Tribunal overturns PCIT's order, upholds AO's assessment.

M/s Colour Publications Pvt Ltd. Versus Principal Commissioner of Incometax- 2, Mumbai

M/s Colour Publications Pvt Ltd. Versus Principal Commissioner of Incometax- 2, Mumbai - [2018] 67 ITR (Trib) 57 Issues Involved:
1. Invocation of Section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (PCIT).
2. Disallowance of performance bonus under Section 36(1)(ii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (PCIT):

The assessee appealed against the PCIT's order invoking Section 263, arguing that the assessment order under Section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The PCIT had issued a show cause notice proposing to revise the assessment order on the grounds that the AO had incorrectly disallowed only a portion of the performance bonus under Section 40A(2) instead of the entire amount under Section 36(1)(ii). The PCIT alleged that the AO did not conduct proper verification and that the payment of the performance bonus was a method to avoid dividend distribution tax, thus prejudicial to the revenue's interest.

The tribunal noted that the AO had indeed conducted enquiries during the assessment proceedings, requesting and receiving detailed submissions from the assessee, including board resolutions and explanations justifying the performance bonus. The tribunal emphasized that for the PCIT to invoke Section 263, both conditions of the order being erroneous and prejudicial to the revenue must be satisfied. The tribunal found that the AO had applied his mind and made a partial disallowance under Section 40A(2), and therefore, the PCIT's invocation of Section 263 was incorrect.

2. Disallowance of performance bonus under Section 36(1)(ii) of the Income Tax Act, 1961:

The PCIT contended that the performance bonus paid to the director was unreasonable and a method to avoid paying dividend distribution tax, thus falling under the purview of Section 36(1)(ii). The tribunal, however, found that the AO had considered the performance bonus under Section 40A(2) and made a partial disallowance after thorough verification. The assessee had provided sufficient evidence, including board resolutions and the director's contributions to the company's profitability, justifying the performance bonus.

The tribunal referred to several judicial precedents, including the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which clarified that an order could not be termed erroneous unless it was not in accordance with the law. The tribunal concluded that the AO had conducted the necessary enquiries and applied the relevant provisions of the Act, thus the assessment order was neither erroneous nor prejudicial to the revenue's interest.

Conclusion:

The tribunal allowed the assessee's appeal, setting aside the PCIT's order under Section 263 and restoring the AO's assessment order under Section 143(3). The tribunal held that the AO had conducted appropriate enquiries and applied his mind to the facts, and the PCIT's invocation of Section 263 was unwarranted. The performance bonus was rightly considered under Section 40A(2) and not Section 36(1)(ii), as argued by the PCIT.