Nidhi Petrochemicals Pvt. Ltd. Vs PCIT (ITAT Ahmedabad)
Section 263: Silence in Assessment Order Does Not Prove Lack of Enquiry into Related-Party Payments
Background of the Dispute
The assessee company filed its return declaring income of ₹23,64,230. The Assessing Officer completed the assessment on 19 April 2021, accepting the returned income.
The Principal Commissioner subsequently invoked section 263, questioning the examination of payments aggregating to ₹45,35,900 made to persons specified under section 40A(2)(b) and disclosed in Form No. 3CD.
According to the PCIT, the Assessing Officer had not adequately examined whether the expenditure was reasonable. He also considered the related-party commission payments excessive and unjustified.
Invoking Explanation 2 to section 263(1), the PCIT set aside the assessment through an order dated 30 March 2024, treating it as erroneous and prejudicial to the interests of the Revenue.
The assessee challenged this revision before the Tribunal.
Assessment Records Established a Specific Enquiry
The Tribunal examined the assessment correspondence and found that the Assessing Officer had specifically sought details of transactions covered by section 40A(2)(b).
In response, the assessee’s letter dated 13 July 2020 furnished the relevant particulars in Annexure N, including the nature of payments and the reasons for making them.
The issue was therefore demonstrably examined during assessment, even though the assessment order did not separately discuss it.
The Tribunal considered that the Assessing Officer had called for relevant information and taken a conscious and plausible view after considering the explanation.
It rejected the inference that absence of an elaborate discussion necessarily established absence of enquiry.
Section 263 Requires Both Error and Revenue Prejudice
Relying on Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC), the Tribunal reiterated that an assessment must be both erroneous and prejudicial to the interests of the Revenue before revision can be justified.
Where the Assessing Officer adopts a legally permissible view, the Commissioner cannot invoke section 263 merely because he prefers another view.
The Tribunal also referred to CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Delhi), distinguishing lack of enquiry from an enquiry which the Commissioner considers insufficiently elaborate.
The assessment record, rather than silence in the final order alone, must determine whether the issue was examined.
Here, the specific query and the assessee’s detailed response contradicted the PCIT’s premise that no enquiry had been undertaken.
Related-Party Status Does Not Establish Excessiveness
The PCIT had observed that the commission payments were fixed rather than linked to actual sales and resembled remuneration.
However, the Tribunal found that he had not identified a comparable market price, quantified the alleged excess or demonstrated the basis on which disallowance was warranted.
Section 40A(2)(a) does not authorise automatic disallowance merely because the recipient falls within section 40A(2)(b).
The expenditure must be shown to be excessive or unreasonable by reference to the relevant statutory criteria. The PCIT had brought no comparable transaction or case on record to substantiate that conclusion.
Consequently, his direction effectively required the Assessing Officer to examine the matter again without first establishing the defect in the view already taken.
Earlier Scrutiny Assessments and Tax Position Supported the Assessee
During the hearing, the Tribunal called for details of commission payments in earlier years.
The material showed that related-party payments had been accepted without disallowance in the preceding two assessment years completed under scrutiny.
The Tribunal also considered the tax position of the recipients and referred to CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2009] 310 ITR 306 (Bombay).
These circumstances supported its conclusion that the PCIT had not demonstrated how the original assessment caused prejudice to the Revenue.
The decision rested on the combined record of actual enquiry, a plausible assessment view and absence of substantiated excessiveness—not merely on the recipients being taxable.
Explanation 2 Does Not Confer Unrestricted Revisionary Power
The Tribunal further relied on Shanti Multilink Pvt. Ltd. v. PCIT, ITA No. 175/Ahd/2021, concerning revision in the context of section 40A(2)(b).
It observed that Explanation 2 does not permit revision of every assessment simply because the PCIT believes further enquiry should have been conducted.
Finding no justification to sustain the revision, the Tribunal set aside the section 263 order and allowed the assessee’s appeal.
Author’s Comments
The ruling highlights two distinct requirements: proving an assessment error and substantiating the alleged excessiveness of expenditure.
