The Pr. CIT noted that these aspects were not verified by the Assessing Officer while finalising the assessment
4 ITA.No.791/Hyd./2025 proceedings and assessment order was passed without making proper enquiries or verification which should have been done in the course of assessment proceedings. Accordingly, the learned Pr. CIT issued a show cause notice u/sec.263 of the Act dated 20.02.2025 to the assessee to explain as to why the assessment order dated 27.12.2022 passed u/sec.143(3) r.w.s.144B of the Act should not be revised u/sec.263 of the Act. In response to the show cause notice, the assessee company has filed its detailed reply and explained that there was a difference of Rs.4,86,576/- on account of re-valuation of mutual funds due to difference in the accounting treatment followed by the assessee company for computation of book profit and computation of income under the normal provisions of the Act. The assessee further explained that description of property in capital gain schedule is wrongly typed as immovable property, but the asset sold is a mutual fund. Therefore, there is a typographical mistake in the return of income which 5 ITA.No.791/Hyd./2025 would not attract any tax liability when the asset actually transferred is mutual fund. On the third aspect, the assessee explained that the asset sold during the year resulting profit/loss are depreciable assets and, therefore, as per the provisions of sec.43(6) r.w.s.32 of the Act, the same is required to be reduced from the block of asset and not to be declared any income or loss under the Income Tax Act. After considering the reply of the assessee, the learned Pr. CIT observed that the assessee is taking contrary stands in respect of the capital gain arising from the sale of mutual fund as well as re- valuation of the mutual fund and, therefore, these aspects are very much required to be verified with reference to the books of accounts along with other supporting documents. Similarly, the profit on sale of asset claimed as transfer of depreciable assets and required to be reduced from block of asset, the Pr. CIT noted that necessary details of assets sold, profit earned, block of asset, treatment of adjustment, were not given
6 ITA.No.791/Hyd./2025 and, therefore, the same also required to be verified. Thus, the learned Pr. CIT set-aside the assessment order partially with a direction to the Assessing Officer to verify the issue as discussed in the impugned order in accordance with law, after affording reasonable opportunity of being heard to the assessee.
4. Before the Tribunal, the learned Authorised Representative of the Assessee has submitted that during the course of scrutiny assessment, the Assessing Officer has issued show cause notice u/sec.142(1) of the Act dated 12.10.2022 and as per query no.3, the Assessing Officer asked the assessee to furnish all the details of investment made as appearing in the balance-sheet as on 31.03.2021 and further to explain the disallowance of Rs.7 crores made u/sec.37 of the Act mentioning it as a ‘provision’. The Assessing Officer also asked to furnish the break-up of the amount of Rs.7 crores disallowed as ‘other provisions’ under Schedule-II of the computation. The assessee company has filed its reply to the said show
7 ITA.No.791/Hyd./2025 cause notice vide letter dated 17.11.2022 placed at page- 120 of the paper book. The learned Authorised Representative of the Assessee, then referred to the computation of income and submitted that an amount of Rs.16,35,74,851/- is shown under the short-term capital gain from securities are charitable under the Head “capital gain”. He has further pointed out capital expenditure debited to the P & L A/c on account of asset written-off and loss on sale of fixed assets were added back to the income of the assessee in the statement of income. Thus, the issues taken up by the learned Pr. CIT are already