2017 (3) TMI 888 - AT - Income Tax

Tribunal rules in favor of assessee, overturning Principal Commissioner's order. Remuneration found exempt.

Cadila Healthcare Ltd. Versus PCIT-1, Ahmedabad

Cadila Healthcare Ltd. Versus PCIT-1, Ahmedabad - TMI Issues Involved:1. Exercise of revision jurisdiction under Section 263 of the Income Tax Act.2. Whether the remuneration received by the assessee from the partnership firm is exempt under Section 28(v) of the Income Tax Act.3. Adequacy of inquiry conducted by the Assessing Officer during the assessment proceedings.Issue-wise Detailed Analysis:1. Exercise of Revision Jurisdiction under Section 263:The Principal Commissioner of Income Tax (PCIT) exercised revision jurisdiction under Section 263, directing the Assessing Officer (AO) to frame a fresh assessment. The PCIT deemed the original assessment erroneous and prejudicial to the interests of the Revenue, primarily due to the AO's failure to conduct necessary inquiries and properly apply the law. The PCIT's order emphasized that the AO had not sufficiently investigated the facts and circumstances surrounding the remuneration of Rs. 48 crores received by the assessee from the partnership firm. The PCIT cited several precedents, including CIT vs. Shree Manjunathesware Packing Products & Camphor Works and CIT vs. Seshasayee Paper & Boards Ltd., to support the wide amplitude of revisionary powers under Section 263.2. Exemption under Section 28(v):The primary contention was whether the remuneration of Rs. 48 crores received by the assessee from the partnership firm could be treated as exempt under Section 28(v). The assessee argued that this remuneration was for marketing and auxiliary services provided to the partnership firm, and since the firm had disallowed the remuneration under Section 40(b), the same should be exempt under Section 28(v). The PCIT, however, contended that the remuneration was essentially for services rendered and should be treated as 'Other Income' of the assessee. The PCIT also highlighted that the original partnership agreement did not envisage such remuneration, and subsequent agreements seemed to be a device to avoid tax.3. Adequacy of Inquiry by the Assessing Officer:The PCIT criticized the AO for not conducting a thorough inquiry and simply accepting the assessee's claims without further investigation. The AO's failure to pierce the corporate veil and properly scrutinize the remuneration transaction was seen as a lapse leading to substantial revenue loss. However, the Tribunal noted that the AO had indeed raised specific queries during the assessment proceedings, as evidenced by the Section 142(1) notice, and had examined the issue. The Tribunal referenced the Bombay High Court's judgment in CIT vs. Gabriel India Ltd., which held that an assessment could not be deemed erroneous merely because the AO did not discuss every issue in the assessment order, provided the issue was examined during scrutiny.Tribunal's Conclusion:The Tribunal found that the AO had conducted the necessary inquiries and that the remuneration was disallowed by the partnership firm, thus entitling the assessee to claim the corresponding adjustment under Section 28(v). The Tribunal also noted that a coordinate bench had previously reversed a similar exercise of Section 263 jurisdiction in the assessee's case for the preceding assessment year. Consequently, the Tribunal reversed the PCIT's order passed under Section 263, allowing the assessee's appeal.Outcome:The assessee succeeded in its appeal, and the Tribunal pronounced the judgment in favor of the assessee on March 16, 2017.