IT: Where assessee made payment of commission to 'M' for procuring orders of medical equipment and said payment was duly approved by its board of directors, assessee's claim for deduction in respect of same was to be allowed
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[2013] 32 taxmann.com 386 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax -II
v.
Medical Technologies Ltd.*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 116 OF 2013
MARCH 22, 2013
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Commission] - Assessee-company paid commission to 'M' for procuring orders of medical equipments - Board of directors of assessee-company had duly approved said payment - Moreover, commission received by 'M' had been shown as income in return filed by 'M' - Whether on facts, there remained no doubt as to genuineness of payment in question and, thus, assessee's claim in respect of same was to be allowed - Held, yes [Para 5] [In favour of assessee]
CASES REFERRED TO
CIT v. Chetan Chemicals (P.) Ltd.[2004] 267 ITR 770/139 Taxman 301 (Guj.) (para 6) and Rollatainers Ltd. v. CIT[2011] 339 ITR 54/ 203 Taxman 31 (Mag.)/15 taxmann.com 111 (Delhi) (para 7)
Mrs. Mauna M. Bhatt for the Appellant.
ORDER
Akil Kureshi, J. - Revenue is in appeal against the judgment of Income Tax Appellate Tribunal dated 20.07.2012. Following questions have been presented for our consideration:
| "1. | Whether the Tribunal is right in law and on facts in confirming the disallowance of commission expenses of Rs. 5,40,00,000/- without appreciating the fact that the assessee has failed to establish the genuineness of transactions and reasonableness of payments in support of alleged payments of commission? | |
| 2. | Whether the Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in deleting the addition of Rs. 1,28,28,072/- on account of writing back of loan liability, admitting fresh evidences in violation of Rule 46A without appreciating the fact that though specifically called for has not submitted such details during the assessment proceedings? | |
| 3. | Whether the Tribunal is right in law and on facts in deleting the addition of Rs. 66,77,655/- on account of interest income on FDR not offered for taxation without appreciating the fact that the assessee company has not furnished any break up or details regarding interest income and inclusion of interest income of Rs. 66,77,655/- in the total income?" |
2. With respect to question No. 1, we notice that Assessing Officer disallowed commission expenses of Rs. 5.40 crores on the ground of genuineness of payments. The Assessee carried the issue in appeal. CIT(A) deleted the disallowance upon which, the revenue approached the Tribunal. Tribunal confirmed the view of CIT(A) upon which, the revenue is before us in the present tax appeal.
3. Upon perusal of the record with the assistance of learned counsel for the revenue, we notice that CIT(A) while upholding the disallowance held and observed that the payment of commission made by the assessee was approved by the Board of Directors in its resolution dated 19.03.2001. Correspondingly, M/s. Matrix Logistics Ltd. who received such commission had shown the commission income in its income tax return. Such company had also entered into agreement with the assessee-company for providing services for such commission. In fact, such services were rendered for procuring orders of medical equipments on behalf of the assessee and the commission was paid on the basis of orders procured.
4. The Tribunal confirmed such view of CIT(A) making following observations:
"3.1.5 From the above para, it is seen that it is noted by Ld. CIT(A) that there is an agreement regarding payment of commission to this party and the sale of the assessee has increased considerably i.e. from Rs. 7.40 crores to Rs. 24.27 crores. It is also noted by Ld. CIT(A) that this agreement was executed on 01.04.2000 for making local sales. It was submitted before Ld. CIT(A) that before this year, the assessee was mainly making export sales directly or indirectly and it has decided to enter into local market for sale for the first time and it had no infrastructure for achieving the local sales to this extent. It is also noted by Ld. CIT(A) that payment of commission has been approved by the Board of Directors and the agent has shown the commission income in its return of income. Regarding services, it was noted by Ld. CIT(A) that agent had provided services for procurement of orders of medical equipments on behalf of the assessee and the commission had been paid on the basis of orders procured as per clause (3)(d) of the agreement. Considering these facts and finding of Ld. CIT(A) which could not be controverted by the Ld. D.R., we are of the considered opinion, no interference is called for in the order of Ld. CIT() on this issue. We, therefore, reject this ground."
5. From the above, it is clear that the entire issue is based on appreciation of relevant evidence on record. In terms of such evidence concurrently, the CIT(A) as well as the Tribunal held that payment of commission was not only genuine but also in terms of the agreement between the parties. We see no question of law arising. As already noted, significantly, the company receiving the commission had reflected the entire income in its tax returns. The company has provided service for procuring orders and commission was paid on the basis of such procurement.
6. Question No. 2 pertains to a loan liability of Rs. 1.28 crores (rounded off) written off by the bank. The Assessing Officer treated as remission of liability and desired to tax it accordingly. CIT(A) as well as the Tribunal both relied on the decision of this Court in case of CIT v. Chetan Chemicals (P.) Ltd.[2004] 267 ITR 770/139 Taxman 301 and reversed the decision of Assessing Officer. The Tribunal, in particular, observed as under:
"3.3.6 We find that Ld. CIT(A) has decided this issue in favour of the assessee by following the judgement of Hon'ble Gujarat High Court rendered in the case of Chetan Chemicals Pvt. Ltd. (supra) and as per the provisions of Section 41(1) of the Income Tax Act, 1961. As per this judgement of Hon'ble Gujarat High Court, no addition can be made u/s. 41(1) of the Income Tax Act, 1961 in respect of remission of any loan liability for which no deduction was allowed to the assessee in the present year or in any earlier year. We find that before the A.O. also, reliance was placed by the assessee on this very judgement of Hon'ble Gujarat High Court rendered in the case of Chetan Chemicals Pvt. Ltd. (supra). The A.O. has decided this issue against the assessee on this basis that since the assessee has written back the liability in the books of account, the same is to be taxed in the hands of the assessee. The second basis of the A.O. is that the benefit to the assessee has arisen during the business but he has failed to consider that giving and taking loan is not the business of the assessee. The assessee is in the business of trading in equipments, plant & machinery and pharmaceutical products and providing technical services as has been noted by the A.O. on page 1 of the assessment order. This being so, it cannot be said that the benefit has arisen to the assessee in the course of business. This is a different aspect that loan has been taken by the assessee for the purpose of business but this does not mean that taking and giving loan is the business of the assessee and hence, it cannot be said that Section 41(1) can be attracted for remission in respect of loan liability when admittedly, no deduction was allowed to the assessee in respect of such loan liability in the present year or in any earlier year. We also do not find that any fresh evidence was admitted by Ld. CIT(A) because his decision is mainly on the basis of judgement of Hon'ble Gujarat High Court rendered in the case of Chetan Chemicals Pvt. Ltd(supra) and this judgement is also cited before the A.O. This was never in dispute before the A.O or before Ld. CIT(A) that advantage received by the assessee is in respect of waiver of loan liability for which no deduction was allowed to the assessee at any point of time. Hence, we do not find any merit in ground No. 6 of the revenue and ground No. 5 of the revenue is also devoid of any merit because in the facts of the present case, section 41(1) is not attracted because this benefit has not arisen to the assessee in the course of business of taking and giving loan and no deduction was allowed to the assessee in respect of this loan liability at any point of time. Hence, we decline to interfere in the order of Ld. CIT() on this issue. Both these grounds of the revenue are rejected."
7. The view of the Tribunal finds support from the decision of this Court in case of Chetan Chemicals (P.) Ltd. (supra) Counsel for the revenue, however, placed reliance on the decision of Delhi High Court in case of Rollatainers Ltd. v. CIT[2011] 339 ITR 54/203 Taxman 31 (Mag.)/15 taxmann.com 111 where, the distinction is drawn for cessation of liability on the basis whether the loan was a trading liability or a capital liability. He, therefore, contended that the purpose for which, the loan was obtained would be a relevant factor. Such aspects not having been examined, the Tribunal committed an error.
8. In our view, however, when the Assessing Officer did not pursue this line and brought no evidence on record to make a discussion as is sought to be legally canvassed before us, at this stage, we cannot find fault with the view of the Tribunal. Therefore, without commenting upon the legal contention raised before us by the counsel for the revenue, noted above, such question is not entertained.
9. Question No. 3 deserves summary rejection. The Tribunal confirmed the decision of CIT(A) on following basis:
"3.5.5 From the above para of the order of Ld. CIT(), we find that Ld. CIT(A) has given this finding that the assessee has offered interest income of Rs. 1.03 crores as interest on fixed deposits and out of the said interest income, an amount of Rs. 66.77 lacs was not received and, therefore, the same has been shown as accrued interest in Schedule V in the balance sheet. Since this income was already offered by the assessee, no further addition as required to be made and on this basis, Ld. CIT(A) has deleted this addition. Ld. D.R. could not controvert these findings of Ld. CIT(A) and hence, on this issue also, no interference is called for in the order of Ld. CIT(A). These grounds of the revenue are also rejected."
10. Issue being purely one of facts, no question of law arises.
11. In the result, tax appeal is dismissed.
IT : Addition on account of accommodation entry cannot be made on basis of unconfronted oral statement of third party
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[2013] 32 taxmann.com 384 (Rajasthan)
HIGH COURT OF RAJASTHAN
Commissioner of Income-tax - I, Jaipur
v.
A.L. Lalpuria Construction (P.) Ltd.*
AJAY RASTOGI AND VEERENDER SINGH SIRADHANA, JJ.
D.B. IT APPEAL NOS. 256 OF 2010
AND 26 & 39 OF 2011†
AND 26 & 39 OF 2011†
FEBRUARY 25, 2013
Section 68, read with section 143, of the Income-tax Act, 1961 - Cash credit [Accommodation entry] - Whether oral statement of third party recorded by search authorities which was never placed to be confronted by assessee and no documentary evidence was supplied to assessee, could not be considered in making addition on account of alleged accommodation entries - Held, yes [Paras 3&4] [In favour of assessee]
FACTS
| ■ | In the case of another assessee, it was revealed that in the garb of tax consultation the owners and employees of this group were running a racket of providing accommodation entries. | |
| ■ | The Assessing Officer was of the view that details made available by the assessee as regards unsecured loans and share application money appeared to be the accommodation entries. By invoking under section 68, these amounts were considered to be part of income in the hands of the assessee. | |
| ■ | The Commissioner (Appeals) observed that (i) summons issued under section 131 to all applicant/creditors, their confirmation letter were filed, (ii) these companies were assessed to tax being the private limited companies and (iii) the existence of their separate legal entity ordinarily could not have been doubted. However, on the basis of statement of one K recorded during the search by the authority as regards accommodation entries, a sum of Rs. 5 lakhs was assessed in the hands of present assessee and as regards, other income, it was not considered to be in the hands of the present assessee. | |
| ■ | On cross appeal, the Tribunal held that on basis of record the existence of the investor was not disputed. The Tribunal further held that since oral statement of K was never confronted and no documentary evidence was supplied to assessee, hence, such statement was not sufficient for addition of Rs. 5 lakhs in the hands of the assessee. |
HELD
| ■ | What has been observed by the Commissioner (Appeals) & the Tribunal appears to be based on factual matrix and thus no, substantial question of law arises which may require interference by this Court to be examined in the instant appeal. [Para 4] |
J.K. Singhi and Anuroop Singh for the Appellant. Naresh Gupta for the Respondent.
ORDER
1. Instant three appeals since arise from common judgment of Income Tax Appellate Tribunal ("Tribunal") dt.31.03.2010, hence heard together & disposed of by the present order.
2. The revenue has preferred instant appeals U/s 260A of Income Tax Act,1961 ("Act, 1961") assailing judgment of the Tribunal dt.31.03.2010 affirming order of Commissioner (Appeals) dt. 05.03.2008, with modification that on the statement of Kripa Shanker Sharma, the income of Rs. 5 Lacs was assessed in the hands of assessee and it was observed by the Tribunal that the statement of Kripa Shanker Sharma was never confronted and no documentary evidence was supplied to the assessee, in absence whereof the income in the hands of the assessee on the basis of statement of Kripa Shanker Sharma deserves deletion.
3. The assessee as alleged carried out construction activities and disclosed income from sub-contract and investment in building construction. After the search U/s 132 of the Act,1961 was carried out on 12.04.2005 in the case of another assessee M/s. B.C. Purohit & Company at Jaipur & Kolkata, evidence was gathered and from the investigation it revealed that in the garb of tax consultation the owners and employees of this group were running the racket of providing accommodation entries of gifts, loans, share application money, share investment and long term capital gains in shares. It will be relevant to record that the present assessee might have been in consultation with M/s. B.C. Purohit & Company and a member of the group and has drawn inference regarding providing accommodation entries and the assessing officer was of the view that details made available by the assessee as regards unsecured loans and share application money, reference of which has been made in para-4 of its order, appears to be the accommodation entries and the present assessee was middle man and invoking Sec.68 of the Act, it was considered to be part of the income in the hands of the assessee. However, on appeal preferred before the Commissioner (Appeals) by the assessee U/s 143(3) r/w 147 of the Act, 1961 all the factual statements were examined at length and the Commissioner (Appeals), after due appreciation of material which came on record, observed that from independent enquiry the copies of bank account were obtained by the assessing officer and found that for clearing of the cheques issued by these companies either cash was deposited in the same account or in another account of the group company in fact was M/s. B.C. Purohit of which the present assessee was considered to be one of the group member. However, it was further observed that summons issued U/s 131 of the Act were served upon all such applicant/ creditors and their confirmation letters were filed and the companies were assessed to tax being the private limited companies, the existence of their separate legal entity ordinarily could not have been doubted. However on the basis of statement of Kripa Shanker Sharma which was recorded by the search authorities as regards accommodation entries, a sum of Rs.5 Lacs was assessed in the hands of present assessee alone and as regards other income, it was not considered to be in the hands of the present assessee. Obviously the department being aggrieved preferred appeal before the Tribunal and at the same time, the present assessee filed cross objection regarding part of the income, to the extent of a sum of Rs.5 Lacs, as being recorded in the hands of present assessee on the basis of statement of Kripa Shanker Sharma. The Tribunal while appreciating the factual matrix came on record observed that after the summons were issued U/s 131 of the Act,1961 to the applicant/creditors and their confirmation letters were filed and the companies were assessed to tax being private limited companies the existence of their separate legal entity ordinarily could not have been challenged more so when the identity of existence of the investor is not disputed and accordingly upheld the view of Commissioner (Appeals), at the same time further observed that merely on the basis of oral statement of Kripa Shanker Sharma recorded before the search authorities that the assessee provided accommodation entries was not sufficient for the income to be assessed for a sum of Rs.5 Lacs in the hands of the assessee and while allowing the cross objection filed by the assessee dismissed the appeal preferred by the revenue under order impugned.
4. We have heard the parties at length and of the view that what has been observed by the Commissioner (Appeals) & the Tribunal appears to be based on factual matrix and there appears no substantial question of law arises which may require interference by this Court to be examined in the instant appeal.
5. Consequently, the instant appeals are wholly devoid of merit and accordingly stand dismissed.
2013-TIOL-322-ITAT-AHM
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'D' AHMEDABAD
BENCH 'D' AHMEDABAD
ITA No.2804 & 2805/Ahd/2008
Assessment Year: 2004 -05 & 2005-06
Assessment Year: 2004 -05 & 2005-06
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-4, AAYAKAR BHAVAN
NEAR RACE COURSE CIRCLE, BARODA
CIRCLE-4, AAYAKAR BHAVAN
NEAR RACE COURSE CIRCLE, BARODA
Vs
M/s 20 MICRON LTD
307-308 ARUNDEEP COMPLEX
RACE COURSE SOUTH
BARODA-390007
PAN NO:AAACZ0580B
307-308 ARUNDEEP COMPLEX
RACE COURSE SOUTH
BARODA-390007
PAN NO:AAACZ0580B
Mukul Kr Shrawat, JM and Anil Chaturvedi, AM
Dated: April 26, 2013
Appellants Rep by: Mr D P Gupta, CIT(DR) & Mr T Shankar, Sr. DR
Respondent Rep by: Mr S N Soparkar, Sr. Adv.
Respondent Rep by: Mr S N Soparkar, Sr. Adv.
Income tax - Section 37 - Revenue or Capital Expenditure - Whether the expenditure claimed for diminution of value of raw material on account of deterioration of the material and the same was valued as per accounting standard at cost price or net realizable value whichever is less, the same has to be allowed - Whether the expenditure incurred for repair of asset due to which no new asset has come into existence, is revenue in nature - Whether the assessee is allowed claim in respect of stock which was damaged and lying at the customers place and written off in the books of account as expenditure.
A) Assessee is engaged in the business of manufacturing micronised minerals. In assessment proceedings AO observed that assessee follows the policy of valuing the slow and non moving inventory of raw materials at net realisable value as estimated by the management. During the year management ascertained permanent diminution in its value and the same was written off. Assessee submitted that raw materials were accumulation of slow and non-moving stock and on the basis of the report of independent stock auditor appointed by SBI from which assessee was enjoying credit facility, the stock was revalued. AO did not accept the claim of assessee stating that in case of talc and marble lumps the value adopted was Rs. 400/- per Mt. Ton and assessee could not substantiate the claim that it was landed cost. In the case of the value of finished goods, the valuation was also not accepted and disallowance was made of 25% of the amount claimed.
Before CIT (A) assessee further contended that one of the major customer informed that material supplied was contaminated with fungal growth which resulted in poor quality. Assessee also examined the same and found correct. The assessee also submitted to bank that the material was deteriorated in quality and also requested to restructure the account and the bank agreed to value the same by third party auditors and based on that report stock was revalued.
