• Friday, 11 Apr 2025, 10:55:26 am

Income Tax Act, 1961 – Sections 263, 153A, 143(3), 37(1) and 132 - The assessee, engaged in the hotel business, filed a return declaring a loss. A search under Section 132 was conducted, and the case was centralized under Section 127. The Assessing Officer (AO) completed the assessment under Section 153A r.w.s. 143(3), accepting the returned loss. The Principal Commissioner of Income Tax (PCIT) invoked Section 263, alleging that the AO failed to examine the allowability of ROC legal fees (Rs. 5,54,581/-) under Section 37(1), which the PCIT held to be capital expenditure. The PCIT set aside the assessment, directing the AO to re-examine the issue. The assessee appealed, arguing that (i) the assessment was completed and not open for revision, (ii) the expenditure was already examined by the AO, and (iii) the PCIT merely held a different opinion rather than proving the order was erroneous and prejudicial to Revenue - Whether the PCIT was justified in invoking Section 263, despite the AO’s acceptance of the legal fee deduction under Section 37(1) - Whether an assessment completed under Section 153A can be revised under Section 263, in the absence of incriminating material - Whether the legal fee for ROC filing qualifies as revenue or capital expenditure – HELD - The ITAT, upheld the PCIT’s revisionary order under Section 263, ruling that - The AO did not specifically question or verify the allowability of ROC legal fees under Section 37(1). Since the AO failed to conduct necessary inquiries, the assessment order was erroneous and prejudicial to the interest of Revenue, as per Explanation 2(a) to Section 263 - The ITAT relied on Brooke Bond India Ltd. v. CIT, holding that expenses for increasing authorized capital are capital in nature, even if they aid business expansion. Hence, the ROC legal fee was not allowable under Section 37(1) - The Tribunal rejected the assessee’s claim that no addition could be made in a completed assessment under Section 153A without incriminating material, ruling that the case was still open for verification at the time of search and thus, the PCIT could revise the order under Section 263 - The ITAT clarified that Section 263 is applicable when the AO fails to conduct proper inquiries, even if an alternate view exists. The mere non-recording of an issue in the assessment order does not imply it was examined - The assessee’s appeal was dismissed, and the PCIT’s order under Section 263 was upheld, directing a fresh examination of the ROC legal fee deduction as capital expenditure

 

2025-VIL-221-ITAT-HYD

 

IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD ‘A’ BENCH HYDERABAD

 

ITA No. 370/Hyd/2023

Assessment Year: 2019-20

 

Date of Hearing: 07.01.2025

Date of Pronouncement: 29.01.2025

 

M/s SKILL PROMOTERS HOLDING AND LEASING PRIVATE LIMITED

 

Vs

 

PCIT (CENTRAL), HYDERABAD

 

Assessee by: Shri P. Murali Mohan Rao, AR

Revenue by: Shri B. Bala Krishna, CIT-DR

 

BEFORE

Shri Vijay Pal Rao, Vice President

Shri Manjunatha G., Accountant Member

 

ORDER

 

PER. MANJUNATHA G., A.M:

 

This appeal filed by the assessee is directed against the order dated 23.06.2023 of the learned Principal Commissioner of Income Tax (Central) (Ld. PCIT), Hyderabad, pertaining to A.Y.2019-20 on the following grounds:

 

1. The order passed u/s 263 of the Act dated 23.06.2023 is erroneous both on facts and in law.

 

2. The Ld. Pr. CIT erred in holding that the assessment order dated 26.09.2021 passed u/s 153A is erroneous in so far as the same is prejudicial to the interests of the Revenue.

 

3. The Ld. Pr.CIT erred in setting aside the assessment to the file of the Assessing Officer with a direction to examine the nature of the legal fee paid to ROC, its allowability as Revenue expenditure u/s 37 of the I.T Act and for taking appropriate action as per law.

 

4. a) The Ld.CIT(A) ought to have appreciated that there was no incriminating material detected as a result of the search

 

b) The Ld.CIT(A) ought to have appreciated that the assessment for the A.Y.2019-20 is a completed / unabated assessment and that in the absence of any incriminating material no addition can be made by the A.O. in the assessment completed u/s 153A of the Act.

