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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against order of the Principal Commissioner of Income-tax-2, Mumbai dated31-03-2017 for the assessment year 2012-13. The assessee has raised the following grounds of appeal:-
“1 The learned Principal Commissioner of Income tax erred in law and on facts of the case in invoking the provision of Section 263 of the Income tax Act 1961. The learned Principal Commissioner of Income tax overlooked the fact that the assessment order u/s 143(3} of Income tax Act 1961. Neither erroneous nor detrimental to the interest of the revenue. 2 The learned Principal Commissioner of Income Tax erred in law and on the facts of the , case in invoking the provisions of section 36(1)( ii) of the 2 ITA 4023/Mum/2017
Income Tax Act, 1961 ("Act") and thereby making the disallowance of Rs.5,95,42,980/-. 2.1. The Learned Principal Commissioner of Income Tax failed to appreciate the fact that the provisions of sec. 36(1 )(ii) are not applicable in the case of the appellant. 2.2. The Learned Principal Commissioner of Income Tax failed to understand that the director was entitled to receive commission for services rendered to the company in terms of the board resolution. 2.3. The learned Principal Commissioner of Income Tax erred in law and fact by treating bonus as a colorable device to evade tax. 2.4. We rely on the decision of the Hon'ble High Court of Delhi in the case of AMD Metplast (P.) Ltd. v/s Deputy Commissioner of Income Tax (2012) 20 taxmann.com 647 (Delhi) and list the following points - 2.4.1 The director was entitled to performance bonus for services rendered to the company in terms of the board resolution. 2.4.2 There was a contractual arrangement between the appellant company and the director for the payment of performance bonus. 2.4.3 Performance bonus was treated as a part and parcel of the salary and TDS had been deducted. Therefore, the tax is paid by the director on the said performance bonus. 2.4.4 Dividend has to be paid to all shareholders equally. It is a return on investment and not salary or part thereof. In the appellant's case, the consideration in the form of performance bonus which is paid to the director is as per the terms of the board resolution.”
The brief facts of the case are that the assessee company which is engaged in the business of publication of books, periodicals and conducting seminars, conference, etc., filed its return of income for AY 2012-13 on 28-09-2012 declaring total income of Rs.2,94,37,160. The case has been selected for scrutiny and the assessment was completed u/s 143(3) of the Income-tax Act, 1961 on 26-02-2015 determining the total income at Rs.2,99,85,640 by making addition towards unreconciled receipts of Rs.91,454 an disallowance of excess performance bonus paid to directors u/s 40A(2) of the Act for Rs.4,57,020.
3. Later, the Principal Commissioner of Income-tax-2, Mumbai (PCIT,
3 ITA 4023/Mum/2017 henceforth) issued a show cause dated 15-03-2017 and asked the assessee as to why assessment order passed by the AO u/s 143(3) on 26-02-2015 shall not be revised u/s 263 of the Income-tax Act, 1961 for the reasons stated in his show cause notice. In the said show cause notice, the PCIT proposed to revise the assessment order on the ground that the assessment order passed by the AO is erroneous insofar as it was prejudicial to the interest of the revenue on account of wrong claim of deduction towards performance bonus paid to Shri Dilip Raghavan, director of the company. The PCIT further stated that the AO has wrongly disallowed the claim of bonus u/s 40A(2) of Rs.4,57,020 instead of Rs.6 crores claimed by the assessee without conducting proper verification on the expenses claimed by the assessee in the light of provisions of section 36(1)(ii) of the Income-tax ACT, 1961. The AO considered the expenses u/s 40A(2) and found that there is excess payment on performance bonus which required disallowance without considering the said issue in the light of provisions of section 36(1)(ii) of the Act. The PCIT further stated that the director of the company being a major shareholder alongwith his family members, the assessee, instead of distributing profit in the form of dividend, paid performance bonus to one of the directors so as to reduce tax liability. The AO, without appreciating these facts, simply disallowed certain portion of 4 ITA 4023/Mum/2017 performance bonus u/s 40A(2), therefore, the PCIT opined that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue.
