2018 (8) TMI 916 - AT - Income Tax

Revision of assessment order u/s 263 - an order which is erroneous or detrimental to the interest of the revenue - invoking the provisions of section 36(1)(ii) - Commission paid to directors for services rendered - performance bonus paid to directors for services rendered to the company in terms of the board resolution. - Payment to avoid payment of dividend distribution tax (DDT) - Held that - The AO has called for necessary enquiries during the course of assessment proceedings in respect of payment of performance bonus for which the assessee has filed a detailed reply alongwith Board Resolution authorizing payment of performance bonus, reasons for payment of such bonus to Shri Dilip Raghavan. These facts were not disputed by the AO as the same are part of discussion in the body of the assessment order. The AO has discussed the issue of payment of performance bonus to the director in his assessment order and applied the provisions of section 40A(2) to disallow excess amount of ₹ 4,57,020. The PCIT is only on the point that the 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.

Summary

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (PCIT).
2. Disallowance of performance bonus under Section 36(1)(ii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (PCIT):

The assessee appealed against the PCIT's order invoking Section 263, arguing that the assessment order under Section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The PCIT had issued a show cause notice proposing to revise the assessment order on the grounds that the AO had incorrectly disallowed only a portion of the performance bonus under Section 40A(2) instead of the entire amount under Section 36(1)(ii). The PCIT alleged that the AO did not conduct proper verification and that the payment of the performance bonus was a method to avoid dividend distribution tax, thus prejudicial to the revenue's interest.

The tribunal noted that the AO had indeed conducted enquiries during the assessment proceedings, requesting and receiving detailed submissions from the assessee, including board resolutions and explanations justifying the performance bonus. The tribunal emphasized that for the PCIT to invoke Section 263, both conditions of the order being erroneous and prejudicial to the revenue must be satisfied. The tribunal found that the AO had applied his mind and made a partial disallowance under Section 40A(2), and therefore, the PCIT's invocation of Section 263 was incorrect.

2. Disallowance of performance bonus under Section 36(1)(ii) of the Income Tax Act, 1961:

The PCIT contended that the performance bonus paid to the director was unreasonable and a method to avoid paying dividend distribution tax, thus falling under the purview of Section 36(1)(ii). The tribunal, however, found that the AO had considered the performance bonus under Section 40A(2) and made a partial disallowance after thorough verification. The assessee had provided sufficient evidence, including board resolutions and the director's contributions to the company's profitability, justifying the performance bonus.

The tribunal referred to several judicial precedents, including the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which clarified that an order could not be termed erroneous unless it was not in accordance with the law. The tribunal concluded that the AO had conducted the necessary enquiries and applied the relevant provisions of the Act, thus the assessment order was neither erroneous nor prejudicial to the revenue's interest.

Conclusion:

The tribunal allowed the assessee's appeal, setting aside the PCIT's order under Section 263 and restoring the AO's assessment order under Section 143(3). The tribunal held that the AO had conducted appropriate enquiries and applied his mind to the facts, and the PCIT's invocation of Section 263 was unwarranted. The performance bonus was rightly considered under Section 40A(2) and not Section 36(1)(ii), as argued by the PCIT.