Loading judgment…
Facts
The assessee company engaged in processing fruits and vegetables filed its return of income, which was selected for scrutiny. The Assessing Officer (AO) completed the assessment accepting the returned income. The Principal Commissioner of Income Tax (PCIT) initiated proceedings under Section 263 of the Income Tax Act, 1961, believing the AO's order was erroneous and prejudicial to the revenue.
Held
The Tribunal held that the assessment order was not a speaking order and the AO failed to conduct proper inquiries and verifications regarding government grants and ECB loans, making the order erroneous and prejudicial to the revenue. The Tribunal confirmed the PCIT's order directing the AO to reframe the assessment.
Key Issues
Whether the AO's assessment order was erroneous and prejudicial to the revenue due to lack of proper inquiry regarding government grants and ECB loans, warranting revision under Section 263.
Sections Cited
263, 143(3), 2(24)(xviii), 43(1), 144B, 119
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI MANISH BORAD & SHRI VINAY BHAMORE
Assessment Year : 2020-21 Sahyadri Farmers Producer Vs. PCIT-1, Nashik. Company Limited, Survey No.1102/8, Behind Police Head Quarter, Adgaon, Nashik- 422003. PAN : AAPCS1516D Appellant Respondent Assessee by : Shri Kishor B. Phadke Revenue by : Shri Amit Bobde Date of hearing : 21.08.2025 Date of pronouncement : 14.11.2025 आदेश / ORDER
PER VINAY BHAMORE, JM:
This appeal filed by the assessee is directed against the order dated 27.03.2025 passed u/s 263 of the Act by Ld. PCIT, Nashik-1 [‘Ld. PCIT’] for the assessment year 2020-21.
The appellant has raised the following grounds of appeal :-
1. The learned PCIT-1, Nashik erred in law and on facts in assuming jurisdiction u/s 263 of the ITA, 1961 on the analogy that the order passed u/s 143(3) of the ITA, 1961 dated 19/09/2022 was erroneous and prejudicial to the interest of the revenue. Grounds relating to Government grants:
2. The learned PCIT-1, Nashik erred in law and on facts in not appreciating the fact that all the details/information relating government grants were submitted during the scrutiny proceeding u/s 143(3) of the ITA, 1961 and were duly verified by the learned AO. As such the order u/s 143(3) of the ITA, 1961 is neither erroneous nor prejudicial to the interest of the revenue.
Learned PCIT erred in law and on facts in treating the government grants as taxable income of appellant as per section 2(24)(xviii) of ITA, 1961 without appreciating that, said grants are reduced from cost of respective assets (for which grants are received) as per explanation 10 to section 43(1). As such, the such grants are excluded from purview of section 2(24)(xviii).
Learned PCIT erred in law and on facts in not appreciating that, various courts have held that, government grants are not revenue in nature and ought to be deducted from cost of assets (As per explanation 10 to 43(1) by applying "Purpose test"). Grounds relating to Interest cost on ECB loan: 5. Learned PCIT erred in law and on facts in holding that, interest cost incurred on ECB loan ought to be capitalized to respective assets for the purpose of whom the said loan was raised instead of debiting to P&L as done by appellant. However, learned PCIT failed to appreciate that, said interest cost was debited to P&L: - About 13% of loan was used for acquisition of non-qualifying assets - About 87% of loan was parked in CC account for temporary basis 6. Learned PCIT erred in law and on facts in simply observing about non-verification of the subject matter by learned AO. Learned PCIT ought to have verified the related facts himself before concluding whether the Assessment order is erroneous and Prejudicial to the interest of revenue.
7. The appellant craves leave to add / modify / amend / delete all / any of the grounds of appeal
.”
3. Facts of the case, in brief, are that the assessee is a company engaged in the business of processing, preservation, packaging and cold storage of various types of fruits and vegetables. The return of income for the year under consideration was filed on 12.02.2021 Rs.22,86,58,980/-. The case was selected for scrutiny under CASS and statutory notices were issued to the assessee. Based on the details available on record, the Assessing Officer completed the assessment u/s 143(3) r.w.s. 144B of the Act by accepting the income returned by the assessee.
4. Subsequently, Ld. PCIT on examination of the assessment records was of the opinion that the Assessing Officer failed to conduct necessary enquiries before accepting the income returned by the assessee. Therefore, notice u/s 263 of the Act was issued on 09.01.2025 to the assessee. After considering the reply of the assessee, Ld. PCIT came to the conclusion that the assessment order passed u/s 143(3) of the Act is erroneous in so far as it is prejudicial to the interest of the Revenue.
It is the above order against which the assessee is in appeal before this Tribunal.