3. In response to the show cause notice, the assessee, vide its letter dated 20-03-2017, filed a detailed submission before the PCIT alongwith certain judicial precedents. The detailed submissions filed by the assessee has been reproduced at para 4 on pages 2 to 8 of PCIT’s order. The sum and substance of the arguments of the assessee before the PCIT are that the order passed by the AO u/s 143(3) is neither erroneous nor prejudicial to the interest of the revenue as the AO has caused necessary enquiries with regard to the payment of performance bonus to the director, Shri Dilip Raghavan, by issue of various show cause notices for which the assessee has filed detailed reply alongwith necessary evidences including copy of Board Resolution authorizing payment of performance bonus, duties and responsibilities carried out by the director for the company and necessity of payment of bonus. The assessee further explained before the PCIT that the director of the company has made the business from scratch to profitability which is evident from the details filed which shows that the company was incurring huge losses before the director took charge of the affairs of the company and after he took over the charge, turned the fortunes of the 5 ITA 4023/Mum/2017 company into profit for which the company has rewarded him by way of payment of performance bonus. The assessee further referring to the copy of Board Resolution submitted that the Board has approved payment of performance bonus considering the nominal salary drawn by the director and also such bonus is directly linked to business of the assessee. The AO, after considering all these facts and after being satisfied with the explanation furnished by the assessee chose to allow performance bonus paid to the director by disallowing certain portion u/s 40A(2), therefore, the order passed by the AO cannot be termed as erroneous insofar as it is prejudicial to the interest of the revenue.
The PCIT, after considering relevant submissions of the assessee and also relying upon certain judicial precedents including the decision of Hon’ble Bombay High Court in the case of Loyal Motor Service Co vs CIT 14 ITR 647 (Bom) observed that the assessee has paid performance bonus @51% of gross revenue to the highest shareholder Shri Dilip Raghavan, who holds 35.27% share. The PCIT, further observed that the remaining part of share capital is held by his family members. The bonus paid to the directors is around 75% of net profit of the company which is highly unreasonable and was paid to avoid payment of taxes. The PCIT further observed that if the company has declared dividend, it has to pay dividend distribution tax, therefore, it has 6 ITA 4023/Mum/2017 devised a method to avoid payment of dividend distribution tax and as such paid huge amount of performance bonus to one of its directors held majority of shareholding in the company. Though the AO has caused certain enquiries with regard to the payment of performance bonus and also disallowed partial amount u/s 40A(2), but failed to apply his mind in the light of provisions of section 36(1)(ii) of the Act, which prohibits payment of any sum to an employee of the company for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. In this case, the assessee even though has earned huge profits, not chosen to declare dividend, has paid more than 75% of profit to one of the directors as performance bonus to avoid payment of taxes, therefore, opined that the assessment order passed by the AO was erroneous insofar as it is prejudicial to the interest of the revenue in terms of section 263 of the Act, and accordingly set aside the assessment order passed by the AO u/s 143(3) dated 26-02-2015 and directed the AO to pass the order once again after giving opportunity of hearing to the assessee. The AO was directed to further examine the issue and any other issues and assess the total income of the assessee.
Aggrieved by the order of PCIT, assessee is in appeal before us.
