Income Tax - Revision of assessment order, disallowance of expenses, allocation of expenses between tonnage and non-tonnage divisions - The assessee company was involved in towage, berthing and un-berthing of ships, tug operations, comprehensive port management services and related services. The assessee filed its return of income admitting a total income. The case was selected for scrutiny and the Assessing Officer (AO) completed the assessment order. The PCIT initiated revision proceedings under section 263 of the Income Tax Act on the ground that the assessment order was erroneous and prejudicial to the interests of revenue - Whether the PCIT was justified in initiating revision proceedings under section 263 on the ground that the AO failed to examine the genuineness of the expenditures claimed by the assessee towards 'Provision for loss allowance', 'Advances written-off' and 'Investments written-off' - HELD - The AO had considered the explanation and the basis of allocation of expenses between tonnage and non-tonnage divisions provided by the assessee, and had accepted the same. Once the AO has taken a plausible view on an issue, the PCIT cannot simply set aside the assessment order for further verification, unless the view taken by the AO is unsustainable in law. The PCIT had not made any observation as to how the view taken by the AO was erroneous or unsustainable, and therefore, the initiation of revision proceedings under section 263 on this ground was not justified – Therefore, the revision order passed by the PCIT is quashed under section 263 and restored the assessment order passed by the AO – The appeal of the assessee is allowed
Issue 2: Whether the PCIT was justified in directing the AO to verify the basis of allocation of expenses between tonnage and non-tonnage divisions, and the nature of 'Advances written-off' and 'Investments written-off' - HELD - The AO had considered the explanation and the basis of allocation of expenses provided by the assessee, and had accepted the same. The PCIT had not made any observation as to how the basis of allocation adopted by the assessee was incorrect or unsustainable - Further, the assessee had explained the nature of 'Advances written-off' and 'Investments written-off' as allowable business expenditures, and the AO had accepted the same. Once the AO has taken a plausible view on these issues, the PCIT cannot simply set aside the assessment order for further verification, unless the view taken by the AO is erroneous or unsustainable in law.
2025-VIL-1637-ITAT-HYD
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD
ITA No. 744/Hyd/2025
Assessment Year: 2020-21
Date of Hearing: 15.10.2025
Date of Pronouncement: 07.11.2025
M/s OCEAN SPARKLE LIMITED
Vs
THE DEPUTY COMMISSIONER OF INCOME TAX
Assessee by: Shri A.V. Raghuram, Advocate
Department by: Ms. U. Mini Chandran, CIT DR
BEFORE
SHRI G. MANJUNATHA, HON’BLE ACCOUNTANT MEMBER
SHRI RAVISH SOOD, HON’BLE JUDICIAL MEMBER
ORDER
PER MANJUNATHA G., A.M:
This appeal filed by the assessee is directed against the order of the Principal Commissioner of Income Tax, Hyderabad - 4, dated 28.02.2025 passed under Section 263 of the Income Tax Act, 1961 (for short “the Act”) and pertains to the assessment year 2020-21.
2. The assessee has raised the following grounds in the instant appeal:
“1. The learned PCIT has erred in law and in the facts and circumstances of the case in initiating the proceedings under section 263 of the Act in an much as there is no error which is prejudicial to the interest of revenue as envisaged under section 263 of the Income Tax Act.
2. The learned PCIT has erred in holding that order passed by the Assessing Officer (hereinafter referred to as the 'learned AO') under section 143(3) read with section 144B of the Act dated 03.01.2025 (hereinafter referred to as the Assessment Order) is erroneous and prejudicial to the interest of the Revenue on the ground that Other Expenses consisting of Provision for loss allowance of Rs 2.60 Crores, Advances written off of Rs. 16,45,000 and Investments written off of Rs.3 lacs are inadmissible expenditures not added back in the computation of income.
3. The learned PCIT has erred in not appreciating that the other expenses under consideration have been apportioned between Tonnage Tax Division and Non Tonnage Division and that no disallowance is required to be made in respect of the amounts allocated to Tonnage Tax Division in as much as the income thereof is computed under the Tonnage Tax Scheme in accordance with "Chapter XII G SPECIAL PROVISIONS RELATING TO INCOME OF SHIPPING OF COMPANIES, Section 115V to 115VZC of the Income Tax Act, 1961", which has been duly examined and accepted by the AO in the assessment and expenses pertaining to Tonnage Tax Division is not claimed by the Appellant.
4. The learned PCIT has erred in not appreciating that the appropriate portion of the Provision for loss allowance working out to Rs.79,26,329 apportioned to Non Tonnage Tax Division has already been disallowed by the assessee in the ROI and accepted in the assessment and hence there is no error in the assessment order which needs to be considered under section 263 of the Act.
5. The learned PCIT has erred in not appreciating that the appropriate portion of the Advances Written off working out to Rs.5,01,42 apportioned to Non Tonnage Tax Division pertains to irrecoverable EMD and other advances allowable as deduction, as Bad Debts or u/s 37(1) of the Act, and hence there is no error in the assessment order which needs to be considered under section 263 of the Act.
6. The learned PCIT has erred in not appreciating that the appropriate portion of the Investments Written off working out to Rs.91,458 Business investments advances allowable as deduction u/s 37(1) of the apportioned to Non Tonnage Tax Division pertains to irrecoverable Act, and hence there is no error in the assessment order which needs to be considered under section 263 of the Act.
7. The learned PCIT has erred in law and in the facts and circumstances of the case in making adverse findings in para 5.2 and 5.3 of the impugned order u/s 263 with regard to the allowability of the expenses and further directing the AO to verify the nature of expenses ignoring the evidence on record and also furnished before the PCIT during the proceedings u/s 263.
