AARVEE DENIMS & EXPORTS LTD.,AHMEDABAD vs. THE PR. CIT, AHMEDABAD-1, AHMEDABAD

"ी टी.आर. से""ल कुमार, "ाियक सद" एवं "ी मकरंद वसंत महादेवकर, लेखा सद" के सम#। ] ] BEFORE SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं / Year : 2018-19 Aarvee Denims & Exports Ltd. The Pr.CIT बनाम/ 191, Shahwadi Ahmedabad-1 v/s. Narol–Sarkhej Highway Ahmedabad – 382 405 (Gujarat) "थायी लेखा सं./PAN: AABCA 6019 P (अपीलाथ&/ Appellant) ('( यथ&/ Respondent) Assessee by : Shri Divyakant Parikh, AR Revenue by : Shri Prithviraj Meena, CIT-DR सुनवाई की तारीख/Date of Hearing : 19/09/2024 घोषणा की तारीख /Date of Pronouncement: 27/09/2024 आदेश/O R D E R PER MAKARAND V. MAHADEOKAR, AM:

This appeal by the assessee is directed against the order passed by the Principal Commissioner of Income Tax (hereinafter referred to as “PCIT”) under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), dated 03.01.2024, setting aside the assessment order passed by the Assessing Officer (hereinafter referred to as “AO”) under Section 143(3) r.w.s. 144B of the Act for the Assessment Year(A.Y.) 2018-19, with a direction to make a fresh assessment. Aarvee Denims & Exports Ltd. Vs. The Pr.CIT Asst. Year : 2018-19 2 Facts of the Case: 2. The assessee filed its return of income for AY 2018-19 declaring NIL income after claiming deductions under section 80IA of the Act. The return was processed u/s 143(1) of the Act making addition of Rs.42,06,604/-. The copy of intimation u/s 143(1) of the Act was not received by the assessee so the AO provided the same to the assessee. The AO completed the assessment under Section 143(3) r.w.s. 144B of the Act, making additions of Rs.42,06,604/- as per order under section 143(1) of the Act and Rs. 3,15,44,000/- under section 40(a)(i) of the Act on account of non-deduction of TDS on foreign commission. The gross total income was computed at Rs.12,04,36,098/-, against which the assessee claimed a deduction of Rs.12,04,36,098/- under section 80IA of the Act, resulting in NIL taxable income.

2.1. Subsequently, the PCIT invoked the revisionary jurisdiction under Section 263, holding that the assessment order was erroneous and prejudicial to the interest of the revenue due to two specific issues:- i. That, the alleged failure of the AO to disallow unpaid leave salary under section 43B of the Act, and ii. That, the AO's failure to verify the claim of depreciation and additional depreciation on fixed assets.

3. During the proceedings under Section 263 of the Act, the assessee submitted that the PCIT had misunderstood the disclosure related to unpaid leave salary in the Tax Audit Report. The Tax Audit Report, specifically Column 26(i)(A)(b), required the disclosure of certain outstanding liabilities under section 43B of the Act that pre-existed on the first day of the previous Aarvee Denims & Exports Ltd. Vs. The Pr.CIT Asst. Year : 2018-19 year but were not allowed in any preceding year. It was explained that the unpaid leave salary of Rs.74,67,276/- reported in the Tax Audit Report was never claimed as a deduction in the current or previous years. Only the amount of Rs.29,35,991/-, which was actually paid, was claimed as a deduction. Therefore, any further disallowance of the unpaid leave salary would result in a double disallowance. The assessee also stated that even if a disallowance of Rs.46,16,406/- for unpaid leave salary was considered, the tax effect would be NIL because the assessee was eligible for a large deduction under section 80IA. The gross total income before the section 80IA deduction was Rs.12,04,36,098/-, and the available deduction under section 80IA was Rs.17,43,55,892/-. Since the assessed income did not exceed the available deduction, the resulting taxable income would still be NIL, making the assessment order not prejudicial to the revenue. The assessee highlighted that all details regarding fixed assets, depreciation, and additional depreciation were thoroughly examined and verified by the AO from the audited financial statements and the Tax Audit Report. The AO reviewed the relevant documents, was satisfied with the available details, and therefore did not request further information. This indicated that the AO had applied his mind while finalizing the assessment. The assessee also placed reliance on some judicial precedents during the course of proceedings before PCIT. The PCIT acknowledged the judicial pronouncements cited by the assessee but held that they were not applicable to the facts of this case, as the AO had failed to conduct necessary inquiries, making the assessment order erroneous and prejudicial to the revenue.

