PROPERTY PLUS REALTORS,DELHI vs. PR, CIT CENTRAL DELHI 2, DELHI

Against the said order, assessee filed an appeal before Ld. CIT(A) which is pending for adjudication as on date as stated by the ld. AR for the assessee. In the meantime, PCIT issued a show cause notice dt. 22.03.2025 initiating revisionary proceedings u/s 263 of the Act and asked the assessee to file necessary reply on 25.03.2025. In the show cause notice, ld. PCIT alleged that assessee has paid commission to one M/s Softech International Pvt. Ltd. (“SIPL”) which was taken over by few partners of the assessee firm and assessee had paid commission to the extent of INR 4.55 crores to the said company who had claimed expenses to the extent of INR 24.19 Lakhs only and declared net profit of INR 4.32 crores out of such receipts. Ld. PCIT further observed that commission paid to this company is an arrangement to save the taxes as the tax rates in the hands of the company SIPL is less than by 7.2124% and accordingly, assessment order was held as erroneous and pre-judicial to the interest of the Revenue. It was held by ld. PCIT that company SIPL was taken over to divert the profits of the assessee firm and to minimize its tax liability and accordingly PCIT concluded that it is a colourable device created for tax avoidance. Therefore, after holding the assessment order as erroneous and pre-judicial to the interest of the Revenue, direct the AO to verify the payment of commission to SIPL and re-compute the total income of the assessee.

Aggrieved by the said order, assessee is in appeal before the Tribunal by taking following grounds of appeal:-

Any other ground as deemed appropriate in the facts and circumstances of the case which may be allowed by the Hon'ble ITAT.”

Before us, Ld. AR for the assessee submits that PCIT has summarily rejected the submissions made by the assessee without providing proper opportunity of being heard and very short time of 09 days was provided from the date of order passed and the initiation of proceedings u/s 263 by issue of show cause notice on 22.03.2025.

Ld. AR submits that during the course of assessment proceedings, AO made specific inquiries from SIPL regarding on payment of commission to it and show-cause notice was issued to the assessee on 05.01.2024 alongwith the questionnaire containing more than 60 pages where in Point No.8 at page 51 of the notice, the AO show caused the assessee to explain why the commission paid of INR 4.55 crores to SIPL will not be treated as unjustified excess and unreasonable and should not be disallowed. In reply thereof, assessee filed submission which is available at page 273 of the paper book. Ld.AR submits that after considering the submissions, AO has not taken any adverse inference and accepted the claim made by the assessee. It is further submitted that assessee also filed copy of the financial statements and copy of ITR of SIPL and submits that there was no excess payment made. It is further submitted by Ld.AR that in the case of assessee, AO has rejected the books of accounts and estimated the income by applying net profit rate of 40% thus, no further disallowance is required to be made once the profit rate is applied. Ld.AR submits that since assessment order was passed after making necessary inquiries and even show-cause notice was issued before accepting the contention of the assessee thus, it is not a case where no inquiry or verification was made therefore, the action of the PCIT in holding the assessment order as erroneous and pre-judicial to the interest of the revenue is not correct. It is further submitted that the tax rate between the two entities are almost the same and merely for the reason that there is some difference in the tax rate due surcharge etc., the assessee has not made an attempt to transfer its income, more particularly, looking to the fact that both the entities are separate legal entities. He, therefore, prayed for quashing of order passed u/s 263 of the Act. The assessee also filed written submissions in this regard. The relevant contents of the written submissions are reproduced as under:- GROUNDS OF APPEAL

That the Ld.AO adopted a plausible view on evidence during the assessment proceedings. The Ld. PCIT cannot substitute its judgement for the AO's merely on suspicions or perceived tax arbitrage.

Further it is submitted that in the absence of any specific anti- avoidance provisions applicable to this domestic payment, there is no statutory basis to characterize income between two separate tax payers. SIPL duly accounted for income and paid taxes on the same while filing its return. In the hands of appellant also, the commission was allowed as deduction by the Ld.AO. Therefore, there is no statutory basis to re-characterize the income and charge the difference between the tax rates in the hands of the Appellant.

In Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC), the Hon'ble Supreme Court held that the assessment order must be both erroneous and prejudicial in order for the Ld. PCIT to evoke her jurisdiction under 263. If the Ld.AO adopts a permissible view on the facts of the case, the Ld. PCIT cannot invoke her jurisdiction u/s 263.

In CIT vs. Gabriel India LTD. (1993) 203 ITR 108 (Bom), it was held that the CIT while passing order u/s 263 must demonstrate a specific error in the assessment order. A roving direction given to the Ld.AO is not permissible.

In ITO vs. D.G. Housing Projects Ltd. (2012) 343 ITR 329 (Del), it was laid down that the CIT must conduct/record her independent verification. Mere disagreement with the LD.AO is not enough to invoke jurisdiction u/s 263. Conclusion basis Ground 1 & 4. In view of the above facts and legal position, the AO's acceptance of commission was a legally tenable, evidence-based view. The Ld. PCIT during the proceedings u/s 263 identified no concrete error of fact or law. Therefore, the first ground taken by the Appellant ought to be allowed and the impugned order containing finding on alleged diversion should be vacated. Ground No.2: Purported Lack of Inquiry under Explanation 2 to Section 263 21. The Ground No.2 taken by the Appellant is as under, Because the PCIT erred in law and on facts to record the finding "that the Ld.AO has passed the assessment order without making enquiries or verification which should have been made." In fact the case of the appellant does not fall in any of the categories specified in the Explanation (2) of Section 263 of the Act.

Another issue involved in the present appeal is whether Explanation 2(a) to of Section 263 is applicable in the facts of the present case. Under explanation 2(a) and assessment order is deemed erroneous if the same is passed without making inquiries/verifications which should have been made. In the present case the Ld. AO actually examined the very issue of payment of commission by the Appellant to the company SIPL.

It is further submitted that the assessment records contained the AO's specific notice on the SIPL Commission (Refer to Annexure A-6 of this Appeal). Further the Appellant filed detailed reply to the query regarding the commission to SIPL raised by the Appellant during assessment proceedings. The reply filed by the Appellant is filed as Annexure- A-7 to this appeal. The AO consciously accepted the claim of payment of commission by the Appellant to SIPL and did not make any specific disallowance on account of commission while computing income in the hands of Appellant.

It is an established law that a case on "no inquiry" has to be distinguished from inadequate inquiry. If some enquiry exists, powers u/s 263 cannot be used merely because the Ld. PCIT prefers deeper probing.

It is further submitted that the Ld. PCIT did not unearth new facts or demonstrated how any supposed inquiry lapse definitively caused under-assessment. A perusal of the order u/s 263 would show that the Ld. PCIT mainly remanded for re-verification which is not permissible on the basis of plethora of legal judgement on the issue.

It is submitted that the reliance is placed on the following case laws under this ground of appeal

It is further submitted that GAAR is a self-contained code with thresholds and mandatory procedure u/s 144BA. The cases which fall below the threshold provided under the GAAR cannot be shoehorned into the proceedings u/s 263.

It is further submitted that in the absence of GAAR invocation, the AO had no lawful basis to disregard a genuine payment between resident parties merely on account of tax rate arbitrage.

Last but not the least, the Ld. PCIT has relied upon the judgment in M/s MacDowell and Company Ltd. vs. Commercial Tax Officer [(1985) 3 SCC 230) Case. It is humbly submitted that MacDowell dictum cannot over-ride GAARS statutory limits. Here it is submitted that the Hon'ble Supreme Court in UOI vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) and Vodafone Case (2012) 341 ITR 1 (SC) protect legitimate tax planning absent sham.

In this regard, provisions of Rule 10U may be considered. Rule 10U provides that chapter X-A is not to apply in certain cases. Rule 10U (1)(a) reads as under: The provisions of Chapter X-A shall not apply to- An arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the parties to the arrangement does not exceed a sum of rupees three crore. Conclusion basis Ground No. 3: In view of the above facts and in law, the Ld. PCIT's GAAR-style re- characterisation of income by invoking power u/s 263 is ultra vires. The Ground No.3 taken by the Appellant ought to be allowed. Ground 5: Borrowed Satisfaction 34. The Ground No.5 taken by the Appellant is as under, Because on fact and in law and the grounds taken and basis adopted the Impugned Order is based on borrowed satisfaction and without application of mind. The impugned order is, therefore, not maintainable.