The Ld.AR for the assessee submitted that the assessment order
7 ITA 4023/Mum/2017 passed by the AO u/s 143(3) of the Act, dated 26-02-2015 is neither erroneous nor prejudicial to the interest of the revenue insofar as the issue of payment of performance bonus to director, Shri Dilip Raghavan is concerned, as the AO has verified the issue of payment of performance bonus at the time of assessment proceedings and after considering relevant facts and submissions of the assessee, on being fully satisfied with the claim, made partial disallowance of performance bonus u/s 40(A)(2), therefore, the PCIT was completely erred in revising the assessment order u/s 263 of the Income-tax Act, 1961. The Ld.AR, referring to the paper book filed, containing pages 1 to 97, submitted that the AO has issued show cause notice on various occasions for which the assessee has filed detailed reply, vide its letter dated 20-11-2014, 7- 05-2015 and submitted necessary evidences in support of payment of performance bonus including copy of Board Resolution authorizing such payment, duties performed by the director and also relevance of payment of such performance bonus. The Ld.AR further submitted that the director of the company has made business of the assessee from loss to profitability which is evident from the fact that the company was running into huge losses before he took over charge of the affairs of the company and after he took over the charge, he turned the fortunes of the company into profitability for which the company has suitably rewarded
8 ITA 4023/Mum/2017 him by considering the minimum salary draw by him. The Ld.AR further submitted that it was agreed between the director of the company that he would draw minimum salary and also draw performance bonus which is directly linked to the business of the assessee. The assessee has continuously paid performance bonus to the director right from AY 2004- 05 to 2011-12 depending upon total business of the company and such payment has been accepted by the department. Therefore, without there being any material changes in facts and only for the reason that performance bonus paid for the year is more, there is no reason to disallow performance bonus u/s 36(1)(ii) of the Act. In this regard, he relied upon various judicial precedents including the decision of Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd vs CIT (2000) 240 ITR 83 (SC). Further, the assessee also relied upon the following case laws:-
CIT vs Gabriel India Ltd (1993) 203 ITR 209 (Bom)
2. CIT vs Arvind Jewellers (2003) 259 ITR 502 (Bom)
Mrs. Khatiza Oomerbhoy (2006) 101 TTJ 1095 (Mum)
On the other hand, the Ld.DR strongly supporting the order of the PCIT, submitted that the AO has failed to conduct required enquiries and also applied his mind on payment of performance bonus to the director of the company in the light of provisions of section 36(1)(ii) of the Act,
9 ITA 4023/Mum/2017 where it was prohibited payment of bonus or commission to employees of the company for services rendered, where such sum would not have been payable to him as profits or dividend, if he had not been paid as bonus or commission. The AO, without appreciating the facts in the light of provisions of section 36(1)(ii) simply allowed performance bonus by disallowing partial amount u/s 40A(2) which caused prejudice to the interest of the revenue and hence, the PCIT has rightly invoked the jurisdiction u/s 263 of the Act, to revise the assessment order passed by the AO and his order should be upheld.
We have heard both the parties and perused the materials available on record. The PCIT assumed jurisdiction u/s 263 and set aside the assessment order passed by the AO u/s 143(3) dated 26-02-2015 on the ground that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue. The PCIT assumed jurisdiction on the ground that the AO has not conducted required enquiries and also not applied his mind in respect of payment of performance bonus to director, Shri Dilip Raghavan which is otherwise not allowable u/s 36(1)(ii) of Income-tax Act, 1961. The PCIT has given various reasons for setting aside the assessment order passed by the AO. According to PCIT, the AO has applied incorrect provision to disallow a portion of bonus u/s 40A(2), whereas the right provision to be 10 ITA 4023/Mum/2017 applied under the given facts and circumstances is section 36(1)(ii) which deals with any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or commission. The PCIT further observed that the assessee has paid performance bonus of 51% of gross revenue and which is 75% of net profit of the year which is highly unreasonable. The PCIT further observed that the assessee has devised a method whereby it avoids payment of dividend distribution tax by paying huge performance bonus to one of its directors which is evident from the fact that the director, alongwith his family members holding more than 90% of share capital of the company. Had, the assessee distributed dividend, it would have paid dividend distribution tax. The assessee, although derived huge profits not declared any dividend by paying huge performance bonus to the director of the company which caused prejudice to the interest of the revenue. The AO, without apprising these facts in right perspective in the light of provisions of section 36(1)(ii) has allowed the claim of the assessee, therefore, the PCIT opined that the assessment order passed by the AO is prejudicial to the interest of the revenue.
The PCIT assumed jurisdiction u/s 263 of the Act, on the ground that there is lack of enquiry on the part of the AO, which he ought to 11 ITA 4023/Mum/2017 have conducted in the given facts and circumstances of the case in the light of provisions of section 36(1)(ii) of the Act. The PCIT never disputed the fact that the AO has caused enquiry in respect of payment of performance bonus. The AO has called for necessary enquiries during the course of assessment proceedings in respect of payment of performance bonus for which the assessee has filed a detailed reply alongwith Board Resolution authorizing payment of performance bonus, reasons for payment of such bonus to Shri Dilip Raghavan. These facts were not disputed by the AO as the same are part of discussion in the body of the assessment order. The AO has discussed the issue of payment of performance bonus to the director in his assessment order and applied the provisions of section 40A(2) to disallow excess amount of Rs.4,57,020. The PCIT is only on the point that the enquiries conducted by the AO is inadequate and he applied wrong provisions of the Act, which caused prejudice to the interest of the revenue. In these factual circumstances, if we analysis the case of the assessee in the light of provisions of section 263, whether the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue, needs to be ascertained.