 

c) The Ld.CIT(A) ought to have appreciated that the apex court in the case of Pr.CIT, Central-3 Vs. Abhisar Buildwell Pvt. Ltd. in civil appeal No.6580 of 2021 dated 24.04.2023 as held, among other things, that no addition can be made in respect of completed assessments in the absence of any incriminating material.

 

5. The Ld. Pr.CIT has grossly erred in passing the revisionary order without satisfying the twin conditions that the order should be both erroneous and prejudicial to the interest of the revenue.

 

6. The Ld. Pr.CIT erred in passing the revisionary order by forming different opinion from that of the Assessing Officer taken during the course of assessment proceedings.

 

7. The Ld .Pr. CIT ought to have well appreciated that the issue was already examined by the Assessing Officer thoroughly in the course of assessment proceedings u/s 153A of the Act and has not meddled with the above issue as he was fully satisfied with the details furnished and therefore, the Ld. Pr.CIT cannot direct the Ld.AO u/s 263 of the Act to re examine the same issue or conduct further enquiries on the issue already considered by the Assessing Officer.

 

8. The Ld. Pr.CIT ought to have appreciated that there is no mistake of application of law or shortcoming or failure on the part of the Assessing Officer in the making further enquiry or examination of the issues.

 

9. The Ld. Pr.CIT ought to have appreciated that there is no lapse on the part of the Assessing Officer to examine the issues raised by the Pr.CIT and that there is no need to record in the assessment order all the issues examined and satisfied by the Assessing Officer.

 

10.The CIT(A) is erred in considering that the non-recording of certain facts of examination necessarily leads to unrebuttable conclusion to infer that A.O failed to examine certain issues on the face of the assessment record.

 

11.The assessee may, add, alter or modify or substitute any other points to the grounds of appeal at any time before or at the time of hearing of the appeal.

 

2. The brief facts of the case are that the assessee, engaged in the business of running hotels, filed its return of income for the A.Y.2019-20 on 29.10.2019, declaring total loss of Rs.23,13,886/-. A search and seizure operation u/s 132 of the Income Tax Act, 1961 (“the Act”) was conducted on the assessee as part of the searches conducted on M/s Skill Promoters Pvt. Ltd. Group & others on 22.10.2019. The case was subsequently centralized to Central Circle-2(3) vide order u/s 127 of the Act dated 03.12.2019. Consequent to centralization of the case, notice u/s 153A dated 02.02.2021 was issued to the assessee. In response to the notice u/s 153A, the assessee filed its return of income on 26.01.2021, declaring total loss of Rs.23,13,886/-. The case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act dated 27.05.2021 were issued and served on the assessee. In response to the notices, authorized representative of the assessee attended from time to time and submitted the information called for. Assessment has been completed u/s 143(3) r.w.s.153A of the Act on 26.09.2021, determining the total loss at Rs.23,13,886/-.

 

3. The case has been, subsequently taken up for revision proceedings by the Ld.PCIT, Hyderabad and accordingly, a show cause notice u/s 263 of the Act dated 24.01.2023 was issued to the assessee. The Ld. PCIT, in the said show cause notice observed that the assessment order passed by the Assessing Officer u/s 153A dated 26.09.2021 as well as the order of approval u/s 153D issued by the Addl.CIT, Central Range-2, Hyderabad dated 24.09,2021 were erroneous in so far as it was prejudicial to the interest of the revenue on the issue of deduction allowed towards ROC legal fee of Rs.5,54,581/-, even though the said expenditure is in the nature of capital expenditure and not allowable deduction u/s 37 of the Act. In response to the show cause notice, the assessee vide letter dated 16.02.2023 submitted that the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue, because the Assessing Officer passed the assessment order u/s 153A after necessary approval from Addl.CIT u/s 153D of the Act and has taken one plausible view on the issue of deduction of legal fee towards ROC and therefore, the order passed by the Assessing Officer cannot be considered as erroneous and prejudicial to the interest of the Revenue. The Ld. PCIT, after considering the submissions of the assessee and also taking note of certain judicial precedents, set aside the order passed by the Assessing Officer by exercising powers conferred u/s 263 of the Act, by holding that the assessment order passed by the Assessing Officer u/s 143(3) r.w.s. 153A of the Act dated 26.09.2021 and the order of the approval u/s 153D dated 24.09.2021 are erroneous and prejudicial to the interest of the Revenue. The relevant findings of the Ld. PCIT are as under:

 

“9. The contentions made by the assessee have been carefully examined and the same are not acceptable for the following reasons.

