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of <h1>ITAT Upholds Section 263 Revision but Corrects Section 80G Donation Deduction Limit</h1> <h3>Condor Footwear (India) Limited Versus The PCIT – 1, Surat</h3> Condor Footwear (India) Limited Versus The PCIT – 1, Surat - TMI 1. ISSUES PRESENTED and CONSIDERED Whether the Principal Commissioner of Income Tax (PCIT) rightly exercised jurisdiction under section 263 of the Income-tax Act, 1961 to revise the assessment order. Whether the order passed by the Assessing Officer (AO) under section 143(3) read with section 144B was erroneous and prejudicial to the interests of revenue. Whether the PCIT violated principles of natural justice by not specifying grounds in the show cause notice issued under section 263. Whether the PCIT's action amounted to mere change of opinion rather than valid revision under section 263. Whether the AO properly verified and inquired into the claims of deduction under section 80G and disallowance under section 36(1)(va) relating to donations and late payment of employees' contributions respectively. Whether the cancellation of registration of a donee trust under section 12A affects the allowability of deduction claimed under section 80G. Whether late payment of employees' contribution to Provident Fund and ESI is allowable as deduction under section 36(1)(va). Whether the PCIT correctly quantified the disallowance and directed reassessment accordingly. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Jurisdiction and Validity of Revision Proceedings under Section 263 Relevant Legal Framework and Precedents: Section 263 empowers the Principal Commissioner or Commissioner to revise an order passed by the AO if it is found to be erroneous and prejudicial to the interests of revenue. Jurisdiction under section 263 is to be exercised sparingly and only when both conditions (error and prejudice) are satisfied. The revision order must specify grounds and comply with principles of natural justice. Court's Interpretation and Reasoning: The PCIT initiated revision proceedings after examining the assessment order and records. The PCIT identified that the AO failed to verify critical claims and allowed deductions without proper application of mind. The PCIT issued a show cause notice specifying the grounds for revision, including erroneous allowance of deduction under section 80G and disallowance under section 36(1)(va). Treatment of Competing Arguments: The assessee contended that the PCIT did not mention grounds in the show cause notice, violating natural justice, and that the revision was a mere change of opinion. The Tribunal found that the grounds were adequately communicated and that the revision was based on substantive errors, not mere opinion change. Conclusions: The PCIT rightly assumed jurisdiction under section 263. The revision proceedings complied with principles of natural justice, and the order under section 263 is valid. Issue 2: Erroneous and Prejudicial Nature of the AO's Order Relevant Legal Framework and Precedents: An order is erroneous if it is based on incorrect facts or law, and prejudicial if it results in loss of revenue. The Supreme Court has held that both conditions must be cumulatively satisfied for revision under section 263. Key Evidence and Findings: The PCIT observed that the AO allowed deduction under section 80G for donations to a trust whose registration under section 12A was cancelled since 2004, rendering such deduction impermissible. Further, the AO did not disallow expenses related to late payment of employees' contributions to Provident Fund and ESI, which is disallowable under section 36(1)(va) as per binding Supreme Court precedent. Application of Law to Facts: The AO's failure to disallow deductions in these respects resulted in under-assessment of income and consequent short levy of tax. The PCIT's finding that the order was erroneous and prejudicial to revenue was upheld. Treatment of Competing Arguments: The assessee accepted the disallowance of donations to the unregistered trust and addition for late payment of PF/ESI contributions, thereby conceding the error and prejudice. Conclusions: The AO's order was erroneous and prejudicial to the interests of revenue, justifying revision under section 263. Issue 3: Verification and Inquiry by the AO Regarding Donations and Late Payment of Employees' Contributions Relevant Legal Framework and Precedents: Deduction under section 80G is allowable only for donations to eligible entities with valid registration under section 12A and 80G. Late payment of employees' contributions to PF/ESI is disallowable under section 36(1)(va) as per Supreme Court authority. Key Evidence and Findings: The AO did not verify the validity of the donee trust's registration status and allowed deduction for donations to a trust whose registration was cancelled. The AO also failed to disallow expenses related to late payment of employees' contributions. Application of Law to Facts: The PCIT found that the AO did not apply mind or verify facts properly, resulting in erroneous allowance of deductions. Treatment of Competing Arguments: The assessee admitted the correctness of PCIT's observations and agreed to rectify the claims accordingly. Conclusions: The AO's lack of proper verification and inquiry rendered the assessment order erroneous. Issue 4: Quantification and Extent of Disallowance under Section 80G Relevant Legal Framework: Deduction under section 80G(4) is limited to 10% of gross total income for donations eligible under the Act. The assessee claimed deduction both on 50% of total donation amount and limited to 10% of gross total income. Key Evidence and Findings: The PCIT's order incorrectly quantified the disallowance as Rs. 25,00,000/- (50% of total donations), whereas the assessee's claim was Rs. 12,68,250/- (10% of gross total income). After excluding donations to the unregistered trust, the eligible donation amount was Rs. 5,86,000/- (50% of remaining donations). Application of Law to Facts: The Tribunal directed the PCIT to modify the order to restrict the deduction to Rs. 5,86,000/- instead of the higher amount disallowed by PCIT. Conclusions: The quantification of disallowance under section 80G requires correction; the deduction shall be limited to Rs. 5,86,000/- after excluding donations to the unregistered trust. Issue 5: Late Payment of Employees' Contribution to Provident Fund and ESI Relevant Legal Framework and Precedents: Section 36(1)(va) disallows deduction for amounts payable as employees' contribution to PF/ESI if not paid within prescribed time. The Supreme Court has held that timely deposit is mandatory for deduction. Key Evidence and Findings: The assessee admitted late payment of Rs. 8,79,551/- and agreed to disallow deduction accordingly. Application of Law to Facts: The PCIT's direction to disallow late payment was justified and accepted by the assessee. Conclusions: Late payment disallowance under section 36(1)(va) is valid and upheld. Issue 6: Whether the Revision Proceedings Amounted to Mere Change of Opinion Relevant Legal Framework and Precedents: Revision under section 263 cannot be based on mere change of opinion; it requires the order to be erroneous and prejudicial. Court's Interpretation and Reasoning: The PCIT's revision was based on factual and legal errors identified in the AO's order, including failure to verify registration status and non-application of binding judicial precedents. Treatment of Competing Arguments: The assessee's contention of mere change of opinion was rejected as the errors were substantive and admitted. Conclusions: The revision was not a mere change of opinion but a valid exercise of power under section 263. Issue 7: Compliance with Principles of Natural Justice in Revision Proceedings Relevant Legal Framework: Revision proceedings require issuance of show cause notice specifying grounds and opportunity to be heard. Key Evidence and Findings: The PCIT issued a detailed show cause notice specifying grounds of revision. The assessee filed reply and participated in proceedings. Conclusions: No violation of principles of natural justice occurred; proceedings were fair and proper. Issue 8: Scope of Direction to AO for Fresh Assessment Court's Interpretation and Reasoning: The PCIT set aside the assessment order directing AO to reassess after considering disallowance of donations to unregistered trust and late payment of employees' contributions. Conclusions: The direction is valid and necessary to rectify errors prejudicial to revenue.
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