SOPHOS TECHNOLOGY PRIVATE LIMITED,AHMEDABAD V. THE PR. CIT-3, AHMEDABAD

ITA 696/AHD/2024

AI Insights

The case involves two appeals by Sophos Technologies Private Limited against the orders of the Principal Commissioner of Income Tax (PCIT) for the assessment years 2016-17 and 2018-19. The appeals primarily contested the PCIT's invocation of revisional jurisdiction under Section 263 of the Income Tax Act, 1961, which led to the setting aside of the AO's assessment orders. For A.Y. 2016-17, the ITAT found that the AO had correctly accepted the assessee's claims regarding product certification and warranty expenses, which had been previously disallowed in earlier years for non-deduction of TDS but were accepted in the current year after TDS was duly deducted. For A.Y. 2018-19, the ITAT agreed with the PCIT that the AO had failed to critically examine the claims related to expenses for earning exempt income and the treatment of outstanding GST liabilities, thus upholding the PCIT's order.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 25334 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-11-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 16-10-2024
• Assessment Year: 2016-2017
• Appeal Filed On: 12-04-2024
• Other Referred Cases: Malabar Industrial Co. Ltd., 243 ITR 83, Kwality Steel Suppliers Complex 395 ITR 1, Kamal Galani 95 taxmann.com 261, Kamal Galani 110 taxmann.com 213, Cadila Pharmaceuticals Ltd. 164 taxmann.com 52, Cargo Motors (P.) Ltd. 453 ITR 554
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A. P. SINGH
• Assessee Lawyers: S.N. SOPARKAR
• Keywords: Set aside; Opportunity of being heard; Capital expenditure; TDS; Earning of tax free income; Assessment record; Rule 8D; Revision of order
• Section: 143(3); 263; 13; 14A; 43B

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD BEFORE SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER & SHRI NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER आयकर अपील सं./I.T.A. Nos. 696 & 752/Ahd/2024 (Ǔनधा[रण वष[ / Assessment Years : 2016-17 & 2018-19) Sophos Technologies Private Limited Sophos House, Near Kalgi X Rasta, Gujarat College Road, Ellisbridge, Ahmedabad, Gujarat - 380006 बनाम/ Vs. Principal Commissioner of Income Tax-3 Ahmedabad èथायी लेखा सं./जीआइआर सं./PAN/GIR No. : AACCC7727M (Appellant) .. (Respondent) अपीलाथȸ ओर से /Appellant by : Shri S. N. Soparkar, Sr. Advocate & Shri Parin Shah, A.R. Ĥ×यथȸ कȧ ओर से/Respondent by : Shri A. P. Singh, CIT. DR Date of Hearing 16/10/2024 Date of Pronouncement 05/11/2024 O R D E R PER SHRI NARENDRA PRASAD SINHA, AM: These two appeals are filed by the assessee against the order of the Principal Commissioner of Income Tax, Ahmedabad-3, (in short ‘the PCIT), dated 14.02.2024 & 20.02.2024 for A.Ys. 2016- 17 & 2018-19 respectively, passed in the revisional jurisdiction under section 263 of the Income Tax Act, 1961 (in short ‘the Act’). 2. We will first take up appeal in ITA No.696/Ahd/2024 for A.Y. 2016-17 for adjudication. ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 2 – ITA No.696/Ahd/2024 (A.Y. 2016-17) 3. The brief facts of the case are that the return of income for A.Y. 2016-17 was filed on 30.11.2016 declaring total income of Rs.1,48,86,82,230/-. Subsequently, the return was revised on 27.03.2018 declaring total income of Rs.1,49,22,97,140/-. Thereafter, a modified return of income u/s.92CD in consequence to the APA agreement, was filed on 14.11.2019 declaring total income of Rs.1,57,70,06,240/-. The case was selected for complete scrutiny in CASS and the assessment order was passed u/s.143(3) r.w.s. 144B of the Act on 31.08.2021, wherein the return of income was accepted. Subsequently, the case record was called for and examined by the Ld. PCIT who found that the assessee had debited an amount of Rs.26,14,611/- on account of product registration charges which was claimed as revenue expense. According to the Ld. PCIT, this expenditure was capital in nature. Further, the assessee had also debited an amount of Rs.1,04,64,842/- on account of provision of warranty and replacement expenses. According to the Ld. PCIT, such warranty expenses was contingent in nature having no nexus with actual expenditure of business and was, therefore, not allowable. As the AO had not disallowed product registration expenses and provision for warranty, the Ld. PCIT held that the order of the AO was erroneous and prejudicial to the interest of the revenue. Therefore, he passed the impugned order u/s.263 of the Act, after allowing an opportunity of being heard to the assessee, and set aside the order of the AO with a direction to complete the assessment de-novo. ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 3 – 4. Aggrieved with the order of the Ld. PCIT, the assessee is in appeal before us. The following grounds of appeal have been taken in this appeal: “1. Wrongly invoked jurisdiction under Section 263 of the Act 1.1 On the facts and in the circumstances of the case and in law, the learned PCTT grossly erred in exercising jurisdiction under Section 2tig of the Act on the basis that the assessment order dated 31 August 2021 passed under Section 143(3) of the Act ('the assessment order) by the learned Assessing Officer ('the learned AO') being erroneous and prejudicial to the interest of revenue. 