2017 (4) TMI 1384 - AT - Income Tax

Revision u/s 263 - an order which is erroneous and prejudicial to the interests - The PCIT was of the view that subsidy received after start of production is revenue in nature. He also observed the subsidy received by the assessee was nothing but contractual receipt towards supply of chemical compound hence should have been treated as revenue receipt forming part of operating profit of the assessee. - He observed even if the subsidy from Kureha Corporation Japan is treated as capital in nature it should have been adjusted firstly from block of assets having higher rate of depreciation rather than the block having depreciation rate of 35% or proportionate adjustment should have been made. He observed if the capital subsidy would have been adjusted against the block of assets higher rate of depreciation the depreciation available to the assessee would be substantially less than what is claimed by the assessee. Held that - In our view the direction of the revisional authority to start a fresh enquiry is in the nature of roving and fishing enquiry without having any specific material before him. Though the revisional authority has alleged that the Assessing Officer failed to make any enquiry neither he himself has made any enquiry on the basis of material on record to point out the specific error committed by the Assessing Officer nor has mentioned the nature of enquiry to be conducted by the Assessing Officer and what more documents and details are required to be called for considering the fact that all documents and details relating to subsidy are already available on record. Therefore on over all consideration of facts and circumstances of this case we are of the view that the assessment order cannot be held to be erroneous and prejudicial to the interests of Revenue hence PCIT was unjustified in exercising power under section 263 for revising the assessment order. - Order u/s 263 set aside - Decided in favor of assessee.

Summary

Issues Involved:
1. Validity of the assumption of jurisdiction under section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT).
2. Nature and taxability of the capital subsidy received by the assessee from Kureha Corporation, Japan.
3. Adequacy of the enquiry conducted by the Assessing Officer (AO) during the assessment proceedings.
4. Compliance with the principles of natural justice by the PCIT.

Issue-wise Detailed Analysis:

1. Validity of the assumption of jurisdiction under section 263 of the Income Tax Act by the PCIT:
The PCIT assumed jurisdiction under section 263, arguing that the assessment order was erroneous and prejudicial to the interests of the Revenue because the AO did not properly examine the nature and taxability of the capital subsidy received by the assessee from Kureha Corporation, Japan. The PCIT believed that the AO failed to consider whether the subsidy should be treated as a revenue receipt forming part of the operating profit of the assessee.

2. Nature and taxability of the capital subsidy received by the assessee from Kureha Corporation, Japan:
The assessee received a capital subsidy of Rs. 29.78 crore from Kureha Corporation, Japan, out of which Rs. 8,33,12,691 pertained to the impugned assessment year. The assessee treated this subsidy as a capital receipt and reduced it from the computation of income. The PCIT, however, argued that as per the decision of the Hon'ble Supreme Court in Sahney Steel and Press Works Ltd. v/s CIT, subsidy received after the start of production is revenue in nature. The PCIT further contended that the subsidy was essentially a contractual receipt towards the supply of chemical compounds and should have been treated as a revenue receipt.

3. Adequacy of the enquiry conducted by the AO during the assessment proceedings:
The assessee contended that the AO had thoroughly examined the nature of the subsidy during the assessment proceedings. The AO had made specific enquiries regarding the subsidy and its accounting treatment, and the assessee had provided detailed submissions and supporting evidence. The AO, after considering the facts and materials on record, accepted the assessee's claim that the subsidy was capital in nature and completed the assessment accordingly. The Tribunal noted that the AO referred to the assessee's letter dated 18th November 2013 in the assessment order, which contained exhaustive submissions on the nature of the subsidy.

4. Compliance with the principles of natural justice by the PCIT:
The assessee argued that the PCIT introduced a new issue regarding the claim of depreciation without providing an opportunity to the assessee to respond, thereby violating the principles of natural justice. The Tribunal observed that the PCIT should have conducted necessary enquiries or verification to show that the AO's finding was erroneous or unsustainable in law. The Tribunal emphasized that the insertion of Explanation-2 to section 263 does not give unbridled power to the revisional authority to revise any order merely on the reasoning that the AO did not carry out the enquiry which he should have made.

Conclusion:
The Tribunal concluded that the AO had made proper enquiries and examined the nature and character of the subsidy received by the assessee during the assessment proceedings. The Tribunal held that the view taken by the AO to treat the subsidy as capital in nature was a possible view, and therefore, the PCIT was not justified in exercising power under section 263 to revise the assessment order. The Tribunal set aside the impugned order passed by the PCIT and restored the assessment order. The assessee's appeal was allowed.