SWASTIK CORPORATION,VAPI vs. PR. CIT 3, VALSAD

“1. On the facts and circumstances of the case as well as law on the subject, the revision order passed by the learned Principal Commissioner of Income Tax u/s 263 of the Act for assessment year 2012-13 is erroneous contrary to law, equity, facts and circumstances of the present case and the materials available on record.

The facts of the case which can be stated quite shortly are as follows: Assessee is a partnership firm engaged in the business of builders and developers. For the assessment year 2012-13, the assessee-firm had filed its return of income on 28.07.2012, declaring total income of Rs.3,73,440/-. The assessee`s case was selected for scrutiny under CASS and the assessment was completed u/s 143(3) of the Act, on 25.02.2015, determining total income assessed at Rs. 3,73,440/-. Subsequently the assessee`s case has been re-opened u/s 147 of the Act, on 20.07.2016. The re-assessment u/s 144 r.w.s 147 was completed on 30.08.2017, at determining total income at Rs.4,92,940/-, after making an addition of Rs.1,19,500/-, on account of disallowance u/s 40(a)(ia) of the Act.

Later on, Learned Principal Commissioner of Income Tax (in brief, Ld. PCIT), has exercised his jurisdiction, under section 263 of the Income Tax Act, 1961. It was observed by ld PCIT that re-assessment order framed by the Assessing Officer suffers from the following mistake/defects therefore rendering the order erroneous as well as prejudicial to the interest of Revenue: “While passing the order u/s 144 r.w.s 147 of the Act the AO i.e ITO, Ward-8 Vapi had not disallowed deduction of interest and remuneration paid to the partners in view of provision of Section 184(5) of the Act, as the assessment of firm has been finalized u/s 144 of the Act. However, the then AO has wrongly allowed the interest of Rs.11,05,769/-, which has resulted in under assessment of Rs.11,05,769/-. Further, the AO has not charged interest u/s 234A(1) of the Act from the date of issuing notice u/s 148 of the Act i.e. 20.07.20216 to the date of assessment order i.e. 30.08.2017 which has resulted into short levy of interest of Rs.19,800/-.”

Therefore a notice u/s 263 of the Act, dated 17.01.2020, was issued to the assessee, fixing the hearing on 31.01.2020 and the said notice was 21/SRT/2021 AY.12-13 M/s Swastik Corporation duly served upon the assessee personally through notice server. Such notice issued by ld PCIT dated 17.01.2020 is reproduced as under: “After going through the Range head and examination of the re-assessment records in this case shows that the re-assessment order framed by the then Assessing Officer i.e. ITO, Ward-8, Vapi, suffers from the following mistake/defect rendering the order erroneous as well as prejudicial to the interest of revenue: (i)While passing the order u/s 144 r.w.s. 147, the AO i.e ITO, Ward-8, Vapi had not disallowed deduction of interest and remuneration paid to the partners in view of provision of Section 184(5) of the Act, as the assessment of firm has been finalized u/s 144 of the Act. However, the then AO has wrongly allowed the interest of Rs.11,05,769/-, which has resulted in under assessment of Rs.11,05,769/- 5. In view of the above para-4(i) you are, therefore, required to show-cause as to why the said re-assessment order be not revised by invoking the provisions of 263 of I.T. Act, 1961. The hearing in your case is being fixed on 31.01.2020 at 11.45 A.M. Please note that the required details should be submitted after numbering the documents enclosed and indexing the same in the forwarding/covering letter.”

In response to the above notice, the assessee has not submitted its reply therefore ld PCIT noticed that interest of Rs.11,05,769/- was paid to the partners as per 3CD Report and Profit and Loss Account for the year under consideration. Considering the facts of the case and the provision of section 184(5) of the I.T. Act, the interest and remuneration paid to the partners of Rs.11,05,769/- was not allowable to the assessee- firm as the assessment order was passed u/s 144 of the Income Tax Act. The AO had wrongly allowed the above said interest to partners. Further, the AO has not charged interest u/s 234A(1) of the I.T. Act from the date of issuing notice u/s 148 of the I.T. Act i.e., 20.07.2016 to the date of assessment order i.e. 30.08.2017, which has resulted into short levy of interest of Rs.19,800/-. Therefore, ld PCIT held that order passed by assessing officer u/s 144 r.w.s. 147 of the Act on 30.08.2017 is erroneous and prejudicial to the interest of Revenue. Therefore, ld PCIT set aside the assessment order with a direction to the assessing officer to reframe the assessment afresh after examining the 21/SRT/2021 AY.12-13 M/s Swastik Corporation issues regarding the interest paid to partners of Rs.11,05,769/- and charge interest u/s 234A(1) of the Act.

