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Facts
The assessee incurred expenses of Rs. 7,43,77,613/- for acquiring M/s. Asian Colour Coated Ispat Limited. The Assessing Officer (AO) allowed this claim after scrutinizing the details and explanation provided by the assessee. However, the Principal Commissioner of Income Tax (Pr. CIT) invoked Section 263, asserting the AO's order was erroneous and prejudicial to revenue, directing a modification.
Held
The Tribunal held that the Pr. CIT erred in assuming jurisdiction under Section 263. The AO had conducted proper inquiries and was satisfied with the assessee's explanation and evidence regarding the merger and acquisition expenses. The Tribunal cited judicial precedents emphasizing that Section 263 requires an order to be both erroneous and prejudicial to revenue, and that it cannot be invoked when there are two possible views or when the AO has made a reasonable inquiry.
Key Issues
Whether the Pr. CIT was justified in assuming jurisdiction under Section 263 of the Income Tax Act, 1961, to revise an assessment order where the Assessing Officer had allowed merger and acquisition expenses after due inquiry and satisfaction.
Sections Cited
263, 143(3), 144B, 40(a)(i), 80HHC(3)
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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, HON’BLE & SHRI NARENDRA KUMAR BILLAIYA, HON’BLE
O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the assessee is preferred against the order of the ld. Pr. CIT – 5, Mumbai [hereinafter “the ld. Pr. CIT”] dt. 06/03/2025 pertaining to AY 2021-22.
The sum and substance of the grievance of the assessee is that the ld. Pr. CIT erred in assuming jurisdiction conferred upon him by the provisions of Section 263 of the Act and further erred in holding that the assessment order dated 29/12/2022 framed u/s 143(3) r.w.s. 144B of the Act is not only erroneous but also prejudicial to the interest of the revenue. 3. Representatives of both the sides were heard at length, case records carefully perused and the relevant documentary evidence 2 brought on record duly considered in the light of Rule 18(6) of the ITAT Rules, 1963. 4. During the course of scrutiny assessment proceedings, the AO noticed that the assessee has acquired M/s. Asian Colour Coated Ispat Limited, for which it incurred expenses of Rs. 7,43,77,613/-. The assessee filed the requisite details as under:-
4.1. The supporting bills were also submitted which are exhibited at pages 68 to 74 of the paper book.
Vide showcause notice dated 14/12/2022, the AO sought explanation as to why the proposed variation should not be made on the issues of merger and acquisition expenses – claim of 3 expenses towards merger and acquisition. In response to which the assessee filed a detailed reply. The relevant reply reads as under:- “Disallowance of "Merger & Acquisition Expenses" of Rs.7,43,77,613 u/s 40(a)(i) of the Act Your good-self has contended that the expenses of Rs.7,43,77,613 be disallowed in view of the provisions of Section 40(a)(i) of the Act, in the absence of details of TDS deducted on the said payments. The Assessee Company hereby submits that the above expenses are legal & professional fees. The party wise details have been submitted vide Annexure 2B of our submission dated 03.12.2022 as sought by your goodself.
Further, the Assessee Company submits that it had deducted TDS from the payment of fees and deposited the same to the Government as per the applicable rates of TDS for FY 2020-21. In this regard we have enclosed the details of TDS deducted from the legal & professional fees paid to the parties as Annexure 6. We have also enclosed copies of Form 16A issued to the above parties as Annexure 7 for your good-self's information. Your kind attention is invited to Clause 34 of tax audit report where the TDS details are audited by SRBC & Co LLP.
On the basis of above the Assessee Company hereby submits that the Merger & Acquisition expenses of Rs.7,43,77,613 is allowable.”
Thus, it can be seen that to the specific queries relating to the impugned expenses, specifies replies were given by the assessee along with documentary evidence. After perusing the reply and the documentary evidence, the AO framed the impugned assessment order.
