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Facts
The assessee filed its return for AY 2021-22, which was assessed by the AO. The PCIT invoked Section 263 powers, finding the AO's disallowance of promotional expenses to be erroneous and prejudicial to revenue. The PCIT increased the disallowance from 7.5% to 12.5%, deeming the AO's assessment lacking proper inquiry.
Held
The Tribunal held that the PCIT cannot invoke Section 263 powers merely to substitute its own view for the AO's, especially when the AO has taken a considered view after inquiry. The PCIT failed to justify the enhanced disallowance of 12.5% over the AO's 7.5%.
Key Issues
Whether the PCIT's invocation of Section 263 to enhance the disallowance of promotional expenses was justified when the AO had already conducted an inquiry and taken a view. Whether the PCIT provided sufficient justification for the increased disallowance.
Sections Cited
263, 143(3), 144B, 14A, 43B, 80IE, 37(1), 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SHRI SIDDHARTHA NAUTIYAL & SHRI NARENDRA PRASAD SINHA
O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
These are appeals filed by the Assessee for Assessment Years 2020- 21 & 2021-22 against order passed by Ld. Principal Commissioner of Income Tax-1, (in short “Ld. PCIT”), Ahmedabad under Section 263 of the Act dated 26.03.2025. Since common facts and issues for consideration are involved for both the years under consideration, both the appeals are being disposed of by way of a common order.
The assessee has taken the following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the order passed by Ld. Principal CIT u/s.263 of the Income-tax Act is ab initio void being bad in law.
& 1038/Ahd/2025 Eris Lifesciences Ltd. vs. PCIT Asst. Years –2020-21 & 2021-22 - 2– 2. On the facts and in the circumstances of the case and in law, the Principal CIT erred in setting aside the order u/s 143 read with sec. 144B dated 28/12/2022 passed by NFAC, Delhi and directing the Assessing Officer to pass a fresh Assessment Order.
3. On the facts and in the circumstances of the case and in law, the Ld. Principal CIT erred in setting aside the order u/s 143(3) read with sec. 144B dated 28/12/2022 passed by the NFAC without having Jurisdiction as the Original Assessment Order is passed by the NFAC.
On the facts and in the circumstances of the case and in law, the Ld. Principal CIT erred in setting aside the order u/s 143(3) read with sec. 144B dated 28/12/2022 as the Ld. Assessing Officer has taken particular view after carefully examining the facts of the case in detail.
5. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal
either before or during the course of hearing of the appeal.”
3. The brief facts of the case are that for Assessment Year 2021-22, the assessee filed its return of income on 11.03.2022, declaring a total income of ₹29,10,74,420/-. The assessment was completed under section 143(3) read with section 144B of the Income-tax Act, 1961 (Act) at an income of ₹32,15,58,481/-. The Assessing Officer (A.O.) had made two additions: ₹75,907/- under section 14A of the Act and a sum of ₹2,85,31,585/-, which was disallowed as employee expenses pertaining to the Guwahati Unit. Subsequently, the Principal Commissioner observed that the A.O. had failed to fully disallow expenses incurred on account of “channel partner and retail promotion”, particularly those suspected to be in the nature of gifts and promotional freebies given to Doctors. PCIT noted that the A.O. had only disallowed 7.5% of these expenses, amounting to ₹15,17,835/-, on an estimated basis without any justification, whereas the total expenditure under this head stood at ₹7.72 crores. The Principal Commissioner held that the A.O.’s decision not to disallow the full amount was erroneous and prejudicial to the interests of the Revenue, as the CBDT Circular No. 5 of 2012 dated 01.08.2012 clearly prohibits such deductions, particularly when & 1038/Ahd/2025 Eris Lifesciences Ltd. vs. PCIT Asst. Years –2020-21 & 2021-22 - 3– the expenses potentially benefit medical professionals, in contravention of the law and public policy. During the course of 263 proceedings, the assessee submitted that the “promotional expenditure” was incurred wholly and exclusively for business purposes, directed toward the company’s network of approximately 2,300 stockists and around 5 lakh retail medical stores across India, with no benefits having been provided to medical practitioners. It was further argued that there was no evidence from any authority, including the Medical Council of India, to suggest that gifts or freebies were distributed to doctors, and that the A.O. had already correctly exercised his judgment by disallowing 7.5% of the expenditure. The assessee submitted that