2025 (1) TMI 1621 - AT - Income Tax

Tax authority's revision under section 263 wrongly invoked; assessment under section 143(3) read with 144C upheld

ITAT (Hyderabad) held that the PCIT's revision u/s 263 was incorrectly invoked and the assessment framed u/s 143(3) r.w.s.144C stood valid. The Tribunal ... Revision u/s 263 - Assessment in the present case has been passed in pursuant to the directions of the Dispute Resolution Panel (“DRP”) issued u/s 144C(5) - Impairment loss on assets debited into Profit & Loss account in terms of Accounting Standards issued by the Institute of Chartered Accountants of India (“ICAI”) - HELD THAT:- The assessee had debited impairment loss to Profit & Loss account and disclosed the reasons for ascertaining loss in notes to account in the financial statements. The assessee had also given the reasons for ascertaining the fair value of the asset as on date and according to the assessee, impairment loss on reusable components were arrived at after deciding the carrying value of recorded cost and this was due to shift in business focus and change in industry trend. Going by the Accounting Standards issued by ICAI, there is no dispute with regard to the fact that the assessee has to provide for impairment loss in respect of various assets in their books of accounts. The assessee had also reported the reasons in their financial statements. PCIT referred to the financial statements of the assessee for the year under consideration, which was already on record before the Assessing Officer, while passing the final assessment order. Once those records are available to the Assessing Officer, it is presumed that the Assessing Officer has looked into the issue, while completing the assessment and has taken one plausible view. Therefore, unless the PCIT brings out the reasons that the said issue has not been examined by the Assessing Officer and further it caused prejudice to the interest of the Revenue, in our considered view, merely because the assessee has debited the loss to the Profit & Loss account, is not the reason for PCIT to assume jurisdiction. PCIT considered the prior period income and notional gain on foreign exchange and observed that, although the assessee reduced the income while computing taxable income, but the AO has not examined the issues - PCIT has discussed the issue in light of computation of total income furnished by the assessee, along with financial statements for the relevant financial year. If we go by the decision of PCIT in their order, we find that the PCIT referred to notes to accounts, where the assessee has explained the reasons for reducing the income while computing taxable income. These financial statements were before the Assessing Officer. PCIT, having noticed the fact that the Assessing Officer has considered and taken one view, in our considered view, he ought not to have set aside the assessment order on these two issues, by holding that the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Corporate guarantee adjustment - As going by the proceedings for the year under consideration, including the proceedings u/s 92CA, in our considered view when the assessee has furnished relevant details including the financials for the year under consideration during the TP proceedings, we are of the considered view that the Assessing Officer has taken one plausible view on the issue by considering the explanation of the assesse, therefore, in our considered view, the PCIT, without giving any reasons as to how the assessment order passed by the Assessing Officer on the same issue is erroneous, cannot come to the conclusion that the assessment order is erroneous and prejudicial to the interest of the revenue. This is because, as per the provisions of section 263, PCIT needs to give reasons for coming to the conclusion that the assessment order passed by the Assessing Officer is erroneous, which caused prejudice to the interest of the Revenue. In the present case, the Ld.PCIT simply discussed the issue in light of financial statements filed by the assessee, however, not arrived at a definite conclusion, that because of non-verification of corporate guarantee, prejudice is caused to the interest of the Revenue. Therefore we are of the considered view that invocation of jurisdiction by the Ld.PCIT u/s 263 of the Act is incorrect. Directions issued by the DRP u/s 144C(5) - As per the provisions of section 144C(5), the DRP shall have powers to call for relevant information and also cause or make enquiry it deems fit and also to enhance the assessment. Since the DRP has issued directions u/s 144C(5) after carrying out necessary enquiries and called for information and has not observed anything on the issues questioned by the Ld.PCIT in his show cause notice u/s 263 of the Act, in our considered view, the allegation of the Ld.PCIT that the Assessing Officer has not carried out any enquiries, which he ought to have carried under the provisions of explanation 2 to section 263 of the Act is devoid of merit and cannot be accepted. Once the law does not permit the Assessing Officer to go beyond the directions of the DRP, in our considered view, the final assessment order passed by