 

i. In the case of Brooke Bond India Limited vs. CIT (1997) 225 ITR 798, Hon'ble Supreme Court has held as under on the issue under consideration.

 

“Expenditure incurred by your company in connection with issue of shares, with a view to increase their capital is directly related to the expansion of the capital base of the company and is capital expenditure”

 

ii. In view of the above mentioned decisions of Hon'ble Supreme Court the legal fee paid by the Assessee to ROC is in the nature of capital expenditure.

 

iii. The Assessing Officer has not called for the reasons for payment of legal fee to ROC and did not examine its nature and its allowability u/s 37 of the Act in the light of the above mentioned judicial position. Thus the AO has passed the Assessment Order without making inquiries or verification which should have been made with regard to the nature of legal fee paid to ROC and its allowability u/s 37 of the Act. Hence the Assessment Order is deemed to be erroneous in so far as it is prejudicial to the interest of revenue under the provisions of Clause (a) to Explanation 2 to Section 263(1) of the Act.

 

iv. Coming to the case of M/s Malabar Industries on which the assessee has relied upon, Hon'ble Supreme Court has held that the phrase ‘prejudicial to the interest of Revenue’ is of wide import and is not confined to loss of Tax alone. It was further held therein that if the view taken by the Assessing Officer is not sustainable in law, such an order can be an erroneous order prejudicial tot the interest of Revenue. In the instant case the AO has accepted the assessee’s claim of expenditure of legal fee to ROC without examining the nature of the expenditure. Hence the view taken by the Assessing Officer is not sustainable in law as the legal fee paid to ROC is apparently capital in nature and hence not allowable u/s 37 of the Act. Thus the action of the AO has not only resulted in loss of revenue but the same is also not sustainable in law.

 

v. In the case of Commissioner of Income Tax Vs. M/s Paville Projects Private Limited (2023) 149 Taxmann.com 115 Hon'ble Supreme Court has observed that as laid down in the decision of the Apex Court in Malabar Industrial Company Limited Vs.CIT (2000), the scheme of Income Tax is to levy and collect tax in accordance with the provisions of the Act, and that this task is entrusted to the Revenue. Hon'ble Court further observed that if due to an erroneous order of the Assessing Officer, the Revenue in losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of Revenue. In the instant case the AO failed to examine the nature of the legal fee paid to ROC and its allowability u/s 37 of the Act as Revenue Expenditure. Therefore such an order is erroneous and prejudicial to the interest of Revenue as Revenue is losing tax lawfully payable by the assessee due to the above mentioned failure of the Assessing Officer.

 

vi. The decisions relied upon by the assessee were rendered in their own facts and therefore the same cannot be applied to the instant case as a thumb rule without examining the nature of expenditure involved in the instant case.

 

10. In view of all the above, it is held that the objections raised by the assessee vide its letter filed on 16.05.2023 in response to notice u/s 263 dated 21.04.2023 are not tenable in law as well as on facts. Considering the facts of the case as discussed in preceding paragraphs, it is hereby held that the Assessment Order passed the A.O. u/s 143(3) r.w.s.153A on 26.09.2021 for A.Y.2019-20 and the Order of approval u/s 153D of the Act dated 24.09.2021 issued by the Addl.CIT, Central Range-2, Hyderabad are erroneous and prejudicial to the interest of revenue. Accordingly the same are set-aside to the file of the A.O. and the Addl.CIT respectively for the limited purpose of examining the nature of the legal fee paid to ROC, its allowability as Revenue expenditure u/s 37 of the I.T. Act and for taking appropriate action as per law. Needless to say that the assessee should be afforded proper opportunity of being heard during the assessment proceedings taken up in consequence of this order. The assessee is at liberty to furnish necessary evidence, if any to the Assessing Officer during the proceedings being taken up in consequence to this order.”