Assuming jurisdiction conferred upon him by the provisions of Section 263 of the Act, the ld. Pr. CIT issued as many as seven showcause notice asking the assessee again and again to furnish the details and explanation to merger and acquisition expenses of Rs. 7,43,77,613/- to which, each time the assessee furnished details along with the justification of the expenses. However, the reply of the assessee did not find any favour with the ld. Pr. CIT who was of the firm belief that the assessment order dated 29/12/2022 passed u/s 143(3) r.w.s. 144B of the Act is erroneous insofar as it is prejudicial to the interest of the revenue within the meaning of Section 263 of the Act as regards the issue of claim of expenditure of Rs. 7,43,77,613/- on account of acquisition of M/s. Asian Colour Coated Ispat Limited and accordingly, directed the AO to modify the assessment by passing a speaking order and also initiated penalty proceedings as per the provisions of the Act. 8. We have given a thoughtful consideration to the observations of the ld. Pr. CIT. As mentioned elsewhere, during the course of scrutiny assessment proceedings, the AO has thoroughly examined the claim of expenses. The AO has also considered the explanation given along with the supporting evidence, therefore, we do not find any merit in the assumption of jurisdiction by the ld. Pr. CIT u/s 263 of the Act. 9. Our view is fortified by the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., 243 ITR 83 (SC), where the Hon’ble Supreme Court has laid down the following ratio:- “A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-- recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order 7 is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous ".
Further, the Hon’ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. reported in [1993] 203 ITR 108 (Bombay), while dealing with identical issue has held as under:- 13. We, therefore, hold that in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Our aforesaid conclusion gets full support from a decision of Sabyasachi Mukharji J. (as his Lordship then was) in Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl. CIT . In our opinion, any other view in the matter will amount to giving unbridled and arbitrary power to the revising authority to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. As already stated it is a quasi judicial power hedged in with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly, it is an administrative act, but on examination "to consider" or in other words, to form an opinion that the particular order is erroneous in so tar as it is prejudicial to the interests of the Revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of re-examination and reconsideration of an order of assessment, which has already been concluded and controversy which has been set at rest, is set again in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from the records called for by the Commissioner.
We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income- tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-examine the matter. That, in our opinion, is not permissible. Further inquiry and/or fresh determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and it is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.”
The Hon’ble Supreme Court in the case of CIT vs. Max India Ltd. reported in [2007] 295 ITR 282 (SC), had the occasion to consider a similar challenge to 263 proceedings and held as under:- “1. In our view at the relevant time two views were possible on the word 'profits' in the proviso to section 80HHC(3). It is true that vide 2005 amendment the law has been clarified with retrospective effect by insertion of the word 'loss' in the new proviso. We express no opinion on the scope of the said amendment of 2005. Suffice it to state that in this particular case when the order of the Commissioner was passed under section 263 of the Income-tax Act two views on the said word 'profits' existed. In our view the matter is squarely covered by the judgment of this Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 as also by the judgment of the Calcutta High Court in the case of Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 at 243. 2. At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase "prejudicial to the interest of the revenue" under section 263 has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when the 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. According to the learned Additional Solicitor General on interpretation of the provision of section 80HHC(3) as it then stood the view taken by the Assessing Officer was unsustainable in law and therefore the Commissioner was right in invoking section 263 of the Income-tax Act. In this connection he has further submitted that in fact 2005 amendment which is clarificatory and retrospective in nature itself indicates that the view taken by the Assessing Officer at the relevant time was unsustainable in law. We find no merit in the said contentions. Firstly, it is not in dispute when the Order of the Commissioner was passed there were two views on the word 'profit' in that section. The problem with section 80HHC is that it has been amended eleven times. Different views existed on the day when the Commissioner passed the above order. Moreover the mechanics of the section have become so complicated over the years that two views were inherently possible. Therefore, subsequent amendment in 2005 even though retrospective will not attract the provision of section 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated 5-3-1997 in purported exercise of his powers under section 263 of the Income-tax Act.”