2025 (6) TMI 1446 - AT - Income Tax

Revision u/s 263 - PCIT observed that as per Schedule 23 (Provisions on Loan and Advances) to the Profit and Loss account an amount was debited by the assessee for Standard Assets Provisions which is not allowable as per provision of sections of section 36(1)(via) and while computing taxable income as per Income Tax Act on account of Syndication fees for CCPS issue (Convertible Cumulative preference shares) an amount was reduced by the assessee from the taxable income the same is not allowable as per provision of section 37(1) being an expenditure in the nature of capital in nature AND assessee debited expenses under the head rates and rates which is not allowable as per the provision of section 40(a) HELD THAT - AO has raised the issue and taken a plausible view or the ld. AR of the assessee placed on record relevant material so as to establish that on that issue the order is not erroneous and that of the matter has not been challenged by the ld. DR. Thus when based on the submission and discussion so recorded herein above as is evident that on all of the aspect of the matter either the inquiry has been made or considering the submission of the assessee the same is not prejudicial to the interest of the revenue the order passed by the ld. AO cannot be held prejudicial to the interest of the revenue as the twin condition laid down under the Act fails as order of the ld. AO is neither erroneous on facts nor prejudicial to the interest of the revenue. Therefore the order passed by the ld. PCIT cannot be sustained in law merely because the original assessment order does not exactly advert to the issue which the ld. PCIT is seeing. Moreover we note that the issue that has been discussed on which the ld. AO took a possible view in the matter and even though the ld. AR of the assessee demonstrated the same are not prejudicial to the interest of the revenue. PCIT could not have exercised the powers conferred upon her u/s. 263 of the Act only on the reasons that she had a different view or perspective in the matter. The principle of law enunciated by the Supreme Court in Malabar Industrial Co. Ltd. has set up a standard concerning the width and amplitude of power vested for exercising revisionary jurisdiction under Section 263 of the Act. While exercising power under the said provision the concerned officer must be satisfied that the twin conditions provided therein stand fulfilled i.e. the order passed by the AO which is sought to be revised is erroneous and is also prejudicial to the interest of the revenue. In other words if one of the two conditions is not satisfied the revisionary power under the said provision cannot be invoked. One cannot quibble with the principle of law in the said case. We are of the considered view that the Ld. PCIT was not justified in invoking the provision of section 263 to the present case of the assessee. Being so we quash the order passed by ld. PCIT u/s 263.

Summary

The core legal questions considered in this appeal revolve around the validity and correctness of the revisionary order passed under section 263 of the Income Tax Act, 1961 ("the Act") by the Principal Commissioner of Income Tax (PCIT). Specifically, the issues are:

1. Whether the PCIT rightly assumed jurisdiction under section 263 by holding the assessment order passed by the Assessing Officer (AO) to be erroneous and prejudicial to the interest of the revenue.

2. Whether the disallowance of provisions made for standard assets by the Non-Banking Financial Company (NBFC) under section 36(1)(viia) of the Act was justified.

3. Whether the deduction claimed for syndication fees paid for issuance of Convertible Cumulative Preference Shares (CCPS) qualifies as allowable business expenditure under section 37(1) or is capital expenditure requiring disallowance.

4. Whether the expenses debited under rates and taxes, particularly stamp duty and Registrar of Companies (ROC) charges, are allowable deductions under the Act or require disallowance under section 40(a).

5. Whether the delay of 262 days in filing the appeal before the Tribunal is liable to be condoned.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 - Whether the AO's order was erroneous and prejudicial to the revenue

The legal framework for revision under section 263 requires the PCIT to be satisfied of two conditions: (i) the AO's order is erroneous, and (ii) the order is prejudicial to the interests of the revenue. This principle was reinforced by the Supreme Court in Malabar Industrial Co. Ltd., which held that both conditions must coexist for invoking section 263. The Calcutta High Court in Dawjee Dadabhoy and Co. further clarified that "prejudicial to the interests of the revenue" means that the lawful revenue due has not been realized or cannot be realized.

In the present case, the PCIT assumed jurisdiction on the basis that the AO's order was erroneous and prejudicial as it allowed certain deductions without proper verification. However, the AO's order was passed by the National Faceless Assessment Centre (NFAC) involving multiple units and officers, including Additional Commissioners and Principal Commissioners, indicating application of mind by several authorities.

The Tribunal noted that the PCIT's assertion that the AO's order was passed in a "routine and casual manner" was unsupported by evidence. The PCIT failed to demonstrate any non-application of mind or factual errors that would render the AO's order erroneous or prejudicial. Moreover, the AO had conducted detailed enquiries, sought clarifications, and considered documentary evidence before allowing the claims.

Thus, the Tribunal held that the PCIT's invocation of section 263 jurisdiction was unjustified, as the twin conditions of error and prejudice were not satisfied.

2. Allowability of Provision for Standard Assets under Section 36(1)(viia)

The PCIT contended that the AO erred in allowing a deduction of Rs. 30,63,618 made as provision for "Standard Assets" by the NBFC, relying on section 36(1)(viia) which allows deduction only for provisions relating to bad and doubtful debts made by scheduled or non-scheduled banks and cooperative banks, but not NBFCs.

