Can AO’s order be termed as erroneous and prejudicial u/s 263 if the assessee has stated transactions are not allowable for deduction but AO has allowed such deductions?
Case: EMDEE DIGITRONICS PVT LTD vs PR. COMMISSIONER OF INCOME TAX-4, ITAT KOLKATA
- The assessee’s return of income was passed on for reassessment u/s 143(2).
- After the assessment, the AO passed an order u/s 143(3) of the Income Tax Act, 1961 in favour of assessee.
- The PCIT revised the order passed by AO by exercising his jurisdiction u/s 263 of the Act.
The assessee had admitted the liability in the assessment order and had debited expenditure under the head Interest on delayed payment of VAT, Service Tax and TDS. These expenses are penal in nature and they should not be deducted u/s 37(1) of the Act. Therefore, the order passed by the AO was erroneous and prejudicial in nature.
The order passed by the AO was neither erroneous and nor prejudicial to the interest of the Revenue as interest on TDS, service tax and VAT is allowable expenditure under section 37(1) of the Act.
- If expenses are allowable under the Act then these cannot be disallowed merely because the assessee had admitted to them.
- It was abundantly clear that interest on late deposit of VAT, service tax, TDS etc. was allowable expenditure under section 37(1) of the Act.
- The word “erroneous” in section 263 includes the failure to make an enquiry and not if there is anything wrong with the order when all the facts stated therein are assumed to be correct.
Because of all the reasons above, the order passed by the assessing officer u/s 143(3), was neither erroneous and nor prejudicial to the interest of Revenue and could not be held to be unsustainable in law.
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