1.2 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned PCIT erred in exercising jurisdiction under Section 263 of the Act since the issues on which revision is sought were deliberated, examined and accepted in the course of the regular assessment proceedings and hence, the primary condition of exercise of jurisdiction is not satisfied. 1.3 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned PCTT erred in holding that the assessment order passed by the learned AO is erroneous in so far as it is prejudicial to the interest of the revenue by invoking the provisions of explanation 2 of section 263 in the case of the Appellant. 1.4 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned PCIT erred in exercising jurisdiction under Section 263 of the Act on the issues which are debatable in nature and in not appreciating that there existed two possible views on the issues involved. It is prayed that the Hon'ble ITAT be pleased to hold that the PCIT does not have jurisdiction under Section 2563 of the Act to revise the assessment order. 2. Allowability of claim on merits - Disallowance of Product registration charges Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned PCTT erred in disallowing the Product registration charges amounting to INR 26,14,611 stating that the same is capital in nature and ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 4 – remanding back the matter to the Assessing officer for fresh adjudication. It is prayed that the product registration charges amounting to INR 26,14,611 incurred by the Company be allowed as per the provisions of the Act as the same is revenue in nature. 3. Allowability of claim on merits - Disallowance of Provision for warranty and replacement expenses 3.1 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned PCIT erred in disallowing the Provision for warranty and replacement expense amounting to INR 1,04,64,842 stating that the same is contingent in nature and having no nexus with the actual expenditure and remanding back the matter to the Assessing officer for fresh adjudication.” 5. Shri S. N. Soparkar, Ld. Senior Counsel appearing for the assessee submitted that the Ld. PCIT was not correct in holding that the order of the AO was erroneous and prejudicial to the interest of the revenue. He explained that both the issues of product certification expense and warranty & replacement expenses were duly examined by the AO in the course of assessment proceeding and the assessee had made a detailed submission in this regard. The AO after considering the reply of the assessee had taken a view by holding that no disallowance was called for in respect of these two expenses. The Ld. Senior Counsel submitted that when the AO had taken a particular view in the course of assessment after examining the facts of the case, it was not open for the PCIT to superimpose his view on the view as taken by the AO. In this regard he has drawn our attention to the queries raised by the AO in the course of assessment proceedings and the reply of the assessee, which was filed in the paper book. The Ld. Senior Counsel further submitted that the issues on which the order of the AO was held as erroneous and ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 5 – prejudicial to the interest of revenue were already settled in favour of the assessee in other years. The Ld. Senior Counsel assailed the order of the Ld. PCIT and submitted that the order of the AO was neither erroneous nor prejudicial to the interest of the revenue. He also relied upon the following decisions in this regard: i. Malabar Industrial Co. Ltd., 243 ITR 83 ii. Kwality Steel Suppliers Complex 395 ITR 1 iii. Kamal Galani 95 taxmann.com 261 iv. Kamal Galani 110 taxmann.com 213 v. Cadila Pharmaceuticals Ltd. 164 taxmann.com 52 vi. Cargo Motors (P.) Ltd. 453 ITR 554 6. Per contra, Shri A. P. Singh, the Ld. CIT. DR submitted that the AO had merely accepted the submission of the assessee without critically examining the merits of the submission. He explained that disallowance in respect of provision for warranty expense and product certification charge expense was made in the preceding assessment years i.e. A.Ys. 2013-14, 2014-15 & 2015- 16, which was also acknowledged by the assessee in its reply filed before the AO. Under the circumstances, the AO should have critically examined the submissions of the assessee and not merely accepted it on its face value. According to the Ld. CIT.DR, since the AO had failed to make proper enquiries in respect of these issues, the Ld. PCIT had rightly held that the order of the AO was erroneous and prejudicial to the interest of the revenue. Accordingly, he strongly supported the order