CIT (A) deleted the disallowance made by AO observing that the assessee had been following the mercantile system of accounting and valuation of stocks of raw material had been done at cost. The assessee is a company within the meaning of the Companies Act, 1956 and its books are to be maintained and accounts are to be prepared in accordance with section 209 to 211 of that Act. As per section 211 (3C), the accounting standards prescribed by the Institute of Chartered Accountants of India shall be mandatorily. As per Accounting Standard 2, under the heading "measurement of inventories", it has been provided that "inventory should be valued at the lower of cost and net realizable value". Net realizable value is nothing but the prevailing market price on the valuation date. This method has in fact been adopted by the assessee. Therefore, there can be no issue regarding the legality of the action. To support the claim, documentary evidences were produced such as correspondence with bank to bring out the fact that the fungal growth was found in stockpile, laboratory report and a report from independent expert. Further various banks in these circumstances also reduced the rate of interest and also rescheduled the installments. Thus, the contamination of the stock of raw materials represented a serious threat to the business which was also recognized by banks. The revaluation of its stock of raw material was not a unilateral arbitrary act on the part of the assessee but was taken after proper audit, technical evaluation and agreement with bank. Thus, the disallowance was unwarranted.
Revenue contended that the rejection in value of the inventory considered by the assessee in some of the cases and the rates adopted by the assessee could not be substantiated. Further banker also observed that the raw materials were of non perishable nature and could be used even after substantial lapse of time. Though the exercise for analyzing the stock had been carried out the purpose of Bank, valuation adopted by the Bank could not be adopted for the purpose of Income Tax. The valuation report of the Chartered Accountant was received after the close of the year and CA is not Registered Valuer and therefore the Valuation Report could not be relied upon.
B) Assessee debited expenses of Rs. 33.44 lacs as extra ordinary items which were repairs of plant and machinery at Bhuj Plant as it was damaged during the earthquake. After carrying out inspection of the damaged plant a team of engineers opined that it was not possible to repair the machines in India and can be repaired at its plant in UK. The amount received by the assessee from insurance company was offered as income and the subsidy received from government was credited to expenses account. The net amount was claimed as extraordinary item. AO rejected the claim of the assessee stating that the equipment was sent for refurbishment to its original overseas suppliers and after repairs it was expected to have increase in capacity and its useful life. Expenditure incurred was booked as capital work in progress by the assessee. Thus, he concluded that the entire expenditure incurred by the assessee was in the nature of capital nature which give benefit of enduring nature to the assessee.
CIT (A) allowed the appeal of the assessee observing that the expenditure incurred in replacement is not of material consideration but what is material is the nature of the machine which is replaced. If the machine is part of the plant, though it may be capable of carrying on independent activity yet it might still be part of the whole plant. If the machine replaced gives the end product and is the only process that is involved, the expenditure incurred would definitely be a capital expenditure. However, in the reverse situation, it would constitute revenue expenditure. Here, what was replaced was only a part of the whole plant. That part was not capable of producing the end product which was sold but only facilitated in its manufacture. Thus, the expenditure was wrongly treated as capital in nature. The aspect regarding the machinery taken out from gross block to Capital WIP and again reinstated in gross block, in the present case, the asset was not disposed off but merely held for possible future use after repairs. Accordingly, the assessee was correct in following the Accounting Standard prescribed and treating the same was capital work-in-progress. Once the same machine as reintroduced into the gross block the nature of the expenditure incurred thereon could not be said to be different from any other repairs merely because of the fact that the repairs took more than 2 years to be completed.
C) AO observed that assessee had written off slow / non moving stock at various sites of customers which was rejected by them and abandoned. Assessee submitted that the material was rejected by customers and it was not commercially viable to bring back the material and incur higher freight charges. Thus, the amount was written off from the books of account. AO rejected the claim stating that the goods were not even rejected in the earlier years and the assessee had given the credit for the same during the year under assessment.
CIT (A) deleted the disallowance observing that what the A.O. has disputed is only the year in which the debt turned bad. As per Section 37(1)(iii), the debt is allowed to be written off in that year in which "any bad debt or part thereof is written off as irrecoverable in the accounts for the previous year." Looking to the long over-due nature of the receivables and difficulties associated with their recovery, the assessee reasonably concluded that there was no option left but to write off the amount. There is no evidence to show that there was any possibility of recovery, or that the assessee still harboured any hopes of recovery.
Revenue contended that though it had been stated to be written off of bad debts but it was in the nature of write off of stock. As per the annual accounts, it was mentioned that the write off in stock include credit of stock abandoned at customers end. Since the assessee had not been able to prove the write off of its debts, assessee's claim could not be allowed.
After hearing both the parties, the ITAT held that,
A) ++ it is an undisputed fact that the assessee had carried the revaluation exercise with respect to its stock of materials as per the directions of its bankers and based on the audit report submitted by the auditors, the assessee had written down the value of stock. Assessee had explored the possibility of removing the fungus so that it could be used but the cost of removal of impurity was very costly and further it was not possible to completely remove fungal growth. Further considering the documentary evidence like lab report, correspondence from customers, report of independent expert CIT (A) has given a finding that the stock was contaminated by fungal microbacterial growth which necessitated for revaluation of stock duly supported by sound technical and commercial reasons. Thus, the order of CIT (A) is upheld;
B) ++ the machinery was damaged due to earthquake and expenses were incurred for its repairs. It is a fact that no new asset have come into existence. In the present case what was replaced was only a part of the machinery and not the entire machinery. Nothing has been brought on record by the Revenue to prove that the entire machinery was replaced and the replacement was not a part of the existing machinery. Thus, the order of CIT (A) is upheld;
C) ++ CIT (A) while deleting the addition has held that the debt had become bad. He has further held that considering the nature of the receivable which was long overdue and the difficulties associated with the recovery, the assessee was reasonable in concluding that the amount was not realizable and therefore, it was written off. These findings of CIT (A) could not be controverted by bringing any contrary evidence on record. Thus, there is no reason to interfere with the order of CIT (A).
A) Assessee is engaged in the business of manufacturing micronised minerals. In assessment proceedings AO observed that assessee follows the policy of valuing the slow and non moving inventory of raw materials at net realisable value as estimated by the management. During the year management ascertained permanent diminution in its value and the same was written off. Assessee submitted that raw materials were accumulation of slow and non-moving stock and on the basis of the report of independent stock auditor appointed by SBI from which assessee was enjoying credit facility, the stock was revalued. AO did not accept the claim of assessee stating that in case of talc and marble lumps the value adopted was Rs. 400/- per Mt. Ton and assessee could not substantiate the claim that it was landed cost. In the case of the value of finished goods, the valuation was also not accepted and disallowance was made of 25% of the amount claimed.
Before CIT (A) assessee further contended that one of the major customer informed that material supplied was contaminated with fungal growth which resulted in poor quality. Assessee also examined the same and found correct. The assessee also submitted to bank that the material was deteriorated in quality and also requested to restructure the account and the bank agreed to value the same by third party auditors and based on that report stock was revalued.
CIT (A) deleted the disallowance made by AO observing that the assessee had been following the mercantile system of accounting and valuation of stocks of raw material had been done at cost. The assessee is a company within the meaning of the Companies Act, 1956 and its books are to be maintained and accounts are to be prepared in accordance with section 209 to 211 of that Act. As per section 211 (3C), the accounting standards prescribed by the Institute of Chartered Accountants of India shall be mandatorily. As per Accounting Standard 2, under the heading "measurement of inventories", it has been provided that "inventory should be valued at the lower of cost and net realizable value". Net realizable value is nothing but the prevailing market price on the valuation date. This method has in fact been adopted by the assessee. Therefore, there can be no issue regarding the legality of the action. To support the claim, documentary evidences were produced such as correspondence with bank to bring out the fact that the fungal growth was found in stockpile, laboratory report and a report from independent expert. Further various banks in these circumstances also reduced the rate of interest and also rescheduled the installments. Thus, the contamination of the stock of raw materials represented a serious threat to the business which was also recognized by banks. The revaluation of its stock of raw material was not a unilateral arbitrary act on the part of the assessee but was taken after proper audit, technical evaluation and agreement with bank. Thus, the disallowance was unwarranted.
Revenue contended that the rejection in value of the inventory considered by the assessee in some of the cases and the rates adopted by the assessee could not be substantiated. Further banker also observed that the raw materials were of non perishable nature and could be used even after substantial lapse of time. Though the exercise for analyzing the stock had been carried out the purpose of Bank, valuation adopted by the Bank could not be adopted for the purpose of Income Tax. The valuation report of the Chartered Accountant was received after the close of the year and CA is not Registered Valuer and therefore the Valuation Report could not be relied upon.
B) Assessee debited expenses of Rs. 33.44 lacs as extra ordinary items which were repairs of plant and machinery at Bhuj Plant as it was damaged during the earthquake. After carrying out inspection of the damaged plant a team of engineers opined that it was not possible to repair the machines in India and can be repaired at its plant in UK. The amount received by the assessee from insurance company was offered as income and the subsidy received from government was credited to expenses account. The net amount was claimed as extraordinary item. AO rejected the claim of the assessee stating that the equipment was sent for refurbishment to its original overseas suppliers and after repairs it was expected to have increase in capacity and its useful life. Expenditure incurred was booked as capital work in progress by the assessee. Thus, he concluded that the entire expenditure incurred by the assessee was in the nature of capital nature which give benefit of enduring nature to the assessee.
CIT (A) allowed the appeal of the assessee observing that the expenditure incurred in replacement is not of material consideration but what is material is the nature of the machine which is replaced. If the machine is part of the plant, though it may be capable of carrying on independent activity yet it might still be part of the whole plant. If the machine replaced gives the end product and is the only process that is involved, the expenditure incurred would definitely be a capital expenditure. However, in the reverse situation, it would constitute revenue expenditure. Here, what was replaced was only a part of the whole plant. That part was not capable of producing the end product which was sold but only facilitated in its manufacture. Thus, the expenditure was wrongly treated as capital in nature. The aspect regarding the machinery taken out from gross block to Capital WIP and again reinstated in gross block, in the present case, the asset was not disposed off but merely held for possible future use after repairs. Accordingly, the assessee was correct in following the Accounting Standard prescribed and treating the same was capital work-in-progress. Once the same machine as reintroduced into the gross block the nature of the expenditure incurred thereon could not be said to be different from any other repairs merely because of the fact that the repairs took more than 2 years to be completed.
C) AO observed that assessee had written off slow / non moving stock at various sites of customers which was rejected by them and abandoned. Assessee submitted that the material was rejected by customers and it was not commercially viable to bring back the material and incur higher freight charges. Thus, the amount was written off from the books of account. AO rejected the claim stating that the goods were not even rejected in the earlier years and the assessee had given the credit for the same during the year under assessment.
CIT (A) deleted the disallowance observing that what the A.O. has disputed is only the year in which the debt turned bad. As per Section 37(1)(iii), the debt is allowed to be written off in that year in which "any bad debt or part thereof is written off as irrecoverable in the accounts for the previous year." Looking to the long over-due nature of the receivables and difficulties associated with their recovery, the assessee reasonably concluded that there was no option left but to write off the amount. There is no evidence to show that there was any possibility of recovery, or that the assessee still harboured any hopes of recovery.
Revenue contended that though it had been stated to be written off of bad debts but it was in the nature of write off of stock. As per the annual accounts, it was mentioned that the write off in stock include credit of stock abandoned at customers end. Since the assessee had not been able to prove the write off of its debts, assessee's claim could not be allowed.
After hearing both the parties, the ITAT held that,
A) ++ it is an undisputed fact that the assessee had carried the revaluation exercise with respect to its stock of materials as per the directions of its bankers and based on the audit report submitted by the auditors, the assessee had written down the value of stock. Assessee had explored the possibility of removing the fungus so that it could be used but the cost of removal of impurity was very costly and further it was not possible to completely remove fungal growth. Further considering the documentary evidence like lab report, correspondence from customers, report of independent expert CIT (A) has given a finding that the stock was contaminated by fungal microbacterial growth which necessitated for revaluation of stock duly supported by sound technical and commercial reasons. Thus, the order of CIT (A) is upheld;
B) ++ the machinery was damaged due to earthquake and expenses were incurred for its repairs. It is a fact that no new asset have come into existence. In the present case what was replaced was only a part of the machinery and not the entire machinery. Nothing has been brought on record by the Revenue to prove that the entire machinery was replaced and the replacement was not a part of the existing machinery. Thus, the order of CIT (A) is upheld;
C) ++ CIT (A) while deleting the addition has held that the debt had become bad. He has further held that considering the nature of the receivable which was long overdue and the difficulties associated with the recovery, the assessee was reasonable in concluding that the amount was not realizable and therefore, it was written off. These findings of CIT (A) could not be controverted by bringing any contrary evidence on record. Thus, there is no reason to interfere with the order of CIT (A).
Revenue's appeal dismissed
Cases followed:
CIT vs. Tanjavore Textile Mills 253 ITR 138 (Mad.)
Oman International Bank Ltd. (2006-TII-10-ITAT-MUM-SB-INTL)
Oman International Bank Ltd. (2006-TII-10-ITAT-MUM-SB-INTL)
ORDER
Per: Anil Chaturvedi:
These two appeals are filed by the Revenue against two separate orders passed by Ld. CIT (A)-III, Baroda dated 29-5-2008 & 30-5-2008 for the assessment years 2004-05 and 2005-06 respectively.
2. The facts as culled out from the orders of the lower authorities are as under.
3. The assessee is a company engaged in the business of manufacturing micronised minerals. The assessee has manufacturing facilities at various places and it also has mines which are engaged in micronising various types of non-metalic minerals namely talc, calcite, china clay, barites, limestone, silica, mica etc. The assessee buys lumps, course powder from outside and grinds them to course powder and micronises to a very finer size called "microns". The assessee filed its return of income on 29-10-2004 showing total loss of Rs.7,36,79,224. Case was selected for scrutiny and thereafter the assessment was framed u/s. 143(3) vide order dated 26-12-2006 and the total loss was determined at Rs.5,78,75,272/-.
4. Aggrieved by the order of A.O. assessee carried the matter before CIT (A) and CIT (A) vide order dated 29-5-2008 partly allowed the appeal of the assessee.
5. Aggrieved by the aforesaid order of CIT (A), Revenue is now in appeal before us. Before us the Revenue has raised following two effective grounds:-
"1. On the facts and circumstances of the case, the Ld. CIT(A) erred in directing the Assessing Officer to delete Rs.72,57,271/- being diminution in value of inventory even though the assessee could not substantiate its claim and had not included the landed cost in case of talc and marble lumps.2. The Ld. CIT (A), erred in allowing expenditure of Rs.33,44,209/- on repairs of plant and machinery, considering it as revenue nature even though in note at para 11 to the audit report it was mentioned that the expenditure on repairs of plant and machinery caused enduring benefit to the assessee."
First ground is with respect to the deletion of diminution in value of inventory of Rs. 72,57,271/-.
6. During the course of assessment proceedings on perusing the balance sheet and the Profit and loss account A.O. noticed that the assessee follows the policy of valuing the slow and non moving inventory of raw materials at net realisable value as estimated by the management. Management ascertained permanent diminution in its value amounting to Rs.2,90,29,086/- and the same was written off during the year. The assessee was asked to explain the basis for such reduction in the value of inventory along with justification. In response to the query of the A.O. Assessee submitted and explained manufacturing process. It was further submitted that the assessee had in its stock materials which were purchased 3 to 5 years back. These raw materials were accumulation of slow and non-moving stock and during the year the State Bank of India from whom the assessee enjoyed the working capital facility had appointed an independent Auditor to carry out independent stock audit of the stocks of the company lying at various locations and point out slow and nonmoving stock. The auditors carried out detailed verification of stock at various locations and pointed out slow and non moving stock. Based on the report submitted by the stock auditor assessee revalued the value in the material lying at different locations. The list of which is furnished at page 5 and 6 of the A.O's order. Considering the slow and non moving items the assessee valued the aforesaid stock at net realizable value & ascertained permanent diminution in its value of Rs.2,90,29,086/-.The submissions & justifications made by the assessee were not found acceptable to the A.O. A.O. was of the view that in the case of talc and marble lumps the value adopted by the assessee for certain locations was Rs.400/- per Mt. ton. According to the A.O. assessee could not substantiate the claim that it was landed cost. In the case of the value of finished goods the assessee was asked to explain the basis of taking conversion cost for the purpose of valuation. The valuation of the assessee was not accepted by the A.O. he therefore did not fully accept the valuation made by the assessee and thereby disallowed the claim of the assessee by 25% and accordingly made an addition of Rs.72,55,271/-.