verified and examined by the Assessing Officer while completing the assessment and, therefore, there was no error in the assessment order amenable for revision u/sec.263 of the Act on account of lack of enquiry on the part of the Assessing Officer. The learned Authorised Representative of the Assessee has submitted that the assessee in the books of accounts has recognized the notional gain/loss by re-valuing the mutual fund for 8 ITA.No.791/Hyd./2025 NAV as on the date of balance-sheet. This notional income is neither accrued nor arise on transfer of capital asset as on the date of balance-sheet and, therefore, the same is not a taxable transaction. The assessee has declared the gain or loss by reducing the actual cost from the sale value receipt and, therefore, there is no loss of revenue, and the assessee has properly offered it’s income to tax. The learned Authorised Representative of the Assessee has further submitted that every unexempt part of assessment does not result in assessment being erroneous and prejudicial to the interests of revenue. Further, the profit or loss on sale of depreciable asset, on which, depreciation was already claimed and allowed, is not an income on sale of asset, but the sale value is reduced from the block of assets as the block of assets did not cease to exist. Thus, the learned Authorised Representative of the Assessee has submitted that once the entire record was available before the Assessing Officer and the Assessing Officer was satisfied with the 9 ITA.No.791/Hyd./2025 details and explanation of the assessee, then, a detailed reasoning was not required to be recorded on such issues. The learned Authorised Representative of the Assessee further contended that once the Assessing Officer has conducted a proper enquiry and was satisfied with the claims, then, an elaborate finding is not required to be recorded in the assessment order and, therefore, the same cannot be a ground to hold that the order of the Assessing Officer is erroneous for lack of enquiry or inadequate enquiry. In support of his contention, the learned Authorised Representative of the Assessee has relied upon the following decisions: i. Pr. CIT vs. M/s. V Con Integrated Solutions Pvt. Ltd., Punjab & Haryana High Court – [TS-6567-HC-2024] (Punjab & Haryana HC-O); ii. Pr. CIT vs. M/s. V Con Integrated Solutions Pvt. Ltd., - [TS-5067-SC-2025-O]; iii. CIT vs. Armenian Church – [TS-5061-SC-2025-O]; iv. Malabar Industrial Co. Ltd., vs. CIT [2000] 243 ITR 83 (SC);
10 ITA.No.791/Hyd./2025 v. CIT vs., Vellore Institute of Technology [2025] 142 TLC 119 (Mad.-HC). vi. Order of ITAT, Mumbai in the case of KPMG Assurance and Consulting Services LLP, Mumbai vs., Pr. CIT-8, Mumbai in ITA.No.2396/Mum./2025, dated 28.08.2025.
5. On the other hand, the learned DR has referred to the impugned order of the learned Pr. CIT and submitted that the learned Pr. CIT has pointed-out various discrepancies in the claim of the assessee in respect of the capital gain on sale of investment, capital gain on re-valuation and capital gain on sale of immovable property. However, the Assessing Officer has not verified a single item as to how the assessee is reporting some of the transactions as sale of immovable property which is claimed before the Pr. CIT as a typographical mistake. Further, it was also noted that the assessee has though reduced the profit on sale of asset from the business income but has not added the loss on sale of asset while computing the total income as per the 11 ITA.No.791/Hyd./2025 statement of income. Therefore, all these aspects including admitted mistakes in the computation of income are required to be verified. The learned DR has relied upon the impugned order of the learned Pr. CIT. The learned DR has also relied upon the Judgment of Hon’ble Supreme Court in the case of Daniel Merchants (P.) Ltd., vs., ITO [2018] 95 taxmann.com 366 (SC).