before Principal CIT that there was neither lack of inquiry nor absence of evidence and that section 263 proceedings cannot be invoked merely due to a difference in opinion or perceived insufficiency of inquiry. After an examination of the assessee’s submissions and the assessment records, the Principal Commissioner rejected the assessee's arguments and held that the A.O. had failed to properly examine the nature and recipients of the expenditure, thereby resulting in an under-assessment of income. Placing reliance on judgment of the Hon’ble Supreme Court, which highlighted the public harm caused by pharmaceutical companies offering prohibited freebies to Doctors, the Principal Commissioner held that such expenditures are not allowable under section 37(1) of the Act since they are prohibited by law. It was also noted that the A.O. neither verified the recipient list in detail nor provided any rationale for estimating the disallowance at 7.5%. Given the quantum of expenditure and the scale of operations, the Principal Commissioner held that a more reasonable estimate of disallowance would be 12.5% of the total expenditure, amounting to ₹96,52,882/-. Accordingly, & 1038/Ahd/2025 Eris Lifesciences Ltd. vs. PCIT Asst. Years –2020-21 & 2021-22 - 4– the income of the assessee was enhanced by this revised disallowance. The Principal Commissioner, therefore, set aside the assessment order to this extent, invoking powers under section 263 of the Act, holding it to be erroneous and prejudicial to the interest of the Revenue.
4. The assessee is in appeal before us against the order passed by Ld. PCIT setting-aside the assessment order as being erroneous in so far as prejudicial to the interest of the Revenue. Before us, the contention of the assessee are two folds. Firstly, it was submitted that the only reason why the assessment order was set-aside since PCIT was of the view that the Assessing Officer should have disallowed 12.5% of such expenses as against 7.5% which were disallowed by the Assessing Officer. The PCIT had set-aside the assessment order only with a view to disallow a higher percentage of such promotional expenses. Secondly, the Counsel for the assessee submitted that the case of the assessee was directly covered in favour of the assessee by order of Ahmedabad Tribunal in assessee’s own case for A.Y. 2018-19 in vide order dated 25.09.2024, wherein similar order passed by the PCIT proposing to enhance the disallowance to 12.5% as against 7.5% done by the Assessing Officer, was set-aside by the Ahmedabad Tribunal. Copy of the 263 order has been placed on record for a consideration.
It would be useful to reproduce the relevant extracts of the order of ITAT for ready reference:
“3. The return of income for Assessment Year 2018-19 was filed on 27.10.2018 declaring total income of Rs.0/-. The Assessment Order under Section 143(3) r.w.s. 144B of the Income tax Act, 1901 was passed on 26.09.2021 at the assessed income of Rs.6.05,77,835/-. The Assessing Officer has made addition of Rs.11,62,133/- on & 1038/Ahd/2025 Eris Lifesciences Ltd. vs. PCIT Asst. Years –2020-21 & 2021-22 - 5– account of disallowance under Section 14A, addition of Rs.69,39,723/- on account of disallowance of channel partners/retail promotion expenses as grouped under the head other selling & Distribution expenses, addition of Rs.33,59,890/- on account disallowance of conference related expenses as grouped under the head travelling, conveyance & vehicle expenses and addition of Rs.3,84,012/- made on account of late payment of employees contribution towards provident fund. The PCIT observed that the Assessing Officer has not established that the Long Term Capital Gain of Rs.13,97,31,310/- was earned from its Guwahati Unit/Undertaking. Therefore, the Assessing Officer ought to have disallowed deduction under Section 80IE on such Long Term Capital Gain. Furthermore, the Assessing Officer has disallowed expenses at 7.5% on account of payment to channel partners/retail promotion expenses as grouped under the head other selling and distribution expenses, though the said entire expenses of payment of channel partners should have been disallowed. Accordingly, the PCIT issued notice under Section 263 of the Act dated 01.02.2024. ((((((In response to the said notice, the assessee filed the reply and after taking into account, the PCIT held that the Assessing Officer erred in not verifying the issue of Leave Encashment as well as the entire payment/expenses paid to channel partners/retail promotion expenses. The PCIT therefore enhanced the assessee’s income to Rs.6,17,61,532/- (Book profit under Section 115JB of the Act at Rs.3,18,57,87,542/- and directed the Assessing Officer to give effect to the order of the PCIT after verifying the issue of Leave Encashment.