A concise assessment order may still follow a meaningful enquiry. The taxpayer’s strongest evidence is therefore the assessment correspondence showing the precise question asked and the explanation furnished.
Similarly, disclosure of a related-party payment in Form No. 3CD identifies a transaction requiring consideration; it does not establish a disallowable amount.
A section 263 direction cannot substitute an unsupported concern for a demonstrated error. Equally, this decision should not be read as insulating every assessment merely because a query was issued. Here, the Tribunal expressly found a conscious, plausible view and no material establishing unreasonable expenditure or Revenue prejudice.
Cases Discussed
- Malabar Industrial Co. Ltd. v. CIT — [2000] 243 ITR 83 (SC)
- CIT v. Sunbeam Auto Ltd. — [2011] 332 ITR 167 (Delhi)
- CIT v. Indo Saudi Services (Travel) (P.) Ltd. — [2009] 310 ITR 306 (Bombay)
- Shanti Multilink Pvt. Ltd. v. PCIT — ITA No. 175/Ahd/2021
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT AHMEDABAD
The assessee has filed the appeal against the order dated 30-03-2024 passed by Principal Commissioner of Income Tax (Central), Ahmedabad (in short, referred to as the PCIT) u/s. 263 of the Income Tax Act, 1961 (herein referred to as “the Act”) relating to Assessment Year 201819.
2. The assessee raised the following grounds of appeal:-
“1. The order passed by PCIT is bad in law and required to be quashed.
2. Ld. PCIT erred in law and on facts in initiating proceedings u/s 263 of the Act ignoring fact that issue raised in show cause notice u/s 263 of the Act has been properly verified by AO during assessment scrutiny proceedings.
3. Ld. PCIT erred in law and on facts in proceedings with revision jurisdiction ignoring fact that order passed by AO is neither erroneous nor prejudicial to the interest of revenue.
4. Ld. PCIT ought to have considered fact that for invocation of section 40A(2)(b), the unreasonableness must have been proved which he failed to prove.
5. Ld. PCIT ought to have considered fact that payees are in same tax bracket and accordingly, the order is not prejudicial to the interest of revenue.
6. Ld. PCIT erred in observing that AO passed an order without making any enquiry ignoring notices u/s 142(1) of the Act and it’s replied by appellant.
7. Ld. PCIT erred in observing that case is covered by Explanation 2 to section 263” of the Act ignoring fact that it is applied in cases where there is gross negligence and not otherwise.”
3. Brief facts of the case are that assessee company filed its return of income for A.Y. 2018-19 on 29-10-2018 admitting income of Rs. 23,64,230. AO completed the assessment on 1904-2021 accepting the returned income.
3.1 PCIT by exercising the revisionary power u/s. 263 of the Act set aside the assessment order vide his order dated 30-032024 holding that AO did not make necessary examination/verification/inquiries in respect of expenditure claimed u/s. 40A(2)(b) of the Act. According to PCIT payments to the tune of Rs. 45,35,900/- were made to persons covered u/s. 40A(2)(b) as per Form 3CD report and prima facie the reasonableness of the expenditure was not scrutinized by the A.O.. Further, he held that payment of commission to related parties was not reasonable and was excessive and not justified and was required to be disallowed. PCIT was of the view that AO had not examined this issue and had not asked for any further questions. According to PCIT not conducting proper inquiry and not making disallowances which were called for are valid grounds for invoking the provisions of section 263 of the Act. Drawing support from provisions of explanation 2 to section 263(1) of the Act, PCIT held the assessment order dated 19-042021 was erroneous and prejudicial to the interests of revenue as the order was passed without making inquiries or verifications which should have been made.
4. Aggrieved by this order, the assessee filed appeal before the Tribunal.
5. We have heard both the parties and perused the materials available on record.
5.1 In response to notice issued during the course of assessment proceedings, assessee in its reply dated 13-07-2020 had furnished details of transactions covered u/s. 40A(2)(b) along with nature of payment and reasons thereof (Annexure -N). Thus, it is obvious that AO called for relevant details in this regard to examine related party payments and took a conscious/plausible view on this issue.
