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Facts
The assessee's appeal challenges a revisional order passed by the Principal Commissioner of Income-tax under section 263 of the Income Tax Act, 1961. The revisional order treated the original assessment order as erroneous and prejudicial to the revenue regarding claims for depreciation on a rented property and certain expenses (excise duty, GST, sales tax). The original assessment had allowed these claims, but the PCIT believed they were not business-related or properly substantiated.
Held
The Tribunal held that the Assessing Officer (AO) had conducted a thorough inquiry during the assessment proceedings, applying his mind to the issues raised by the assessee. The AO had taken a considered view in accepting the assessee's explanations regarding the depreciation claim and the expenses. Therefore, the assessment order was not erroneous or prejudicial to the interest of the revenue. The invocation of Section 263 was deemed unjustified.
Key Issues
Whether the order passed by the Assessing Officer allowing depreciation on rented property and expenses related to excise duty, GST, and sales tax was erroneous and prejudicial to the interest of revenue, justifying invocation of Section 263.
Sections Cited
263, 143(3), 32, 142(1), 2(5), 2(4)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, JODHPUR BENCH, JODHPUR
Before: DR. MITHA LAL MEENA & SHRI ANIKESH BANERJEE
Instant appeal of the assessee was filed against the order of the Learned Principal Commissioner of Income-tax-1, Jodhpur (for brevity, ‘Ld. PCIT’) passed under section 263 of the Income Tax Act, 1961 (in short, ‘the Act’) for A.Y. 2018- 19, date of order 18/03/2024 for A.Y. 2017-18. The impugned order emanated from the National e-Assessment Centre, Delhi, (in short, ‘Ld.AO’) passed under section 143(3) r.w.s. 143(3A) & 143(3B) of the Act, date of order 09/04/2021.
2 ITA 344/JODH/2024 Shree Ram Colloids Private Limited 2. The brief facts of the case are that the assessment was completed under section 143(3) of the Act by the National e-Assessment Centre, Delhi on 09/04/2021 and addition was made related to duty draw back not shown in the return of income amount to Rs.12,547/-. The Ld. PCIT by invoking provisions of section 263 issued notice to the assessee by treating this assessment order as erroneous and prejudicial to the interest of the revenue. The 5 points was asked to explain by the Ld.PCIT in his impugned notice. But finally, related to two points for claiming of depreciation on rented property and the expenses related to excise duty, GST expenses and sales-tax expenses amount to Rs.11,54,204.12 was treated as erroneous and prejudicial to the interest of the revenue, which was not considered by the Ld.AO, by invoking provisions of section 263 of the Act. The aggrieved assessee filed an appeal before us by challenging the revisional order.
3. The Ld.AR argued and filed a paper book spanning pages 1 to 467, which is kept on record. The Ld.AR argued that the property was given on rent and the said rent was declared as business income and accordingly, the depreciation was claimed. During the assessment and also before the Ld.PCIT, the assessee explained that the assessee has given on a short tenure lease its property being fully equipped hotel and restaurant situated at Village Osiyan. The lease amount received from the said letting out was declared as ‘Business income’. As per the object clause of the assessee, the memorandum includes objects to run hotel, restaurant, resorts, café, swimming pool, health clubs motes, holiday camps, canteens, clubs and to act as property dealer. During the assessment proceedings, the details were called for by issuing notice under section 142(1) asking for the details. Further, the Ld. PCIT issued the notice dated 09/01/2024 3 ITA 344/JODH/2024 Shree Ram Colloids Private Limited and asked for the details from assessee about the claim of depreciation on the leasehold property amount to Rs.59,98,438/-. The relevant paragraph of the notice is extracted below:- “1. On perusal of the case records, it is noticed that in the audited financial statements, the assessee has disclosed details of fixed assets in two different heads i.e. property, plant and machinery (note 4 to B/S) used for business purposes, WIP and Investment property (note 5 to B/S) which are meant for investment purposes. On verification of details of fixed assets in note 4 and 5 to balance sheet with the of details of assets on which depreciation has been claimed in clause 18 of tax audit report form 3CD and also the details of fixed assets given below the computation of income filed with reply dated 18.12.2020/- , it is seen that the assessee has claimed depreciation of Rs.48,48,295/- on Hotel building at Osiyan and Rs. 11,50,143/-on furniture/fittings/kitchen equipment etc. of Hotel at Osiyan. This Hotel building at Osiyan is not a business asset used for the purpose of business but it is shown under the head "investment in property in the note 5 to balance sheet. Further there are no business receipts from this hotel which could prove that it was used for any business purposes. Since the assets (Hotel building and its furniture etc.) on which above depreciations have been claimed are not business assets and not used for the purpose of business, no depreciation u/s 32 is allowable on such assets. The law does not provide any depreciation on assets kept for the purpose of "investment". While completing the assessment, the FAO did not examine this issue and an incorrect claim of depreciation of Rs.59,98,438/- has been allowed, thereby causing an over computation business loss of Rs.59,98,438/-.”