Yet another issue involved in the present appeal is whether the Ld. PCIT can assume jurisdiction u/s 263 on borrowed satisfaction or the jurisdiction should be assumed by drawing independent satisfaction from the appellant's records.

It is respectfully submitted that the notice u/s 263 (Annexure-A-3) substantially relies upon SIPL financials (Profit ratio expenses and tax rate comparison). In other words, all this material was not found as part of the Appellant's assessment records. It is respectfully submitted that the proceedings u/s 263 must emanate from the assesse's own proceedings: and external finding cannot, by itself, form the foundation for revision unless independently verified and tied to an error in the Appellant's record.

From the facts of the case, it is amply clear that the Ld, PCIT did not conduct independent fact finding e.g. (summoning SIPL or the appellant) to establish sham. The satisfaction by the LD.PCIT is, therefore, derivative or borrowed.

In this regard, the reliance is placed on the judgement in Manoj Pandaliya vs. PCIT (ITAT Ahmedabad, 06.01.25), where it was held that the proceedings u/s 263 cannot rest on third-party findings. Borrowed satisfaction by the Ld. PCIT is invalid.

Further in the case of D.G Housing Delhi High Court it was held that the CIT must apply her own mind. Audit note is not a substitute. Conclusion basis Ground 5: As the core premise used by the Ld. PCIT in invoking jurisdiction u/s 263 stems from SIPL return Profile/ Audit perspective rather than an established lapse in the Appellant's record, the impugned order u/s 263 is vitiated. The Ground No.5 taken by the Appellant deserves to be allowed. Ground 6: Breach of Natural Justice 40. The Ground No.6 taken by the Appellant is as under, Because on facts and in law the Ld. PCIT grossly violated the Principles of Natural Justice and passed the Impugned order without providing sufficient opportunity to the appellant. The impugned order is, therefore, violative of the principles of natural justice and deserves to be quashed.

Last but not the least, there is yet another issue involved in the present appeal is also "whether proceedings u/s 263 stands vitiated due to inadequate opportunity/denial of fair hearing and non-consideration of the appellant's detailed reply".

In this regard, it is respectfully submitted that SCN dated 22.03.2025 (Annesxure A-3) was made returnable on 25.03.2025. In other words only two days' time was given. The appellant duly sought adjournment on 25-03-25 (Annexure A-4) which was completely ignored by the Ld. PCIT. Further the written Submissions were uploaded/filed by the Appellant on 29.03.2025 (Annexure A-5) The written submissions were not considered by the Ld. PCIT while passing the impugned order dated 31.03.2025. Further, no personal hearing was afforded to the appellant.

It is humbly submitted that section 263 mandates a real and effective opportunity to be provided to the appellant. A compressed timeline/ denied adjournment in a time-barred month violates the principle of the audi alteram partem.

Further a non-speaking order that ignores material submission/ evidence is per se invalid.

That in this regard the reliance is place on the following cases, (a) CIT vs. Amitabh Bachchan (2016) 384 ITR 200 (SC), where it was held that hearing is mandatory. (b) R.N. Khemka Enterprises vs. ITAT (ITAT Delhi, 2023) where it was held that undue haste vitiates order u/s 263. (c) Hi-Shine Inks Pvt. Ltd. (ITAT Surat, 2023), where it was held that order without considering reply/hearing is unsustainable. Conclusion basis Ground 6 The impugned order is therefore, void for breach of natural justice. The Ground No.6 taken Appellant ought to be allowed.”

On the other hand, Ld. CIT DR for the Revenue vehemently supported the order of Ld. PCIT and submits that in the replies filed before the AO, assessee sought time to file further details however, no such details were ever filed and AO had accepted the part submission of the assessee. It is thus, submitted by Ld. CIT DR that the commission paid SIPL is mere book entry made to reduce the tax liability of the assessee firm and therefore, PCIT has rightly hold the assessment order as erroneous and pre-judicial to the interest of the Revenue. She prayed accordingly.