We have considered the rival submissions as well as relevant material on record. The assessment in the case of the assessee was completed u/sec.143(3) r.w.s.144B of the Act on 27.12.2022. Thereafter, on verification of assessment record the Pr. CIT has noted certain discrepancies in the claim of the assessee regarding the capital gain on sale of mutual fund, valuation of investment in mutual fund as well as profit from sale of asset which was subtracted from the net profit from business but not admitted as income. Accordingly, the Pr. CIT has issued a show cause notice dated 20.02.2025 which reads as under :
12 ITA.No.791/Hyd./2025 भारतसरकार Government of India Office of the �धान आयकर आयताकाया�लय Pr. Commissioner of Income Tax �त�प�तनात�भवन आयकर,के. �ट. Tirupati Charge Aayakar Bhavan, KT Road, माग� �त�प�त-५१७५०७ Tirupati - 517 507 टे�लफोन०८७७-२२८०५४१ Telephone 0877-2287541 Fax No 0877-2287531 फै�स ०८७७-२२८७५३१ F.No.263/PCIT/TPT/2024-25 Date: 20.02 2025 PAN-AABCA9264E DIN-ITBA/REV/M/REV1/2024-25/1073542295(1)
To M/s. Amara Raja Batteries Limited, Amara Raja Campus. Renigunta-Cuddapah Road, Karakambadi, Tirupati - 517520 Sir Sub Show cause notice u/s 263 of the Income Tax Act. 1961-Reg Ref: Order passed u/s 143(3) rws 1448 of the IT Act, 1961 dated 27 12 2022 for the A.Y.2021-22 ****** The assessee-company filed return of income for the AY 2021-22 on 14.02.2022 declaring a total income of Rs.9.10,50,74,140/- and the case was selected for complete scrutiny The assessment was completed u/s 143(3) r.w.s. 144B of the Income Tax Act, 1961 on 27.12.2022 by determining the income at Rs.9,27,76,95,193/- 2 Nevertheless, on examination of records, it is seen that the assessment was completed without carrying out the necessary and relevant enquiries as discussed below:
“It was noticed from ITR (vide pg No 27/99) that assessee offered capital gains of Rs.14.1736,848/- from sale of mutual funds As per the statement of income of the assessee it was reduced from net profit of business income (vide schedule-8) to be considered separately However it was not offered to tax separately under the head income from capital gains. Additionally, the fair valuation gain on investment in mutual funds amounting to Rs.2,23,24,579/-
13 ITA.No.791/Hyd./2025 and profit from sale of assets amounting to Rs.9,05,785/- which had been subtracted from the net profit from business were also not admitted as income under any other head of income."
3. The above mentioned aspect was not verified by the Assessing Officer while finalising the assessment proceedings. The assessment order was passed without making proper enquiries or verification which should have been done in the course of assessment proceedings. Consequently, it is proposed to treat the said assessment order as erroneous and prejudicial to the interest of revenue. You are therefore requested to explain as to why the order dated 27.12.2022 passed by the NFAC, Delhi should not be subjected to revision u/s. 263 of the Act.
You are herewith given an opportunity to explain as to why the order passed u/s. 143(3) rws 144B of the I T Act, 1961 dated 27.12.2022 in your case for the assessment year 2021-22 should not be revised u/s 263 of the Income Tax Act, 1961. Your reply may be submitted in writing, along with a certified copy of documents, accounts and other evidences on which you rely in support of your case and file them on or before 28.02.2025 at this office. You may also e-mail a soft copy of your written reply in response to this notice to tirupati.pcit@incometax.gov.in on or before the said date.
5. In case you fail to make the written reply in response to this notice before the due date as mentioned above, the proceedings u/s 263 of the Act shall be finalised ex-parte as per law.
भवद�य/Yours faithfully, Sd/-Sunithe b (सुनीता �ब�ला, भा.रा.से) / (SUNITA BILLA, IRS) �धान आयकर आयु�त/ Pr. Commissioner of Income Tax �त�प�त �भार, �त�प�त / Tirupati Charge, Tirupati.”
14 ITA.No.791/Hyd./2025 7. The facts as pointed out by the learned Pr. CIT in the show cause notice regarding the discrepancies and fair valuation gain on investment in mutual funds as well as profit on sale of assets are not disputed by the assessee being part of the record. However, the assessee has claimed that the Assessing Officer while framing the assessment has conducted a proper enquiry and verified all these aspects including the mistake in declaring the capital gain from sale of immovable property which in fact is sale of mutual funds. The learned Authorised Representative of the Assessee has referred to the show cause notice issued by the Assessing Officer u/sec.142(1) of the Act dated 12.10.2022 and particularly, the query no.3 of the said show cause notice which reads as under:
“3. From the perusal of your financials for the year, it is noted that you have made significant amount of investments in your balance sheet as on 31.03.2021. In this context, you are required to state as to why should the disallowance not be made under Section 14A as per Rule 8D of the Income-tax Rules. In relation to this, the details of the investments made.
