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Income Tax Appellate Tribunal, DELHI BENCH ‘C’: NEW DELHI
Before: SHRI SUDHIR KUMAR & SHRI MANISH AGARWAL
S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT O R D E R
PER MANISH AGARWAL, AM:
This appeal is filed by the assessee against the order of Learned Principal Commissioner of Income Tax, Delhi-4 (‘Ld. PCIT’ in short) passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred ‘the Act’) dated 28.03.2025 wherein the Ld. CIT(A) has set aside the order of the Assessing Officer passed u/s 143(3) r.w.s 144C(13) of the Act dated 30.01.2023.
Against this order, the assessee is in appeal before us by taking the following Grounds of appeal:
1. Section 263 is invoked without jurisdictional preconditions for revision being satisfied, hence impugned order is bad in law.
2. Time barred (applying principles laid down in decision of Roca Bathroom) and otherwise invalid (without proper DIN) final assessment order dated 31 January 2023, cannot be indirectly & unlawfully revived in the garb of revision u/s 263.
3. Impugned order erred in not appreciating that huge adjustments made to returned income in Assessment order u/ 143(3) emphatically disprove allegation that order was passed without making enquiries or verification. All material/documents available on record relating to royalty expenditure were filed pursuant to specific written notice from Ld. AO, who after making sufficient enquiries adopted one of 2 possible views Le, that it is revenue expenditure.
4. Revision jurisdiction under section 263 is invoked perfunctorily by reliance on opinion expressed by audit wing on debatable question of law relating to nature (capital Vs revenue) of expenditure. Audit wing's guess that Royalty expenditure could possibly be capital in nature being solely with reference to facts/documents/ submissions on assessment record establishes that Ld. AO made sufficient enquiries on the issue. Allegation that Ld. Assessing officer did not verify issue of deductibility of royalty expenditure is ex-facie contrary to record, baseless and false.
5. Impugned order is unlawful and bad in law as it disregards settled principle of law that Assessing officer's conclusion adopting one of two plausible views S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT cannot be labeled as "erroneous" and such an order cannot be prejudicial to interest of revenue justifying invocation of revisionary jurisdiction u/s 263.
6. Revisionary jurisdiction is invoked ignoring (1) facts on record, (ii) submissions filed establishing royalty expenditure was incurred year on year, (iii) duly reported in return and verified in assessment proceedings and (iv) allowed as revenue expenditure year after year. Further impugned order lightly ignored decisions of Hon'ble Courts filed on record which upheld deduction of such expenditure as being revenue in nature and wrongly relying on judgements which are not at all applicable to the case of Appellant. 6.1. Impugned order justifies impermissible invocation of revisionary jurisdiction on extraneous and incorrect presumption such as 'no prejudice will be caused to the Appellant if the AO examines.
7. Predetermined and arbitrary approach adopted in Impugned order stares one in the face as it is erroneously presumed that Ld. AO has not incorporated adjustments made by CPC u/s 143(1), ignoring that the issue of interest on refund was duly examined by in the assessment order as well as rectified order passed u/s 154 on the same issue for AY 2019-20. 7.1. As the interest on refund is already taxed by the Ld. AO and the matter is pending before CIT(A) for AY 2014-15. Revision u/s 263 of the same issue cannot be done again in the relevant assessment year.
8. Predetermined and arbitrary approach adopted in impugned order stares one in the face, if one considers direction to Ld. AO to examine the issue of late payment of ESI. Appellant has duly deposited taxes in view of the Supreme Court order in case of Checkmate Services (P) Ltd. Vs. CIT (2022) 143 taxmann.com 178 (SC) and has also informed the same to Ld. PCIT during course of 263 proceedings.
9. Impugned order casually and feebly alleges interest on refund and late payment of ESI were not verified perhaps being conscious of settled legal position that on debatable issue of nature of expenditure like Royalty invocation of section 263 jurisdiction will not be justified.
Notice dated 23.10.24 and 20.02.25 issued by Ld. CIT initially alleged issues mentioned therein were not enquired into/ verified but para 9 of impugned order cancels whole assessment order and directs fresh adjudication, proving that entire exercise of invoking revision was a mere empty pretext to carry out fishing and roving enquiries travelling beyond initial notice.
11. Contrary to express mandate of law, decision to invoke revisionary jurisdiction appears to be wrongly based on absence of finding on the issues S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT in assessment order ignoring enquiries/ verification carried out by Ld. AO by way of written notice and responses filed during Assessment proceedings. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute, withdraw any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case.”
Ground of appeal No. 2 is not pressed thus the same is dismissed. Remaining grounds of the appeal taken by the assessee are with respect to the initiation of revisionary proceedings u/s 263 of the Act, and, therefore, they are taken together for consideration.