4. Being aggrieved by the order under Section 263 of the Act, the assessee filed the present appeal before the Tribunal.
5. The Ld. AR submitted hat the assessee had filed sufficient evidences and explained during the course of assessment proceedings in support of channel partners/retail promotion expenses which was duly considered by the Assessing Officer. In fact, in the earlier year, the Revenue has held that part of these expenses may include payments made to Doctors/Medical Fraternity for attending seminars/meetings/conferences [such payments are prohibited by the Indian Medical Council Regulations (Professional Conduct, Etiquettes and Ethics) Regulations 2002 as elaborated in Circular No.5/2012 dated 01.08.2012 by the CBDT) and the documentary evidences submitted by the assessee in this regard were held not complete and appropriate. Thus, in the earlier Assessment Years i.e. Assessment Years 2017-18, 2016-17, 2014-15 & 2013-14 and the Assessing Officer made similar disallowance at 7.5% of the channel partners and Retail Promotion Expenses. The Ld. AR submitted that the assessee has also given the details related to leave encashment, leave promotion paid in respect of deduction under Section 43B of the Act. The Ld. AR submitted that the PCIT is not justified in setting aside the order under Section 143(3) read with section 144B of the Act as the Assessing Officer has already taken a particular view and that view cannot be diverted with the enhancement without any basis as per Section 263 of the Act. The Ld. AR further submitted that the decision of Hon’ble Andhra Pradesh High Court in the case of Spectra Shares & Scrips (P) Limited vs. CIT (I.T.T.A. Nos. 512 of 2011 & 177 of 2012) which held that it is settled law that the Assessing Officer in the Assessment Order is not required to give detailed reasons and once it is clear that there was application of mind by an enquiry, the respondent merely because he entertains a different opinion in the matter cannot & 1038/Ahd/2025 Eris Lifesciences Ltd. vs. PCIT Asst. Years –2020-21 & 2021-22 - 6– invoke his powers under Section 263 of the Act. It is, therefore, not correct to say that there was no proper enquiry by the Assessing Officer. The Ld. AR further submitted that the PCIT does not have jurisdiction to revise the order passed by NFAC. ….
7. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the Assessment Order was passed in respect of complete scrutiny assessment thereby the deduction claimed for Industrial Undertaking under Section 80IE was specifically called for as well as the expenses incurred for earning exempt income was also called for. The fact remains that the allocation of employee expenses to Guwahati Unit was also part of the Assessment Order and after thorough verification, the Assessing Officer has taken a view and allowed the deduction. As relates to channel partners/retail promotion expenses, the same was regularly quantified and was disallowed at 7.5% in earlier Assessment Years that of Assessment Years 2013-14, 2014-15, 2016-17 & 2017-18. Thus, the Department, after verifying the same, continually taken the expenses and disallowed to the extent of 7.5%. The observation of the PCIT that the Assessing Officer ought to have taken a different view as the view related to Leave Encashment under Section 43B as well as deduction under Section 80IE and the disallowance under entire expenses of payment to channel partners is that of a different opinion of the PCIT which is not as per the provisions of Section 263 of the Act. The PCIT though simply mentioned that view taken by the Assessing Officer is erroneous and prejudicial to the interest of Revenue, yet the PCIT failed to justify that the Assessing Officer has not verified these aspects at the time of assessment. In fact, from the perusal of the Assessment Order as well as the notices issued under Section 142(1) of the Act dated 30.03.2021 and the subsequent response of the assessee alongwith details dated 03.04.2021 clearly set out that the Assessing Officer has verified all the aspects in consonance with the submissions as well as the documents provided by the assessee during the assessment proceedings and in fact the Assessing Officer has taken cognisance of each and every Sections including that of Section 43B of the Act as well as Section 80IE of the Act and also that of the expenses which should be disallowed at what percentage. Thus, the view taken by the PCIT that of enhancing the Assessment Order is not justifiable as per the provisions of Section 263 of the Act which is a revisionary power and can be invoked only when the Assessment Order is erroneous and prejudicial to the interest of Revenue. in the present case, the Assessing Officer has taken utmost care to verify each aspect of assessee’s claim of deduction as well as expenses and has passed the Assessment Order as per the provisions of Income Tax Statute. Therefore, the PCIT is not right in invoking Section 263 of the Act and passing the Order under the said provisions. In the result, appeal of the assessee is allowed.” 8.