Heard the contentions of both the parities and perused the material available on record. In this case, sole issue is regarding the verification of the commission paid SIPL which is a company owned by two of the partners of assessee firm. Ld. PCIT observed that commission was paid SIPL to reduce the tax liability however, the claim of the assessee is that commission paid was under normal business transactions and for the services rendered by it. It is also claimed by the assessee that AO has made specific query in this regard for which he referred para 8 of the query letter dated 05.01.2023. The relevant query as made by the AO is reproduced as under:- 8. “During the year under consideration, firm have paid commission of Rs. 4,55,00,000/- to M/s Soft Tech International Private Limited, a sister concern of firm. During assessment proceedings a notice u/s 133(6) of Income Tax act, 1961 was issued to Soft Tech International Private Limited, for providing the details and justification of commission income earned, however no reply till date was filed by the company. Under the light of above para, You are hereby being show caused to explain why not the commission paid of Rs. 4.55,00,000/- to sister concern will be treated as unjustified, excessive or unreasonable having regard for the legitimate needs of business or profession of the assessee and why it should not be disallowed.”

It is further seen that the assessee has made reply in terms of the letter filed online on 11.01.2023 wherein assessee has accepted the facts of claim of expenditure towards commission paid to SIPL. It is further seen that the recipient company had also filed confirmation of receipt of commission alongwith the copies of its financial statements, bills, copy of ITR, invoices raised to the assessee company with relevant annexures. It is further observed that assessee in reply to show cause before PCIT has stated that AO has made proper inquiries and verification of the payment before reaching to the conclusion. Further AO independently issued summon u/s 133(6) of the Act to the recipient company therefore, it is not the case where provisions of section 263 Explanation (2) could be invoked. It is also observed that AO has rejected the books of accounts and applied net profit rate of 40% on the gross receipt of the assessee company which has resulted into an addition of INR 6,43,68,191/- and the matter is sub-judice before Ld. CIT(A). While invoking the provisions of section 145(3) of the Act and estimating the income, the AO has observed in para 11.4 of the order that the application of 40% of net profit rate is to cover up bogus expenditure claimed by the assessee in the Profit & Loss Account and extra margin earned on unrecorded commission income, if any. Once the AO has rejected the books of accounts and estimated the income, any further disallowance out of Profit & Loss Account is not permissible as has been held by Hon’ble Andhra Pradesh High Court in the case of Indwell Constructions Vs. CIT reported in (1998) 232 ITR 776(AP).

It is also observed that the recipient i.e. SIPL has included the said commission in its gross receipts and paid taxes on almost 88% of the income i.e. 88% of the total commission paid by the assessee and no effort was made to evade any tax.

In view of the above facts, in our considered opinion, action of ld. PCIT in treating the assessment order as erroneous and pre- judicial to the interest of the Revenue is not correct as the AO has made all the plausible inquiries and verification and thereafter concluded that expenses on account of commission paid to SIPL is genuine expenditure and therefore, the said order cannot be revised u/s 263 of the Act. While observing so, we keep in mind that AO has estimated the income of the assessee by applying net profit rate after invoking the provisions of section 145(3) of the Act and considering the aspect of bogus expenditure, if any.

In view of the above discussion, we hereby, quashed the order passed u/s 263 of the Act.

In the result, appeal of the assessee is allowed.

Now we take up appeal of the assessee in [Assessment Year 2021-22].

Before us, both the parties consented that in this case, facts are identical with the facts in Year 2020-21] except change in amount of payment of commission. While deciding the appeal of the assessee in [Assessment Year 2020-21], we have already quashed the order passed u/s 263 of the Act. For the present appeal, before us, the respective sides have canvassed similar plea. In view of the similarity of facts, our decision in ITA No.3406/Del/2025 [Assessment Year 2020-21] would apply Mutatis Mutandis applied in this appeal also, filed by the assessee.

In the result, appeal filed by the assessee is allowed.

In the final result, appeals of the assessee in & 3407/Del/2025 [Assessment Years 2020-21 & 2021-22] are allowed.