ITAT Quashes Section 263 Revision as AO Had Examined Related-Party Payments Under Section 40A(2)(b):

Nidhi Petrochemicals Pvt. Ltd. filed its return of income for Assessment Year 2018–19 on 29 October 2018, declaring total income of Rs. 23,64,230. The AO completed the assessment on 19 April 2021, accepting the returned income.

Subsequently, the PCIT invoked revisionary jurisdiction under Section 263 of the Income Tax Act, 1961, and set aside the assessment order vide order dated 30 March 2024. The PCIT observed that the AO had failed to conduct adequate inquiries into expenditure claimed in respect of persons covered under Section 40A(2)(b) of the Act. Aggrieved by the revisionary order, the assessee approached the Tribunal. 

The Tribunal examined the assessment records and noted that, in response to a notice issued during the assessment proceedings, the assessee had furnished details of transactions covered under Section 40A(2)(b), including the nature of the payments and the reasons for making them, through its reply dated 13 July 2020. The Tribunal held that the AO had called for the relevant information and had taken a conscious and legally permissible view after considering the assessee’s explanation.

In the present case, the PCIT had neither identified comparable market transactions nor established the extent to which the commission payments were excessive or unreasonable. No specific basis had been demonstrated for making a disallowance or for concluding that the assessment order had caused prejudice to the Revenue.

The Tribunal also considered the fact that, in the two preceding assessment years completed under scrutiny, the Revenue had accepted payments to persons covered under Section 40A(2)(b) without making any disallowance. 

The Tribunal held that the PCIT had failed to establish that the assessment order was both erroneous and prejudicial to the interests of the Revenue. Accordingly, the Tribunal set aside the PCIT’s order dated 30 March 2024 passed under Section 263 of the Income Tax Act, 1961, and allowed the appeal filed by Nidhi Petrochemicals Pvt. Ltd.