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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI ANUBHAV SHARMA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order dated 27.03.2022 framed u/s 263 of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] by the CIT, International Taxation, Delhi -3 pertaining to Assessment Year 2017-18.
2. The sum and substance of the grievance of the assessee is that the ld. CIT(A) erred in assuming jurisdiction u/s 263 of the Act and further erred in holding that the order dated 09.12.2019 framed u/s 143(3) of the Act is erroneous and prejudicial to the interest of the Revenue.
The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in light of Rule 18(6) of IITAT Rules.
4. We have given thoughtful consideration to the orders of the authorities below.
Briefly stated, the facts of the case are the assessee is a public company incorporated under the laws of Mauritius in 2010 and operates as an investment holding company. For the purposes of Indian tax laws, the assessee is a non resident company and is a tax resident of Mauritius under Article 4 of the India Mauritius Tax Treaty.
6. The assessee holds a valid tax residency certificate issued in Mauritius for the period under consideration. The assessee also holds a valid global business license issued by the Financial Services Commission in Mauritius.
The assessee filed its return of income electronically on 30.10.2017. The total income of the assessee was computed as under:
A INCOME FROM CAPITAL GAINS / (LOSS) 1 Total Taxable Income under head Long Term Capital Gains / Loss - Unlisted Long Term Capital Gains on sale of shares of Youngmonk Technologies Pvt. Ltd. (unlisted shares) (Refer Note to Computation) 40,056,781 Less; Exempt under provisions of India-Mauritius Tax Treaty (40,056,781) Long Term Capital Loss on sale of shares of A2 Media Private (219,865,449) Limited (unlisted shares)
Total Taxable Loss under the head Long Term Capital Gains
Total Taxable Income under head Short Term Capital Gains - 2 (219,546,516) Unlisted Short Term Capital Gains/ (Loss) on sale of shares of Youngmonk Technologies Pvt.(unlisted shares) (Refer Note to Computation) Total Taxable Loss under the head Short Term Capital Gains - 3 Total Taxable Income under head Long Term Capital Gains (Exempt) - Listed (229,185,105) Long Term Capital Gains/ (Loss) on sale of shares exempt under section 10(38) of the Act (Refer Note to Computation) Total Taxable Loss under the head Capital Gains (Exempt) B INCOME FROM OTHER SOURCES
Dividend Income 22,300,518 1 Less: Exempt dividend income under section 10(34) of the (22.300,518) Act (Refer Note to Computation) Total taxable income under the head Other Sources
TOTAL TAXABLE INCOME / (LOSS)
Return was selected for scrutiny assessment and notice dated 21.08.2018 was issued u/s 143(2) of the Act alongwith notice u/s 142(1) of the Act which reads as under:
GOVERNMENT OF INDIA MINISTRY OF FINANCE INCOME TAX DEPARTMENT OFFICE OF THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE INT TAX 3(1)(2)DEL
To, SAIF PARTNERS INDIA IV LIMITED 3RD FLOOR,STANDARD CHARTERED TOWER, 19 CYBERCITY EBENE MAURITIUS,FOREIGN Mauritius
PAN: AY: Dated: Notice No : AAOCS8595D 2017-18 08/11/2019 ITBA/AST/F/142(1 )/2019- 20/1020021087(1)
Notice under Sub Section (1) of Section 142 of the Income Tax Act, 1961
Sir/ Madam/ M/s,
In connection with the assessment for the Assessment Year 2017-18 you are required to: a) Furnish or cause to be furnished on or before 1511/2019 at 11:AM in accounts and documents specified overleaf. b) Furnish and verified in the prescribed manner under Rule 14 of IT Rules, 1962 the information called for as per annexure and on the points or matters specified therein on or before 15/11/2019 at 11:00 AM c) The above mentioned evidence/information is to be furnished online electronically in E-proceeding’ facility through your account in e-filing website of Income Tax Department d) Para(s) (a) to (c) are applicable if you have an account in e-filing website of Income Tax Department. Till such an account is created by you, assessment proceedings shall be carried gut either through your e-mail account or manually (if e-mail is not available) e) In cases where order has to be passed under section 153A/153C of the Income Tax Act, 1961 read with section 143(3), assessment proceedings; would be conducted manually.