8. The learned PCIT has erred in law and in the facts and circumstances of the case in making adverse findings in para 5.1, 5.2 and 5.3 of the impugned order u/s 263 with regard to the bifurcation of the expenses and directing the AO to verify the nature of advances/ investments written off along with the issue of differential bifurcation of such expenses under Tonnage & Non Tonnage schemes and disallow accordingly". The learned PCIT failed to appreciate that the bifurcation of the relevant expenses between Tonnage and Non-Tonnage Tax Divisions has been done on the basis of respective turnover (s) which is a reasonable and generally accepted basis, and hence there is no error in the assessment order and no further detailed examination is required.
9. The learned PCIT has erred in setting aside the Assessment Order with directions to the learned AO to make a fresh assessment.
10. The learned PCIT has erred in relying on various cases law in support of revising the assessment order in as much as all those cases are distinguishable on facts and have no relevance to the facts and circumstances of the present case.”
2. The brief facts of the case are that, the assessee company viz., M/s. Ocean Sparkle Limited, is involved in towage, berthing and un-berthing of ships, tug operations, comprehensive port management services and related services. The company enters into contracts for providing comprehensive port services or for providing tugs on time charter. The assessee-company, e-filed its original return of income for the impugned assessment year 2020-2021 on 19.01.2021 admitting a total income of Rs.73,63,74,190/-. The case of the assessee has been selected for complete scrutiny on the ground that (i). Claim of any Other Amount Allowable as deduction in Schedule BP (ii) Imports (iii) Refund Claim; (iv). ICDS Compliance and Adjustment (v). Foreign Financial Interest (vi). Exports and (vii). Deduction from Total Income under Chapter VI-A. During the course of assessment proceedings, the Assessing Officer issued notice u/sec.143(2) of the Act dated 29.06.2021 and duly served on the assessee. Further, notices u/sec.142(1) of the I.T. Act 1961 on 29.11.2021, 19.08.2021 and show cause notice dated 08.09.2022 were issued and served on the assessee from time to time, calling for certain details/information. In response to the said notices, the assessee company has filed it’s submissions. During the course of assessment proceedings, the Assessing Officer has considered the explanation of the assessee issue-wise and accepted the explanation of the assessee with regard to claim of ‘Any other amount allowable as deduction in Schedule-BP’ amounting to Rs.61,47,24,838/- after considering the split-up of the expenditure and explanation furnished by the assessee on the issue. Further, the Assessing Officer has also accepted the explanation of assessee furnished vide it’s letter dated 13.12.2002 on ‘Imports’ and did not propose for any variation on this count. Similarly, the Assessing Officer had not proposed for any variation with respect to ICDS Compliance and Adjustment after considering the explanation of the assessee dated 13.12.2021 where the assessee has submitted that no adjustments were required to be made to book profits under ICDS. With regard to ‘Foreign Financial Interest’ also, the Assessing Officer has not proposed for any variation after considering the specific details furnished by the assessee regarding foreign financial interest in the nature of financial interest in any entity held during the year vide it’s letter dated 13.12.2021. With regard to ‘Exports’, the Assessing Officer after considering the reconciliation statement of import/export ledger for the assessment year 2020-2021 vide letter dated 13.12.2021 furnished by the assessee and as the same was found to be in order, has not proposed for any variation. Further, with respect to deduction from total income under Chapter-VIA, the Assessing Officer after considering the explanation of the assessee determined the indirect expenditure incurred by the assessee in relation to income which does not form part of the total income u/sec.14A r.w. Rule 8D of I.T. Rules, 1962 at Rs.27,53,957/-. Since the assessee company has already disallowed a sum of Rs.8,97,237/- suo moto in it’s return of income, the Assessing Officer made the differential sum as addition amounting to Rs.18,56,720/- u/sec.14A r.w. Rule 8D of I.T. Rules, 1962. Accordingly, the Assessing Officer assessed the total income of the assessee at Rs.73,82,30,910/- by making addition on account of variation in respect of issue of disallowance u/sec.14A at Rs.18,56,720/- as against the returned income of Rs.73,63,74,190/- vide order dated 22.09.2022 passed u/sec.143(3) r.w.s.144B of the Income Tax Act, 1961.
3. The case has been, subsequently taken up for revision proceedings by the learned PCIT u/sec.263 of the Income Tax Act, 1961. The learned PCIT has issued a show cause notice dated 03.01.2025 under Section 263 of the Act, and served on the assessee. The Ld. Pr. CIT in the said show-cause notice called upon the assessee to explain as to why the assessment order passed by the Assessing Officer under Section 143(3) r.w.s.144B of the Income Tax Act, 1961, dated 22.09.2022 shall not be revised in terms of section 263 of the Act, because, the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue on the issue of genuineness of expenditure incurred by the assessee. In the said show-cause notice, the Ld. Pr. CIT observed that, although the case was selected for scrutiny to verify genuineness of expenditure, but, the Assessing Officer completed the assessment without carrying out required enquiries, he ought to have been carried-out in light of provisions of Section 263 of the Act, in respect of ‘Other Expenses’ i.e., Rs.72,60,00,000/-, Rs.716,45,000/- and Rs.73,00,000/- [as per note 2.33 of the assessment record which were debited towards ‘Provision for loss allowance’, Advance written-off and ‘Investment written-off’ respectively. The learned PCIT pointed-out in it’s show cause notice that these are inadmissible expenditures as the same were not added back in the ‘Computation of Total Income’ for the financial year 2019-2020 relevant to assessment year 2020-2021 under consideration, which resulted in a short computation of taxable income. Since the Assessing Officer has not taken into consideration this aspect, the learned PCIT has called-upon the assessee to furnish clarification in this regard along with supporting documentary evidences to substantiate the claim. In response to the said show cause notice dated 03.01.2025, the Director and Authorised Representative of the assessee company has furnished it’s detailed submissions which are reproduced by the learned PCIT in his order vide pages 3 to 18 of his order.
