CISCO SYSTEMS (INDIA) PRIVATE LIMITED,BANGALORE vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX - 2, KORAMANGALA, BANGALORE

8. On the basis of these observations, the Principal Commissioner was of the view that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue. Accordingly, the assessee has been issued a notice dated 26-2-2025 to clarify the position as to why the order passed under section 143(3) read with section 144B should not be set aside under section 263 of the Act.

9.1 It was explained that the deduction of ₹15,59,55,015/- is not on account of reimbursement of post-employment benefit obligations, but pertains to the remeasurement of such obligations, as reflected in the financial statements for the financial year 2020-21. The said figure has been disclosed in the statement of profit and loss under the head “Items that will not be reclassified to profit or loss.” The negative amount in brackets indicates that it represents an item of expenditure and not an item of income. The assessee produced a copy of the relevant portion of the financial statements, showing that the said amount forms part of the comprehensive income computation and has been correctly presented as per applicable accounting standards.

9.2 The assessee submitted that under the Indian Accounting Standards (IND AS), remeasurement gains or losses on defined benefit plans such as gratuity and provident fund are required to be disclosed under “Other Comprehensive Income.” Under the previous Indian GAAP, the entire expense, including remeasurement losses, would have been charged to the profit and loss account. The change in classification is merely a presentation requirement and does not alter the nature or allowability of the expenditure for income tax purposes.

9.3 It was further clarified that since this loss on remeasurement of post-employment obligations has not been considered while computing the taxable profit for the year, the assessee has separately deducted the said amount while computing its total income in the return.

9.4 The assessee placed reliance on the actuarial report to substantiate the figures of remeasurement losses. As per the report, there was an actuarial loss of ₹22,84,64,799/- on account of the provident fund and an actuarial gain of ₹7,25,09,784/- on account of the gratuity fund. The net actuarial loss thus worked out to ₹15,59,55,015/-, which was claimed as a deduction. Copies of actuarial computations for provident fund and gratuity fund were enclosed as Annexures 4 and 5 respectively.

9.5 The assessee then referred to Sections 36(1)(iv), 36(1)(v), and 43B of the Act. It was submitted that contributions made to recognized provident and approved gratuity funds are allowable deductions under Section 36 of the Act, subject to the condition under Section 43B of the Act that such payments are actually made before the due date of filing the return of income under Section 139(1) of the Act. The assessee emphasized that it has strictly followed these provisions and has claimed only those payments that were actually made within the prescribed due date.

9.6 The detailed working furnished before the Ld. PCIT showed that the total cost recognized towards the provident fund was ₹158,92,92,043/-, out of which ₹109,53,41,648/- was paid before the due date of filing the return. The balance amount of ₹49,39,50,395/-, which was not paid within the due date, was disallowed by the assessee itself in its computation of income. Similarly, the total cost recognized towards the approved gratuity fund was ₹39,35,86,063/-, all of which was paid before the due date of filing the return. Hence, no disallowance was warranted under Section 43B of the Act in respect of the gratuity contribution.

9.7 The assessee further highlighted that all supporting documents, including the computation of income, actuarial valuation reports, and details of payments, were enclosed in the submission. Therefore, there was full compliance with the statutory provisions, and the claim made by the assessee was based on actual payments and proper accounting recognition.

9.8 Finally, the assessee requested the Ld. PCIT to kindly appreciate that the claim does not represent any contingent or estimated liability but an ascertained expenditure based on actuarial valuation and actual contribution. The assessee humbly prayed that the computation furnished, being in accordance with Section 36 read with Section 43B of the Act, may kindly be accepted and the deduction allowed in full.

9.9 Likewise, the assessee on the issue of reduction of realized foreign exchange gain of ₹32,77,83,741/- from the business income made detailed submission.

9.10 It was explained that the said gain has arisen on account of payments made towards capital creditors for the purchase of fixed assets. The assessee clarified that such gain is not related to trading or revenue transactions but directly linked with the acquisition of capital assets. Hence, in accordance with the provisions of Section 43A of the Act, the realized foreign exchange gain or loss at the time of payment should be adjusted to the “block of assets” and not offered as income under the head “business income.”

9.11 The assessee relied upon the language of section 43A of the Act, which provides that when an assessee acquires an asset from a country outside India for the purposes of business or profession, and there is an increase or reduction in liability due to fluctuation in the exchange rate, the corresponding change must be added to or deducted from the actual cost of the asset. The assessee reproduced the relevant extract of Section 43A of the Act before the PCIT to substantiate this legal position. It was emphasized that the section applies irrespective of the accounting method adopted by the assessee and requires adjustment to the asset block at the time of making payment.

