Bangalore ITAT Cancels Section 263 Revision Where Alleged Commission Expense Was Never Claimed

Background of the Dispute

The Bangalore Bench of the Income Tax Appellate Tribunal, in the case of Khoday India Limited Vs DCIT, set aside a revisionary order passed under Section 263 of the Income Tax Act 1961 on the ground that the very basis of the Principal Commissioner’s action – an alleged claim of commission expenditure of ₹18,84,425 – did not, in fact, exist in the assessee’s books or return of income.

The Tribunal emphasised that when no such expenditure has been claimed by the assessee in the relevant assessment year, there is no occasion for the Assessing Officer to have allowed it as a deduction, whether with or without verification. Consequently, the order of assessment could not be regarded as “erroneous and prejudicial to the interests of the Revenue”, which is a mandatory pre-condition for invoking Section 263.

Assessment Proceedings and Search Background

Original Return and Search Action

  1. The assessee, Khoday India Limited, filed its original return of income under Section 139(1) on 31.12.2020, declaring a total loss of ₹3,06,22,529.
  2. A search under Section 132 was conducted in the case of the assessee on 09.02.2021.
  3. Consequent to the search, assessment proceedings were initiated under Section 153A on 13.10.2021.
  4. In response to the Section 153A notice, the assessee filed a return on 27.08.2022 declaring Nil income.
  5. The assessment under Section 153A was ultimately completed on 31.03.2023, making an addition of ₹7,27,023.

At this stage, no issue was raised by the Assessing Officer regarding any commission expenditure of ₹18,84,425 allegedly paid in connection with liquor sales.

Initiation of Section 263 Proceedings

PCIT’s Observations and Show Cause

On examination of the assessment records, the Principal Commissioner of Income Tax (Central), Bengaluru (PCIT) formed a prima facie view that:

  • Payments aggregating to ₹18,84,425, described as commission, were in fact allegedly illegal payments linked to liquor sales.
  • Such payments, according to the PCIT, were hit by the prohibition in Section 37(1) on deduction of expenditure incurred for purposes that are an offence or prohibited by law.
  • The Assessing Officer, in the PCIT’s view, had not carried out adequate enquiry or verification in respect of this alleged expenditure while framing the order under Section 153A.

On this basis, a show cause notice under Section 263 was issued to the assessee on 30.08.2024, proposing to treat the assessment order as erroneous and prejudicial to the interests of the Revenue.

Assessee’s Initial Response

In reply to the first show cause, the assessee categorically submitted that:

  • It was unable to even identify or quantify the figure of ₹18,84,425 in its books or records for the relevant year.
  • The notice did not disclose how the PCIT had concluded that such a commission was paid, or on what material he was relying.
  • No details, documents or basis of allegation were made available to the assessee along with the notice.

Second Show Cause with Reference to Search on Third Parties

Subsequently, the PCIT issued a second notice dated 08.01.2025, giving more particulars. In this notice, the PCIT stated that:

  • During a search conducted on 27.02.2020 in the case of Tuteja, Bhatia and Dhand group of cases, who were engaged in the liquor trade, material allegedly revealed that a sum of ₹18,84,425 was paid by the assessee as commission for sale of India Made Foreign Liquor (IMFL).
  • The PCIT referred to certain evidences and a satisfaction note said to have been recorded in the case of the searched parties, indicating that this amount related to commission paid by the assessee.