TMI Blog2018 (8) TMI 916X X X X Extracts X X X X X X X X Extracts X X X X ..... he enquiries conducted by the AO is inadequate and he applied wrong provisions of the Act, which caused prejudice to the interest of the revenue. In the opinion of the PCIT, the enquiries conducted by the AO may be inadequate, but that by itself, would not be a ground for the PCIT to revise assessment order passed by the AO unless the PCIT specifically points out that the AO has grossly overlooked the issue during assessment proceedings. In this case, on perusal of details filed by the assessee, we find that the AO has caused necessary enquiries and the assessee has filed all details to justify payment of performance bonus, therefore, we are of the considered view that the PCIT was incorrect in terming the assessment order passed by the AO as erroneous and prejudicial to the interest of the revenue. The PCIT was totally incorrect in coming to the conclusion that payment of performance bonus is a colorable device for evading payment of dividend distribution tax. The PCIT was in correct in setting aside the assessment order passed by the AO u/s 263 of the Income-tax Act, 1961 - Revision order set aside - Decided in favor of assessee. - I.T.A No.4023 /Mum/2017 - - - Dated:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in the form of performance bonus which is paid to the director is as per the terms of the board resolution. 2. The brief facts of the case are that the assessee company which is engaged in the business of publication of books, periodicals and conducting seminars, conference, etc., filed its return of income for AY 2012-13 on 28-09-2012 declaring total income of ₹ 2, 94, 37, 160. The case has been selected for scrutiny and the assessment was completed u/s 143(3) of the Income-tax Act, 1961 on 26-02-2015 determining the total income at ₹ 2, 99, 85, 640 by making addition towards unreconciled receipts of ₹ 91, 454 an disallowance of excess performance bonus paid to directors u/s 40A(2) of the Act for ₹ 4, 57, 020. 3. Later, the Principal Commissioner of Income-tax-2, Mumbai (PCIT, henceforth) issued a show cause dated 15-03-2017 and asked the assessee as to why assessment order passed by the AO u/s 143(3) on 26-02-2015 shall not be revised u/s 263 of the Income-tax Act, 1961 for the reasons stated in his show cause notice. In the said show cause notice, the PCIT proposed to revise the assessment order on the ground that the assessment order passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director took charge of the affairs of the company and after he took over the charge, turned the fortunes of the company into profit for which the company has rewarded him by way of payment of performance bonus. The assessee further referring to the copy of Board Resolution submitted that the Board has approved payment of performance bonus considering the nominal salary drawn by the director and also such bonus is directly linked to business of the assessee. The AO, after considering all these facts and after being satisfied with the explanation furnished by the assessee chose to allow performance bonus paid to the director by disallowing certain portion u/s 40A(2), therefore, the order passed by the AO cannot be termed as erroneous insofar as it is prejudicial to the interest of the revenue. 4. The PCIT, after considering relevant submissions of the assessee and also relying upon certain judicial precedents including the decision of Hon ble Bombay High Court in the case of Loyal Motor Service Co vs CIT 14 ITR 647 (Bom) observed that the assessee has paid performance bonus @51% of gross revenue to the highest shareholder Shri Dilip Raghavan, who holds 35.27% share. The PCIT, fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. The Ld.AR, referring to the paper book filed, containing pages 1 to 97, submitted that the AO has issued show cause notice on various occasions for which the assessee has filed detailed reply, vide its letter dated 20-11-2014, 7- 05-2015 and submitted necessary evidences in support of payment of performance bonus including copy of Board Resolution authorizing such payment, duties performed by the director and also relevance of payment of such performance bonus. The Ld.AR further submitted that the director of the company has made business of the assessee from loss to profitability which is evident from the fact that the company was running into huge losses before he took over charge of the affairs of the company and after he took over the charge, he turned the fortunes of the company into profitability for which the company has suitably rewarded him by considering the minimum salary draw by him. The Ld.AR further submitted that it was agreed between the director of the company that he would draw minimum salary and also draw performance bonus which is directly linked to the business of the assessee. The assessee has continuously paid performance bonus to the director right from A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w a portion of bonus u/s 40A(2), whereas the right provision to be applied under the given facts and circumstances is section 36(1)(ii) which deals with any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or commission. The PCIT further observed that the assessee has paid performance bonus of 51% of gross revenue and which is 75% of net profit of the year which is highly unreasonable. The PCIT further observed that the assessee has devised a method whereby it avoids payment of dividend distribution tax by paying huge performance bonus to one of its directors which is evident from the fact that the director, alongwith his family members holding more than 90% of share capital of the company. Had, the assessee distributed dividend, it would have paid dividend distribution tax. The assessee, although derived huge profits not declared any dividend by paying huge performance bonus to the director of the company which caused prejudice to the interest of the revenue. The AO, without apprising these facts in right perspective in the