TaxTMI 
TaxTMI 
2018 (8) TMI 916
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....n 36(1)( ii) of the Income Tax Act, 1961 ("Act") and thereby making the disallowance of Rs. 5, 95, 42, 980/-. 2.1. The Learned Principal Commissioner of Income Tax failed to appreciate the fact that the provisions of sec. 36(1 )(ii) are not applicable in the case of the appellant. 2.2. The Learned Principal Commissioner of Income Tax failed to understand that the director was entitled to receive commission for services rendered to the company in terms of the board resolution. 2.3. The learned Principal Commissioner of Income Tax erred in law and fact by treating bonus as a colorable device to evade tax. 2.4. We rely on the decision of the Hon'ble High Court of Delhi in the case of AMD Metplast (P.) Ltd. v/s Deputy Commissioner of Income Tax (2012) 20 taxmann.com 647 (Delhi) and list the following points - 2.4.1 The director was entitled to performance bonus for services rendered to the company in terms of the board resolution. 2.4.2 There was a contractual arrangement between the appellant company and the director for the payment of performance bonus. 2.4.3 Performance bonus was treated as a part and parcel of the salary and....
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....one of the directors so as to reduce tax liability. The AO, without appreciating these facts, simply disallowed certain portion of performance bonus u/s 40A(2), therefore, the PCIT opined that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue. 3. In response to the show cause notice, the assessee, vide its letter dated 20-03-2017, filed a detailed submission before the PCIT alongwith certain judicial precedents. The detailed submissions filed by the assessee has been reproduced at para 4 on pages 2 to 8 of PCIT's order. The sum and substance of the arguments of the assessee before the PCIT are that the order passed by the AO u/s 143(3) is neither erroneous nor prejudicial to the interest of the revenue as the AO has caused necessary enquiries with regard to the payment of performance bonus to the director, Shri Dilip Raghavan, by issue of various show cause notices for which the assessee has filed detailed reply alongwith necessary evidences including copy of Board Resolution authorizing payment of performance bonus, duties and responsibilities carried out by the director for the company and necessity of payment of bon....
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....nus or commission. In this case, the assessee even though has earned huge profits, not chosen to declare dividend, has paid more than 75% of profit to one of the directors as performance bonus to avoid payment of taxes, therefore, opined that the assessment order passed by the AO was erroneous insofar as it is prejudicial to the interest of the revenue in terms of section 263 of the Act, and accordingly set aside the assessment order passed by the AO u/s 143(3) dated 26-02-2015 and directed the AO to pass the order once again after giving opportunity of hearing to the assessee. The AO was directed to further examine the issue and any other issues and assess the total income of the assessee. Aggrieved by the order of PCIT, assessee is in appeal before us. 5. The Ld.AR for the assessee submitted that the assessment order passed by the AO u/s 143(3) of the Act, dated 26-02-2015 is neither erroneous nor prejudicial to the interest of the revenue insofar as the issue of payment of performance bonus to director, Shri Dilip Raghavan is concerned, as the AO has verified the issue of payment of performance bonus at the time of assessment proceedings and after considering relevant facts a....
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....onus to the director of the company in the light of provisions of section 36(1)(ii) of the Act, where it was prohibited payment of bonus or commission to employees of the company for services rendered, where such sum would not have been payable to him as profits or dividend, if he had not been paid as bonus or commission. The AO, without appreciating the facts in the light of provisions of section 36(1)(ii) simply allowed performance bonus by disallowing partial amount u/s 40A(2) which caused prejudice to the interest of the revenue and hence, the PCIT has rightly invoked the jurisdiction u/s 263 of the Act, to revise the assessment order passed by the AO and his order should be upheld. 7. We have heard both the parties and perused the materials available on record. The PCIT assumed jurisdiction u/s 263 and set aside the assessment order passed by the AO u/s 143(3) dated 26-02-2015 on the ground that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue. The PCIT assumed jurisdiction on the ground that the AO has not conducted required enquiries and also not applied his mind in respect of payment of performance bonus to di....
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....ssessment order. The AO has discussed the issue of payment of performance bonus to the director in his assessment order and applied the provisions of section 40A(2) to disallow excess amount of Rs. 4, 57, 020. The PCIT is only on the point that the enquiries conducted by the AO is inadequate and he applied wrong provisions of the Act, which caused prejudice to the interest of the revenue. In these factual circumstances, if we analysis the case of the assessee in the light of provisions of section 263, whether the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue, needs to be ascertained. 9. The language used by the legislature in section 263 is to the effect that the CIT may interfere in revision, if he considers that the order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue. It is quite clear that two conditions must co-exist in order to give jurisdiction to the CIT to interfere in revision. The order of the AO in question must not only be erroneous but also it must be prejudicial to the interest of the revenue. In other words, merely because the assessment order is erroneous, the....
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....on, the AO did not make an elaborate discussion in this regard. 11. In this legal background, if we examine the facts of the case of the assessee, it is abundantly clear that the AO has called for necessary evidences in support of payment of performance bonus by issuing show cause notice during assessment proceedings. The assessee, in reply to such show cause notice, filed various details including copy of Board Resolution authorizing payment of performance bonus and also necessity for payment of such bonus to the director. The assessee also explained the provisions of section 36(1)(ii) by way of a letter dated 20- 11-2014 were he explained to the AO why the provisions of section 36(1) could not be invoked in this case. The AO, on being satisfied with the explanation furnished by the assessee, has applied the provisions of section 40A(2) to disallow excess performance bonus paid to the director of the company which is evident from the assessment order passed by the AO where at para 6 of the order, the AO has elaborately discussed the issue of payment of performance bonus to the director. Once the AO has called for necessary enquiries and applied his mind to a particular provisio....
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.... case held that if order of the AO is erroneous, but does not prejudice the interest of the revenue or if it is not erroneous but is prejudicial to the interest of the revenue, recourse cannot be taken u/s 263 of the Income-tax Act, 1961. The relevant portion of the order is extracted below:- "A bare reading of section 263(1) makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (\) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to section 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumpt....
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....ordance with la\v makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous, Cases may be visualised where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left lo the Commissioner he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the Commissioner with power to re-exmine the accounts and determine the income himself at a higher figure, it is because the ITO has exercised the quasi-judicial power vested in him in accordance with law' and arrived at a conclusion and such a conclusion cannot be termed la be erroneous....
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....lf, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter. That was not permissible. Hence, the provisions of section 263 were not applicable to the instant case and. therefore, the Commissioner was not justified in setting aside the assessment order." 15. The assessee has also relied upon the decision of Hon'ble Gujarat High Court in the case of CIT vs Arvind Jewellers (supra). The Hon'ble Gujarat High Court, in the said case, has observed as under:- "A bare reading of section 263(1)makes it clear that the provisions of section 263 cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous, that section will be attracted and incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the instant case, it was the finding of fact given by the Tribunal that the assessee had produced relevant m....
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....ted by the AO. (vii) The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion, (viii) The CIT, before exercising his jurisdiction under s. 263, must have material on record to arrive at a satisfaction, (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard. A reference to the Mumbai, Tribunal decision in the case of Girdharilal B. Rohra (supra) may also be fruitful and the ratio of this case is as under (reproduced from the headnote) : "It is now well settled position of law that in order to assume jurisdiction under s. 263, the CIT must satisfy himself prima facie that the order of the AO is erroneous and prejudicial to the interests of Revenue. Such satisf....