3.1. The PCIT reiterated that Section 263 of the Act empowers the Commissioner to revise any order that is erroneous and prejudicial to the Aarvee Denims & Exports Ltd. Vs. The Pr.CIT Asst. Year : 2018-19 revenue. Both conditions must be satisfied for invoking this provision. The PCIT held that the assessment order met both criteria, as the AO’s failure to make proper inquiries had led to potential loss of tax revenue.

1. The learned CIT has erred in law and on facts in passing an order u/s 263, setting aside the assessment order passed by the learned AO u/s 143(3), r.w.s. 144 B of the Act, with direction to make fresh assessment, which was neither erroneous nor prejudicial to the interest of revenue. The conditions of section 263 having not been satisfied the learned CIT has no jurisdiction to invoke provisions of section 263. It be so held now and the order passed by CIT under section 263 be cancelled.

The learned CIT ought not to have passed an order cancelling the said order of AO with direction to make fresh assessment which was neither erroneous nor prejudicial to the revenue since the taxable income does not change and as a result no additional tax liability arise. It be so held now and the order u/s 263 be cancelled.

The un-paid leave expenses closing balance of Rs. 74,67,276/- disclosed in Tax Audit Report was already disallowed in earlier year's computation of Income, as a result if the said amount is disallowed again it will amount to double disallowance of same amount which is against the sanction of Law. It be so held now and the order u/s 263 be cancelled. Aarvee Denims & Exports Ltd. Vs. The Pr.CIT Asst. Year : 2018-19 5 4. The learned CIT has erred in law and facts in not accepting the detail submissions dated 08.01.2024 stating that the details regarding fixed assets and claim of depreciation and additional depreciation are apparent in the audited balance sheet and Tax Audit Report, and after verification of these documents only the further details which were necessary for scrutiny assessment were called for by the AO and were submitted by the assessee. The learned AO has already applied his mind and being satisfied with the available details on record he did not call for any further details and accepted the assessee's claim of depreciation.

The learned CIT's contention that since the issues were not verified the assessment order passed is erroneous in so far as prejudicial to the interest of the revenue, is beyond the scope of provisions of section 263 of the Income-tax Act. It be so held now and the order passed by CIT under section 263 be cancelled.

5. The order of learned CIT u/s 263 is wholly unjust, illegal, invalid and bad in law and against the settled legal position by the apex court. The learned CIT ought to have dropped the revision proceedings erroneously initiated by him. It be so held now, and order passed by CIT under section 263 be cancelled. The appellant craves leave to add, amend, alter, edit, delete, modify or change any of the grounds of appeal at the time of or before the hearing of the appeal.

6.2. The AR also placed before us the copies of computation of income relating to these disallowances of respective years.

6.3. The AR argued that the AO had thoroughly verified the depreciation claims during the assessment proceedings. The AR further argued that the AO specifically examined the schedules related to fixed assets and depreciation, which were part of the financial statements and duly audited by the statutory auditors. The Tax Audit Report, particularly in Form 3CD, under section 44AB of the Act provided an exhaustive summary of all additions to fixed assets and the corresponding depreciation calculations and the auditor’s certification validated that the depreciation was correctly claimed according to the Act. The AR explained the details as given in the form 3CD placed before us.

