2016 (5) TMI 1569 - AT - Income Tax

Tribunal upholds AO's assessment, allows deductions for partner's salary and deems certain charges as business-related.

The Tribunal held that the AO's assessment order was not erroneous or prejudicial to revenue. The classification of sundry income as business income was ... Jurisdiction under section 263 - failure to make enquiries as ground for invoking section 263 - book-profit for 40(b)(v) - scope of Explanation 3 - allowability of expenditure under 37(1) - nexus of expenditure to businessJurisdiction under section 263 - failure to make enquiries as ground for invoking section 263 - Whether the CIT was justified in invoking jurisdiction under section 263 on the ground that the Assessing Officer failed to make enquiries which he ought to have made in relation to the assessment for AY 2009-10. - HELD THAT: - The Tribunal examined the material placed before the Assessing Officer and the inquiries actually made during the assessment. The Court recognised the settled principle that section 263 may be invoked where an assessing officer has failed to make inquiries which the circumstances required. However, on the facts, the AO had called for and obtained details in relation to the items questioned by the CIT and there were no adverse observations in the assessment order to indicate that the AO failed to apply his mind. The CIT's order under section 263 consisted largely of a general observation that 'no proper details have been obtained' without specifying what further inquiries were necessary or why the AO's enquiries were inadequate. A bare statement that inquiries ought to have been made, without identification of the specific omission or the nature of the inquiry required, is insufficient to sustain revision under section 263. Applying these principles to the present record, the Tribunal found that the CIT had not demonstrated that the AO's order was erroneous or prejudicial to the revenue on the asserted ground of inadequate inquiry and therefore quashed the section 263 order. [Paras 5, 16, 17, 18]Order passed by the CIT under section 263 quashed; appeal allowed on this ground.Book-profit for 40(b)(v) - scope of Explanation 3 - nexus of expenditure to business - Whether the sundry income (including a non refundable grant from PwC Services BV) was properly treated in the assessment and whether such receipt could be excluded from book profit for computing partners' remuneration under section 40(b)(v). - HELD THAT: - The AO had sought details specific to 'Sundry Income' and the assessee furnished a break up showing the major component as a grant from PwC Services BV, along with other items (sale of scrap, foreign exchange gain). The assessee explained that the grant was non refundable, received under contractual arrangements within the PwC network, and accounted as sundry income on accrual basis. The Tribunal noted the assessee's explanation and that the AO had obtained and considered the details. Further, the Tribunal accepted the submission (with reliance on applicable precedent as relied upon by the assessee) that for the purpose of Explanation 3 to section 40(b)(v) the book profit comprises the net profit as shown in the profit and loss account and therefore such receipts cannot be simply excluded from the book profit calculation. The CIT had not identified any particular inquiry which the AO omitted that would have shown a different treatment to be warranted. [Paras 7, 8, 9, 17]AO's treatment of the sundry income and the inclusion in book profit upheld; no ground for revision under section 263 on this score.Allowability of expenditure under 37(1) - nexus of expenditure to business - Whether the payments described as 'PwC Global Services Charges' were allowable as business expenditure and whether the AO failed to make necessary inquiries before allowing the deduction. - HELD THAT: - The assessee produced the Firm Services Agreement, invoices, payment evidence and TDS documents in response to the AO's queries during assessment. The agreement and supporting material showed that services rendered related to network quality standards, risk and quality management, audit transformation and operational support, all of which the assessee adduced were incurred wholly and exclusively for the purpose of its business. The AO examined these materials and allowed the deduction; the Tribunal observed that prior assessments had also allowed similar charges. The CIT's objection that the AO should have further probed related party aspects, fair market value or the precise nature of services was not supported by a specification of what additional inquiries were necessary or how the existing material was inadequate. On the record, there was no reason to conclude that the AO's acceptance was without enquiry or unreasonable. [Paras 10, 11, 12, 13, 17]PwC Global Services charges held to have been properly examined and allowable as business expenditure; no basis for invoking section 263.Allowability of expenditure under 37(1) - nexus of expenditure to business - Whether the premium paid for professional indemnity ('Accountant Risk Policy Premium') was a business expenditure properly allowable and whether the AO's lack of a specific inquiry rendered the assessment erroneous and prejudicial. - HELD THAT: - The