In reply, the assessee submitted the details which was already submitted before the Ld.AO. The details of submission of the assessee in its letter dated 13/02/2024 (APB pages 8 to 25) is reproduced below:- “2.1 During the year under consideration the appellant had given on a short term lease its property being a fully equipped hotel and restaurant situated at Village Osian. The lease amount received from the said letting out was shown as business income. As per the objects clause of the assesseethe memorandum include objects to build, construct, acquire, hold, purchase, sale, lease, sub-lease, let out, alter, enlarge, remove, pull down replace, maintain, improve, develop, 4 ITA 344/JODH/2024 Shree Ram Colloids Private Limited work, control and manage any land, buildings, offices, factories, shop, godowns, farm house, colonies, malls, multiplexes, multistories, apartments, flats, shopping complexes, townships, row houses, and other works and conveniences and to build, maintain and run hotel, restaurant, resorts, café, swimming pool, health clubs motes, holiday camps, canteens, clubs and to act as property dealer. One of the purpose of the company as inserted on 01/11/2012 was also leasing activities. 2.2 In the case of the assessee it is a inseparable contract of letting out and it is the composite tool of the trade. The hotel building is situated in the small Village Osian in the Thar Desert on the sand dunes. The same consists of some structure constructed and also major portion which is partly constructed where tents were being placed. These are purely temporary structures and specifically designed assets to attract tourists. These special features cannot be merely said that the letting out of property and cannot be considered as income from house property. In the present case, the assessee is the owner of a commercial property specifically designed to suit a particular business only and no other use of the asset can be made, and the income derived from exploitation of such business apparatus would be the income from Business.
2.3 The nature of business of the assessee also includes the income from hotel and leasing activities and carrying out all the activities which are relevant for earning the income for these properties by extending various facilities. The income arising there from is necessarily assessable under the head Income from Business and profession and assessee and accordingly the claim of depreciation was in order. Your kind attention is also invited towards the decision of Hon'ble Supreme Court at Page nos. 772-773 in the case of Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax IR 1955 SC 176, (1954) 26 ITR 765 SC, 19551 SCR 952 stated as under:
"Business" as defined in section 2(5) of the Excess Profits Tax Act includes amongst others, any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture. The first part of this definition of "a business" in the Excess Profits Tax Act is the same as the definition of a business in section 2(4) of the Indian Income-tax Act. Whether a particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture is always a difficult question to answer. On the one hand it has been pointed out by the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. ((2932) IL.R. 59 Cat 1343), that the words 5 ITA 344/JODH/2024 Shree Ram Colloids Private Limited used in that definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity. The word "business" connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the others hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is.
2.4 In the case of Chennai Properties & Investments Ltd. V. CIT (2015) 373 ITR 673, Hon'ble Supreme Court held as under: - "Fact: - The assessee-company was incorporated with main objective, as stated in the Memorandum of Association to acquire the properties in the city and to let out those properties.
