ITAT’S Disallowance on Erroneous Assumption: Kerala HC Sets Aside ITAT Order in Malabar Regional Co-op Milk Producers Union Ltd's Appeal [Read Order]

The Division Bench of the Kerala High Court has set aside an order of the Income Tax Appellate Tribunal (ITAT), observing that the Tribunal misdirected itself in proceeding on a wrong assumption that the Assessing Officer had not examined the allowability of either of the two expenditures, when the order of the Principal Commissioner was explicitly in favour of the assessee on one of them.

The Division Bench of Justice Devan Ramachandran and Justice Basant Balaji held that the ITAT failed to grasp the exact features of the order given by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act.

The controversy began when PCIT initiated revision proceedings under Section 263 of the Income Tax Act for Assessment Year 2018-19 objecting to two amounts of expenditure submitted by the assessee. The PCIT ultimately passed an order in favour of assessee for Rs. 1,57,94,958/-. As far as the second number i.e. in respect of 'performance allowance' is concerned, the PCIT remanded the issue to the Assessing Officer for reconsideration.

Aggrieved, the assessee filed the ITAT with the specific plea that the expenditure was not prohibited or illegal under the Income Tax Act, the expenditure having been obtained with the approval of the Government as back as on 31.01.2019 and such approval having been passed for the expenditure in the internal management of the assessee.

However, the ITAT erred in holding that the Assessing Officer has not considered the allowability of either of the two clauses but proceeded on the wrong assumption. The PCIT had determined one aspect in favour of assessee, but the ITAT ignored this and dismissed the appeal of the assessee in its entirety.

The Senior Standing Counsel for the Revenue, Sri.Harikumar, fairly conceded this factual situation. He agreed with the Senior Counsel for the assessee, Anil D. Nair that the order of the PCIT clearly differentiated between the two amounts.

The High Court observed that there was no doubt that the ITAT had not given due consideration to the specific allegation of the assessee in relation to the government ratification. The Court held that the ITAT had erred in law and facts and accepted the appeal and set aside the impugned decree.

The matter was remanded to ITAT for fresh adjudication with the direction that ITAT will specifically consider the ruling passed by PCIT and the arguments raised by the assessee including the impact of government sanction. The Court directed the ITAT to pass a fresh order within six months and kept all questions of law and rival contentions open to be decided on merits by the Tribunal.

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