the Assessing Officer, in conformity with the DRP directions cannot be held to be erroneous on various issues, which is not considered by the DRP in their proceedings u/s 144C(5) of the Act. Therefore in our considered view, when the Assessing Officer could not have directly make any changes in the final assessment order after the directions of the DRP, then the PCIT cannot make any changes, so as to circumvent the provisions of section 144C(13) of the Act. Therefore, on this issue also Ld.PCIT erred in assuming jurisdiction u/s 263. Assessment order passed by the AO u/s 143(3) r.w.s.144C of the Act is neither erroneous nor prejudicial to the interest of the Revenue on all four issues discussed by the Ld.PCIT in his show cause notice - Appeal of assessee allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner may exercise revisionary jurisdiction under section 263 of the Income Tax Act where the assessment was completed by the Assessing Officer in conformity with directions of the Dispute Resolution Panel (DRP) under section 144C(5) and section 144C(13). 2. Whether the assessment order was 'erroneous in so far as it is prejudicial to the interest of the Revenue' within the meaning of section 263 on account of (a) allowance of impairment loss on assets debited to profit and loss account; (b) reduction of prior period income credited to profit and loss account; (c) exclusion of unrealized notional foreign exchange gain from taxable income; and (d) failure to examine and make a transfer pricing adjustment in respect of a corporate guarantee and non-reporting of the guarantee in Form 3CEB/related-party disclosures. 3. Whether the existence of divergent or debatable views on the taxability/benchmarking of corporate guarantees precludes exercise of section 263 jurisdiction where the Assessing Officer and the TPO/DRP have taken a plausible view after considering the records. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction of Principal Commissioner to invoke section 263 where assessment conforms to DRP directions (legal framework) Legal framework: Section 263 empowers the Commissioner to revise an assessment order if it is erroneous and prejudicial to Revenue. Sections 92CA, 144C(5) and 144C(13) govern transfer-pricing proceedings and DRP directions; section 144C(13) requires the Assessing Officer to complete assessment in conformity with DRP directions without further hearing to the assessee. Precedent treatment: The Tribunal reviewed authorities addressing the interplay between DRP-directed assessments and section 263; it cited and relied on precedents holding that an assessment completed pursuant to DRP directions limits the Assessing Officer's scope to make further enquiries and that PCIT cannot circumvent statutory limits by invoking section 263 where DRP has considered the matters. Interpretation and reasoning: The Court reasoned that when the DRP has exercised its powers under section 144C(5) - called for records, made enquiries and issued directions - the Assessing Officer completes the assessment pursuant to those directions under section 144C(13) and lacks authority to go beyond them. Consequently, the Commissioner, sitting alone, cannot validly revise an order under section 263 on issues that were subject to DRP scrutiny or that the Assessing Officer could not independently revisit after DRP directions. The Tribunal emphasized that invocation of section 263 requires the PCIT to show not only non-examination by the AO but that the erroneous order caused prejudice to Revenue; mere disagreement or re-examination where DRP has acted is insufficient. Ratio vs. Obiter: Ratio - where an assessment order is completed in conformity with DRP directions under sections 144C(5) & 144C(13), the PCIT cannot exercise section 263 to overturn the assessment on matters that were within DRP's remit, absent clear reasoned satisfaction that the AO failed to examine issues and such failure prejudiced Revenue. Obiter - broader commentary on separation of functions between DRP and PCIT. Conclusion: Section 263 jurisdiction was improperly invoked to revise an assessment that was finalised in conformity with DRP directions on the same issues; PCIT's order was quashed on jurisdictional grounds to the extent it sought to circumvent section 144C(13). Issue 2(a) - Deductibility of impairment loss debited to profit & loss account (legal framework) Legal framework: Taxability/deductibility of amounts in profit & loss account depends on nature (revenue v. capital) and whether AO has examined facts. Accounting standards permit recognition of impairment in financial statements. Precedent treatment: The Tribunal applied the principle that availability of records in the assessment file and disclosure in financial statements creates a presumption that the AO considered the issue; section 263 requires PCIT to demonstrate that the AO omitted necessary verification causing prejudice. Interpretation and reasoning: The Tribunal found the impairment entries and supporting notes were on record and that the AO had taken a plausible view; mere debit to P&L and subsequent disagreement by PCIT did not suffice to establish erroneous and prejudicial