2025 (6) TMI 1986 - AT - Income Tax

Revision u/s 263 - whether assessment order passed is erroneous and prejudicial to the interests of revenue? - Applicability of section 40(a)(iib) of the Act in respect of the payment of guarantee commission fees paid by the appellant company to the State Government of Kerala - HELD THAT - In order to invoke the power of revision the above two conditions are required to be satisfied cumulatively. References in this regard can be made to the decision of the Hon ble Supreme Court in the case of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT and Max India Ltd. 2007 (11) TMI 12 - SUPREME COURT The error in the assessment order should be one that it is not debatable or plausible view. In a case where the AO examined the claim took one of the plausible views the assessment order cannot be termed as an erroneous . In the present case it is an admitted fact that the AO had not examined the applicability or otherwise of the provisions of sec.40(a)(iib) of the Act in respect of the payment of guarantee commission fees paid by the appellant company to the State Government of Kerala. Non-examination of the issue is clearly palpable and falls within the meaning of an error and therefore amenable to the jurisdiction u/s.263 of the Act. See COCHIN INTERNATIONAL AIRPORT LTD 2025 (2) TMI 986 - KERALA HIGH COURT wherein held that the order sought to be revised contained error for lack of reasoning; (b) the order sought to be revised proceeds on incorrect assumption of facts and applies the law incorrectly and (c) stereotype orders passed by the assessing officer simply accepting the version of the assessee. Coming to the facts of the instant case perusal of the assessment order it would show that the AO did not show any application of mind and mechanically accepted the claim for allowability of guarantee commission fees paid to the State Government of Kerala. Therefore we do not find any fault with the PCIT for exercising his jurisdiction u/s.263 of the Act. Decided against assessee.

The core legal questions considered in this judgment are:

(i) Whether the Principal Commissioner of Income-tax (PCIT) was justified in invoking the revisionary jurisdiction under section 263 of the Income-tax Act, 1961 ("the Act") on the ground that the original assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interests of the revenue;

(ii) Whether the AO's failure to examine the applicability of section 40(a)(iib) of the Act in respect of guarantee commission paid by the appellant company to the State Government of Kerala constitutes an error warranting revision under section 263;

(iii) Whether the guarantee commission paid to the State Government of Kerala falls within the ambit of disallowance under section 40(a)(iib) of the Act;

(iv) The scope and limits of the revisional power under section 263 of the Act, particularly regarding the nature of error required to invoke such power and the necessity of prejudice to revenue;

(v) The applicability of precedents, including the Supreme Court decision in Kerala State Beverages (Manufacturing & Marketing) Corporation Ltd. v. ACIT, and relevant High Court rulings on the exercise of jurisdiction under section 263.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income-tax Act:

Legal framework and precedents: Section 263 empowers the Commissioner of Income-tax to revise an assessment order if it is found to be erroneous and prejudicial to the interests of the revenue. The Supreme Court has clarified in Malabar Industrial Co. Ltd. vs. CIT and CIT vs. Max India Ltd. that both conditions-error and prejudice-must be cumulatively satisfied. The error must be such that it is not a debatable or plausible view but a clear legal or factual mistake. The revisional power is not meant to correct every error but only those that cause prejudice to revenue and where the AO has failed to apply mind or conduct necessary enquiry.

Court's interpretation and reasoning: The Tribunal emphasized that the AO's failure to examine the applicability of section 40(a)(iib) in respect of guarantee commission paid to the State Government of Kerala was a palpable error. The AO mechanically accepted the claim without any inquiry or application of mind, which is contrary to the dual role of the AO as both adjudicator and investigator. This failure to consider a relevant statutory provision and the absence of reasoning in the assessment order rendered it erroneous and prejudicial to revenue.

Key evidence and findings: The assessment order did not contain any discussion or examination of section 40(a)(iib) despite the large payment of guarantee commission (Rs. 53,22,39,975) to the State Government. The PCIT's show cause notice and subsequent order relied on this non-examination as a fundamental error.

Application of law to facts: The Tribunal applied the principles laid down in the cited Supreme Court decisions and the jurisdictional High Court ruling in Cochin International Airport Limited v. ACIT, which held that section 263 applies to orders passed without application of mind, incorrect assumptions, or lack of reasoning. The AO's order fell into this category.

Treatment of competing arguments: The appellant contended that the guarantee commission was a business expenditure allowable under section 37(1) and not hit by section 40(a)(iib). The Tribunal noted this but held that the AO was required to examine the applicability of section 40(a)(iib) before allowing the claim. The failure to do so was an error, regardless of the ultimate correctness of the appellant's claim.

Conclusions: The Tribunal upheld the PCIT's exercise of revisional jurisdiction under section 263, finding the assessment order erroneous and prejudicial to revenue due to non-application of mind on a material issue.

