2025 (5) TMI 196 - AT - Income Tax

Revision u/s 263 - Amount paid to the assessee in the form of dividend to be included in the profits of the assessee as its business income and subjected to taxation in view of provisions of Article 9 of the Convention between the Republic of India and the Kingdom of Morocco for the Avoidance of double Taxation and for the prevention of fiscal evasion - HELD THAT - As case of the assessee was selected for complete scrutiny as regards the above mentioned 11 points but the AO felt satisfied as regards all the issues except on the issue under the head Claim of any other amount allowable as deduction in schedule BP . AO categorically recorded as to why verification was not required on the above 10 issues. He so expressed his satisfaction after perusing the information provided by the assessee and having verified the same with reference to the ITR and TAR. This goes to shows that the AO had satisfied himself even on the first mentioned issue of double taxation relief u/s 90 and 91 of the Act which PCIT picked up to hold the assessment order as erroneous. AO must record reason(s) even though same may be in brief to apprise the higher authorities that he had applied his mind in recording his satisfaction and while framing the assessment. Otherwise how the higher authorities would come to know about application of mind by the AO. It is true that here the Assessing Authority should have recorded even though in brief some reason in respect of each of the 10 points selected for scrutiny but he did not record. Fact remains that the AO expressed his satisfaction after perusing the information provided by the assessee and having verified the same with reference to the ITR and TAR. Had the AO not observed even so things would have been otherwise but we are satisfied that the Assessing Officer recorded his satisfaction after applying his mind to the material made available. We find merit in the contention raised by assessee that this is a case of subsequent opinion given by Learned PCIT which is different from the opinion already given by the Assessing Officer on the same issue. As per well settled law no resort can be made to the provisions of section 263 of the Act in such like situation i.e. where a different view is expressed by the higher authority or say two views are possible from the same material. Point raised on behalf of the appellant that already in respect of assessment year 2018-19 same issue had cropped up . Therein after passing of assessment order Learned PCIT had exercised powers u/s 263 but ITAT Jaipur Benches quashed the said order passed by Learned PCIT 2024 (10) TMI 1654 - ITAT JAIPUR Admittedly the decision by the Co-ordinate Bench was brought to the notice of Ld. PCIT. We find that Learned PCIT fell in error while observing that the impugned assessment order dated 28.09.2022 passed by the Assessing Officer was erroneous and also prejudicial to the interest of the revenue as regards the above said issue of dividend. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal (AT) in this matter are:

- Whether the order passed by the Assessing Officer (AO) dated 28.09.2022, relating to the assessment year 2020-21, was erroneous and prejudicial to the interests of the Revenue, thereby justifying exercise of powers under section 263 of the Income Tax Act, 1961 (the Act) by the Principal Commissioner of Income Tax (PCIT).

- Whether the income amounting to Rs. 71,80,35,464/- received as dividend by the assessee should have been treated as business income rather than dividend income for tax purposes, particularly in light of Article 9 of the Double Taxation Avoidance Agreement (DTAA) between India and Morocco.

- Whether the PCIT was justified in setting aside the assessment order and directing reassessment on the issue of dividend income.

- Whether the action of the PCIT amounted to a mere change of opinion, which is impermissible under section 263 of the Act.

- The applicability and effect of a coordinate bench decision on a similar issue for assessment year 2018-19, which had quashed a similar order passed under section 263.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for exercise of powers under section 263 of the Act

Relevant legal framework and precedents: Section 263 empowers the PCIT to revise an order passed by the AO if it is found to be erroneous and prejudicial to the interests of the Revenue. However, settled judicial principles establish that this power cannot be exercised merely because a different opinion is held by the PCIT; it requires a demonstrable error in the order.

Court's interpretation and reasoning: The Tribunal noted that the AO had conducted a detailed scrutiny of the revised return filed by the assessee and was satisfied on 10 out of 11 issues selected for scrutiny, including the issue of double taxation relief under sections 90/91 of the Act. The AO had recorded reasons, albeit brief, in para 3.4 of the assessment order indicating application of mind and verification of information provided by the assessee.