9.12 The assessee explained that, although accounting standards (IND AS) require foreign exchange gains or losses to be routed through the profit and loss account for financial reporting purposes, the Income Tax Act governs the tax treatment independently. Therefore, under Section 43A of the Act, the gain realized on repayment of capital creditors cannot be taxed as business income but must be adjusted against the block of assets.

9.13 It was further submitted that the foreign exchange gain was already considered in the profit before tax as per the audited financial statements. However, while computing taxable income, the assessee has reduced this gain to correctly align with the provisions of Section 43A of the Act. The assessee clarified that the said adjustment does not result in any revenue loss to the department because it only affects the computation of the “actual cost” of assets for depreciation purposes, not the overall taxable income on a permanent basis.

9.14 To support its claim, the assessee placed reliance on the fixed asset register and depreciation schedule reproduced from Form 3CD, Annexure E, which shows the details of additions and adjustments made during the financial year 2020-21. The reconciliation furnished demonstrates that the adjustment for realized exchange gain was duly made while determining the closing block of assets as of 31st March 2021.

9.15 It was also highlighted that unrealized exchange losses pertaining to earlier years i.e. ₹25,99,96,260/- for FY 2018-19 and ₹13,66,35,934/- for FY 2019-20, had already been recognized. During the current year, these losses were adjusted against the realized foreign exchange gain of ₹32,77,83,741/-, resulting in a net adjustment of ₹6,88,48,453/- to the block of fixed assets under Section 43A of the Act.

9.16 Based on these details, the assessee submitted that the accounting treatment and tax computation were consistent with the statutory provisions. The amount of ₹32,77,83,741/- represents a capital adjustment and not a taxable revenue item. The assessee therefore urged that the same should not be included in the business income for the relevant assessment year. In conclusion, the assessee humbly requested that, in view of the clear mandate of Section 43A of the Act and the supporting reconciliation of fixed asset additions, the adjustment for realized foreign exchange gain should be accepted.

9.17 The assessee in view of the above claimed that no error occurred in the assessment order which prejudicial to the interest of the revenue. Hence the assessee prayed the Ld. PCIT to drop the proceeding under section 263 of the Act.

Page 9 of 19 on the actuarial reports for the gratuity fund and provident fund computations. The assessee has further submitted that the payments to the provident fund and gratuity fund which were not paid within the due date of filing the return of income had been disallowed in the computation of income. It is observed that these details had not been verified by the AO during the assessment proceedings nor had he made any enquiries with respect to the same. Allowing the assessee’s claim of remeasurement of post-employment benefit obligations without proper enquiry or verification of the assessee’s claims makes the order erroneous and prejudicial to the interest of the revenue.

9. Therefore, in terms of Explanation 2 to section 263, the order of the AO dated 29.12.2022 is erroneous and prejudicial to the interest of the revenue. Accordingly, the order u/s 143(3) r.w.s. 44AB dated 29.12.2022 is set aside for the purpose of making a fresh assessment in accordance with law. The AO is directed to revise the assessment after verifying thoroughly the assessee’s claims of re-measurement of post-employment benefit obligations and foreign exchange gains realized on payment towards capital creditors for the purchase of fixed assets. The AO shall conduct necessary enquiries and verification for this purpose, and shall give the assessee an opportunity to furnish necessary supportive evidence of its claim and explain why the proposed addition/disallowance should not be made to its income. The AO shall consider the facts as well as the explanation furnished by the assessee and make a fresh assessment in accordance with law.

12.1 He began by submitting that the impugned order passed by the PCIT is bad in law, without jurisdiction, and contrary to the settled principles governing the exercise of powers under section 263 of the Act. He contended that the basic preconditions for invoking such jurisdiction — namely, that the assessment order must be both erroneous and prejudicial to the interest of the Revenue — have not been satisfied in this case.

12.2 The Ld. AR explained that both issues raised by the PCIT — (a) the remeasurement of post-employment benefit obligations, and (b) the reduction of realized foreign exchange gain related to capital creditors, are routine, recurring matters that have been consistently accepted by the department in earlier years after due verification.

12.3 The Ld. AR further argued that the Ld. PCIT failed to appreciate that the assessment proceedings under sections 143(2) and 142(1) of the Act involved comprehensive scrutiny of all financial and tax audit records. The AO had before him the actuarial reports, financial statements, Form 3CD details, and supporting schedules forming part of the statutory audit. These documents clearly disclosed the computation of post-employment benefit obligations and the adjustment of foreign exchange gains to the block of assets under section 43A of the Act. The AO, being a quasi-judicial authority, exercised his judgment after considering these materials. The PCIT cannot substitute his own view merely because he holds a different opinion on the same set of facts.

