Mafatbhai Bhikhabhai Parmar Vs PCIT (ITAT Ahmedabad)
The Income Tax Appellate Tribunal (ITAT), Ahmedabad, recently dismissed nine appeals filed by former employees of GE Power India Ltd., upholding the Principal Commissioner of Income Tax (PCIT), Vadodara-1’s order under Section 263 of the Income Tax Act, 1961. The appeals, pertaining to the Assessment Year 2018-19, challenged the PCIT’s decision to set aside the assessment orders passed by the Assessing Officer (AO) and direct fresh assessments. The central issue in all cases revolved around the allowance of certain exemptions claimed by the employees on their salary income, specifically concerning benefits received under a Voluntary Retirement Scheme (VRS).
The PCIT initiated the revisionary proceedings under Section 263 after examining the assessment records and forming the opinion that the AO’s orders were erroneous and prejudicial to the revenue’s interest. This conclusion was based on the observation that the AO had wrongly allowed exemptions claimed by the assessees against their VRS benefits without conducting adequate inquiry or verifying the claims against the provisions of the Income Tax Act. The exemptions in question included amounts claimed under Section 10(10CC) for tax paid by the employer, Section 10(10B) for retrenchment compensation, and a substantial amount paid by the employer directly to LIC for purchasing annuity policies for the retiring employees.
The assessees, represented by Shri Rajiv Goyal, argued that the AO had conducted thorough inquiries, issuing multiple notices under Section 142(1) of the Act, indicating a complete application of mind. They contended that the PCIT’s action amounted to a mere change of opinion, which is not a valid ground for invoking Section 263. Reliance was placed on the Supreme Court’s decision in Malabar Industrial Company Ltd. Vs. CIT (243 ITR 83), which established that if the AO has taken one of the possible views after due inquiry, the order cannot be deemed erroneous.
However, the ITAT, after considering the submissions and the evidence on record, sided with the Revenue. The Tribunal noted a significant discrepancy between the gross salary reflected in Form 16 issued by the employer and the salary income declared by the assessees in their income tax returns. It found that while the AO had indeed issued notices, the inquiries were superficial, and the AO had accepted the assessees’ explanations at face value without seeking corroborative evidence from the employer, particularly regarding the nature and taxability of the VRS benefits and the claimed exemptions.
The ITAT emphasized Explanation 2 to Section 263, which deems an order erroneous and prejudicial to revenue if it is passed without making inquiries or verifications that should have been made, or if relief is allowed without proper inquiry into the claim. In this context, the Tribunal highlighted that the AO failed to verify why amounts like the LIC annuity payment and the claimed exemptions were shown as part of the gross salary in Form 16 if they were indeed exempt or not taxable.
Crucially, during the proceedings under Section 263, the PCIT made inquiries with GE Power India Ltd., the employer. The employer clarified that the LIC annuity policy payments were made at the request of the employees from their VRS amounts and were considered part of their taxable income. The employer also stated that the income tax liability related to the annuity policy was not treated as a perquisite in Form 16, nor was any disallowance claimed under Section 40(a)(v) in their own return. This direct confirmation from the employer contradicted the assessees’ claims and highlighted the lack of proper verification by the AO.
The ITAT also referred to the Supreme Court’s decision in CIT Vs. Navnit Lal Sakar Lal (113 taxmann.com 692), which held that amounts utilized by the employer for obtaining a deferred annuity policy constitute part of the employee’s remuneration and are taxable as salary. This precedent further supported the PCIT’s view that the exemption allowed on the LIC annuity payment was erroneous. The Tribunal concluded that the AO’s order was indeed erroneous and prejudicial to the interest of the revenue due to the lack of necessary inquiries and the incorrect application of tax laws. Consequently, the ITAT upheld the PCIT’s order setting aside the original assessments and directing fresh assessments.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