assessment. Absent specific findings that AO failed to examine the issue or that examination would have led to different tax liability, PCIT could not invoke section 263. Ratio vs. Obiter: Ratio - where accounting entries and explanations are on record and AO has taken a plausible view, PCIT must show positive failure to examine and resultant prejudice before invoking section 263. Obiter - discussion on accounting standards' role in tax treatment. Conclusion: PCIT erred in setting aside the assessment on this ground; AO's treatment of the impairment loss did not render the order erroneous and prejudicial within section 263. Issue 2(b) - Reduction of prior period income credited to profit & loss account (legal framework) Legal framework: Prior period adjustments require tax treatment according to nature and timing; AO's computation and reasons must be shown to be lacking for section 263 to be invoked. Precedent treatment: Tribunal accepted PCIT's acknowledgement that AO had considered the matter and taken a view; as such, PCIT should not have exercised section 263. Interpretation and reasoning: Because financial statements and computations explaining the reduction of prior period income were on record before the AO, and the AO had taken a view, the PCIT's setting aside of the order lacked the necessary demonstration of omission and prejudice required by section 263. Ratio vs. Obiter: Ratio - PCIT cannot set aside assessment under section 263 where AO has considered and taken a plausible view on prior period adjustments shown in records. Obiter - none. Conclusion: PCIT's revision on this ground was unwarranted; the AO's assessment was neither shown to be erroneous nor prejudicial. Issue 2(c) - Exclusion of unrealized notional foreign exchange gain (legal framework) Legal framework: Tax treatment of unrealized foreign exchange gains depends on accounting method and tax principles; where books explain treatment and AO has taken a view, section 263 requires demonstration of omission and prejudice. Precedent treatment: Tribunal relied on the same presumption of AO's consideration where the notes and computations were before the AO and the DRP process had occurred. Interpretation and reasoning: The Tribunal noted AO had those records and had taken a plausible view; the PCIT accepted that AO considered some issues and therefore should not revisit them under section 263 absent specific demonstration of prejudicial omission. Ratio vs. Obiter: Ratio - similar to prior points: absence of proof that AO failed to examine recorded explanations precludes exercise of section 263. Obiter - commentary on parity of exchange gains/losses treatment. Conclusion: Revision on account of notional foreign exchange gain was unwarranted. Issue 2(d) - Corporate guarantee: failure to examine, transfer pricing adjustment and non-reporting (legal framework) Legal framework: International transactions and associated disclosures under sections 92B/92D/92E and Form 3CEB may attract TP adjustments and penalties for non-reporting; but determination whether a corporate guarantee constitutes an international transaction can be debatable. Precedent treatment: The Tribunal recognized divergent judicial views on whether corporate guarantee arrangements constitute international transactions requiring benchmarking; where the issue is debatable and records including TP study were before the TPO/DRP, a plausible view by AO/TPO/DRP is sufficient to defeat section 263 intervention absent clear prejudice. Interpretation and reasoning: The Tribunal held that the corporate guarantee issue was highly debatable and that the assessee had furnished financials and TP study during TP proceedings. Given the TPO/DRP process and existence of plausible alternative views, the PCIT's mere application of a notional 2% commission (without demonstrating AO/TPO failed to consider the matter or that prejudice ensued) could not sustain a section 263 revision. The PCIT failed to explain how non-examination by AO caused prejudice; accordingly, section 263 could not be validly invoked. Ratio vs. Obiter: Ratio - where an issue (e.g., corporate guarantee benchmarking) is debatable and TP proceedings including TPO/DRP consideration occurred, PCIT must show clear omission and resulting prejudice to invoke section 263. Obiter - on appropriate rates/benchmarking methodologies. Conclusion: PCIT erred in quantifying a notional adjustment and invoking section 263; assessment could not be set aside on this ground. Cross-reference and overall conclusion Cross-reference: Issues 1 and 2(d) are closely linked - the statutory constraint imposed by sections 144C(5) and 144C(13) and the DRP process informed the Tribunal's conclusions on corporate guarantee and other contested items. The Tribunal repeatedly applied the principle that section 263 requires demonstrable omission and resultant prejudice, not mere difference of opinion. Overall conclusion: The Tribunal quashed the revisionary order under section 263 and held that the assessment order completed under section 143(3) read with section 144C was neither erroneous nor prejudicial to Revenue on the questioned issues; accordingly the appeal was allowed.