4. Briefly stated the facts are that assessee company is a wholly owned subsidiary of Microsoft Corporation, USA engaged in the manufacturing, replicating, marketing and distribution of Microsoft retail software products in India, including online cloud-based services. The return of income was filed on 25.11.2019 declaring total income at Rs. 7,89,93,77,420/-. The said return was later revised at an income of Rs.7,92,63,19,080/-. The AO after making reference to the TPO for determination of Transfer Pricing Adjustment of international transactions and further giving effect to the directions by the Ld. DRP had passed the final assessment order on 30.01.2023 wherein a total income was assessed at Rs.3030,80,55,490/- by making various additions/disallowances including an addition of Rs.54,32,424/- made towards interest of income tax refund on protective basis. Against the said final order, an appeal is filed before the Tribunal by the assessee which pending for adjudication. Before us, the Ld. AR stated that in the said appeal assessee has raised the grounds of limitation and relied upon the judgment of the Hon’ble Madras High S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT Court in the case of Roca Bathroom Products Private Limited (W.A. Nos.1517 and 1519 of 2021) dated 9th June, 2022. In the said appeal, Revenue has sought adjournment stating that this issue is pending before the Hon’ble Supreme Court. In view of these facts, the appeal of the assessee stood adjournment sine-die. In the meantime, Ld. PCIT, Delhi vide order dated 28.03.2025 has held the assessment order so passed as erroneous and prejudicial to the interest of Revenue and directed the AO to pass fresh order as per the directions given in the impugned order by Ld. PCIT, Delhi. With this background, the appeal of the assessee is decided as under:
5. Before us, the Ld. AR of the assessee submits that the Ld. PCIT vide notice dated 23.10.2024 has issued noticed for hearing with respect to revision proceedings. In the said notice, the Ld. PCIT has observed that the expenses incurred on account of royalty payment of Rs.4076,03,20,487/- as claimed by the assessee in the P&L Account which was paid to its holding company as Microsoft India Corporation, USA and Microsoft Online Inc. USA are not covered as deductions u/s 30 and 36 of the Act. Further the payments of royalty is made to the foreign parent company, therefore, the said expenditure is capital in nature and, therefore, only depreciation is to be allowed on the same, however, the AO has not examined this fact and allowed the expenses. Accordingly, the Ld. PCIT vide aforesaid show cause notice, asked the assessee as to why not the assessment order be held erroneous and prejudicial to the interest of Revenue and be set aside. The Ld. AR submits that from the perusal of para No.4 of the revisions order it could be evident that the present revisionary proceedings were initiated in terms of the audit objections raised by the Audit Wing of Department. He further submits that the audit wing also pointed out that variation made in the intimation order passed u/s 143(1) of the Act on 14.10.2022 towards delayed payment of PF and ESI and further addition towards S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT interest received on IT refund, are not included in the income computed by the Ao in the final assessment order. The Ld. AR submits that the assessee in terms of its reply filed before the Ld. PCIT vide letter dated 27.02.2025 has made a detailed submissions and stated that the interest on Income Tax refund of Rs.54,32,424/- for Assessment Year 2012-13 was recorded in the books of accounts and offered for tax in Assessment Year 2014-15 vide final assessment order dated 26.12.2017 passed by the AO. The Ld. AR further submits that against the said final assessment order for Assessment Year 2014-15, an appeal is filed before the Commissioner of Income Tax which is still pending for adjudication. Since this interest has already been taxed in Assessment Year 2014-15, the assessee has not included the said interest income in the return of income filed for the instant year i.e., Assessment Year 2019-20 to avoid double taxation. The Ld. AR also drew our attention to the rectification application filed before the CPC and the AO wherein the AO after considering the error pointed out by the assessee has passed the rectification order u/s 154 dated 27.03.2023 and deleted the same. Ld. AR further submits that the said order was also filed before the Ld. PCIT, who has filed to appreciate the same before reaching to the conclusion that the final assessment order is erroneous and prejudicial to ten interest of revenue on this score. The necessary copy of the order passed u/s 154 by the AO dated 27.03.2023 is available in the PB page 499 and 500 filed before us.
5.1. With regard to the disallowance of delayed payment of employees contribution towards PF & ESI u/s 36(1)(va) of the Act, the Ld. AR stated that the assessee has accepted the adjustment and after including the same had prepared revised computation of income and paid due tax on the same, necessary copies of the revised computation along with the copy of tax challan are available in the PB page 598 to 608. Ld. AR thus submits that once the issue has been admitted and tax S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT stood paid by the assessee their remained no question for holding the assessment order as erroneous and prejudicial to the interest of the Revenue on this count. The copy of the letter dated 05.03.2025 through which the copy of the revised computation and tax challan with respect to the payment of tax on delayed payment of PF & ESI was submitted before the Ld. PCIT are available at Paper Book pages 592 to 597. The Ld. AR submits in view of the above facts, on these two issues, the assessment order cannot be held as erroneous and prejudicial to the interest of Revenue.