of the Ld. PCIT. 7. We have carefully considered the rival submissions. It is found that the assessee had debited the following expenses under ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 6 – the head ‘other expenses’, the details of which was available at Note 28 of the audited account: i. Warranties & replacement expense – Rs.1,04,64,842/- ii. Product certificate expenses – Rs.26,14,611/- 8. In the course of assessment, the AO had made enquiries regarding these expenses vide questionnaire issued along with the notice u/s.142(1) of the Act. The assessee vide letter dated 11th October, 2019 had fairly admitted that disallowance in respect of provision of warranty expense and product certification expense was made in the earlier assessment years i.e. A.Ys. 2013-14, 2014-15 & 2015-16. The nature of product certification expense incurred and provision for warranty expense incurred by the assessee was explained vide letter dated 11th October, 2019 as under: (iv) Product Certification Expense In this regard, the assessee submits that it is into the business of network security products wherein it is regularly required to get its product certified through a third-party certifier. Further, the assessee supplies its product to more than 100 countries around the world. On account of security reasons, many countries do not allow import of security products unless they are certified by the local agency of such country. Accordingly, the assessee is also required to get its products certified in the country of its export to meet such local country regulations. Further in assessee's business, it is essential to have such network security product certified by an external certifier to assure the customers about its quality and utility. The competitors of assessee also gets such certification for their products. Sometime product certificate is mandatory requirement for participating in tendering process Certification gives customers an assurance that the product is reliable and hence has a better demand. Further sometimes when a tender is rolled out. It also requires the party to submit a certificate from a third party. Accordingly, to get the products certified, assessee availed the services of several various parties who certify the product ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 7 – The assessee requests you to appreciate the fact that the said disallowance has been made in AY 2013-14 and AY 2014-15 on the grounds that the assessee had not deducted tax at source on such expenses. However, without prejudice to the non applicability of the provisions of deduction of tax source in the earlier years and to avoid long drawn litigations, from AY 2015-16 onwards, the assessee had started deducting tax at source on the said payments. Accordingly, no disallowance for the product certification expense was made in AY 2015-16. Further for the year under consideration as well, the assessee has duly deducted tax at source on the product certification expense and hence there remains no question of making such disallowance in the captioned year. We shall submit the party wise details of expense and tax deducted at source, if sought for by your goodself. (vi) Provision of warranty expenses In this regard, the assessee submits that the profit and loss account of assessee is charged with the provision for warranty, reversal of the warranty provision for earlier years and actual warranty expenses. With respect to the provision for warranty the assessee submits that when assessee buys the hardware, it comes with a warranty. The period of warranty starts from the date of its purchase. However, there is a time gap between the hardware purchased by the assessee and when it is finally sold by it to third parties. Accordingly, the assessee provides warranty to its customers for the period in which the purchaser warranty is not available. Further, the actual warranty expense claimed by the customers is also charged to the profit and loss account. In this regard, for the year under consideration the break-up of warranty expense charged to the profit and loss account is as under: Particulars Amount Actual warranty expense charged to profit and loss account 2,23,64,340 Provision made during the year on scientific basis 68,29,286 Reversal of provisions made during the earlier years (1,87,28,784) Total expense as per profit and loss account 1,04,64,842 ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 8 – The assessee requests you to appreciate the fact that during the year under consideration, the net impact on the profit and loss account due to the provisions is negative. The assessee further requests you to appreciate the fact that the actual warranty expense is Rs. 2,23,64,340, however considering the impact due to reversal of provision, the assessee had only claimed Rs. 1,04,64,842 as an allowable actual warranty expense. Hence there remains no question of disallowance of provision for warranty expenses. Accordingly, since the facts of the year under consideration provides that no amount is charged to the profit and loss account as provision for warranty, no disallowance shall be made. However, if your goodself are still desirous of taking any adverse view, request you to provide an opportunity of being heard.” 