7. Aggrieved by the order of A.O. assessee carried the matter before the CIT (A). Before CIT (A) the assessee interalia submitted that one of the major customers had informed that the material supplied by the assessee was contaminated with fungal growth which resulted in poor quality of product. The assessee also got technical report prepared and examined the possibility of removing the fungus. However, it was reported that the stockpile of calcite, china clay had deteriorated in quality to a great extent and the removal of impurity was very costly. Even after removal of impurity some fungal growth would still remain, as a result of which the usage of such contaminated raw materials would be hazardous particularly for application in plastics industry. The stock of raw materials had been hypothecated to banks and other financial institutions. This matter was brought to the notice of the bankers and the assessee company requested the banks for restructuring of its debts. Banks with the other financial institutions agreed to undertake the verification of inventory by third party auditors and based on their report the stock was revalued. CIT (A) after considering the submissions of the assessee and placing reliance on the various decisions of High Court deleted the addition made by A.O. by holding as under:-
"3.2. I have considered the submissions of the Ld. A. R. and the facts of the case. The issue relating to revaluation of inventory has been considered by the courts. There is unanimity in judicial opinion regarding the allowability of a change in the valuation of stock provided it is done for bonafide reasons. An issue similar to the present one came up for consideration of the Delhi High Court in the case of CIT vs. Bharat Commerce & Industries Ltd., 240 ITR 256, wherein the court held that in the case of slow moving items which did not have a ready market, it was permissible for the assessee to adopt a lower value. In another case the Madras High Court observed, while permitting a lower valuation of goods, that the object is not to load the stock with a value which is higher than what is realizable (India Motor Parts & Accessories Ltd. vs. CIT 60 ITR 531). Section 145A of the Act deals with the valuation of inventory for the purposes of determining the income chargeable under the head "profits and gains of business or profession". It has been prescribed that such valuation shall be in accordance with the method of accounting regularly employed by the assessee. The appellant has been following the mercantile system of accounting and valuation of stocks of raw material has been done at cost. The fact that this method has been regularly followed is not in dispute. The appellant is a company within the meaning of the Companies Act, 1956. Its books are to be maintained and accounts are to be prepared in accordance with section 209 to 211 of that Act. As per section 211 (3C), the accounting standards prescribed by the Institute of Chartered Accountants of India shall be mandatorily followed by companies till alternate standards are prescribed by the Central Government. The ICAI has, interalia, prescribed Accounting Standard-2 dealing with valuation of inventories. At paragraph 5, under the heading "measurement of inventories", it has been provided that "inventory should be valued at the lower of cost and net realizable value". Net realizable value is nothing but the prevailing market price on the valuation date. When the appellant is bound to follow AS 2, & AS 2 prescribes adoption of the lower of the cost or market value, and this method has in fact been adopted by the appellant, there can be no issue regarding the legality of the action. At most a case could be made out that the correct net realizable value was not adopted.3.2.1. In the instant case, the assessee has adduced convincing documentary evidence in support of the averments made as above. The correspondence with M/s. ICI Ltd. clearly brings out the fact that the fungal growth in assessee's stockpile of raw material was brought to notice and adverse consequences flowed therefrom. Secondly, the laboratory report shows fungal microbacterial growth in stock of raw materials. Thirdly, a report from an independent expert Dr. Dhanjay Sant, consultant and geologist, also brings out the fact that the stockpile of raw materials had become unfit for use as raw material by the assessee company due to fungal growth. Fourthly, the other important stake-holders in the company, viz. SBI, Exim Bank of India, IDBI and SIDBI had a joint meeting under the chairmanship of the lead manager of the consortium (IDBI). As per minutes of the meeting dated 26-3-2004 of the Corporate Debt Restructuring Cell, IDBI, it has been recorded that all the banks/financial institutions have agreed to reduce the rate of interest to 10.25% from 17.74 (IDBI), from 15% (Exim Bank) and from 17% (GSFC). Further, repayment of principal amount was also rescheduled and allowed to be repaid in 24 equal quarterly installments ending in April, 2013. Further, the cash credit limit was converted into term loan and some interest was also waived. Altogether IDBI, Exim Bank and GSFC waived interest amounting to Rs.511 lacs,Rs. 82 lacs and Rs.32 lacs respectively.3.3.2. From the above, it is clear that the contamination of the stock of raw materials represented a serious threat to the business. This was recognized not only by the assessee company but also its bankers. Looking to the potential loss in profitability resulting from the revaluation of its useless stock, the bank and other financial institutions agreed to undertake a debt restructuring and rescheduling exercise. In terms of the exercise the bankers provided some respite to the assessee in order to enable it to tide over the crisis. It is thus apparent that the revaluation of its stock of raw material was not a unilateral arbitrary act on the part of the assessee. The decision was taken after proper auditor, technical evaluation and with the agreement of its bankers. I am therefore of the opinion that there were sufficient and sound reasons, both technical and commercial, for the assessee to revalue its inventory of raw materials, as a result of which the reduction in value thereof was to the tune of Rs.2,90,29,086/-. Provision for deterioration in stock value has been held to be allowable business expenditure [South Eastern Coalfields Ltd. vs. CIT, 260 ITR (IT) (Nag,)]. Similarly, the Mumbai Bench of ITAT has held, in ACIT vs. Rishiroop Polymers Ltd. 286 ITR (AT) 54, that where stocks have become obsolescent and written off in the accounts, there was no justification for disallowing 50% thereof on an adhoc basis. Accordingly, following the rational of the cases cited, it is held that the A.O., was not justified in disallowing 25% thereof, i.e. Rs.72,57,271/-, which is directed to be deleted."
8. Aggrieved by the aforesaid decision of CIT (A), the Revenue is now in appeal before us.
9. Before us the Ld. D.R. submitted that the rejection in value of the inventory considered by the assessee in some of the cases and the rates adopted by the assessee could not be substantiated. The Ld. D.R. pointed out to the reply of assessee to its Banker which is at page No.178 of the paper book wherein it was submitted that the raw materials were of non perishable nature and can be used even after substantial lapse of time. The Ld. D.R. further submitted that this submission of the Managing Director was at variance with the submission made before the CIT (A) wherein it has been stated that the raw materials cannot be used for manufacturing process. He further submitted that though the exercise for analyzing the stock has been carried out the purpose of Bank, valuation adopted by the Bank cannot be adopted for the purpose of Income Tax. He further submitted that the review made by the bank was for the limited purpose of review of the credit facilities only. He further submitted that the assessee has written off the amounts in two years i.e. A. Y. 2004-05 and 2005-06. He further submitted that the valuation report of the Chartered Accountant was received after the close of the year. Further the C.A. is not a Registered Valuer and therefore the Valuation Report submitted by him cannot be relied upon. He thus supported the order of A.O.
10. The Ld. A.R. on the other hand submitted that the assessee had considered the current market rate for the purposes of valuation. Assessee had submitted various purchase bills and also the current purchase prices in the form of bills as evidence to support the price. The Ld. A.R. further submitted that the valuation of stock has been done in line with Accounting Standard-2 on Valuation of Inventory prescribed by the Institute of Chartered Accountants of India (ICAI). He further pointed out that the A.O. has not fully accepted the justification offered by the assessee meaning thereby that the justification could not be fully ignored. The Ld. A.R. further pointed out that the revaluation/reduction in value of various materials had been listed at pages 501 & 502 of the paper book. From the aforesaid table he pointed out to the fact that in many of the cases the goods were lying beyond 2000. He also pointed out to the notices, reports placed at page No.16 to 34 of the paper book in respect of various raw materials wherein it has been stated that the material was not qualitatively approved for use. It was also submitted that even after the write off the assessee had losses and therefore the motive of assessee to write off the stock to reduce the losses cannot be doubted. He further relied on the decision in the case of Alfa Laval India Ltd. v/s. DCIT Bombay High Court (2004) 266 ITR 418 which was confirmed by Hon'ble Apex Court and reported at 294 ITR 451 = (2007-TIOL-418-HC-DEL-IT) He also passed order relying on the decision in the case of CIT VS. Bharat Commerce & Industries 240 ITR 256 (Del), South Eastern Coalfields Ltd. vs. CIT 260 ITR (IT) (Nag.), Mumbai Bench ITAT in the case of ACIT vs. Rishiroop Polymers Ltd. 286 ITR (AT) 54. He thus urged that the order of CIT (A) be upheld
11. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the assessee had carried the revaluation exercise with respect to its stock of materials as per the directions of its bankers and based on the audit report submitted by the auditors, the assessee had written down the value of stock. Before CIT(A) it was submitted by the Assessee that one of the major customers had informed that the material supplied by the Assessee was contaminated due to fungal growth which resulted in poor quality of final product. The Assessee had explored the possibility of removing the fungus so that it could be used but the cost of removal of impurity was very costly and further it was not possible to completely remove fungal growth. CIT (A) apart from considering the aforesaid submission and also considering the documentary evidence like lab report, correspondence from customers, report of independent expert has given a finding that the stock was contaminated by fungal microbacterial growth which necessitated for revaluation of stock duly supported by sound technical and commercial reasons. The aforesaid finding of CIT(A) could not be controverted by Revenue by bringing any contrary material on record. Thus considering the totality of the aforesaid facts and relying on the aforesaid decisions of Hon. High Court find no reason to interfere with the order of CIT(A) and thus uphold his order on this ground. thus this ground of Revenue is dismissed.
Second ground is with respect to expenditure of Rs.33,44,209/- on repairs of plant and machinery.
12. Assessing Officer observed that assessee had debited expenses of Rs.33,44,209/- as an Extra ordinary items in its profit and loss account. The assessee submitted that the aforesaid expenses were incurred for repairs of plant and machinery at its Bhuj plant as it was damaged during the earthquake at Bhuj. Assessee submitted that the plant and machinery at its Bhuj was damaged at the time of earthquake on 26-1-2001. After carrying out inspection of the damaged plant a team of engineers opined that it was not possible to repair the machines in India and can be repaired at its plant in UK. The assessee further submitted that the assessee had claimed an insurance from the insurance company and the claim of Rs.16,04,401/- which was received by the assessee was accounted as other income in F.Y. 2004-05 and offered to tax. The assessee had also received subsidy of Rs.31,80,000/- through Government of Gujarat which was credited to the expenses account. Thus the net amount of Rs.33,44,209/- was accounted as an extra ordinary item and claimed as an expenditure. A.O. did not accept the contention of the assessee for the reason that in notes to accounts. It was stated that the equipment was sent for refurbishment to its original overseas suppliers and after repairs it is expected to have increase in capacity and its useful life. He further observed that the expenditure incurred was booked as capital work in progress by the assessee. He thus concluded that the entire expenditure incurred by the assessee was in the nature of capital nature which give benefit of enduring nature to the assessee. He thus held that the expenditure cannot be allowed as a Revenue expenditure and accordingly disallowed Rs. 33,44,209/-. Aggrieved by the action of A.O. the assessee carried the matter before the CIT (A).
13. CIT (A) after considering the submissions of the assessee deleted the addition by holding as under:-
"4.2. I have considered the submissions of the Ld. A.R. and the facts of the case. Judicial decisions abound laying down the proposition that replacement of any single machine in a group of machines (even if that machine is replaced in its entirety) may not be capital expenditure for the reason that the product such machine generates is not the end product sold by the assessee but is, in turn, used for further processing. In Ambica Cotton Mills Ltd. vs. JCIT 86 ITD 240, the Madras Bench of the ITAT held that where the mill contains several items of machinery and each of them are linked together for carrying on various processes in sequence, replacement of any one or more of the machines ion the link would result only in replacement of part of the whole plant and hence it is in the nature of revenue expenses. The expenditure incurred in replacement is not of material consideration but what is material is the nature of the machine which is replaced. If the machine is part of the plant, though it may be capable of carrying on independent activity yet it might still be part of the whole plant. The test is the end product. If the machine replaced gives the end product and is the only process that is involved, the expenditure incurred would definitely be a capital expenditure. However, in the reverse situation, it would constitute revenue expenditure. Similarly, Madras High Court has held in CIT vs. Tanjavore Textile Mills, 253 ITR 138 that expenditure on replacement of worn out parts of machinery is expenditure of revenue character as it is meant to keep the business without break-down of machinery and not expenditure incurred for starting a new business. Here, what was replaced was only a part of the whole plant. That part was not capable of producing the end product which was sold but only facilitated in its manufacture. Hence, in my opinion the A.O. was not correct in treating the expenditure of Rs.33,44,209/- as capital expenditiure.4.2.1 Coming to the aspect regarding the machinery taken out from the gross block to capital work-in-progress in the earlier year, and reinstatement of the same in the gross block by taking out from the capital work-in-progress, it would be relevant to reproduce the Accounting Standard-10 for case of reference."14. Retirements and Disposals14.1. An item of fixed asset is eliminated from the financial statements on disposal.14.2. Item of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realizable value and are shown separately in the financial statements. Any expected loss is recognized immediately in the profit and loss statement.14.3. In historical cost financial statements, gains or losses arising on disposal are generally recognized in the profit and loss statement.14.4. On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value is normally charged or credited to the profit and loss statement except that, to the extent such a loss is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilized, it is charged directly to that account. The amount standing in revaluation reserve following the retirement or disposal of an asset which relates to that asset may be transferred to general reserve."4.2.2 In the instant case, the assessee had repaired the machine reinstalled the same in this year. The same was not disposed off but merely held for possible future use after repairs. Accordingly, the assessee was correct in following the Accounting Standard prescribed and treating the same was capital work-in-progress. Once the same machine as reintroduced into the gross block the nature of the expenditure incurred thereon could not be said to be different from any other repairs merely because of the fact that the repairs took more than 2 years to be completed. Accordingly, the addition of Rs.31,44,209/- is directed to be deleted."
14. Aggrieved by the aforesaid order of CIT (A) the Revenue is now in appeal before us.
15. Before us the Ld. D.R. submitted that the company in its notes to accounts has very clearly stated that on refurbishment, machinery capacity would increase and its useful life and performance of the machine was also likely to improve substantially. He thus submitted that when the assessee itself was of the view that the expenditure would increase the capacity and useful life, the expenses therefore cannot be considered to be of Revenue in nature. He however, submitted that CIT (A) has relied on the decision of Madras High Court in the case of CIT vs. Tanjavore Textile Mills 253 ITR 138 which was decided prior to insertion of Explanation-3 to Sec.31 and therefore not applicable to the facts of the present case. He thus submitted that the expenses were in the nature of capital and therefore, the action of the A.O. be upheld.
16. The Ld. A.R. on other hand submitted that the assessee has debited the net amount of Rs.33,44,209/- to Profit and loss account. He further submitted that the insurance claim that was received in subsequent year has been offered as income. In the alternate he submitted that if the expenditure are treated as capital expenditure, the assessee should be granted depreciation.
17. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the machinery was damaged due to earthquake and expenses were incurred for its repairs. It is also a fact that no new asset have come into existence. In the present case what was replaced was only a part of the machinery and not the entire machinery. Nothing has been brought on record by the Revenue to prove that the entire machinery was replaced and the replacement was not a part of the existing machinery. In the case of CIT vs. Tanjavore Textile Mills 253 ITR 138 (Mad.) it has been held as under:-
Expenditure on replacement of worn out parts of machinery is expenditure of revenue character as it is meant to keep the business without break down of machinery and not expenditure incurred for starting a new business. Held accordingly that,Tribunal was right in allowing the assessee's claim to deduction of expenditure towards replacement of certain items of machinery and no question of law arose from its order." CIT vs. Sri Hari Mills Pvt. Ltd., (1999) 237 ITR 188 (Mad) followed."
18. Considering the totality of the facts and relying on the aforesaid decision of the Hon'ble Madras High Court we are of the view that no interference is called for in the order of CIT (A). Thus this ground of the Revenue is dismissed.
19. In the result, the appeal of the Revenue is dismissed.
I.T.A. No.2805/AHD/2008 (A.Y. 2005-06).
20. In this appeal Revenue has raised following grounds of appeal:
"1. On the facts and circumstances of the case, the Ld. CIT (A) erred in directing the Assessing Officer to delete Rs4,81,44,087/- being diminution in value of inventory even though, the assessee could not substantiate its claim and had not included the landed cost in case of talc and marble lumps.2. On the facts and in the circumstances of the case, the Ld. CIT (A) erred in law and on facts in directing the assessing officer, to delete the addition of Rs.61,77,200/-, disallowed as bad debts, though assessee failed to prove that it had made any efforts for the recovery and also ignoring the underlying principles laid down by the Gujarat High Court in the case of Dhall Enterprises & Engineers Pvt. Ltd. vs. CIT 295 ITR 481 (Guj.)."
21. Since both the parties have agreed that no new facts are there this issue may be decided in line with ground No.1 of ITA No.2804/Ahd/2008.
22. We have heard both the parties. It is an undisputed fact that the facts of the case in the year under appeal are identical to that of A.Y. 2004-05. CIT (A) also while deciding the issue held that the facts and issue of the present appeal are identical to that of A.Y. 2004-05 and therefore followed his own order. We also for the reasons spelt out in para-11 hereinabove decide the issue in favour of assessee and dismiss the ground of Revenue. Thus this ground of Revenue is dismissed. We first take up second ground with respect to deletion of addition of Rs.61,77,200/-.
23. Assessing Officer observed that the assessee had written off slow /non-moving stock worth Rs.6.59 crores, which consists of Rs.4,81,44,087/- lying at various sites of the assessee and stock of Rs.1,78,28,557/-being the material rejected by the customers and abandoned at the site of customers. The assessee was asked to submit its justification and substantiate its claim. Assessee interalia submitted that the material lying at the customers site was rejected by the customers as the material was found to be unacceptable. Further it was not commercially viable proposition to bring back the material to Bhuj as the freight charges were very high and further the cost of reimbursement was also high. Under these circumstances, the amount was written off from the books of accounts. The A.O. did not accept the contention of the assessee. He was of the view that the goods were not even rejected in the earlier years and the assessee had given the credit for the same during the year under assessment. Since the assessee was following the mercantile system, the same could be accounted in respect of assessee. He thus disallowed the claim of the assessee. Aggrieved by the order of A.O. assessee carried the matter before the CIT (A).
24. CIT (A) after considering the submissions of the assessee deleted the addition by holding as under:-
"6.2.3. It is not in dispute that the debt had become bad. What the A.O. has disputed is only the year in which the debt turned bad Section 37(1)(iii) is very clear on this point. The debt is allowed to be written off in that year in which "any bad debt or part thereof is written off as irrecoverable in the accounts for the previous year." As a general rule, the write-off is admissible in the year in which the debt is actually written off by the assessee. Thus, the proposition laid down in Oman International Bank has been qualified by the Gujarat High Court in Dhall's case. The High Court has pointed out that where evidence was available to show that the assessee himself was making efforts for recovery, it would not be said that the debt was irrecoverable. However, the question as to whether a particular debt was recoverable or irrecoverable has to be decided with reference to the facts of a particular case. In this background, I am of the opinion that looking to the long over-due nature of the receivables and difficulties associated with their recovery; the assessee reasonably concluded that there was no option left but to write off the amount. There is no evidence to show that there was any possibility of recovery, or that the assessee still harboured any hopes of recovery. Looking to the facts and circumstances, it is held that the A.O. held that the A.O. was not justified in disallowing the writing off of bad debt amounting to Rs.1,78,28,557/-. The disallowance is directed to be deleted."
25. Before us the Ld. D.R. submitted that though it has been stated to be written off of bad debts but it was in the nature of write off of stock. He pointed out to note No.1 to the Annual Accounts which forms part of the paper book wherein it was stated that the write off in stock include credit of stock abandoned at customers end. It was also submitted that since the assessee has not been able to prove the write off of its debts, assessee's claim cannot be allowed.