5.2 With respect to the 3rd issue that payment of royalty is capital expenditure or revenue expenditure, ld. AR drew our attention to para 2.1 of the revision order of Ld. PCIT wherein the extract of the submissions made by the assessee dated 05.03.2025 is reproduced. Assessee has submitted a tabular submissions wherein it is submitted that the expenses claimed on account of royalty was thoroughly examined in preceding assessment years where the than assessing officer initially proposed to make the disallowance of the amount of royalty paid to the parent company however, after considering the submissions made by the assessee, entire payment was allowed as business expenditure allowable u/s 37(1) of the Act. The Ld. AR further submits that during the course of proceedings before the Ld. AO/TPO, assessee has filed all the relevant details with respect to claim of expenses on account of royalty and copies of these replies are filed before us in the Paper Book. The Ld. AR submits that once the issue has already been examined and discussed during the course of assessment proceedings where the AO has taken judicious view based on the past history of the assessee, it cannot be said that such order is erroneous and prejudicial to the interest of revenue on this issue. He further submits that as per principle of consistency where Royalty paid in the preceding S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT years were examined and allowed as Revenue expenditure in the orders passed u/s 143(3) and was never held as capital expenditure. He thus, prayed that the issue raised by the PCIT in the year under appeal is contrary to the settled history of the assessee and contrary to the principal of consistency and, therefore, assessment order should not be held as erroneous and prejudicial to the interest of Revenue on this score also. He placed reliance on the judgment of the Hon’ble Jurisdictional High Court in the case of CIT vs. Escorts Ltd. reported in [2011] 198 Taxman 324 and further on the Co-ordinate Bench of the Tribunal of ITAT, Ahmedabad in the case of Torrent Pharmaceuticals Ltd. vs. DCIT, reported in [2018] 97 taxmann.com 671.
On the other hand, Ld. CIT-DR supported the order of the Ld. PCIT and submits that the Ld. CIT in the show cause notice dated 20.02.2025 in para 2.3, clearly observed that AO made general queries during the course of assessment proceedings without examining the allowability of royalty expenses as revenue expenditure. He further drew our attention to para 3.1 of the show cause notice wherein it is observed by Ld. PCIT that Royalty expenditure incurred is capital in nature and further reliance was placed on the judgement of Hon’ble Supreme Court in the case of Honda Seil Cars India Ltd. vs. CIT reported in 395 ITR 713 (SC) wherein the Hon’ble Supreme Court held that “if the assessee was already in that particular line of business and royalty was paid for transfer of technical knowhow which only improvise/enhance its technical capacity, can be said to be revenue in nature; but if the royalty is paid for transfer of proprietary rights in the technical knowhow on the basis of which business of the assessee on the particular product came into in existence and on termination, the assessee would have to discontinue further manufacture and sale of that particular product, then that business of the S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT assessee was dependent upon the said agreement to transfer technical knowhow and the royalty paid would be capital in nature.”
6.1 Ld. CIT DR further drew our attention to the judgment of the Karnataka High Court in the case of in the case of M/s Telco Construction Company Ltd. (now known as Tata Hitachi Construction Machinery Co. Pvt. Ltd.) vs. ACIT, wherein the hon’ble High Court has relied upon the judgment of Hon’ble Supreme Court in the case Honda Seil Cars India Ltd. vs. CIT (supra) and held that the royalty as capital in nature. The Ld. CIT-DR further submits that in the instant case the assessee has non exclusive rights as per which after completion of the period, the Indian entity was not entitled to continue the said business. He thus submits that the Ld. PCIT has rightly observed that the order passed is erroneous and prejudicial to the interest of Revenue and the orders passed by the AO is without application of the mind without properly appreciating the agreement submitted by the assessee. He further submits that the Ld. PCIT has invoked the powers conferred under Explanation 2 to section 263 of the Act and asked the AO to make necessary enquiries and after considering the submissions, to pass fresh order in accordance with law. The Ld. CIT-DR concluded that the order to Ld. PCIT being based on full appreciation of facts which were not considered properly by the AO in its final order, therefore, he requested for the confirmation of the revision order passed by the Ld. PCIT.