9. Thereafter, the AO vide notice u/s.142(1) of the Act dated 17.03.2021 had made following enquiry in respect of provision for warranty: 7. Please specify if you have claimed expense in the nature of Provision for warranty. If yes, give arguments for allowing such expenses under Income Tax Act quoting relevant sections and giving legal arguments. Also give break-up of warranty expense charged to P&L Account for the year under consideration. 10. The assessee vide letter dated 23rd March, 2021 had made the following submissions in this regard: “6. Details of claim of provision for warranty (point 7 of notice):- During the year under consideration, the Company has credited reversal of provision for warranty amounting to INR 1.18.99.498 to the statement of profit and loss and has offered the same to tax. Hence, the question of disallowance of provision for warranty does not arise. For your ease of reference, breakup of warranty expense and provision for warranty expenses debited/(credited) to the profit and loss account is summarized below: Particulars Amount (in INR) Remarks Warranty expense during the year incurred 2,23,63,340 This represents actual warranty expense incurred and debited to the statement of ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 9 – profit and loss for the year under consideration and claimed as a deduction Provision for warranty credited to PSL (net) (refer note 1 below for working of net provision) (1,18,99,498) This represents the provision for warranty (net) credited to the statement of profit and loss for the year under consideration and offered to tax Total (net) 1,04,64,842 Net expense debited to statement of profit and loss and claimed as deduction (Note 28 to financial statements) Note 1-Working of net provision for warranty Particulars Amount (in INR) Remarks Provision made during the year [A] 68,29,286 Note 35 of financial statements Reversal of provision made during the year [B] (1,87,28,784) Note 35 of financial statements Net provision reversal [A-B) (1,18,99,418) - Further, as mentioned in our submission dated 11 October 2019, we wish to submit that in absence of any provision for warranty (expense) debited to statement of profit and loss, question of disallowance of the same does not arise.” 11. As regarding product certification expense, the assessee had made the following submission vide letter dated 30th March, 2021: “1. Details of product certification expense and TDS on the same (point & of notice) During the year under consideration, the Company has incurred product certification expense amounting to INR 26,14.611 and the same is debited to statement of profit and loss under the head other expenses (refer note 28 of financial statements). ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 10 – With respect to the details of TDS asked by your goodself, we request your goodself to refer Annexure B1. Further, we have also enclosed herewith (Annexure B2) the sample copy of invoices in relation to product certification expense.” 12. It is, thus, found that the AO had made detailed enquiries in respect of product certification expense and warranty & replacement expense in the course of assessment. Therefore, it cannot be held that the AO had passed the order without making enquiry or verifications, which was required to be made, in respect of these two issues. The contention of the Ld. PCIT is that the AO did not examine the nature of product registration charges of Rs.26,14,611/- and that this expense was of capital in nature. The assessee had explained the nature of this expense vide letter dated 11th October, 2019 (as reproduced earlier). In fact, the nomenclature referred by the Ld. PCIT is itself wrong. This was not product registration expense but it was product certification expense. As explained this expenditure was incurred to get the products certified from a third party which was a mandatory requirement for participating in tendering process. Further, this expenditure was also incurred in the earlier years and the Revenue had never held that the expense was in the nature of capital expenditure. Therefore, the AO cannot be charged with deviating from the stand taken on this issue in the past. In the earlier years, the disallowance in respect of product certification charges was made only for the reason that no TDS was deducted on this expense. The AO had considered this aspect and since the assessee had duly deducted TDS in this year, no disallowance was called for. Had it been a capital expenditure there was no question of deduction of TDS. By making disallowance for not deducting TDS in respect of this payment, the Revenue had acknowledged ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 11 – that the expenditure was revenue in nature. Therefore, the order of the AO cannot be held as erroneous and prejudicial to the interest of the revenue on the issue of non-disallowance of product certification expense. 