NIDHI PETROCHEMICALS PVT. LTD.,AHMEDABAD vs. THE PCIT (CENTRAL), AHMEDABAD

ITA 985/AHD/2024Status: DisposedITAT Ahmedabad13 October 2026AY 2018-196 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the PCIT's order under Section 263 was unsustainable and set it aside, allowing the assessee's appeal. The Tribunal found that the AO had indeed called for relevant details regarding transactions covered under Section 40A(2)(b) in response to a notice under Section 142(1), and the assessee had furnished a detailed reply on July 13, 2020. This indicated that the AO had examined the issue and taken a conscious view. The governing test for revision under Section 263 requires the assessment to be both erroneous and prejudicial to the revenue, and the Commissioner cannot invoke it merely because he has a different view if the AO has adopted a legally permissible one. The Tribunal distinguished between 'lack of inquiry' and 'inadequate inquiry,' stating that Section 263 cannot be invoked simply because the PCIT believes a more elaborate inquiry should have been conducted. The assessment order's silence on Section 40A(2)(b) payments does not automatically imply a lack of inquiry. Furthermore, the PCIT had not identified comparable market prices or quantified how the payment to related parties was excessive. The Tribunal also noted that in earlier assessment years, the revenue had accepted similar payments to parties covered under Section 40A(2)(b) without disallowance, and the payees were in a higher tax bracket. The Tribunal relied on precedents like CIT vs. Indo Saudi Services (Travel) (P) Ltd. and Shanti Multilink Pvt. Ltd. vs. PCIT, which held that if the AO had examined an issue, it cannot be treated as an omission to examine, and Explanation 2 does not grant unrestricted power to revise every assessment.

What were the facts?

The assessee, Nidhi Petrochemicals Pvt. Ltd., filed its return of income for Assessment Year 2018-19 on October 29, 2018, declaring an income of Rs. 23,64,230. The Assessing Officer (AO) completed the assessment on April 19, 2021, accepting the returned income. The Principal Commissioner of Income Tax (PCIT), Ahmedabad, initiated proceedings under Section 263 of the Income Tax Act, 1961, and passed an order on March 30, 2024, setting aside the AO's assessment order. The PCIT held that the AO failed to conduct necessary inquiries regarding expenditure claimed under Section 40A(2)(b) of the Act, specifically payments totaling Rs. 45,35,900 to related parties, which were prima facie not scrutinized for reasonableness. The assessee appealed this order to the Income Tax Appellate Tribunal (ITAT).

What were the issues?

1. Whether the PCIT erred in law and facts by initiating proceedings under Section 263 of the Income Tax Act, 1961, when the issue raised in the show cause notice was properly verified by the AO during assessment scrutiny proceedings, and whether the AO's order was neither erroneous nor prejudicial to the interest of the revenue, as per Section 263. Assessee's Contentions: - The AO properly verified the issue during assessment proceedings. - The PCIT erred in initiating revision proceedings as the AO's order was not erroneous or prejudicial to revenue. - For invocation of Section 40A(2)(b), unreasonableness must be proved, which the PCIT failed to do. - Payees were in the same tax bracket, making the order not prejudicial to revenue. - The AO did not pass an order without inquiry, as notices under Section 142(1) were issued and replied to. - The PCIT erred in applying Explanation 2 to Section 263, as it applies to gross negligence, not otherwise. Revenue's Contentions: - The PCIT held that the AO did not make necessary examination/verification/inquiries in respect of expenditure claimed under Section 40A(2)(b). - Payments to related parties were not scrutinized for reasonableness, were excessive, not justified, and required disallowance. - The AO had not examined this issue and had not asked for further questions. - Not conducting proper inquiry and not making disallowances were valid grounds for invoking Section 263. - The assessment order was erroneous and prejudicial to revenue as it was passed without making necessary inquiries or verifications, as per Explanation 2 to Section 263(1).

Which sections of the Income-tax Act were involved?

Section 263,Section 40A(2)(b),Section 142(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH

Before: Shri Sanjay Garg & Shri R. Govindarajan

For Appellant: Shri Parin Shah, A.R
For Respondent: Shri Abirama Karthikeyan, CIT-D.R

PER R. GOVINDARAJAN, ACCOUNTANT MEMBER:

The assessee has filed the appeal against the order dated 30-03-2024 passed by Principal Commissioner of Income Tax (Central), Ahmedabad (in short, referred to as the PCIT) u/s. 263 of the Income Tax Act, 1961 (herein referred to as “the Act”) relating to Assessment Year 2018-

19.2.

The assessee raised the following grounds of appeal:- “1. The order passed by PCIT is bad in law and required to be quashed.

2.

Ld. PCIT erred in law and on facts in initiating proceedings u/s 263 of the Act ignoring fact that issue raised in show cause Nidhi Petrochemicals Pvt. Ltd., A.Y. 2018-19 notice u/s 263 of the Act has been properly verified by

The order continues below.

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