15 ITA.No.791/Hyd./2025 appears as part of assets in your balance sheet are to be submitted in following format:
Whether disallowance Nature of as per Section income 14A is made likely to while accrcue out computing of the taxable Amount of Amount of Name and Country of Amount of investments. income, if Source of investment investment PAN of the residence investment Sr. Whether yes, specify investment made as on No. No which of the as on such income the amount made during the 31.03.2021 investment entity 01.04.2020 will be and year is made. taxable calculation of under the amount of Income-tax disallowance. Act, 1961 If No, kindly state the reasons.
7.1. Thus, this query was raised by the Assessing Officer only in respect of disallowance u/sec.14A read with Rule 8D of I.T. Rules, 1962. The Assessing Officer has not raised any query on the issues and aspects taken up by the learned Pr. CIT in the show cause notice for initiation of proceedings u/sec.263 of the Act. The reply to the said show cause notice was filed by the assessee on 17.11.2022 wherein the assessee has given the summary of investment as on 31.03.2022 and 16 ITA.No.791/Hyd./2025 31.03.2021 at page nos.120 and 121 of the paper book are as under:
“From Dt: 17-11-2022 AMARA RAJA BATTERIES LIMITED Amara Raja Campus, Renigunta-cuddapah Road, Karakambadi, TIRUPATI DISTRICT-517520, Andhra Pradesh, India To THE LEARNED ASSESSING OFFICER Assessment Unit/Verification Unit/Technical Unit/Review Unit National Faceless Assessment Centre, Income Tax Department DELHI Dear Sir, Sub: Response to Notice under Sec 142(1) 1. Notice under Sec 142(1) with No. ITBA/AST/F/ Ref: 142(1)/2022-23/1046267355(1) dated 12/10/2022 2. Our PAN: AABCA9264E, AY: 2021-22 * * * With respect to above-mentioned notice, we are herewith submitting the point-wise replies as follows Point No. 3: Investments and Sec 14A Disallowance The summary of investments as on 31st March 2021 and 31st March 2020 are given below. The detailed schedules of both current and non-current investments are given in attachment to this submission.
17 ITA.No.791/Hyd./2025
S.No. Particulars As on 31st As on 31st March 2022 March 2021 1. Non-current investments. 7,11,85,185 13,91,51,527 2. Current investments. 273,42,42,040 142,25,41,624 Grand Total 280,54,27,225 156,16,93,151 Non-current investments refer to investment in other companies. Current Investments refer to investment in Mutual Funds. We would like to bring to your notice the following points in this regard.
Non-current investments are valued at fair value (ie, market value) as at each balance sheet date. The methodology is FVTOCI which means Fair Value Through Other Comprehensive Income. The net decrease in non-current investments is NOT due to sale but due to re-valuation as at each Balance Sheet date. The decrease in such re-valuation is NOT treated as expenditure of the assessee-company. The decrease is considered in OCI Schedule and the same is not considered in computing the taxable profits as per Income Tax Act 1961. The non-current investments are revalued due to mandatory requirement under Companies Act 2013 to follow Ind-AS which requires revaluation as at each Balance Sheet date.
Amongst the non-current investments, an entity named Amara Raja Batteries Middle East FZE is the one and only subsidiary of the assessee-company located outside India. All other investments are located in India only.
All the Non-current investments yield dividend income and capital gains. The dividend income is taxable with effect from 18 ITA.No.791/Hyd./2025 1" April 2020. The exemption given in Sec 10(34) of the Income Tax Act 1961 is withdrawn for dividends received after 1 April 2020, as the taxability under Sec 115-0 is withdrawn from 1 April 2020. Similarly, both long-term and short-term capital gains form part of total income of the assessee- company, as and when they arise from non-current investments.
4. So there is no exempt income arising from non-current investments. Hence there is no application of disallowance under Sec 14A in respect of non-current investments.
Without prejudice to the above submissions, the assessee- company would like to bring to the notice of the Ld. AO that in the Assessment Order for AY 2020-21, the Ld. AO, NaFAC, Delhi has specifically excluded the investment in subsidiary from the calculation under Sec 14A read with Rule 8D as the investment in subsidiary yields taxable income. Adopting the same rule of consistency, the investment in subsidiary is to be excluded in current year also, just like other investments.