12.4 The Ld. AR highlighted that the PCIT’s order is based on a mere assumption that no enquiry was made, whereas the record itself shows that all necessary details were available. He argued that deeming fiction under Explanation 2 to section 263 of the Act, which treats an order as erroneous if no enquiries are made, cannot be mechanically applied. The Ld. AR cited the decision of the Hon’ble ITAT Ahmedabad Bench in Torrent Pharmaceuticals Ltd. vs. DCIT (2018) reported in 97 taxmann.com 671, wherein it was held that the phrase “should have been made” must be understood contextually and not in an abstract or subjective manner. An assessment order cannot be branded as erroneous merely because the PCIT feels a deeper or different enquiry should have been made.

12.5 Referring to the same decision, the Ld. AR emphasized that if the AO has examined the issue, considered the material evidence, and taken a plausible view, the order cannot be revised under section 263 of the Act simply because the PCIT believes further enquiry was desirable. The Tribunal in Torrent Pharmaceuticals Ltd.(supra) also observed that reopening settled aspects year after year without any new facts or material would lead to chaos and uncertainty in tax administration.

12.6 The Ld. AR then drew attention to the decision of the Hon’ble Delhi High Court in CIT vs. Escorts Ltd. (ITA No. 14/1999), where it was held that once the AO has taken a conscious view on a recurring issue after examining the facts, the ld. PCIT cannot invoke section 263 merely to re-examine the same aspect. The Ld. AR pointed out that the assessee’s accounting and tax treatment of post-employment benefit obligations and foreign exchange fluctuations had been consistently accepted in prior years, which further supports the bona fides of the assessee’s claim.

12.7 He then addressed the specific allegations made in the impugned order. On the first issue, i.e. remeasurement of post-employment benefit obligations, the ld. AR explained that the amount of ₹15,59,55,015/- represents actuarial losses arising from remeasurement of gratuity and provident fund obligations, duly recorded under “Other Comprehensive Income” in accordance with IND AS. These actuarial computations were supported by reports from qualified actuaries, and the corresponding details were furnished in the tax audit report. The AO had accepted the claim after verifying that payments disallowed under section 43B of the Act (not made before the due date of filing the return) were separately added back in the computation of income. Therefore, there was neither error nor prejudice to the revenue.

13.1 The Ld. AR further explained that the foreign exchange gain was consistently treated as capital in nature in earlier years, and unrealized losses were carried forward and adjusted in subsequent years. The same treatment was continued in the year under appeal, and this consistent accounting approach was verified and accepted by the department. Hence, reopening the issue in revisionary proceedings is unjustified and contrary to law.

13.2 The Ld. AR also placed reliance on judicial precedents including Nya International (2025) 482 ITR 281 (SC), Usha International Ltd. (2012) 348 ITR 485 (Delhi), and Cognizant Technology Solutions India Pvt. Ltd. (2023) 14 SCC 421, to reinforce that section 263 of the Act cannot be used to substitute one plausible view with another. The AO’s view, even if brief, cannot be treated as erroneous when it is based on material evidence and consistent with past practice.

13.3 The Ld. AR concluded by arguing that the PCIT failed to specify what further enquiry the AO should have conducted or how the AO’s approach was erroneous. The ld. PCIT merely presumed lack of verification without identifying any factual or legal error in the assessment order. Such a revisionary order, based on conjecture and not on concrete evidence, is invalid in law.

13.4 The ld. AR therefore prayed that the order passed under section 263 of the Act be quashed. He submitted that the AO had examined the issues judiciously, applied the correct legal principles, and that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The proceedings initiated under section 263 were thus without jurisdiction and deserve to be annulled in the interest of justice.

13.5 The ld. AR without prejudice to above vide letter dated 20-01-2026 as per the direction of the Bench further submitted that the issue in the assessment was limited to the issue raised in VRU i.e. Non-deduction of TDS. Therefore, the assessment cannot be held as erroneous and prejudicial to the interest of Revenue on the issues as pointed out by the ld. PCIT in his order passed under section 263 of the Act.

15.1 Before examining the merits of the rival contentions, it is necessary to briefly advert to the statutory architecture of faceless assessment. Under section 144B of the Act, the assessment proceedings are conducted through the National Faceless Assessment Centre, which may assign different functions to specialized units, namely the Assessment Unit, Verification Unit, Technical Unit and Review Unit. Where factual verification, examination of records, third-party enquiries or recording of statements is required, the Assessment Unit is empowered to request the National Faceless Assessment Centre to assign the matter to a Verification Unit. The Verification Unit then conducts the necessary enquiries and uploads its report, which forms part of the assessment record and may be relied upon by the Assessing Officer while framing the order.