The language used by the legislature in section 263 is to the effect that the CIT may interfere in revision, if he considers that the order
12 ITA 4023/Mum/2017 passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue. It is quite clear that two conditions must co-exist in order to give jurisdiction to the CIT to interfere in revision. The order of the AO in question must not only be erroneous but also it must be prejudicial to the interest of the revenue. In other words, merely because the assessment order is erroneous, the CIT cannot interfere. Again, merely because the order of the AO is prejudicial to the interest of the revenue, then that is not enough to confer jurisdiction on the CIT to interfere in revision. The CIT cannot assume jurisdiction u/s 263, if the two conditions prescribed under the provisions of Act, viz. (i) the order is erroneous; and (ii) the same is also prejudicial to the interest of the revenue is not satisfied. Each and every erroneous order cannot be the subject matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed.
The phrase “prejudicial to the interest of the revenue” has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue has a consequence of an order of AO
13 ITA 4023/Mum/2017 cannot be treated as prejudicial to the interest of the revenue. For example, when an AO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the AO has taken one view with which the CIT did not agree with, it cannot be treated as an erroneous order prejudicial to the interest of the revenue because the view taken by the AO is unsustainable in law. The order passed by the AO without making necessary enquiries on certain important points connected with the assessment would be erroneous and prejudicial to the interest of the revenue, when the AO expected to make required enquiries on a particular item of income and he does not make an enquiry as expected, that would be a ground for the CIT to interfere with the order passed by the AO. Since such an order passed by the AO is erroneous and prejudicial to the interest of the revenue.
Where the AO had made enquiries in regard to the nature of expenditure incurred by the assessee, who had given detailed explanation in that regard by a letter in writing and all these are part of record of his case and the claim was allowed by the AO on being satisfied with the explanation of the assessee, such decision of the AO cannot be held to be erroneous, simply because in his opinion, the AO did not make an elaborate discussion in this regard.
In this legal background, if we examine the facts of the case of the 14 ITA 4023/Mum/2017 assessee, it is abundantly clear that the AO has called for necessary evidences in support of payment of performance bonus by issuing show cause notice during assessment proceedings. The assessee, in reply to such show cause notice, filed various details including copy of Board Resolution authorizing payment of performance bonus and also necessity for payment of such bonus to the director. The assessee also explained the provisions of section 36(1)(ii) by way of a letter dated 20- 11-2014 were he explained to the AO why the provisions of section 36(1) could not be invoked in this case. The AO, on being satisfied with the explanation furnished by the assessee, has applied the provisions of section 40A(2) to disallow excess performance bonus paid to the director of the company which is evident from the assessment order passed by the AO where at para 6 of the order, the AO has elaborately discussed the issue of payment of performance bonus to the director.
Once the AO has called for necessary enquiries and applied his mind to a particular provision and chose to allow the claim of the assessee, then there is no reason for the PCIT to assume jurisdiction u/s 263 of the Act on the ground that the AO has not conducted required enquiries and also not applied in mind. In the opinion of the PCIT, the enquiries conducted by the AO may be inadequate, but that by itself, would not be a ground for the PCIT to revise assessment order passed by the AO
15 ITA 4023/Mum/2017 unless the PCIT specifically points out that the AO has grossly overlooked the issue during assessment proceedings. In this case, on perusal of details filed by the assessee, we find that the AO has caused necessary enquiries and the assessee has filed all details to justify payment of performance bonus, therefore, we are of the considered view that the PCIT was incorrect in terming the assessment order passed by the AO as erroneous and prejudicial to the interest of the revenue.
Now coming to the issue of performance bonus u/s 36(1)(ii) or u/s 40A(2) of the Act. The PCIT has given his own reasons to take the issue in the light of provisions of section 36(1)(ii) of the Act. According to the PCIT, the performance bonus paid by the assessee is 51% of total revenue at the year and 75% of net profit of the year which is highly unreasonable and which was paid to evade payment of dividend distribution tax. The PCIT has further stated that the director is holding 35.27% of share capital and other family members are holding remaining share capital of the company and hence, the assessee has paid performance bonus to avoid distribution of dividend and evade payment of dividend distribution tax. We do not find any merit in the findings of the PCIT for the reason that merely because the director who was paid performance bonus is holding 36% share capital in the company is not a reason for the PCIT to suspect performance bonus paid by the assessee
16 ITA 4023/Mum/2017 when the assessee has filed various details to prove that such performance bonus is directly linked to duties performed by the director.
