Loading judgment…
Facts
The assessee, a State Government undertaking, filed its return for AY 2018-19, which included a claim for guarantee commission paid to the State Government of Kerala. The PCIT initiated Section 263 proceedings, contending that the Assessing Officer's order was erroneous and prejudicial to revenue because the AO failed to examine the applicability of Section 40(a)(iib) to this significant payment. The PCIT set aside the assessment order for a fresh assessment on this specific issue.
Held
The Tribunal observed that the AO mechanically accepted the claim for guarantee commission without any application of mind or inquiry into the provisions of Section 40(a)(iib). Citing precedents, the Tribunal confirmed that non-examination of a crucial issue renders the assessment order erroneous and prejudicial. Therefore, the Tribunal found no fault in the PCIT's exercise of jurisdiction under Section 263 and dismissed the assessee's appeal.
Key Issues
Whether the PCIT was justified in exercising revisional powers under Section 263 when the AO failed to examine the applicability of Section 40(a)(iib) to guarantee commission payments, rendering the assessment order erroneous and prejudicial to the revenue.
Sections Cited
263, 40(a)(iib), 37(1), 143(3A), 143(3B), 36(1)(va), 2(24)(x), 43B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Inturi Rama Rao & Shri Sandeep Singh Karhail
IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri Inturi Rama Rao, Accountant Member & Shri Sandeep Singh Karhail, Judicial Member ITA No.307/Coch/2023 : Asst.Year 2018-2019 Kerala State Financial The Deputy Commissioner of Enterprises Limited, Bhadratha v. Income-tax, Cir 1(1) & TPS Museum Road, Chembukkavu Thrissur. Thrissur – 680 020. PAN : AABCT3817A. (Appellant) (Respondent) Appellant by : Sri.Harikrishnanunny, CA Respondent by : Sri.Sanjit Kumar Das, CIT-DR Date of Date of Hearing : 26.03.2025 Pronouncement : 14.05.2025 O R D E R Per Inturi Rama Rao, AM : This appeal filed by the assessee is directed against the order of the Principal Commissioner of Income-tax, Kozhikode [“the PCIT”] dated 09.03.2023 passed u/s.263 of the Income-tax Act, 1961 (“the Act”) for the assessment year 2018-2019.
Briefly, the facts of the case are that the appellant is a company duly incorporated under the provisions of the Companies Act. It is an undertaking of the State Government of Kerala. It is engaged in the business of Chitti Investment Services. The original return of income for the assessment year 2018-2019 was filed on 26th October, 2018 disclosing a total income of Rs.279,20,77,140. The same was revised on 20th March, 2019 at a total income of Rs.252,90,33,220. Against the
2 ITA No.307/Coch/2023. Kerala State Financial Enterprises Ltd. said return of income, the assessment was completed by the NFAC vide order dated 5th March, 2021 passed u/s.143(3A) read with section 143(3B) of the Act at a total income of Rs.396,29,16,115. While doing so, the Assessing Officer (AO) made following disallowances:-
(i) Disallowance of provision for bad and doubtful debts. Rs.142,30,66,326 (ii) Disallowance u/s.36(1)(va) r.w.s. 2(24)(x) Rs. 6,61,577 (iii) Disallowance u/s.43B Rs. 4,79,102 (iv) Disallowances of prior period expenses. Rs. 96,75,890
Being aggrieved by the above disallowances, the appellant filed an appeal before the CIT(A). While the matter stood thus subsequently on examination of the assessment records, the learned PCIT formed an opinion that the assessment order is erroneous and prejudicial to the interests of the revenue, as the AO had failed to examine the applicability or otherwise of the provisions of sec.40(a)(iib) of the Act, in respect of payment of Rs.53,22,39,975 being guarantee commission to the State Government of Kerala, since the appellant is a wholly owned State Government undertaking. Accordingly, a show cause notice u/s.263 of the Act was issued to the appellant proposing to revise the assessment order calling upon the appellant to file objection to the proposed action u/s.263 of the Act. In response to the show cause notice, the appellant had filed a detailed explanation. The pith and substance of the explanation is that the guarantee commission is an expenditure incurred wholly and exclusively for the business purpose
3 ITA No.307/Coch/2023. Kerala State Financial Enterprises Ltd. covered u/s.37(1) of the Act and therefore provisions of sec.40(a)(iib) has no application.
The PCIT after referring to the memorandum attached to the Finance Bill 2013 and the decision of the Hon’ble Supreme Court in the case of Kerala State Beverages (Manufacturing & Marketing) Corporation Ltd. v. ACIT (2022) 134 taxmann.com 11 (SC) proceeded to hold that the guarantee commission fee paid to the State Government of Kerala, falls within the ambit of sec.40(a)(iib) of the Act, and therefore, in the absence of inquiry on the part of the AO, the assessment order passed by the AO is erroneous and prejudicial to the interests of the revenue. Accordingly, set aside the assessment order to the file of the AO to pass a fresh order after affording reasonable opportunity of being heard to the assessee.
