1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal under section 263 of the Income Tax Act, 1961 ("the Act") are:
- Whether the order passed by the Assessing Officer (AO) under section 143(3) read with section 144B of the Act for assessment year 2018-19 was erroneous and prejudicial to the interest of the revenue, thereby justifying revision under section 263.
- Whether the AO adequately examined the issues relating to commission payments and director's remuneration, including the applicability and deduction of tax at source (TDS) under sections 194H and 194J of the Act.
- Whether the Principal Commissioner of Income Tax (PCIT) conducted an independent enquiry as mandated under section 263 before setting aside the assessment order.
- Whether the disallowance of expenses claimed by the assessee was justified based on the facts and law.
- Whether the PCIT's order under section 263 was passed in a hasty and perfunctory manner without proper consideration of the assessee's submissions and AO's comments.
- Whether the entire assessment order was liable to be set aside or only specific issues required reconsideration.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether the AO's order was erroneous and prejudicial to the interest of revenue, warranting revision under section 263
Relevant legal framework and precedents: Section 263 empowers the PCIT to revise an assessment order if it is found to be erroneous and prejudicial to the interest of the revenue. The Supreme Court in Malabar Industrial Co. Ltd. v. CIT and other decisions has clarified that both conditions-error and prejudice-must be satisfied. An order is erroneous if it involves incorrect application of law or facts, or is passed without application of mind. However, if the AO's order reflects a plausible view and proper enquiry, revision is not justified. Further, the PCIT must conduct an independent enquiry before invoking section 263.
Court's interpretation and reasoning: The Tribunal noted that the AO had conducted detailed scrutiny under CASS, issued notices under section 142(1), and examined the commission and remuneration payments with supporting documents. The AO disallowed a portion of commission expenses after verifying the genuineness and TDS compliance. The PCIT's order was found to be perfunctory and lacking detailed discussion on the assessee's submissions. The PCIT did not consider the AO's comments dated 01.01.2024 or the detailed replies and documents filed by the assessee, including the tax audit report (Form 3CD).
Key evidence and findings: The assessee filed comprehensive replies to notices, including party-wise commission details, TDS deducted and deposited, ledger accounts, salary details of directors and employees, and copies of tax returns of directors. The AO verified these details and made a reasoned disallowance of Rs. 2,40,442/- on commission payable. The PCIT's show cause notice alleged failure to deduct TDS on commission and director remuneration, and absence of audit report on file, which were factually incorrect as per records.
Application of law to facts: The Tribunal applied the legal principle that if the AO has made enquiries and taken a plausible view, the PCIT cannot revise the order merely because it disagrees. The AO's enquiry was adequate and the order was neither erroneous nor prejudicial. The PCIT's reliance on audit objections without independent enquiry was contrary to the statutory mandate.
Treatment of competing arguments: The assessee argued that the AO had examined all issues thoroughly, deducted TDS wherever applicable, and disallowed expenses where necessary. The PCIT contended that the AO failed to examine TDS deduction on commission and director remuneration and that the audit report was not on file. The Tribunal rejected the PCIT's contentions as factually incorrect and unsupported by material on record.
Conclusion: The AO's order was not erroneous or prejudicial to revenue; hence, revision under section 263 was not justified on this ground.
Issue 2: Whether the AO adequately examined commission payments and director remuneration, including TDS compliance
Relevant legal framework and precedents: Section 194H and 194J require deduction of TDS on commission and professional fees respectively. Section 40(a)(ia) disallows expenses if TDS is not deducted or deposited as required. However, judicial precedents clarify that disallowance is not automatic if TDS is deducted under a different section or if deductees have filed returns and no default is attributable to the assessee.
Court's interpretation and reasoning: The AO verified commission payments, TDS deducted on payments exceeding Rs. 15,000, and disallowed 15% of commission payable outstanding as not wholly for business purposes. The AO accepted TDS deduction under section 192 on director salaries, which was consistent with employer-employee relationship. The Tribunal noted that the directors had filed returns showing income from salary and refunds due, negating the PCIT's claim of TDS default.
Key evidence and findings: The assessee submitted ledger accounts, TDS challans, tax audit report, and returns of directors. The AO sought and received details of commission recipients, agreements, and basis of commission. The AO also queried salary and commission payments exceeding Rs. 50,000 per month and obtained PAN and addresses. The PCIT's allegation of non-filing of Form 3CD was disproved by the assessee's submission and portal records.
Application of law to facts: The AO's detailed enquiries and disallowance of part of commission expenses were in accordance with law. The AO's acceptance of director remuneration under salary head with TDS under section 192 was justified. The Tribunal held that no disallowance under section 40(a)(ia) was warranted as there was no failure to deduct or deposit TDS under the correct provisions.
Treatment of competing arguments: The PCIT argued non-deduction of TDS under sections 194H and 194J and absence of audit report. The assessee rebutted with documentary evidence and legal precedents supporting the correctness of AO's view. The Tribunal found the assessee's arguments substantiated and the PCIT's allegations unsubstantiated.
