Top Stories Adani Infrastructure Gets Relief from ITAT: Revision Order Passed by PCIT Set Aside Due to Lack of Error and Prejudice [Read Order] The company argued that the compensation was a contractual expense and not a penalty for violating any law, and therefore, did not fall under Section 37 of the Income Tax Act, 1961 By Adwaid M S – On March 4, 2025 10:27 am – 3 mins read The Income Tax Appellate Tribunal (ITAT) Ahmedabad Bench ruled in favor of the assessee, setting aside the revision order passed by the Principal Commissioner of Income Tax (PCIT)-1, Ahmedabad, under Section 263 of the Income Tax Act, 1961. The tribunal held that the twin conditions for invoking revisionary jurisdiction under Section 263—error in the assessment order and prejudice to the interest of the Revenue—were not met. Want a deeper insight into the Income Tax Bill, 2025? Click here

Adani Infrastructure and Developers Private Limited, appellant-assessee which had filed its income tax return for Assessment Year (AY) 2018-19, reporting a total loss of Rs.35.46 crore. The National e-Assessment Centre, Delhi, assessed the loss at Rs.35.36 crore under Section 143(3) read with Sections 143(3A) and 143(3B) of the Income Tax Act. The PCIT exercised revisionary jurisdiction under Section 263 and issued an order on March 12, 2024, setting aside the assessment on two grounds. The first issue was the disallowance under Section 14A read with Rule 8D amounting to Rs.27.05 lakh, where the PCIT claimed the Assessing Officer (AO) did not properly verify the computation of disallowance. The second issue was the compensation payment of Rs.60 lakh, which the PCIT alleged was not allowable under Sections 28 to 44DA of the Act, and that the AO had not examined its nature properly. Read More: Adani Group Reports Nearly 25% Increase in Tax Payments, Reaching ₹58,104 Crore in FY24 Adani Infrastructure challenged the PCIT’s order before the ITAT Ahmedabad, arguing that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The company contended that the AO had already examined the issue of disallowance under Section 14A, and a similar disallowance made in AY 2017-18 had been deleted by the CIT(A) in an earlier ruling. The company also stated that no fresh investments were made during the year, and it had sufficient interest-free funds to justify its financial position.

It argued that administrative expenses incurred were solely for business purposes, and no part of them could be attributed to tax-free income. Regarding the Rs.60 lakh compensation, Adani Infrastructure explained that it had entered into a Memorandum of Understanding (MoU) for purchasing a property valued at Rs.60 crore from Madhu Rajiv Maheshwari. The MoU contained a forfeiture clause, and upon cancellation of the agreement, the company paid 1% of the total consideration as compensation, which was recorded as a business expense. The company argued that the compensation was a contractual expense and not a penalty for violating any law, and therefore, did not fall under Section 37 of the Income Tax Act, 1961. It also stated that the AO had already examined the expense during the assessment proceedings, making the PCIT’s direction to re-verify the matter unnecessary. The Revenue argued that the AO failed to apply Rule 8D(2)(iii) while computing disallowance under Section 14A and did not properly verify the compensation payment.

The Revenue contended that the PCIT had validly exercised revisionary jurisdiction under Section 263. ITAT Ahmedabad Bench comprising Dr. B.R.R. Kumar (Vice President) and T.R. Senthil Kumar (Judicial Member), ruled in favor of the assessee. The tribunal observed that the Board’s Circular has been interpreted by various courts, confirming that disallowance under Section 14A is not warranted in the absence of exempt income. The tribunal further noted that the AO had examined the issue and made disallowance, which was subsequently deleted by the CIT(A) in the previous assessment year. Since the PCIT could not invoke Section 263 for the same issue, the tribunal ruled in favor of Adani Infrastructure. The tribunal also held that contractual compensation is different from a penalty for violating the law, and since the expense was incurred as per the MoU terms and was directly related to business transactions, no disallowance was warranted. Clear all Your Doubts on RCM, TCS, GTA, OIDAR, SEZ, ISD Etc… Click Here The ITAT Ahmedabad quashed the PCIT’s revision order, ruling that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The tribunal held that the conditions for invoking Section 263 were not satisfied, granting relief to Adani Infrastructure and Developers Private Limited. The ruling provides clarity on the treatment of contractual compensation expenses and disallowance under Section 14A In Conclusion, the appeal was allowed.