4. The learned PCIT after considering the detailed submissions of the assessee noted that, the amounts under the Head ‘Other Expenses’ were wrongly mentioned as Rs.72,60,00,000/-, Rs.716,45,000/- and Rs.73,00,000/- which was occurred due to typographical error by adding ‘7’ at the beginning of each amount and, therefore, the learned PCIT has rectified the said mistake and directed to read the amounts as Rs.2,60,00,000/-; Rs.16,45,000/- and Rs.73,00,000/-. Before the PCIT, it was the submission of the assessee with respect to computing the taxable income on all direct income and all direct expenses incurred for the Tonnage division and Non-Tonnage division, the assessee has considered these expenses separately under their respective categories, whereas the common expenses are allocated between the Tonnage division and the Non Tonnage division based on the ratio/ proportion of the operational turnover of the respective divisions to the Total Operational Turnover which has been tabulated at page-11 of the order of the learned PCIT. From the above table it is evident that the Tonnage division accounts for 69.51% of the total operational income while the Non Tonnage division accounts for 30.49%. Hence, the common expenses are allocated to the respective division in the said ratio by the assessee company. Further, the assessee company has also filed break-up of Tonnage, Non-Tonnage and common expenses and the details of profit before tax after allocation of common expenses to the respective divisions as Annexure-3. With respect to provision for loss allowance, the assessee company has submitted before the learned PCIT that, as per the provisions of IND-AS accounting standards, a provision is statutorily required to be created based on the Expected Credit Loss method (ECL) laid down in the IND-AS on the entire Sundry Debtors of the Company. The incremental amount of ECL for the year under review was accordingly estimated by the assessee company at Rs.2,60,00,000/- and the same was provided in the books. Out of the provision for loss allowance (ECL) of Rs.2,60,00,000/-, an amount of Rs.79,26,329/- (-30.49%) has been allocated to Non-Tonnage division which amount has already been suo-moto disallowed and added back in the computation of income of Non-Tonnage division, under the description "Ind AS Adjustment under ECL" since this relates to the provision made as per Ind-AS requirements. The snap shot of the relevant page of ITR of BP schedule is also re-produced by the learned PCIT in his order at page-12 of the order.
5. Further, in respect of ‘Advances written-off’ amounting to Rs.16,44,765/-, the assessee has produced detailed ledger extract as Annexure-5 before the learned PCIT wherein the assessee has submitted that the amounts paid as Earnest Money Deposits (EMDs) were not returned by various Port Authorities and out of these advances written off, an amount of Rs.5,01,421/- [30.49%] has been allocated to Non-Tonnage division and accordingly, pleaded before the learned PCIT that this expenditure is an allowable business expenditure and hence, no adjustments/ disallowances for it was made in the computation of total income.
6. Further, with respect to ‘Investments written-off’ by the assessee company, the assessee company has furnished ledger account which was marked as Annexure-6 and pertains to investments in related business made up-to the year 2007. Since, these investments were proved futile, were irrecoverable and consequently, the assessee company has written-off the investments and an amount of Rs.91,458/- [30.49%] has been allocated to Non-Tonnage division and accordingly, pleaded before the learned PCIT that, this expenditure is an allowable business expenditure and hence, no adjustments were made in the computation of total taxable income. In support of it’s contention that the loss on sale of investment would be treated as business loss, the assessee-company has relied on the decision of Hon’ble Karnataka High Court in the case of M/s. Ace Designers Ltd., vs., Addl. Commissioner, decision of Bombay High Court in the case of CIT vs., Colgate Palm Olive (India) Ltd.,; Investa Industrial Corporation Ltd., and decision of ITAT, Delhi Bench in the case of Cosmos Industries Ltd., vs., DCIT which decisions are reproduced by the learned PCIT at pages 14 to 15 of his order.
7. The learned PCIT after considering the detailed submissions of the assessee-company, directed the Assessing Officer to verify the claim of Tonnage and Non-Tonnage schemes in absence of the basis on which such differential bifurcation of expenses furnished by the assessee. Similar directions were given by the learned PCIT with regard to expenses claimed under ‘Advances Written-Off’ and expenses claimed under “Investments Written Off”. The relevant observations of the learned PCIT from paras 5.1 to 7 are as under :
“5.1. With regard to claim of "Provision for Loss Allowance", the assessee stated that the only an amount of Rs.79.26,329/- (that pertains to non-tonnage division) needs to be disallowed and the same is already added back to income in ITR (Item 15 of Schedule BP). Under the said item 15, the assessee has added back an amount of Rs.3,31,60,065/- (CSR and Donation Expenses of Rs.2,52,31,892/-; Interest on Taxes of Rs.1,844/- and "Provision for Loss Allowance" of Rs.79,26,329/-). It is noticed that the assessee has claimed an expenditure of Rs.2,52,31892/-under the head CSR expenses and Donation Expenses in ITR and the entire amount was disallowed and added back to total income. However, the assessee has only disallowed an amount of Rs 79,26,329/- that is classified under non-tonnage division and added back to total income despite claiming Rs.2,60,00,000/- in ITR. In the absence of the basis on which such differential bifurcation of expenses under Tonnage and non-Tonnage schemes is done, the AO is directed to verify the claim of assessee and disallow accordingly.
5.2 With regard to expenses claimed under "Advances Written Off", the assessee submitted that the expenses are in the nature of "Bad debts" and thus should be allowed u/s 37 of IT Act. However, it is seen that the assessee has been claiming EMD advances given to Govt. entities like "Kolkata Port Trust", "Kerala State Maritime Development Corporation" and other entities as bad debts. Further, the assessee attributed reasons such as "DD returned by Kolkata Port Trust was lost in transit’ for treating them as bad debts. The reasoning given by the assessee M/s. Ocean Sparkle Limited is not satisfactory. In view of these discrepancies, AO is directed to verify the nature of such advances along with issue of differential bifurcation of such expenses under Tonnage & Non-Tonnage schemes and disallow accordingly.
