As AO made ruling without conducting sufficient inquiry, revisionary actions under Section 263 were justified

Fact and issue of the case

This appeal at the instance of the assessee is directed against PCIT’s order dated 27.03.2023, passed under section 263 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2018-19.

The grounds raised read as follows:

General Grounds

The Principal Commissioner of Income Tax, Bengaluru-1, Bengaluru (Pr. CIT’) erred in passing the order under section 263 of the Income Tax Act (the Act’) by holding that the order passed by the Deputy Commissioner of Income Tax, Circle – NFAC (`AO’) as erroneous and prejudicial to the interest of the revenue. The order passed under section 263 is bad in law and liable to be quashed.

The learned Pr. CIT erred in disregarding the submissions made by the Appellant and remanding all the issues to the learned AO to verify and pass a suitable order demonstrating the fact that the learned Pr. CIT is seeking to make fishing and roving enquiry, which is not permissible under the provisions of section 263 of the Act.

Grounds relating to the order passed under section 263

The learned Pr. CIT erred in holding that the assessment order passed u/s 143(3) was erroneous in so far as it is prejudicial to the interests of revenue as per clause (a) of explanation 2 of section 263.

The learned Pr. CIT erred in concluding that the assessment order passed under section 143(3) was made without making proper inquiries or verification regarding the allowability of certain expenditures.

The learned Pr. CIT failed to appreciate that: a) the issues proposed to be revised in the order passed under section 263 were verified by the learned AO during the assessment proceedings under section 143(3). b) Inadequacy of enquiry by the learned AO during the assessment proceedings under section 143(3) cannot be a ground to assume jurisdiction under section c) the principles of res-judicata are inapplicable to appellate proceedings under the Act and that assessment of one year cannot govern the assessment of another/later years.

Without prejudice, the learned Pr. CIT erred in not appreciating that revision under section 263 cannot be made where two views are possible and the AO has accepted one of the possible views while passing the assessment order.

Without prejudice, the learned Pr. CIT has erred in not appreciating that the assessment order passed under section 143(3) accepting the payment of sales incentives without deduction of TDS was not prejudicial to the interests of revenue as the same was offered to tax by the respective dealers in their return of income filed for AY 2018-19.

On facts and circumstances of the case and in law, the assumption of jurisdictional by the learned Pr. CIT under section 263 is bad in law and the consequent order is to be quashed in its entirety.

Grounds relating to applicability of section 194H

The learned Pr. CIT erred in holding that sales incentives paid to dealers to the tune of Rs. 9,38,92,257 is liable to tax deduction at source under section 194H of the Act.

The learned Pr. CIT failed to appreciate that the provisions of section 194H are inapplicable in the absence of a principal-agent relationship.

The learned Pr. CIT erred in stating that disallowance under section 40(a)(ia) is to be made in line with assessments concluded for earlier assessment years i.e., AY 2016-17 and AY 2017-18.

On facts and circumstances of the case and in law, the proposed invocation of the provisions of section 194H in relation to the payment made towards sales incentives to dealers is bad in law and deserves to be quashed.

Grounds relating to addition of deferred tax

The learned Pr. CIT erred in holding that a deduction was claimed to the tune of Rs.42,87,627 towards provision for deferred tax under section 40(a)(ii) of the Act.

The learned Pr. CIT failed to appreciate that the provision for deferred tax was added back to book profits to arrive at the figure of taxable profits for the purposes of the Act.

Without prejudice to the above, addition of an amount of Rs. 42,87,627 towards provision for deferred tax would lead to double addition and the same is against the basic cannons of taxation.

On the facts and circumstances of the above, the proposed addition of the provision for deferred tax is bad in law and deserves to be deleted.

Observation o the court

The major issue for the PCIT to invoke revisionary jurisdiction is regarding the allowability of sales promotion incentive which was admittedly not subjected to TDS under section 194H of the Act. If the sales incentive is a payment made on principal-to-principal basis, the same need not be subjected to TDS under section 194H of the Act. However, if the said expenditure incurred is on a principal to agent basis, the said payment would come within the purview of commission under section 194H of the Act, and non-deduction of TDS would entail the expenditure to be disallowed under section 40(a)(ia) of the Act. To determine whether the sales incentive which is paid by the assessee to its dealers is in the nature of ‘discount’ or ‘commission’, necessarily the agreement between the assessee and its dealers has to be examined. On an query from the Bench during the course of hearing, the learned AR candidly admitted that the agreement between the assessee and its dealers for making the payments of sales incentive was never placed before the AO during the course of assessment proceedings. Mere furnishing of sales ledger, credit note, etc., by itself would not be a determining factor whether the sales incentive would be in the nature of ‘commission’ or ‘discount’. We fail to understand how the AO has allowed the impugned expenditure without examining / verifying the agreement entered into between the assessee (the payer) and its dealers (the payees). Therefore, on the facts of the instant case, the Assessment Order has been passed without verification, which should have been made, and the PCIT was well within the jurisdiction to have invoked the revisionary powers under section 263 of the Act.

Moreover, we find that on identical issue, the matter is pending before the CIT(A) for Assessment Years 2016-17 and 2017-18. The PCIT has only directed the AO to carryout necessary enquiry / verification after affording sufficient opportunity of being heard to the assessee. Therefore, in the strict sense, there is no prejudice caused to the assessee.

For the aforesaid reasoning, we uphold the order of the PCIT as correct and in accordance with law. It is ordered accordingly.

In the result, appeal filed by the assessee is dismissed.