Ld. AR appearing from side of the assessee submitted before us that the order passed by Ld. PCIT u/s 263 of the Act is unjustified. Ld. AR submitted before us that two notices were issued by the Assessing Officer & whatever information was desired the same was furnished before the Assessing Officer. In Assessing Officer were also produced before the bench. In support of its contentions, Ld. AR also furnished paper book before the bench wherein various details related to the points raised by the Ld. PCIT were furnished. Accordingly, Ld. AR requested to cancel the order passed by Ld. PCIT u/s 263 of the Act & further requested to confirm the assessment order passed by the Assessing Officer.
Ld. DR appearing from the side of the Revenue submitted before us that the order of the Assessing Officer is cryptic one and it is apparent that no proper enquiry or verification was made by the Assessing Officer. Ld. DR further submitted that Ld. PCIT, Nashik-1 has rightly initiated proceedings u/s 263 of the Act and in this regard a detailed and reasoned order is passed by him. Ld. DR further submitted that the Assessing Officer failed to conduct any enquiry regarding non-applicability of provisions of section 2(24)(xvii) of the Act and also failed to conduct any enquiry with regard to External Commercial Borrowing (ECB). Ld. DR also submitted before the Bench that the claim of the assessee that – section 263 is not applicable when two views are possible, is not correct since neither any enquiry was conducted nor any view was expressed. Ld. DR accordingly requested before the Bench to confirm the order passed by Ld. PCIT u/s 263 of the Act.
We have heard Ld. Counsels from both the side and perused the material available on record including the paper book furnished by the assessee and copy of case laws. In this regard, we find that the order passed by the Assessing Officer is not a speaking order. It is apparent that the desired enquiry and verification as pointed out in the order u/s 263 passed by Ld. PCIT, Nashik-1, was not carried out by the Assessing Officer. We further find that Ld. PCIT, Nashik-1 directed the Assessing Officer to pass assessment order afresh by observing as under :- “08. On going through the submission filed before me during the proceedings u/s 263, the assessee has given the details supporting in respect of all issued raised in the revisionary proceedings, but these issue were not inquired by the NeAC AO and no documentary evidences for the same was submitted before the NeAC AO for verification during assessment proceedings. Though, the assessee has submitted his submission in this respect during revisionary proceedings u/s 263, however, this office cannot step into the shoes of Assessing Officer and verify all the details at this stage. Considering the overall facts of the case, it is clearly established that the assessee has failed to submit the details at the assessment stage before the A.O. All these details have escaped scrutiny in the hands of A.O. Therefore, it can be inferred safely that AO has, in the absence of submission and evidences has failed to cause proper inquiries and consequential verifications which rendered assessment order erroneous and prejudicial to the interest of revenue.
After the introduction of Explanation 2 to Sec. 263, of the Act it has been made clear as to what kind of assessment order shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. The Explanation 2 to Sec. 263 is reproduced below :- "Explanation 2. For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer for the Transfer Pricing Officer, as the case may be shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,- (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person," 9.1 From the above cited Explanation which has come into effect from 01.06.2015, it is clear that an assessment order has been passed without verifying the issue i.e. various provisions made by the assessee and subsequently claimed as expenses. Therefore, assessment order has been passed in violation of sub-clause (a) and sub-clause (b) of Explanation 2 to Section 263 of the I.T. Act, 1961.
10. In the light of the detailed discussion made hereinabove, I am of the considered opinion that the assessment order passed u/s.143(3) of the Act for Assessment Year 2020-21 on 19.09.2022 by the then AO, is erroneous in so far as it is prejudicial to the interests of Revenue, because the assessment has been made not only without proper verification but also without applying the relevant provisions of the Act properly. Therefore, the provisions of section 263 of the I.T. Act, 1961 are hereby invoked and assessment order passed by the AO on the above issue is hereby set aside on the issue mentioned at para No. 03 and 3.1. The AO is directed that the assessment order be framed afresh as per the provisions of law, after considering proper facts and submissions of the assessee on the issue set-aside herein above, after affording proper opportunity to the assessee within the time allowed under the Income-tax Act, 1961.”
9. From perusal of above order passed by Ld. PCIT, Nashik-1, u/s 263 of the Act, we are of the considered opinion that there is no error in the above order. Apart from above, we also find that the assessee has furnished the detailed supporting in respect of all issues raised in the revisionary proceedings, but these issues were neither enquired by the Assessing Officer nor any documentary evidences for the same were submitted before the Assessing Officer for verification during the assessment proceedings. In this regard, we find that Explanation 2 clause (a) of section 263 of the Act is relevant which is as under :- “Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made;”
From a plain reading of above Explanation 2 clause (a) of section 263 of the Act, we are of the considered opinion that the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of Revenue since in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner, the order is passed