26. On the other hand, the Ld. A.R. submitted that the assessee had supplied the materials to its customers and the same was rejected by the customers. The cost of transportation of goods from the customers place would have been much more and therefore the assessee took the decision in bringing the material back but in turn gave credit of the material to the customers. He further submitted that since the assessee has written off the amount it was covered by the decision of Hon'ble Supreme Court in the case of TRF Ltd., vs. CIT (2010) [323 ITR 397] = (2010-TIOL-15-SC-IT). He thus supported the order of CIT (A).
27. We have heard the rival submissions and perused the material on record. CIT (A) while deleting the addition has held that the debt had become bad. He has further held that considering the nature of the receivable which was long overdue and the difficulties associated with the recovery, the assessee was reasonable in concluding that the amount was not realizable and therefore, it was written off. CIT (A) has also placed reliance on the decision of Tribunal in the case of Oman International Bank Ltd. 100 ITD 285 (Mum.) (SB) =(2006-TII-10-ITAT-MUM-SB-INTL). These findings of CIT (A) could not be controverted by bringing any contrary evidence on record. CIT (A) has also considered the principles laid down in the case of Dhall Engineers Enterprise as reported in 294 ITR 481 (Guj.) and deleted the addition. This could not be controverted by the Revenue. We thus find no reason to interfere with the order of CIT (A) and thus uphold the action of the CIT (A) in deleting the addition. We dismiss this ground of the Revenue.
28. In the result, appeals of the Revenue are dismissed.
(Order pronounced in Open Court on 26.4.2013.)
2013-TIOL-323-ITAT-CHD
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' CHANDIGARH
BENCH 'B' CHANDIGARH
ITA No.367/Chd/2012
Assessment Year: 2007-08
Assessment Year: 2007-08
AARTI INTERNATIONAL LTD
G T ROAD, MILLERGANJ
LUDHIANA
PAN NO:AABCA4454C
G T ROAD, MILLERGANJ
LUDHIANA
PAN NO:AABCA4454C
Vs
COMMISSIONER OF INCOME TAX
II, LUDHIANA
II, LUDHIANA
Sushma Chowla, JM and Mehar Singh, AM
Dated: March 7, 2013
Appellant Rep by: Shri Subhash Aggarwal
Respondent Rep by: Shri Manjeet Singh, DR
Respondent Rep by: Shri Manjeet Singh, DR
Income tax - Sections 14A, 36(1)(iii), 263, Rule 8D - Whether when the AO has applied his mind on the issue on the basis of which jurisdiction is invoked u/s 263 and further the jurisdiction is assumed merely on the basis of audit objections, the proceedings initiated u/s 263 are still valid.
Assessment was made u/s 143(3) of the Act. CIT observed certain points that the order was erroneous and prejudicial to the interest of revenue and notice was issued u/s 263 of the Act. The first issued for invoking jurisdiction u/s 263 is capitalization of interest expenditure in relation to investment in land. CIT noted the assessee to have borrowed funds for investment in assets on which interest liability arose which was liable to be capitalized and added back to the income under the proviso to section 36(1)(iii) of the Act. Assessee explained complete details of WIP and explained that the investments were out of own funds and no borrowings were made for making the investment except the investment made in plant and machinery on which interest was capitalized. The copies of the title deed and the bank account were produced before the Assessing Officer and no addition was made on this account. The second issue was in respect of disallowance of expenses relatable to the exempt unit. The assessee had claimed deduction u/s 10B in respect of unit No.2 and Commissioner of Income Tax show caused the assessee as to why the Directors' and Auditors' remuneration of Rs.6,61,000/- on proportionate basis should not be allocated to unit No.2 where exemption was claimed u/s 10B. Assessee contended that it filed a reply during original assessment proceedings and in this regard no adverse action was taken. The third issue raised was in relation to disallowance u/s 14A which was already considered by appellate authorities also. CIT stated in this regard that contention of assessee that the issue has already been decided by appellate authorities was not acceptable as the issue in question was not before appellate authorities at any stage.
Assessee contended that full details were furnished before AO in this regard. CIT observed that AO did not apply his mind and failed to verify and examine complete aspects in relation to investment made in work-in-progress and computing income from exempt income vis-Ã -vis common expenses in relation to the computation of deduction u/s 14A. CIT set aside the order of AO for making fresh order keeping view of directions of CIT.
Assessee contended that the only discussion in order was in relation to disallowance u/s 14A of the Act which was deleted by ITAT against the said addition. It was also contended that the notice u/s 263 was issued on the basis of audit objections raised by audit party. CIT did not apply mind before issue of notice in comparison to assessment order passed by AO which was passed after due application of mind. In respect of issue raised regarding capitalization of interest vis-Ã -vis work in progress, assessee contended that it was not known from where the figures were picked up. Assessee further contended that the amount invested in land and plant and machinery was out of own sources and no borrowings were made for making investments except investment in plant and machinery which was made out of term loan on which interest was capitalized.
In respect of disallowance u/s 14A, assessee contended that it had invested its own funds and there was no merit in the application of Rule 8D as the said Rule came into operation w.e.f. AY 2008-09. Elaborate enquiries were made by AO during assessment proceedings in respect of all the three issues i.e. investment in work in progress and claim of interest, eligible profits u/s 10B and also disallowance u/s 14A. Assessee contended that merely on the basis of the audit objections invoking of jurisdiction u/s 263 was not warranted. There is difference between non-application of mind and no enquiries being conducted or inadequate enquiries being made. However, in the case of the assessee there were due enquiries made and the AO applied his mind before computing the income in the hands of the assessee.
Revenue contended that the assessment order talks of only disallowance u/s 14A whereas no enquiries were made by AO on account of the disallowance u/s 36(1)(iii) and 10B. Revenue further contended that the assessment order in the case was passed by the Addl.CIT who is only an administrative head and there was no application of mind in passing the said order.
After hearing both the parties, the ITAT held that,
++ assessee enclosed requisite details working out details of exemption under section 10B of the Act during assessment proceedings. The assessee had also elaborately explained details of capital work in progress alongwith the said letter. AO in response raised another set of queries which were also replied by assessee and explained the issue in respect of disallowance u/s 14A of the Act and also the allowability of deduction u/s 10B of the Act. The order-sheet entries noted the assessee to have produced books of account, which were examined on test-check basis and also with reference to reply filed by the assessee. The case was discussed thereafter and assessment order was passed by the AO in which the only disallowance made was u/s 14A. As per the decision of Apex Court in the case of Malabar Industrial Co. Ltd., the cases which fell in the category of non-application of principle of natural justice or non-application of mind would satisfy the requirement of the order being erroneous and the Commissioner of Income Tax thus would be entitled to invoke the revisional jurisdiction under section 263 of the Act. The Delhi High Court in case of CIT Vs. Sunbeam Auto Ltd held that there was distinction between the lack of enquiry and inadvertent enquiry where there was application of mind by the AO before allowing expenditure in question and even if inadequate enquiries were made by the AO that in itself would not empower the CIT to invoke the revisional jurisdiction u/s 263;
++ in the case at present, AO had raised the queries in respect of the investment in land and other assets which were put to use during the year itself and the source of investment in the said assets was explained. Part of investment was made out of borrowed funds. The assessee itself had disallowed a sum out of interest expenditure account which was accepted by AO. The second aspect of this issue raised by the Commissioner of Income Tax vide his show cause notice issued under section 263 of the Act was narration of the figures in respect of the investment made by the assessee during the year under consideration. It is observed that the show cause notice issued by CIT u/s 263 and the audit objections raised by the CIT (Audit) in this case and find that the figures and contents are identical. It is surprising to note that the CIT while passing the order u/s 263 had not even taken any note of the objection of the assessee that the figures appearing in the show cause notice do not match with the figures reflected in the Balance Sheet of the assessee. The basis of such figures in the show cause notice issued by the Commissioner of Income Tax is not clear and in the absence of the same, there is no merit in invoking section 263 of the Act specially in cases where AO had made due enquiries during the course of assessment proceedings and had applied his mind before passing the assessment order;
++ regarding issue raised in regard to exemption claimed u/s 10B, AO not only asked the assessee to justify its claim of deduction u/s 10B but also to adduce relevant documents. Assessee has placed on record the details submitted before the AO alongwith letter in which the elaborate working of the exemption u/s 10B of the Act was furnished during the course of assessment proceedings. AO had made enquiries and had decided the issue after taking into consideration the relevant data and material. CIT initiated proceedings without verification observed that the order passed by the AO was without due application of mind and having accepted the contention of the assessee without verification, would be an order which is erroneous and prejudicial to the interest of the Revenue within the meaning of provisions of section 263. However, in the present case, AO had applied his mind by raising queries in respect of the claim of exemption u/s 10B and after the reply was filed by the assessee further enquiries were made by the AO and elaborate working was forwarded by the assessee which was accepted and no disallowance was made. Thus, there is no merit in invoking jurisdiction u/s 263;
++ in respect of disallowance u/s 14A, in case where the AO had computed the disallowance and worked out the addition on the basis of such disallowance made by invoking the provisions of section 14A of the Act, there is no merit in the order of CIT in invoking his jurisdiction u/s 263. The issue was decided by AO by making enquiries and due application of mind and had also elaborately discussed the issue in the body of the assessment order resulting in addition. In such circumstances where the AO had made the enquiries and had applied his mind in working out the disallowance which in turn has been deleted by the Tribunal, which facts stand accepted by the CIT, there is no jurisdiction of CIT u/s 263.
Assessment was made u/s 143(3) of the Act. CIT observed certain points that the order was erroneous and prejudicial to the interest of revenue and notice was issued u/s 263 of the Act. The first issued for invoking jurisdiction u/s 263 is capitalization of interest expenditure in relation to investment in land. CIT noted the assessee to have borrowed funds for investment in assets on which interest liability arose which was liable to be capitalized and added back to the income under the proviso to section 36(1)(iii) of the Act. Assessee explained complete details of WIP and explained that the investments were out of own funds and no borrowings were made for making the investment except the investment made in plant and machinery on which interest was capitalized. The copies of the title deed and the bank account were produced before the Assessing Officer and no addition was made on this account. The second issue was in respect of disallowance of expenses relatable to the exempt unit. The assessee had claimed deduction u/s 10B in respect of unit No.2 and Commissioner of Income Tax show caused the assessee as to why the Directors' and Auditors' remuneration of Rs.6,61,000/- on proportionate basis should not be allocated to unit No.2 where exemption was claimed u/s 10B. Assessee contended that it filed a reply during original assessment proceedings and in this regard no adverse action was taken. The third issue raised was in relation to disallowance u/s 14A which was already considered by appellate authorities also. CIT stated in this regard that contention of assessee that the issue has already been decided by appellate authorities was not acceptable as the issue in question was not before appellate authorities at any stage.
Assessee contended that full details were furnished before AO in this regard. CIT observed that AO did not apply his mind and failed to verify and examine complete aspects in relation to investment made in work-in-progress and computing income from exempt income vis-Ã -vis common expenses in relation to the computation of deduction u/s 14A. CIT set aside the order of AO for making fresh order keeping view of directions of CIT.
Assessee contended that the only discussion in order was in relation to disallowance u/s 14A of the Act which was deleted by ITAT against the said addition. It was also contended that the notice u/s 263 was issued on the basis of audit objections raised by audit party. CIT did not apply mind before issue of notice in comparison to assessment order passed by AO which was passed after due application of mind. In respect of issue raised regarding capitalization of interest vis-Ã -vis work in progress, assessee contended that it was not known from where the figures were picked up. Assessee further contended that the amount invested in land and plant and machinery was out of own sources and no borrowings were made for making investments except investment in plant and machinery which was made out of term loan on which interest was capitalized.
In respect of disallowance u/s 14A, assessee contended that it had invested its own funds and there was no merit in the application of Rule 8D as the said Rule came into operation w.e.f. AY 2008-09. Elaborate enquiries were made by AO during assessment proceedings in respect of all the three issues i.e. investment in work in progress and claim of interest, eligible profits u/s 10B and also disallowance u/s 14A. Assessee contended that merely on the basis of the audit objections invoking of jurisdiction u/s 263 was not warranted. There is difference between non-application of mind and no enquiries being conducted or inadequate enquiries being made. However, in the case of the assessee there were due enquiries made and the AO applied his mind before computing the income in the hands of the assessee.
Revenue contended that the assessment order talks of only disallowance u/s 14A whereas no enquiries were made by AO on account of the disallowance u/s 36(1)(iii) and 10B. Revenue further contended that the assessment order in the case was passed by the Addl.CIT who is only an administrative head and there was no application of mind in passing the said order.
After hearing both the parties, the ITAT held that,
++ assessee enclosed requisite details working out details of exemption under section 10B of the Act during assessment proceedings. The assessee had also elaborately explained details of capital work in progress alongwith the said letter. AO in response raised another set of queries which were also replied by assessee and explained the issue in respect of disallowance u/s 14A of the Act and also the allowability of deduction u/s 10B of the Act. The order-sheet entries noted the assessee to have produced books of account, which were examined on test-check basis and also with reference to reply filed by the assessee. The case was discussed thereafter and assessment order was passed by the AO in which the only disallowance made was u/s 14A. As per the decision of Apex Court in the case of Malabar Industrial Co. Ltd., the cases which fell in the category of non-application of principle of natural justice or non-application of mind would satisfy the requirement of the order being erroneous and the Commissioner of Income Tax thus would be entitled to invoke the revisional jurisdiction under section 263 of the Act. The Delhi High Court in case of CIT Vs. Sunbeam Auto Ltd held that there was distinction between the lack of enquiry and inadvertent enquiry where there was application of mind by the AO before allowing expenditure in question and even if inadequate enquiries were made by the AO that in itself would not empower the CIT to invoke the revisional jurisdiction u/s 263;
++ in the case at present, AO had raised the queries in respect of the investment in land and other assets which were put to use during the year itself and the source of investment in the said assets was explained. Part of investment was made out of borrowed funds. The assessee itself had disallowed a sum out of interest expenditure account which was accepted by AO. The second aspect of this issue raised by the Commissioner of Income Tax vide his show cause notice issued under section 263 of the Act was narration of the figures in respect of the investment made by the assessee during the year under consideration. It is observed that the show cause notice issued by CIT u/s 263 and the audit objections raised by the CIT (Audit) in this case and find that the figures and contents are identical. It is surprising to note that the CIT while passing the order u/s 263 had not even taken any note of the objection of the assessee that the figures appearing in the show cause notice do not match with the figures reflected in the Balance Sheet of the assessee. The basis of such figures in the show cause notice issued by the Commissioner of Income Tax is not clear and in the absence of the same, there is no merit in invoking section 263 of the Act specially in cases where AO had made due enquiries during the course of assessment proceedings and had applied his mind before passing the assessment order;
++ regarding issue raised in regard to exemption claimed u/s 10B, AO not only asked the assessee to justify its claim of deduction u/s 10B but also to adduce relevant documents. Assessee has placed on record the details submitted before the AO alongwith letter in which the elaborate working of the exemption u/s 10B of the Act was furnished during the course of assessment proceedings. AO had made enquiries and had decided the issue after taking into consideration the relevant data and material. CIT initiated proceedings without verification observed that the order passed by the AO was without due application of mind and having accepted the contention of the assessee without verification, would be an order which is erroneous and prejudicial to the interest of the Revenue within the meaning of provisions of section 263. However, in the present case, AO had applied his mind by raising queries in respect of the claim of exemption u/s 10B and after the reply was filed by the assessee further enquiries were made by the AO and elaborate working was forwarded by the assessee which was accepted and no disallowance was made. Thus, there is no merit in invoking jurisdiction u/s 263;
++ in respect of disallowance u/s 14A, in case where the AO had computed the disallowance and worked out the addition on the basis of such disallowance made by invoking the provisions of section 14A of the Act, there is no merit in the order of CIT in invoking his jurisdiction u/s 263. The issue was decided by AO by making enquiries and due application of mind and had also elaborately discussed the issue in the body of the assessment order resulting in addition. In such circumstances where the AO had made the enquiries and had applied his mind in working out the disallowance which in turn has been deleted by the Tribunal, which facts stand accepted by the CIT, there is no jurisdiction of CIT u/s 263.
Assessee's appeal allowed
Cases followed:
ITO Vs. D.G. Housing Projects Ltd. (2012-TIOL-195-HC-DEL-IT)
CIT Vs. Sunbeam Auto Ltd. (2009-TIOL-552-HC-DEL-IT)
Shri Jaswinder Singh, Prop. Vs. CIT-II, Chandigarh (2012-TIOL-277-ITAT-CHD)
CIT Vs. Sohana Woollen Mills [296 ITR 238 (P&H)]
CIT Vs. Sunbeam Auto Ltd. (2009-TIOL-552-HC-DEL-IT)
Shri Jaswinder Singh, Prop. Vs. CIT-II, Chandigarh (2012-TIOL-277-ITAT-CHD)
CIT Vs. Sohana Woollen Mills [296 ITR 238 (P&H)]
ORDER
Per: Sushma Chowla:
This appeal by the assessee is against the order of the Commissioner of Income Tax-II, Ludhiana dated 23.11.2011 relating to assessment year 2007-08 against the order passed u/s 263 of Income Tax Act, 1961 (in short 'the Act').
2. The assessee has raised following grounds of appeal:
"1. That the CIT-II has erred in setting aside the order of the Assessing Officer.2. That the learned CIT- II has erred in setting aside the issue regarding disallowance of interest u/s 36(1)(iii) on the investment made in the land, Building and machinery ignoring the facts of the case and also ignoring the fact that the order was passed by the A.O. after due application of mind.3. That the CIT II has erred in setting aside the issue regarding allocation of expenses to the 10-B Unit which issue has been duly dealt with by the after due application of mind.4. That in any case the order passed by the CIT-II u/s 263 is against the law and facts of the case and deserves to be quashed.5. That the learned CIT- II has erred in modifying the disallowance u/s 14A ignoring the order of the Hon'ble Tribunal."
3. The issues raised in the present appeal are in relation to the order passed by the Commissioner of Income Tax, Ludhiana under section 263 of the Act.
