In PCIT Vs TE Connectivity India Pvt. Ltd. Karnataka High Court upholds Section 263 Revision despite prior AO enquiry, distinguishes “Plausible View” doctrine; Karnataka HC Upholds PCIT Revision on TDS Disallowance; Karnataka High Court allowed Dept’s appeal against ITAT which had earlier quashed a revisionary order passed u/s 263 by PCIT.
Assessee filed its return for AY 2015–16 declaring income of ₹7.35 crore. A final assessment order was passed after scrutiny. PCIT later revised this order u/s 263 stating that commission payments of ₹36.34 crore were wrongly allowed without disallowance u/s 40(a)(ia), as TDS had not been deducted. ITAT set aside this revision, holding that AO had taken a plausible view after proper enquiry. Revenue challenged the ITAT order before the High Court.
Revenue argued that the Tribunal has failed to note that the PCIT vide the order passed by it, has observed that an amount of Rs.36.34crore debited towards commission on sales of profit & loss A/c without TDS was not disallowed u/s 40(a)(ia) in the assessment order. Failure to do so has resulted in the short computation of income. Accordingly, the assessment order was considered to be erroneous & prejudicial to the interest of the Revenue in terms of Sec 263. Tribunal has failed to note that the PCIT has also noted that assessee has not filed necessary evidence to substantiate its claim & TDS was required to be deducted on Rs.36.34 cror. Since Assessee did not deduct TDS on this sum, the disallowance should have been made in terms of Sec 40(a)(ia). Tribunal has failed to note that, a similar disallowance was made in the AYs 2013-14 & 2014-15. Moreover, it is not a case where one of the legally plausible views has been taken.
Per contra, Assessee argued assessment was selected for complete scrutiny & a notice u/s 143(2) was served. Initially, a draft assessment order u/s 143(3) r.w.s.144C(13) was passed. Assessee filed objections to the draft assessment order before the DRP & pursuant to DRP directions, AO passed the final assessment order u/s 143(3) r.w.s.144C(13). Subsequently, the PCIT issued a notice u/s 263 seeking to revise the final assessment order & rejecting the objections of the respondent, passed the revisionary order holding that the assessment order was erroneous inasmuch as it was prejudicial to the interests of the Revenue. PCIT held that the respondent had debited Rs.36.34 crore towards commission on sales on which tax had not been deducted at source & consequently that a disallowance u/s 40(a)(ia) ought to have been made. Aggrieved by 263 order, Assesee filed appeal before the Tribunal & Tribunal set aside PCIT’s order holding that the jurisdiction u/s 263 had not been properly exercised. It was held that AO had, during the course of the assessment proceeding, duly conducted enquires & examined the alleged commission payments in detail & had taken a plausible view that the same tax deduction at source was not required. Following the decision of this Court in CIT -Vs.- Chemsworth Pvt. Ltd [(2020) 119 taxmann.com 358 (Karnataka)), Tribunal held that although the order of assessment had not discussed the issue, the record evidenced examination of the issue & therefore, it was a case where there was application of mind to the issue concerned by AO. Tribunal also noted that for the subsequent AYs 2016-17, 2017-18 & 2018-19 too, no disallowance u/s 40(a)(ia) was made.
Assessee also argued that the exercise of jurisdiction by PCIT purported to be u/s 263 is totally untenable, as such, a jurisdiction is only available when the assessment order is both erroneous & prejudicial to the interests of the Revenue. In terms of the Explanation 2(a) to Section 263, an order is deemed to be erroneous insofar as it is prejudicial to the interests of the Revenue if the order is passed without making enquiries which should have been made. Therefore, where an order is passed after making enquiries, the same cannot be said to be erroneous insofar as it is prejudicial to the interests of the Revenue simply because the view taken by AO s not acceptable to the PCIT. AO had specifically called for details as to the commission expenditure of Rs.36.34 crore & as to why no tax had been deducted at source. It was explained by e assessee that the payments were not in the nature of commission but were in fact discounts which would not be covered u/s 194H, which applies to commission payments. Assesee stated that, another notice was issued & Assessee again explained Section 194H was not applicable. Thus AO had made elaborate enquiries on the issue of tax deduction at source u/s 194H & had agreed with the respondent that no tax deduction at source was required. It is settled position that where the record indicates elaborate enquiries being made & application of mind by AO to the query concerned, it is to be deemed that AO accepted the contentions of assessee, although elaborate discussions may not find place in the assessment order. The conclusion drawn by the PCIT in 263 order that a disallowance u/s 40(a)(ia) ought to be made is incorrect & erroneous. the debit to the profit & loss A/c of Rs.36.34 crore represents trade discounts given to distributors, where transactions are on a principal-to principal basis & not commission & Sec 194H would have no application to discounts. Order passed by the PCIT u/s 263 does not dispute the fact that the amount of Rs.36.34 crore represents discounts. The only plausible view is that Sec 194H does not stand attracted & therefore the conclusion that there ought to be a disallowance u/s 40(a) & 40(ai) is incorrect & without any basis.
High Court observed that neither the DAO nor the assessment order reflect the aforesaid issue i.e., whether the expenditure amount of Rs.36.34 crore is commission paid to the distributors or discount given. There is no analysis of the documents filed by the respondent either in the DAO or the order of AO. When there is no finding/view it cannot be said that view is plausible view. It cannot be said that AO has examined the impugned transaction in detail during the course of assessment proceedings, for the following reasons:
i. Merely because notices have been issued & replies submitted shall not show/depict AO has examined the transaction.
ii. Even otherwise, when there is no finding in the DAO/assessment order, it is not clear what were the relevant considerations which weighed with AO to agree with the stand of the respondent.
iii. It can be said, in the absence of the finding on the transaction, AO has not examined the same.
iv. In the absence of express finding, it cannot be said the view of AO is a plausible view.
Court observed that Tribunal has decided the appeal and set aside the order of PCIT only on the ground that AO has examined the impugned transaction in-detail during the course of the assessment, without going into the merits of the case and hence remanded the matter back to Tribunal for consideration of the appeal on merits in accordance with law
Author’s views
On the surface, the High Court’s decision in this case appears to run counter to established judicial principles laid down by the Supreme Court & various High Courts on the exercise of Section 263 jurisdiction, especially in the context of “plausible view” & “adequate enquiry.” However, the High Court has provided reasoning that distinguishes this case from those precedents.
Author Bio
It also appears to be against the judgments that hold that it is not necessary that the administrative authority, while passing orders, should write elaborately on the grounds on which his decision is based. In most orders, the authorities simply write after recording the history ” I have carefully considered the facts and …” Will all such orders become null and void and subject to re-adjudication.
Not necessarily. They won’t automatically become null & void unless the reasoning is so cryptic that it is impossible to understand why or on what basis the conclusion was reached or the order affects substantive rights (e.g., assessment, penalty, denial of exemption) without any intelligible justification or the issue involved is complex or contested n a speaking order is expected. Mere brevity is not fatal. Lack of any reasoning or unintelligible reasoning is fatal. Courts apply a case by case approach . they won’t invalidate all orders with minimal reasoning, but will strike down those where justice is compromised due to non-disclosure of basis.