Income Tax Act | Kerala High Court: Revisional Power Under Section 263 Not Attracted When AO Allows Section 32AC Deduction After Proper Inquiry
Isabella Mariam
The High Court of Kerala, Division Bench of Justice A. Muhamed Mustaque and Justice Harisankar V. Menon held that the revisional power under Section 263 of the Income Tax Act cannot be exercised when the Assessing Officer has granted deduction under Section 32AC after conducting a proper inquiry. The Court set aside the order of the Income Tax Appellate Tribunal which had affirmed the Principal Commissioner’s decision to revise the assessment, observing that the Assessing Officer had duly examined the assessee’s claim relating to investment in new plant and machinery. The Bench directed the Principal Commissioner of Income Tax to reconsider the issue afresh in accordance with law, after providing the assessee an effective opportunity of hearing.
The matter arises from an income tax appeal filed by an assessee-company challenging the initiation of suo motu revision proceedings under Section 263 of the Income Tax Act, 1961. The assessee had claimed deduction under Section 32AC for new assets acquired and installed during the financial year 2013–14 relevant to Assessment Year 2014–15. It asserted that the Assessing Officer (AO) had raised queries during the assessment proceedings, including questions regarding the eligibility of the claim. In response, the assessee submitted letters dated 12.12.2017 and 15.12.2017 furnishing clarifications and details of investments.
The AO accepted the assessee’s explanation and completed the assessment on 23.10.2018. Subsequently, the Principal Commissioner invoked Section 263 on the ground that a major portion of the assets on which deduction was claimed had been purchased prior to 01.04.2013, making the AO's order erroneous and prejudicial to the interests of the Revenue. He passed an order on 29.03.2021 setting aside the assessment for de novo consideration. The assessee’s appeal before the Tribunal challenging the revision order was dismissed on 10.05.2024.
The assessee contended before the High Court that the AO had conducted inquiries and accepted its explanation, and therefore Section 263 was improperly invoked. It relied on the proviso to Section 32AC(1A), which allows extension of benefits with reference to the year of installation. The Revenue maintained that the AO failed to properly examine the purchase dates and therefore the order warranted revision.
The statutory dispute centred on whether the AO had in fact made adequate inquiries regarding the assessee’s entitlement under Section 32AC and whether the Commissioner’s exercise of revisional power was justified based on alleged erroneous assumptions and lack of inquiry. The matter required the Court to assess both the scope of Section 263 and the extent of AO’s inquiry as evidenced by the record.
The Court recorded: “A perusal of Annexure C clarification provided by the assessee, upon which much reliance is placed by it, shows that the assessee was required to provide clarifications as regards its claim under section 32AC of the Act by AO and that the assessee has provided the same also with specific reference to the statute and the investments made by it.”
It was further stated that the revisional authority’s power arises only when the assessment order is both erroneous and prejudicial to the interests of the revenue: “The question of exercising the suo moto revisional power under Section 263 of the Act arises only when the order is both ‘erroneous’ and ‘prejudicial to the interests of the revenue’.”
The Bench referred to the basis on which the Principal Commissioner acted and the relevance of the statutory provision: “The suo motu steps have been initiated, as noticed earlier, since a major portion of the purchases entitling the deduction were made prior to the cut-off date (01.04.2013). However, the proviso to Section 32AC(1A) of the Act provided for extension of the benefits with reference to the year in which the ‘installation’ has taken place of the assets, as rightly contended by the learned senior counsel for the assessee.”
The Court stated that there was evidence of inquiry and verification by the Assessing Officer: “On the face of the afore provisions and the explanations provided by the assessee to the AO as borne out of the letter dated 12.12.2017 (Annexure C), we are of the opinion that it cannot be said that there was no inquiry/verification by the AO before he passed the assessment order dated 23-10-2018.”
Referring to the Supreme Court decision in Principal Commissioner of Income-Tax v. V-con Integrated Solutions Pvt. Ltd., the Bench quoted: “Once the Assessing Officer carries out the investigation but does not make any addition, it can be taken that he accepts the plea and stand of the assessee.”
The Court then recorded: “Thus, merely for the reason that AO extended the deduction claimed after carrying out investigations, exercise of the power under Section 263 of the Act is not required. At worst, the revisional authority can correct the error, if any, committed by the AO, by holding that the extension of the benefit of deduction was erroneous, with reference to the purchase of the assets during the previous years. The authority could also consider the issue as to the applicability of the proviso to Section 32AC(1A), introduced by the Finance Act, 2016, with only a prospective effect, as not applicable for the year under assessment.”
Finally, the Court held that the Tribunal erred in affirming the revision and concluded: “we are of the opinion that the matter requires to be remitted to the respondent (revisional authority) for de novo disposal.”
The Court ordered: “Resultantly, this appeal would stand allowed by setting aside the impugned order of the Tribunal and remitting the matter to the respondent/Principal Commissioner of Income Tax, for fresh disposal in accordance with law, after affording the assessee an effective opportunity of being heard.”
Advocates Representing The Parties
For the Petitioners: Shri Abraham Joseph Markos, Sri V. Abraham Markos, Sri Isaac Thomas, Shri Alexander Joseph Markos, Shri John Vithayathil, Sri P.G. Chandapillai Abraham.
For the Respondents: Sri Jose Joseph, Standing Counsel.
Case Title: M/s Apollo Tyres Ltd. v. Principal Commissioner of Income Tax
Neutral Citation: 2025: KER:82228
Case Number: ITA No. 63 of 2024
Bench: Justice A. Muhamed Mustaque, Justice Harisankar V. Menon
