A consistent view taken by AO can’t be held erroneous and prejudicial to interest of revenue – ITAT
In a recent judgment, the ITAT Ahmedabad has held that a consistent view taken by AO can’t be held erroneous and prejudicial to interest of revenue.
ABCAUS Case Law Citation:
ABCAUS 4098 (2024) (06) ITAT
Important Case Laws relied upon:
Mafatbhai Bhikhabhai Parmar Vs. PCIT and others
In the instant case, the assessee had challenged the order passed by the Principal Commissioner of Income Tax (PCIT) in exercise of his revisionary powers under Section 263 of the Income Tax Act, 1961 (the Act).
The assessee was engaged in the business of trading of its pharmaceutical products. The assessee had filed the return of income declaring loss. In the course of assessment, the Assessing Officer made addition towards 10% of marketing expenses, i.e. expenditure incurred for distribution of gifts, bags and other articles to distributors, stockists, chemists, including doctors etc.
The assessment records were subsequently called for by the PCIT, wherein he noticed that the Assessing Officer had disallowed only 10% of the expenditure incurred for distribution of gifts, bags and other articles.
According to PCIT, the expenditure in the nature of gifts was required to be disallowed at 100% of such expenses. He, therefore, found that the order of the Assessing Officer was erroneous and prejudicial to the interest of the Revenue and, accordingly, he passed order u/s 263 of the Act setting aside the order of the Assessing Officer for passing a fresh order.
Before the Tribunal the assessee submitted that those gift item were required in order to promote and market its products and the Assessing Officer already examined it during the course of assessment.
It was further submitted that when the Assessing Officer has taken one view, it was not open for the PCIT to substitute his view on the stand already taken by the Assessing Officer in the course of assessment proceedings.
He further submitted that the revision order u/s 263 of the Act was passed by the PCIT on the basis of an audit objection and there was no independent application of mind by the PCIT. He also submitted that the entire marketing expenditure was not incurred on distribution of gifts to the doctors alone and, therefore, the contention of the PCIT that the entire expenses should have been disallowed was not correct.
The Tribunal observed that no cogent reason was given by the PCIT as to why the entire marketing expenses were required to be disallowed. The PCIT had formed his opinion and given the direction to the Assessing Officer to disallow the entire expenses on the presumption that the entire marketing expenses was in the nature of gifts distributed to doctors. However, no material had been brought on record to establish that the entire gifts were given to the doctors.
The Tribunal observed that undisputedly, as settled by the Hon’ble Supreme Court gifts to the doctors are now prohibited and liable to be disallowed u/s 37(1) of the Act. However, before giving the direction to disallow the entire marketing expenses, no material had been brought on record to establish that the entire marketing expenses in respect of distribution of gifts, bags, other articles etc. was given to doctors only.
The Tribunal opined that considering the fact that some component of marketing expenses was utilized towards giving gifts to doctors, the Assessing Officer had taken a reasoned decision to disallow only 10% of the expenditure following the identical disallowance made in the earlier years.
The Tribunal noted that there was no material to conclude that the entire marketing expenses was in the nature of gifts to doctors. In the course of the proceedings u/s 263 of the Act also, no such material had been brought on record.
The Tribunal observed that s per provisions of Section 263 of the Act, the PCIT is empowered to cause such inquiry as he deems necessary. However, no such inquiry was caused by the PCIT to establish that the entire marketing expenses was in the nature of gifts to doctors. In the absence of any such evidence on record, there was no basis for the PCIT to conclude that the entire marketing expenses was in the nature of gifts to doctors and was liable for 100% disallowance.
The Tribunal opined that the Assessing Officer had taken a reasoned view to disallow 10% of marketing expenses being in the nature of gifts to doctors, following the treatment as given in the earlier years. It was also not the case that the entire marketing expense was disallowed in the earlier years.
The Tribunal opined that considering the consistent view taken by the AO on this issue, it can’t be held that the order of the AO was erroneous and prejudicial to interest of revenue. Further, in the absence of any additional material being brought on record, the direction of the PCIT to disallow the entire marketing expenditure as being in the nature of gifts to doctors was not correct.
As a result, the Tribunal held that the order of the Assessing Officer was neither erroneous nor prejudicial to the interest of the Revenue.
Accordingly, the Tribunal cancelled the order u/s 263 of the Act passed by the PCIT and the grounds taken by the assessee was allowed.
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