6.4. The AR argued that even if the disallowances of Rs.46,16,406/- (leave encashment) and Rs.2,35,52,933/- (additional depreciation) were considered, these amounts would enhance the eligible business profits. With the available section 80IA deduction of Rs.5,39,19,734/-, the enhanced profits would still result in NIL taxable income, making the PCIT’s order to reassess futile and without prejudice to the revenue. The AR relied on CBDT Circular No. 37/2016, which acknowledges that disallowances such as those under sections 43B and 40(a)(ia) enhance eligible business profits, and the enhanced profits qualify for deductions under Chapter VI-A. The said circular referred judgements of Hon’ble High Courts in case of ITO vs. Keval Construction Aarvee Denims & Exports Ltd. Vs. The Pr.CIT Asst. Year : 2018-19 (Gujarat High Court, Tax Appeal No. 443 of 2012) and CIT vs. Sunil Vishwambarnath Tiwari (Bombay High Court IT Appeal No. 2 of 2011), where it was held that disallowances that enhance business profits are eligible for corresponding deductions under section 80IA of the Act. The AR also placed reliance on recent decision of Co-ordinate Bench in DCIT vs. Kota Baran Tollway Pvt. Ltd. (ITA No: 2025/AHD/2018 dated 30.04.2024) followed the principle that enhanced profits due to disallowances are eligible for higher deductions under section 80IA of the Act.

8.1. The primary contention of the PCIT was that the AO failed to disallow unpaid leave salary under Section 43B of the Act and did not verify the claim of depreciation and additional depreciation on fixed assets. However, upon examining the facts, it is evident that the AO had thoroughly reviewed the relevant details during the assessment proceedings. The Tax Audit Report, specifically Column 26(i)(A)(b), clearly indicated that the unpaid leave salary Aarvee Denims & Exports Ltd. Vs. The Pr.CIT Asst. Year : 2018-19 of Rs.74,67,276/- was disclosed as a liability and not claimed as a deduction. Only the amount paid, Rs.29,35,991/-, was claimed in the profit and loss account, which was appropriately considered by the AO. This explanation was corroborated by detailed submissions, including ledger accounts and prior years' computations provided to the PCIT, demonstrating that there was no duplication of deductions.

8.2. As regards depreciation, the AO reviewed the audited financial statements and the Tax Audit Report, particularly Form 3CD, which detailed all additions to fixed assets and the corresponding depreciation claimed. The auditor, had certified these claims, confirming their accuracy and compliance with the provisions of the Act. The purpose of the Tax Audit under section 44AB of the Act is to ensure that financial records and claims are thoroughly verified by an independent professional, providing a reliable basis for the AO to rely upon. If the AO is expected to recheck all the details already certified by the auditor, especially when there are no specific qualifications or adverse remarks in the audit report, it would undermine the very purpose of the audit under section 44AB of the Act. The AO appropriately relied on the certified audit report, as intended by law, and no further verification was necessary in absence of any discrepancies noted by the auditor. Thus, the AO’s acceptance of the depreciation claim was fully justified and in line with the principles underlying the audit provisions.

8.3. For invoking jurisdiction under Section 263, it must be established that the assessment order is both erroneous and prejudicial to the interest of the revenue. In the present case, the AO’s order was based on a conscious examination of the records, and no substantive errors were pointed out by Aarvee Denims & Exports Ltd. Vs. The Pr.CIT Asst. Year : 2018-19 the PCIT that would indicate any failure in the verification process. The assessee’s argument that even if the unpaid leave salary and additional depreciation were disallowed, the resulting tax effect would be NIL due to the large available deduction under Section 80IA is relevant. The gross total income before deduction under Section 80IA was Rs. 12,04,36,098/-, and the available deduction under Section 80IA was Rs.17,43,55,892/-. Thus, the taxable income would still remain NIL, demonstrating that there is no prejudice to the revenue. The assessee cited CBDT Circular No. 37/2016, which clarified that disallowances enhancing business profits qualify for deductions under Chapter VI A, including Section 80IA. Judicial precedents, such as, ITO vs. Keval Construction (Gujarat High Court) and CIT vs. Sunil Vishwambarnath Tiwari (Bombay High Court), supported this view. These precedents directly address the present issue, showing that the assessment order is not prejudicial to the revenue when the final taxable income remains unaffected.

9.1. Thus, the conditions of being erroneous and prejudicial to the revenue under Section 263 are not satisfied. Accordingly, the appeal of the assessee is allowed, and the order of the PCIT is quashed.