2. Applicability of Section 40(a)(iib) to Guarantee Commission Paid to State Government:

Legal framework and precedents: Section 40(a)(iib) disallows any expenditure by way of guarantee commission or similar fees paid to a person in respect of guarantee given for any loan or borrowing made by the assessee. The Finance Bill 2013 memorandum and the Supreme Court decision in Kerala State Beverages (Manufacturing & Marketing) Corporation Ltd. v. ACIT clarified that such payments to government entities are also covered under this provision.

Court's interpretation and reasoning: The Tribunal referred to the Supreme Court ruling which held that guarantee commission paid to the State Government falls within the ambit of section 40(a)(iib). This settled law negates the appellant's argument that the payment is allowable under section 37(1) and not hit by section 40(a)(iib).

Key evidence and findings: The payment of Rs. 53,22,39,975 as guarantee commission to the State Government was undisputed. The AO's failure to consider section 40(a)(iib) in respect of this payment was the basis for the PCIT's revision.

Application of law to facts: Given the Supreme Court's authoritative interpretation, the guarantee commission payment is disallowable unless the AO conducts inquiry and applies the provision correctly. The AO's omission to do so rendered the assessment order erroneous.

Treatment of competing arguments: The appellant's reliance on section 37(1) was rejected in light of the binding Supreme Court precedent. The Tribunal did not delve into the merits of allowability but focused on the procedural lapse of non-application of mind by the AO.

Conclusions: The guarantee commission paid to the State Government is covered by section 40(a)(iib). The AO was duty-bound to examine and apply this provision before allowing the expenditure.

3. Scope and Limits of Revisional Power under Section 263:

Legal framework and precedents: The revisional power under section 263 is discretionary and limited to cases where the order is erroneous and prejudicial to revenue. The Supreme Court and High Courts have emphasized that not every error or difference of opinion qualifies for revision. The AO's order must be perverse, without application of mind, or based on incorrect assumption of facts or law.

Court's interpretation and reasoning: The Tribunal reiterated that the AO's role includes investigation and protection of revenue interest. A mechanical acceptance of claims without enquiry is a failure of duty. The Tribunal relied on the High Court's observations in Cochin International Airport Limited v. ACIT to highlight that section 263 is aimed at removing prejudice caused by erroneous orders passed without enquiry or application of mind.

Key evidence and findings: The AO's assessment order contained no reasoning or inquiry on the applicability of section 40(a)(iib), reflecting a stereotyped order accepting the appellant's claim.

Application of law to facts: This lack of application of mind and enquiry constituted an error attracting section 263 revision. The Tribunal found no plausible or debatable view taken by the AO on this issue.

Treatment of competing arguments: The appellant argued that the AO's view was plausible and hence not erroneous. The Tribunal rejected this, emphasizing that failure to examine a relevant statutory provision is not a plausible view but an error.

Conclusions: The revisional jurisdiction was rightly exercised by the PCIT as the AO's order was erroneous and prejudicial to revenue.

4. Treatment of the Appellant's Contentions:

The appellant contended that the guarantee commission was a business expenditure wholly and exclusively for business purposes under section 37(1) and not subject to disallowance under section 40(a)(iib). The Tribunal acknowledged this contention but underscored that the AO was required to examine this issue and apply the law accordingly. The absence of such examination and reasoning rendered the assessment order erroneous. The Tribunal did not adjudicate on the ultimate allowability but focused on the procedural and legal correctness of the assessment order.

Significant Holdings:

"The error in the assessment order should be one that it is not debatable or plausible view. In a case where the Assessing Officer examined the claim took one of the plausible views, the assessment order cannot be termed as an 'erroneous'."

"The role of the assessing officer under the Income Tax Act, 1961 is not only that of an adjudicator but also of an investigator and he cannot remain oblivious in the face of a claim without any enquiry. The assessing officer must exercise a dual role of protecting the interest of the Revenue as well as that of the assessee and that is the reason why he is expected to pass orders with utmost diligence."

"Section 263 of the Income Tax Act, 1961 applies in the following cases: (a) the order sought to be revised contained error for lack of reasoning; (b) the order sought to be revised proceeds on incorrect assumption of facts and applies the law incorrectly, and (c) stereotype orders passed by the assessing officer simply accepting the version of the assessee."

"The guarantee commission fee paid to the State Government of Kerala, falls within the ambit of sec.40(a)(iib) of the Act."

The Tribunal concluded that the PCIT rightly exercised jurisdiction under section 263 to set aside the assessment order for fresh adjudication after proper application of mind and inquiry into the applicability of section 40(a)(iib). The appeal filed by the assessee was dismissed accordingly.

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