4. The present appeal was filed after a delay of 40 days before the Tribunal. The assessee had received the order passed under section 263 of the Act on 19.12.2011 whereas the appeal against the said order was filed on 28.3.2012. The learned counsel for the assessee has filed an affidavit of the Finance Manager of the assessee company, under which it has been stated that he was not aware that an appeal could be filed before the Tribunal against the order of the Commissioner of Income Tax passed under section 263 of the Act. It was only after receipt of notice under section 142(1) of the Act from the Assessing Officer, he was informed that an appeal should have been filed against the order passed under section 263 of the Act. The said appeal as per the assessee was filed on 28.3.2012. The affidavit of Shri Dushwant Kumar Kapil working as Finance Manager with the assessee is furnished on record. In the entirety of the above said facts and circumstances of the case, we condone the delay in filing the present appeal late by 40 days and proceed to decide the appeal.
5. The brief facts of the case are that the assessment in this case was completed under section 143(3) of the Act by Addl.CIT, Range-V, Ludhiana vide order dated 29.12.2009. The Commissioner of Income Tax, Ludhiana on the perusal of the assessment record observed that in respect of few points the order of assessment was erroneous and prejudicial to the interest of the Revenue and the show cause notice under section 263(1) of the Act was issued to the assessee. In response to the said notice, the assessee furnished its reply wherein the first plea of the assessee was that the figures mentioned in the said show cause notice do not match with the figures reflected in the Balance Sheet and related documents of the assessee. The learned A.R. for the assessee also submitted that it had furnished complete information before the Assessing Officer in respect of the above said items/points raised in the show cause notice issued by the Commissioner of Income Tax under section 263 of the Act. The Commissioner of Income Tax was of the view that the Assessing Officer had not applied his mind and had failed to verify and examine the complete aspects of the case in relation to the investment made in the work in progress, and in computing the income from the exempt and taxable units vis-Ã -vis common expenses and also in relation to the computation of deduction under section 14A of the Act. The Commissioner of Income Tax consequently held the order passed by the Assessing Officer in respect of three issues to be both erroneous and prejudicial to the interest of the Revenue within the meaning of provisions of section 263 of the Act and the order of the Assessing Officer was set aside to its file for making a fresh order keeping in view the directions of the Commissioner of Income Tax and also after allowing due opportunity to the assessee.
6. The assessee is in appeal against the aforesaid order passed by the Commissioner of Income Tax, Ludhiana under section 263 of the Act. The learned A.R. for the assessee pointed out that the perusal of the order passed under section 143(3) of the Act dated 29.12.2009 would reveal that the only discussion in the assessment order was in relation to the disallowance under section 14A of the Act r.w.s.8D of the Income Tax Rules under which the disallowance of Rs.75,77,959/- was made. The Commissioner of Income Tax vide order dated 15.4.2010 had reduced the disallowance to Rs. 11,48,013/-, which in turn was deleted by the Tribunal. The learned A.R. for the assessee further pointed out that the show cause notice issued by the Commissioner of Income Tax, Ludhiana dated 10.8.2011 was passed on the audit objections raised in the case by the audit party. Our attention was drawn to the narration in the show cause notice, placed at pages 1 and 2 of the Paper Book and audit objections raised in the case of the assessee for the relevant assessment year placed at pages 24 to 27 of the Paper Book. The learned A.R. for the assessee pointed out that same objections as raised by the audit party were in the show cause notice issued by the Commissioner of Income Tax, Ludhiana. It was the claim of the learned A.R. for the assessee that there was non application of mind by the Commissioner of Income Tax before issue of said show cause notice in comparison to the assessment order passed by the Assessing Officer which was passed after due application of mind. In respect of the first issue raised by the Commissioner of Income Tax with regard to the capitalization of interest vis-Ã -vis work in progress, the learned A.R. for the assessee pointed out that the figures as reflected in the show cause notice were at variance with the figures reflected in the Balance Sheet and it was not known from where the figures were picked up. The learned A.R. for the assessee referred to the reply filed by the assessee to the show cause notice issued in the case placed at page 3 of the Paper Book with special reference to page 5 of the Paper Book and also the copy of Balance Sheet placed at page 7 of the Paper Book. The learned A.R. for the assessee pointed out that the working of the total interest less subsidy received is placed at page 9 of the Paper Book and balance of Rs.5,84,115/- being the interest expenditure was capitalized. The total investment in building and machinery was from loans on which interest of Rs.10.41% was incurred on loans of Rs.12 crores borrowed from 23.2.2007. The investment in land was out of its own funds. The learned A.R. for the assessee drew our attention to the bank account of the period under consideration placed at pages 13 to 15 of the Paper Book. In respect of the disallowance under section 14A of the Act the learned A.R. for the assessee pointed out that it had invested its own funds and there was no merit in the application of Rule 8D for the instant assessment year as the said Rule came into operation w.e.f. assessment year 2008-09. The learned A.R. for the assessee further pointed out that elaborate enquiries were made by the Assessing Officer during the course of assessment proceedings in respect of all the three issues i.e. investment in work in progress and claim of interest, eligible profits under section 10B of the Act and also disallowance under section 14A of the Act. The learned A.R. for the assessee took us through the questionnaire issued by the Assessing Officer from time to time and replies filed by the assessee which are placed at pages 70 to 87 of the Paper Book. The plea of the learned A.R. for the assessee was that merely on the basis of the audit objections the invoking of jurisdiction under section 263 of the Act was not warranted as held by the Hon'ble Punjab & Haryana High Court in CIT Vs. Sohana Woollen Mills [296 ITR 238 (P&H)]. Further reliance was placed on the decision of the Chandigarh Bench of the Tribunal in Sh.Jaswinder Singh Prop. Vs. CIT in ITA No.690/Chd/2010= (2012-TIOL-277-ITAT-CHD) - date of order 9.3.2012 for assessment year 2005-06 and in R.S. Warehousing Vs. ITO in ITA No.310/Chd/2011 - date of order 30.9.2011. It was further submitted by the learned A.R. for the assessee that there was difference between non-application of mind and no enquiries being conducted or inadequate enquiries being made. However, in the case of the assessee there were due enquiries made and the Assessing Officer applied his mind before computing the income in the hands of the assessee. In respect of the working of disallowance under section 14A of the Act, it was pointed out that the Commissioner of Income Tax had ignored the last page of the Balance Sheet which reflected no overdraft balance.
7. The learned D.R. for the Revenue pointed out that the application of mind by the Assessing Officer was demonstrated by the order passed in the case. It was stressed by the learned D.R. for the Revenue that the assessment order talks of only disallowance under section 14A of the Act whereas no enquiries were made by the Assessing Officer on account of the disallowance under sections 36(1)(iii) and 10B of the Act. In respect of disallowance made under section 14A of the Act, reliance was placed on the order of the Commissioner of Income Tax. The learned D.R. for the Revenue thereafter placed reliance on the undermentioned decisions:
1) Sukhjeet Singh Vs. CIT-II, Chandigarh ITA No.422/Chandigarh/2011- date of decision 18.1.20122) CIT Vs. Assam Tea House 344 ITR 507 (P&H)3) M/s Rico Auto Industries Ltd. Vs. Addl.CIT ITA No.547/Chd/2011 - date of decision 21.9.20114. CIT Vs. Usha International Ltd. ITA No.2026/2010 (Del)/348 ITR 485 (Del) =(2012-TIOL-764-HC-DEL-IT-LB)5. CIT Vs. Shree Manjunathesware Packing Products 231 ITR 53(SC)
8. It was further pointed out by the learned D.R. for the Revenue that the assessment order in the case was passed by the Addl.CIT who is only an administrative head and there was no application of mind in passing the said order.
9. The learned A.R. for the assessee in rejoinder stressed that from the facts of the case it is apparent that there was no application of mind by Commissioner of Income Tax as is apparent from the perusal of the audit objections raised in the case and show cause notice issued by the Commissioner of Income Tax, which on comparison were found to be verbatim. In respect of various reliances placed by the learned D.R. for the Revenue it was pointed out that the ratio laid down on Rico Auto Industries Ltd. (supra) was not applicable as there were no details before the Assessing Officer and the assessee had also not furnished any reply before the Assessing Officer. In respect of the ratio laid down in CIT Vs P.V.S. Beedies Pvt. Ltd. [237 ITR 13 (SC)] and also on Usha International Ltd. (supra), the learned A.R. for the assessee pointed out the same were distinguishable as both the decisions were on the issue of invoking of jurisdiction under section 147/148 of the Act. The learned A.R. for the assessee further placed reliance on ratio laid down by the Hon'ble Delhi High Court in ITO Vs. D.G. Housing Projects Ltd. [343 ITR 329 (Del)] = (2012-TIOL-195-HC-DEL-IT) and CIT Vs. Sunbeam Auto Ltd. [332 ITR 167 (Del)] = (2009-TIOL-552-HC-DEL-IT) and by the Hon'ble Punjab & Haryana High Court in Hari Iron Trading Co. Vs. CIT [263 ITR 437 (P&H)].
10. We have heard the rival contentions and perused the record. The issue arising in the present appeal is against the invoking of jurisdiction by the Commissioner of Income Tax, Ludhiana under section 263 of the Act. In all such cases where assessment made by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue, the Commissioner of Income Tax is empowered to invoke his jurisdiction under section 263 of the Act. However, the twin conditions of the order being erroneous and prejudicial to the interest of the Revenue are to be satisfied cumulatively.
11. Now coming to the facts of the present case the assessment in the case of the assessee was taken for scrutiny by the Assessing Officer. The first questionnaire was issued on 8.4.2009. Various queries were raised by the Assessing Officer in the said questionnaire issued. The assessee thereafter filed replies to the various queries and thereafter another show cause notice was given to the assessee by way of entries in the order-sheet and assessment was completed under section 143(3) of the Act vide order dated 29.12.2009. The Commissioner of Income Tax had issued show cause notice under section 263 of the Act on the undermentioned issues:
The Assessment in your case for the year 2007-08 was completed u/s 143(3) on 29.12.2009 by the .then Addl. CIT, Range-V, Ludhiana. The assessment records have been called for and examined by the undersigned and the following features have been noticed:-1. From the depreciation chart filed alongwith the return, it is observed that the following assets had not been put to use during the. relevant previous year.
S.No. | Current Year | Last Year | |
i) | Building under | 7,07,36,051/- | 12,21,49,715/- |
ii) | Machinery under installation | 2,09,92,893/- | 14,30,232/- |
iii) | Advance against capital expenditure | 4,50,48,775/- | 27,80,3041- |
Total | 13,67,77,719/- | 126360251/- |
In addition to the above, land amounting to Rs.34,98,68,640/- was purchased during the year, on which no construction was made and, accordingly the same too was not put to use. In this way total amount of Rs.48,66,46,359/- stood invested in such fixed assets which were not put to use during the previous year. Accordingly, interest pertaining to borrowed funds invested in these assets was liable to be capitalized and added back to your income under provisio to section 36(1)(iii) of the Income Tax act, 1961. The disallowance @ 12% on Rs.48,66,46,359/- comes to Rs.5,83,97,563/-. Against this you have capitalized an amount of Rs. 5,84,115/- only. As on 31.03.2007 the amount of borrowed funds is Rs. 244.47 crores out of which Rs. 57.07 crore were raised during the year. The assessing officer failed to take these facts into consideration and accordingly failed to compute correct amount to be capitalized and disallowed.2. Further it is observed that the income of your unit-II is exempt u/s 10B. For the purpose of computing the-incomes from exempt and taxable unit the common expense's have to be apportioned between the two units on a rational basis. It is observed that you have incurred Rs.6,61,000/- on account of Director Remuneration and Auditor Remuneration. However, these have been debited to the profit and loss account of unit-I only. In this way the income, of unit-I (taxable) has been reduced and that of unit-II (exempt) has been over stated. This has resulted into excess deduction of Rs. 4,90,020/-. The A.O. has failed to notice this irregularity also.3. In the assessment order the assessing officer has made disallowance of Rs.75,77,959/- u/s 14A of the income Tax Act, 1961. As per the provisions of Rule 8D of the I.T. Rules 1962 this has been computed on the basis of amount shown in the Balance Sheet, as per which the value of total assets as on 31.03.2007 was Rs.432,44,07,771/-. This included an amount of Rs.29,85,70,978/- which is depreciation of earlier years back. The value of assets as on 31.03.07 has been artificially increased by this amount. For the purpose of computation of the disallowance the correct value of total assets was to be adopted. The A.O. has failed to notice this aspect and this failure on his part has further resulted into disallowance of a lower amount."
12. The reply of the assessee before the Commissioner of Income Tax in relation to each of the issues was as under:
"1. The assessment was made by the Addl. Commissioner of Income Tax, Range-V, Ludhiana, vide order dated 29.12.2009. During the course of hearing all those issues, which are being raised now, were duly discussed. A detailed reply dated 18.12.2009 relating to various issues was filed. Complete details regarding capital work in progress mounting to Rs.7,07,36,051.82/- were filed which appear as page no. 5.7 of our submission dated 18.12.2009. This was in connection with the issue raised by the AO for making disallowance on the investment made in WIP. It was clearly mentioned in para 5 of our submission that the amounts invested were out of our own sources and no borrowing were made for making these investment except the investment made in the plant & machinery which was made out of the term loan on which interest of Rs.5,84,115/-was capitalized. This was further clarified in para 11 our reply.2. As regards the figures mentioned in para 1 of your notice, it is submitted that the figures do not tally with the figures given, in our balance sheet. It is again submitted that an audit objection dated 10.05.2010 was raised by the Addl. Commissioner of Income Tax(Audit) Chandigarh, on similar issue which was duly replied on 24.05.2010 and the AO felt duly satisfied with the reply and it appears that no action was taken and the proceedings were dropped.3. The objection raised in your notice para 2 of the letter regarding adjustment of director's and auditor's remuneration of Rs.6,61,000/- onproportionatebasisin Unit No.II where exemption has been claimed u/s 10B, again reply stood filed before the Addl. Commissioner of Income Tax, Range-V, Ludhiana and no adverse action was taken and it is surprising that now after a gap of about one and half year the same issue is being raised.4. As regards disallowance u/s 14A the learned AO gas discussed the issue on detail running into 10 pages of his order. A disallowance of Rs.75,77,959/- was made. The appellant filed an appeal before CIT(A)-II who reduced the disallowance of Rs.11,48,013/- vide order dated 15.04.2010. In appeal before the Tribunal by the assessee and the department, the addition sustained stood deleted by the Hon'ble Tribunal vide order dated 21.10.2010. That since the issue has gone through the appellate proceedings the provisions of section 263 are not applicable.5. In view of the above it is submitted order passed by the AO is neither erroneous nor prejudicial to the interest of revenue and the proceedings are liable to be dropped."
13. The Commissioner of Income Tax had held the order of the Assessing Officer being erroneous and prejudicial to the interest of the Revenue on all the three accounts.
14. Considering the issue of invoking of jurisdiction under section 263 of the Act point-wise we find that the first issue raised by the Commissioner of Income Tax was in relation to the investment in land amounting to Rs.34.98 crores purchased during the year on which no construction was made. Further the Commissioner of Income Tax has tabulated the list of assets which, according to him, were not put to use during the relevant previous year, which reads as under:
S.No. | Current Year | Last Year | |
i) | Building under | 7,07,36,051/- | 12,21,49,715/- |
ii) | Machinery under installation | 2,09,92,893/- | 14,30,232/- |
iii) | Advance against capital expenditure | 4,50,48,775/- | 27,80,3041- |
Total | 13,67,77,719/- | 126360251/- |
15. The Commissioner of Income Tax noted the assessee to have borrowed funds for investment in the said assets, on which interest liability arose, which was liable to be capitalized and added back to the income under the proviso to section 36(1)(iii) of the Act. The explanation of the assessee in this regard was that complete details of capital work in progress amounting to Rs.7.07 crores were filed under which it was explained that the amounts invested were out of own funds and no borrowings were made for making the investment except the investment made in plant and machinery, which was made out of term loan on which interest of Rs.5,84,115/- was capitalized. The second contention of the assessee in this regard was that the figures in the show cause notice do not match with the figures reflected in the Balance Sheet. The assessee also clarified that the audit objection dated 10.5.2010 was raised by the Commissioner of Income Tax (Audit) on similar issue to which reply was filed and no action was taken and the proceedings were dropped. In respect of the investments in purchase of land it was explained that the details were furnished before the Assessing Officer during the course of assessment proceedings that the investments had been made out of own sources and no money was borrowed for making the said investments. The copies of the title deed and the bank account were produced before the Assessing Officer and no addition was made on this account. The Commissioner of Income Tax, however, observed that Assessing Officer has not applied his mind. Investment in bank account suggest to the contrary. Investments made were not out of own funds. TheAssessing Officer failed to verify and examine as to when investments in assets which were not put to use by 31.3.2007 was Rs.48.66 crore, however, only interest of Rs.5,84,115/-could be capitalized.
16. The second issue raised by the Commissioner of Income Tax was in respect of disallowance of expenses relatable to the exempt unit. The assessee had claimed deduction under section 10B of the Act in respect of unit No.2 and Commissioner of Income Tax show caused the assessee as to why the Directors' and Auditors' remuneration of Rs.6,61,000/- on proportionate basis should not be allocated to unit No.2 where exemption was claimed under section 10B of the Act. The explanation of the assessee was that the it had filed the reply during the assessment proceedings in this regard and no adverse action was taken by the Assessing Officer. The Commissioner of Income Tax vide para 3.1 observed as under:
"3.1 I have carefully considered the contention of the ld. Counsels of the assessee and perused the relevant record. The only contention of the ld. Counsel is that the details and submissions were duly made before the AO and that there was no justification in taking up these issue again now. However I do not agree with the ld. Counsel in this regard. It is settled position of law that if the AO has passed the assessment order without due application of mind and accepted the contention of the assessee without verification, such an order could very well be taken to be erroneous and prejudicial to the interest of the revenue within the meaning of the provisions of section 263 of the I.T.Act. It is almost settled position in view of the various decisions of Hon'ble High Courts and different Benches of the Hon'ble ITATs that administrative and other common expenses are to be apportioned amongst different units of assessee for the purpose of determination of income of these respective units. Just, because separate books of accounts have been maintained for different units common administrative expenses cannot be said to be pertaining to only the units in the books of accounts of which such expenses have been debited. Clearly the order of the AO in accepting the contention of the assessee and not apportioning these expenses between the two units on rational basis is erroneous and prejudicial to the interest of the revenue within the meaning of provision of section 263 of the I.T. Act. The order of the AO on this issue is also set aside to his file for making afresh order keeping in view the above directions and after allowing due opportunities to the assessee."