 

4. Aggrieved by the Ld. PCIT order, the assessee is now in appeal before the Tribunal.

 

5. The learned counsel for the assessee, Shri Murali Mohan Rao, CA, submitted that the Ld. PCIT erred in setting aside the assessment order, by exercising powers conferred u/s 263 of the Act, without appreciating the fact that the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue. The learned counsel for the assessee further submitted that the assessment for the impugned assessment year is unabated / concluded as on the date of search, which is evident from the fact that the Assessing Officer assumed jurisdiction u/s 153A vide order u/s 127 of the Act dated 03.12.2019 and by that time the assessment for the impugned assessment year is unabated / concluded and therefore, in the absence of incriminating material, no additions can be made by the Assessing Officer towards any expenditure and consequently, on the said issue, assumption of jurisdiction by the Ld. PCIT is contrary to law and against the provisions of section 263 of the Act. The learned Counsel for the assessee, further referring to certain judicial precedents submitted that the Assessing Officer has examined the issue of allowance of expenditure towards ROC legal fee, while completing the assessment u/s 153A of the Act, which is evident from the relevant notices issued u/s 143(2) and 142(1) of the Act, where, the Assessing Officer has called for specific details about the financial statements and in response, the assessee has filed relevant financial statements and also explained the nature of expenditure and proved that the said expenditure is in the nature of revenue expenditure. The learned counsel for the assessee further submitted that once the Assessing Officer has taken a plausible view on the issue, then there is no scope for the Ld. PCIT to invoke jurisdiction u/s 263 of the Act, by holding that the Assessing Officer has not verified the issue, unless the view taken by the Assessing Officer is unsustainable in law, where the expenditure towards increase in authorised capital of the company is revenue in nature, if such increase in authorised capital is utilised for working capital purpose of the company. The Assessing Officer based on such judicial precedents and also on the basis of submissions of the assessee has accepted the view and therefore, the Ld. PCIT has no jurisdiction to invoke his powers u/s 263 of the Act. The learned counsel for the assessee further submitted that the assessee has increased the authorised capital in the previous financial year and filed relevant Form No.SH-7 in the financial year relevant to the assessment year under consideration and therefore, even if the said expenditure is capital in nature, the same cannot be disallowed for the year under consideration, when there is no increase in authorised capital of the assessee company. In this regard, he relied upon certain judicial precedents including the decision of Hon'ble High Court of Bombay in the case of Commissioner of Income Tax (Central)-II, Mumbai Vs. Development Credit Bank Ltd. (2010) 323 ITR 206 (Bombay). The assessee had also relied upon the decision of ITAT Hyderabad in the case of Madhucon Toll Highways Ltd. Vs. ACIT in ITA No.1487/Hyd/2018 and various judicial precedents in support of his argument.

 

6. Shri B. Bala Krishna, the Ld. CIT-DR supporting the order of the Ld. PCIT, submitted that the Assessing Officer has not examined the issue of legal fee towards ROC, which is evident from the assessment order passed by the Assessing Officer u/s 153A dated 26.09.2021 and notice issued u/s 143(2) and 142(1) of the Act on various dates. When the Assessing Officer has not examined the issue, the question of expression of any view on the said issue does not arise and therefore, the arguments of the learned counsel for the assessee that the Assessing Officer has taken a plausible view on the issue is devoid of merit. Further, the Ld. PCIT has examined the issue of deductibility of expenditure incurred for increase of authorised capital of the company and reached a conclusion with reasons and observed that the said expenditure is in the nature of capital expenditure, which is not deductible u/s 37(1) of the Act. The Ld. PCIT had also taken support from the decision of Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd. Vs. CIT (1997) 225 ITR 7983. Therefore, the arguments of the counsel for the assessee, that the Ld. PCIT has not held that the expenditure is capital expenditure and only set aside the order for further verification is incorrect and devoid of merit. In this regard, he relied on the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd.(2000) 243 ITR 83 (SC).

