ITAT quashes PCIT Directions on TDS under Section 194J and Closing Stock Valuation [Read Order]

In partial relief to an assessee, the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has quashed two major directions issued by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act.

The Tribunal held that the PCIT overstepped jurisdiction in ordering further verification on Tax Deducted at Source (TDS) under Section 194J of the Income Tax Act and valuation of closing stock under the Percentage Completion Method (PCM), without first establishing that the original assessment was erroneous or prejudicial to revenue.

The case stems from the PCIT’s revisionary action against the assessment order for AY 2018–19 passed under Section 143(3) by the National e-Assessment Centre. The PCIT had flagged multiple issues, including non-deduction of TDS on rent and professional services, undervaluation of closing stock, and inadequate verification of unsecured loans. While ITAT upheld some of the PCIT’s concerns, it set aside findings related to Section 194J and closing stock valuation.

Addressing the TDS under Section 194J, the PCIT alleged that the assessee had made payments of ₹22.02 lakh towards professional and technical services, but deducted TDS only on ₹17.34 lakh. The assessee contested this, providing audited financial statements showing the actual expenditure was ₹17.79 lakh and pointing out that the Assessing Officer (AO) had already disallowed ₹9,750 under Section 40(a)(ia) during scrutiny for failure to deduct TDS on a small component.

The tribunal held that the issue was already examined and addressed by the AO and that the PCIT had failed to demonstrate any error in the AO's action. The Tribunal ruled that the PCIT cannot merely refer a matter for verification without establishing prima facie error and prejudice, and accordingly struck down the direction.

On the issue of closing stock valuation, the PCIT alleged that the assessee had undervalued work-in-progress by ₹5.62 crore by not adhering to Income Computation and Disclosure Standards (ICDS). The assessee responded by stating that it had followed the prescribed Guidance Note for real estate accounting and provided detailed workings based on costs incurred till the correct cut-off date of March 31, 2018. The ITAT found that the PCIT had failed to counter or analyze the explanation offered by the assessee and did not substantiate how the valuation method violated ICDS. In the absence of demonstrated error, the Tribunal concluded that the PCIT’s directions were unsustainable in law.

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