Held: The Memorandum of Association of the appellant-company which is placed on record mentions main objects as well as incidental or ancillary objects in clause III. (A) and (B) respectively. The main object of the appellant company is to acquire and hold the properties known as "Chennai House" and "Firhauin Estate" both in Chennai and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. What we emphasise is that holding the aforesaid properties and earning income by letting out those properties is the main objective of the company. It may further be recorded that in the return that was filed entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the assessing officer himself in his order. We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment It is for this reason, we have, at the beginning of this judgment, stated the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as 'income from the house property’.”
6 ITA 344/JODH/2024 Shree Ram Colloids Private Limited 4. While considering the issue related to the expenses claimed by the assssee in P&L Account pertaining to indirect expenses, amount to Rs.11,54,204.12, show cause notice was issued by the Ld.PCIT and the relevant paragraph 6 of the impugned notice is reproduced as below:- “6. In order to examine the sales declared in the ITR with the sales/turnover declared in the VAT/GST returns, the FAO asked the assessee to submit copies of VAT/GST returns. The assessee submitted GST returns in form GSTR 3B for the period July 2017 to March 2018 but no VAT return or GSTR-1 is filed to show details of sales in the period of April 2017 to June 2017. As such the information submitted by the assessee was incomplete but the FAO did not ask for the reaming data of sales declared in VAT returns of 1.4.2017 to 30.6.2017.
Therefore, you are given an opportunity of being heard and are requested to explain with documentary evidences as to why the order passed on 09.04.2021 u/s 143(3) of the Act by the Assessing Officer should not be declared as erroneous in so far as it is prejudicial to the interest of revenue to the extent of the additional issues discussed as above.”
The assessee replied to the questions raised by the Ld. PCIT by the letter dated 13/02/2024 (APB pages 8 to 25) and the relevant paragraph is reproduced below: 5. That the details of the expenses of Rs.11,54,204/- is related to the following expenses: - Particulars Amount in Rs. Excise Duty 2,66,251.00 GST Expenses 1,620.00 Sales Tax Expenses 8,86,333.12 Total 11,54,204.12 5.1 The Tax Auditor, in the clause 26(i)(B)(b) of form 3CD has reported no payment of Sales tax/VAT/Excise Duty or GST has been routed through profit and Loss account because of we have followed the accounting policy of recognising the sales/turnover in our books of accounts net off Sales tax/VAT/Excise Duty or 7 ITA 344/JODH/2024 Shree Ram Colloids Private Limited GST. As such there is no amount of Sales tax/VAT/Excise Duty or GST which is included in Sales/turnover in our books of accounts & simultaneously no expenditure of Sales tax/VAT/Excise Duty or GST related to the sales/turnover is booked in profit and loss account. The figure of Rs. 11,54,204.12 is related to :- a) GST ineligible Credit Rs. 1620/-, b) Sales Tax Expenses Rs. 8,86,333.12 The Input Tax Credit which were claimed in VAT credit however due to Mismatch in VAT the Credit were not allowed as refund by the Commercial Tax Department, Jodhpur c) Excise duty of Rs. 2,66,251.00 added to gross turnover for presentation in financial statement following IND AS only. 5.2 Excise duty Rs. 2,66,251.00 Revenue for corresponding year and up to June 30, 2017 is reported inclusive of excise duty. The Government of India has implemented Goods and Service tax (GST) from July 01, 2017 replacing Excise duty, Service Tax and various other indirect taxes. As per Ind AS 18, the revenue for the period July 01, 2017 to March 31, 2018 is reported net of GST and is not comparable with corresponding period. The Gross revenue includes excise duty of Rs. 2,66,251.00 for the year ended March 31, 2018. The duties & taxes charged to Statement of Profit & Loss in the head other expenses includes excise duty of Rs. 2,66,251.00 for the year ended March 31, 2018. Hence, Excise duty of Rs. 2,66,251.00 were included in Sale of Goods. 5.3 GST Expenses Rs. 1,620.00-the ineligible IGST has been reversed. The copy of Ledger account is attached. The credit of this IGST is not allowed under the GST laws, and therefore the same had been expensed out. This is not any penalty or interest but as a matter of fact it is payment of tax. 5.4 Sales Tax Expenses Rs. 8,86,333.12-The Input Tax Credit which were claimed in VAT credit however due to Mismatch in VAT the Credit were not allowed as refund by the Commercial Tax Department, Jodhpur has been claimed as expenditure. The Copy of Ledger account & rectification order passed by authority is attached herewith for your ready reference. The company has followed the below policy for accounting of GST/CENVAT/VAT Credit 5.5 The GST/CENVAT/VAT credit available on purchase of materials, other eligible inputs and capital goods is adjusted against taxes payable. The eligible refunds received are adjusted against such Credits. The unadjusted GST/CENVAT/VAT credit is shown under the head "Other Current Assets". 5.6 All the above referred expenses are direct related to business and revenue nature. Therefore, allowable as expenditure.”