Tribunal noted the nature of the insurance as protecting the firm against liabilities arising from professional negligence and that details of the insurance had been furnished during assessment. Although the AO did not make a separate, specific inquiry, the Tribunal found that the expense plainly related to the business and was in the nature of revenue expenditure incurred wholly and exclusively for business purposes. The CIT failed to articulate what further inquiry should have been made or how the absence of such inquiry produced an erroneous order; mere conjecture that inquiries ought to have been made did not satisfy the requirements for revision under section 263. The Tribunal also observed that similar expenditures had been allowed in earlier assessments of the assessee. [Paras 3, 14, 17]Accountant Risk Policy premium deductible as business expenditure; no reason to sustain the section 263 revision.Final Conclusion: Both appeals allowed; the orders passed by the CIT under section 263 (relating to the AO's treatment of sundry income, PwC Global services charges and professional indemnity premium for AY 2009-10) quashed and the assessment conclusions restored. Issues Involved:1. Classification of Sundry Income.2. Deductibility of PWC Global Services Charges.3. Allowability of Accountant Risk Policy Premium.4. Adequacy of AO's Inquiry during Assessment.Issue-wise Detailed Analysis:1. Classification of Sundry Income:The CIT, Kolkata-XIX, Kolkata, exercised powers under Section 263 of the Income Tax Act, 1961, asserting that the AO's order was erroneous and prejudicial to the revenue. The CIT contended that the sundry income of Rs. 10,35,13,136/- credited in the profit and loss account should have been considered under 'Income from Other Sources' rather than 'Income from Business or Profession.' This misclassification allegedly led to an excessive deduction of partner’s salary under Section 40(b)(v) of the Act by Rs. 3,68,36,524/-.The Tribunal noted that the AO had indeed sought details regarding sundry income (Item No. 20 in the notice under Section 142(1)). The Assessee provided a breakdown, including Rs. 10,02,60,000/- from Price Waterhouse Coopers BV, Rs. 2,83,633/- from the sale of scrap, and Rs. 29,69,503.46/- from foreign currency gain/loss. The Tribunal accepted the Assessee's argument that these amounts were intricately linked to the business, especially the non-refundable grant from PwC Services BV, which was for maintaining and enhancing resources and capabilities. Citing the Hon'ble Kolkata High Court's decision in Md. Serajuddin & Brothers vs. CIT, the Tribunal concluded that such income should be included in the book profit for computing partner’s salary deduction.2. Deductibility of PWC Global Services Charges:The CIT argued that the AO allowed a deduction of Rs. 3,34,56,529/- for PWC Global Services Charges without proper inquiry into its nexus with the Assessee's business. The AO had obtained relevant agreements and invoices but allegedly did not investigate the nature and necessity of the services.The Tribunal found that the Assessee had provided detailed responses and agreements during the original assessment. The services under the Firm Services Agreement (FSA) with PwC Services BV were essential for the Assessee's operations, including risk and quality management, learning and education, and audit transformation. The Tribunal noted that similar deductions had been allowed in previous assessments and found no reason to doubt the nexus of these expenses with the Assessee's business.3. Allowability of Accountant Risk Policy Premium:The CIT questioned the deduction of Rs. 1,71,40,899/- for Accountant Risk Policy Premium, asserting that the AO did not obtain proper details or make requisite inquiries.The Tribunal observed that the Assessee had provided details of insurance premiums in the original assessment proceedings. The premium was for professional indemnity insurance, covering risks of professional negligence, which is directly related to the business. The Tribunal referenced past assessments where similar deductions were allowed and concluded that the expenditure was wholly and exclusively for business purposes.4. Adequacy of AO's Inquiry during Assessment:The CIT's primary contention was that the AO failed to make adequate inquiries, rendering the assessment order erroneous and prejudicial to the revenue.The Tribunal emphasized that the AO had made necessary inquiries and obtained detailed responses from the Assessee. It referenced the Delhi High Court's decision in Gee Vee Enterprises, which states that an AO's failure to make prudent inquiries can render an order erroneous. However, in this case, the Tribunal found that the AO had sufficiently investigated the facts and circumstances, and the CIT did not specify what further inquiries were necessary.Conclusion:The Tribunal concluded that the CIT's invocation of Section 263 was not sustainable, as the AO's order was neither erroneous nor prejudicial to the revenue. The Tribunal quashed the CIT's order and allowed the Assessee's appeal.Separate Judgments:The Tribunal delivered a separate judgment for ITA No.1278/Kol/2014, involving similar issues and reasoning, and quashed the CIT's order for the same reasons.Result:Both appeals by the Assessee were allowed.