2015 (9) TMI 693 - AT - Income Tax

Revision u/s 263 - direction of the CIT to the AO to reframe the assessment to disallow the expenditure for payment of reinsurance premium to associated enterprises u/s. 40(a)(i) - Held that - It can be safely concluded that the assessment order has not been made on an incorrect application of law. On facts, a perusal of the questionnaire issued alongwith the notice u/s. 142(1) of the Act dt. 18th August, 2008 shows that vide Question No. 29 the AO had sought details of all payments/expenses on which tax was deductible at source as per the provisions of the Act. Question No. 35 was with respect to details of amount remitted/sent abroad supported by RBI prescribed certificate issued by C.A u/s. 195 of the Act, 1961 and Question No. 37 was in connection with the transactions reported in the Form 3CEB. The assessee had filed a detailed reply in respect of these queries raised during the assessment proceedings. Thus the observation of the CIT that the payment to its associated enterprise has not been considered and examined by the AO for disallowance u/s. 40(a)(i) of the Act is incorrect in the light of the facts stated hereinabove. AO has taken a view which may be different from the view of the Ld. Commissioner and assuming that the view taken by the AO is a loss to the Revenue but the Hon ble Supreme Court in Malabar Industrial Co. Ltd. (2000 (2) TMI 10 - SUPREME Court ) has held that every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the Revenue, for e.g. when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income Tax Officer has taken one view with which the Ld. Commissioner does not agree, it cannot be treated as an order which is erroneous or prejudicial to the interest of Revenue unless the view taken by the Income Tax Officer is unsustainable in law. The Bombay High Court in CIT Vs Gabrial India Ltd., (1993 (4) TMI 55 - BOMBAY High Court) has held that the decision of the Income Tax Officer could not be held to be erroneous simply because in his order, he did not make an elaborate discussion in that regard . Thus the assessment order is neither erroneous nor prejudicial to the interest of the revenue. We, therefore, set aside the impugned order passed by the Ld. Commissioner u/s. 263 and restore that of the Assessing Officer passed u/s. 143(3) of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Whether the order passed by the AO under section 143(3) is erroneous and prejudicial to the interest of the Revenue.
2. Whether the payment of reinsurance premium to associated enterprises without deducting tax at source is liable for disallowance under section 40(a)(i) of the Act.
3. Whether the CIT was justified in invoking section 263 of the Act to direct the AO to reframe the assessment.

Analysis:

Issue 1:
The appeal challenges the order of the Ld. CIT-10, Mumbai regarding the assessment year 2005-06. The CIT found the AO's order under section 143(3) to be erroneous and prejudicial to the Revenue due to non-deduction of tax at source on payment to associated enterprises.

Issue 2:
The CIT invoked section 263 based on the belief that the assessee made a payment to its associated enterprises without deducting tax at source, potentially violating section 40(a)(i) of the Act. The assessee argued that the payment was exempt under the Double Taxation Avoidance Agreement and CBDT Circulars, supported by a declaration from the enterprise in Singapore.

Issue 3:
The CIT's decision was challenged by the assessee, contending that the AO had made necessary inquiries during assessment proceedings, including queries related to tax-deductible payments and expenses. The Tribunal's decision in a previous year's case supported the assessee's position that the payment was not taxable in India.

Conclusion:
The Tribunal analyzed the CIT's decision under section 263 in light of the requirement that the AO's order must be both erroneous and prejudicial to the Revenue. The Tribunal found that the AO's assessment was not based on an incorrect application of law, as evidenced by the inquiries made during assessment proceedings and the previous Tribunal decision. Therefore, the Tribunal set aside the CIT's order and restored the AO's assessment under section 143(3) of the Act. The appeal by the assessee was allowed, emphasizing that not every loss of revenue constitutes an order prejudicial to the interest of the Revenue.

This detailed analysis of the legal judgment highlights the key issues, arguments presented, and the Tribunal's decision in a comprehensive manner.