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Facts
The assessee, a private limited company engaged in civil construction, filed its return of income. The Assessing Officer (AO) completed the assessment with a disallowance for prior period expenses. The Principal Commissioner of Income Tax (PCIT) invoked revisionary powers under Section 263, holding the AO's order erroneous for not properly examining disallowances under Section 14A and Section 36(1)(va).
Held
The Tribunal held that the PCIT erred in invoking Section 263 powers. For Section 14A, the assessee had not made any investment out of interest-bearing funds in the joint venture and had not earned dividend income from equity shares. For Section 36(1)(va), the AO's view was legally permissible at the time of assessment, considering the available judicial pronouncements before the Supreme Court's decision in Checkmate Services.
Key Issues
Whether the PCIT was justified in initiating revision proceedings under Section 263 based on issues of Section 14A disallowance and Section 36(1)(va) disallowance for delayed deposit of employee contributions, when the AO's assessment order was based on a legally permissible view at the time.
Sections Cited
143(3), 263, 14A, 142(1), 143(2), 36(1)(va), 139(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE “A” BENCH : PUNE
Before: DR. MANISH BORAD & Ms. ASTHA CHANDRA
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE “A” BENCH : PUNE BEFORE DR. MANISH BORAD, ACCOUNTANT MEMBER AND Ms. ASTHA CHANDRA, JUDICIAL MEMBER I.T.A.No.1851/PUN/2024 (Assessment Year 2020-2021) Desai Infra Projects (I) Pvt. Pr.CIT (Central), Pune. Ltd., Unit No.303, Gera 77, Ramwadi, Survey No.2016/1, F.No. 88, Kalyani Nagar, Pune. vs. PAN : AADCD 0443 N (Appellant) (Respondent) For Assessee : Shri Nikhil S. Pathank, Advocate For Revenue : Shri Amol Khairnar, CIT-DR Date of Hearing : 15.05.2025 Date of Pronouncement : 23.05.2025 ORDER PER DR. MANISH BORAD, AM:
This appeal filed by the assessee is directed against the order passed by the Ld. Principal Commissioner of Income Tax (Central), Pune [“PCIT”] u/s. 263 of the Act, dated 07/02/2024 for the Assessment Year (“AY”) 2020-21.
The assessee has raised the following grounds of appeal:-
“1. The learned Pr. CIT (Central) erred in passing order u/s 263 revising the asst. order on the ground that the asst. order passed u/s 143(3) was erroneous and prejudicial to the interest of the revenue.
2. The learned Pr. CIT erred in holding that the learned A.O. had not verified the issue regarding the disallowance u/s 14A and thereby erred in setting aside the asst. order on the said issue.
3. The learned Pr. CIT failed to appreciate that on the facts of the case, no disallowance u/s 14A was warranted and hence, there was no reason to set aside the asst. order on the said issue.
2 ITA.No.1851/PUN./2024 4. The learned Pr. CIT further erred in holding that the learned A.O. had not verified the issue regarding delayed payment of employee's contribution to provident fund and thereby erred in setting aside the asst. order on the said issue.
5. The learned Pr. CIT failed to appreciate that the learned A.O. had verified the issue relating to the delayed payment of employee's contribution and therefore, there was no reason to set aside the asst. order on the said issue.
6. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”
Brief facts of the case are that the assessee is a private limited company, engaged in the business of civil construction for Irrigation Department and PWD of Government of Maharashtra. It also undertook contract for construction of road in joint venture. E-return of income for the A.Y. 2020-21 filed on 14/01/2021 declaring income of Rs. 6,43,04,760/-. The case selected for scrutiny under CASS and statutory notices u/s. 143(2) & 142(1) of the Income Tax Act, 1961 (the „Act‟) were issued and served upon the assessee. The details called for in the questionnaire attached to notice u/s. 142(1) of the Act were duly submitted by the assessee. The Ld.AO after examining these details, concluded the assessment making disallowance of Prior Period expenses of Rs. 2,23,000/- and assessed income at Rs.6,45,27,760/-. Thereafter, Ld. PCIT called for assessment records under the powers conferred in him u/s. 263 of the Act and observed that certain issues have not been examined by the Ld.AO. A show-cause notice u/s. 263, dated 12/01/2024 issued wherein the following two issues were mentioned by the Ld.PCIT:-
“03. On perusal of the assessment records it is seen that the assessee had derived exempt income of Rs. 1,44,42,319/-, being share of income from AOP/BOI. The assessee had tax free investments as shown below:-
3 ITA.No.1851/PUN./2024 Entity Closing Balance Opening Balance (In Rs.) (in Rs.) 1) Kalyan Raj Desai JV 14798936 356617 2) Equity shares of Nature 71650000 71650000 Delight Dairy and Dairy Products P. Ltd. Total 86448936 72006617 Hence average {(86448936 72006617)/2) = Rs. 79227777/- Hence, disallowance @ 1% of annual average = Rs. 7,92,277/- The fact that the assessee has received exempt income of Rs. 1,44,42,319/- from AOP/BOI and no disallowance has been made by the assessee u/s 14A of the Act as seen from the computation of income. As the assessee has not disallowed u/s 14A voluntarily, provisions of sub-section 3 of section 14A of the Act become applicable. Hence, disallowance u/s 14A r.w.rule 8D of the Act was to required to be made which was not considered during the assessment proceedings for the year under consideration. 3.1 Further, on perusal of the audit report, it is observed that delayed payment of employee's contribution of Rs. 4,71,825/- u/s 36(1)(va) of the Act has been reported by the Auditor. The said amount was required to be disallowed u/s 36(1)()va) of the Act in view of Hon'ble Supreme Court of India decision in the case of Checkmate Services Pvt. Ltd. vs Commissioner of Income-tax-1 [Civil Appeal No. 2833 of 2016]. The AO failed to do the same. Hence, disallowance to the tune of Rs. 4,71,825/- was not considered during the assessment proceedings for the year under consideration.
4. In view of the above, it is found that the assessee company failed to disallow income of Rs. 1,44,42,319/- received from AOP/BOI. Further, Rs. 4,71,825/-was also not disallowed by the assessee company. Also no verification on the aforesaid issues has been done in the assessment proceedings by the AO. As per explanation (2) to section 263(1) of the Act an order without making inquiries or verification which should have been made is deemed to be erroneous in so far as it is prejudicial to the interest of revenue.”
The Ld.PCIT referring to the above two issues, observed that Ld.AO ought to have examined these issues after calling for relevant records and thereafter verified the same. The assessee furnished detailed reply to the said show-cause notice. However, the Ld.PCIT was not satisfied and concluded the revisionary proceedings observing that since the AO has failed to make necessary enquiry on the issues stated above in the show-cause notice, the assessment order for A.Y. 2020-21 dated 19/03/2022
4 ITA.No.1851/PUN./2024 passed u/s. 143(3) of the Act is erroneous insofar as prejudicial to the interest of Revenue and accordingly, the assessment order was set aside directing the AO to examine the above two issues while framing the assessment order.
Aggrieved, the assessee is in appeal before this Tribunal.
Learned counsel for the assessee submitted that the details called for by the AO in the questionnaire attached to notice u/s. 142(1) were duly submitted and the Ld.AO after making proper application of mind and taking one of the legally permissible view has completed the assessment. He further submitted that so far as the first issue referred in show-cause notice relating to disallowance u/s. 14A of the Act, firstly, no dividend income earned on the investment in the equity shares of Nature Delight Dairy and Dairy Products P. Ltd. (in short, „NDDDPPL) So far as the investment appearing in the name of Kalyan Raj Desai JV, he submitted that assessee had not made any investment in the joint venture and the closing balance only comprises of net profit earned by the joint venture and, therefore, no disallowance u/s. 14A is called for.