In rejoinder, the Ld. AR submits that during the course of assessment proceedings vide replies dated 12.12.2016, 16.12.2016, 19.12.2016 for Assessment Year 2013-14, detailed submissions was made on this issue before the than AO and after considering the submissions the expenses claimed was allowed as revenue S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT expenditure. He further submits that in Assessment Year 2017-18 and 2018-19, again this issue were examined and was allowed as Revenue expenditure. Since the facts and circumstances and the agreement under which the payment of Royalty made int eh year under appeal and in preceding year are the same, therefore, following the principle of consistency, the payment of Royalty deserves to be allowed as revenue expenditure.
Heard the parties and perused the materials available on record. From the perusal of the revision order passed by the Ld. PCIT, we find that the Ld. PCIT has raised three issues based on the audit objections pointed out by the audit wing of the Department according to which first issue is with respect to allowability of royalty expenses of Rs.4076,03,20,487/- as a Revenue expenditure as against treating the same as capital expenditure; second issue is regarding adjustments in income towards interest on ITR refund of Rs.54,15,901/- made in the order passed u/s 143(1) and further adjustment of Rs.2,54,82,915/- made in the intimation order u/s 143(1) towards delayed payment of employees contribution of PF & ESI u/s 36(1) (va) of the Act.
With respect to the variation on account of interest income of Rs.54,15,901/- on IT refund, we find that this after the intimation order passed u/s 143(1) of the Act, the assessee filed a rectification application before the Assessing Officer who vide order dated 27.03.2023 has rectified the said order which is reproduced as under: ORDER U/S 154/143(3) OF THE INCOME TX ACT, 1961 The assessee had filed it's original return of income (ROI) vide Acknowledgement Number 1360281251119 on 25.11. 2019 declaring the total income at Rs 7,89,93,77,420. The total tax Liability was determined at Rs. 2,76,03,58,446/-, which was discharged by way of tax deducted at source TDS) amounting to Rs.4,50,36,93,631/- and claimed a refund of INR 1,74,33,35,190- in the ROI.
The assessee had filed it's revised return of income ('RROI') vide Acknowledgment Number 410416051210720 on 21.07.2020 declaring the total income at Rs. 7,92,63,19,080/-, The total tax liability Vas determined at Rs. 2,76,97,72,939, which was discharged by way of tax deducted at source (TDS) amounting to Rs. 4,46,14,24,735/- and claimed a refund of Rs. 1,69,16,51,800/- in the RROI. Pursuant to this the assessment got concluded and final order under section 143(3) read with section 144C of the Act was passed on 31.01.2023 determining total income at Rs. 30,30,80,55,486 and raising demand of Rs. 15,58,09,35,225. Against the final order the assessee has filed a rectification application to rectify the mistakes apparent from the records on the below mentioned issues:
1. 1. Protective addition added to computation:- Vide the final order an addition of Rs. 54,32,424/- has 11 been made on protective basis however the same was erroneously added to the computation of income while the same is to be added if this addition gets deleted in AY 2014-15. This being mistake apparent from the record is being rectified.
2. Short Grant of TDS credit:- Vide the final order, the assessee was not granted full credit of TDS, this being mistake apparent from the record is being rectified.
3. Levy of interest under section 234C of the Act:- Vide the final order, the interest under section 234C was levied on assessed income and not on returned income. This being mistake apparent from the record is being rectified. Accordingly, the mistakes being apparent from record are being rectified vide present order.” Give credit of taxes and issued necessary forms.”
10. Thus it is evident that in terms of aforesaid rectification order passed u/s 154/143(3) of the Act where the AO admitted the protective addition made being mistake apparent on record and thus rectified. It is further seen that the addition of Rs.54,15,901/- made in the order by the CPC and further protective addition of Rs.54,32,424/- both are related to the interest on income tax refund which has already been taxed in AY 2014-15, and thus is a double addition as per the submissions made by the assessee as reproduced in para 2.11 to 2.17 of the order of S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT PCIT. Thus, the addition of Rs.54,15,901/- made by the CPC being part of the addition of Rs.54,32,424/- thus, there remain no error in the order of the AO to this extent and the action of ld. PCIT in holding non-inclusion of this income in the final assessment is not an error and therefore, the order cannot be held as prejudicial to the interest of revenue.
With respect to the disallowance of Rs.2,54,82,915/- made by the CPC in the order passed u/s 143(1) of the Act on account of delayed payment of employees contribution of PF & ESI u/s 36(1) (va) of the Act, the assessee submits that the said amount was accepted by the assessee after including the same in the total income due taxes were paid, for which the necessary copy of the challan were also produced before us. It is further seen that the copy of the said challan and the revised computation were filed before the Ld. PCIT during the course of revisionary proceedings vide letter dated 5th March, 2025, however, the Ld. PCIT failed to appreciate the fact that once this disallowance is accepted and by including the same in the total income, due taxes have been paid thus, there is no question of holding the assessment order as erroneous and prejudicial to the interest of revenue on this score.