5.3. With regard to expenses claimed under "Investments Written Off, the assessee submitted that the expenses are in the nature of "Bad debts" and thus should be allowed u/s 37 of IT Act. The assessee stated that these are investments in related business which have become irrecoverable and hence written off as bad debts. However, it is not forthcoming from the records whether the said expenses claim is 'capital' or 'revenue' in nature to be qualified for allowability. In view of these, AO is directed to verify the nature of such investments written off along with issue of differential bifurcation of such expenses under Tonnage & Non-Tonnage schemes and disallow accordingly.
6. In view of the foregoing observations, the AO failed to examine these aspects while completing scrutiny assessment on 22.09.2022. Hence, there is an error in the assessment order framed by the AO, which is prejudicial to the interest of the revenue and is therefore set aside. The Principal Commissioner is empowered to revise such assessment by invoking the provisions of section 263 of the I.T. Act. There are various judicial decisions in support of such proposition which are as under:
(1) Rampyari Devi Sarogi Vs. CIT (SC) 67 ITR 84
(2) Malabar Industrial Co Ltd. Vs. CIT (SC) 243 ITR 83.
(3) Swarup Vegetable Products Inds Ltd. Vs. CIT (All) 187 ITR 412
(4) Gee Vee Enterprises Vs. Addl. CIT & Ors (Del) 99 ITR 375
(5) Rajalakshmi Mills Ltd. Vs. ITO (ITAT, SB Chennai) 121 ITD 343
(6) SRM Systems & Software P Ltd. Vs. ACIT (2010-TIOL-646-HC-MAD-IT
(7) Deloitte Haskins &Sells, Chennai Vs, DCIT ITA No. 1164/Mad/12
7. Considering the facts, issues and circumstances of the case, the assessment order under section143(3) r.w.s.144B of the Act made by the Assessing Officer on 22.09.2022 is erroneous, as it is prejudicial to the interest of revenue. Hence, the AO is directed to pass a fresh assessment order after affording opportunity to the assessee.”
8. Aggrieved by the order of the learned PCIT, the assessee company is now, in appeal before the Tribunal.
9. Sri A V Raghuram, Advocate-Learned Counsel for the Assessee submitted that, the learned PCIT has erred in law and in the facts and circumstances of the case in initiating the proceedings under section 263 of the Act inasmuch as there is no error which is prejudicial to the interest of revenue as envisaged under section 263 of the Income Tax Act. Learned Counsel for the Assessee submitted that, the learned PCIT has erred in holding that, the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue on the ground that Other Expenses consisting of Provision for loss allowance of Rs 2.60 Crores, Advances written off of Rs.16,45,000/- and Investments written off of Rs.3 lacs are inadmissible expenditures not added back in the computation of income, without appreciating the fact that, the other expenses under consideration have been apportioned between Tonnage Tax Division and Non Tonnage Division and that no disallowance is required to be made in respect of the amounts allocated to Tonnage Tax Division inasmuch as the income thereof is computed under the Tonnage Tax Scheme in accordance with "Chapter XII G SPECIAL PROVISIONS RELATING TO INCOME OF SHIPPING OF COMPANIES, Section 115V to 115VZC of the Income Tax Act, 1961", which has been duly examined and accepted by the Assessing Officer in the assessment and expenses pertaining to Tonnage Tax Division is not claimed by the Appellant. Further, the learned PCIT has also failed in not appreciating that, the appropriate portion of the Provision for loss allowance working-out to Rs.79,26,329/- apportioned to Non Tonnage Tax Division has already been disallowed by the assessee in the return of income and accepted in the assessment and hence, the Learned Counsel for the Assessee submitted that, there is no error in the assessment order which needs to be considered under section 263 of the Act. He submitted that, the learned PCIT has given similar directions on Advances Written Off working out to Rs.5,01,42/- without appreciating the fact that the said amount was apportioned to Non Tonnage Tax Division pertains to irrecoverable EMD and other advances allowable as deduction, as Bad Debts or u/s 37(1) of the Act, and hence there is no error in the assessment order which needs to be considered under section 263 of the Act. Further, the learned PCIT has erred in not appreciating that the appropriate portion of the Investments Written off working-out to Rs.91,458/- Business investments advances allowable as deduction u/s 37(1) of the Act and apportioned to Non Tonnage Tax Division pertains to irrecoverable Act, and hence there is no error in the assessment order which needs to be considered under section 263 of the Act. The Learned Counsel for the Assessee, therefore, submitted that, the learned PCIT was erred in law and in the facts and circumstances of the case in directing the Assessing Officer to verify the nature of expenses ignoring the evidence on record and also furnished before the PCIT during the proceedings u/s 263. Learned Counsel for the Assessee further submitted that, although, the assessee has furnished bifurcation of the expenses under Tonnage & Non Tonnage schemes, the learned PCIT failed to appreciate the bifurcation of the relevant expenses between Tonnage and Non-Tonnage Tax Divisions which has been done on the basis of respective turnover(s) which is a reasonable and generally accepted basis. He submitted that, the case law relied upon by the learned PCIT are distinguishable on facts and has no relevance to the facts and circumstances of the present case. The Learned Counsel for the Assessee accordingly submitted that, the learned PCIT has erred in setting aside the Assessment Order with directions to the learned Assessing Officer to make a fresh assessment. He submitted that, the Assessing Officer during the course of assessment proceedings had raised specific questions and called for information from the assessee. The assessee has filed it’s submissions in response to the notices issued by the Assessing Officer and after duly verifying and examining the submissions of the assessee, the Assessing Officer was satisfied with the explanation offered by the assessee and, therefore, had not proposed for addition on variations selected in the scrutiny assessment. Further, the learned PCIT was erred in exercising revisionary jurisdiction u/sec.263 of the Act on the ground that, Assessing Officer has not conducted enquiries while accepting the variations. Learned Counsel for the Assessee submitted that, the Assessing Officer after duly examining the break-up/split-up expenses between tonnage and non-tonnage divisions and the ratio of the expenses allocated by the assessee company between tonnage and non-tonnage divisions, has not proposed variations and, therefore, no enquiries were conducted by the Assessing Officer which he ought to have to do as noted by the learned PCIT in the show cause notice, cannot be accepted. He submitted that, the Assessing Officer has examined and verified thoroughly the explanation submitted by the assessee along with supporting documentary evidences and, therefore, the Assessing Officer has taken one of the possible view and as such, the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interests of the Revenue. In support of this contentions, the Learned Counsel for the Assessee has relied upon the Judgment of Hon’ble Supreme Court in the case of PCIT Vs., Sreeji Prints (P) Ltd., [2021] 130 taxmann.com 294 (SC). Learned Counsel for the Assessee, accordingly submitted that, the assessment order passed by the Assessing Officer should be upheld and the order of the learned PCIT should be set-aside in the interest of justice.