Aggrieved by the order of the Ld. PCIT, the assessee is in appeal before us.

At the outset, Shri Hardik Vora, Learned Counsel for the assessee, argued that after passing the original assessment order u/s 143(3) on 25.02.2015, the Department has initiated the re-assessment proceedings u/s 147 against the assessee and the re-assessment proceeding u/s 144 r.w.s. 147 were completed by the Assessing Officer on 30.08.2017. The assessing officer made part addition in respect of the issue raised by ld PCIT in his revision proceedings. The assessee, was aggrieved by the said part addition, therefore, the assessee filed the appeal against the order passed u/s 144 r.w.s. 147 dated 30.08.2017, before the ld CIT(A). The ld CIT(A), after taking into account the submission made by the assessee, has deleted the addition. The ld PCIT has exercised his jurisdiction u/s 263 of the Act in respect of part addition, which was deleted by ld CIT(A). Therefore, ld Counsel contended that for one particular addition there should not be two views. The ld CIT(A) deleted the part addition, however, for another part, the ld PCIT has exercised his jurisdiction u/s 263 of the Act, is not tenable. The Ld. Counsel further submitted that Assessing Officer has framed the assessment order u/s 144 r.w.s. 147 of the Act and assessee has filed appeal against said order before Ld. CIT(A). The Ld. CIT(A) has power to enhance, if any item remain untaxed, the ld CIT(A) may enhance the tax liability. Therefore, the matter which is subject to appeal before Ld. CIT(A) in respect of addition sustained by Assessing Officer, the ld PCIT ought not to have exercised his jurisdiction u/s 263 of the Act.

We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. In our considered view, it was wholly erroneous on the part of the ld PCIT to exercise jurisdiction u/s 263 of the Act in respect of the part amount for which the Assessing Officer has applied his mind and made addition and on appeal by assessee before ld CIT(A), which was ultimately, deleted by ld CIT(A). We note that when addition was made by the Assessing Officer, the assessee filed the appeal before ld CIT(A) and ld CIT(A) has considered the assessee`s facts as follows: “Very small set of facts are required to decide the appeal. It was noticed by the assessing officer that during the year under consideration, the assessee has debited an amount of Rs.10,03,176/- towards interest expenses on unsecured loans. Further, that the assessee deducted TDS of Rs.88,226/- only instead of Rs.1,09,317/-. There was no response to the show-cause notices issued by the assessing officer and therefore, the assessment was completed under section 144 of the Income Tax Act. As there was a short deduction of tax at source by Rs.11,950/- the proportionate interest payment of Rs.1,19,500/- was disallowed under section 40(a)(ia)”

From the above facts stated by ld CIT(A) it is abundantly clear that ld PCIT did not high light any other facts in his revision order under section 263 of the Act, that is, same facts noted above have been taken into account by ld PCIT. Thus, we note that assessment order passed by the assessing officer under section 144 r.w.s. 147 has been quashed by ld CIT(A), the ld PCIT should not have exercised his jurisdiction under section 263 of the Act. Moreover, the ld CIT(A) has power to enhance u/s 251 (1) of the Act,

An erroneous order does not mean a wrong order; it does not mean an order with which the Commissioner is unable to agree. An erroneous order would be an order which suffers from a patent lack of jurisdiction; the error must be with reference to jurisdiction. Prejudicial to the interest of the Revenue would mean an erroneous order which goes against the interest of Revenue collection. We note that order which has merged with appellate order cannot be revised u/s 263 of the Act. The ld PCIT has powers to revise only orders of the Assessing Authorities which ware erroneous and prejudicial to the interest of the revenue. Therefore, based on this factual position, the order passed by the ld PCIT u/s 263 of the Act is bad in law.

In view of the facts of the case and judicial pronouncements relied upon, it is well established that the impugned order passed u/s 144 r.w.s.147 of the Act dated 30.08.2017, was passed by Assessing Officer, by making part addition on the issue which was subject matter of revision u/s 263 by ld PCIT. The Assessing Officer has passed the assessment order after

In the result, appeal of the assessee is allowed.