The assessee submitted that under sub-clause (d) of clause (viia) of section 36(1), introduced by Finance Act 2016 with effect from 1-4-2017, NBFCs are entitled to deduction for provisions made for bad and doubtful debts. The NBFC's audited financial statements disclosed that the provisions for standard assets are part of the overall provisioning for bad and doubtful debts, in compliance with RBI Master Directions.

The PCIT misinterpreted the provision by treating "standard assets" separately from bad and doubtful debts. The Tribunal observed that in NBFC parlance, provisioning for standard and non-performing assets collectively constitutes provisioning for bad and doubtful debts. The AO had applied his mind and allowed the deduction accordingly.

Therefore, the Tribunal held that the AO did not err in allowing the deduction, and the PCIT's revision was unwarranted.

3. Deduction of Syndication Fees for CCPS Issue under Section 37(1)

The PCIT disallowed Rs. 1,18,50,389 claimed as deduction for syndication fees paid for raising CCPS, treating it as capital expenditure under section 37(1), relying on the Supreme Court decision in Punjab State Industrial Development Corporation Ltd. v. CIT, which held that fees paid to Registrar of Companies for capital expansion is capital expenditure.

The assessee contended that the syndication fees represent consultancy and advisory fees paid to arrange strategic investment, including identifying investors, strategizing, and facilitating negotiations, which are revenue expenses wholly and exclusively for business purposes.

Supporting case law included JCT Electronics Ltd. and Lok Advisory Services (P.) Ltd., where consultancy fees for business restructuring and investor identification were held to be allowable revenue expenses under section 37(1).

The AO, after detailed enquiry and considering documentary evidence, allowed the expenditure as revenue in nature. The Tribunal noted that the PCIT's reliance on the Punjab State Industrial Development Corporation case was misplaced, as the present expenditure was not ROC fees but consultancy fees.

Given the debatable nature of the issue and plausible view taken by the AO, the Tribunal concluded that the AO's order was neither erroneous nor prejudicial. The PCIT could not substitute her opinion for that of the AO in such a matter.

4. Allowability of Stamp Duty and ROC Charges under Section 40(a)

The PCIT questioned the allowance of Rs. 37,23,416 debited under "Rates and Taxes," alleging non-allowability under section 40(a) due to lack of supporting documents.

The assessee clarified that only one-fifth of these expenses were claimed as deduction, with the balance disallowed voluntarily. The AO issued detailed queries and received comprehensive replies with documentary evidence during assessment proceedings.

The AO accepted the claim after verification, and no additions were made subsequently. The Tribunal observed that the PCIT's allegation of non-verification was incorrect, as the AO had conducted due enquiry and applied mind.

Therefore, no error or prejudice was found in the AO's order on this issue.

5. Condonation of Delay in Filing Appeal

The assessee filed the appeal before the Tribunal with a delay of 262 days. The delay was attributed to the notice being sent to a personal email address of a director, which was infrequently used, and health issues preventing timely access.

The Tribunal, applying the Supreme Court's decision in Collector, Land Acquisition v. Mst. Katiji, held that sufficient cause existed for the delay. The assessee acted promptly upon becoming aware of the order and updated the email address to prevent recurrence.

Accordingly, the delay was condoned, and the appeal admitted.

Application of Law to Facts and Treatment of Competing Arguments

The Tribunal carefully examined the AO's assessment order, the PCIT's revision order, and the detailed submissions and documentary evidence presented by the assessee. It noted that the AO's order was passed after detailed scrutiny, queries, and replies, reflecting application of mind and adherence to legal provisions.

The PCIT's reliance on selective provisions and case law was found to be misplaced or inapplicable to the facts. The Tribunal emphasized that section 263 cannot be invoked merely because the PCIT holds a different view; the AO's order must be demonstrably erroneous and prejudicial.

On the disputed issues, the Tribunal found the AO's decisions to be based on plausible views supported by legal precedents and factual material. The PCIT's allegations of routine or casual orders were unsubstantiated.

The Tribunal also underscored that the faceless assessment regime involves multiple levels of scrutiny, reducing the likelihood of errors prejudicial to revenue.

Significant Holdings

"A bare reading of this provision makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suomotu 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 with 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)."

"In the case of NBFCs, the assets are either classified as Standard Assets or Non-Performing Assets. The provision made on such assets is always termed as Bad and Doubtful Debts ... the practice adopted by NBFCs is that for different types of assets, provisioning is done, and all such provisioning is in relation to Bad and Doubtful Debts."

"The expenditure sought to be disallowed by the Ld. PCIT is not in relation to the fees paid to the Registrar of Companies ... the said case is not applicable to the present case of the assessee company."

"Jurisdiction under section 263 cannot be invoked for making short enquiries or to go into the process of assessment again and again merely on the basis that more enquiry ought to have been conducted to find something."

The Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the revenue and that the PCIT's revision under section 263 was unjustified and liable to be quashed. The appeal was allowed accordingly, and the revisionary order set aside.