Now coming to the 3rd issue of allowability of royalty expenses as revenue 12. expenditure or capital expenditure. At the outset, it is seen that these facts have been discussed and examined by the revenue during the course of assessment proceedings for Assessment Year 2013-14, 2017-18 and 2018-19 and 2020-21 where the notices were issued to examine the allowability of Royalty payment as business expenses u/s 37 of the Act and thereafter the same was allowed as revenue expenses and such orders were never doubted by the revenue. The Ld. PCIT observed that in the year S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT under appeal, the AO though had made some enquiries, however, these are only general enquiries and the AO had failed to examine the agreement and other material so as to reach the conclusion whether the same is revenue expenditure or capital expenditure.
We find that the AO in terms of notice issue u/s 142(1) dated 20.07.2021, which is available in PB page 379 to 384, had described the reasons for selection of the case of the assessee for complete scrutiny wherein it is observed by the AO that once of the reason was “large expenditure on Royalty”. It is further seen that in respect to the allowability of Royalty expenses as revenue expenditure, a detailed submissions was made by the assessee vide letter dated 15.12.2021. In the said letter, in reply to point 3.1, assessee has filed all the relevant details along with the necessary copies of royalty agreements. The relevant extract of the submissions so made is reproduced as under:
The annexure in the requisite format for such payment of royalty as submitted before the AO is available at PB pages 397 which is reproduced as under: S. Name Address PAN Amount as per TDS Reason for Referenc No Financials payment e . 1 Microsoft 6100, Neil AAICM7886 40,62,18,89,90 4,43,59,10,37 The Assessee Refer India Road, Suite, K 8 8 is engaged in Note 23 corporatio 100, Reno, the business of AFS n, Nevada, United of USA States of manufacturin (“MIC”) America, g replicating, NV 89511 marketing and selling of Microsoft Retail Software products and services in India Further, it replicates d distributes
the MS Retail Software Products in India and earns revenue from that. entered into an agreement beer with Microsoft India Corporation (MIC) wherein it granted a non- exclusive to manufacture, replicate, market and distribute MS Retail Software Products. Under the License Agreement, MCIPL is required to pay a royalty to MIC. For such non- exclusive rights granted. 2 Microsoft PO BOX # AALCM4228 13,84,30,579 1,51,16,619 The Assessee Refer Online inc. 847543, N provides Note 22 (“MOI”) 1950 N online search of AFS STEMMON advertisemen S FWY, STE t services to 5010, its Indian DALLAS, customers UNITED and earns STATES OF revenue for AMERICA, the same. For 75207 providing this services, the Assessee entered into an agreement with Microsoft Online Inc., USA (MOI)
S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT whereby MOI has given non exclusive rights to market and distribute online search advertisemen t services. Against such rights given by MOI, MCIPL is required to royalty to MOI.
The copies of the license agreement executed between the assessee and parent company are available at PB pages 398 to 413.
From the above, it could be seen that the AO has not only made the enquiries with respect to the allowability of royalty expenses as revenue expenditure but also examine all the relevant agreements before reaching to the conclusion that the same is allowable as revenue expenses. It is further seen that the assessee has also filed all these details before the Ld. PCIT during the course of revisionary proceedings along with submissions made vide letter dated 27.02.2025, wherein the assessee referred all the replies filed before the AO on various occasions and further submits that in preceding years also necessary enquiry on this issue were made by the than AO. The Ld. CIT(A) though has reproduced the extract of said submissions, however has failed to appreciate that once the AO has made detailed enquiries and reached to the conclusion, it cannot be said that the enquiries conducted by the Assessing Officer were inadequate or insufficient more particularly when all the plausible queries were raised and were duly replied by the assessee.
S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT 16. As observed above, in the case of assessee itself, in preceding assessment years as well as in subsequent assessment years, identical claim of royalty as Revenue expenditure stood allowed by the Revenue under similar circumstances, therefore, following the Principle of Consistency, the same should not be doubted in the year under appeal before us.
The Hon’ble jurisdictional High Court in the case of CIT vs. Escort Ltd. (supra) has held as under: “13. Therefore, in our opinion, given the fact that the assessee had been engaged in these transactions in the preceding assessment years, CIT could have had no occasion to take recourse to revisional powers under section 263 of the Act on the fundamental aspects of the transactions in issue on which a view had been taken and, not shown to us as having been challenged. The argument of Ms. Bansal that the CIT only sought to treat the price differential as the cost incurred by the assessee towards retention of legal ownership in the units, is premised on the transactions being different from that what the assessee claimed them to be in the earlier assessment year a position which decidedly remained unchallenged. Such an approach is against the principle of consistency. The department has not shown any special circumstances warranting deviation from the said principle.”
