2021 (12) TMI 1534 - AT - Income Tax

Revision under Section 263 quashed; discounts for business exigency held allowable under Section 36, appeal allowed

ITAT Chennai (AT) held that the PCIT erred in setting aside the assessment under section 263. The tribunal found the AO had considered the explanations on ... Revision u/s 263 - Petrol and Diesel has to be sold at the rate per litre fixed by the Govt. Of India/Oil Companies and therefore, the discount is not allowable and it cannot be stated to earn income as per the provisions u/s 36 - HELD THAT:- By filing copy of the explanations offered against question No. 4 and 5, assessee has submitted that after considering the above explanations of the assessee and making due enquires in respect of discounts to members as well as non-members, the AO has completed the assessment. Therefore, the assessment order passed by the AO cannot be said that it is neither erroneous nor prejudicial to the interest of the Revenue. That apart, the discount given to the members particularly for the business purposes and therefore, it cannot be said that the discount is not allowable u/s 36 of the Act. In this case, due to business exigency, the assessee wanted to reduce its profit by making more turnovers by giving discounts to the members. Therefore, it is a business decision of the assessee for the purpose of its business. We are of the opinion that the PCIT was not correct in setting aside the assessment order passed by the AO. Thus, the revision order passed under section 263 of the Act directing the AO to complete the assessment afresh stands quashed. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the revisionary power under section 263 of the Income Tax Act can be validly exercised on the ground that discounts paid by an assessee to member-customers are not allowable under section 36 as business expenditure, when the Assessing Officer had issued specific queries, received explanations and completed assessment accepting the return. 2. Whether the assessment order can be held to be 'erroneous and prejudicial to the interests of Revenue' under section 263 for not disallowing discounts given to member-customers where the discounts were shown to be for commercial/business purposes to increase turnover. 3. Whether the Assessing Officer made proper enquiry in the course of assessment proceedings with respect to discounts to members and non-members such that the revision under section 263 was unwarranted. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exercise of power under section 263 when AO had made enquiries and accepted explanations Legal framework: Section 263 authorizes revision of an assessment if the assessment order is found to be erroneous and prejudicial to the interests of Revenue. The power is to be exercised only when the order is demonstrated to be both erroneous and prejudicial, and not where the Assessing Officer has made enquiries and reached a considered conclusion. Precedent Treatment: No specific judicial precedent is cited in the judgment; the Tribunal's reasoning is grounded on principles of conditioning exercise of s.263 on existence of error and prejudice after due enquiry by the Assessing Officer. Interpretation and reasoning: The Tribunal notes that the Assessing Officer issued a notice with specific questions regarding discounts to members and non-members, received the assessee's detailed explanations and documents (letter dated 09.07.2015), and thereafter completed assessment under section 143(3) accepting the return. Given these enquiries and the record of response, the Tribunal reasons that the Assessing Officer had made due enquiries and formed a view. The revision under section 263 therefore lacked foundation because it attempted to substitute the PCIT's view for the considered conclusion of the Assessing Officer where no jurisdictional defect or failure of enquiry was shown. Ratio vs. Obiter: Ratio - where the Assessing Officer, after issuing specific queries and receiving explanations, completes assessment accepting those explanations, the revisionary power under section 263 should not be invoked absent clear error or prejudice. Conclusion: The exercise of revisionary power under section 263 was not valid in the facts because the Assessing Officer had conducted enquiries and accepted explanations; accordingly the revision order was quashed on this ground. Issue 2 - Allowability under section 36 of discounts given to member-customers as business expenditure Legal framework: Section 36 recognizes deductions for amounts expended wholly and exclusively for the purposes of the business. Discounts or concessions that are business-driven to promote sales and increase turnover are ordinarily considered business expenditure if established as such. Precedent Treatment: The judgment does not invoke or distinguish specific authorities; the treatment follows general tax law principles distinguishing business expenditure from non-allowable personal or capital payments. Interpretation and reasoning: The Tribunal accepts the assessee's explanation that discounts to member-customers were given as a commercial/business strategy to increase turnover and were not in the nature of special income payable to members or amounts not expended for business purposes. The AO had sought and examined details regarding the discounts and, upon being satisfied, allowed the return. The Tribunal finds no basis to conclude that discounts were outside the ambit of section 36 or were contrary to prescribed selling prices, where the discounts formed part of the ordinary business conduct to promote sales. Ratio vs. Obiter: Ratio - where discounts are shown to be given as a business expedient to increase turnover and are substantiated in the assessment proceedings, they are allowable under section 36; absence of contrary material means disallowance should not be imposed in revision under section 263. Conclusion: The discounts to member-customers were business expenditures allowable under section 36, and therefore the revision to add back such discounts was unwarranted. Issue 3 - Sufficiency of AO's enquiry regarding discounts to members and non-members Legal framework: For revision under section 263 to be sustained on the ground of inadequate enquiry, the revising authority must demonstrate that the Assessing Officer failed to make relevant enquiries or ignored material facts rendering the assessment per se erroneous. Precedent Treatment: No prior rulings are cited; the Tribunal applies the settled administrative law principle that absence of enquiry must be shown, not presumed, to justify revision. Interpretation and reasoning: The Tribunal examines the record showing issuance of specific questionnaire items (dated 12.06.2015) and the assessee's written responses (09.07.2015) addressing discounts to non-members, contractors and member-customers, including member-wise details. The AO's acceptance of those explanations in the assessment order indicates that enquiries were made and the facts considered. The Tribunal finds the PCIT's assertion of inadequate enquiry unsupported by the record; hence the prerequisite for invoking s.263 (failure of enquiry) is not established. Ratio vs. Obiter: Ratio - where the Assessing Officer issues specific queries, receives detailed responses and records consideration in the assessment order, a revisional authority cannot legitimately set aside the assessment on the ground of inadequate enquiry without demonstrable omission or error. Conclusion: The Assessing Officer's enquiries were sufficient; the PCIT's conclusion that the AO had not made proper enquiries is not borne out by the record, and therefore the revision under section 263 was unjustified. Overall Conclusion of the Court The Tribunal concludes that the revision order issued under section 263 was unsustainable on two principal grounds: (a) the Assessing Officer had made specific enquiries, considered the assessee's explanations and completed assessment accordingly; and (b) the discounts given to member-customers were business expenditures allowable under section 36 as commercial measures to increase turnover. Consequently, the revision order was quashed and the appeal allowed.