The Tribunal emphasized that the AO's satisfaction on these issues, including the dividend income treatment, was based on material furnished and verification against the Income Tax Return (ITR) and Tax Audit Report (TAR). The PCIT's order did not demonstrate any specific error in the AO's order but rather expressed a different view.

Key evidence and findings: The PCIT set aside the assessment order primarily on the ground that the dividend income should have been treated as business income under Article 9 of the India-Morocco DTAA. However, the AO had accepted the dividend income treatment after scrutiny.

Application of law to facts: The Tribunal held that the PCIT's action was a case of change of opinion, which is not permissible under section 263. The AO had applied his mind and recorded satisfaction, thus the PCIT's revision was unwarranted.

Treatment of competing arguments: The assessee's counsel argued that the AO's order was not erroneous but a valid exercise of discretion based on facts and documents. The Revenue's representative relied on the DTAA provisions and the PCIT's opinion that the order was prejudicial to Revenue. The Tribunal sided with the assessee, holding that differing views do not amount to an erroneous order.

Conclusions: The Tribunal concluded that the PCIT erred in exercising powers under section 263, as the AO's order was neither erroneous nor prejudicial to Revenue's interests.

Issue 2: Tax treatment of dividend income vis-`a-vis business income under Article 9 of the India-Morocco DTAA

Relevant legal framework and precedents: Article 9 of the DTAA deals with associated enterprises and transfer pricing adjustments, potentially recharacterizing income for tax purposes. The question was whether the dividend income declared by the assessee should be treated as business income under this provision.

Court's interpretation and reasoning: The Tribunal observed that the AO had accepted the dividend income classification after examining the documents and replies furnished by the assessee. The PCIT's contrary view was not supported by any fresh material or evidence indicating the dividend should be treated as business income.

Key evidence and findings: The assessee's submissions and documentary evidence supported the dividend income characterization. The AO's assessment order reflected satisfaction with this treatment.

Application of law to facts: Since the AO applied the relevant provisions and was satisfied with the dividend income treatment, the Tribunal found no basis for the PCIT's direction to treat the amount as business income under Article 9 of the DTAA.

Treatment of competing arguments: The Revenue contended that the amount should be included as business income, but the Tribunal noted the absence of any error or prejudice in the AO's order on this issue.

Conclusions: The Tribunal held that the dividend income treatment was correct and the PCIT's direction for reassessment on this issue was unjustified.

Issue 3: Applicability of coordinate bench decision on similar issue for assessment year 2018-19

Relevant legal framework and precedents: The assessee relied on a coordinate bench decision dated 25.10.2024, wherein a similar order under section 263 was quashed for assessment year 2018-19 on the same issue of dividend income treatment.

Court's interpretation and reasoning: The Tribunal noted that the PCIT was aware of the coordinate bench decision but dismissed it on the ground that it was challenged before the High Court. However, there was no stay on the coordinate bench order's operation.

Key evidence and findings: The coordinate bench decision was binding unless stayed, and no stay was granted by the High Court.

Application of law to facts: The Tribunal held that the PCIT could not disregard the coordinate bench decision merely because it was under challenge, absent any stay.

Treatment of competing arguments: The Revenue argued that the decision was under challenge and hence not binding. The Tribunal rejected this argument.

Conclusions: The Tribunal gave weight to the coordinate bench decision, reinforcing that the PCIT's order was unsustainable.

3. SIGNIFICANT HOLDINGS

- "Assessing Officer must record reason(s), even though same may be in brief, to apprise the higher authorities that he had applied his mind in recording his satisfaction and while framing the assessment."

- "As per well settled law, no resort can be made to the provisions of section 263 of the Act in such like situation i.e. where a different view is expressed by the higher authority or say, two views are possible from the same material."

- "The Assessing Officer expressed his satisfaction after perusing the information provided by the assessee and having verified the same with reference to the ITR and TAR."

- "Simply because the said decision is under challenge before Hon'ble High Court, there is no merit in the abovesaid observations made by Ld. PCIT in exercising powers u/s 263 of the Act."

- The Tribunal conclusively held that the impugned assessment order was neither erroneous nor prejudicial to the interests of the Revenue, and the PCIT's order setting aside the assessment was set aside accordingly.