2024 (1) TMI 1468 - HC - Income Tax

Revision u/s 263 - PCIT passed the order u/s 263 directing AO to re-compute and determine the correct total income of the assessee after making disallowance u/s 40(a)(ia) pertaining to the amount of tax which was though deducted but not paid in the Government accounts by the assessee - Tribunal was of the opinion that the PCIT could not have invoked the revisional jurisdiction u/s 263 as the Assessment Order cannot be said to be either erroneous and prejudicial to the interest of Revenue HELD THAT - Once the assessee has shown that the payee has already offered the amount as income as well as the tax is paid thereon as stated in the Certificate issued under Form 26A the assessee cannot be said to be in default and as such the payment made by the assessee could not have been considered as a deemed income u/s 40(a)(ia). Tribunal has rightly come to the conclusion that the view taken by the AO is a possible view and as such the assessment order cannot be said to be an erroneous and prejudice to the interest of Revenue as twin conditions cannot be said to be satisfied for assuming the jurisdiction by the PCIT under Section 263 of the Act. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether the Income Tax Appellate Tribunal (ITAT) was justified in quashing the Principal Commissioner of Income Tax's (PCIT) order passed under Section 263 of the Income Tax Act, 1961, which had directed reassessment on the ground that the original assessment order was erroneous and prejudicial to the interest of the Revenue. Specifically, the issue was whether the PCIT was correct in invoking revisional jurisdiction under Section 263 when the Assessing Officer's (AO) order was a possible view and not demonstrably erroneous or prejudicial to Revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Validity of invoking Section 263 revisional jurisdiction by the PCIT against the AO's order for Assessment Year 2014-15 concerning disallowance under Section 40(a)(ia) of the Act due to late payment of TDS.

Relevant Legal Framework and Precedents:

The Court examined the provisions of Section 263 of the Income Tax Act, which empowers the PCIT to revise an assessment order if it is "erroneous" and "prejudicial to the interest of the Revenue." The twin conditions for exercise of this jurisdiction were reiterated from the Apex Court's decision in Malabar Industries Limited v. CIT, which held that both conditions must be satisfied for the PCIT to interfere.

Further, the Court analyzed Section 201(1) and its provisos, which define when a person is deemed an assessee in default for failure to deduct or pay tax at source, and the protection available if the payee has declared the income and paid tax, supported by a certificate in Form 26A.

Section 40(a)(ia) was also considered, which mandates disallowance of expenses if tax deductible at source has not been deducted or paid on or before the due date for filing the return, except where the payee has declared the income and paid tax accordingly.

Court's Interpretation and Reasoning:

The Court noted that the AO had conducted a detailed inquiry during the assessment proceedings, calling for explanations regarding the late deposit of TDS and examining the relevant documents including the payee's income declaration and tax payment certificate (Form 26A). The AO accepted the assessee's contention that the payee had included the income in its return and paid the tax, and accordingly did not make disallowance under Section 40(a)(ia).

The PCIT, however, took the view that since the tax was deposited after the due date, the assessee was an assessee in default and the expenditure should have been disallowed. The PCIT thus issued a show-cause notice and passed an order under Section 263 to revise the assessment.

The ITAT examined these facts and found that the AO's order represented a possible view based on the material on record and the submissions made. The AO's decision to not disallow the expenditure was neither erroneous nor prejudicial to Revenue as the payee had declared the income and paid tax, and the assessee had furnished the requisite certificate under Form 26A.

The Tribunal relied on the Malabar Industries decision to emphasize that the PCIT cannot interfere merely because he disagrees with the AO's view if that view is possible and supported by evidence. The Tribunal therefore quashed the PCIT's order under Section 263.

Key Evidence and Findings:

• Assessee's payment of Rs. 2,19,96,779/- to RK Infratel Limited (RKIL) for technical services and lease rent.
• Tax deducted at source of Rs. 21,99,678/- at 10%, but deposited after due date.
• RKIL declared the income and paid tax as per Form 26A certificate.
• AO examined the delay in deposit and accepted the payee's tax compliance, refraining from disallowance under Section 40(a)(ia).
• PCIT disagreed and invoked Section 263.
• ITAT found AO's order was a possible view and not erroneous or prejudicial.

Application of Law to Facts:

The Court applied the twin conditions test under Section 263 and found that the AO's order was based on a possible view after due inquiry and application of mind. The payee had complied with tax obligations, and the assessee had furnished the necessary certificate. Hence, the conditions for invoking Section 263 were not met.

Treatment of Competing Arguments:

The Revenue argued that late payment of TDS made the assessee an assessee in default, mandating disallowance under Section 40(a)(ia), and that the AO's failure to do so rendered the order erroneous and prejudicial. The assessee contended that since the payee declared the income and paid tax, and the certificate was furnished, the provisos protected them from disallowance.

The Court and the Tribunal accepted the assessee's argument, emphasizing the statutory protection under the provisos to Sections 201(1) and 40(a)(ia) and the principle that revisional jurisdiction cannot be exercised merely because the PCIT disagrees with a possible view taken by the AO.

Conclusions:

The revisional jurisdiction under Section 263 was improperly invoked by the PCIT. The AO's order was neither erroneous nor prejudicial to Revenue. The disallowance under Section 40(a)(ia) was not warranted due to compliance by the payee and the certificate furnished. The PCIT's order was rightly quashed by the Tribunal.

3. SIGNIFICANT HOLDINGS

The Court preserved the Tribunal's crucial legal reasoning verbatim:

"Taking note of the aforesaid dictum of law laid down by the Hon'ble Apex Court, we note that assessing officer, in the assessee's case under consideration has taken possible view, therefore order passed by the assessing officer is neither erroneous nor prejudicial to the interest of Revenue."

"In view of the facts of the case and judicial pronouncements relied upon, it is well established that the impugned order passed u/s.143(3) of the Act dated 21.12.2016, was passed by assessing officer, after calling for relevant information and after detailed examination of the same. The Assessing Officer has passed the assessment order after calling for details on the issue and after considering the reply and documents and after verification of the same and after due application of mind passed the assessment order, so it cannot be termed as erroneous and prejudicial to the interest of the revenue."

"So, the Ld.PCIT's finding fault, with the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue, on account of lack of inquiry, has to fail. Bases on these facts and circumstances, we quash the order dated 27.03.2019 passed by the Ld.PCIT under Section 263 of the Act."

The Court also emphasized the statutory interplay between Sections 201(1) and 40(a)(ia), holding that where the payee has declared the income and paid tax, and the certificate is furnished, the deductor cannot be treated as an assessee in default and disallowance is not warranted.

Final determinations on the issue were that no question of law arose from the Tribunal's order and the Revenue's appeal was dismissed for lack of merit.