light of provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions prescribed under the provisions of Act, viz. (i) the order is erroneous; and (ii) the same is also prejudicial to the interest of the revenue is not satisfied. Each and every erroneous order cannot be the subject matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed. 10. The phrase prejudicial to the interest of the revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue has a consequence of an order of AO cannot be treated as prejudicial to the interest of the revenue. For example, when an AO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the AO has taken one view with which the CIT did not agree with, it cannot be treated as an erroneous order prejudicial to the interest of the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iries conducted by the AO may be inadequate, but that by itself, would not be a ground for the PCIT to revise assessment order passed by the AO unless the PCIT specifically points out that the AO has grossly overlooked the issue during assessment proceedings. In this case, on perusal of details filed by the assessee, we find that the AO has caused necessary enquiries and the assessee has filed all details to justify payment of performance bonus, therefore, we are of the considered view that the PCIT was incorrect in terming the assessment order passed by the AO as erroneous and prejudicial to the interest of the revenue. 12. Now coming to the issue of performance bonus u/s 36(1)(ii) or u/s 40A(2) of the Act. The PCIT has given his own reasons to take the issue in the light of provisions of section 36(1)(ii) of the Act. According to the PCIT, the performance bonus paid by the assessee is 51% of total revenue at the year and 75% of net profit of the year which is highly unreasonable and which was paid to evade payment of dividend distribution tax. The PCIT has further stated that the director is holding 35.27% of share capital and other family members are holding remaining share c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial to the interests of the revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. 14. The assessee has also relied upon the decision of Hon ble Bombay High Court in the case of CIT vs Gabriel India Ltd (supra). The Hon ble Bombay High Court in the case held as under:- The power of suo motu revision under sub-section (I) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (1 ) the order is erroneous; and ( ii) by virtue of the order being erroneous prejudice has been caused to the interests of the revenue. It has. therefore, lo be considered firstly as to when an order can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enough to vest the Commissioner with the power of 'suo motu revision because the or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser fax than what was just has been imposed Therefore, in order to exercise power under section 263(1) there must be material before the Commissioner to consider that the order passed by the ITO was erroneous insofar as if is prejudicial to the interests of the revenue and that it must be an order which is not in accordance with the fan' or winch has been passed by the ITO without making any- enquiry in undue haste. An order can be said to be prejudicial to the interests of the revenue if it is not in accordance with the law in consequence whereof the lawful revenue due lo the State has not been realised or cannot be realised There must be material available on the record called for by the Commissioner to satisfy' him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings far revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion reached by the ITO. Section 263 did not empower him to take action on these facts to arrive at the conclusion that the order passed by the ITO was erroneous and prejudicial to the interest of the revenue. Since the material was there on record and the said material was considered by the ITO and a particular view was taken, the mere fact that different view could be taken, should not be the basis for an action under section 263 and it could not be held to be justified. 16. The assessee has also relied upon the decision of ITAT, Mumbai Bench H in the case of Khatiza Oomerbhoy (supra). The co-ordinate bench of ITAT, after considering relevant facts of the case and also the decision of Hon ble Supreme Court in the case of Malabar Industrial Co. Ltd vs CIT (supra), held as under:- The fundamental principle which emerge from the above cases may be summarized below : (i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interests of the Revenue. Both the conditions must be fulfilled, (ii) Sec. 263 cannot be ^invoked to correct each and every type of mistake or error committed by the AO and it is only when an order is erroneo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision of s. 263 cannot be invoked. While passing the order under s. 263, it is expected that the CIT should be prima facie satisfied about the erroneous nature of the assessment which has caused prejudice to the Revenue. Beyond stating that no further enquiries are made, there should be some material which must be pointed out to show how lack of an enquiry has caused prejudice to the Revenue. The Courts have held that jurisdiction under s. 263 cannot be utilized as an instrument for reopening concluded proceedings on flimsy grounds or on assumptions. This was the view expressed by the Tribunal, Delhi Bench, in the case of Triveni Engineering Works Ltd. (supra). The ratio of this case may also be reproduced below from the headnote : A bare reading of the provisions of s. 263 makes it clear that the prerequisite to the exercise of jurisdiction by the CIT under it is that order of the AO is erroneous insofar as it is prejudicial to the interest of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interest of the Revenue. The revisional jurisdiction of the CIT as a super ..... X X X X Extracts X X X X X X X X Extracts X X X X
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