Yours faithfully
Sd/- Mikesh Kumar Sinha Circle Intl. Tax 3(1)(2)Del
The assessee filed detailed reply which reads as under:
15 November 2019 By email Assistant Commissioner of income Tax Circle Int. Tax (1)(2) Civic Centre, Minto Road New Delhi-110002 India
Dear Sir Re: SAIF Partners India IV Limited (hereinafter referred to as the "Company" or the "Assessee")
Permanent Account Number : AAOCS8595D Assessment Year : 2017-18 Financial Year : 2016-17
Subject: Notice dated 8 November 2019 issued under Section 142(1) of the Income-tax Act, 1961 (the "Act")
This is in connection with notice under section 142(1) of the Act issued by your office dated 8 November 2019 (enclosed as Annexure 1) seeking information and details of the Assessee. In this regard, we respectfully submit the following:
In response to query No.1, No. 13, No. 14, No. 15, No. 16, No. 17, No.18, No 20,No. 21, No. 22 and No. 26
The Company is a public company limited by shares incorporated under the laws of Mauritius. The tax residence certificate of the Company for the subject period is enclosed as Annexure 2. The Company operates as an investment holding company for undertaking various investments.
During the year under consideration, the Company has transferred shares of Indian Companies and gains (or losses) arising on transfer of such shares are taxed as per provisions on capital gain taxation as provided in the Act. Please find enclosed the notes to computation (also furnished earlier) as Annexure 3 for detailed description in relation to transactions undertaken during the year under consideration.
Further, the Company is a non-resident as per the provisions of the Act and does not create a permanent establishment in India for the relevant Assessment Year ("AY") since it does not carry any business operations in India. Further, the Company has no office space in India and has no employees or expat base working in India.
In response to query No, 2, No. 3, No.4, No. 5, No. 6, No. 8, No. 9, No. 11, No. 19, No. 27, No. 29, No. 3C, No. 31, No. 32, No. 33, No. 34, No. 36 The copy of Income Tax Return ("ITR") form, computation of income along with notes to computation has already been submitted vide submission dated 13 September 2018. As stated above, the Company has no business operations or place of business in India, therefore, section 44AA of the Act has no applicability on the Company. Accordingly, no books of accounts are required to be maintained in India. In view of the same, Form 3CD or Form 29B has not been filed by the Company. Further, during the year under consideration, no international transactions have been undertaken by the Company with an associated enterprise in India in terms of transfer pricing provisions of the Act. In view of the above, section 40(A)(2)(b), section 43B, section 40(a)(ia) of the Act shall hold no applicability on the Company. Further, the Company has availed no deductions under Chapter VI- A of the Act. 1. In response to query no. 7 The details of directors of the Company during the relevant AY along with their addresses are duly disclosed in the ITR form. The relevant extracts of the ITR Form are enclosed as Annexure 4.
2. In response to query No. 12
The Company has received no orders under section 195(2) of the Act from the payers during the relevant AY. In responseto No. 23 and No. 24 3. The Company maintains no bank accounts in India. In response to No. 28 4. The copy of Form 26AS for AY 2017-18 is enclosed as Annexure 5. 5. In response to No. 35 The assessment proceedings under the Act are initiated for the first time during the relevant AY for the Company.
In response to No. 10, No. 25, No. 37 7. As stated above, the Company has no business operations in India and holds no bank account in India. During the relevant AY, the Company received (i) payment with respect to share transfer and (ii) dividend income from India. Since the Company has no bank account in India, the aforesaid payments were remitted to foreign bank account of the Company through normal banking channels. Further, request you to refer the notes to computation for details. We request you to take the above on record and oblige. In case your office requires any clarification with respect to the above, the Company will furnish the same on hearing from your office. Thanking you.
10. Alongwith its reply, the assessee filed the following notes to computation of income:
• SAIF Partners India IV Limited ("SAIF" or "the Company" or "Assessee") is a private limited company incorporated under the laws of Mauritius. The Company maintains its registered office at IFS Court, Bank Street, Twenty Eight, Cyber city, Ebene 72201, Mauritius. The Company hold valid tax residency certificate for the subject year. • • During the year under consideration, the Company sold shares of the following entities (here after referred to as 'Indian entities') and incurred a net loss of INR628,540,289.
S Name of Long term Short term Net Gain / No. Company Capital Gains / Capital Gain / (Loss) (Loss) (Loss) 1 A2 Media (219,855,449) (219,865,449) Private Limited (Unlisted) 2 Manpasand (229,185,105) (229,185,105) Beverages Limited (Listed) 3 Youngmonk 40,056,781 (219,546,516) (179,489,735) Technologies Pvt. Ltd (Unlisted) Total (408,993,773) (219,546,516) (628,540,289)
In addition, the Company earned certain dividend income amounting to INR 22,300,518 during the subject year. A. Sale of share of Indian entities • Under the provisions of the Act, as per section 5(2) of the Act read with section 9(l)(i), a non-resident is liable to tax on any income arising through the transfer of a capital asset situated in India. Accordingly, gains arising on transfer of shares of aforementioned entities would be taxable in India.