17. The third issue raised by the CIT (Appeals) was in relation to the disallowance to be made under section 14A of the Act. The explanation of the assessee in this regard was that the Assessing Officer had elaborately discussed the issue in the assessment order and made disallowance of Rs.75.77 lacs which was reduced to Rs.11.48 lacs by the Commissioner of Income Tax (Appeals) and deleted by the Tribunal. The Commissioner of Income Tax vide para 4.1 observed as under:
"4.1 I have carefully considered the contentions of the ld. Counsels for the assessee and have perused the relevant record. The contention that the provisions of section 263 of the I.T.Act are not applicable since the issue have gone through appellate proceedings is not acceptable because the issue in question was not before the appellate authorities at any stage. The issue was neither raised in the assessment order nor taken up in the appellate proceedings. Therefore, the assessee is not justified in taking this plea during the present proceedings. Further it is not being disputed that in principle the disallowance u/s 14A should have been made as per the details given in para 3 of the notice dated 10-8-2011 issued u/s 263 of the Act the only contention of the ld. Counsel is that the disallowance whatsoever, made u/s 14A of the Act has been deleted by the Hon'ble ITAT. Under the circumstances no addition can be made on this account at this stage. However, if. the order of Hon'ble ITAT is reversed by Hon'ble High Court at any stage, the AO would work out the disallowance u/s 14A including the amount of Rs.29,85,78,970/- in the total assets of the assessee as on 31-03-2007. The order dated 29-12-2009 being erroneous and prejudicial to the interest of the revenue, the assessment order of the AO on this issue is modified to the above extent u/s 263 of the I.T.Act."
18. The learned A.R. for the assessee has furnished on record questionnaires and the replies filed during the course of assessment proceedings. The first questionnaire was issued on 8.4.2009, copy of which is placed at pages 72 to 74 of the Paper Book and the relevant queries in respect of the issues raised in the said show cause notice were as under:
"13. Please furnish details of additions made to fixed assets.18. Please justify deduction claimed u/s 10B amounting at Rs.11,18,29,590/-.19. Please furnish photocopy of the land purchased by you during the year at Rs.34,98,68,640/- alongwith the site plan of the land purchased.22. Please give the number of units of the company, complete addresses of all units.23. Please file separate Balance Sheet cum Trading & Profit & Loss Account of each unit and complete Balance Sheet of last 2 years of each units.24. Please produce computation of exemption u/s 10B claimed at Rs.11,18,29,590/- and evidence to prove that all the conditions of section 10B are satisfied.25. Evidence of donation paid and allowability of deduction u/s 806.26. You have claimed deduction on account of interest earned at Rs. 1,69,83,373/- in the computation of income. Please furnish complete evidence of allowability of this deduction. Why interest paid on investment made in earning this exempted interest income be not disallowed u/s 14A.27. As per clause (iia) of explanation in section 115JB depreciation on account of revaluation of assets which has been written back is not to be reduced. Please give working of depreciation claimed at 19,65,30,310/- and how much out of it is the depreciation on account of revaluation of assets. Why the same be not added back.28. Details of addition in fixed assets with evidence. Copies of Land Account, Building Account, Plant & Machinery Account, Misc. Fixed Assets account, Building under construction, Machinery under installation, Advance against capital expenditure & preoperative expenditure accounts. Source of funds used in creating these assets. Why interest expenses till the assets are put to use be not capitalized. Please workout the figure of interest to be so capitalized.29. Investment in shares is shown to be made at Rs.22.97 crores, dividend income wherefrom is exempt from tax while on one side you are paying interest on borrowed funds on the other side you have diverted funds to tax free investments. Please explain as to why proportionate interest expenses be not disallowed u/s 14A."
19. The second questionnaire was issued on 22.9.2009 which is placed at pages 75 to 80. The first reply of the assessee is placed at pages 81 to 83 of the Paper Book and point-wise reply filed before the Assessing Officer was as under:
"13. Detail of additions made to fixed assets is enclosed.18. Regarding justification of deduction U/s l0B, it is submitted as follows:-a) That the undertaking i.e. Aarti International Limited(Unit-I and Unit-II) is 100% Export Oriented Unit, which has been approved as a hundred percent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act,1951 and the rules made under that Act. The undertaking registered as 100% EOU can sell in domestic market upto 50% of its FOB value of exports, as per provisions of Export Import Policy.b) That the undertaking is engaged in the manufacturing of 100% Cotton Yarn since 8.11.1996.c) That it has not been formed by the splitting up or re-construction of business already in existence.d) That it is not formed by the transfer of a new business of machinery or plant previously used for any purpose, because all the machinery was new.e) That all the machinery of the said undertaking was new and no old machinery was purchased.f) That all the sale proceeds of exports out of India were received in India in convertible foreign exchange within a period of 6 months from the end of the previous year.19. During the year under reference land for Rs.34,98,68,640/- was purchased. Photocopy of the title deed are produced herewith for your verification.22. The company has two units '(UNIT-I & UNIT-II) at Chandigarh road, Ludhiana.23. Copy of separate balance sheet cum trading & profit and loss accounts of each unit and complete balance sheets of last 2 years is enclosed.24. That investment in shares amounting to Rs.22.97 crore in the shares of associated concern namely Aarti Steels Limited. The said investment was made by the company from its internal cash accruals and no money was borrowed for the said investment. Further, no dividend was received from the above said investment in the associate concern. The disallowance U/s 14A is not warranted because of the fact that as already submitted, the above said investments were made from the internal cash accruals of the company and no borrowing was made. The borrowing of the company stood invested in either fixed assets or in stocks and book debts, that is all for business purpose."
20. The second reply before the Assessing Officer is dated 5.9.2009 and is placed at pages 84 to 86 of the Paper Book. The Assessing Officer vide order-sheet entries dated December, 2009 raised the following queries:
2. Comparative chart of GP/NP etc. for the 3 years as demanded by you has already been submitted.3. Details of Income tax assessments for the earlier 5 years as demanded by you is enclosed.4. Detail of addresses of various places of business as demanded by you is enclosed.6. Details of transactions with associate concerns as demanded by you is enclosed. "
21. The copy of the order-sheet entries for the relevant year are placed at pages 65 to 71 of the Paper Book.
22. In the third reply filed on 18.12.2009, the relevant portion was as under:
2. Balance Sheet, Profit & Loss A/c of Unit-I & II alongwith computation of deduction U/s 10B enclosed.3. Regarding investment made in shares, it is submitted that no money was borrowed for making investment, which was made from the internal cash accruals of the company. Further the interest paid during the year was mainly to the banks on Term Loans taken from banks for the purchase of Land, Building and Machinery" and on working capital borrowings for investment in stocks and book debts. We may further apprise here that the borrowing from the banks were taken only after establishing that the necessary funds have been invested in fixed assets or current assets for the purpose of business and those funds can not be used other than these purposes, because bank disburse the term loan in proportion to the capital expenditure incurred to the fixed assets. Similarly the working capital funds were also given on the basis of drawing power given to the bank from time to time. Therefore, not even a single pie out of these funds could be invested in other than the business activities. Therefore interest paid on the said borrowings was a business expense and no part of it can be disallowed.11. Detail of capital WIP as on 31.03.2007 is enclosed herewith. It is further submitted that an amount of Rs.584115/- paid as interest on term loan paid up to 31.03.2007 was capitalized under pre-operative expenses."
23. The assessee had enclosed requisite details working out details of exemption under section 10B of the Act alongwith said letter dated 18.12.2009, copies of which are placed before us alongwith said letter dated 18.12.2009. The assessee had also elaborately explained details of capital work in progress alongwith the said letter dated 18.12.2009. The Assessing Officer in response raised another set of queries on 21.12.2009 and the relevant queries raised are 5 and 6. The reply of the assessee dated 24.12.2009 elaborately explained the issue in respect of disallowance under section 14A of the Act and also the allowability of deduction under section 10B of the Act. The order-sheet entries dated 24.12.2009 noted the assessee to have produced books of account, which were examined on test-check basis and also with reference to reply filed by the assessee. The case was discussed thereafter and assessment order was passed by the Assessing Officer in which the only disallowance made was under section 14A of the Act totaling Rs.75.77 lacs - order dated 29.12.2009.
24. The Hon'ble Supreme Court in Malabar Industrial Co. Ltd. Vs. CIT [243 ITR 83 (SC) = (2002-TIOL-491-SC-IT) held as under:
"A bare reading of section 263(1) makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to section 263(1).There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.The phrase 'prejudicial to the interests of the revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue."
25. The Hon'ble Supreme Court in Malabar Industrial Co. Ltd. (supra) noted that the cases which fell in the category of non-application of principle of natural justice or non-application of mind would satisfy the requirement of the order being erroneous and the Commissioner of Income Tax thus would be entitled to invoke the revisional jurisdiction under section 263 of the Act. The Hon'ble Supreme Court in Malabar Industrial Co. Ltd. (supra) further held that the order of the Assessing Officer passed without application of mind by merely accepting the entries in the statement of account filed by the assessee in the absence of any supporting material and without making any enquiries would be an erroneous order and where the said order is erroneous or implying thereby that in case the said order has resulted in loss of revenue, or is also prejudicial to the interest of the Revenue justifies the invoking of jurisdiction by the Commissioner of Income Tax under section 263 of the Act.
26. The Hon'ble Delhi High Court in ITO Vs. D.G. Housing Projects Ltd. (supra) observed as under:
"This distinction must be kept in mind by the Commissioner while exercising jurisdiction under section 263 and in the absence of the finding that the order is erroneous and prejudicial to the interest of revenue, exercise of jurisdiction under section 263 is not sustainable. In most cases of alleged 'inadequate investigation', it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without Commissioner conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. Commissioner cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the Commissioner to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the Commissioner hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore, the Commissioner must after recording reasons hold that the order is erroneous.A distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of revenue. In latter cases, the Commissioner has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. In the second set of cases, the Commissioner cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not."
27. The Hon'ble Delhi High Court in CIT Vs. Sunbeam Auto Ltd.(supra) had also held that:
"The submission of the revenue was that while passing the assessment order, the Assessing Officer did not consider the aspect specifically whether the expenditure in question was revenue or capital expenditure. That argument predicated on the assessment order, which apparently did not give any reason while allowing the entire expenditure as revenue expenditure. However, that, by itself, would not be indicative of the fact that the Assessing Officer had not applied his mind to the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reasons in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. One has to keep in mind the distinction between 'lack of inquiry' and 'inadequate inquiry'. If there was any inquiry, even inadequate, that would not, by itself, give occasion to the Commissioner to pass orders under section 263 merely because he has different opinion in the matter. It is only in cases of 'lack of inquiry' that such a course of action would be open.In the instant case, the Assessing Officer had called for explanation on items in question from the assessee and the assessee had furnished his explanation. Said fact was even taken note of by the Commissioner himself in his order."
28. The Hon'ble Delhi High Court in CIT Vs. Sunbeam Auto Ltd.(supra) laid down the principle that there was distinction between the lack of enquiry and inadvertent enquiry where there was application of mind by the Assessing Officer before allowing expenditure in question and even if inadequate enquiries were made by the Assessing Officer that in itself would not empower the Commissioner of Income Tax to invoke the revisional jurisdiction under section 263 of the Act.
29. The Hon'ble Punjab & Haryana High Court in Hari Iron Trading Co. (supra) had held as under:
"The Assessing Officer had duly raised the issue of not showing surrendered amount in return by assessee, in the notices, whereby he had required the assessee to produce the relevant books and bills for his verification. The record also showed that the contention of the assessee was found to be correct on verification and, therefore, the Assessing Officer had accepted the contention of the assessee that surrender had been made due to a bona fide mistake in calculation of stock as per books and that in fact there was no discrepancy in stock. The record also showed that purchases from various parties had duly been verified as the Assessing Officer had placed on record certified copies from such parties.In the light of the above factual background, it could not be appreciated as to how the Commissioner had recorded a finding that the assessment had been framed without application of mind or that difference the stock had not been properly examined. Unfortunately, his order was totally non-speaking and it did not convey as to what according to him should have been the proper examination by the Assessing Officer. The assessee had filed a detailed reply to his notice under section 263(1) which had been rejected without giving any reasons whatsoever. The Commissioner did not appear to have either perused the records or applied his mind to the detailed reply filed by the assessee. He had not discussed even a single contention raised therein. The Tribunal had done no better. The Tribunal had based its findings entirely on the fact that there was no mention in the assessment order about the inquiries made by the Assessing Officer about the discrepancy in stock. That was not the correct approach as was evident from the provisions of sub-section (1) of section 263.A perusal of section 263 shows that the Commissioner can exercise powers under sub-section (1) of section 263 only after examining 'the record of any proceedings under the Act'. The expression 'record' has also been defined in clause (b) of the Explanation so as to include all records relating to any proceedings available at the time of examination by the Commissioner. Thus, it was not only the assessment order but the entire record which had to be examined before arriving at a conclusion as to whether the Assessing Officer had examined any issue or not. The assessee had no control over the way an assessment order was drafted. The assessee on its part had produced enough material on record to show that the matter had been discussed in detail by the Assessing Officer. The least that the Tribunal could have done was to refer to the assessment record to verify the contentions of the assessee. Instead of doing that, the Tribunal had merely been swayed by the fact that the Assessing Officer had not mentioned anything in the assessment order. During the course of assessment proceedings, the Assessing Officer examined numerous issues. Generally, the issues which are accepted do not find mention in the assessment order and only such points are taken note of on which the assessee's explanations are rejected and additions/disallowances are made. On examination the records of the instant case, it was found that the Assessing Officer had made full inquiries before accepting the claim of the assessee and amount on account of discrepancy in stock. Not only that, he had even gone a step further and appended an office note with the assessment order to explain why the addition for allegation discrepancy in stock was not being made. In the absence of any suggestion by the Commissioner as to how the inquiry was not proper, the action taken by him under section 263 could not be upheld."
30. In view of the settled position of law wherein it has been repeatedly held that in all such cases where the Assessing Officer has conducted the enquiries and passed the assessment order consequent to the enquiries conducted during the assessment proceedings, there was no occasion for the Commissioner of Income Tax to invoke the jurisdiction under section 263 of the Act on the surmises that there was no application of mind by the Commissioner of Income Tax. In the facts of the present case as referred to by us in the paras herein above, the Assessing Officer had raised the queries in respect of the investment in land and other assets which were put to use during the year itself and the source of investment in the above said assets was explained. Part of investment was made out of borrowed funds raised on 23/02/2007. The assessee itself had disallowed sum of Rs.5,84,115/- out of interest expenditure account which was accepted by the Assessing Officer. The second aspect of this issue raised by the Commissioner of Income Tax vide his show cause notice issued under section 263 of the Act was narration of the figures in respect of the investment made by the assessee during the year under consideration. We have perused the show cause notice issued by the Commissioner of Income Tax under section 263 of the Act and the audit objections raised by the Commissioner of Income Tax(Audit) in this case and find that the figures and contents are identical. We will address the issue of invoking of jurisdiction under section 263 of the Act on the basis of the objections, in the later para. However, it is surprising to note that the Commissioner of Income Tax while passing the order under section 263 of the Act had not even taken any note of the objection of the assessee that the figures appearing in the show cause notice do not match with the figures reflected in the Balance Sheet of the assessee. The basis of such figures in the show cause notice issued by the Commissioner of Income Tax is not clear and in the absence of the same we find no merit in invoking of jurisdiction by the Commissioner of Income Tax under section 263 of the Act specially in cases where the Assessing Officer had made due enquiries during the course of assessment proceedings and had applied his mind before passing the assessment order. We find support from the ratio laid down by Hon'ble Delhi High Court in ITO Vs D.G. Housing Projects Ltd. (supra) and CIT Vs Sunbeam Auto Ltd. (supra).
31. The second issue raised by the CIT (Appeals) was in regard to the exemption claimed under section 10B of the Act. The Assessing Officer not only asked the assessee to justify its claim of deduction under section 10B of the Act but also to adduce relevant documents. The assessee has placed on record the details submitted before the Assessing Officer alongwith letter dated 18.12.2009 in which the elaborate working of the exemption under section 10B of the Act were furnished during the course of assessment proceedings. The Assessing Officer had made enquiries and had decided the issue after taking into consideration the relevant data and material. The Commissioner of Income Tax while exercising his jurisdiction under section 263 of the Act had observed vide para 3.1 that where the order passed by the Assessing Officer was without due application of mind and having accepted the contention of the assessee without verification, would be an order which is erroneous and prejudicial to the interest of the Revenue within the meaning of provisions of section 263 of the Act. We are in conformity with the observation of he Commissioner of Income Tax that where there is non-application of mind by the Assessing Officer and where the contention of the assessee had been accepted without verification, such an order can be subject to the revisional jurisdiction by the Commissioner of Income Tax under section 263 of the Act. However, in the facts of the present case and as pointed out in paras hereinabove, the Assessing Officer had applied his mind by raising queries in respect of the claim of exemption under section 10B of the Act and after the reply was filed by the assessee further enquiries were made by the Assessing Officer and elaborate working was forwarded by the assessee which was accepted and no disallowance was made under section 10B of the Act. In view thereof where the Assessing Officer has decided the issue after making enquiries and applying his mind and also in view of the ratio laid down by the Hon'ble Delhi High Court in ITO Vs. D.G. Housing Projects Ltd. (supra) and Hon'ble Delhi High Court in CIT Vs. Sunbeam Auto Ltd.(supra), we find no merit in invoking of jurisdiction by the Commissioner of Income Tax under section 263 of the Act in relation to the exemption claimed under section 10B of the Act and the same is satisfied.
