Kiri Industries Ltd. Vs PCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that invocation of revisionary jurisdiction under section 263 of the Income Tax Act by the Principal CIT erred since AO has taken legally plausible view. Accordingly, order set aside.

Facts- The assessee filed the return of income declaring a total income of Rs. Nil. However, AO completed the assessment u/s. 143(3) read with Section 144B determining the assessed income at Rs. 3,37,97,789/-.

Later, PCIT was of the view that the AO had erred in not considering the Audit Report, which indicated the inadmissibility of the claimed interest. This oversight was deemed to have resulted in a loss of Revenue, thereby satisfying the conditions for revising the assessment u/s. 263. As a result, the Principal Commissioner exercised the powers conferred u/s. 263, setting aside the AO’s order.

Being aggrieved, against the order passed by PCIT u/s. 263, assessee has preferred the present appeal.

Conclusion- Held that when the Assessing Officer 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 Assessing Officer, unless the view taken by the Assessing Officer is wholly unsustainable. However, as noted by us in the preceding paragraphs, the view taken by the Assessing Officer is a legally plausible view and therefore, looking in the instant facts, Principal CIT erred in invoking revisionary jurisdiction u/s 263 of the Act.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal has been filed by the Assessee against the order passed by the Ld. Principal Commissioner of Income Tax, (in short “Ld. PCIT”), Ahmedabad-1, vide order dated 29.02.2024 passed for A.Y. 2018-19.

2. The Assessee has taken the following grounds of appeal:-

“1. The Ld. PCIT has grossly erred in law and on facts in assuming jurisdiction u/s.263 of the Act on the erroneous ground that the impugned assessment order is erroneous in so far as it is prejudicial to the interest of the revenue.

2. The Ld. PCIT has grossly erred in not appreciating that in order to invoke s.263, two conditions must be fulfilled viz. the impugned assessment order must be erroneous and that error must be prejudicial to the interest of the revenue. In the present case, Ld. AO has passed the reasoned assessment order after analyzing all details and therefore there was no error in the impugned assessment order so as to justify action u/s.263 of the Act. Under the circumstances, the very assumption of power u/s.263 of the Act is unjustified and bad in law and therefore, order u/s.263 of the Act deserved to be quashed.

3. The subject order u/s. 263 passed by the Ld. PCIT is illegal and bad in law in absence of any finding of Ld. PCIT how the alleged error of AO has resulted in loss of revenue particularly when interest paid u/s. 201(1A)/206C(7) on late payment of TDS/TCS has rightly been claimed as an allowable expenditure u/s. 37 of the Act.

4. The Ld. PCIT has further erred in law and on facts in not appreciating that the view taken by the AO during the assessment proceedings is a possible view and hence the revisionary proceedings are illegal and bad in law.

5. The ld. PCIT has further erred in law in not coming to any concrete conclusion and without conducting any inquiry or investigating the issue, merely directed the AO to frame the assessment order afresh. Without there being any positive finding about order being erroneous and prejudicial to the interest of the revenue, the action of ld. PCIT is without jurisdiction and illegal and hence deserves to be deleted.

6. PCIT has erred in not considering various facts, submissions, explanations and clarifications as given by the appellant and further erred in not appreciating the facts and law in their proper perspective.

7. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”

3. The brief facts of the case are that the assessee filed the return of income for the A.Y. 2018-19 on March 27, 2019, declaring a total income of Rs. Nil. However, the Assessing Officer (AO) completed the assessment under Section 143(3) read with Section 144B of the Income Tax Act (Act) on April 22, 2021, determining the assessed income at Rs. 3,37,97,789/-. The AO made several additions, including Rs. 1,56,10,238/- under Section 14A, a disallowance of employee contributions to the Provident Fund amounting to Rs. 88,94,666/- under Section 36(1)(va), a disallowance of Rs. 57,74,100/-concerning commission paid to non-residents and a sum of Rs. 35,18,785/-under Section 36(1)(iii) of the Act.

