2025 (6) TMI 657 - HC - Income Tax

Revision u/s 263 - Disallowance u/s 40 (a) (ia) ought to be made is incorrect and erroneous - As stated by assessee the debit to the profit and loss account represents trade discounts given to distributors where transactions are on a principal-to-principal basis and not commission and Section 194H would have no application to discounts HELD THAT - Having noted the order of the PCIT insofar as the plea of learned Senior Counsel for the respondent that the exercise of jurisdiction by the PCIT u/s 263 of the Act in the facts of this case is untenable is concerned the same is not appealing. The law in respect of interpretation of Section 263 of the Act is well settled by plethora of judgments which have been referred to by the PCIT in his order dated 25.10.2019 more specifically in paragraph No. 9 of the order with which we agree. Insofar as the plea of learned Senior Counsel for the respondent that the AO having accepted the contentions of the assessee although elaborate discussions may not have find place in the assessment order the order of the AO is justified is concerned the same is also not appealing. This we say so for the reason that there is no discussion at all. In the absence of any discussion to say that the Assessing Officer has accepted the contention of the assessee cannot be accepted. In support of this submission reliance placed by the learned Senior Counsel for the respondent on the judgments in the cases of Hari Iron Trading Co. 2003 (5) TMI 48 - PUNJAB AND HARYANA HIGH COURT Ashish Rajpal 2009 (5) TMI 18 - DELHI HIGH COURT Saravana Developers 2016 (1) TMI 1104 - KARNATAKA HIGH COURT Sun Microsystems India Pvt. Ltd. 2015 (6) TMI 324 - KARNATAKA HIGH COURT Chemsworth Pvt. Ltd. 2020 (9) TMI 875 - KARNATAKA HIGH COURT Marico Ltd. 2020 (6) TMI 436 - SC ORDER and Cognizant Technology Solutions India (P.) Ltd. 2023 (1) TMI 1233 - SC ORDER are concerned the same are distinguishable on facts. We also note that respondent has made submissions on the merit of the issue to say that the conclusion drawn by the PCIT in the order under Section 263 of the Act that a disallowance under Section 40 (a) (ia) of the Act ought to be made is incorrect and erroneous is concerned we find that the Tribunal has decided the appeal and set aside the order of PCIT only on the ground that the Assessing Officer has examined the impugned transaction in-detail during the course of the assessment without going into the merits of the case. So we are of the view that the Tribunal need to examine the issue on merits. We accordingly set aside the impugned order passed by the Tribunal and remand the matter back to the Tribunal for consideration of the appeal filed by the respondent herein on merits in accordance with law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this appeal are:

• Whether the Income Tax Appellate Tribunal (ITAT) was justified in quashing the revisionary order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, when the assessment order was alleged to be erroneous and prejudicial to the interests of the Revenue.
• Whether the Assessing Officer (AO) had taken a legally plausible view in not disallowing commission payments made without deducting tax at source under Section 40(a)(ia) of the Act.
• Whether the AO had conducted necessary enquiries and applied mind to the issue of tax deduction at source on the commission payments or discounts.
• Whether the PCIT's exercise of revisionary jurisdiction under Section 263 was justified in the facts and circumstances of the case.
• Whether the issue of classification of payments as commission or trade discounts, and the consequent applicability of TDS provisions under Section 194H, was properly examined and decided.
• Whether the Tribunal erred in not deciding the appeal on merits and only on the ground of plausible view taken by the AO.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the AO took a legally plausible view in not disallowing commission payments under Section 40(a)(ia)

Legal framework and precedents: Section 40(a)(ia) mandates disallowance of expenses where tax is not deducted at source (TDS) as required by law. The PCIT's jurisdiction under Section 263 can be invoked only if the assessment order is erroneous and prejudicial to Revenue's interests. The Supreme Court in Max India Ltd. and other cases has held that if the AO takes one of the plausible views, the order cannot be revised under Section 263. However, the recent Constitution Bench ruling in Dilip Kumar and Co. clarified that exemption notifications and TDS provisions must be strictly construed in favor of Revenue.

Court's reasoning and findings: The PCIT held that the AO did not disallow commission payments of Rs. 36.34 crores made without TDS, resulting in short computation of income and loss to Revenue. The PCIT noted that similar disallowances were made in earlier assessment years, and the AO's failure to disallow was contrary to law and not a plausible view. The AO's order lacked any express finding on whether the payments were commission or discounts. The Tribunal, however, held that the AO had examined the issue in detail and taken a conscious decision not to disallow, relying on prior judicial precedents supporting plausible views.

The Court disagreed with the Tribunal's conclusion that the AO took a plausible view, emphasizing that the DAO and final assessment order did not record any finding or reasoning on the nature of payments or applicability of TDS provisions. Merely issuing notices and receiving replies does not amount to proper examination. Without any express finding or analysis, the AO's order cannot be deemed a plausible view.

Application of law to facts: The Court relied on the PCIT's detailed order under Section 263, which highlighted the failure of the AO to disallow the commission payments despite the absence of TDS and the precedent of disallowances in earlier years. The Court held that the AO's order was erroneous and prejudicial to Revenue.