10. Ms. U. Mini Chandran, learned CIT-DR for Revenue, on the other hand, strongly relied on the order of the learned PCIT. She submitted that, the case of the assessee company was selected for scrutiny on seven issues i.e., (i). Claim of any Other Amount Allowable as deduction in Schedule BP (ii) Imports (iii) Refund Claim; (iv). ICDS Compliance and Adjustment (v). Foreign Financial Interest (vi). Exports and (vii). Deduction from Total Income under Chapter VI-A. During the course of assessment proceedings, the Assessing Officer has not proposed any variations in respect of tonnage and non tonnage expenses claimed by the assessee and simply accepted the ratio of the expenses claimed by the assessee between the tonnage and non tonnage divisions. Therefore, the learned PCIT has rightly invoked the revisionary jurisdiction u/sec.263 of the Act and called upon the assessee to furnish relevant information with supporting documentary evidences as the assessment order passed by the Assessing Officer is not only erroneous but also prejudicial to the interests of the Revenue and further, the Assessing Officer has not conducted detailed enquiries which he ought to do while accepting the claims of the assessee company. In view of the above facts and circumstances, the learned PCIT has exercised revisionary jurisdiction u/sec.263 of the Act and after considering the relevant submissions furnished by the assessee, directed the Assessing Officer to verify the claim of the assessee under the Head “Provision for Loss Allowance” between tonnage and non-tonnage divisions as the assessee was failed to furnish the basis, on which, such differential bifurcation of expenses are done. Similar directions were given by the learned PCIT in respect of ‘Advances written off’ and “Investments written off” by the assessee company between the tonnage and non-tonnage schemes. Further, the learned PCIT has relied on various Judgments of Hon’ble Supreme Court and various High Courts and the decision of Coordinate Bench of the Tribunal in support of his proposition. Therefore, the learned DR submitted that, the order of the learned PCIT should be upheld.
11. We have heard both the parties, perused the material available on record and had gone through the orders of the authorities below. The learned PCIT set aside the assessment order passed by the A.O. u/s 143(3) r.w.s. 144B of the Income Tax Act, 1961, in terms of provisions of Section 263 of the Act, on the ground that, the assessment order passed by the A.O. is erroneous in so far as prejudicial to the interest of the revenue. The learned PCIT set aside the assessment order on three counts. The first and foremost issue considered by the learned PCIT for the purpose of revision proceedings u/s 263 of the Act is deduction claimed towards provision for loss allowances of Rs.73 lakhs. According to the learned PCIT, the assessee has added back an amount of Rs. 3,31,60,065/- under clause 15 of Schedule BP, which includes CSR and donation expenses of Rs.2,52,31,892/-, interest on taxes of Rs.1,844/- and provisions for loss allowances of Rs.79,26,329/-. Upon verification of relevant facts, it was noticed that the assessee has allocated provision for loss allowances of Rs.2,60,00,000/- to Tonnage Tax Division and Non Tonnage Tax Division and has allocated sum of Rs.79,26,329/- to Non Tonnage Tax Division and added back to total income, even though the total expenditure debited into the profit and loss account was at Rs.2,60,00,000/- and the basis of said allocation has also not been justified. The assessee has explained the method of accounting of provision for loss allowances in terms of IND-AS and explained the total loss to be provided in the books of accounts at Rs.2,60,00,000/- and the same has been apportioned between the Tonnage Tax Division and Non Tonnage Tax Division on the basis of total turnover or income from operations and has allocated sum of Rs.1,80,73,671/- to Tonnage Divison and Rs.79,26,329/- to Non Tonnage Tax Division. Further since the assessee has paid taxes on Tonnage Division, as per the provisions of Section 115 VA of the Act, which includes all expenditure, including provisions for loss allowances, while computing income form business and profession, the assessee added back the sum of Rs.79,26,329/- in the statement of total income towards Non Tonnage Tax Division for provisions for loss allowances and reported in the Schedule 15 of BP. The assessee has been following this method of accounting for allocation of expenses between Tonnage Division and Non Tonnage Tax Division for several years and the same has also not been disputed by the Revenue. Once the assessee has explained the basis of allocation of expenses between Tax Division and Non Tonnage Tax Division, in our considered view, the learned PCIT without assigning any reasons as to how the said method is incorrect and also what is the correct method of allocation of expenditure, simply cannot set aside the assessment order and direct the A.O. to verify the issue. In our considered view, the scope of powers of learned PCIT u/s 263 of the Act, is very clear in as much as unless the learned PCIT makes out a case of erroneous orders passed by the A.O. which caused prejudicial to the interest of Revenue with relevant reasoning, he cannot simply set aside the assessment order for further verification. In our considered view, once the A.O. has considered the issue and has taken a plausible view on any issue on which the learned PCIT may have a different view, but unless the view taken by the A.O. is unsustainable in law, then there is no scope for the learned PCIT to set aside the assessment order on the very same issue without making any observation with regard to the claim made by the assessee. Since the A.O. has considered the issue of allocation expenses between Tonnage Tax Division and Non Tonnage Tax Division in the original assessment proceedings and further, the basis of allocation is one of the plausible views, in our considered view, the reasons given by the learned PCIT to set aside the assessment order on this issue is devoid of merit and cannot be accepted.
