9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2025 (4) TMI 1557 - AT - Income TaxRevision u/s 263 - allowability of legal and professional expenses loan origination costs and Direct Selling Agent (DSA) costs u/s 37 allowability of other expenses including year-end provisions treatment of cost allocation charges allowability of finance costs amounting to Rs. 40.35 crores correctness of depreciation claimed and admissibility of employee benefit expenditure HELD THAT - When due enquiries have been made by the AO in the course of assessment proceedings merely because the fact of making enquiries were not recorded by him in the assessment order the order of the ld AO does not become erroneous. There is no need for the AO to state in his assessment order as to what enquiry he had made with regard to various issues in the assessment. He is expected to address only those issues where he is not in agreement with the claim of the assessee and he is not expected to write a thesis in the assessment order. Merely because a particular fact of enquiry is not reflected in the assessment order of the AO it does not automatically tantamount to non-enquiry by the AO and assessment being framed with non application of mind by the ld AO. Legal and Professional charges loan origination cost and DSA cost - more than adequate enquires have been made by the ld AO with regard to legal and professional charges and loan origination cost in the assessment proceedings itself. Hence it cannot be said by any stretch of imagination that adequate enquiries were not made by the AO. This is not the case of no enquiry by the ld AO qua the impugned issue. PCIT had merely directed the ld AO to examine the allowability of the same u/s 37 of the Act in the light of the observation given by the auditors in the financial statements. PCIT had not even stated as to why the observations made in the financial statements by the auditors have any adverse impact on the computation of income of the assessee qua these issues. On the other hand the assessee had furnished complete details and had also proved before the AO that this has been claimed by it on a consistent basis by clearly bringing on record the differential treatment given in the books of account and in the income tax computation. PCIT had merely directed the AO to make fishing and roving enquiries on the impugned issue without bringing on record the error committed by the ld AO in the assessment order. Other expenses which includes year-end provision - The assessee furnished the reply dated 07.04.2021 giving the details of various expenses in a tabular form explaining the nature and the amount incurred under the respective head. The assessee also submitted that the revenue had increased three fold during the year from its business operations whereas the expenditure had increased only less than 2 fold during the year. Accordingly it justified the claim of expenses to be in consonance with the revenue earned during the year. The assessee also gave the specific explanation with regard to year-end provision of Rs. 7.91 crores by drawing direct attention to Note No. 24 of the audited financial statements which is already reproduced supra as to how the year-end provision for expenses are accounted and reflected. Even before us the assessee explained that in the computation of income the amount of Rs. 6.77 crores being year-end provision created was suo moto disallowed by the assessee and the balance provision of Rs. 1.13 crores pertains to the provision for capital expenditure which has not been included in the capital work in progress and not all debited to profit and loss account. Hence there is no question of disallowing year-end provision again for Rs. 7.91 cores as directed by the ld PCIT in his revision order. No hesitation to hold that the ld PCIT grossly erred in assuming revision jurisdiction u/s 263 of the Act qua the issue of other expenses and year-end provision for expenses. Cost Allocation charges - We find that the ld PCIT had not understood the basic fact that this cost allocation charges represent income of the assessee and not expenditure. Without understanding this preliminary fact he had directed the ld AO to verify and examine the same. Either way this is not even prejudicial to the interest of the revenue as it only represent income of the assessee. Hence revision jurisdiction u/s 263 of the Act could not be exercised by the ld PCIT for the same. Finance Cost - The assessee filed its reply dated 08.01.2021 giving the complete details of long term and short term borrowings obtained from various banks and financial institutions together with the details of interest paid thereon. Hence it cannot be said that the ld AO had made any enquiry on the finance cost of Rs. 40.35 crores. PCIT erred in assuming revision jurisdiction u/s 263 of the Act qua this issue. Further we also find the ld PCIT absolutely without any basis had concluded that the finance cost is not allowable as deduction. As stated earlier the finance cost is the raw material for a finance company. How the raw material (interest paid in this case) be not allowed as deduction. It is not even the case of the ld PCIT that the borrowed funds were not utilized by the assessee for its business. The assessee is engaged in the business of financing i.e. advanced