4. Subsequently, upon reviewing the records, Principal CIT noted that the Auditors of Kiri Industries i.e. the assessee had certified that an interest amount of Rs. 13,56,539/- had been paid by the assessee under Sections 201(1A) and 206C(7) towards late payment of TDS. Principal CIT observed that the AO did not disallow these expenses, which were categorized as “penalties” by the Auditors of the assessee company. Principal CIT was of the view that the AO’s failure to disallow this amount led to the assessment order as being erroneous and prejudicial to the interests of the Revenue. Accordingly, Principal CIT issued notice under Section 263 of the Act to the assessee company to explain why the assessment order should not be revised. During the hearing, the assessee submitted that the interest paid on late TDS was compensatory and not penal in nature. The assessee contended that the interest, amounting to Rs. 13,56,539/-, should be allowable under Section 37(1) of the Act as it compensated the Government for the loss of interest. The assessee company submitted that the nature of the payment was not linked to their income tax but rather constituted a liability incurred as an agent of the Government in relation to third-party payments. Therefore, the assessee submitted that the interest was deductible under Section 37, and not subject to disallowance under Section 40(a)(ii) of the Act. The assessee company submitted that during the original scrutiny assessment, all relevant details had been provided, and the AO had not raised any issues concerning the expenses claimed by the assessee. The assessee placed reliance on various judicial precedents in support of their position that the interest on late payment of TDS should not be disallowed. The Principal CIT was of the view that the AO had erred in not considering the Audit Report, which indicated the inadmissibility of the claimed interest. This oversight was deemed to have resulted in a loss of Revenue, thereby satisfying the conditions for revising the assessment under Section 263. As a result, the Principal Commissioner exercised the powers conferred under Section 263, setting aside the AO’s order dated April 22, 2021. The AO was directed to re-evaluate the claim regarding the interest on late payment of TDS amounting to Rs. 13,56,539/-, ensuring that a fresh assessment order was issued in accordance with the law after allowing the assessee a reasonable opportunity to present their case.

5. The assessee is in appeal before us against the order passed by Principal CIT u/s 263 of the Act. Before us, the Counsel for the assessee submitted in the context of invoking revisionary jurisdiction under section 263 of the Income Tax Act, it is established that two essential conditions must be met: first, the order of the Assessing Officer (AO) must be erroneous, and second, it must be prejudicial to the interest of Revenue. If either of these conditions is not fulfilled, the Principal Commissioner of Income Tax (Principal CIT) lacks the authority to invoke revisionary jurisdiction. This principle is reinforced by the Supreme Court decision in “Malabar Industrial Co. Ltd. vs. CIT” (2000) 243 ITR 83. In the present case, the learned Principal CIT failed to recognize that both conditions are necessary for the invocation of revisionary powers. If either condition is absent, the Principal CIT cannot proceed under section 263 of the Act. Furthermore, it is a well-established legal principle that interest on late payment of Tax Deducted at Source (TDS) under section 201(1) of the Act is considered compensatory in nature and, therefore, deductible under section 37. This stance of the assessee is supported by several court rulings, including “Resolve Salvage & Fire India (P.) Ltd.” (2022) 195 ITD 266 (Mum), “Kaypee Mechanical India P. Ltd.” (2014) 223 Taxman 346 (Guj), and several decisions from the Supreme Court, such as “Mahalaxmi Sugar Mills Co.” (1980) 123 ITR 429 and “Triveni Engineering Works Ltd.” (1983) 144 ITR 732. Therefore, even on substantive grounds, the addition proposed by the Principal CIT is untenable given the established legal principles. Consequently, the Counsel for the assessee submitted that the order of the Assessing Officer does not meet the criteria of being erroneous or prejudicial to Revenue interests, thus failing to satisfy the twin conditions required to invoke section 263 of the Act.

6. In response, the Ld. DR placed reliance on the case of Premier Irrigation Adritec 146 com 389 (Kolkata Tribunal) and on the case of Expat Engineering India Limited 149 Taxmann.com 451 (Bangalore Tribunal) in support of the proposition that interest payment on delayed deposit of TDS is not an allowable expenditure.

7. We have heard the rival contentions and perused the material on record. We observe that in the case of Resolve Salvage & Fire India (P.) Ltd. v. DCIT 139taxmann.com196 (Mumbai – Trib.), the ITAT 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. While passing the order, ITAT made the following observations:

5. Considered the rival submissions and materials placed on record. We observe that assessee has paid interest on late payment of TDS. We observe from various decisions relied upon by both the parties and we observe that Ld.CIT(A) has relied upon the decision of Ferro Alloys Corpn. (supra) in which the Hon’ble High Court has not discussed anything on merit considering the fact that the case Bharat Commerce Industries Ltd. v. CIT [1985] 20 Taxman 302/153 ITR 275 was pending before Hon’ble Supreme Court and we observe that even in the case of Bharat Commerce Industries Ltd, the issue involved is relating to interest paid on late payment of advance-tax. Therefore, the issue involved in the present case is not relating to late remittance of advance-tax but late remittance of TDS. Therefore, the issue involved is whether the interest paid by the assessee to the government can be termed as compensatory or penal in nature. In our considered view, the assessee has deducted the tax on behalf of the third party and failed to remit the same within the due date and the interest charged on such amount is only compensatory in nature. Here we notice that the co-ordinate bench of this Tribunal has already held the same view in the case of STUP Consultants (P.) Ltd. (supra) by observing as under :—

7. We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, AO has disallowed the interest expenses incurred by the assessee on account of late deposit of service tax and TDS after having reliance on the judgment of Hon’ble Supreme Court in the case of Bharat Commerce Industries Ltd. v. CIT (1998) (supra). The relevant extract of the judgment reads as under :—