 

7. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also considered relevant case laws referred to by both the parties in support of their arguments. Admittedly, the assessment order passed by the Assessing Officer u/s 143(3) r.w.s. 153A of the Act is silent on the issue of legal fee to ROC debited in the profit and loss account. Further even during the assessment proceedings, although the Assessing Officer issued notices u/s 142(1) and 143(2) of the Act on many occasions, there is no specific question on the issue towards expenditure incurred towards increase in authorised capital. From the above, it is undoubtedly clear that the Assessing Officer has not examined the issue of deductibility of expenditure incurred under the head Legal Fee ROC for increase in authorised capital, while completing the assessment u/s 143(3) r.w.s.153A of the Act. Therefore, we are of the considered view that the arguments of the assessee that the Assessing Officer has verified the issue and taken a plausible view is devoid of merit and cannot be accepted. We, further note that once the Assessing Officer has not carried out any enquiries, which he ought to have carried out, in light of provisions of Clause(a) to Explanation 2 of section 263 of the Act, in our considered view, the order passed by the Assessing Officer definitely fits under the category of erroneous order which is prejudicial to the interest of the Revenue. Therefore, the argument of the assessee that the Assessing Officer has verified the issue and had taken a plausible view cannot be accepted. At this stage, it is relevant to refer to the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd.(supra), where, it has been clearly held that if due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue. Therefore, we reject the arguments of the assessee on this issue.

 

8. Having said so, let us come back, whether, the Ld. PCIT has expressed any view on the nature of expenditure and its allowability or left open to the Assessing Officer for verification / examination. We find that the Ld. PCIT has discussed the issue of deductibility of ROC fee legal in light of nature of expenditure and reached to a conclusion with reasons that the said expenditure is in the nature of capital expenditure, which is not allowable u/s 37(1) of the Act. The Ld. PCIT had also taken support from the decision of Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd.(supra), where, Hon'ble Supreme Court clearly held that expenditure incurred by a company in connection with issue of shares, with a view to increase its share capital is directly related to the expansion of the capital base of the company and is capital expenditure, even though it may incidentally help in the business of the company and in the profit making, it was contended before the Hon'ble Supreme Court that where the object of enhancement of the capital was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital has to be treated as revenue expenditure. On this, Hon'ble Supreme Court has held that the Tribunal did not record the finding to the effect that the expansion of the capital was undertaken by the assessee, in order to meet the need for more working funds for the assessee and therefore, the arguments cannot be accepted. From the findings of the facts recorded by the Ld. PCIT, coupled with the ratio laid down by the Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd.(supra), it is abundantly clear that expenditure incurred by the assessee under the head ‘legal fees ROC’ towards increase in authorized capital of the company is definitely in the nature of capital expenditure, which is not allowable u/s 37 of the Act, and therefore, in our considered view, the arguments of the learned counsel for the assessee that the PCIT has not reached to the conclusion that such expenditure is capital in nature is incorrect and cannot be accepted.

 

9. Coming back to another argument of the learned counsel for the assessee. The learned counsel for the assessee has made another argument in light of certain judicial precedents and submitted that that the assessment for the impugned assessment year is unabated / concluded, because the Assessing Officer has assumed jurisdiction to assess u/s 153A vide order u/s 127 dated 03.12.2019 and by that time, the assessment for the assessment year is unabated / concluded as on the date of search and therefore, in the absence of incriminating material, the Assessing Officer cannot make any additions and consequently, on the said issue, invocation of jurisdiction by the Ld. PCIT is incorrect. We find whether a particular assessment is unabated / abated needs to be examined, with reference to the date of initiation of search u/s 132 of the Act. If we consider the date of search 22.10.2019 the assessment for the impugned assessment year is abated, because the Assessing Officer has time for issuing notice u/s 143(2) upto 30.09.2020, which is much later than the date of search in the present case. Therefore, we are of the considered view that the arguments of the counsel for the assessee fails and thus, rejected.

 

10. The learned counsel for the assessee also relied on plethora of judicial precedents. We have gone through the relevant case laws in light of facts of the present case and we find that the case laws referred to by the learned counsel are not applicable to the facts of the case and therefore, all case laws relied upon are rejected.

 

11. In view of this matter and considering the facts and circumstances, we are of the considered view that the assessment order passed by the Assessing Officer u/s 153A is erroneous in so far as it is prejudicial to the interest of the revenue. The Ld. PCIT, after considering the facts has rightly set aside the assessment order passed by the Assessing Officer by his powers conferred u/s 263 of the Act. Thus, we are inclined to uphold the order passed by the Ld. PCIT u/s 263 of the Act and dismiss the appeal filed by the assessee.

 

12. In the result, appeal filed by the assessee is dismissed.

 

Order pronounced in the Open Court on 29th January, 2025.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that publisher is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.