2016 (5) TMI 1569 - AT - Income Tax

Revision u/s 263 by CIT - AO while completing the assessment proceeding did not make enquiries which he ought to have made - HELD THAT - It is clear from the submissions and material available on record with regard to the sundry income credited in the profit and loss account the AO made the required inquiries. Though there is no specific reference by the AO on this aspect, yet the fact remains that the AO got the details of the sundry income and in the absence of any adverse observations in the order of AO it is to be presumed that he was satisfied that the income in question had nexus with the business of the assessee and therefore had to be recorded as income from business. There cannot also be any dispute with regard to the fact that the income from sale of scrap, foreign exchange fluctuation gain are inextricably linked to the profession income and have to be regarded as income from profession. With regard to the payment of service charges to Price Waterhouse Coopers again the required details were filed by the assessee and AO had raised specific queries on these charges. As pointed out by the learned counsel for the assessee similar charges had been allowed as deduction in the past. There was no reason for the AO to doubt the nexus of these expenses with the business of the assessee. With regard to the payment of policy premium to cover the risk of damages owing to professional negligence it cannot be disputed that the same was in relation to the business of the assessee. It is no doubt true that the AO while completing the assessment did not make any specific inquiries with regard to this item of expenditure, the fact, however, remains that these expenses have direct nexus with the business of the assessee and had to be recorded as expenses wholly and exclusively incurred for the purpose of the business of the assessee. Besides the above as rightly pointed out by the learned counsel for the assessee the CIT has not set out as to why this item of expenditure need to be investigated and as to what type of inquiry ought to have conducted by the AO. A mere observation that no proper details have been obtained, cannot be sufficient to come to a conclusion that the AO did not make proper and adequate inquiries which he ought to have made in the given facts and circumstances of this case. In the conclusion we are of the view that none of the reasons set out by the CIT for invoking the jurisdiction u/s 263 of the Act are sustainable. The impugned order of the CIT-A has to be quashed for the reason that order of the AO sought to be revised in the impugned order was neither erroneous nor prejudicial to the interest of the revenue for the reason of any law of inquiry that the AO ought to have made in the given facts and circumstances of the case. We accordingly quash the order u/s 263 of the Act and allow the appeal of the assessee.

Summary

Issues Involved:
1. Classification of Sundry Income.
2. Deductibility of PWC Global Services Charges.
3. Allowability of Accountant Risk Policy Premium.
4. Adequacy of AO's Inquiry during Assessment.

Issue-wise Detailed Analysis:

1. Classification of Sundry Income:
The CIT, Kolkata-XIX, Kolkata, exercised powers under Section 263 of the Income Tax Act, 1961, asserting that the AO's order was erroneous and prejudicial to the revenue. The CIT contended that the sundry income of ?10,35,13,136/- credited in the profit and loss account should have been considered under "Income from Other Sources" rather than "Income from Business or Profession." This misclassification allegedly led to an excessive deduction of partner’s salary under Section 40(b)(v) of the Act by ?3,68,36,524/-.

The Tribunal noted that the AO had indeed sought details regarding sundry income (Item No. 20 in the notice under Section 142(1)). The Assessee provided a breakdown, including ?10,02,60,000/- from Price Waterhouse Coopers BV, ?2,83,633/- from the sale of scrap, and ?29,69,503.46/- from foreign currency gain/loss. The Tribunal accepted the Assessee's argument that these amounts were intricately linked to the business, especially the non-refundable grant from PwC Services BV, which was for maintaining and enhancing resources and capabilities. Citing the Hon'ble Kolkata High Court's decision in Md. Serajuddin & Brothers vs. CIT, the Tribunal concluded that such income should be included in the book profit for computing partner’s salary deduction.

2. Deductibility of PWC Global Services Charges:
The CIT argued that the AO allowed a deduction of ?3,34,56,529/- for PWC Global Services Charges without proper inquiry into its nexus with the Assessee's business. The AO had obtained relevant agreements and invoices but allegedly did not investigate the nature and necessity of the services.

The Tribunal found that the Assessee had provided detailed responses and agreements during the original assessment. The services under the Firm Services Agreement (FSA) with PwC Services BV were essential for the Assessee's operations, including risk and quality management, learning and education, and audit transformation. The Tribunal noted that similar deductions had been allowed in previous assessments and found no reason to doubt the nexus of these expenses with the Assessee's business.

3. Allowability of Accountant Risk Policy Premium:
The CIT questioned the deduction of ?1,71,40,899/- for Accountant Risk Policy Premium, asserting that the AO did not obtain proper details or make requisite inquiries.

The Tribunal observed that the Assessee had provided details of insurance premiums in the original assessment proceedings. The premium was for professional indemnity insurance, covering risks of professional negligence, which is directly related to the business. The Tribunal referenced past assessments where similar deductions were allowed and concluded that the expenditure was wholly and exclusively for business purposes.

4. Adequacy of AO's Inquiry during Assessment:
The CIT's primary contention was that the AO failed to make adequate inquiries, rendering the assessment order erroneous and prejudicial to the revenue.

The Tribunal emphasized that the AO had made necessary inquiries and obtained detailed responses from the Assessee. It referenced the Delhi High Court's decision in Gee Vee Enterprises, which states that an AO's failure to make prudent inquiries can render an order erroneous. However, in this case, the Tribunal found that the AO had sufficiently investigated the facts and circumstances, and the CIT did not specify what further inquiries were necessary.

Conclusion:
The Tribunal concluded that the CIT's invocation of Section 263 was not sustainable, as the AO's order was neither erroneous nor prejudicial to the revenue. The Tribunal quashed the CIT's order and allowed the Assessee's appeal.

Separate Judgments:
The Tribunal delivered a separate judgment for ITA No.1278/Kol/2014, involving similar issues and reasoning, and quashed the CIT's order for the same reasons.

Result:
Both appeals by the Assessee were allowed.