So far as second issue relating to disallowance u/s. 36(1)(va) of the Act for delay in payment of employees contribution of Rs.4,71,825/- is concerned, he submitted that the assessment order was framed on 19/03/2022 and the judgment of the Hon'ble Apex Court in the case of Checkmate Services P. Ltd. vs. CIT (2022) 143 taxman.com 178 came subsequent to the date of assessment order. He also submitted that prior to the judgment of Hon'ble
5 ITA.No.1851/PUN./2024 Apex Court in Checkmate Services P. Ltd. (supra) there were various judgments of jurisdictional High Courts in favour of the assessee where disallowance u/s. 36(1)(va) for delayed payment of employees contribution were not confirmed as the assessee had deposited the said sum prior to the due date prescribed u/s. 139(1) of the Act for filing of income tax return. He submitted that the Ld.AO took the legally permissible view at that point of time and, therefore, the assessment order dated 19/03/2022 cannot be held as erroneous insofar as prejudicial to the interest of revenue. Learned counsel for the assessee also referred various documents placed in the paper book running into 149 pages. Reliance also placed on the decision of this Tribunal in the case of M/s. Karan Sanran Associates v. PCIT in dated 09/09/2024 and another decision of the coordinate bench of Surat Tribunal in the case of D.V. Properties (P.) Ltd. vs. PCIT [2023] 155 taxmann.com 119 (Surat-Trib.).
On the other hand, ld.DR vehemently argued supporting the order of Ld.PCIT.
We have heard rival contentions and perused the material placed before us. The assessee is aggrieved with the assumption of jurisdiction u/s. 263 of the Act by the Ld.PCIT finding of the Ld.PCIT holding the assessment order dated 19/03/2022 for A.Y. 2020-21 erroneous insofar as prejudicial to the interest of revenue as the AO failed to examine the following two issues: (1) disallowance u/s. 14A of the Act for the investments made in Kalyan Raj Desai JV and investment in equity shares of Nature
6 ITA.No.1851/PUN./2024 Delight Dairy and Dairy Products P. Ltd. and (2) relating to disallowance u/s. 36(1)(va) for delay in deposit of employees contribution to PF.
We find that the provision of Section 263 of the Act has direct bearing on the issue raised before us, therefore, it is pertinent to take note of this section which reads as under:
"263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
7 ITA.No.1851/PUN./2024 (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded." 10.1. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer.
8 ITA.No.1851/PUN./2024 At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263.
10.2. Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC)has laid down following ratio with regard to provisions of section 263 of the Act:
“There can be no doubt that 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 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. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue’ has to be read in conjunction with an 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 interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue - RampyariDevi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). [Emphasis Supplied]”
9 ITA.No.1851/PUN./2024 11. Now, examining the facts of the instant case in the light of the above judgments and discussions, we firstly take up disallowance u/s. 14A of the Act. The Ld.PCIT has referred to investments made by the assessee in Kalyan Raj Desai JV from which the assessee earns exempt income and secondly investment made in equity shares of Nature Delight Dairy and Dairy Products P. Ltd. From perusal of the paper book pages 30-66 regarding the documents filed in relation to Kalyan Raj Desai JV, we observe that the assessee had not made any investment in the said joint venture and the opening balance as on 01/04/2019 of Rs. 3,56,617/- is the net profit share from joint ventures for F.Y. 2018-19 and the addition during the year of Rs.1,44,42,319/- is also net profit share for joint ventures received/accrued to the assessee for the F.Y. 2019-20. Thus, it remains an admitted fact that the assessee had not made any investment out of its interest bearing funds in Kalyan Raj Desai JV and, therefore, no disallowance u/s. 14A of the Act is called for. So far as investment made in equity shares of Nature Delight Dairy and Dairy Products P. Ltd., we find that the Hon'ble Delhi High Court in the case of PCIT vs. Era Infrastructure (India) Ltd. in dated 20/07/2022 held that disallowance u/s. 14A of the Act should not exceed the exempt income earned by the assessee during the year. Respectfully following the said judgment, we find that since the dividend income has not been earned from the investment in equity shares, no disallowance u/s. 14A of the Act is called for on the alleged investment in equity shares. To conclude, we find that since the assessee had not made any investment in Kalyan Raj Desai JV and has not earned
10 ITA.No.1851/PUN./2024 dividend income from investment in equity shares of NDDADPPL, no disallowance u/s. 14A is called for. Thus, even if the issue is set aside to the file of the Ld.AO for necessary enquiry, no disallowance will be called for and, therefore, no prejudice is caused to the Revenue.