In view of the above findings of the Ahmedabad Tribunal which have been rendered on identical set of facts, we set-aside the order passed by Ld. PCIT under Section 263 of the Act and allow the appeal of the assessee. In & 1038/Ahd/2025 Eris Lifesciences Ltd. vs. PCIT Asst. Years –2020-21 & 2021-22 - 7– addition, we would also like to mention that it is a well settled law that proceedings under Section 263 of the Act cannot be initiated only with the objectives to supplant the view of PCIT with that of the view taken by the Assessing Officer. There may be circumstances that the Assessing Officer after having examined the facts of the assessee’s case takes a considered view that a certain percentage of the expenses may be disallowed. However, 263 proceedings cannot be initiated against the assessee only with the objective of enhancing the disallowance made by the Assessing Officer and supplant the view of PCIT with that of the view taken by the Assessing Officer, unless it is demonstrated that the view taken by the Assessing Officer is perverse or there is no legal or factual justification for the Assessing Officer to have taken such a view while framing the assessment order. In the instant case, we note that even the PCIT has not given any justifiable rational for adopting the rate of disallowance of 12.5% of promotional expenses as against 7.5% rate of such disallowance adopted by the Assessing Officer. The PCIT has not given any justification or basis for adopting 12.5% rate of disallowance of such expenses and how the same would meet the ends of justice. Accordingly, in light of the above observations, we are of the considered view that the order passed by PCIT under Section 263 of the Act is not sustainable.
In the result, the appeal of the assessee is allowed. for A.Y. 2020-21
The assessee has raised the following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the order passed by Ld. Principal CIT u/s.263 of the Income-tax Act is ab initio void being bad in law.
& 1038/Ahd/2025 Eris Lifesciences Ltd. vs. PCIT Asst. Years –2020-21 & 2021-22 - 8–
2. On the facts and in the circumstances of the case and in law, the Principal CIT erred in setting aside the order u/s 143 read with sec. 144B dated 27/09/2022 passed by NFAC, Delhi and directing the Assessing Officer to pass a fresh Assessment Order.
On the facts and in the circumstances of the case and in law, the Ld. Principal CIT erred in setting aside the order u/s 143(3) read with sec. 144B dated 27/09/2022 passed by the NFAC without having Jurisdiction as the Original Assessment Order is passed by the NFAC.
4. On the facts and in the circumstances of the case and in law, the Ld. Principal CIT erred in setting aside the order u/s 143(3) read with sec. 144B dated 27/09/2022 as the Ld. Assessing Officer has taken particular view after carefully examining the facts of the case in detail. 5. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal
either before or during the course of hearing of the appeal.”
9. We observe that the facts and issues for consideration are identical for A.Y. 2020-21 as well and accordingly, the appeal of the assessee is also allowed for A.Y. 2020-21.
In the combined result, both the appeals filed by the assessee are allowed. This Order is pronounced in the Open Court on 04/08/2025
Sd/- Sd/- (NARENDRA P. SINHA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 04/08/2025 TANMAY, Sr. PS TRUE COPY आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��थ� / The Respondent. संबंिधत आयकर आयु� / Concerned CIT 3. 4. आयकर आयु�(अपील) / The CIT(A)- 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER,