Facts of the Case

The assessee, Wardha Solar (Maharashtra) Private Limited, filed its return of income for Assessment Year 2020-21 declaring Nil income. The case was selected for complete scrutiny under CASS. The assessment was completed under Section 143(3) on 13.09.2022 at Nil income after making disallowances aggregating to ₹6.32 crore on account of interest under Section 36(1)(iii) and carbon credit, which were set off against losses.

Subsequently, the Principal Commissioner of Income Tax, Ahmedabad-3 examined the assessment records and noted that the assessee had debited ₹57.02 crore as “Exceptional Items” in the profit and loss account. These items related to one-time expenses incurred on refinancing of earlier borrowings, including prepayment charges, unamortised borrowing costs and costs of premature termination of derivative contracts, as explained in Note 46 of the audited financial statements.

The PCIT held that the Assessing Officer had not examined the allowability of this exceptional claim and invoked revisionary jurisdiction under Section 263, setting aside the assessment and directing the AO to pass a fresh order after examination.

Issues Involved

Whether the assessment order was erroneous and prejudicial to the interests of the Revenue due to lack of enquiry into the claim of exceptional items of ₹57.02 crore, whether Explanation 2 to Section 263 was applicable, and whether the PCIT could direct enquiry into issues not forming part of the show cause notice under Section 263.

Petitioner’s Arguments

The assessee contended that the exceptional items represented allowable business expenditure incurred on refinancing of borrowings and were fully explained in the audited accounts. It was argued that the expenses were genuine and revenue in nature. The assessee, however, fairly conceded that the Assessing Officer had not specifically examined this claim during assessment proceedings.

The assessee further argued that the PCIT exceeded jurisdiction by directing examination of alleged losses which were not part of the show cause notice issued under Section 263.

Respondent’s Arguments

The Revenue submitted that the case was selected for complete scrutiny and that a substantial claim of ₹57.02 crore made for the first time required detailed examination. Since the Assessing Officer failed to make any enquiry on this issue, the assessment order was erroneous and prejudicial to the interests of the Revenue. The Revenue supported invocation of Explanation 2 to Section 263.

Court Order / Findings

The ITAT Ahmedabad observed that the assessee had claimed deduction of ₹57.02 crore as exceptional items for the first time during the year and that the nature of the expenditure was extraordinary, arising from refinancing of borrowings. The Tribunal held that the Assessing Officer ought to have examined the allowability of such a significant and one-time claim by making appropriate enquiries.

The Tribunal held that in the absence of such enquiry, the assessment order was deemed to be erroneous and prejudicial to the interests of the Revenue in terms of Explanation 2 to Section 263. Accordingly, invocation of revisionary jurisdiction by the PCIT on this issue was upheld.

However, the Tribunal also held that the PCIT could not travel beyond the issues mentioned in the show cause notice. Since the PCIT had not issued any notice in respect of alleged losses, the direction to examine allowability of losses was held to be incorrect. The Tribunal modified the PCIT’s order and directed the Assessing Officer to restrict enquiries only to the claim of exceptional items of ₹57.02 crore and the difference in sundry balances written off.

Important Clarification

The Tribunal clarified that failure of the Assessing Officer to examine a substantial and exceptional claim attracts Explanation 2 to Section 263 and justifies revision. At the same time, revisionary directions must remain confined to issues specifically put to notice under Section 263 and cannot be expanded beyond the show cause notice.

Final Outcome

The appeal filed by the assessee was dismissed, subject to modification of the PCIT’s directions. The revision under Section 263 was upheld in respect of non-examination of the ₹57.02 crore exceptional items claim, but the Assessing Officer was restricted to examine only the issues mentioned in the show cause notice, namely the exceptional items and the sundry balance write-off difference.

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