8 ITA 344/JODH/2024 Shree Ram Colloids Private Limited 5. The Ld.AR further stated that the same query was duly raised by the Ld.AO in assessment proceedings in the notice for clarification issued by the Ld.AO, on 16/01/2023. The relevant notice dated 16/01/2023 is enclosed in APB pages 130- 133 and the said notice is duly complied by the assessee and uploaded the reply in the system. The copy e-proceeding response related notice date 16/01/2023 is annexed in APB pages 138-139. Finally, the draft assessment order was issued and the Ld.AO has accepted the assessee’s reply which was filed during the assessment proceedings. The showcause notice was issued by the Ld. AO for clarification related to duty draw back not offered to tax and the addition was proposed amount to Rs.63,597/-. So, the explanation with relevant evidence of the assessee are duly considered by the Ld.AO while verifying the facts during assessment proceeding.
The Ld.DR argued and fully stands with the order of the Ld.PCIT. The relevant paragraphs 5.3 to 5.5, on pages 26 to 27, are relied upon, which are extracted below:- “5.3. On the issue of rent income from the property, the Assessee has contended that it has given on a short term lease its property being a fully equipped hotel and restaurant situated at village Osian and that the lease amount received was shown as business income. The Assessee has contended that the hotel building and the temporary structures were specially designed assets to attract tourists and the income from letting out of these properties cannot be considered as income from house property. The Assessee has contended that he being owner of a commercial property specifically designed to suit a particular business income derived from the property falls under the head income from business. The Assessee has placed reliance upon the decision of Hon'ble Supreme Court in the case of Narain Swadeshi Weaving Mills for the purpose of business of definition of the term business. Based on these contentions, the Assessee has contended that the rent income of Assessee from a commercial property cannot be taken as income from house property and even if it is taken as income from other source, the Assessee would be allowed depreciation u/s 32 or section 57.
9 ITA 344/JODH/2024 Shree Ram Colloids Private Limited 5.4. Having considered facts and circumstances of the case, I find that the Assessing Officer has not looked into the nature of assets from which rent income has been earned and whether it has been shown in correct head and whether depreciation has been claimed correctly. The issue requires further verification.
5.5. On the issue of Sales tax/VAT and GST of Rs. 11,54,204/-having been claimed in profit & loss account, whereas, the auditor pointing out that no such payment has been routed through profit & loss account and hence, the expense of Rs. 11,54,204/- ought to have been disallowed, the Assessee contended that it has followed the accounting policy of recognizing the sales net of Sales tax/VAT/Excise Duty or GST. The Assessee has submitted that this amount of Rs. 11,54,204/- relates to GST ineligible credit, mismatch in VAT input and not allowed as refund by the Commercial Tax Department, excise duty included in sales, ineligible IGST under the GST laws etc. The Assessee has contended that these expenses are directly related to business and of revenue nature, therefore, they are allowable as expenditure. I find that these claims of Assessee and allowability of this amount have not been examined by Assessing Officer and the issue requires scrutiny.”