17.1 The Hon’ble Supreme Court in the case of Pr. CIT vs Shreeji Prints (P.) Ltd. reported in [2021] 130 taxmann.com 294 (SC) has held as under:- “Section 69, read with section 263, of the Income-tax Act, 1961 - Unexplained investments (Unsecured loans) - Assessment year 2013-14 - Assessee-company had received unsecured loans from two different companies - Commissioner noting that said loans were shown as investment in assessee's name in balance sheet of respective companies exercised revisionary powers and passed an order without giving an opportunity to assessee of being heard, invoking Explanation 2 to section 263 - High court by impugned order held that since Assessing Officer has made inquires in details and accepted genuineness of loans receive by assessee, such view of Assessing Officer was a plausible view and same cannot to be considered erroneous or prejudicial to interest of revenue - Whether SLP against said impugned order was to be dismissed – Held, Yes”
17.2. The Hon’ble Supreme Court in the case of PCIT vs NYA International, while dismissing the SLP filed by the Revenue in Special Leave Petition (civil) Diary S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT No.1845/2025 the Hon’ble Court vide order dated 17.02.2025 has observed as under:- “Delay condoned. This special leave petition is misconceived and is completely contrary to the law pertaining to Section 263 of the Income Tax Act, 1961. The notice under Section 148 of the 1961 Act referred to two reasons. The first reason was with regard to non-declaration of the account in ING Vysya Bank with a credit of Rs.70,13,43,319/- (Rupees seventy crores thirteen lakhs forty three thousand three hundred and nineteen only). The second reason was with regard to the claim of deduction under Section 10AA of the 1961 Act. It is accepted that a reassessment order under Section 148 read with Section 143(3) of the 1961 Act was passed. Addition was not made for the first reason. In the given facts, the assertion by the Revenue that inquiry and verification in re the bank account was not made is ex-facie incorrect. This being the position, this is not a case of failure to investigate, but as no addition was made, the Revenue can argue that it is a case of wrong conclusion and decision in the re-assessment proceedings. Therefore, to exercise jurisdiction under Section 263 of the 1961 Act, the Commissioner of Income Tax should have examined the merits and only on reaching a finding that the re-assessment order was erroneous and prejudicial to the interest of the Revenue made an addition. This is not a case of 'no inquiry and verification', but as made out by the Revenue, a case of wrong conclusion. The difference between the two situations is clear and has different consequences. This being the position, the High Court was right in dismissing the appeal preferred by the Revenue. The special leave petition is dismissed in the above terms. Pending application(s), if any, shall stand disposed of.” 17.3 The Hon’ble Delhi High Court in the case of PCIT vs. Clix Finance India Ltd. while concurring to the findings of the Tribunal has observed as under:
“27. Considering the aforesaid judicial pronouncements, it can be safely concluded that inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act.
S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. Rather, in our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit.
28. Notably, the ITAT, while making a categorical finding that the CIT had failed to point out any definite or specific error in the assessment order, has satisfactorily explained both the claims in question in Paragraph 8.2 of its order, which reads as under:- "8.2 In the Impugned Order, the Ld. Commissioner of Income Tax-IV, Delhi held that the AO had not examined the aforesaid two issues properly and, therefore, set aside the issues for further inquiries to be conducted by the AO. As regards the first issue is concerned, we note that out of total provision of Rs. 1114.68 lacs, a sum of Rs. 7,60,76,105/- was suo moto added back in the computation of income and a further sum of Rs. 73,46,160- was disallowed by the AO in the original assessment order dated 30.3.2005. Therefore, out of Rs. 1114.68 lacs, Rs. 834.22 lacs already stood disallowed in the original assessment order. The balance amount represented actual write off which was palpably clear from page 2 of the impugned order itself. No deduction on account of any such provision was, therefore, allowed to the assessee. Hence, there is no error or prejudice to the interest of revenue. As regards second issue it was noted that interest rate swap was an actual loss and only the net loss of Rs. 114.05 lacs after setting of gain of interest rate swap was claimed as deduction. However, we find that both these issues were duly examined by the AO vide Questionnaire dated 2.11.2004 (Page 1-2 of the Paper Book) to which replies dated 9.12.2004, 20.12.2004 and 6.1.2005 (Page No. 3-39 of Paper Book-1) were furnished and, therefore, the finding of the Ld. CIT that the issues were not examined properly was not correct. Even the Ld. CIT has not pointed out the definite and specific error in the original assessment order and observed that the inquiry made by the AO was inadequate or improper without first pointing out the error in the original assessment order passed by the AO, particularly because both the aforesaid issues were duly examined at the stage of the original assessment proceedings, hence, the impugned order is beyond jurisdiction, bad in law and void-ab-initio."