FACTS

During the year under consideration, the assessee failed to pay advance tax equivalent to 75 per cent of estimated tax. The Assessing Officer levied\section 215 as well as under section 139. The assessee claimed that were payable were delayed, the assessee’s financial resources increased available for business purposes. Hence, the interest which was paid Government was interest on capital that would be borrowed by the assessee otherwise. Hence, the amounts should be allowed as deduction. The allow such deduction. The High Court affirmed the view. On appeal to the Supreme Court: HELD

When interest is paid for committing a default in respect of a statutory liability 10 advance tax, the amount paid and the expenditure incurred in that connection is in no way connected with preserving or promoting the business of the assessee. This is not expenditure which is incurred and which has to be taken into account before the profits of the business are calculated. The liability in the case of payment of income-tax and interest for delayed payment of income-tax or advance tax arises on the computation of the profits and gains of business. The tax which is payable is on the assessee’s income after the income is determined. This cannot, therefore, be considered as an expenditure for the purpose of earning any income or profits. Interest which is paid for delayed payment of advance tax on such income cannot be considered as expenditure wholly and exclusively for the purpose of business. Under the Act, the payment of such interest is inextricably connected with the assessee’s tax liability. If income-tax itself is not permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory objection under the Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction.

Therefore, it was to be held that deduction of interest levied under sections 139 and 215 would not be allowable under section 37.

In the above judgment, the claim of the assessee for interest expenses was denied as it defaulted to make the payment of advance tax as per the provisions of the Act. The advance tax is nothing but income tax only which the assessee has to pay on his income. In the instant case the default relates to the delay in the payment of advance tax and consequently interest was charged on the delayed payment of advance tax. In the above judgment the Hon’ble Apex Court held that as Income-tax paid by the assessee is not allowable deduction and therefore interest emanating from the delayed payment of income tax (advance tax) is also not allowable deduction.

However the facts of the instant case before us are distinguishable as in the case before us the interest was paid for delayed payment of service tax & TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature. As such the interest on delayed payment is not in the nature of penalty in the instant case on hand.

The issue of delay in the payment of service tax is directly covered by the judgment of Hon’ble Apex Court in the case of Lachmandas Mathura v. CIT reported in 254 ITR 799 in favour of assessee. The relevant extract of the judgment is reproduced below : “The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Bench’s decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 TTR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 (All.) (FB) wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue.”

In view of the above judgment, there remains no doubt that the interest expense on the delayed payment of service tax is allowable deduction.

The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates to the expenses claimed by the assessee which are subject to the TDS provisions. The assessee claims the specified expenses of certain amount in its profit & loss account and thereafter the assessee from the payment to the party deducts certain percentage as specified under the Act as TDS and pays to the Government Exchequer. The amount of TDS represents the amount of income tax of the party on whose behalf the payment was deducted & paid to the Government Exchequer. Thus the TDS amount does not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. Thus any delay in the payment of TDS by the assessee cannot be linked to the income tax of the assessee and consequently the principles laid down by the Hon’ble Apex Court in the case of Bharat Commerce Industries Ltd. v. CIT (1998) reported in 230 ITR 733 cannot be applied to the case on hand.’

6. Being consistent with the above decision of the co-ordinate bench, we hold that the interest paid on delayed payment of TDS u/s 201(1A) is an allowable deduction. We direct accordingly. Assessee succeeds in its appeal.

7. In the result, appeal filed by the assessee is allowed.

8. 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 Assessing Officer has taken a legally plausible view, duly supported by judicial precedents. Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC), wherein it was held as under:

“When an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law.”

9. The said view has also been held in a judgment of the Hon’ble Punjab & Haryana High Court in the case of CIT v. Indo German Fabs IT Appeal No. 248 of 2012, dated 24- 12-2014, in the following words:

“Section 263 of the Act confers power to examine an assessment order so as to ascertain whether it is erroneous and prejudicial to the interest of the revenue but does not confer jurisdiction upon the CIT to substitute his opinion for the opinion of the Assessing Officer. The words prejudicial and erroneous have to be read in conjunction and therefore, it is not each and every error in an assessment that invites exercise of powers under Section 263 of the Act, but only orders that are erroneous and prejudicial to the interest of the revenue.”

10. In a decision rendered by Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), 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

“12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open.————– From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.”

11. Accordingly, when the Assessing Officer 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 Assessing Officer, unless the view taken by the Assessing Officer is wholly unsustainable. However, as noted by us in the preceding paragraphs, the view taken by the Assessing Officer is a legally plausible view and therefore, looking in the instant facts, Principal CIT erred in invoking revisionary jurisdiction u/s 263 of the Act.

12. In the result, appeal of the assessee is allowed.

This Order pronounced in Open Court on 23/10/2024