SARDARSAROVAR NARMADA NIGAM LTD.,GANDHINAGAR vs. THE PR. CIT, AHMEDABAD-3, AHMEDABAD

3.1. Thereafter, the learned PCIT, on examination of the assessment records, noted that the assessee had debited an amount of Rs.20.26 crores towards Labour Welfare Cess under the head "Other Expenses" (Schedule 33). The learned PCIT was of the view that the said expenditure related to Sardarsarovar Narmada Nigam Ltd. vs. The Pr.CIT Asst. Year : 2018-19 capital works and thus ought not to have been allowed as a deduction under section 37(1) of the Act. The PCIT observed that the Assessing Officer failed to make necessary inquiries or disallowance in this regard, thereby rendering the assessment order erroneous in so far as it is prejudicial to the interests of the Revenue.

1. The Hon'ble Principle Commissioner of Income-tax ("Hon'ble PCIT") erred in law and facts of the case by invoking the revision proceedings u/s 263 of the Act on the premise that the learned Assessing Officer failed to disallow Labour welfare cess amounting to Rs.20.26 crores which renders the assessment order dated 27.05.2021 passed u/s. 143(3) of the Act as erroneous and prejudicial to the interest of the revenue, despite the fact that the learned Assessing Officer during the assessment proceedings, thoroughly reviewed all the details, including audited accounts showing the impugned Labour Welfare Cess expenditure, and after detailed inquiry and verification, passed the aforesaid order accepting the returned loss. It is submitted that, the order dated 08.03.2024 passed by the Hon'ble PCIT u/s.263 of the Act is bad in law and therefore, be set aside.

2. Without prejudice to the above, even on merits of the case, the Hon'ble PCIT erred in invoking provision of section 263 for disallowing the expenditure of Labour Welfare Cess amounting to Rs.20.26 crore incurred by the appellant for the purpose of business without appreciating the fact that the impugned expenditure is eligible for deduction under section 37 of the Act. It is submitted Sardarsarovar Narmada Nigam Ltd. vs. The Pr.CIT Asst. Year : 2018-19 4 that order passed by learned AO was neither erroneous nor prejudicial to the interest of the department and hence provision of section 263 should not have been invoked at all. It is submitted that it be so held now and the order passed by learned PCIT u/s 263 be quashed.

3. The Appellant reserves the right to add, alter, amend and /or withdraw any of the above Grounds of Appeal.

6.1. The learned AR submitted that the FAO had thus conducted appropriate inquiry on the issue and that the acceptance of the claim after due verification could not be regarded as non-application of mind. It was argued that once the Assessing Officer had applied his mind to the material available on record and taken a plausible view, the exercise of jurisdiction under section 263 of the Act by the learned PCIT was impermissible.

6.2. On the merits of the claim of expenditure, the learned AR submitted that the Labour Welfare Cess expenditure was incurred wholly and exclusively for the purposes of business and is allowable under section 37(1) of the Act, as it formed part of the statutory obligations of the assessee company in the course of carrying out construction works under the Sardar Sarovar Project. In support of the submissions, reliance was also placed on some judicial precedents.

8.1. However, on a careful examination of the assessment records and the submissions made, we find that while the assessee had furnished certain documents in response to the notices issued under sections 143(2) and 142(1), such as the financial statements, bank account details, computation of income, and shareholding documents, the specific ledger relating to the Labour Welfare Cess expenditure of Rs.20.26 Lacs was not submitted before the FAO. The ledger accounts submitted by the assessee pertained only to Leave Salary (four ledgers) and Profit on Sale of Vehicles (Group V). There is no material placed on record to show that the FAO had called for or examined the ledger relating to Labour Welfare Cess or conducted any inquiry regarding its allowability.

8.2. Upon consideration of the rival submissions and the records, we find merit in the contentions advanced by the learned DR. The failure of the FAO to examine the allowability of a material expenditure item amounting to Rs.20.26 lacs constitute a lapse in the conduct of the assessment proceedings. It is particularly significant to note that the assessee’s case was selected for Complete Scrutiny under the Computer Aided Scrutiny Selection (CASS) Sardarsarovar Narmada Nigam Ltd. vs. The Pr.CIT Asst. Year : 2018-19 mechanism. In cases selected for Complete Scrutiny, the Assessing Officer is expected to examine all material aspects of the return of income diligently and conduct inquiries into all significant claims made by the assessee. In the absence of any specific inquiry or verification, the assessment order cannot be said to have been passed after due application of mind. It is well settled that where an assessment order is passed without making inquiries or verification which ought to have been made, such an order is erroneous and prejudicial to the interests of the Revenue. The Hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [(2000) 243 ITR 83 (SC)] has laid down that the failure of the Assessing Officer (in present case FAO) to examine crucial issues during assessment renders the order susceptible to revision under section 263 of the Act. Explanation 2(a) to section 263 of the Act inserted by the Finance Act, 2015, also creates a deeming fiction that an order shall be treated as erroneous where inquiries or verifications which should have been made are not conducted.

8.4. We would also like to clarify that in the present proceedings, we are not adjudicating the merits of the allowability or otherwise of the Labour Welfare Cess expenditure under section 37(1) of the Act. Our decision is confined to the examination of the correctness of the exercise of revisionary jurisdiction by the learned PCIT under section 263 on the ground of failure to conduct necessary inquiry.

8.5. The judicial precedents relied upon by the learned AR, have been duly considered. However, in the facts of the present case, where there is a patent lack of inquiry on a material claim, those decisions do not come to the aid of Sardarsarovar Narmada Nigam Ltd. vs. The Pr.CIT Asst. Year : 2018-19 the assessee. It is well settled that when there is a complete absence of inquiry, the revisionary jurisdiction under section 263 can validly be exercised.

8.6. In view of the foregoing, we hold that the learned PCIT was justified in invoking revisionary jurisdiction under section 263 of the Act and setting aside the assessment order dated 27.05.2021 for passing a fresh assessment order after conducting due inquiry into the allowability of Labour Welfare Cess expenditure.