The Madras High Court recently reiterated that the revision powers conferred on the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act cannot be invoked only on account of a change in opinion if the assessment order has been passed after due application of mind (M/s.Virtusa Consulting Services Pvt. Ltd. v. The Deputy Commissioner of Income-tax, Income Tax, Chennai).
A Bench of Justices TS Sivagnanam and RN Manjula observed that the twin conditions of (i) the assessing officer having committed an error in assessment and (ii) the erroneous decision being prejudicial to the interest of revenue, as laid down under Section 263, must be satisfied.
“It is settled legal position that for invoking the power under Section 263 of the Act, the twin conditions are to be cumulatively satisfied, viz., the assessment order should be erroneous and the assessment order should be prejudicial to the interest of Revenue,” said the judgment.
If any one of these two limbs is absent, the power conferred on the PCIT under Section 263 of the Act, cannot be invoked, the Court observed.
“If there is material to show that the Assessing Officer did apply his mind to the said issue and then arrived at the permissible deduction under Section 10A of the Act, the order passed by the Assessing Officer cannot be branded as being ‘erroneous’ and if the power under Section 263 of the Act could not have been invoked solely for the reason that the assessment order is prejudicial to the interest of Revenue,” the Bench explained.
Coupled with this, the Court recalled that in Kumar Rajaram vs. Income-tax Officer, the Court had considered the scope of Section 263 of the Act and opined that revision powers could not be exercised in that case given that it was invoked “on account of mere change of opinion.”
The Bench made these observations while allowing an appeal moved by a software development company, M/s.Virtusa Consulting Services Pvt. Ltd. (assessee).
The case stemmed from an income tax return submitted by the assessee in 2010, which was selected for scrutiny. The assessing officer concluded that deductions claimed by the assessee under Section 10A of the Income Tax Act were wrongly computed and a rectification order was passed in 2014.
In 2016, however, the PCIT issued notice invoking Section 263, IT Act and, eventually set aside the 2014 order insofar as the deductions claimed under Section 10A was concerned.
The PCIT claimed that the assessment order was erroneous and prejudicial to Revenue. Inter alia, it was also claimed that no separate books of account were maintained with respect to 10A units and non-10A units.
An appeal challenging the 2016 revision order was dismissed by the Income Tax Appellate Tribunal (ITAT), Chennai in 2017.
On appeal, the High Court found that the PCIT’s order was erroneous for the following reasons:-
- The assessment order passed under Section 143(3) of the Act indicated that the Assessing Officer did conduct an enquiry, called for details, the details were produced and thereafter, the assessment was completed. Therefore, the finding of the PCIT that no enquiry was conducted is erroneous. Consequently, the assumption of jurisdiction under Section 263 of the Act was not sustainable.
- The Assessing Officer had applied his mind to arrive at the deduction as made by him in his 2014 order. Therefore, the PCIT committed an error in holding that the assessment order is erroneous.
- The Assessing Officer completed the assessment based on the materials and documents placed before him and there is nothing to suggest that the conclusion arrived at by him was unsustainable in law, justifying invoking the revisional jurisdiction under Section 263 of the Act
- There is no discussion and finding with regard to the exercise of jurisdiction under Section 263 in the order passed by the PCIT.
- The issue whether it is mandatory for the assesse to maintain separate books of accounts was also not decided by the PCIT. If according to the PCIT, it is mandatory to maintain separate books of accounts, the alternate submission made by the assesse that they have maintained separate profit and loss account and the same was submitted to the Assessing Officer, who has considered the same and then completed the assessment, was not dealt with or discussed.
- In terms of a clarification issued by the CBDT by Circular No.1/2013, dated January 17, 2013, there is no requirement to maintain separate books of account. This circular and subsequent directions calling for compliance with this circular are binding on the Department. Therefore, the conclusion of the PCIT that it is necessary to maintain separate books of account is not sustainable.
Having made these observations, the Court proceeded to fault the ITAT as well in upholding the PCIT’s order.
“The Tribunal while testing the correctness of the order passed by the PCIT has also not dealt with the issues, which were specifically pleaded by the assesse. Therefore, we are to necessarily hold that the order passed by the Tribunal is also erroneous,” the Court said.
In view of these findings, the Court allowed the appeal and ruled that the ITAT had erred in not interfering with the order passed by the PCIT.
Advocate Kamal Sawhney, assisted by Advocate Prashant Meharchandani, for Advocate-on-Record NV Balaji appeared for the appellant/assesse. Senior Standing Counsel R Hemalatha appeared for the Revenue authority.