loan to others and earning interest income. For this purpose it had used own funds as well as borrowed funds. For the borrowed funds it has to pay interest. That interest cost becomes an allowable deduction under the head business. Depreciation - There is absolutely no reason for the ld AO to take a divergent view in this regard. Very strangely the ld PCIT goes to conclude that the depreciation has not been correctly claimed which is without any basis and the decision of the Hon ble Supreme Court in the case of ICDS Ltd had to be rejected without adducing any reasons. The directions given by the ld PCIT to the ld AO are merely to make fishing and roving enquiry which in our considered opinion is not permissible in proceedings u/s 263. Hence we have no hesitation to quash the assumption of revision jurisdiction u/s 263 of PCIT qua this issue. Employee benefit expenditure - The employee benefit expenditure based on actual and based on actuarial valuation are reflected in the audited financial statements at pages 3 to 53 of the Paper Book vide Note No. 23 of the audited financial statement. PCIT does not find any error in the said working. In fact the assessee had already made suo moto disallowance of amount debited to the profit and loss Account with regard to provisions made on account of employee benefit expenditure and had claimed the actual amount of payment of gratuity and earned leave encashment in accordance with provisions of Section 43B of the Act. This fact is also duly reflected in the tax audit report. Whatever is the unpaid portion the assessee had voluntarily added back in the computation. We find that the ld PCIT does not point out any error in the action of the assessee or in the action of the ld AO in accepting to the contentions of the assessee. We have no hesitation to quash the entire revision order u/s 263 of the Act by the ld PCIT by holding that revision jurisdiction have been invalidly assumed by PCIT and his action cannot be sustained in the eyes of law. Accordingly grounds raised by the assessee are allowed.
The primary legal question considered is whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking the revision jurisdiction under section 263 of the Income-tax Act, 1961 ("the Act") in the facts and circumstances of the case. The issues revolve around whether the assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interests of the revenue, thereby warranting revision under section 263.
Several subsidiary issues were examined as part of the revision proceedings and the appeal, including:
Each of these issues was examined in detail to determine whether the AO's assessment order was erroneous and prejudicial to the revenue, thus justifying the PCIT's revision under section 263. Issue-wise Detailed Analysis 1. Jurisdiction under Section 263 of the Act The Court emphasized that the PCIT's power to revise an assessment order under section 263 is subject to two cumulative conditions: (i) the assessment order must be erroneous, and (ii) the order must be prejudicial to the interests of the revenue. The Court reiterated that if either of these conditions is not satisfied, revision jurisdiction cannot be exercised. This principle was supported by precedents from the Supreme Court, including the decisions in the Malabar Industrial Co. Ltd. and Max India Ltd. cases. The Court found that the PCIT did not demonstrate any specific error in the AO's order or failure to make enquiries. Instead, the PCIT directed the AO to conduct fresh, unspecified investigations ("fishing and roving enquiries") on issues that had already been addressed during the original assessment proceedings. The Court held that mere absence of detailed enquiry notes in the AO's order does not imply non-enquiry or non-application of mind. The AO is only required to address points of disagreement with the assessee's claims, not to document every enquiry made. This view was supported by various judicial decisions emphasizing that lack of explicit enquiry narration in the assessment order does not render it erroneous. 2. Legal and Professional Charges, Loan Origination Cost, and DSA Cost The AO had issued multiple notices under section 142(1) seeking detailed explanations and documentation regarding these expenses. The assessee provided comprehensive replies, including agreements, invoices, and consistent accounting treatment across years. The AO accepted these explanations and allowed the claims after verification. The PCIT's revision order questioned the allowability of these expenses under section 37 but did not point out any specific error or omission by the AO. The Court found that the PCIT's directions amounted to unwarranted fishing enquiries without establishing any error in the AO's order. The Court concluded that the revision jurisdiction was wrongly invoked in this respect. 3. Other Expenses Including Year-End Provisions The assessee's audited financial statements included a detailed breakdown of other expenses and year-end provisions, with explanatory notes clarifying the accounting treatment of provisions for expenses incurred but not invoiced. The AO had issued notices and the assessee submitted detailed justifications and supporting documents. The assessee had also made voluntary disallowances of certain provisions in the income computation, demonstrating prudence and compliance. The PCIT directed the AO to verify these expenses and provisions again, including ordering additions for year-end provisions. The Court held that since the AO had already made adequate enquiries and the assessee had voluntarily disallowed certain amounts, the PCIT's revision was unjustified. No error in the AO's order was demonstrated, and the revision jurisdiction was improperly exercised. 