Therefore, the PCIT was totally incorrect in coming to the conclusion that payment of performance bonus is a colorable device for evading payment of dividend distribution tax.
Coming to the case laws relied upon by the assessee. The assessee has relied upon the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co Ltd vs CIT (supra). The Hon’ble Supreme Court in the said case held that if order of the AO is erroneous, but does not prejudice the interest of the revenue or if it is not erroneous but is prejudicial to the interest of the revenue, recourse cannot be taken u/s 263 of the Income-tax Act, 1961. The relevant portion of the order is extracted below:-
“A bare reading of section 263(1) makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (\) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to section 263(1). 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' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an 17 ITA 4023/Mum/2017 erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue.”
The assessee has also relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs Gabriel India Ltd (supra). The Hon’ble Bombay High Court in the case held as under:-
“The power of suo motu revision under sub-section (I) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (1) the order is erroneous; and (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the revenue. It has. therefore, lo be considered firstly as to when an order can be said to be erroneous. One finds that the expressions 'erroneous', 'erroneous assessment' and 'erroneous judgment' have been defined in Black's Law Dictionary. According to the definition, 'erroneous'means 'involving error: deviating from the law'. 'Erroneous assessment'refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, 'erroneous judgment' means 'one rendered according to course and practice of Court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles'. From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law'. If an ITO acting in accordance with la\v makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous, Cases may be visualised where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left lo the Commissioner he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the Commissioner with power to re-exmine the accounts and determine the income himself at a higher figure, it is because the ITO has exercised the quasi-judicial power vested in him in accordance with law' and arrived at a conclusion and such a conclusion cannot be termed la be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the revenue. But that by itself will not be enough to vest the Commissioner with the power of 'suo motu revision because the or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser fax than what was just has been imposed Therefore, in order to exercise power under section 263(1) there must be material before the Commissioner to consider that the order passed by the ITO was erroneous insofar as if is prejudicial to the interests of the revenue and that it must be an order which is not in accordance with the fan' or winch has been passed by the ITO without making any- enquiry in undue haste. An order can be said to be prejudicial to the interests of the revenue if it is not in accordance with the law in consequence whereof the lawful revenue due lo the State has not been realised or cannot be realised There must be material available on the record called for by the Commissioner to satisfy' him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate
18 ITA 4023/Mum/2017 proceedings far revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority: is challenged before the Court, it would be open to the Courts to examine whether the relevant objectives were available from the records called for and examined by such authority The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assssee. The assessee had given a detailed explanation in thai regard by a letter in writing. All these were pan of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. This decision of the ITO could not be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter. That was not permissible. Hence, the provisions of section 263 were not applicable to the instant case and. therefore, the Commissioner was not justified in setting aside the assessment order.”
The assessee has also relied upon the decision of Hon’ble Gujarat High Court in the case of CIT vs Arvind Jewellers (supra). The Hon’ble Gujarat High Court, in the said case, has observed as under:-
“A bare reading of section 263(1)makes it clear that the provisions of section 263 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 section will be attracted and incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the instant case, it was the finding of fact given by the Tribunal that the assessee had produced relevant material and offered explanation in pursuance of the notices issued under section 142(1) as well as section 143(2) and after considering those materials and explanation, the ITO had come to a definite conclusion. Commissioner did not agree with the conclusion reached by the ITO. Section 263 did not empower him to take action on these facts to arrive at the conclusion that the order passed by the ITO was erroneous and prejudicial to the interest of the revenue. Since the material was there on record and the said material was considered by the ITO and a particular view was taken, the mere fact that different view could be taken, should not be the basis for an action under section 263 and it could not be held to be justified.”
