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Facts
The assessee's assessment was completed u/s 143(3) by rejecting book results and estimating net profit at 16%. The PCIT later initiated revision proceedings u/s 263, directing disallowance of Rs. 8,14,182/- under section 40(a)(ia) for non-deduction of TDS. The CIT(A) had previously dismissed the assessee's appeal as not maintainable, considering the issue was subject to PCIT's 263 proceedings, despite a prior Tribunal direction to adopt a 9% net profit rate.
Held
The Tribunal ruled that once book results are rejected and net profit is estimated (here, at 9%), the PCIT cannot legally invoke revisionary jurisdiction u/s 263 to make specific disallowances u/s 40(a)(ia) from the same books, as all expenditures are subsumed in the estimated profit. The Tribunal also upheld the validity of the revision notice issued by ITO, HQ on behalf of PCIT u/s 263.
Key Issues
1. Can PCIT initiate revision proceedings u/s 263 for specific disallowances u/s 40(a)(ia) when the books are already rejected and net profit estimated? 2. Is a revision notice u/s 263 issued by ITO, HQ on behalf of PCIT valid?
Sections Cited
143(3), 263, 40(a)(ia), 145(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI ANUBHAV SHARMA
PER M. BALAGANESH, A. M.: 1. The appeal in AY 2008-09, arises out of the order of the Commissioner of Income Tax, Noida [hereinafter referred to as ‘ld. CIT’, in short] dated 30.03.2013 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 16.11.2010 by the Assessing Officer, ITO, Noida (hereinafter referred to as ‘ld. AO’).
At the outset, there is a delay in filing of appeal by the assessee by 1089 days. The delay condonation petition of the assessee states that erstwhile advocate had adviced the assessee not to prefer any appeal against the order passed by the ld PCIT u/s 263 of the Act before this Tribunal. In support of this, an affidavit has also been filed by the concerned advocate confirming the affirmations of the assessee in the delay condonation petition. Hence, it goes to prove that assessee was prevented from sufficient cause as he had to follow the advice of erstwhile advocate. Considering the totality of the facts and the reasons adduced in the delay condonation petition coupled with an affidavit of the advocate, we are inclined to condone the delay and admit the appeal of the assessee for adjudication.
The additional ground Nos. 1 and 2 raised by the assessee on 30.01.2018 are challenging the validity of issue of notice u/s 263 of the Act by the ITO, Headquarters to ld PCIT instead of Ld PCIT himself. No facts are required for verification for these additional grounds. The same being a legal issue and going to the root of the matter, we deem it fit to admit those additional grounds and take up the same for adjudication.
We find that the notice has been issued to ITO, Headquarters (HQ) of Ld PCIT u/s 263 of the Act. The ITO, HQ to ld PCIT is an Officer working for and on behalf of ld. PCIT only. All communications that goes from the office of Ld PCIT would be signed only by ITO, HQ. Hence, there is nothing illegal in the show cause issued u/s 263 of the Act being sent to the assessee duly signed by ITO, HQ to ld. PCIT. Hence, the additional grounds raised by the assessee are hereby dismissed.
The Ld. PCIT has passed revision order u/s 263 of the Act with a 5. direction to modify the assessment order framed u/s 143(3) of the Act on 16.11.2010 to disallow a sum of Rs. 8,14,182/- which has been paid to Om Sai Ram International Freight Forwarders clearing agent without deduction of tax at source by invoking the provisions of section 40(a)(ia) of the Act. We find that the assessment was completed u/s 143(3) of the Act on 16.11.2010 by rejecting the book Page | 2 results of the assessee and by estimating the net profit of the assessee @16%. The ld AR before us argued that once the books of account are rejected and net profit estimated thereon, the ld PCIT cannot get into the very same books of account and cherry pick a particular item of expenditure and direct the ld AO to disallow the same u/s 40(a)(ia) of the Act.
Per contra , the ld DR placed reliance on the order passed by the 6. coordinate bench of this Tribunal in the first round of proceedings in for AY 2008-09 dated 19.02.2019, wherein, in para 9 of the said order, this Tribunal had recorded a finding that net profit estimation @9% would be fair and reasonable in this case and since the ld CIT(A) had dismissed the appeal on maintainability on the ground that the issue was subject matter of 263 proceedings before the ld PCIT, the Tribunal had stated that issue before the ld PCIT u/s 263 was on a different subject matter and directed the ld AO to adopt net profit @9% as against 16%. Based on this observation, the ld DR stated that the Tribunal had already taken a view in assessee’s own case that the issue that was before the ld PCIT u/s 263 of the Act was on a different subject matter and accordingly, the ld PCIT would be justified in directing the ld AO to make fresh disallowances u/s 40(a)(ia) of the Act despite the rejection of books of account and estimating the net profit.
We find that the original assessment was completed u/s 143(3) 7. of the Act after rejecting the book results of the assessee and estimating the net profit of the assessee @16% of the turnover. This was agitated by the assessee before the ld CIT(A). When the appeal was pending before the ld CIT(A), the proceedings u/s 263 of the Act stood initiated by the ld PCIT to look into the issue of disallowance of clearing and forwarding charges u/s 40(a)(ia) of the Act. The ld CIT(A) dismissed the appeal of the assessee as not maintainable on the premise that the issue in dispute before him was the subject matter of revision proceedings u/s 263 of the Act before the ld PCIT. Against that dismissal order of the ld CIT(A), the assessee preferred an appeal before this Tribunal and this Tribunal in dated 19.02.2019 had stated that the ld CIT(A) was wrong in dismissing the appeal of the assessee as not maintainable by stating that the issue before the ld PCIT u/s 263 of the Act was on a different subject matter and had also directed the ld AO to adopt the net profit @9% instead of 16%. So, the observations of the Tribunal had to be understood in this context. The Tribunal nowhere gave a leeway to the revenue to proceed with the 263 proceedings by making a specific disallowance of expenditure u/s 40(a)(ia) of the Act despite rejecting the book results and estimating the net profit of the assessee thereon. In our considered opinion, once, the book results of the assessee are rejected by the ld AO u/s 145(3) of the Act, only recourse available to the ld AO is by bringing in comparable instances and estimating the net profit of the assessee on a reasonable basis. The said reasonable basis of estimation has been decided by the Tribunal to be @9%. Once, the book results are rejected, the ld PCIT by invoking revision jurisdiction u/s 263 of the Act, getting into the very same books of account and suggesting fresh disallowance of expenses u/s 40(a)(ia) of the Act is legally unsustainable. The entire expenditure debited in the profit and loss account gets subsumed in the estimation of profit itself. Accordingly, the revision jurisdiction u/s 263 of the Act are hereby quashed and original grounds of appeal of the assessee are allowed.
8. Since, the revision proceeding u/s 263 of the Act stand quashed, the dismissal of additional ground of the assessee would have no repercussion.
In result, appeal of the assessee is allowed.