It is discernible from the aforenoted findings of the ITAT that both the claims were duly examined during the original assessment proceedings itself and neither there was any error nor the same was prejudicial to the interests of the Revenue. Thus, the findings of fact arrived at by the ITAT do not warrant any interference of this Court.
So far as the reliance placed by the CIT on Umashankar Rice Mill is concerned, the same is misplaced, particularly in light of the insertion of Explanation 2 to Section 263 of the Act, brought in place by the Finance Act, 2015. The said amendment markedly specifies various conditions to exercise the authority vested in S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT the Commissioner under Section 263 of the Act, leaving no ambiguity in the interpretation of the said provision.
In view of the aforesaid, the appeal preferred by the Revenue is dismissed alongwith the pending application(s), if any.” 17.4 Further the Hon’ble Supreme Court in the case of PCIT vs. V. Con Integrated Solutions Private Ltd. while dismissing the SLP of the assessee has observed as under:- “In our opinion, the order passed by the High Court, which upheld the decision of the Tribunal, is correct on facts and in law. This case does not involve a failure by the assessee officer to conduct any investigation. Instead, according to the Revenue, it is a case where the assessing officer having made inquiries erred by not making additions. The assessee does not have control over the pen of the Assessing Officer. Once the Assessing Office carries out the investigation but does not make any addition, it can be taken that he accepts the plea and stand of the assessee. In such cases, it would be wrong to say that the Revenue is remediless. The power under Section 263 of the Income Tax Act, 1961, can be exercised by the Commissioner of Income Tax, but by going into the merits and making an addition, and not by way of a remand, recording that there was failure to investigate. There is a distinction between the failure or absence of investigation and a wrong decision/conclusion. A wrong decision/conclusion can be corrected by the Commissioner of Income Tax with a decision on merits and by making an addition or disallowance There may be cases where the Assessing Officer undertakes a superficial and random investigation that may justify a remit, albeit the Commissioner of Income Tax must record the abject failure and lapse on the part of the Assessing Officer to establish both the error and the prejudice caused to the Revenue.”
In the instant case, ld. CIT(A) invoked the provisions of Explanation-2 of section 263 which conferred power to the PCIT/CIT to give directions to the AO for making fresh examination and verification, which is inserted by Finance Act, 2015 in Section 263 with effect from 01.06.2015. As per this Explanation, to declare an order to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of appropriate authority- (i) the order was passed without making inquiries or verifications which should have been made; (ii) the order is passed S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT allowing any relief without inquiring into the claim; (iii) the order is not in accordance with any direction or instructions etc. issued by the Board u/s 119; or (iv) the order was not in accordance with binding judicial precedent.
In the instant case, the ld. PCIT has given direction to the AO for making further examination and verification on the issue of allowability of Royalty payment as revenue expenditure or capital expenditure and further non-inclusion of adjustments made in the intimation order u/s 143(1) in the final assessment order. As per the provisions of Section 263 of Income Tax Act, 1961, the PCIT/CIT is vested with the supervisory powers of suo-moto revision of any order passed by the Assessing Officer [AO]. For the said purpose, the appropriate authority may call for and examine the record of any proceedings under the Act and may proceed to revise the same provided two conditions are satisfied- (i) the order of the assessing officer erroneous; and (ii) it is prejudicial to the interest of the revenue. If one of the condition is absent i.e. if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but it is prejudicial to the revenue, action cannot be taken u/s 263 of the Act as has been held by Hon’ble Supreme Court in Malabar Industrial Co. Ltd. reported in 243 ITR 83(SC) and followed by Hon’ble Delhi High Court in the case of CIT vs Vikas Polymers reported in 194 Taxman 57(Delhi).
The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. (supra) has held that the phrase 'prejudicial to the interests of the revenue' must be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when an Income-tax Officer adopted one S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be held as an erroneous order which is prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. This principal has been again reiterated by Hon’ble Court in its subsequent judgment in the case of CIT vs Max India Ltd. reported in 295 ITR 282 (SC).
