PCIT Cannot Revise Assessment Over Alleged Illegal Commission Expenditure Deduction Which Taxpayer Never Claimed: ITAT [Read Order]

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) quashed a revisionary order passed under Section 263 of the Income Tax Act after finding that Khoday India Limited had not claimed the alleged commission expenditure which the Principal Commissioner of Income Tax (PCIT) sought to disallow.

Khody India Limited filed the appeal against the order of the PCIT, Central, Bengaluru, for Assessment Year 2020-21. The PCIT had held that the assessment order passed under Section 153A was erroneous and prejudicial to the interests of the Revenue.

The taxpayer had filed its original return declaring a loss of Rs. 3,06,22,529. A search under Section 132 was conducted on February 9, 2021. Later, assessment under Section 153A was completed on March 31, 2023 by making an addition of Rs. 7,27,023.

The PCIT formed a view that the taxpayer had paid Rs. 18,84,425 as commission expenditure. According to the PCIT, the payment was illegal in nature and was not allowable under Section 37. The PCIT held that the AO had failed to examine the issue during assessment.

The assessee’s counsel argued that it had not claimed any such commission expenditure for Financial Year 2019-20. They also argued that the PCIT had not provided complete material or the basis for treating the alleged payment as illegal. The taxpayer further submitted that it had no transaction with the persons named in the show cause notice.

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The revenue counsel argued that information was found during search in the case of Tuteja, Bhatia and Dhand group. They submitted that the information was forwarded to the AO and the Section 263 proceedings were initiated on that basis.

The two-member bench comprising Prashant Maharishi (Vice-President) and Keshav Dubey (Judicial Member) observed that the main issue was whether the taxpayer had claimed the alleged expenditure at all.

The tribunal observed that the taxpayer had produced financial statements to show that no such commission expenditure was claimed. It further observed that neither the PCIT nor the Departmental Representative showed that the alleged expenditure was allowed as deduction.

The tribunal held that when the expenditure itself was not claimed, the assessment order could not be treated as erroneous and prejudicial to the interests of the Revenue on the ground that the AO allowed the deduction without verification.

The tribunal quashed the Section 263 order and allowed the taxpayer’s appeal.

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