12. Coming back to the other two issues considered by the learned PCIT for the purpose of revision proceedings u/s 263 of the Act. The learned PCIT questioned the issue of Advances written off and Investments written off. The assessee has debited Advances written off of Rs.16,45,000/- and Investments written off of Rs.3,00,000/- by debiting into Profit and Loss account. Once again both expenditures have been apportioned between Tonnage Tax Division and Non Tonnage Tax Division on the basis of turnover. The assessee has also explained the basis for debiting the said expenditure as revenue in nature and according to the assessee, these are the advances and EMDs paid to various authorities in the normal course of business of the assessee and same are not recoverable and therefore, treated as irrecoverable advances like bad debts and debited to profit and loss account. The learned PCIT once again discussed the issue in light of provisions of Section 37 of the Act, and held that, only bad debts written off can be allowed as deduction, but not amount written off EMD advance etc., however, failed to give any clear findings as to how the treatment given by the assessee for the above expenditure in the books of accounts is incorrect, which is evident from the order passed by the A.O. where the learned PCIT has directed the A.O. to verify the nature of advances along with bifurcation of such expenses under Tonnage and Non Tonnage Schemes. In our considered view, once again, the learned PCIT has erred in invoking powers u/s 263 of the Act on these issues, because, the assessee has rightly claimed deduction towards Advances written off and Investments written off, as revenue expenditure having noticed the fact that EMDs paid in the normal course of business becomes irrecoverable and also bad debts. Once the advances given in the ordinary course of business becomes irrecoverable, then the same partakes the nature of bad debts and therefore, in our considered view, the assessee has rightly claimed deduction for the said expenditure as revenue in nature. Further, this fact has been explained to the A.O. during the course of assessment proceedings, where the A.O. has issued a specific notice u/s 142(1) of the Act, on these issues for which the assessee has furnished the details. The A.O. after considering the relevant facts has rightly allowed the claim of the assessee. In our considered view, the learned PCIT without making any case for revision of assessment order on this issue, simply set aside the assessment order only for the purpose of verification of the issue, even though the assessee has explained the issues with relevant evidences. Since the view taken by the A.O. on these issues is one of the plausible views, in our considered view, unless the learned PCIT makes out a case that the view taken by the A.O. is unsustainable in law, he cannot set aside the assessment order, in terms of his powers vested u/s 263 of the Act.
13. The assessee relied upon the decision of Hon'ble High Court of Andhra Pradesh in the case of Shares and Scrips Pvt. Ltd Vs. CIT (2013) 354 ITR 35 (A.P) in support of his contentions. The Hon'ble High Court of Andhra Pradesh on the very same issue of revision order passed by the learned PCIT u/s 263 of the Act, in very clear terms held that once, the A.O. having passed the assessment order accepting the case of the assessee that, its income from the sale of shares and mutual funds needs to be taxed under the head “Capital Gains” after satisfying himself with the explanation and details submitted by the assessee, in response to his various queries, the order of the A.O. could not be termed as erroneous or prejudicial to the interest of the revenue, warranting exercise of revisional jurisdiction u/s 263 of the Act, merely because, the learned PCIT entertained a different opinion in the matter, more so when the Revenue has all along accepted that the assessee’s holding shares and mutual funds as investments and not as stock-in-trade. In other words, the Hon'ble High Court very clearly held that, once a view is taken by the A.O. on the issue and further, the said view is one of the plausible views, then there is no scope for the learned PCIT to invoke jurisdiction u/s 263 of the Act on different opinion unless the view taken by the A.O. is unsustainable in law. The relevant observations of the Hon'ble High Court are as under :
“The AO had passed the assessment order accepting the case of the assessee that its income has to be taxed under the head "Capital gain" as he was satisfied with the explanation and data submitted by the assessee vide its letters (to his queries made vide his letters dt. 22nd Jan., 2008, 17th April, 2008 and 4th Aug., 2008), that it is an investment company carrying on business in shares and such investment is made for the sole purpose of deriving dividend income. The correspondence exchanged between the parties shows that the AO raised specific queries about the business activity of the assessee and also its claim of LTCG income from quoted shares, unquoted shares and mutual fund units apart from STCG from sale of shares and mutual fund units. The assessee had also given details of computation of capital gains under various categories. It is settled law that the AO is not called upon to write an elaborate judgment giving detailed reasons. In paras 5 and 5.2 of his order under s. 263, the CIT also held that substantial information had been furnished by the assessee, and at para 5.1 he held that there was application of mind by the AO but the conclusion of the AO is wrong. It may be that in the assessment order, the AO has not made an elaborate discussion on the issue as to the nature of activity of the assessee i.e., whether it is an investment or whether it is business income and did not refer to his query on the issue to the assessee before passing the order or the reply given by the assessee to his query (vide it's letter dt. 29th Aug., 2008). When it is not incumbent on the AO to pass a detailed order, merely because the order does not contain reasons as to why he accepted that the assessee is an investment company, his order does not become susceptible for revision. The AO while making an assessment had examined the accounts, made inquiries, applied his mind to the facts and circumstances of the case and determined the income of the assessee. Therefore, it is not open to the CIT, on the ground that a different view is possible, to reopen the assessment on the ground that the AO did not make an elaborate discussion in that regard.-CIT vs. Vikas Polymers (2010) 236 CTR (Del) 476: (2010) 47 DTR (Del) 348, CIT vs. Sunbeam Auto Ltd. (2009) 227 CTR (Del) 133: (2009) 31 DTR (Del) 1 (2011) 332 ITR 167 (Del) and CIT vs. Gabrial India Ltd. (1993) 114 CTR (Bom) 81: (1993) 203 ITR 108 (Bom) relied on.
