2025 (7) TMI 444 - AT - Income Tax

Revision u/s 263 on excess set-off of brought forward unabsorbed depreciation losses allowed - scope of term erroneous - as per CIT AO erred allowing excess set-off of brought forward unabsorbed depreciation losses in the assessment framed under section 143(3) r.w.s. 144B for A.Y. 2020 21 - HELD THAT - The basis for the PCIT s invocation of section 263 is the alleged mechanical allowance of Rs. 48.03 crore of depreciation loss out of which Rs. 31.80 crore purportedly pertains to A.Ys. 2016 17 and 2017 18 years in which depreciation on goodwill had already been disallowed and therefore not eligible for carry forward. Computation portion of the assessment order demonstrates that the AO allowed set-off only to the extent of Rs. 16.38 crore which as per the records pertains to unabsorbed depreciation of A.Y. 2018 19 post set-off of Rs. 2.31 crore in A.Y. 2019 20. This figure has been consistently explained and substantiated by the assessee both during the assessment proceedings (reply dated 14.09.2022) and in its response to the PCIT (reply dated 19.03.2025). In this context it is necessary to reiterate that an assessment order cannot be termed erroneous merely because the PCIT forms a different opinion based on a reading of the return of income or its schedules. As held by the Hon ble Supreme Court in CIT v. Max India Ltd. 2007 (11) TMI 12 - SUPREME COURT and Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT two conditions must co-exist for invoking jurisdiction under section 263 (i) the assessment order must be erroneous and (ii) such error must be prejudicial to the interest of Revenue. The absence of either renders the assumption of jurisdiction invalid. In the present case the record clearly evidences that the AO had conducted detailed inquiries. Notices under section 143(2) and 142(1) were issued on multiple occasions and the assessee s replies as explained the workings of unabsorbed depreciation and details of claim under section 80IBA. AO not only disallowed depreciation on goodwill but also correctly allowed set-off of Rs. 16.38 crore which was eligible under law. Thus the assessment order is a result of conscious examination and application of mind. The finding of the PCIT that the AO failed to verify the availability of brought forward depreciation losses and also failed to verify the details of deduction u/s 80IBA is factually unsustainable and legally untenable. Further the record reveals that prior to the issuance of the 263 notice AO had already issued a notice under section 154 proposing to rectify the very same issue i.e. the alleged excess set-off of depreciation loss. In the said notice the AO computed the excess allowance at Rs. 31.80 crore and resultant tax impact at Rs. 14.81 crore. The fact that the AO himself considered this matter under the rectification jurisdiction of section 154 belies the PCIT s assumption that there was non-application of mind or lack of inquiry. The initiation of section 154 proceedings by the AO is itself a recognition of the fact that the issue is a matter of record-based computation and was consciously considered in the assessment. The pendency of such rectification proceedings prior in time to the 263 proceedings renders the PCIT s assumption of jurisdiction unsustainable. PCIT has failed to establish how the order is prejudicial to the interest of the Revenue. The allegation of prejudice is based entirely on a presumed excess set-off a presumption not borne out from the assessment record. Once this factual premise is demolished the question of prejudice does not arise. The mere possibility of a computational inaccuracy or clerical inconsistency in ITR cannot be the basis for invoking drastic powers under section 263. Appeal filed by the assessee is allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary jurisdiction under section 263 of the Income Tax Act, 1961, on the ground that the assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interests of the Revenue.

2. Whether the PCIT erred in setting aside the assessment order to conduct fresh inquiry on an issue not covered by the show cause notice under section 263.

3. Whether the issue raised by the PCIT was properly the subject matter of revision under section 263 or should have been dealt with under rectification proceedings under section 154 of the Act.

4. Whether the AO had applied his mind and conducted a detailed inquiry before allowing the set-off of unabsorbed depreciation losses, and whether the assessment order was a result of conscious examination or a mechanical allowance.

5. Whether the PCIT's assumption of jurisdiction was based on a correct factual premise, particularly regarding the quantum of depreciation loss allowed as set-off by the AO.

6. Whether the PCIT established the mandatory condition of prejudice to the interests of Revenue necessary to invoke section 263.

Issue-wise Detailed Analysis

1. Validity of invoking revisionary jurisdiction under section 263

The legal framework requires that for the PCIT to invoke revisionary jurisdiction under section 263, the assessment order must be both erroneous and prejudicial to the interests of the Revenue. This principle is well established by Supreme Court precedents, including CIT v. Max India Ltd. and Malabar Industrial Co. Ltd.

The PCIT's order was based on the premise that the AO had mechanically allowed set-off of Rs. 48.03 crore of brought forward unabsorbed depreciation losses, which included disallowed depreciation on goodwill from earlier years (A.Y. 2016-17 and 2017-18), resulting in an excess set-off of Rs. 31.80 crore and consequent under-assessment of income.

However, the Court's examination of the assessment order revealed that the AO had disallowed depreciation on goodwill amounting to Rs. 14.87 crore and allowed set-off of only Rs. 16.38 crore of unabsorbed depreciation losses pertaining solely to A.Y. 2018-19. The computation of income under normal provisions explicitly reflected this figure.

The assessee had also submitted detailed replies during the assessment proceedings and in response to the PCIT's show cause notice, clarifying the correct quantum of set-off allowed and denying any carry forward of depreciation losses from the disallowed years.

Therefore, the Court found that the foundational assumption of the PCIT-that the AO allowed the full claimed amount of Rs. 48.03 crore-was factually incorrect.

Applying the law to these facts, the Court held that the assessment order was not erroneous as the AO had applied his mind, conducted detailed inquiries, and disallowed depreciation on goodwill while allowing only the eligible set-off. Hence, the mandatory condition of error was not satisfied.

2. Prejudice to the interests of Revenue

The PCIT's allegation of prejudice was solely based on the presumption of excess set-off of depreciation losses. Since the factual basis for this presumption was disproved by the assessment record, the Court held that the question of prejudice does not arise.

The Court emphasized that mere clerical inconsistencies or computational variances in the Income Tax Return (ITR) schedules cannot justify invoking the drastic powers under section 263.

3. Treatment of the issue under section 154 versus section 263

Before the PCIT issued the revisionary order under section 263, the AO had already initiated rectification proceedings under section 154 on the same issue of alleged excess set-off of depreciation losses. The AO's section 154 notice computed the excess allowance and the resultant tax impact, and the assessee had objected to the proposed rectification on the ground that the issue was debatable and pending before the Tribunal.

The Court noted that the AO's initiation of rectification proceedings demonstrated that the AO had applied his mind to the issue and recognized it as a matter of record-based computation rather than an error warranting revision under section 263.

It is settled law that section 263 cannot be invoked to substitute the opinion of the PCIT for that of the AO where two views are possible, especially when rectification under section 154 is available and pending.

Therefore, the Court held that the PCIT's exercise of revisionary jurisdiction was impermissible in the presence of ongoing rectification proceedings and amounted to substitution of opinion.

4. Adequacy of AO's inquiry and application of mind

The AO had issued multiple notices under sections 143(2) and 142(1) and received detailed written submissions from the assessee explaining the depreciation claims, set-off of brought forward losses, and deductions under section 80IBA.

The assessment order recorded the disallowance of depreciation on goodwill and the allowance of set-off of unabsorbed depreciation losses strictly limited to the eligible amount from A.Y. 2018-19.

The Court found that the AO had conducted a conscious and detailed examination of all material facts and submissions, negating the PCIT's allegation of mechanical allowance or non-application of mind.

5. Treatment of competing arguments

The PCIT relied primarily on the figures disclosed in the ITR and Schedule UD without cross-verifying the actual computations in the assessment order. The Court found this reliance misplaced, as the assessment order's computation is the authoritative record reflecting the AO's considered view.

The assessee's argument that the PCIT's assumption was based on an incorrect factual premise was accepted by the Court.

The Departmental Representative conceded that no final rectification order under section 154 had been passed as of the hearing date, further weakening the PCIT's position.

6. Conclusions on the core issues

The Court concluded that:

• The AO's assessment order was neither erroneous nor prejudicial to the interests of Revenue.
• The PCIT's assumption of jurisdiction under section 263 was based on a flawed factual premise and was legally impermissible.
• The AO had applied his mind and conducted detailed inquiries before allowing the set-off of unabsorbed depreciation losses.
• The issue was already the subject matter of rectification proceedings under section 154, which should be independently adjudicated.
• The revisionary order under section 263 was unsustainable and liable to be quashed.

Significant Holdings

"An assessment order cannot be termed 'erroneous' merely because the Principal Commissioner of Income Tax forms a different opinion based on a reading of the return of income or its schedules."

"Two conditions must co-exist for invoking jurisdiction under section 263: (i) the assessment order must be erroneous, and (ii) such error must be prejudicial to the interest of Revenue."

"The initiation of section 154 proceedings by the Assessing Officer is itself a recognition of the fact that the issue is a matter of record-based computation and was consciously considered in the assessment."

"Revisionary powers under section 263 cannot be exercised to substitute the opinion of the PCIT for that of the AO where two views are possible."

"Mere clerical reflection of incorrect carry-forward in the Income Tax Return does not lead to an automatic presumption of allowance, particularly when the AO has consciously acted upon verified figures."

"The absence of either error or prejudice renders the assumption of jurisdiction under section 263 invalid."

The final determination was that the revisionary order passed under section 263 was quashed, and the assessment order was upheld as valid. However, this did not affect the independent adjudication of the rectification proceedings under section 154, which remained to be decided on their own merits.