The Hon’ble Delhi High Court in the case of CIT V/s Vikas Polymers (supra), further observed that as regards the scope and ambit of the expression "erroneous", Hon’ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. reported in [1993] 203 ITR 108 (Bombay HC) held with reference to Black's Law Dictionary that an "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" and thus it is clear that an order cannot be termed as "erroneous" unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law 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 differently or more elaborately. The Section does not visualize the substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is not in accordance with law. Further, each and every erroneous order cannot be the subject matter of revision because the second requirement also must be fulfilled. There must be material on record to show that tax which was lawfully leviable has not been imposed as held in Gabriel India Ltd.(supra). However, the expression "prejudicial to the interest of the revenue", as held by the Supreme Court in the Malabar Industrial S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT Co. Ltd. (supra), is not an expression of art and is not defined in the Act and, therefore, must be understood in its ordinary meaning. The Commissioner's exercise of revisional jurisdiction under the provisions of Section 263 cannot be based on whims or caprice. It is trite law that it is a quasi-judicial power hedged in with limitation and not an unbridled and unchartered arbitrary power. The exercise of the power is limited to cases where the Commissioner on examining the records comes to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interest of the revenue and that fresh determination of the case is warranted. There must be material to justify the Commissioner's finding that the order of the assessment was erroneous insofar as it was prejudicial to the interest of the revenue.
The Hon’ble Delhi High Court, in the case of Vikas Ploymers (supra) further observed that there is a fine though subtle distinction between "lack of inquiry" and "inadequate inquiry". It is only in cases of "lack of inquiry" that the Commissioner is empowered to exercise his revisional powers by calling for and examining the records of any proceedings under the Act and passing orders thereon. In Gabriel India Ltd. (supra), it was expressly observed: - "The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity [Parashuram Pottery Works Co. Ltd. vs. ITO, (1977) 106 ITR 1 (SC)]. It was further observed as under: - "From the aforesaid definitions as it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law 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 visualize a case of S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT substitution of the judgment of the Commissioner for that of the Income tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualized where the Income-tax Officer 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 to the commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasijudicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. x x x x 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 Hon’ble Supreme Court in the case of CIT vs Amitabh Bachchan reported in the case of 69 Taxmann.com 170 held that the power of appeal and revision is contained in Chapter XX of the Act which includes section 263 that confers suo-motu power of revision in the Commissioner. The different shades of power conferred on different authorities under the Act has to be exercised within the areas specifically delineated by the Act and the exercise of power under one provision cannot trench upon the powers available under another provision of the Act. In this regard, it must be specifically noticed that against an order of assessment, so far as the revenue is concerned, the power conferred under the Act is to reopen the concluded assessment under section 147 and/or to revise the assessment order under section 263. The scope of the power/jurisdiction under the different provisions of the Act would naturally be different. The power and jurisdiction of the revenue to deal with a concluded assessment, therefore, must be understood in the context of the provisions of the relevant sections. While doing so, it must also be borne in mind that the legislature had not vested in the revenue any specific power to question an S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT order of assessment by means of an appeal. Regarding applicability of Section 263, what has to be seen is that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the revenue is the basic precondition for exercise of jurisdiction under section 263. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the section to give the assessee an opportunity of being heard. Further, there could be no doubt that so long as the view taken by the Assessing Officer is a possible view, the same ought not to be interfered with by the Commissioner under Section 263 merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority. This is a course of action that must be desisted from.
The Hon’ble Bombay High Court in Moil Ltd. Vs. CIT reported in 81 Taxmann.com 420 has observed that if a query is raised during the assessment proceedings which was responded to by the assessee, the mere fact that the query was not dealt with in the assessment order then it would not lead to a conclusion that no mind has been applied to it and the Assessing Officer is not expected to raise more queries, if he was satisfied about the admissibility of claim on the basis of the material and the details supplied.
In the instant case, Ld. Pr. CIT invoked Explanation 2 of section 263 of the Act to hold the order passed is without making enquiries and verification. However, as observed above in the present case, detailed enquiries and verification was made S.A. No.332/Del/2025 Microsoft Corporation (India) Private Limited vs. PCIT and after considering the submissions of the assessee and by following the past history of the assessee, AO allowed the Royalty expenses as revenue expenditure. Other two issues, as observed above, has already been resolved either by rectification order or by paying taxes on the part of the assessee.
In view of these facts and detailed discussion made herein above, in our considered opinion, Ld. Pr. CIT has failed to appreciate the facts that proper enquiry and examination was made in the instant case and therefore, there is no error in the order of the AO thus, the assessment order so passed is not pre-judicial to the interest of the Revenue. Accordingly, we quash the order passed by Ld. Pr. CIT u/s 263 of the Act wherein the re-assessment order was held as erroneous and pre-judicial to the interest of the Revenue. Hence, Grounds of appeal raised by the assessee are allowed.
In the result, appeal filed by the assessee is allowed.
Since we have already allowed the appeal of the assessee, the stay application become infructuous and thus dismissed.