(Paras 33 & 34)
Admittedly, the assessee had given full details of these transactions in its letter/reply dt. 29th Aug., 2008 to the AO's letter dt. 4th Aug., 2008, giving details of dates of acquisition of the shares in question and dates of sale of shares. As such this material was available before the AO. In its reply to the revised show-cause notice issued by the CIT also, the assessee had enclosed the list of transactions in relation to the scrips contending that having purchased the shares of certain companies, it had retained them for periods ranging from 1 year 2 months to 3 years 6 months before selling them. A few transactions in relation to some of the scrips demonstrate that the assessee is right in its contention that almost every transaction entered into by it indicated that its dealing in shares was only by way of investment (evidenced by retention of shares for at least 11 months upto 5 years) attracting capital gains tax, and the assumption by the CIT that the shares are held as "stock-in-trade" and its business activity is buying and selling of shares, is incorrect.
(Paras 35 & 36)
One of the reasons assigned by the CIT to base his conclusion that the assessee carried out day trading was the sole instance of the assessee purchasing and selling 500 shares of RI Ltd., on 8th Aug., 2005 i.e., on the same day by squaring the account without taking delivery. This was not pointed out in the original show-cause notice or in the revised show-cause notice specifically. The assessee in its written submissions before the Tribunal sought to explain that this was a solitary transaction which happened by mistake on the part of the broker; that when the assessee was informed of the purchase, it immediately told the broker to cancel the transaction which was done accordingly even though this resulted in a loss of Rs. 1,197; that there was nothing wrong if the assessee had availed the services of three leading brokers for the purpose of investment in shares and that fact has no bearing on the nature of the activity; that more than 90 per cent of the transactions are carried out by one broker who has only NSE Terminal and that for shares listed only on BSE, the transactions are being done with other two brokers; and this sole instance cannot be taken to conclude that the assessee is a trader in shares as other transactions show that the shares were held for a long time after their purchase before being sold.
(Para 39)
The CIT states that the ratio between dividend and profits is 2:40 and arrives at it by comparing the profit earned from buying and selling of shares of Rs. 19,18,77,121 (consisting of LTCG of Rs. 18,98,06,611 + STCG of Rs. 20,70,510) with the dividend income of Rs. 47,19,169. He therefore comes to a conclusion that the dividend income is meager compared to profit on sale of shares. But the figure of Rs. 18,98,06,611 of LTCG taken by the CIT includes the figure of Rs. 5,41,58,133 which is LTCG from sale of mutual fund units. To be fair to the assessee, the respondent should have computed the dividend income from the companies with the LTCG from the sale of quoted shares of Rs. 13,56,48,478 only and if he intended to include LTCG from sale of mutual funds units also, he should have taken into account the income from mutual funds and added it to the dividend income as indicated in para 2 of his order. When it comes to cost of shares for purpose of computation of "capital gains", the CIT takes the cost of the shares at the time of their purchase, but he refuses to look at the date of purchase (to decide whether they are LTCG or STCG) and holds that the purchase and sale is in the same year. This indicates a very disturbing and dishonest intention on the part of the respondent to twist the figures to justify a preconceived conclusion adverse to the assessee.
(Para 40)
The explanation given by the assessee for large volume of sale and purchase of shares in March, 2006 is that by Finance Bill, 2006, presented on 28th Feb., 2006 [w.e.f asst. yr. 2007-08 (i.e., to transactions from 1st April, 2006), LTCG though exempt for normal computation would be chargeable to tax under s. 115JB for book profit tax; that the assessee had entered into transactions in the month of March, 2006 to sell its present holding and to repurchase the same to get high cost of the shares which would save the MAT payable by it in the subsequent year. It is clear that the assessee had only made use of the exemption provision under s. 10(38) and s. 115JB by carrying out transactions in March, 2006 and such use of a provision to get benefit is permissible. The decision in Walfort Shares & Stock Brokers (P) Ltd. squarely applies to the present case and the CIT at para 5.14 of his order erred in applying the ratio in McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148 (SC) and holding that the assessee by taking advantage of its registration as an NBFC is camouflaging its trading activity in shares and units of Mutual Funds and the Tribunal erred in confirming the same. -CIT vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42: (2010) 41 DTR (SC) 233: (2010) 326 ITR 1 (SC) applied.
