Sourabh Sharma Vs PCIT (ITAT Jaipur)
In a significant ruling by the ITAT Jaipur in the case of Sourabh Sharma Vs PCIT, the tribunal examined the jurisdiction of Section 263, particularly in scenarios where the Principal Commissioner of Income Tax (PCIT) sought additional inquiries post-assessment. The case pivoted on whether the PCIT could revise an already completed assessment based on the belief that the Assessing Officer (AO) might not have fully grasped the assessee’s claim, leading to potential revenue loss.
Background and Tribunal’s Order: The case stemmed from the PCIT’s dissatisfaction with the AO’s handling of sales promotion expenses claimed by the assessee, Sourabh Sharma. Despite the AO raising nine specific questions regarding these expenses and ultimately allowing them based on the assessee’s responses, the PCIT issued notices under the assumption of inadequate inquiry.
However, the ITAT Jaipur highlighted a critical aspect of the ‘faceless assessment’ process, emphasizing the collaborative effort involving multiple units under the Income Tax Department. This process ensures a thorough review and consideration of the cases, negating the notion of inadequate inquiry by a single officer.
Legal Interpretation of Section 263: The tribunal delved into Explanation 2 of Section 263, inserted by the Finance Act 2015, which broadens the PCIT’s powers to revise assessments deemed prejudicial to the interest of the revenue. Despite this provision, the ITAT Jaipur reasoned that the mere desire for more detailed inquiries by the PCIT does not inherently render the AO’s order erroneous or prejudicial.
Tribunal’s Rationale and Precedents: Drawing on precedents and the principle of judicial examination, the tribunal underscored that the AO’s decision, arrived at after detailed inquiries and review of the assessee’s submissions, stands firm unless proven otherwise by substantial evidence. The tribunal cited the case of CIT V. K. Ramachandran and the Rajasthan High Court’s ruling in CIT Vs. Ganpat Ram Bishnoi to support its decision, emphasizing that the assessment order’s correctness is evident from the detailed inquiries conducted by the AO.
Conclusion: The ITAT Jaipur’s ruling in Sourabh Sharma Vs PCIT underscores a significant legal standpoint: the PCIT’s authority under Section 263 cannot be exercised merely for additional inquiries if the AO’s order is based on comprehensive examinations and reasoned decisions. This verdict reaffirms the importance of procedural correctness and the limitations of Section 263, ensuring that reassessments are grounded in concrete evidence rather than speculative dissatisfaction. The decision is a crucial reminder of the checks and balances within the income tax assessment process, ensuring fairness and thoroughness in the evaluation of claims and deductions.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This appeal is filed by assessee and is arising out of the order of the Principal Commissioner of Income Tax dated 29/03/2023 [here in after (PCIT)] for assessment year 2018-19, which in turn arise from the order of the AO dated 23.11.2020 passed under 143(3) r.w.s 143(3A) & 143(3B) of the Income Tax Act, [ here in after referred to as Act ].
2. The assessee has marched this appeal on the following grounds:-
“1. The Id. PCIT-2, Jaipur erred in law as well as on the fact of the case in taking the action u/s 263, which is bad in law without jurisdiction on various grounds hence, the same may kindly be quashed.
2. The assumption of jurisdiction u/s 263 and the impugned direction, being contrary to the provisions of law and facts on record hence, the proceedings initiated u/s 263 of the Act and the impugned order dated 29.03.2023 deserves to be quashed.
3. The ld. Pr. CIT seriously erred in law as well as on the facts of the case in assuming jurisdiction u/s 263 of the Act by wrongly and incorrectly invoking Explanation 2 to S. 263 as if the same conferred unbridled power upon the CIT even though the facts and circumstances of the case did not justify the application of the said Explanation.
4. The Id. Pr. CIT erred in law as well as on the facts of the case in wrongly setting aside the assessment order dated 23.11.2020 despite there being complete application of mind by the AO on the subjected issues and it was nothing but a case of change of opinion and/or suspicion, based on which, assumption of jurisdiction u/s 263 is not permissible. The impugned order dt. 29.03.2023 therefore, lacks valid jurisdiction u/s 263 of the Act and hence, the same kindly be quashed.
5.1 The ld. Pr. CIT seriously erred in law and on facts of the case in holding that the source of incentive on sales of Rs. 80,46,456/- could not be explained by the appellant which being completely contrary to the provisions of law and facts available on record, such findings and the decision of the CIT(A) deserves to be quashed and set aside.
5.2 That alternately and without prejudice to above, in case the impugned action and other passed by the ld. Pr. CIT is upheld, a clear direction may kindly be given to the AO not be to influenced by the unjustified and invalid finding recorded by the ld. Pr. CIT in Para 5 of the impugned order.
6. The appellant prays your honour to add, amend or alter any of the grounds of the appeal on or before the date of hearing.”
3. The fact as culled out from the records is that the case of the assessee was selected for Limited Scrutiny under E assessment Scheme 2019 on the issue of claim of Business Expenses. Based on that criteria notice u/s 143(2) was issued to the assessee on 28.09.2019 and the assessee had not responded to the same. Further, notice u/s 142(1) was issued to the assessee on 22.11.2019 and 31.01.2020 with specific questionnaire. In response to the notices, the assessee has attached all the relevant documents along with the assessee reply dated 09.12.2020. The submissions made by the assessee were examined, no addition was made on the selection criteria and accordingly the assessment was completed at returned income of Rs. 38,63,240/-.