13. As regarding provision for warranty, the Ld. PCIT has held that the debit made in P&L account was in the nature of provision for warranty & replacement expense and that the AO did not verify whether the provision was made on a scientific basis. It is found that the amount debited to P&L account was not in respect of any provision rather the assessee had debited the actual warranty and replacement expense. As explained by the assessee, the assessee had made provision for warranty amounting to Rs.68,29,286/- during the year and there was reversal of Rs.1,87,28,784/- in respect of provision made during the earlier years. If we take into account these two figures, the assessee had offered income to the extent of Rs.1,18,99,498/- in respect of the provisions. This was adjusted with the actual warranty expenses of Rs.2,23,63,340/- and, thereafter, only net expense of Rs.1,04,64,482/- was debited to P&L account, which was actual expense incurred and not provision. In view of these facts, the finding of the Ld. PCIT that the assessee had debited Rs.1,04,64,842/- on account of provision for warranty and replacement is itself incorrect. The assessee had made provision of Rs.68,29,286/- only during the year and had rather offered income on account of reversal of provisions. Therefore, even if the issue of provision was not examined by the AO, the order cannot be held as erroneous and prejudicial to the interest of the ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 12 – revenue, as the assessee had offered income on account of reversal of provisions. 14. On merit also, no disallowance was called for in respect of the amounts as debited by the assessee in the P&L account. The identical additions made by the Revenue in the earlier years was deleted by the Ld. CIT(A) and the order of the Ld. CIT(A) for the earlier years has been brought on record. In fact, the Co-ordinate Bench of this Tribunal in the case of DCIT vs. Elitecore Technologies Private Limited (Division Office has been merged with the assessee) for the A.Y. 2012-13 in ITA No.508/Ahd/2016, dated 31st March, 2017 had decided the issue in respect of provision of warranty in favour of the assessee. Therefore, on merits also, no addition was called for in respect of the amount as debited in the P&L account. 15. In view of the above facts, we are of the considered opinion that the Ld. PCIT was not correct in holding that the order of the AO was erroneous and prejudicial to the interest of the revenue. Since the issues were already decided in favour of the assessee in other years, it can’t be held that the view taken by the AO was unsustainable in the eyes of law. Further, it is also not the case that the AO did not make any enquiry on the issues involved. Therefore, the finding of the Ld. PCIT that the order of AO was erroneous and prejudicial to the interest of revenue, cannot be held as correct. Since, the order u/s 263 of the Act for the A.Y. 2016-17 as passed by the Ld. PCIT is unsustainable, considering the facts of the case as well as the legal position, the same is quashed. ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 13 – 16. In the result, the appeal filed by the assessee is allowed. ITA No.752/Ahd/2024 – A.Y. 2018-19 17. The brief facts of the case for this year are that the return of income for A.Y. 2018-19 was filed on 30.11.2018 declaring total income of Rs.51,52,81,370/-. The case was selected for complete scrutiny and the assessment was completed u/s.143(3) r.w.s. 144B of the Act on 21.09.2021 at total income of Rs.56,74,17,829/-. Subsequently, the Ld. PCIT called for and examined the assessment record and found that the order of the AO was erroneous and prejudicial to the interest of revenue in respect of the following two issues: (i) The assessee company had earned exempt income of Rs.10,17,279/- during the year and had claimed that expenses relating to the exempt income was to the extent of Rs.52,426/- only. The AO, however, did not examine the correctness of this expense nor the disallowance of expenses pertaining to exempt income was considered in accordance with the provision of Section 14A r.w. Rule 8D of the IT Rules. (ii) The assessee had shown GST payable of Rs.2,33,23,643/- as on 31.03.2018 which was appearing in the balance sheet. However, no enquiry was made by the AO as to whether this outstanding GST was paid by the assessee before the due date of filing of return. 