Being aggrieved by the above order, the appellant is in appeal before us, in the present appeal. It is submitted that the PCIT ought not to have exercised the jurisdiction u/s.263 of the Act, inasmuch as, the guarantee commission paid to the State Government of Kerala is not an item of expenditure hit by the provisions of section 40(a)(iib) of the Act.
On the other hand, the learned CIT-DR submits that the failure of the AO to examine the applicability of provisions of sec.40(a)(iib) of the Act in respect of bank guarantee commission paid by the appellant company to the State Government of Kerala renders the assessment order erroneous. Further, he submits that the issue is no longer res integra as it stood covered against the appellant company in view of the
4 ITA No.307/Coch/2023. Kerala State Financial Enterprises Ltd. decision of the Hon’ble Supreme Court in the case of Kerala State Beverages (Manufacturing & Marketing) Corporation Ltd. v. ACIT (2022) 440 ITR 492 (SC).
We heard the rival submissions and perused the material available on record. The Parliament had conferred the power of revision on the Commissioner of Income Tax u/s 263 of the Act, in case the assessment order passed is erroneous and prejudicial to the interests of revenue. In order to invoke the power of revision, the above two conditions are required to be satisfied cumulatively. References in this regard can be made to the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT, 243 ITR 83 (SC) and in the case of CIT vs. Max India Ltd., 295 ITR 282 (SC). The error in the assessment order should be one that it is not debatable or plausible view. In a case where the Assessing Officer examined the claim took one of the plausible views, the assessment order cannot be termed as an “erroneous”.
In the present case, it is an admitted fact that the AO had not examined the applicability or otherwise of the provisions of sec.40(a)(iib) of the Act in respect of the payment of guarantee commission fees paid by the appellant company to the State Government of Kerala. Non-examination of the issue is clearly palpable and falls within the meaning of an error, and therefore, amenable to the jurisdiction u/s.263 of the Act. In this connection, it is apt to refer to the decision of the Hon’ble jurisdictional High Court in the case of Cochin International Airport Limited v. ACIT in ITA No.77 of 2018 dated 07th January, 2025, wherein the Hon’ble Court observed as under:-
5 ITA No.307/Coch/2023. Kerala State Financial Enterprises Ltd.
“10. It is true that all orders, which are erroneous, are not liable to be subjected to proceedings under Section 263 of the Income Tax Act, 1961. To invoke Section 263, the Principal Commissioner of Income Tax must be satisfied that the erroneous order also causes prejudice to the Revenue. The real purport of Section 263 is to remove the prejudice caused to the Revenue by the erroneous order passed by the assessing officer and it empowers the Commissioner to initiate suo motu proceedings, when either the assessing officer takes a wrong decision without considering materials available on record or renders a decision without enquiry. The role of the assessing officer under the Income Tax Act, 1961 is not only that of an adjudicator but also of an investigator and he cannot remain oblivious in the face of a claim without any enquiry. The assessing officer must exercise a dual role of protecting the interest of the Revenue as well as that of the assessee and that is the reason why he is expected to pass orders with utmost diligence. If, on facts, a claim made is assumed to be correct, then the assessing officer must necessarily state reasons as to why he is allowing the claim. 11. In Malabar Industrial Company Ltd. v. Commissioner of Income Tax [243 ITR 83 (SC)], the Hon'ble Supreme Court held as follows: "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." 12. Therefore, in the light of the principle discussed above, we find that Section 263 of the Income Tax Act, 1961 applies in the following cases: (a) the order sought to be revised contained error for lack of reasoning;
6 ITA No.307/Coch/2023. Kerala State Financial Enterprises Ltd. (b) the order sought to be revised proceeds on incorrect assumption of facts and applies the law incorrectly, and (c) stereotype orders passed by the assessing officer simply accepting the version of the assessee. 9. Coming to the facts of the instant case, perusal of the assessment order, it would show that the AO did not show any application of mind and mechanically accepted the claim for allowability of guarantee commission fees paid to the State Government of Kerala. Therefore, we do not find any fault with the PCIT for exercising his jurisdiction u/s.263 of the Act. We do not find merit in the appeal filed by the appellant.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced on this 14th day of May, 2025.
Sd/- Sd/- (Sandeep Singh Karhail) (Inturi Rama Rao) JUDICIAL MEMBER ACCOUNTANT MEMBER Cochin; Dated : 14th May, 2025. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT, Cochin. 4. The DR, ITAT, Cochin. 5. Guard File. Asst.Registrar/ITAT, Cochin