Before Passing an Order Under Section 263 Principal Commissioner or Commissioner of Income Tax Has to make His/Her Own Enquiry

In the case of Pr.CIT, New Delhi v. Delhi Airport Metro Express Pvt.Ltd. [ITA No. 705/2017, decided on 5-9-2017]  the Commissioner  opined that assessing officer allowed depreciation in excess of what was assessing officer  to make fresh assessment. The Delhi High Court held that for the purpose of exercising jurisdiction under section 263 of the Act, the conclusioin that the order of the assessing  officer is erroneous and prejudicial to the interests of the Revenue has to be preceded  by some minimal inquiry. That basic exercise of determining as to what extent the depreciation was claimed in excess has not been undertaken by the Pr. CIT. He had exercised the second option available to him under section 263(1) of the Act by sending the entire matter back to the assessing officer for a fresh assessment. That option, in the considered view of the Court,can be exercised only after the Pr. CIT undertakes an inquiry himself. The   High Court held that revision was not justified.The learned author discusses the case in detail.      

  1. Introduction

            Subject to it’s Explanations, section 263(1) of the Income Tax Act,1961 (‘Act’) states that the principal Commissioner may call for and examine the record of any proceeding under the Act, ad if he considers that any order passed therein by the assessing officer is  erroneous  on so far as it is prejudicial to the interests of the revenue, he may after giving the assessee an opportunity    of being heard and after such order thereon as the case justify, including  an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

            More recently, in Pr. CIT, New Delhi  v. Delhi Airport Metro Express pvt.Ltd. [ITA No. 705/2017, decided on 5-9-2017], the short question  raised by  the Revenue was whether the ITAT was justified in setting aside the order  of the Principle Commissioner  of Income Tax  (‘Pr. CIT’)  passed  under  section 263  of the Act  in  respect of assessment year 2011-12 setting aside the original assessment order  dated 31-12-2013 passed by the Assessing Officer  (‘AO’) under section 143(3) of the Act.

2. Facts of the case

            The brief  facts in the above –mentioned case were that the assessee being a concessionaire of the Airport Metro Express Project of the  Delhi Metro Rail Corporation  Ltd.  (‘DMRC’) under a Build-Operate-Transfer (‘BOT’)  Scheme, had accepted the concession  for a period of 30 years During the assessment year in   question, the assessee claimed depreciation of Rs.112,29,74,447, on fixed assets  of Rs.15,60,48,17,189 50% of the eligible depreciation rates since, during the assessment year in question, the assets were used  for less than 180 days. The assessing officer framed the assessment under section 143(3) of the Act allowing depreciation as claimed by the assessee.

           The case of the revenue was that the assets were developed under the BOT scheme and  the assessee was not eligible to claim depreciation as it was not the owner of the assets. The Revenue contended that the land for the project was handed over by the DMRC to the assessee  as Concessionaire  of the  basic structure was also done by the DMRC.

          The case of the assessee was that during the assessment year in question it had purchased and installed plant and machinery and such plant and machinery was legally owned by it. It was further contended that since such assets were used for the purpose assessee’s business,it was entitled  to claim depreciation under section  32 of the Act.

          The Pr. CIT, in exercise of powers under section 263 of the Act issued a show cause notice (SCN)  dated 16-3-2015  to the assessee pointing out that if the value of  these fixed assets  were to be amortized evenly over a period of 30 years, the amount  of to be amortized  would only be Rs.52,01,60,572 for each year. Therefore, the depreciation allowed to the assessee was in excess by Rs. 60,28,13,875 and, to that  extent, the order passed by the assessing officer  was prejudicial to the interest of the Revenue. In reply to the SCN, the assessee took the stand that, interest of the Revenue. In reply to the SCN, the assessee took the stand that, during the assessment year in question, it “had purchased the assets from independent vendors, out of its own funds for settings up the project.

           Thereafter, order dated 30-3-2016 was passed by the Pr. CIT.

3. Thus held the court

             The learned Judges of the Delhi High Court observed that for the purpose of exercising jurisdiction under section 263 of the Act, the conclusion that the order of the assessing officer is erroneous and prejudicial to the interests of the assessing officer is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimum inquiry. In fact, if the Pr. CIT was of the view that the AO did no undertake any inquiry, it became incumbent on the Pr.  CIT to conduct such inquiry. All that Pr.  CIT had done in the order was to refer to the Circular of the CBDT and conclude that “in the case of the assessee company, the assessing  officer  was duty bound to calculate  and  allow  depreciation  on the BOT in conformity of the CBDT Circular No. 9/2014 but the  assessing  officer is  erroneous insofar  as prejudicial  to the interest of revenue”. In the considered view of the Court,this  can hardly constitute jurisdiction  under section 263 of the Act. In the context of the  present case depreciation on assets like land  and building, it was  incumbent upon the purchased and installed by the assessee out of its own funds during the assessment year in question and, which were those assets that were handed over to it by the DMRC. That basic exercise of  the determining as to what extent the depreciation was claimed in excess has not been undertaken by the Pr. CIT. He had exercised the second option available ro him under section 263(1) of the Act by sending the entire matter back to the assessing officer for a fresh assessment.  That option, in the considered view of the Court, can be exercised only ofter the  Pr. CIT undertakes an inquiry himself in the manner indicated hereinbefore. That was missing in the present case.

           Finally, the Delhi High Court held, in respect of the appeal, that the ITAT was not in error in setting aside the order  of the Pr. CIT under section  263 of the Act, no substantial question of law arose herein.