18. In view of the failure on the part of the AO to examine the above referred two issues, the Ld. PCIT, after allowing an opportunity of being heard to the assessee, passed the impugned ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 14 – order and held that the order of the AO was erroneous and prejudicial to the interest of the revenue. Accordingly, he set aside the order of the AO with a direction to pass fresh assessment order after computing the disallowance u/s.14A r.w. Rule 8D and also disallowing the GST liability under the provision of Section 43B of the Act. 19. Aggrieved with the order of the Ld. PCIT, the assessee is in appeal before us and has taken the following grounds: “1. Wrongly invoked jurisdiction under Section 263 of the Act 1.1 On the facts and in the circumstances of the case and in law, the learned PCTT grossly erred in exercising jurisdiction under Section 263 of the Act on the basis that the assessment order dated 21 September 2021 passed under Section 143(3) of the Act ('the assessment order) by the learned Assessing Officer (the learned AD') being erroneous and prejudicial to the interest of revenue. 1.2 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned ICIT erred in exercising jurisdiction under Section 263 of the Act since the issues on which revision is sought were deliberated, examined and accepted in the course of the regular assessment proceedings and hence, the primary condition of exercise of jurisdiction is not satisfied. 1.3 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned PCIT erred in holding that the assessment order passed by the learned AO is erroneous in so far as it is prejudicial to the interest of the revenue by invoking the provisions of explanation 2 of section 2563 in the case of the Appellant. 1.4 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned PCTT erred in exercising jurisdiction under Section 2563 of the Act on the issues which are debatable in nature and in not appreciating that there existed two possible views on the issues involved. ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 15 – It is prayed that the Hon'ble ITAT be pleased to hold that the PCIT does not have jurisdiction under Section 263 of the Act to revise the assessment order. 2. Allowability of claim on merits Disallowance of expenditure pertaining to exempt income Without prejudice to above, on the facts and in the circumstances of the case and in law, the learned PCIT grossly erred in directing the learned AO to compute the disallowance under section 14A of the Act by applying Rule 8D of the Income-tax Rules, 1962, in respect of expenses incurred for the purpose of earning exempt income, without appreciating the fact that the Appellant had already identified, and disallowed expenses incurred by it for earning exempt income. It is prayed that no additional disallowance of expenditure pertaining to exempt income amounting to INR 2.17.574 should be made as no additional expenditure has been incurred by the Company to earn such exempt income. 3. Allowability of claim on merits Disallowance of Outstanding Goods and Service Tax ('GST) 3.1 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned PCIT erred in directing the learned AO to disallow the amount of GST liability outstanding as on year end amounting to INR 2,33.23,643 under section 438 of the Act stating that the same is not paid on or before the due date of filing of return of income and remanding back the matter to the Assessing officer for fresh adjudication. It is prayed that no disallowance of GST liability under section 43B of the Act amounting to INR 2.33.23.643 should be made as the same represents balance sheet item and further the said liability has been paid by the company before the due date of filing of return of income of AY 2018-19.” 20. Shri S. N. Soparkar, Ld. Senior Counsel submitted that when the assessee had suo-motto made disallowance of Rs.52,426/- in respect of expenses relating to exempt income, which was accepted by the AO in the course of assessment proceeding, the order of the AO cannot be held to be erroneous and prejudicial to the interest of the revenue in this respect. As ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 16 – regarding GST liability, the Ld. Senior Counsel explained that the provision of Section 43B of the Act was not at all attracted in this case as GST was not routed through P&L account. He further submitted that the outstanding GST as appearing in the balance sheet was paid by the assessee before the due date of filing of return and, therefore, no disallowance u/s.43B of the Act was called for. 21. Per contra, the Ld. CIT.DR submitted that the issue of disallowance u/s.14A r.w. Rule 8D as well as the disallowance of outstanding GST liability u/s.43B of the Act was not at all examined by the AO in the course of assessment proceeding. Therefore, the Ld. PCIT had correctly held that the order of the AO was erroneous and prejudicial to the interest of revenue. 