2024 (11) TMI 275 - AT - Income Tax

Revision u/s 263 - CIT noted that the Auditors of Kiri Industries i.e. the assessee had certified that an interest amount had been paid by the assessee u/s 201(1A) and 206C(7) towards late payment of TDS - CIT observed that the AO did not disallow these expenses, which were categorized as penalties by the Auditors of the assessee company, thus AO's failure to disallow this amount led to the assessment order as being erroneous and prejudicial to the interests of the Revenue HELD THAT - We observe that in the case of Resolve Salvage Fire India (P.) Ltd 2022 (4) TMI 906 - ITAT MUMBAI has held that interest paid on delayed payment of TDS under section 201(1A) would be compensatory in nature and thus, was to be allowed as deduction. Therefore, in view of the above judicial precedent and other precedents cited by the Counsel for the assessee, we are of the considered view that the AO has taken a legally plausible view, duly supported by judicial precedents. In a decision rendered in the case of CIT Vs. Sunbeam Auto 2009 (9) TMI 633 - DELHI HIGH COURT wherein, while considering the distinction between lack of inquiry and inadequate inquiry, the Hon'ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 on the ground of inadequate inquiry. Accordingly, when the AO has taken a legally plausible view, duly supported by judicial precedents, then, in our considered view the Principal CIT is precluded from taking recourse to 263 proceedings only with a view to substitute another view with that of the view taken by the AO, unless the view taken by the Assessing Officer is wholly unsustainable - Assessee appeal allowed.

Issues Involved:

1. Jurisdiction under Section 263 of the Income Tax Act.
2. Nature of interest on late payment of TDS - compensatory or penal.
3. Allowability of interest on late payment of TDS as a deductible expenditure under Section 37 of the Income Tax Act.
4. Adequacy of inquiry conducted by the Assessing Officer (AO).

Issue-wise Analysis:

1. Jurisdiction Under Section 263:
The primary issue in this case was whether the Principal Commissioner of Income Tax (PCIT) correctly assumed jurisdiction under Section 263 of the Income Tax Act. The PCIT invoked Section 263 on the grounds that the assessment order was erroneous and prejudicial to the interests of the Revenue. However, it is established that for Section 263 to be invoked, two conditions must be satisfied: the order must be erroneous, and it must be prejudicial to the interest of the Revenue. The appellant argued that the order was neither erroneous nor prejudicial, as the AO had adopted a legally permissible view supported by judicial precedents. The Tribunal upheld this argument, referencing the Supreme Court's decision in "Malabar Industrial Co. Ltd. vs. CIT," which states that if an AO adopts one of the permissible courses in law, it cannot be treated as erroneous merely because the Commissioner disagrees.

2. Nature of Interest on Late Payment of TDS:
The PCIT categorized the interest on late payment of TDS as a penalty, which should have been disallowed by the AO. The appellant contended that the interest was compensatory, not penal, and thus allowable under Section 37. The Tribunal referred to various judicial precedents, including "Resolve Salvage & Fire India (P.) Ltd." and "Kaypee Mechanical India P. Ltd.," which supported the view that such interest is compensatory. The Tribunal agreed with the appellant, concluding that the interest was compensatory, as it compensated the Government for the delay in payment, and was therefore deductible.

3. Allowability of Interest as Deductible Expenditure:
The appellant argued that the interest on late payment of TDS was allowable under Section 37, as it was compensatory. The Tribunal examined the nature of the interest and found it to be compensatory, aligning with the appellant's stance. The Tribunal noted that the interest was not linked to the appellant's income tax but was a liability incurred as an agent of the Government concerning third-party payments. Therefore, the Tribunal held that the interest was deductible under Section 37 and not subject to disallowance under Section 40(a)(ii).

4. Adequacy of Inquiry by AO:
The PCIT argued that the AO failed to consider the Audit Report's indication of the inadmissibility of the claimed interest. However, the appellant maintained that all relevant details were provided during the original assessment, and the AO had made a conscious decision. The Tribunal emphasized the distinction between lack of inquiry and inadequate inquiry. It reiterated that if the AO had made inquiries, even if deemed inadequate, the order could not be set aside under Section 263 solely because the Commissioner held a different opinion. The Tribunal found that the AO's view was legally plausible and supported by judicial precedents, thus precluding the PCIT from invoking Section 263 merely to substitute his judgment.

In conclusion, the Tribunal allowed the appeal, ruling that the PCIT erred in invoking Section 263, as the AO's order was neither erroneous nor prejudicial to the Revenue's interest. The Tribunal emphasized the need for both conditions to be satisfied for Section 263 to be applicable and upheld the deductibility of interest on late payment of TDS as a compensatory expense.

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