2025 (7) TMI 1155 - AT - Income Tax

Revision u/s 263 - liability deduct tax for the expenses made on the provisional basis more particularly in a situation where the parties for such provisional expenses were not identifiable at the time of creating such provision in the books of accounts - HELD THAT -PCIT failed to consider the provision for expenses created at the end of the financial year is in accordance with the Mercantile System of Accounting which is mandatorily required to be followed by the assessee under the provisions of Income Tax Act and Companies Act. Further the provisions made at the end of the year are reversed immediately on the next day i.e. first day of the next financial year which is not considered by PCIT and came to a conclusion the assessment order passed is erroneous. In our considered view the assessee having reversed the credit on the first day of the financial year Ld. PCIT is not correct in holding that the assessee failed to deduct taxes on the commission and brokerage payment. Decided in favour of assessee. Depreciation claimed in respect of intangible asset by the assessee in the previous assessment year where the cost of acquisition of the asset is Nil - As decided by Tribunal in the case of Man Industries (India) Ltd 2022 (10) TMI 1114 - ITAT MUMBAI TDS liability borne by the assessee on the premium amount after it is thrown into the common hotchpotch of block asset in AY 2013-14 has lost its identity and become an inseparable part of block asset insofar as calculation of depreciation is concerned. Hence the AO could not have disallowed the depreciation claim as made in the first year. Assessee appeal allowed.

Summary

ISSUES:

Whether the revision order passed under section 263 of the Income Tax Act is valid in setting aside the assessment order on grounds of alleged non-deduction of TDS on commission and brokerage expenses claimed on a provisional basis.Whether depreciation claimed on intangible assets introduced by amalgamation, with alleged nil cost of acquisition, is allowable.Whether the conditions for invoking jurisdiction under section 263 of the Income Tax Act, specifically the presence of an error apparent on the face of the record and prejudice to the interest of Revenue, are satisfied.

RULINGS / HOLDINGS:

Regarding non-deduction of TDS on provisional commission and brokerage expenses, the Court held that the assessee followed the Mercantile System of Accounting by creating provisions at year-end and reversing them at the start of the next year, and since the payees were not identifiable at the time, the assessee could not comply with TDS deduction provisions; thus, the revision order under section 263 is not justified on this ground.On depreciation of intangible assets acquired by amalgamation, the Court held that the intangible assets were acquired pursuant to a Business Transfer Agreement on a slump sale basis at a recorded consideration, and depreciation claimed in the subsequent year cannot be disallowed if allowed in the first year, applying the principle of consistency; therefore, depreciation on such intangible assets is allowable.The Court found that the twin conditions for invoking jurisdiction under section 263-existence of an error apparent on the face of the record and prejudice to the Revenue-were not satisfied, rendering the revision order under section 263 erroneous and liable to be quashed.

RATIONALE:

The Court applied the statutory framework of the Income Tax Act, 1961, particularly sections 143(3), 263, 194C, 194H, 40(a)(ia), and relevant Rules including Rule 8D, alongside accounting principles under the Mercantile System of Accounting mandated by the Companies Act and Income Tax Act.Judicial precedents were relied upon, including coordinate bench decisions and High Court rulings, notably the cases concerning provisional expenses and TDS deduction (Dishnet Wireless Ltd., Sanghi Infrastructure Ltd., Arvind Lifestyle Brands Ltd.), and the principle of consistency in depreciation claims on intangible assets acquired by amalgamation (Bodal Chemicals Ltd., Man Industries (India) Ltd.).The Court emphasized that TDS provisions require identifiable payees to comply, and where payees are not identifiable due to provisional accounting, non-deduction of TDS does not constitute default under section 40(a)(ia).The principle of consistency was applied to depreciation claims on intangible assets introduced by amalgamation, preventing disallowance in subsequent years once allowed in the first year, absent any change in facts or law.The Court noted the intangible assets lost their independent identity upon entering the block of assets, consistent with the block asset concept under section 32, and thus depreciation on the block asset is allowable.No dissenting or concurring opinions were recorded.