32. The third issue raised by the Commissioner of Income Tax in the show cause notice is in respect of the disallowance made under section 14A of the Act. Admittedly, the Assessing Officer had disallowed sum of Rs.75.77 lacs which is reduced to Rs.11.48 lacs by the CIT (Appeals). The Tribunal had deleted addition in toto. In such case where the Assessing Officer had computed the disallowance and worked out the addition on the basis of such disallowance made by invoking the provisions of section 14A of the Act, we find no merit in the order of the Commissioner of Income Tax in invoking his jurisdiction under section 263 of the Act in relation to such disallowance under section 14A of the Act. The observations of the CIT (Appeals) are in para 4.1 wherein the Commissioner of Income Tax observed that the issue was neither raised in the assessment order nor taken up in the appellate proceedings.The Commissioner of Income Tax then noticed the contention of the assessee that thedisallowance whatsoever made under section 14A of the Act was deleted by the I.T.A.T. After noting the same the Commissioner of Income Tax admits that no addition could be made on its account at this stage. However, where the order of the Tribunal is reversed by the Hon'ble High Court at any stage, the Assessing Officer is to work out the disallowance under section 14A of the Act by including the amount of Rs.29.85 crores in the total assets of the assessee as on 31.3.2007. On this account the assessment order was held to be erroneous and prejudicial to the interest of the Revenue. First of all the Commissioner of Income Tax has erred in adopting the said figures as against the complete figures available in the Balance Sheet, i.e. on the consequent pages. Further the issue was decided by the Assessing Officer by making enquiries and due application of mind and had also elaborately discussed the issue in the body of the assessment order resulting in addition of Rs.75.77 lacs. In such circumstances where the Assessing Officer had made the enquiries and had applied his mind in working out the disallowance which in turn has been deleted by the Tribunal, which facts stand accepted by the Commissioner of Income Tax, we find no merit in the directions of the Commissioner of Income Tax while invoking his jurisdiction under section 263 of the Act on the said issue. The order of the CIT (Appeals) on all three accounts is thus not sustainable in law and is cancelled.
33. Now coming to the reliance placed by the learned D.R. for the Revenue on various decisions and their application to the facts of the present case. The ratio laid down in Sukhjeet Singh Vs. CIT-II, Chandigarh (supra) was in respect of assessment framed without making any enquiries and without application of mind and consideration of issues by the Assessing Officer. However, in the facts of the present case before us, due enquiries were made by the Assessing Officer, as referred to by us in paras hereinabove. The assessment was completed after due application of mind, as held by us in the paras hereinabove. Consequently, the decision in Sukhjeet Singh Vs. CIT-II (supra) is not applicable to the facts of the present case. It is a settled position of law that the ratio laid down in any decision is applicable wherein the facts are identical. The learned D.R. for the Revenue further placed reliance on the ratio laid down in CIT Vs. M/s Usha International Ltd. (supra) which is in respect of the issue or re-assessment under section 147/148 of the Act and the issue raised before us is invoking of jurisdiction under section 263 of the Act and hence, the said ratio laid down by the Hon'ble Delhi High Court cannot be invoked for deciding the issue before us. Another reliance was placed by the learned D.R. for the Revenue in the case of M/s Rico Auto Industries Ltd. Vs. Addl.CIT, Ludhi an a (supra).
34. In the facts of the case before the Tribunal there was no examination of the issue pertaining to the applicability of provisions of section 14A of the Act during the assessment proceedings. The Assessing Officer had only considered the issue of determination of arms length price. The learned A.R. for the assessee failed to produce any evidence in respect of any query being raised vis-Ã -vis applicability of the provisions of section 14A of the Act i.e. by way of any questionnaire or statutory notice. In such circumstances, the Tribunal came to the conclusion that the exercise of jurisdiction under section 263 of the Act was correct. However, the facts of the present case are at variance and the said ratio is not applicable to the facts of the present case as brought out by us in the paras hereinabove.
35. The Hon'ble Supreme Court in CIT Vs. Manjunathesware Packing Products (supra) considered the legal position and hence, the said ratio is not applicable to the present case.
36. Another reliance placed by the learned D.R. for the Revenue on the decision of the Hon'ble Punjab & Haryana High Court in CIT Vs. Assam Tea House (supra) wherein the invoking of revisional jurisdiction by the Commissioner of Income Tax under section 263 of the Act was held to be correct holding that the Commissioner of Income Tax could have proceeded under section 263 of the Act if the Assessing Officer had made the assessment without application of mind. The Commissioner of Income Tax as per the order-sheet entries in the said case observed that no record was produced while in the assessment order a contrary statement was made. However, the perusal of the order-sheet entries in the case of the assessee before us reflects a completely different picture wherein various queries were raised by the Assessing Officer from time to time and the assessee had participated in the proceedings and filed replies and produced evidence to establish its claim. Further the queries were raised by the Assessing Officer before concluding the assessment and the assessee had elaborately put up its case of claim of deduction/exemption under various sections of the Act and consequently the order of assessment was passed by the Assessing Officer. In such cases where the Assessing Officer had made the enquiries and had duly applied his mind in coming to the conclusion, such order cannot be held to be erroneous and prejudicial to the interest of the Revenue on mere surmises that the Assessing Officer had not made certain enquiries. Further plea of the assessee was that the figures appearing in the show cause notice do not tally with the figures shown in the Balance Sheet of the assessee and also the basis for the said figures were the audit objections raised in the case of the assessee after the completion of assessment, which proceedings were dropped by the Commissioner of Income Tax (Audit) as notice under section 263 of the Act was issued. In the totality of the above said facts and circumstances we find no merit in the exercise of jurisdiction by the Commissioner of Income Tax under section 263 of the Act and the same is quashed.
37. The second aspect which was brought to our attention was the audit objections raised in the case pursuant to the assessment order passed. The copy of the audit objections dated 10.5.2010 are placed at pages 24 to 27 of the Paper Book. The show cause notice issued by the Commissioner of Income Tax is placed at pages 1 and 2 of the Paper Book. The perusal of the audit objections raised in the case and the show cause notice issued by the Commissioner of Income Tax under section 263 of the Act reflects the identical figure and identical issue raised in the audit objections raised by the Addl.CIT (Audit) and also by the Commissioner of Income Tax in its show cause notice issued under section 263 of the Act.
38. We find that similar issue of invoking of jurisdiction under section 263 of the Act on the basis of the audit objections arose before the Tribunal in the case of Shri Jaswinder Singh, Prop. Vs. CIT-II, Chandigarh in ITA No.690/Chd/2010 = (2012-TIOL-277-ITAT-CHD) wherein the Tribunal vide order dated 9.3.2012 in turn relying upon the ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT Vs. Sohana Woollen Mills (supra) held as under:
20. We find that similar issue of exercise of revisionary powers by the Commissioner of Income Tax on the basis of audit objections arose before the Hon'ble Punjab & Haryana High Court in CIT Vs. Sohana Woollen Mills (supra) and it was held that mere audit objection and the fact that a different view could be taken, were not enough to say that the order of Assessing Officer was erroneous or prejudicial to the interests of Revenue. The Hon'ble Court further held that "whether satisfaction of the Commissioner for exercising jurisdiction was called for or not, has to be decided having regard to the given fact situation".21. The Hon'ble Gauhati High Court in B & A Plantation & Industries Ltd. & Another Vs. CIT & Others (supra) has laid down the difference between revisionary, rectification and re-assessment proceedings. The fact situation before the Hon'ble Guahati High Court that rectification proceedings were initiated on the basis of audit objections, which were dropped subsequently and notice under section 263 of the Act was issued by the Commissioner of Income Tax on the basis of same audit objections and the Hon'ble Court held that there was no independent application of mind by the Commissioner of Income Tax and the revision proceedings were held to be not valid. The Hon'ble Gauhati High Court observed as under:"In the case at hand, the order, initiating rectification proceedings under section 154, as well as the order revising the assessment under section 263, were passed on the basis of one and the same audit objection. While exercising revisional jurisdiction, the revisional authority must bear in mind that the principles of natural justice do not permit the decision of a quasi-judicial authority, such as a Commissioner of Income-tax, to be influenced by any other authority. Thus, the Commissioner, in the present case, could not have initiated a suo motu revisional proceeding on the basis of the said audit report. Had, on the basis of the audit report, the Commissioner came to his own finding that the assessing authority, while making the assessment, or the authority empowered to rectify a turnover, which had escaped assessment, has acted without jurisdiction, revisional jurisdiction could have been exercised. Emphasised the Supreme Court, in the case of Sirpur Paper Mill Ltd. v. CWT [1970] 77 ITR 6, that while exercising power, the Commissioner must have an unbiased mind and decide the dispute according to the procedure which is consistent with the principles of natural justice and cannot permit his mind to be influenced by the dictation of another authority. The relevant observations made by a three-judge Bench of the Supreme Court, in the case of Sirpur Paper Mill Ltd. [1970] 77 ITR 6, read as follows (page 7):"In exercise of the power the Commissioner must bring to bear and unbiased mind, consider impartially the objections raised by the aggrieved party, and decide the dispute according to procedure consistent with the principles of natural justice ; he cannot permit his judgment to be influenced by matters not disclosed to the assessee, nor by dictation of another authority."22. Similar view has been taken by the Calcutta High Court in Jeewan Lal (1929) Ltd. Vs. Addl.CIT & Others (supra) that notice issued by the Commissioner of Income Tax at the suggestion of the Audit Department without applying his mind could not be sustained in law.23. In the back drop of the above said settled legal precedents, we find that the Commissioner of Income Tax in the present case had also initiated the proceedings under section 263 of the Act on the basis of the audit objections. Show cause notice was issued in the present case for non-deduction of tax at source, out of certain expenses incurred by the assessee and order passed by the Commissioner of Income Tax under section 263 of the Act directing the Assessing Officer to re-determine the income of the assessee by applying a rate other than the rate applied by the Assessing Officer, being without jurisdiction, is not tenable in law. We find no merit in the plea of the learned D.R. for the Revenue that the source of information in the present case was audit objection, but there was independent application of mind by the Commissioner of Income Tax. The provisions of section 263 of the Act are clear and absolute that the power is to be exercised by the Commissioner of Income Tax from the examination of the records of the proceedings under the Act. The explanation under section 263 of the Act defines 'records' as all records relating to any proceedings under the Act available at the time of examination by the Commissioner. The audit objections under no circumstances can be called as record empowering the Commissioner of Income Tax to exercise jurisdiction under section 263 of the Act. Further it is apparent that the Commissioner of Income Tax has initiated the revision proceedings only on the basis of Audit Objection. Such exercise of power under section 263 of the Act is not tenable in law. Accordingly, we set aside the order passed by the Commissioner of Income Tax under section 263 of the Act. The grounds of appeal raised by the assessee are thus allowed."
39. In view of the above said and following the ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT Vs. Sohana Woollen Mills (supra) we hold that initiation of revisional proceedings under section 263 of the Act in the present set of facts & circumstances was not tenable in law. Accordingly, we set aside the order of the Commissioner of Income Tax in exercising revisional jurisdiction under section 263 of the Act. The grounds of appeal raised by the assessee are allowed.
40. In the result, the appeal filed by the assessee is allowed.
(Order pronounced in the open court on this 7.3.2013.
2013-TIOL-328-ITAT-HYD
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' HYDERABAD
BENCH 'B' HYDERABAD
ITA No.1763/Hyd/11
Asstt. Year: 2007-08
Asstt. Year: 2007-08
SMT PUSHPA DEVI TIRBREWALA
HYDERABAD
PAN NO:ADBPT9252B
HYDERABAD
PAN NO:ADBPT9252B
Vs
INCOME TAX OFFICER
WARD-8(1), HYDERABAD
WARD-8(1), HYDERABAD
Chandra Poojari, AM and Saktijit Dey, JM
Dated: March 22, 2013
Appellant Rep by: Shri K C Devadas
Respondent Rep by: Ms Amisha S Gupt, DR
Respondent Rep by: Ms Amisha S Gupt, DR
Income Tax - Sec 54F, Circular No 667 of 1993 - Whether when assessee invests in purchase of land, which is transferred to a builder for construction of flats on sharing basis, assessee continues to be eligible for Sec 54 benefits.
The assessee alongwith another person jointly acquired certain property for a consideration of Rs.1,95,430.00. Later another person relinquished her rights over the said property. Thereafter the assessee entered into a development agreement with M/s Tibrewala Builders for construction of flats over the said property on 50:50 sharing basis. Accordingly, five flats fell to the share of the assessee, which were claimed to have been sold by her during the year under consideration for a total consideration of Rs.1,79,00,000. The assessee filed her return of income declaring total income of Rs.58,839. In the return of income, the assessee while computing LTCG claimed exemption u/s 54 towards purchase of plot and construction of house besides deposit in capital gains account scheme. The AO noted that exemption u/s. 54 was available only where the assessee purchased a residential house within a period of one year, after the date of transfer or sale of original asset. The AO held that as the assessee purchased only an open plot for construction of a house over it and not a residential house, she was not entitled to claim exemption of the amount of Rs.69,61,500/- u/s 54. The AO however, allowed exemption u/s. 54, on an amount of Rs.64,05,000 deposited in capital gains account scheme. The CIT(A) came to a conclusion that since the assessee had made payment for purchase of the plot from a different source and had not actually utilised the sale consideration received from transfer of the original asset, no deduction u/s. 54 can be allowed to the assessee.
On Appeal before the Tribunal the AR submitted that the only requirement u/s. 54 is the assessee must purchase a residential house within two years or construct a residential house within three years of the transfer of the original asset. It was submitted that investment in purchase of plot for constructing a residential house is sufficient compliance for the provision contained u/s. 54 and in case construction of the residential house is not made within three years, then such income can be charged to capital gains tax .The DR submitted that for claiming exemption u/s 54 the consideration received from sale of original asset has to be utilsied in purchase or construction of the new residential house; and otherwise, the intent and purpose of the provision will be defeated.
Having heard the parties, the Tribunal held that,
++ exemption claimed by the assessee u/s 54 cannot be denied on the ground that the assessee has not utilised the sale consideration received from the sale of flats itself, in purchasing the plot. Law is well settled by the judicial precedents that investment in purchase of pot for construction of house would entitle an assessee to claim exemption u/s.54 or 54F of the Act. Board's circular No.667 dated 18.10.1993 also says so. The assessee is eligible to claim exemption of the amount of Rs.69,61,500 invested in purchase of land u/s 54;
++ on the issue of method of computation of LTCG adopted by the AO, it is evident from the orders of the revenue authorities that the assessee has not produced enough supporting evidence to prove that she has in fact incurred expenditure of Rs.6 lakhs towards cost of construction and cost of improvement. In such a view of the matter, the allowance of 50% of cost of construction at Rs.3 lakhs is reasonable, and no interference is called for;
++ on the issue of revenue authorities, not allowing the amount of Rs.3,00,000 being the cost of boundary wall as part of construction cost of the new property,it is quite evident that they have not disputed the fact that the assessee has incurred the expenditure of Rs.3 lakhs in the construction of the boundary wall. The assessee is entitled for deduction of Rs.3 lakhs, being expenditure incurred on construction of compound wall.
The assessee alongwith another person jointly acquired certain property for a consideration of Rs.1,95,430.00. Later another person relinquished her rights over the said property. Thereafter the assessee entered into a development agreement with M/s Tibrewala Builders for construction of flats over the said property on 50:50 sharing basis. Accordingly, five flats fell to the share of the assessee, which were claimed to have been sold by her during the year under consideration for a total consideration of Rs.1,79,00,000. The assessee filed her return of income declaring total income of Rs.58,839. In the return of income, the assessee while computing LTCG claimed exemption u/s 54 towards purchase of plot and construction of house besides deposit in capital gains account scheme. The AO noted that exemption u/s. 54 was available only where the assessee purchased a residential house within a period of one year, after the date of transfer or sale of original asset. The AO held that as the assessee purchased only an open plot for construction of a house over it and not a residential house, she was not entitled to claim exemption of the amount of Rs.69,61,500/- u/s 54. The AO however, allowed exemption u/s. 54, on an amount of Rs.64,05,000 deposited in capital gains account scheme. The CIT(A) came to a conclusion that since the assessee had made payment for purchase of the plot from a different source and had not actually utilised the sale consideration received from transfer of the original asset, no deduction u/s. 54 can be allowed to the assessee.
On Appeal before the Tribunal the AR submitted that the only requirement u/s. 54 is the assessee must purchase a residential house within two years or construct a residential house within three years of the transfer of the original asset. It was submitted that investment in purchase of plot for constructing a residential house is sufficient compliance for the provision contained u/s. 54 and in case construction of the residential house is not made within three years, then such income can be charged to capital gains tax .The DR submitted that for claiming exemption u/s 54 the consideration received from sale of original asset has to be utilsied in purchase or construction of the new residential house; and otherwise, the intent and purpose of the provision will be defeated.
Having heard the parties, the Tribunal held that,
++ exemption claimed by the assessee u/s 54 cannot be denied on the ground that the assessee has not utilised the sale consideration received from the sale of flats itself, in purchasing the plot. Law is well settled by the judicial precedents that investment in purchase of pot for construction of house would entitle an assessee to claim exemption u/s.54 or 54F of the Act. Board's circular No.667 dated 18.10.1993 also says so. The assessee is eligible to claim exemption of the amount of Rs.69,61,500 invested in purchase of land u/s 54;
++ on the issue of method of computation of LTCG adopted by the AO, it is evident from the orders of the revenue authorities that the assessee has not produced enough supporting evidence to prove that she has in fact incurred expenditure of Rs.6 lakhs towards cost of construction and cost of improvement. In such a view of the matter, the allowance of 50% of cost of construction at Rs.3 lakhs is reasonable, and no interference is called for;
++ on the issue of revenue authorities, not allowing the amount of Rs.3,00,000 being the cost of boundary wall as part of construction cost of the new property,it is quite evident that they have not disputed the fact that the assessee has incurred the expenditure of Rs.3 lakhs in the construction of the boundary wall. The assessee is entitled for deduction of Rs.3 lakhs, being expenditure incurred on construction of compound wall.