6. Current investments are valued at fair value as at each balance sheet date. The net gain in current investments on account of revaluation is Rs 2,23,24,579/- during FY 2020- 21. The increase in such re-valuation is passed through Statement of P&L. Hence the same is NOT treated as income of the assessee-company as the income has neither accrued/arisen nor received. The income on revaluation of 19 ITA.No.791/Hyd./2025 mutual funds is notional and hence the same is added back in computing the profits. The current investments are revalued due to mandatory requirement under Companies Act 2013 to follow Ind-AS which requires revaluation as at each Balance Sheet date. The valuation methodology is FVTPL which means Fair Value Through Profit and Loss. The amount reduced from income is mentioned above.
All Current investments yield dividend income and capital gains from sale of units of Mutual Funds. The dividend income is taxable with effect from 1 April 2020. The exemption given in Sec 10(35) is withdrawn for dividends received after 1" April 2020. Similarly, short-term capital gains on sale of Mutual Funds form part of total income of the assessee- company. It is presently offered under the head "Income from Capital Gains". So even capital gains is resulting in taxable income.
Therefore, there is no exempt income arising from current investments. Hence there is no applicability of See 14A disallowance in respect of current investments.”
7.2. Thus, the entire query and reply of the assessee are only towards the disallowance proposed by the Assessing Officer u/sec.14A of the Act. Even in this reply, the assessee has not pointed out to the Assessing Officer
20 ITA.No.791/Hyd./2025 that there were some typographical mistakes for reporting the capital gain from sale of immovable property as well as the details of the sale of assets which is claimed as depreciable assets and, therefore, to be reduced from the block of assets. Further, the Assessing Officer in the assessment order has also recorded the description of the issue involved in Para-3.1 as under:
“3.1 Description of issues involved 3.1.1. Issue No. 1: Disallowance of the expense claimed on account of Foreign Remittance made by assessee: The Assessee has not submitted the details of foreign remittances made. Same are to be considered vis-à-vis the consequent tax liability.
3.1.2. Issue No. 2: Disallowance of the expense claimed on amount of outward freight and handling charges: Assessee has claimed expenses on account of outward freight and handling charges expense amounting to Rs.203,74,00,000/-. The taxability of same has to be adjudicated upon.”
21 ITA.No.791/Hyd./2025 7.3. Only two issues were raised by the Assessing Officer and none of which is regarding the investment or capital gain arising from the sale of mutual funds and other assets. There is no dispute that if the Assessing Officer has conducted an enquiry on a particular issue and after considering the reply of the assessee was satisfied with the claim of the assessee, then, no elaborate finding is required to be given by the Assessing Officer. However, if there is a lack of enquiry or inappropriate enquiry on the part of the Assessing Officer, then the same will result in the order of the Assessing Officer as erroneous in so far as prejudicial to the interests of revenue. As it is manifested from the record that the Assessing Officer has not conducted any enquiry on these aspects as pointed out by the learned Pr. CIT and, therefore, it is a case of complete lack of enquiry rendering the order of the Assessing Officer as erroneous in so far as prejudicial to the interests of revenue. Therefore, the decisions relied upon by the 22 ITA.No.791/Hyd./2025 learned Authorised Representative of the Assessee will not help the case of the assessee. There is a complete lack of enquiry on the part of the Assessing Officer on these aspects. There may be a case of Bonafide mistake and resulting no revenue loss, but the factual aspects as pointed out by the learned Pr. CIT are very crucial and undisputed facts so far as reporting the capital gain from sale of immovable property as well as the profit or loss of revaluation of mutual funds as on the date of balance- sheet. Therefore, the Assessing Officer was required to ensure that there is no tax incident transaction happened due to re-valuation of the mutual fund as on the date of balance-sheet and due effect has been given while calculating the capital gain on sale of mutual fund. Accordingly, in the facts and circumstances of the case, we do not find any error or illegality in the impugned order of the learned Pr. CIT and, therefore, the same is upheld.
23 ITA.No.791/Hyd./2025 8. In the result, appeal of the Assessee is dismissed. Order pronounced in the open Court on 19.12.2025.