The assessee has also relied upon the decision of ITAT, Mumbai Bench “H” in the case of Khatiza Oomerbhoy (supra). The co-ordinate bench of ITAT, after considering relevant facts of the case and also the decision of Hon’ble Supreme Court in the case of 19 ITA 4023/Mum/2017 Malabar Industrial Co. Ltd vs CIT (supra), held as under:-
The fundamental principle which emerge from the above cases may be summarized below : (i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interests of the Revenue. Both the conditions must be fulfilled, (ii) Sec. 263 cannot be ^invoked to correct each and every type of mistake or error committed by the AO and it is only when an order is erroneous that the section will be attracted, (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous, (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order, (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted\)|e of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law. (vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the CIT, while exercising his power under s. 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. (vii) The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion, (viii) The CIT, before exercising his jurisdiction under s. 263, must have material on record to arrive at a satisfaction, (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard. A reference to the Mumbai, Tribunal decision in the case of Girdharilal B. Rohra (supra) may also be fruitful and the ratio of this case is as under (reproduced from the headnote) : "It is now well settled position of law that in order to assume jurisdiction under s. 263, the CIT must satisfy himself prima facie that the order of the AO is erroneous and prejudicial to the interests of Revenue. Such satisfaction must be based on the material on record. The assumption of jurisdiction under s. 263 cannot be made in a casual and arbitrary manner and if there is no material on record to satisfy prima facie that the aforesaid two conditions are present then the provision of s. 263 cannot be invoked. While passing the order under s. 263, it is expected that the CIT should be prima facie satisfied about the erroneous nature of the assessment which has caused prejudice to the Revenue. Beyond stating that no further enquiries are made, there should be some material which must be pointed out to show how lack of an enquiry has caused prejudice to the Revenue." The Courts have held that jurisdiction under s. 263 cannot be utilized as an instrument for reopening concluded proceedings on flimsy grounds or on assumptions. This was the view expressed by the Tribunal, Delhi Bench, in the case of Triveni Engineering Works Ltd. (supra). The ratio of this case may also be reproduced below from the headnote : "A bare reading of the provisions of s. 263 makes it clear that the prerequisite to the exercise of jurisdiction by the CIT under it is that order of the AO is erroneous insofar as it is prejudicial to the interest of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interest of the Revenue. The revisional jurisdiction of the CIT as a supervisory authority is intended to correct the mistakes of fact and law, which may be committed by the AO and which result in causing
20 ITA 4023/Mum/2017 prejudice to the Revenue. The failure of the AO to make enquiries into facts on record, which arc glaring, apparently unusual and staring in the face from the record would clearly make the order of the AO erroneous and prejudicial to the interest of Revenue. However, the proposition enunciated as above, cannot be extended to confer unrestricted and unfettered powers on the CIT to set aside or modify an assessment merely on the basis of difference of opinion. The jurisdiction under s. 263 cannot obviously be utilized as an instrument for reopening concluded proceedings on flimsy grounds or on mere subjective notions of the CIT. The CIT is not entitled to assume revisional jurisdiction merely because he is not happy with the quality of the assessment or the drafting of the assessment order. The CIT cannot invoke s. 263 for upsetting a concluded assessment framed by the AO merely because he feels that a particular line of investigation which would have been effective and useful for the Revenue has not been adopted by the AO. The conditions enacted under the provisions of s. 263 are obviously intended to avoid element of pure subjectivity or arbitrariness on the part of the CIT in taking resort to revisional powers under s. 263,"
In this view of the matter and respectfully following the case laws discussed above, we are of the considered view that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue, as the issue of payment of performance bonus has been thoroughly examined by the AO in the light of evidence filed by the assessee during the course of assessment proceedings. The assessee has filed complete details of payment of performance bonus and also explained why the provisions of section 36(1)(ii) could not be applied in the given facts and circumstances of the case. The AO, on being satisfied with the explanation filed by the assessee, has chosen to allow the claim of the assessee and disallowed partial amount of claim u/s 40A(2) of the Income-tax Act, 1961. Therefore, we are of the considered view that the PCIT was in correct in setting aside the assessment order passed by the AO u/s 263 of the Income-tax Act, 1961. Hence, we set aside the order passed by the PCIT u/s 263 of the Act, restore the assessment order passed by the AO u/s 143(3) of the Act.
In the result, appeal filed by the assessee is allowed.
21 ITA 4023/Mum/2017