4. Cost Allocation Charges The Court noted that the cost allocation charges of Rs. 12.07 crores represented amounts recovered from group companies for common expenses incurred by the assessee. These charges were netted off against other expenses and thus constituted income rather than expenditure. The PCIT's direction to verify these charges as expenses reflected a fundamental misunderstanding of the facts. The Court held that since these charges represented income, they could not be disallowed as expenses, nor could they prejudice the revenue. Therefore, revision jurisdiction could not be invoked on this issue. 5. Finance Cost The assessee, as a Non-Banking Finance Company (NBFC), incurs finance costs (interest on borrowings) as a necessary and ordinary business expense. The AO had issued specific notices seeking details of borrowings and interest paid, and the assessee had provided complete information. The AO accepted the finance costs as allowable deductions. The PCIT's revision order questioned the allowability of finance costs without any basis, ignoring the fact that finance cost is the "raw material" for a finance company and is deductible if incurred for business purposes. The Court found no error or omission in the AO's order and held that the PCIT's direction for further enquiry was unwarranted and amounted to impermissible fishing. 6. Depreciation The assessee claimed depreciation of Rs. 23.68 crores, with detailed schedules and explanations submitted during assessment. The AO had issued specific queries and the assessee had relied on the Supreme Court's decision in the ICDS vs. CIT case, which held that the lessee under a finance lease is entitled to claim depreciation. The AO accepted this position and allowed the depreciation claim. The PCIT's revision order questioned the correctness of the depreciation claim without adducing any new evidence or reasons, effectively rejecting the Supreme Court's binding precedent. The Court noted that the issue had also been decided in favour of the assessee in earlier assessment years by the Tribunal. The PCIT's directions were thus held to be baseless and amounted to impermissible fishing and roving enquiries. 7. Employee Benefit Expenditure The employee benefit expenses, including actuarial valuations, were reflected in the audited financial statements. The assessee had made voluntary disallowances in the computation of income and claimed deductions in accordance with section 43B of the Act. The AO accepted these claims, and the PCIT did not point out any error in the AO's order. The Court held that the PCIT erred in assuming revision jurisdiction on this issue as there was no error or prejudice to revenue demonstrated. 8. Explanation 2 to Section 263 The Departmental Representative argued that Explanation 2 to section 263 allows revision even if enquiries were made, as long as the AO's order is erroneous and prejudicial. The Court rejected this argument, reasoning that if accepted, it would render all assessments subject to revision regardless of enquiry, defeating the purpose of enquiry during assessment. The Court emphasized that before invoking Explanation 2, the PCIT must find that no enquiry was made on the issue sought to be revised. Since the AO had made adequate enquiries on all issues, the case laws cited by the Department were distinguishable and inapplicable. Significant Holdings "The law is very well settled with the ld PCIT is duty bound to bring on record the satisfaction of twin conditions cumulatively i.e. (i) order of the ld AO must be erroneous and (ii) it is prejudicial to the interest of the revenue. Even if one of the pre requisite twin conditions is not satisfied, then ld PCIT cannot invoke revision jurisdiction u/s 263 of the Act." "When due enquiries have been made by the ld AO in the course of assessment proceedings, merely because the fact of making enquiries were not recorded by him in the assessment order, the order of the ld AO does not become erroneous." "The ld PCIT had merely directed the ld AO to make fishing and roving enquiries on the details which are already placed on record... This is not permissible under section 263 of the Act." "Finance cost is the raw material for a finance company. How the raw material (interest paid in this case) be not allowed as deduction... The ld PCIT grossly erred in assuming revision jurisdiction." "The ld PCIT cannot be substitute his own opinion by taking shelter to Explanation 2 to section 263 of the Act in lieu of a opinion already framed by the ld AO." The Court ultimately quashed the entire revision order passed under section 263, holding that the PCIT had invalidly assumed revision jurisdiction. The AO's assessment order was neither erroneous nor prejudicial to the revenue, and the PCIT's directions amounted to impermissible fishing and roving enquiries. The appeal was allowed in favour of the assessee.
|