4. On culmination of the assessment the ld. PCIT, Jaipur 2 called for the records and upon examination of the record the ld. PCIT noted the sales promotion expense to the tune of Rs. 80,46,456/- were not verified during the assessment proceeding. As the assessee in the expenses debited in the profit & loss account in column 20 noted that the assessee claimed Sales Promotion including publicity (other than advertisement) for an amount of Rs. 80,46,456/- but as per column 38(12) sale promotion expenses under the head “other expenses” it is only Rs. 3,90,158/-. The ld. AO raised query about the expenses of Rs. 76,56,298/-being the difference amount of the figure at column 38(12) and column 20. The ld. PCIT noted that no details were submitted by the assessee during assessment proceedings and the assessment order has been passed without verifying these expenses. Based on these observations a show cause notice u/s. 263 of the Act was issued to the assessee on 09.02.2023. In response the assessee filed a detailed reply on 15.02.2023 contending that there was no case of unexplained expenses of such amount as alleged and assessee submitted the credit and debit note of the sales promotion expenses. The ld. PCIT considered the submission of the assessee but do not found tenable. He noted that the case was selected for limited scrutiny under the E assessment scheme 2019 on the issue of business expenses. The issued two notices u/s 142(1) calling for information on this specific issue, first on 22.01.2019 and the other on 31.01.2020. In the notice on 22.11.2019 specific information in relation to sales promotion have been called for. In response to the same the assessee provided details of sales promotion expenses of Rs 3,90,158. Subsequently, on 31.01.2020 specific details after referring to Profit and Loss account it was queried that sales promotion and other expenses including publicity and was shown as Rs 80,46,456 and sales promotion was of Rs 3,90,158 and the assessee was asked to explain the difference amount of Rs 76,56,298. However, the assessee did not file any details and the assessment order was passed on 23/11/2020. Thus, it is clear that the main issue of expenditure of Rs 80,46,456 relating to incentive on sales remained unverified and only an expenditure of Rs 3,90,158 relating to sales promotion were examined for which the assessee had furnished details. Since, no details were submitted and verified relating to the expenditure of Rs 80,46,456/ relating to sales incentive and business expenses being the reason for limited scrutiny, the assessment order is found to be erroneous in as much as it is prejudicial to the interest of revenue. The order of the assessing officer is therefore, held to be liable for revision under the clause (a), (b) & (c) of Explanation (2) to section 263 of the Act. The relevant finding of the ld. PCIT is reiterated here in below :
5.2 In the present proceedings, it has been submitted that the expenses in the nature of incentives on sales given to clients incurred at Rs 80,46,456 however, since there is no column in ITR form so these were mentioned under Sales promotion in column 20 of P&L account. The assessee has further submitted that the notice u/s 263 is based on an amount of Rs. 76,56,298/- and AO had impliedly accepted its contention and hence the order could not be held as erroneous.
5.3 As regards the amount it was found that due to the representation of the expenditure in the columns by the assessee as the expenditure of Rs 80,46,456 relating to sales incentive was shown under column 20 of the ITR Sales Promotion including publicity (other than advertisement) while Rs 3,90,158 relating to Sales promotion was shown at sub column 12 of column 38 of the ITR RELATING TO OTHER EXPENSES. Thus, a presumption was drawn that out Of Rs 80,46,456 of sales promotion as per column 20, the amount of Rs 3,90,158 is again shown under the Sales promotion in column 38 were to be excluded. Subsequently, it was clarified that Rs 80,46.456 related to sales incentive and Rs 3,90,158 related to Sales promotion vide letter dated 25.3.2023. and this was clarified to the assessee.
5.4 The AO vide notice u/s 142(1) dated 31.01.2020 has clearly questioned the assessee for verification of the amounts of Rs 80,46,456 relating to Sales incentive, however no details had been furnished by the assessee and the AO had completed the assessment without obtaining these details and as a result the impugned expenses were not examined. Since, the main issue for selection of the case for scrutiny was business expenditure and the expenditure debited under this head was substantial, the same needed to be examined and verified as to its genuineness, purpose and justification of the amounts paid. As per the details filed the amounts have been paid to Rs. 80,46,456/- and Rs. 3,90,158/- and thus needed to be verified and examined in depth.
6. From the above facts and circumstances of the case and having regard to the material available on record, the Assessing Officer failed to consider/apply his mind to the information available on record with regard to the unexplained sales promotion expenses relating to sales incentive to the tune of Rs.80,46,456/-. This in turn has resulted in passing of an erroneous order by the Assessing Officer in the case due to non-application of mind to relevant material, reflecting in non-appreciation of facts and incorrect application of mind to law which is prejudicial to the interest of the revenue. Thus, the order passed U/s 143(3) on 23.08.2018 is held to be erroneous and prejudicial to the interest of the revenue terms of the judgement of the Hon’ble Supreme Court in the case of Malabar Industrial Limited V/S CIT 243 ITR wherein it has been held as under-
“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”.