Treatment of competing arguments: The respondent argued that the payments were trade discounts, not commission, and thus not subject to TDS under Section 194H, citing prior decisions and subsequent assessment years where no disallowance was made. The Court noted these arguments but observed that the AO did not record any findings on these contentions in the assessment order, and the issue remained unexamined on record.

Conclusion: The AO did not take a plausible view as required, and the assessment order was erroneous and prejudicial to Revenue for not disallowing the payments under Section 40(a)(ia).

Issue 2: Whether the PCIT's exercise of jurisdiction under Section 263 was justified

Legal framework and precedents: Section 263 empowers the Commissioner to revise an assessment order if it is erroneous and prejudicial to Revenue. The error may arise from incorrect facts, law, or failure to apply mind or make necessary enquiries. The Supreme Court in Malabar Industrial Co. Ltd. and other cases has clarified that the Commissioner must be satisfied on twin conditions: the order is erroneous and prejudicial. The Commissioner's jurisdiction is not to correct every mistake but to prevent miscarriage of Revenue's interests.

Court's reasoning and findings: The PCIT found that the AO's failure to disallow commission payments without TDS was an error of law and fact, prejudicial to Revenue. The PCIT noted that the AO did not make necessary enquiries or record findings despite the large amount involved and prior disallowances in earlier years. The Court relied on the detailed analysis in the PCIT's order, which explained the legal principles and factual background justifying revision.

The respondent's contention that the AO had applied mind and accepted the assessee's contentions was rejected because the assessment order did not reflect any such application of mind or enquiry. The Court also referred to the Delhi High Court's decision in Ashok Logani, which emphasized that the absence of discussion or findings in the assessment order on material issues justifies revision under Section 263.

Application of law to facts: The Court found that the AO's order was a stereotyped order lacking examination of the crucial issue of TDS applicability on commission payments. The PCIT's revisionary jurisdiction was rightly invoked to protect Revenue's interests.

Treatment of competing arguments: The respondent relied on various judgments supporting the proposition that absence of detailed reasoning does not imply lack of application of mind if the record shows enquiry. The Court distinguished those cases on facts, noting the absence of any findings or reasons in the assessment order here.

Conclusion: The PCIT's exercise of jurisdiction under Section 263 was justified and lawful.

Issue 3: Whether the Tribunal erred in setting aside the PCIT's order without deciding the appeal on merits

Court's reasoning and findings: The Tribunal quashed the revisionary order solely on the ground that the AO had taken a plausible view, without examining the merits of whether the payments were commission or discounts and whether TDS was applicable. The Court held that this was an incomplete adjudication because the merits of the case were not considered.

Application of law to facts: The Court remanded the matter to the Tribunal to decide the appeal on merits after examining the nature of payments, applicability of TDS provisions, and the evidence on record.

Conclusion: The Tribunal's order was set aside and the matter remanded for merits consideration.

Issue 4: Whether the payments were commission or trade discounts and the applicability of TDS under Section 194H

Legal framework and precedents: Section 194H requires TDS on commission payments but not on trade discounts. The classification of payments is a factual and legal question requiring examination of agreements and transaction nature. Prior decisions of this Court and the Supreme Court have held that trade discounts on principal-to-principal transactions do not attract TDS under Section 194H.

Court's reasoning and findings: The Court noted that the AO had issued notices and received replies from the assessee claiming the payments were discounts and not commission. However, no finding was recorded in the assessment order. The PCIT's order under Section 263 directed the AO to examine the issue afresh and make necessary enquiries.

Application of law to facts: The Court did not decide the issue on merits but left it open for the AO and Tribunal to consider after proper enquiry and evidence.

Conclusion: The issue remains to be decided on merits by the Tribunal and AO after fresh assessment.

Issue 5: Limitation and effect of non-passing of order giving effect under Section 153(3)

Court's reasoning and findings: The respondent submitted that no order giving effect to the PCIT's revisionary order under Section 263 was passed within the prescribed limitation period under Section 153(3) of the Act, rendering the appeal academic. The Court did not address this submission in detail but focused on the correctness of the revisionary order and remanded the matter for merits.

3. SIGNIFICANT HOLDINGS

"Merely because notices have been issued and replies submitted shall not show/depict the Assessing Officer has examined the transaction."

"In the absence of express finding, it cannot be said the view of the Assessing Officer is a plausible view."

"The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. He must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him."

"The Commissioner may consider an order of the Assessing Officer to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case."

"Where there is no express view of the Assessing Officer, surely it cannot be said that the same is a plausible view."

"The jurisdiction under Section 263 can be exercised only where the assessment order is erroneous and prejudicial to the interests of Revenue."

"The Tribunal erred in setting aside the revisionary order without deciding the appeal on merits."

"The issue of classification of payments as commission or discount and applicability of TDS provisions is a factual issue to be decided after proper enquiry."

Final determinations:

• The AO's assessment order was erroneous and prejudicial to Revenue for not disallowing commission payments without TDS.
• The PCIT rightly exercised jurisdiction under Section 263 to revise the assessment order.
• The Tribunal erred in quashing the revisionary order solely on the ground of plausible view without deciding on merits.
• The matter is remanded to the Tribunal for merits consideration of the issue of commission versus discount and applicability of TDS provisions.