Insofar as second issue relating to disallowance u/s. 36(1)(va), for delay in depositing employees‟ contribution, we find that at the time of finalizing the assessment order, there were various judgments of the Hon'ble Courts where consistent view was taken that if there is any delay in payment of employees‟ contribution and the said sum is deposited prior to the due date of furnishing return of income provided u/s. 139(1) of the Act, no disallowance u/s. 36(1)(va) is called for. Similar view was taken by the Hon'ble Jurisdictional High Court in the case of CIT (Central) vs. Ghatge Patil Transports Ltd. (2014) 368 ITR 749. The judgment of Hon'ble Apex Court in the case of Checkmate Services P. Ltd. (supra) was pronounced on 12/10/2022 whereas the AO passed the assessment on 19/03/2022 and, therefore, the AO while passing the assessment order was bound by the judgment of Hon'ble Jurisdictional High Court in the case of Ghatge Patil Transports Ltd (supra). We also notice that this Tribunal in M/s. Karan Sanran Associates (supra) while dealing with the revisionary proceedings carried out u/s. 263 of the Act has dealt with the very same issue and finding of this Tribunal reads as under:-
“18. So far as the second issue i.e. late payment of employees' contribution to PF and ESI is concerned, we find there is no dispute to the fact that the assessee has deposited the employees' contribution to PF and ESI before the due date of filing the return. The Hon'ble jurisdictional High Court in the case of CIT vs. Ghatge
11 ITA.No.1851/PUN./2024 Patil Transports Ltd. (supra) and various other Hon'ble High Courts have decided this issue in favour of the assessee, according to which no addition can be made on account of late payment of employees' contribution to PF and ESI if the said sum is deposited to the credit of the central government before the due date of filing the return. The law was finally settled by the Hon'ble Supreme Court in the case of Checkmate Services Pvt. Ltd. vs. CIT (supra) which was pronounced on 12.10.2022 whereas the Assessing Officer has passed the order on 13.08.2021. Therefore, we are of the considered opinion that since the assessee has admittedly deposited the employees' contribution to PF and ESI before the due date of filing of return, therefore, the PCIT was not justified in invoking the provisions of section 263 of the Act by relying on the decision of the Hon'ble Supreme Court in the case of Checkmate Services Pvt. Ltd. vs. CIT (supra), which came subsequent to the order passed by the Assessing Officer. We, therefore, are of the considered opinion that the PCIT is not justified in invoking the provisions of section 263 of the Act on the issue of late payment of employees' contribution to PF and ESI.”
Going through the above findings of this Tribunal, the same is squarely applicable on the issue raised in the instant appeal and, therefore, the order of the AO dated 19/03/2022 is neither erroneous nor prejudicial to the interest of the Revenue on the issue of disallowance u/s. 36(1)(va) of the Act raised in the show- cause notice issued by the Ld.PCIT.
In view of the above discussion and the given facts and circumstances of the case, we are of the considered view that since the order of the AO u/s. 143(3) of the Act dated 19/03/2022 is neither erroneous insofar as prejudicial to the interest of the Revenue and the Ld.AO took legally permissible view at that point of time while carrying out the assessment proceedings, therefore, the Ld.PCIT erred in carrying out the impugned revisionary proceedings u/s. 263 of the Act. We, therefore, quash the impugned proceedings u/s. 263 of the Act and restore the assessment order u/s. 143(3) dated 19/03/2022. All the grounds of appeal raised by the assessee are allowed.
12 ITA.No.1851/PUN./2024 15. In the result, appeal of the assessee is allowed.
Order pronounced in the open Court on 23.05.2025.