(Paras 42 & 43)
The CIT did not dispute that the assessee had not borrowed any funds and it had made all the investments with its funds; that the closing stock was valued in its books of account consistently at cost and not at cost or market price whichever is lower; it had earned substantial dividend income amounting to Rs. 3,19,04,901 for asst. yr. 2006-07, Rs. 2,17,25,781 for asst. yr. 2007-08 and Rs. 2,13,38,005 for asst. yr. 2008-09 i.e., more than Rs. 8,00,00,000; that 99 per cent of the total gains are LTCG and less than 1 per cent is STCG; that 40 per cent of investments are in mutual funds; the assessee had never dealt in futures, derivatives and options; that all the transactions of purchase and sale were delivery based except the one solitary instance of RI Ltd. explained above; that the assessee was registered as NBFC with the RBI; and the assessee had never claimed set off of the losses arising from sale of investments against other incomes. Merely because of large frequency and volume of transactions, a conclusion that an assessee is a trader cannot be drawn without considering the period of holding of those shares by the assessee. A trader in shares normally holds them for a short time only, is unlikely to invest in unquoted shares or in mutual funds (which the assessee did); and is likely to borrow funds for its trading activity. The fact that the assessee is monitoring the stock markets and buying at dips and selling at highs with an intention to make profit from these transactions is not conclusive of the fact that the assessee is a trader because even an investor would not buy or sell blindly and take the risk of suffering losses. The fact that the assessee has an administrative set up and incurs considerable administrative expenditure also cannot be a factor to hold that the assessee is a trader because online trading is prevalent today and there is nothing special about the assessee having a few computer terminals or staff to operate them and help it in making the investments. The fact that the assessee is making repetitive purchases and sales of the same shares is a factor in favour of holding that the assessee is an investor as the assessee has explained that this was done due to amendments by Finance Bill, 2006 w.e.f, 1st April, 2006 (asst. yr. 2007-08) to s. 10(38) and s. 115JB. The conclusion of the CIT that the only and sole objective of purchase and sale of shares is to derive profits and not to earn dividend is belied by the admitted fact that the assessee had earned dividends more than Rs. 8,00,00,000 for asst. yr. 2006-07, 2007-08 and 2008-09. It is the total effect of all relevant factors and circumstances that determines the character of the transaction. Admittedly the Revenue had accepted that the assessee was an investor whose income is chargeable under the head "Capital gains" for a number of years from 1999-2000, particularly for the asst. yrs. 2005-06 and 2007-08 i.e. before and after the asst. yr. 2006-07 which is the subject-matter of these proceedings. In view of the above, the CIT cannot under s. 263 interfere on an issue which has been accepted by the Revenue for a number of years particularly when the AO in the assessment order for the asst. yr. 2006-07 takes the same view by terming it erroneous as the CIT is not able to demonstrate a change in circumstances in the said assessment year.-CIT vs. Escorts Ltd. (2011) 51 DTR (Del) 321: (2011) 338 ITR 435 (Del), CIT vs. Darius Pandole (2011) 330 ITR 485 (Bom), CIT vs. Gopal Purohit (2010) 228 CTR (Bom) 582: (2010) 34 DTR (Bom) 52: (2011) 336 ITR 287 (Bom) and Radhasoami Satsang vs. CIT (1991) 100 CTR (SC) 267: (1992) 193 ITR 321 (SC) applied.
(Paras 47, 48 & 50)
The Tribunal could not have upheld the action of the CIT under s. 263 on a ground different from what has been mentioned in the notice under s. 263 or the order of the CIT under s. 263. In the present case, the CIT had held that the AO had applied his mind but has come to an erroneous conclusion at para 5.1 of his order dt. 31st March, 2011. The Tribunal at para 34 of its order held that the assessment order was passed without proper examination or inquiry or verification or objective consideration of the claim made by the assessee and hence, the CIT was justified in revising the order. This is clearly impermissible.-Jagadhri Electric Supply & Industrial Co. (1981) 25 CTR (P&H) 94: (1983) 140 ITR 490 (P&H) and CIT vs. Howrah Flour Mills Ltd. (1999) 155 CTR (Cal) 353: (1999) 236 ITR 156 (Cal) relied on.
(Para 51)
The contention of the Revenue that the AO had not applied his mind to the material on record cannot be accepted because the CIT in his order specifically records a finding that there is application of mind by the AO. The Revenue cannot raise a plea which is not contained in the order of the CIT and is contrary to it and to the record. The contention of the Revenue that there are no reasons given by the AO about the nature of activity of the assessee cannot be accepted because a query was raised by him in the course of the assessment proceedings and was replied by the assessee. Obviously, he was satisfied with the explanation of the assessee and therefore did not think that the issue needs to be specifically mentioned. It is settled law that the AO in the assessment order is not required to give detailed reasons and once it is clear that there was application of mind by an enquiry, the CIT, merely because he entertains a different opinion in the matter, cannot invoke his powers under s. 263. It is therefore not correct to say that there was no proper enquiry by the AO.-P.V.S. Raju & Ors. vs. Addl. CIT (2012) 247 CTR (AP) 583: (2012) 67 DTR (AP) 272: (2012) 340 ITR 75 (AP) distinguished.
(Para 59)
The AO had not only taken a possible view but in the circumstances the only view possible and therefore his order could not have been termed as erroneous or prejudicial to the Revenue warranting exercise of revisional jurisdiction under s. 263 by the CIT. The CIT had no different or new material to take different view from the one taken by the AO and the reasons given by him to reopen the assessment and sustain the revision are totally unacceptable. The CIT is not vested with any power under s. 263 to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. The Tribunal had grossly erred in agreeing with the order of the CIT and in upholding it on grounds which have not been found in the show-cause notice of the CIT, that too without considering the several issues of fact and law raised by the assessee in his written submissions and grounds of appeal. For the above reasons, the order of the CIT and the order of the Tribunal are set aside and the order of the AO is restored.
(Paras 61 & 63)”
14. In this view of the matter and by respectfully following the decision of Hon'ble High Court of Andhra Pradesh in the case of Spectra Shares and Scrips Pvt. Ltd Vs. CIT (supra), we are of the considered view that, the assessment order passed by the A.O. is neither erroneous nor prejudicial to the interests of revenue. The learned PCIT without appreciating relevant facts, simply set aside the assessment order passed by the A.O. Thus, we quashed the revision order passed by the learned PCIT u/s 263 of the Act, and restore the assessment order passed by the A.O. u/s 143(3) r.w.s. 144B of the Income Tax Act, 1961, dated 22.09.2022.
15. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the Open Court on 7th November, 2025.
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