2025 (11) TMI 1382 - AT - Income Tax

Section 263 revision quashed; salary to partner under section 40(b) upheld despite typographical error in partnership deed

ITAT Chandigarh allowed the assessee-firm's appeal and quashed the order passed u/s 263. The dispute concerned disallowance of salary paid to one partner ... Revision u/s 263 - payment of salary to Shri Sorav Jainheld to be not allowable u/s 40(b) as twin conditions of Section 40(b) of the Act are not fulfilled/satisfied in his case (he is a non-working partner) - HELD THAT:- In our opinion, CIT has misconstrued the Partnership Deed. There was a minor typographical error but salary has been mentioned specifically against the name of the partner who will be entitled for that and if this minor ambiguity is being appreciated, then view ought to be taken in favour of the assessee i.e. in the manner in which assessee has given benefit of this Deed in its accounts. It is not an item which has really caused any prejudice to the interests of Revenue. AO has appreciated this Deed and accepted its interpretation according to the way assessee has interpreted it. The ld. CIT has committed an error by branding the assessment order as erroneous in such a minor issue. Therefore, we allow the appeal of the assessee and quash the impugned order passed u/s 263 of the Income Tax Act. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal should condone a 1,196-day delay in filing the appeal under Section 253(5) on the ground of 'sufficient cause'. 2. Whether the order passed under Section 263 holding that salary paid to one partner is not allowable under Section 40(b) because he is a 'non-working partner' is a valid exercise of revisional jurisdiction where the Partnership Deed contains a typographical ambiguity. 3. Whether the alleged ambiguity in the Partnership Deed resulted in any prejudice to the revenue such that the assessment order can be held 'erroneous and prejudicial' within the meaning of Section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of delay under Section 253(5) ('sufficient cause') Legal framework: Section 253(5) permits the Tribunal to admit an appeal after the expiry of the prescribed period if satisfied that there was a 'sufficient cause' for delay. The expression 'sufficient cause' is to be construed liberally, consistent with authorities interpreting identical language in Section 5 of the Limitation Act and Section 249(3) of the Income-tax Act. Precedent treatment: The Tribunal relied on well-established principles from higher courts (including the tests and observations in Collector Land Acquisition v. Mst. Katiji and N. Balakrishnan v. M. Krishnamurthy) that (i) rules of limitation are to be applied pragmatically, (ii) delay is not to be presumed deliberate or mala fide, (iii) courts should prefer substantial justice over technical disqualification, and (iv) explanation of each day's delay need not be pedantic. Interpretation and reasoning: The assessee explained the delay as a bona fide misconception stemming from an incorrect understanding (by the assessee and its tax consultant) of the effect of the Section 263 order - namely, the belief that the assessing officer would re-adjudicate the salary issue in assessment proceedings, with the assessee intending to challenge any adverse AO decision. The Tribunal found no deliberate or dilatory conduct, noted prosecution of related litigation at each stage, and held the explanation did not smack of mala fides. Ratio vs. Obiter: Ratio - the Tribunal applied the liberal construction of 'sufficient cause' to condone delay where bona fide mistake and absence of mala fides were established. Obiter - general observations reiterating principles from cited authorities about limitation and substantial justice. Conclusion: Delay of 1,196 days in filing the appeal was condoned; appeal admitted for adjudication on merits. Issue 2 - Validity of Section 263 order disallowing partner salary where Partnership Deed contains a typographical ambiguity Legal framework: Section 40(b) prescribes conditions for allowance of remuneration to partners; Section 263 empowers the Commissioner to revise an assessment if it is 'erroneous and prejudicial to the interests of the revenue.' The proper interpretation of the Partnership Deed is central to determining entitlement under Section 40(b). Precedent treatment: The Tribunal applied principles of contract/deed interpretation and administrative review: minor ambiguities or typographical errors in documents should, where reasonable, be construed in a manner favourable to the assessee if the assessee's interpretation was consistently acted upon and accepted by the Assessing Officer, and where no real prejudice to revenue results. No contrary precedent was treated as requiring a different result. Interpretation and reasoning: The Tribunal examined the Partnership Deed and noted a drafting/typographical inconsistency between the recital of partners and clause defining 'working partners' entitled to salary. The Deed, as used by the assessee in accounts, specifically showed salary amounts against individual partner names (including the partner whose salary the CIT disallowed). The AO had accepted the assessee's interpretation in the assessment and computed income accordingly. The Tribunal held that the CIT misconstrued the Deed by treating a minor ambiguity as a ground to brand the assessment order 'erroneous' - a conclusion unjustified because (i) the ambiguity was minor/typographical, (ii) the assessee's interpretation was clear from the Deed and accounts, and (iii) no substantive prejudice to revenue was demonstrated. Ratio vs. Obiter: Ratio - a Section 263 revision cannot be sustained where the purported 'error' rests on a reasonable alternative interpretation of a deed reflecting a bona fide, minor typographical ambiguity, particularly where the AO accepted the assessee's construction and no prejudice to revenue ensues. Obiter - statements on general approach to resolving minor drafting inconsistencies in deeds in tax assessments. Conclusion: The Section 263 order disallowing salary to the partner was quashed; the salary as claimed remained allowable under Section 40(b) as per the assessee's interpretation accepted by the AO. Issue 3 - Whether the alleged ambiguity caused prejudice to revenue sufficient to invoke Section 263 Legal framework: Section 263 requires the Commissioner to be satisfied that the assessment is both erroneous and prejudicial to the interests of the revenue. Mere possibility of alternative interpretation of documents is insufficient; actual prejudice must be demonstrable. Precedent treatment: The Tribunal referred to the standard that revisionary powers should not be exercised on slender or technical grounds where no real injury to revenue is shown, and that assessments accepted by the AO on a reasonable interpretation should not be lightly disturbed. Interpretation and reasoning: The Tribunal found no material demonstrating that the typographical ambiguity altered the tax computation or caused loss to revenue. The AO had considered and accepted the assessee's interpretation and allowed the salary in the assessment. The CIT's conclusion was based on a strained reading of the Deed rather than any quantifiable prejudice. Ratio vs. Obiter: Ratio - absence of demonstrated prejudice to revenue defeats exercise of power under Section 263; where AO has adopted a reasonable interpretation of a document and computed tax accordingly, mere alternative readings do not render the assessment 'erroneous and prejudicial.' Obiter - emphasis on restraint in use of revisional jurisdiction for minor drafting errors. Conclusion: The requisites for exercise of Section 263 jurisdiction (error and prejudice) were not met; the revisional order was correctly quashed. Cross-references and final disposition Cross-reference: Issue 1 (condonation) permitted the Tribunal to examine Issues 2-3 on merits. The Tribunal's application of liberal construction of 'sufficient cause' (Issue 1) aligns with preferring substantial justice, which underpinned the decision to quash the Section 263 order (Issue 2 & 3). Final conclusion: Delay condoned; Section 263 order held unsustainable on merits because of a minor typographical ambiguity in the Partnership Deed that did not prejudice revenue; the assessment order stands as per the AO's acceptance and the claimed partner salary is allowable under Section 40(b).