CIT erred in rejecting revision application u/s 264 on legal ground, not deciding merits-High Court

CIT erred in rejecting revision application u/s 264 on the ground of maintainability. CIT ought to have entertained the revision petition on merits- Delhi High Court

ABCAUS Case Law Citation:
ABCAUS 1283 (2017) (07) HC

The Grievance:
The Petitioner company had filed the present petition under Article 226 of the Constitution challenging the order passed by the Respondent, Commissioner of Income Tax (‘CIT’), rejecting its application under Section 264 of the Income Tax Act, 1961 (‘the Act’).

Important Case Laws Cited/relied upon:
Goetze India Limited v. Commissioner of Income Tax (2006) 284 ITR 323
Orissa Rural Housing Development Corporation Ltd. v. ACIT (2014) 44 Taxman.com 341 (Orissa)

Brief Facts of the Case:
The Petitioner company, in pursuance  of the recommendation of the 5th Pay Commission in respect of revised salary with effect from 1st January 1996, had made a provision of wages arrears in the books of accounts for the Financial Year (‘FY’) 1996-97 of Rs. 2,50,00,000. However, since the relevant notification giving effect to the Pay Commission recommendations was issued only on 4th March 1998, the Assessing Officer (‘AO’) disallowed the claim in respect of the revised salary. The disallowance was upheld by the CIT(A) confirming the action of the AO on the ground that the notification dated 4th March 1998 was relevant to FY 1997-98.  The CIT(A) observed that the claim could be considered in FY 1997-98. However, by the time the order of the CIT(A) was issued, the assessment for FY 1997-98 was complete, and in the return filed for the said AY, no claim for provision for arrears of wages was made which was processed.

Therefore, the Petitioner made an application u/s 154 of the Act before the AO for allowing the deduction in respect of the revised pay. This request was rejected after a time of more than eight years in 2009 on the ground that the claim was not based on entries in the books of accounts of the AY in question and since the claim was debatable. CIT(A) also dismissed the appeal filed by the Petitioner holding that that the claim could not be allowed by way of rectification in a proceeding under Section 154 of the Act. On second appeal, the ITAT held the claim was time barred. It further, held that a claim not made before the AO could not give rise to a mistake apparent on the record.

On appeal to the Hon’ble Delhi High Court, the case was disposed off with liberty to petitioner assessee to file an application under Section 264 before the Commissioner of Income Tax.

However, By the impugned order the CIT rejected the application filed by the Petitioner u/s 264 of the Act. The CIT held that the Petitioner had not claimed the deduction in respect of provision for wage arrears by revising the return for AY 1998-99. Therefore, the issue did not emanate from the assessment order.

Observations made by the High Court:
It was observed that the mere fact the Petitioner did not make any claim in the original return and also in its revised return before the passing of the assessment order by the AO would not stand in the way of the CIT exercising revisionary jurisdiction to grant relief. The Supreme Court in its decision in Goetze India Limited held that while the AO could not permit a claim to be made after the filing of the return without the Assessee revising it prior to the assessment order, it did not impinge on the scope of the revisionary jurisdiction of the CIT.

The Court was satisfied that in the present case, the CIT erred in rejecting the revision application of the Petitioner on the ground of maintainability. The CIT ought to have entertained the revision petition on merits.

The Hon’ble High Court observed that considering the pendency of the issue for a number of years, remanding the matter to the CIT would only delay the proceedings and there was sufficient undisputed material on record already to grant relief to the Petitioner on merits in the present petition itself.

Held:
The Hon’ble High Court set aside the impugned order of the CIT and allowed the revision petition. The AO was directed to allow the claim for provision made for wages arrears as per the 5th Pay Commission for FY 1997-98