Conclusion: The AO adequately examined commission and remuneration payments with respect to TDS compliance; no error or prejudice arose on this issue.
Issue 3: Whether the PCIT conducted independent enquiry as mandated under section 263
Relevant legal framework and precedents: The PCIT must conduct an independent enquiry and be satisfied that the AO's order is erroneous and prejudicial before revising under section 263. Mere reliance on audit objections or AO's failure without independent verification is insufficient (Hindustan Marketing and Advertising Co. Ltd., CIT v. Leisure Wear Exports Ltd.).
Court's interpretation and reasoning: The Tribunal observed that the PCIT's order was perfunctory, lacking detailed discussion of the assessee's submissions and AO's comments. The PCIT did not address the letter of the AO dated 01.01.2024 or the detailed replies filed by the assessee. The order appeared hurried to avoid limitation and did not reflect application of mind or independent enquiry.
Key evidence and findings: The assessee's written submissions and supporting documents were on record. The AO's comments responding to these submissions were not considered by the PCIT. The PCIT's order merely echoed audit objections without independent verification.
Application of law to facts: The PCIT failed to fulfill the statutory mandate of independent enquiry under section 263. The order was therefore liable to be set aside for lack of proper consideration and enquiry.
Treatment of competing arguments: The PCIT relied on audit objections and the absence of TDS deduction under certain heads. The assessee contended that the PCIT did not apply mind or verify facts independently. The Tribunal sided with the assessee, emphasizing the need for independent enquiry.
Conclusion: The PCIT's order under section 263 was invalid due to failure to conduct independent enquiry and inadequate consideration of material on record.
Issue 4: Whether the disallowance of expenses claimed by the assessee was justified
Relevant legal framework and precedents: Expenses must be wholly and exclusively for business to be deductible. Disallowance under section 40(a)(ia) arises if TDS is not deducted as required. However, disallowance is not warranted if TDS is deducted under a different section or if deductee files return and no default is attributable to the assessee.
Court's interpretation and reasoning: The AO disallowed Rs. 2,40,442/- on commission payable not incurred for business purposes after scrutiny. The Tribunal found this disallowance reasonable and supported by evidence. The director remuneration was accepted as Rs. 9,84,000/- (not Rs. 23,04,000/- as alleged by PCIT), with TDS deducted under section 192. Salaries to other employees amounting to Rs. 13,20,000/- were debited under salary and wages; the AO had not verified genuineness but this was not a ground for revising the entire assessment order under section 263.
Key evidence and findings: Ledger accounts, salary details, and TDS challans were on record. The AO's disallowance was specific and reasoned, while the PCIT's order generalized the disallowance without detailed enquiry.
Application of law to facts: The AO's disallowance was a plausible view based on facts. The PCIT's setting aside of the entire order was disproportionate and unjustified.
Treatment of competing arguments: The assessee submitted that expenses were genuine and supported by documents. The PCIT contended otherwise without independent verification. The Tribunal favored the assessee's position.
Conclusion: The AO's disallowance was justified; no further disallowance or revision was warranted.
Issue 5: Whether the entire assessment order was liable to be set aside or only specific issues required reconsideration
Court's interpretation and reasoning: The PCIT set aside the entire assessment order for fresh assessment. The Tribunal noted that the PCIT did not specify any particular error warranting complete reassessment. Revision under section 263 should be limited to specific errors prejudicial to revenue.
Conclusion: The PCIT's direction for fresh assessment on entire order was excessive and unjustified.
3. SIGNIFICANT HOLDINGS
"A bare reading of section 263(1) makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent ... recourse cannot be had to section 263(1)."
"Where there are two views possible and Assessing Officer has taken one of the possible views, the order of Assessing Officer cannot be said to be erroneous or prejudicial to the interest of revenue."
"If no enquiry was made by the Assessing Officer, the Commissioner would have jurisdiction u/s 263 but if enquiry was made by the Assessing Officer and the objection of the Commissioner is that such enquiry is not adequate the Commissioner would have no jurisdiction u/s 263."
"Lack of any discussion in the assessment order cannot lead to the assumption that the Assessing Officer did not apply his mind."
"The explanation to Section 263(3) cannot be said to have overridden the law interpreted by various High Courts which held that before holding Assessing Officers order to be 'erroneous' necessary enquiry and verification should be made."
The Tribunal concluded that the PCIT's order under section 263 was "scanty in details and perfunctory in nature; providing only cursory and fleeting coverage of the issues at hand," and "seems to have been passed ... in hasty manner, to avoid the bar of limitation, without dealing with issues at hand adequately."
Accordingly, the Tribunal set aside the PCIT's order under section 263 and directed the PCIT to pass a fresh order after independent enquiry, considering the assessee's submissions and AO's comments, and providing a reasonable opportunity of hearing. The appeal was partly allowed for statistical purposes.
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