5.2 The governing test under u/s 263 for revision is the assessment must be both erroneous and prejudicial to the interests of revenue. This is a settled test in Malabar Industrial Co. Ltd. Vs. CIT (2000) 243 ITR 83 (SC). If AO has adopted one of the legally permissible views, the Commissioner cannot invoke section 263 merely because he has another view.
5.3 CIT vs. Sunbeam Auto Ltd. 332 ITR 167 (Delhi), the Delhi High Court distinguishes between “lack of inquiry” and “inadequate inquiry”. Where the AO has conducted an inquiry and taken a view, section 263” ordinarily cannot be invoked simply because the Commissioner thinks that a more elaborate inquiry should have been conducted. Further, assessment order need not necessarily contain an elaborate discussion on every issue examined. Therefore, assessment order is silent on section u/s. 40A(2)(b) payments does not automatically mean no inquiry by AO. The fact that AO specifically asked for 40A(2)(b) payment details in his notice during the course of assessment proceedings and assessee replied thereto in its letter dated 13-07-2020 amply indicates that this aspect was subject matter of examination/inquiry during the course of assessment proceedings. Mere silence of the assessment order cannot automatically mean that AO failed to examine the matter.
5.4 PCIT further held that the payments that have been shown as commissions were not linked with the actual sales undertaken, rather the commissions have been paid on a fixed basis, similar to remuneration payments. AO specifically asked about related party payments and assessee gave detailed reply. Assessee explained the amount, nature and reasonableness. The details were furnished pursuant to AO’s notice though the assessment order is silent on this aspect. AO examined and consciously accepted the explanation. Further, PCIT has apparently not identified the comparable market price or quantified how the payment to the related parties was excessive or on what ground disallowance was warranted in respect of these payments.
5.5 Section 40A(2)(a) does not authorize an automatic disallowance merely because payment is made to a person specified u/s. 40A(2)(b). The expenditure must be found excessive or unreasonable, having regard to the statutory criteria or market rate. PCIT has not brought on record any comparable transaction/case in this regard.
5.6 During the course of hearing, Hon’ble Bench pursuant to the arguments that no disallowance was made in the earlier years on this issue directed to submit relevant details of commission payments in earlier years. Perusal of relevant details, for earlier two assessment years completed under scrutiny revealed that revenue had accepted payments to parties covered u/s. 40A(2)(b) without any disallowance.
5.7 Bombay High Court in CIT vs. Indo Saudi Services (Travel) (P) Ltd. 310 ITR 306 (Bombay) while deciding a similar issue u/s. 40A(2) took into account that related concern was itself paying tax and revenue could not establish tax avoidance through the allegedly excessive payment. In appellant’s case, the payees are in higher tax bracket and rate of tax for assessee company and payees are the same. Hence, just because the assessment order is cryptic and does not contain any discussion of section u/s. 40A(2)(b), it cannot be held erroneous or prejudicial to the interests of the revenue. There was no lack of inquiry on the part of the AO on this issue. Further PCIT has simply directed the AO to examine u/s. 40A(2)(b) without himself identifying what payment appears excessive, what comparables/FMV demonstrates excessiveness, or how the original assessment caused prejudice to revenue.
5.8 Hon’ble ITAT, Ahmedabad in Shanti Multilink Pvt. Ltd. Vs. PCIT, ITA No. 175/Ahd/2021 examined section 263” specifically in the context of Section 40A(2)(b). It held, in substance, that where the AO had examined the issue, the case could not be treated as one where there was an omission to examine 40A(2)(b). It further observed that Explanation 2 does not confer unrestricted power upon PCIT to revise every assessment merely because the PCIT believes that some further enquiry should have been undertaken. The above decision is particularly close to the facts of assessee’s case.
5.9 In view of this, there is no reason to uphold the order of Ld. PCIT passed u/s. 263 of the Act.
6. The order passed by ld. PCIT is set aside and the appeal of the assessee is allowed.
Order pronounced in the open court on 13-10-2026