15.2 On perusal of the assessment order in the present case, however, we find that no such verification exercise was undertaken in respect of the two issues forming the subject matter of revision by the assessing officer. The order is completely silent on the actuarial valuation of post- employment benefits, the details of payments vis-à-vis section 43B of the Act, and the workings furnished by the assessee under section 43A for adjustment of foreign-exchange gains to the block of assets. There is no reference to any questionnaire, to any reply filed by the assessee on these aspects, or to any report obtained from a Verification Unit in respect thereof. In a faceless regime, where all communications and enquiries are digitally recorded, such silence assumes considerable significance and supports the finding of the Ld. Principal Commissioner that the assessment was completed without the requisite verification on material aspects.

15.3 The Ld. Authorised Representative placed heavy reliance on the decision in Torrent Pharmaceuticals Ltd. We are unable to accept such reliance. In that case, the Assessing Officer had called for details, examined the replies of the assessee and thereafter adopted one of the possible views, and it was in this factual background that revision under section 263 was considered impermissible. In the present case, on the contrary, the assessment records do not disclose that any enquiry whatsoever was conducted on the two disputed issues in the year under consideration. Mere availability of actuarial reports, tax-audit particulars or depreciation schedules in the file cannot be equated with application of mind by the Assessing Officer. The acceptance of substantial and technically complex claims without any prima facie verification clearly falls in the category of “lack of enquiry” and not “inadequate enquiry.” Accordingly, the ratio of Torrent Pharmaceuticals Ltd. does not advance the case of the assessee.

15.4 We also note that the assessee tried to draw an inference from a line appearing in the assessment order in a different context, namely, “Verification report uploaded through VRU – Non-deduction of TDS.” This line only shows that, for a TDS-related issue, the Assessment Unit had asked a Verification Unit to carry out factual verification and submit a report. By itself, this remark does not show whether the case was taken up for limited scrutiny or complete scrutiny, because the use of a Verification Unit under section 144B of the Act depends on the nature of verification required and not on the type of scrutiny. At the same time, the fact that such a mechanism was used for another issue shows that the Assessing Officer had the power, within the faceless system, to seek specialized verification whenever necessary. The absence of any similar exercise for the two disputed issues, despite their large amounts and technical nature, therefore supports the conclusion that the assessment order was passed without proper enquiry on those aspects.

15.5 The Ld. AR relied on the Hon’ble Supreme Court order dismissing the SLP in Cognizant Technology Solutions India (P.) Ltd. v. ACIT [2021] reported in 131 taxmann.com 346. However, that reliance is misplaced. In that case, the Hon’ble Supreme Court observed that the assessee is not responsible for how the assessment order is drafted and that a brief or poorly worded order by itself does not show lack of enquiry, so long as the record proves that the Assessing Officer had in fact made enquiries. In the present case, however, the assessment records do not show that the Assessing Officer made any enquiry at all on the two disputed issues. Therefore, the problem here is not merely the manner in which the order was written, but the complete absence of enquiry. For this reason, the said decision does not help the assessee.

15.6 The claims involved are of large amounts and depend on facts specific to the year, such as actuarial calculations under Indian Accounting Standards and adjustments under section 43A of the Act for foreign-exchange changes relating to capital assets. These matters have to be examined afresh in every assessment year. The principle of consistency cannot remove the duty of the Assessing Officer to verify whether such claims are allowable in the year under appeal.

15.7 Explanation 2 to section 263 creates a deeming provision under which an assessment order shall be treated as erroneous and prejudicial to the interests of the Revenue if it is passed without making enquiries or verification which ought to have been made. In the present case, having regard to the complete absence of any enquiry on record in respect of the two issues, this statutory deeming fiction clearly comes into operation. We are therefore of the considered view that the learned Principal Commissioner was justified in invoking the said provision and in setting aside the assessment order with a direction to the Assessing Officer to carry out proper verification and pass a fresh order in accordance with law after granting due opportunity to the assessee.

15.8 We also draw support from the judgment of the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income-tax [2000] reported in 109 Taxman 66 / 243 ITR 83. The Hon’ble Supreme Court has laid down that, for invoking section 263, the twin conditions must be satisfied, namely, that the assessment order is erroneous and also prejudicial to the interests of the Revenue. It was further held that where the Assessing Officer accepts a claim without making any enquiry and without examining the supporting material, and such acceptance results in loss of tax legally payable, the ld. Commissioner is justified in exercising revisionary powers under section 263 of the Act. In the present case also, the Assessing Officer accepted the assessee’s claims on the two disputed issues without carrying out any enquiry or verification. Therefore, applying the ratio of the above decision, we hold that the learned Principal Commissioner rightly assumed jurisdiction under section 263 of the Act.

15.9 In view of the foregoing discussion, we uphold the revisionary order passed by the Ld. Principal Commissioner under section 263 of the Act. and the grounds raised by the assessee are accordingly dismissed.