Assessee's appeal partly allowed
Cases followed:
Muneer Khan V/s. ITO (41 SOT 504)
Muneer Khan V/s. ITO (41 SOT 504)
J.V.Krishna Rao V/s. DCIT(54 SOT 44)
ORDER
Per: Saktijit Dey:
This appeal of the assessee is directed against the order of the Commissioner of Income-tax(Appeals), Hyderabad dated 24.08.2011 for the assessment year 2007-08.
2. Grounds No.1 and 9 are general in nature. Hence they are not required to be adjudicated upon.
3. Grounds No.2 and 3 relate to disallowance of exemption claimed under S.54 of the Act, amounting to Rs.69,61,500, being invested in purchase of land for constructing a house.
4. Briefly, the facts relating to the issue in dispute are- The assessee is an individual. On 17.2.1981, the assessee alongwith another person, namely, Smt.Sashikala Tibrewala, jointly acquired certain property for a consideration of Rs.1,95,430.00. Later, Smt.Sashikala Tibrewala relinquished her rights over the said property on 23.3.1985. Thereafter the assessee entered into a development agreement with M/s Tibrewala Builders for construction of flats over the said property on 50:50 sharing basis. Accordingly, five flats fell to the share of the assessee, which were claimed to have been sold by her during the year under consideration for a total consideration of Rs.1,79,00,000. For the assessment year under appeal, the assessee filed her return of income declaring total income of Rs.58,839. In the return of income, the assessee while computing long term capital gains claimed exemption under S.54 of the Act towards purchase of plot and construction of house besides deposit in capital gains account scheme. In the course of assessment proceedings, the Assessing Officer, while examining the assessee's claim of exemption u/s. 54 of the Act noted that the assessee has purchased a house bearing No.6-3-1111/14 at Somajiguda, Hyderabad on 8.1.2007 for a cost of Rs.69,61,500 inclusive of registration charges. In response to the query raised by the Assessing Officer, the assessee stated that the property purchased is an open land with old structure, which the assessee intended to dismantle and construct a new house. The Assessing Officer noted that exemption u/s. 54 is available only where the assessee purchases a residential house within a period of one year, after the date of transfer or sale of original asset. The Assessing Officer held that as the assessee purchased only an open plot for construction of a house over it and not a residential house, she is not entitled to claim exemption of the amount of Rs.69,61,500/- under S.54 of the Act. The Assessing Officer, however, allowed exemption u/s. 54, on an amount of Rs.64,05,000 deposited in capital gains account scheme.
5. The part disallowance of exemption claimed u/s. 54 of the Act was challenged by the assessee in appeal filed before the CIT(A). In the course of hearing before the CIT(A), it was contended by the assessee that investment in purchase of land for construction of residential house is also in compliance to the provisions contained u/s. 54 of the Act and hence, the assessee is entitled to claim exemption u/s.54 of the Act. In support of such contention, the assessee relied upon Board's circular No.667 dated 18.10.1993. On examining the information and details submitted by the assessee, the CIT(A) noted that the amount of Rs.63,00,000 paid by the assessee towards purchase of the plot was actually paid on her behalf by M/s. Jagadamba Builders vide cheque No.837507 dated 3.1.2007 drawn on Agrasen Co-op. Urban Bank Ltd., out of her balance with them. On he basis of the above facts, the CIT(A) came to a conclusion that since the assessee has made payment for purchase of the plot from a different source and has no actually utilised the sale consideration received from transfer of the original asset, no deduction u/s. 54 can be allowed to the assessee. In this context, the CIT(A) relied upon the decision of ITAT, Nagpur Bench in the case of Smt.Sashikala Rajkuimar Kabra V/.s. ITO(64 TTJ 754)(SMC) and the decision of the Cochin Bench of the Tribunal in the case of K.A.Abdul Salam V/s. ITO(2 SOT 375).
6. Aggrieved by the above order of the CIT(A), assessee is in second appeal before us.
7. The learned Authorised Representative submitted that the CIT(A) has totally misconceived and misconstrued the provisions contained us/. 54 of the Act, while coming to the conclusion that the assessee is not entitled to exemption, as it has not utilsied the consideration received on transfer of the flats in the purchase of the plot. He submitted that S.54 of the Act cannot be interpreted in a manner to suggest that the investment in the new asset should only be out of the sale consideration received from transfer of the old original assets. In support of such contention, the learned Authorised Representative relied upon the following decisions of the coordinate Bench of the Tribunal-
(a) Muneer Khan V/s. ITO (41 SOT 504)(b) J.V.Krishna Rao V/s. DCIT(54 SOT 44)
The learned Authorised Representative continuing his arguments submitted that the only requirement u/s. 54 is the assessee must purchase a residential house within two years or construct a residential house within three years of the transfer of the original asset. It was submitted that the assessee has invested an amount of Rs.69,61,500 in purchasing a plot for constructing a residential house and has deposited an amount of Rs.64,05,000, in a capital gains account scheme. It was submitted that investment in purchase of plot for constructing a residential house is sufficient compliance for the provision contained u/s. 54 of the Act and in case construction of the residential house is not made within three years, then such income can be charged to capital gains tax only in the assessment year, in which the period of three years expires. In support of such contention, the learned Authorised Representative drew support from the Board Circular No.667 dated 18.10.1983.
8. The learned Departmental Representative submitted that for claiming exemption under S.54 of the Act, the consideration received from sale of original asset has to be utilsied in purchase or construction of the new residential house; and otherwise, the intent and purpose of the provision will be defeated. It was further submitted that the assessee has only purchased the plot and has not constructed the house within three years. Hence, no exemption can be given under S.54 of the Act.
9. The learned Authorised Representative in rejoinder submitted that the assessee in fact has constructed the residential house within the period of three years and complied with the statutory provision by completing the construction of the house in the year 2008. It was submitted that the entire deposits made in capital gains account scheme was withdrawn and utilised in construction of the house. It was further submitted that all these details were also submitted before the Assessing Officer. The learned Authorised Representative also submitted the bank account statement and the letters submitted before the Assessing Officer.
10. We have heard rival submissions and perused the materials on record. We have also carefully applied our mind to the decisions cited before us. On a perusal of the orders of the Revenue authorities and other materials on record, the undisputed facts which emerge are the assessee received an amount of Rs.1,79,00,000 from sale of five flats. The assessee, though admitted long term capital gains, however, claimed exemption in respect of the same under S.54 of the Act, in respect of an amount of Rs.69,57,5000 towards purchases of plot for construction of residential house and an amount of Rs.64,05,000 being deposited in capital gains account scheme. So far as the amount of Rs.64,05,000 deposited in capital gains account scheme is concerned, the Assessing Officer allowed the claim of exemption. However, in respect of the amount of Rs.69,51,500 utilised for purchase of plot, while the Assessing Officer disallowed it on the ground that the assessee has not purchased a residential house within one year, the CIT(A) has disallowed the claim of exemption by holding that the assessee has purchased the plot by utilising fund from a different source and not out of the sale consideration received from the sale of flats. According to the CIT(A), for claiming exemption us. 54 of the Act, the assessee should have utilsied the sale consideration received from sale of flats towards purchase of the plot. On going through the provisions contained in S.54 of the Act, we could not locate any such precondition/restriction. The only condition imposed under sub-section (1) and (2)of S.54 are- (a) the assessee should within a period of two years from the date of transfer, purchase a residential house or within a period of three years from the date of transfer, construct a residential house, and (b) the amount of capital gains not so utilized shall be kept in a scheme of the Central Government made in that behalf.
11. It is not in dispute that the assessee has purchased a plot of land for Rs.69,51,500 and deposited an amount of Rs.64,05,000 in capital gains account scheme. The coordinate bench of this Tribunal, while dealing with an identical issue of utilisation of money from a source other than the sale consideration received from capital asset in the case of J.V.Krishana Rao V/s. DCIT (supra), following an earlier decision of the same bench in the case of Muneer Khan V/s. ITO (supra) held in the following manner-
"9. We heard both the parties and perused the orders of the lower authorities. We have also perused the case-law relied upon by the learned counsel for the assessee. The point in dispute before us is when the assessee undisputedly earned capital gains and when the deposited equivalent amount in the bank under Capital Gains Accounts Schemes, whether the assessing officer is justified in denying benefit of S.54F on the ground that part of such deposit has source in borrowal of funds and part of such gains is diverted elsewhere for other purposes. On this, we find that this issue is covered by the decision of the Hyderabad Bench of Shri Muneer Khan (supra), wherein it has been held that money has no colour and all that is required to be eligible for relief under S.54F of the Act is compliance with the condition of investment within the specified time. We also find support for this view from the decision of the Delhi Bench of the Tribunal in the case of Sita Jain & Others V/s. ACIT, wherein it was held that one to one correlation between the sale proceeds of agricultural lands and utilisation of such proceeds for purchase of land is not necessary. In the case of Bombay Housing Corporation (supra), the Mumbai Bench of the Tribunal held that even if an assessee borrows required funds and satisfied conditions relating to investment in specified assets, he is entitled to exemption. The later decision of the Mumbai Bench of the Tribunal in the case of Mrs. Prema P.Shah (supra) is also to the same effect, and it in fact followed the earlier decision of the Mumbai bench in the case of Bombay Housing Corporation (supra). We have perused the decision of the Hon'ble Kerala High Court in the case of V.R.Desai (197 Taxman 52), relied upon by the learned CIT(A), and find that it is distinguishable on facts in as much as in that case the assessee has failed to make investment in eligible asset within the specified period, and therefore, in our opinion, the CIT(A) erred in following that decision in the impugned order.10. In the light of the above discussion, following the Hyderabad Bench of the Tribunal in the case of Muneer Khan (supra) and also the other decisions of the Tribunal relied upon by the learned counsel for the assessees before us, we hold that the capital gains earned by the assessee can be utilised for other purposes, and as long as the assessee fulfils the condition of investment of the equivalent amount in the scheme specified or in the asset qualifying for relief under S.54F, by securing the money spent out of the capital gains or from other sources available to it either by borrowal or otherwise, and the assessees are eligible for relief under S.54F of the Act in respect of the entire amount of capital gains so deposited. In the circumstances, we find merit in the contentions of the assessees that inasmuch as they have made deposits of the amounts equivalent to the capital gains realized in the Capital Gains Investments Accounts, even though part of those capital gains have been utilized for other purposes, borrowing amounts equivalent to such utilised funds from Shri J.V.Laxman Rao. The assessees are entitled to relief under S.54F of the Act, as ultimately the assessees deposited the requisite amounts in the Capital Gains Accounts Schemes for exemption under S.54F of the Act within the time stipulated by the statute. We accordingly, set aside the orders of the lower authorities on this issue, and direct the assessing officer to delete the disallowance made by the assessing officer in this regard. Grounds of the assessees in these appeals are consequently allowed."
12. The ratio laid down by the coordinate bench as above squarely applies to the facts of the present case as provision contained u/s. 54 of the Act is pari materia with S.54F of the Act. Therefore, following the aforesaid ratio laid down by the coordinate bench, we hold that exemption claimed by the assessee under S.54 of the Act cannot be denied on the ground that the assessee has not utilised the sale consideration received from the sale of flats itself, in purchasing the plot. Law is well settled by the judicial precedents that investment in purchase of pot for construction of house would entitle an assessee to claim exemption u/s.54 or 54F of the Act. Board's circular No.667 dated 18.10.1993 also says so.
13. So far as the issue of whether the assessee has constructed the residential house within a period of three years as stipulated in S.54 is concerned, neither the Assessing Officer nor the CIT(A) has dealt this fact. While the CIT(A) has disallowed the claim of the assessee on the ground that the sale consideration received on transfer of assets has not been utilized in purchasing the plot, the Assessing Officer has disallowed it by observing that the assessee has not purchased a residential house within one year. Be that as it may, it is categorical submission of the learned Authorised Representative that the assessee has constructed the residential house within the stipulated period of three years as per S.54 of the Act, and necessary information and evidences were also produced before the Assessing Officer. In this regard, copy of the bank account and letters submitted before the Assessing Officer have been produced before us. In the absence of any material to the contrary brought on record by the Revenue, we are inclined to accept the assessee's claim that the construction was completed within the stipulated period of three years as per Section 54 of the Act and necessary information and evidence were also produced before the Assessing Officer, as seen from the copies thereof furnished before us as well. As such, the assessee is entitled to the relief under S.54 of the Act, as claimed by her.
14. Even assuming that the construction was not completed within the period of three years, which, of course, is not the case in the present appeal, if at all any disallowance has to be made, then, it has to be made in the year in which the period of three years expires and not in the impugned assessment year, in which the department is obliged in the first place to grant deduction under S.54 of the Act. Considering the totality of facts and circumstances of the case, we are of the view that the assessee is eligible to claim exemption of the amount of Rs.69,61,500 invested in purchase of land under S.54 of the Act. Accordingly, we direct the Assessing Officer to allow the same to the assessee. The grounds raised by the assessee on this aspect, viz. grounds No.2 and 3, are allowed.
15. In ground Nos 4, 5 and 6, the assessee has challenged the method of computation of long term capital gains adopted by the Assessing Officer, and specifically disputed the restriction of the cost of construction and cost of improvement to Rs.3 lakhs as against Rs.6 lakhs claimed by the assessee.
16. We have heard submissions of the parties on the issue and perused the orders of the Revenue authorities. It is evident from the orders of the revenue authorities that the assessee has not produced enough supporting evidence to prove that she has in fact incurred expenditure of Rs.6 lakhs towards cost of construction and cost of improvement. In such a view of the matter, the allowance of 50% of cost of construction at Rs.3 lakhs is reasonable, and no interference is called for. We accordingly reject the grounds raised by the assessee on this aspect.
17. In ground No.7, the assessee has challenged the disallowance of expenditure incurred towards digging of borewell while computing the cost of acquisition. Considering the fact that the assessee has failed to produce any evidence in this regard, her claim was not accepted by the Revenue authorities. In the absence of any evidence in support of her claim in this behalf even before us, we find no infirmity in the action of the revenue authorities in rejecting the claim of the assessee. This ground of the assessee is accordingly rejected.
18. In ground No.8, the assessee has disputed the action of the revenue authorities, in not allowing the amount of Rs.3,00,000 being the cost of boundary wall as part of construction cost of the new property.
19. The Assessing Officer while examining the assessee's claim for exemption under S.54 of the Act noted that assessee claimed an amount of Rs.3,00,000 towards construction of boundary wall over the plot purchased by her. The Assessing Officer rejected the claim by holding that the exemption under S.54 is available where assessee purchases a residential house within a period of one year after the date of transfer of original asset. The CIT(A) confirmed the disallowance of the amount of Rs.3 lakhs by observing that the expenditure incurred on construction of boundary wall on the plot was not out of the actual sale proceeds received by the assessee from sale of the flats.
20. We heard both sides. On a careful consideration of the matter in the light of the orders of the CIT(A) and the Assessing Officer, it is quite evident that they have not disputed the fact that the assessee has incurred the expenditure of Rs.3-lakhs in the construction of the boundary wall. The CIT(A) has rejected the assessee's claim only on the ground that the construction made was not out of sale proceeds of the flats. In paras 10 to 12 of our order hereinabove, we have held that for claiming exemption under S.54 of the Act, it is not necessary that the investment in new asset should be out of the sale consideration received from transfer of the original asset only. In the aforesaid view of the matter, we hold that the assessee is entitled for deduction of Rs.3 lakhs, being expenditure incurred on construction of compound wall. This ground raised by the assessee is allowed.
21. In the result, appeal of the assessee is partly allowed.
(Order pronounced in the court on 22.3.2013)
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
Unfortunately, no remedy has been provided in the Income-tax Act where the A.O. fails to dispose of the petition filed u/s. 154 within the statutory period of six months as provided u/s. 154(8). It may, however, be noted that the department cannot take any coercive measure or recover any outstanding dues without first disposing of the assessee's petition. In this regard, reference may be made to a judgement in the case of Sultan Leather Finishers (P) Ltd. vs. ACIT 191 ITR 179 (All.)
If inspite of reminders and persuasion, the A.O. is still not disposing of the rectification petition, the only legal option available to the assessee is to file a writ petition before the jurisdictional High Court. Our framers of constitution had visualized this situation and equipped the High Courts with the powers to issue a writ of "Mandamus" for securing judicial enforcement of public duties, performance of which has been wrongfully refused.
The Hon'ble Kerala High Court in the case of Smt. Rajamma vs. ITO 152 ITR 657(Ker), where the A.O. was not disposing of the rectification petition u/s. 154, held that an application for relief cannot be kept in cold storage and directed the A.O. to dispose of sec. 154 application within one month from the date of receipt of the order.
However, to avoid the cost, one option available to the assessee is to approachIncome-tax Ombudsman by filing a complaint with him for non-disposal of sec. 154 petition by the A.O. However, before proceeding, one should refer to the Income Tax Ombudsman Guidelines, 2006 so that the proper procedure is followed.
File a request to ITO and ther after to Addl.CIT. You can use the ratio
of delhi high court judgement also where the High court pulled up the
department and made scorthing remarks. then you can go t the income
tax ombusdmen as per the procedure.
frankly speaking , i am unable to understand the mindset of the AO.
They are very capable of making simple things complex for the assessee
.
Ao should be logical and practical in these kinds of issues. If , he
has nay doubt , ask for an indemnity bond , or issue 133(6) to the
party who has deducted TDs and get it confirmed. There are many other
means also to resolve these kinds of grievances if they wants to.
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