22. We have carefully considered the rival submissions. There is no dispute to the fact that the assessee had disclosed dividend income of Rs.10,17,279/-, which was claimed exempt u/s.10(14) of the Act. The assessee had suo motto disallowed a sum of Rs.52,426/- u/s. 14A of the Act in the computation of income. In the course of assessment, however, no query was raised by the AO in respect of disallowance u/s.14A r.w. Rule 8d of the IT Rules as made by the assessee. The working of disallowance as made by the assessee u/s.14A of the Act was, therefore, not verified by the AO. The Ld. PCIT had given a finding that the disallowance of Rs.52,426/- as made by the assessee, was in respect of proportionate salary expenditure of one employee only. According to the Ld. PCIT, the investment regarding decision in mutual funds/shares etc. is taken at the level of Director(s) and, ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 17 – therefore, the Directors’ remunerations should also have been considered for working out the disallowance u/s.14A/Rule 8D. Further, no administrative expenditure was allocated towards 14A disallowance. Be that as it may, the fact remains that the disallowance u/s.14A r.w. Rule 8D was not at all examined by the AO, neither the correctness of the disallowance as made by the assessee was examined in the course of assessment proceeding. 23. As regarding GST liability, it is found that GST payable of Rs.2,33,23,643/- was appearing in the balance sheet under the head ‘other current liabilities’. It was also evident that this liability pertained to the current year only as no outstanding liability of the earlier year was appearing in the balance sheet. Therefore, the AO should have examined as to whether this outstanding liability for the current year was paid by the assessee before the due date of filing of return, which was not done. The contention of the assessee is that the GST was not routed through P&L account and, therefore, no disallowance u/s.43B of the Act was called for. By not routing the GST through P&L account, the assessee had deviated from method of accounting as prescribed u/s.145A of the Act, which was also reported by the Auditor at Sl. No.14b of the Tax Audit Report. In fact, the Auditor has also reported that due to this deviation from the method of valuation as prescribed u/s.145A of the Act, there will be increase in the profit to the extent of Rs.5,43,74,434/-. In view of this specific report in respect of deviation in the method of valuation, the AO should have inquired not only about the payment of outstanding GST liability but should have also examined the correctness of ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 18 – the profit as reported. The Auditor had also reported in Sl. 26(i)(B)(b) of the Tax Audit Report that the GST and other indirect taxes were not passed through P&L account, which had led to the deviation from the prescribed method of valuation. By not passing GST through P&L account the assessee had circumvented the provision of section 43B of the Act and this aspect should have been examined by the AO in the course of assessment proceeding. Since the AO had failed to make any enquiry in this regard, the Ld. PCIT had rightly held that the order of the AO was erroneous and prejudicial to the interest of the revenue. 24. The contention of the assessee is that the outstanding GST liability was paid before the due date of filing of return. If so, no prejudice would be caused to the assessee as the evidence of payment of outstanding GST before the due date of return can be produced before the AO in the course of set aside proceeding. The AO is directed to consider the evidences filed by the assessee in this respect and thereafter decide the matter about disallowance u/s.43B of the Act in accordance with the provisions of the Act. 25. The other contention of the assessee is that since no disallowance u/s.14A and u/s.43B of the Act was called for, the order of the AO cannot be held as erroneous and prejudicial to the interest of the Revenue. The Explanation 2 to Section 263 stipulates that if the order is passed by the AO without making enquiries or verifications which should have been made, the order of the AO shall be deemed to be erroneous and prejudicial to the ITA Nos. 696 & 752/Ahd/2024 [Sophos Technology Private Limited vs. PCIT] - 19 – interest of the Revenue. In the present case, the AO had passed the order without making any enquiry or verification in respect of correctness of disallowance u/s.14A r.w. Rule 8D of the IT Rules as well as in respect of disallowance u/s.43B in respect of outstanding GST. It is not the case that the AO had made any enquiry in respect of these issues and taken a view. It is a settled position that “lack of enquiry” will make the order of the AO erroneous and prejudicial to the interest of the revenue. 26. In view of the above facts, the order of the Ld. PCIT passed u/s.263 of the Act for the A.Y. 2018-19 is upheld. 27. In the result, the appeal of the assessee is dismissed. 28. In the final result, appeal in ITA No.696/Ahd/2024 is allowed, whereas appeal in ITA No.752/Ahd/2024 is dismissed. This Order pronounced on 05/11/2024 Sd/- Sd/- (T.R. SENTHIL KUMAR) (NARENDRA PRASAD SINHA) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 05/11/2024 S. K. SINHA "