2020 (6) TMI 604 - AT - Income Tax

Revision u/s 263 - Assessee failed to substantiate the necessity of payment of large amount of commission in a business of sale of Electric Goods, as well as failed to produce evidence of rendering service - also transpired from record that details of the parties to whom commission were paid were not produced by the assessee - AO Chose to disallow on adhoc basis @ 20% of the expenditure claimed as commission payments - HELD THAT - A perusal of the assessment order and the details filed by the assessee before the AO, in reply to the queries raised by the Assessing Officer during the assessment proceedings demonstrate that this is not a case of lack of enquiry as stated by the ld. Pr. CIT in the last paragraph of his order. This statement is factually incorrect. AO has called for information on the claim of deduction of expenditure made by the assessee and in response thereto, the assessee has filed voluminous details. Payments were made on receipt of claim bills through banking channels. Tax was also deducted at source from these payments. The bills raised by the commission agents along with the list of electric items sold by them based on which the commission was claimed was placed before the AO as well as the ld. Pr. CIT. This is also a fact that the assessee has been paying and claiming as a deduction commission paid to agents, for all the previous Assessment Years as well as for the subsequent Assessment Years. It is common knowledge that in this segment of business, the competition is severe and requires special measures to boost sales. The payment of commission has been accepted as genuine by the revenue in the earlier years as well as in the subsequent Assessment Years. AO has taken a possible view that the expenditure in question claimed by the assessee as commission payment, is allowable in part. This cannot be a case of lack of enquiry or non-application of mind. The issue whether third party enquiries have to be made or not during the course of investigation, is the prerogative of the AO, as he is the investigator. The type, nature and extent of investigation is the prerogative of the Assessing Officer. Pr. CIT, cannot, in our view, invoke his power u/s 263 for revising an order passed u/s 143(3) of the Act for the reason that in his view, the investigation/enquiry should be conducted in a particular manner or to a particular extent. Inadequate enquiry cannot be a ground of revision. we have to necessarily hold that the exercise of revisionary power by the ld. Pr. CIT, u/s 263 of the Act, is bad in law. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the exercise of revisionary power under Section 263 of the Income Tax Act, 1961.
2. Examination of the necessity and genuineness of commission payments.
3. Adequacy of the Assessing Officer's (AO) inquiries and verification procedures.
4. Whether the original assessment order was erroneous and prejudicial to the interest of the revenue.

Detailed Analysis:

1. Validity of the Exercise of Revisionary Power under Section 263 of the Income Tax Act, 1961:
The Appellate Tribunal ITAT Kolkata examined whether the Principal Commissioner of Income Tax (Pr. CIT) was justified in invoking Section 263 of the Income Tax Act to revise the order passed by the AO. The Tribunal emphasized that for the Pr. CIT to exercise revisionary power under Section 263, two conditions must be satisfied: the order must be erroneous and prejudicial to the interest of the revenue. The Tribunal cited various case laws, including Malabar Industrial Co. Ltd. v. CIT and Max India Ltd., to assert that an order cannot be considered erroneous simply because the Pr. CIT holds a different view. The Tribunal concluded that the AO had conducted sufficient inquiries and had taken a possible view, thus the exercise of revisionary power by the Pr. CIT was not justified.

2. Examination of the Necessity and Genuineness of Commission Payments:
The assessee argued that the commission payments were necessary due to the competitive nature of the business in consumer durable goods. The assessee provided detailed records of the commission payments, including ledger accounts, TDS details, and bills raised by the commission agents. The Tribunal noted that the AO had examined these documents and had made a disallowance of 20% of the commission payments on an ad-hoc basis. The Tribunal found that the AO had considered the necessity and genuineness of the commission payments and had taken a possible view based on the evidence provided.

3. Adequacy of the Assessing Officer's Inquiries and Verification Procedures:
The Pr. CIT contended that the AO had not conducted proper inquiries and had failed to verify the genuineness of the commission payments from third parties. However, the Tribunal observed that the AO had called for information and had received voluminous details from the assessee. The Tribunal emphasized that the extent and nature of inquiries are within the AO's discretion. The Tribunal held that the AO had conducted adequate inquiries and had taken a possible view based on the materials available on record.

4. Whether the Original Assessment Order was Erroneous and Prejudicial to the Interest of the Revenue:
The Tribunal analyzed whether the original assessment order was erroneous and prejudicial to the interest of the revenue. The Tribunal referred to various judgments, including CIT v. M/s. Inbuilt Merchant Pvt. Ltd. and CIT v. Alpha Hydronics Pvt. Ltd., which supported the view that the AO's order was not erroneous if it was based on a possible view and adequate inquiries were conducted. The Tribunal concluded that the AO's order was not erroneous or prejudicial to the interest of the revenue, and thus, the exercise of revisionary power by the Pr. CIT under Section 263 was not warranted.

Conclusion:
The Tribunal quashed the revisionary order passed by the Pr. CIT under Section 263 of the Income Tax Act, 1961, and allowed the appeal of the assessee. The Tribunal held that the AO had conducted sufficient inquiries and had taken a possible view on the allowability of commission payments, and thus, the original assessment order was neither erroneous nor prejudicial to the interest of the revenue.