We have heard the rival submissions and carefully considered the documents placed on record. The invocation of Section 263 hinges on the fulfillment of two essential conditions: (i) the assessment order must be erroneous; and (ii) it must be prejudicial to the interests of the revenue. Upon examining the assessment order, we observe that the Ld. AO had conducted a thorough inquiry, as evidenced by the issuance of notices under Section 142(1) of the Act dated 16/01/2023 (enclosed in APB pages 130 to 133) and the assessee's reply dated 27/01/2023 (enclosed in APB pages 134 to 157). The queries raised by the Ld. AO specifically pertained to the “Incorrect claim of depreciation amount to Rs. 59,98,438/-“ & “Over computation of business loss amount to Rs. 11,54,204/-“. This demonstrates that the Ld. AO duly applied his mind to the matter and took a considered view while accepting the assessee’s explanation regarding the two issues. Therefore, the issues were adequately 10 ITA 344/JODH/2024 Shree Ram Colloids Private Limited addressed, leaving no grounds for invoking the provisions of Section 263 of the Act. In arriving at this conclusion, we respectfully rely on the judgments in PCIT vs Pramod Kumar Tekriwal (2023) 154 taxmann.com 142 (SC) where the Hon’ble Apex Court dismissed the appeal of the revenue for the ground that the assessee has produced all the relevant documents before the Ld.AO and the Ld.AO had taken one possible view out of two and assumption of jurisdiction by Principal CIT under section 263 which is erroneous but High Court by the order held that since the factual findings taken by the ITAT, there is no error in the Tribunal which allowed the appeal of the assessee. In the case of PCIT vs. Cartier Leaflin (P.) Ltd. [(2023) 146 taxmann.com 281 (SC)], it was held that if the Ld. AO has adopted a plausible view, there is no justification for invoking Section 263 to revise the assessment order. This ruling applies even if it is alleged that the AO did not examine certain aspects, such as the books of account or the share trading transactions conducted by the assessee through demat accounts, during the assessment proceedings. Moreover, we note that the assessee had claimed depreciation related to hotel business & running the resort “Village Osiyan”. The income is declared under the head business & profession. The factual issue is fully covered the order of the Hon’ble Apex Court in Chennai Properties & Investments Ltd. V. CIT (2015) 373 ITR 673. Considering the other issue, the assessee’s plea is that in Clause 26(i)(B)(b) of Form 3CD, the Tax Auditor has reported that no payments pertaining to Sales Tax, VAT, Excise Duty, or GST have been routed through the Profit and Loss Account. This is in accordance with the accounting policy consistently followed by the 11 ITA 344/JODH/2024 Shree Ram Colloids Private Limited assessee, whereby sales/turnover is recognised in the books of account net of Sales Tax, VAT, Excise Duty, and GST. Accordingly, no component of Sales Tax, VAT, Excise Duty, or GST is included in the reported sales/turnover, and consequently, no related expenditure on account of such indirect taxes has been recorded in the Profit and Loss Account. The amount of Rs.11,54,204.12 reported comprises the following: a) Rs.1,620/- towards ineligible GST credit; b) Rs.8,86,333.12 relating to Sales Tax expenses — representing Input Tax Credit (ITC) initially claimed under VAT but subsequently disallowed by the Commercial Tax Department, Jodhpur, due to mismatch. c) Rs.2,66,251.00 pertaining to Excise Duty, which was added to gross turnover solely for presentation purposes in the financial statements in compliance with IND AS. The reply of the assessee was duly considered by the Ld. AO during assessment proceeding. Given these facts, we find that the order passed by the Ld. AO is neither erroneous nor prejudicial to the revenue. Since one of the two mandatory conditions for invoking Section 263 is not satisfied, the provisions of Section 263 cannot be applied. In view of the above, the assessee’s grounds of appeal succeed.
12 ITA 344/JODH/2024 Shree Ram Colloids Private Limited 8. In the result, the appeal of the assessee bearing