• As per the provisions of section 45 of the Act, any gains arising from the transfer of capital assets shall be chargeable to income tax under the head 'Capital Gains', in the year in which transfer takes place. • As per section 48 of the Act, income chargeable under the head 'Capital Gains' on the transfer of shares by a non-resident is to be computed as excess of (a) Full Value of consideration received or accrued as result of transfer; over (b) Cost of acquisition of shares and (c) Expenses incurred in connection with such transfer. As per section 2(42A) of the Act, in case, shares of unlisted company are held for more than 24 months from the date of transfer, they are categorized as Long term Capital Assets ("LTCA"), else Short term Capital Assets ("STCA"). Period of 24 months shall be substituted by 12 months where the subject shares are listed on recognized stock exchange.
• Where shares being sold are - (a) equity shares; (b) listed on recognized stock exchange; and (c) chargeable to securities transaction tax ("STT"), then any income arising from the same shall be exempt under the provisions of section 10(38) of the Act.
• The Company is a tax resident of Mauritius and is entitled to be governed by the beneficial provisions of Indian-Mauritius Tax Treaty ("Tax Treaty"). As per Article 13 of the Tax Treaty, any gains arising from the transfer of shares of Indian entity shall be taxable in Mauritius. It is submitted that the Company has chosen to opt for the beneficial provisions of the Tax Treaty.
• In the above background, details of shares transferred by the Company during the year under consideration along with computation of capital gains / loss are provided as under : 1. A2 Media Private Limited Unlisted equity shares Long Term Capital Loss on transfer - INR219,865,449
These shares were held by the Company for more than 24 months and accordingly, qualify as LTCA. Any gains or loss arising on transfer of such asset will be taxable as Long Term Capital Gains or Long Term Capital Loss respectively.
On transfer of such shares, the Company has incurred a loss of INR219,865,449. Although, as per provisions of section 71 of the Act, the Company is entitled to carry forward such losses, however, given that the Company has opted to be governed by the provisions of Tax Treaty, the same has not been suo-moto carried forward by the Company. In absence of specific columns to represent such loss in the ITR Form, no disclosures for such transaction was provided.
2. Manpasand Beverages Limited; Listed equity shares Long Term Capital Loss on transfer - INR229,185,105
These shares were also held for more than 12 months and will qualify as LTCA. Any gains or loss arising on transfer of such asset will be taxable as Long Term Capital Gains or Long Term Capital Loss respectively. The Company incurred a loss on the sale of such shares amounting to INR229,185,105. Given that the Company has opted to be governed by the provisions of the Tax Treaty, the Company has not claimed the carry forward of such losses. In absence of specific columns to represent such loss in the ITR Form, no disclosures for such transaction was provided.
3. Youngmonk Technologies Pvt Ltd Unlisted shares Net Short Term Capital Loss of INR179,489,735 Out of total shares held by the Company, 357,143 were held for less than 24 months and balance 285,714 shares were held for more than 24 months. The sale of such shares has resulted into a net loss of INR179,489,735 to the Company (i.e. short terms capital loss of INR219,546,516 less long term capital gain of INR 40,056,781).
Although, as per the provisions of Section 71 of the Act, the Company is entitled to carry forward such losses, however, given that the Company has opted to be governed by the provisions of Tax Treaty, the same has not been suo-moto carried forward by the Company. In absence of specific columns to represent such short term capital loss in the ITR Form, no disclosures for such loss transaction was provided. Note that the long term capital gain of INR40,056,781 has been shown in schedule CG of ITR out of abundant caution.
• Income from dividend - INR22,300,518
During the year under consideration, the Company has received dividend from Senco Gold Limited and Manpasand Beverages amounting to INR22,300,518. Such dividend shall be exempt in the hands of the Company under section 10(34) read with section 115-0 of the Act. Notwithstanding the above, the Company reserves its right to make additional submissions/claims (including carry forward of losses) in case your office do not concur with the positions taken by the Company. Yours faithfully, Sd/- Shafiq-Ur-Rahmaan Soyfoo”
11. From the perusal of notes to computation of income [supra] it can be seen how the loss was computed with a specific mention that on transfer of such shares, though the company has incurred loss, but has opted not to carry forward the said loss.
12. Specific reply of the assessee alongwith notes to computation of income was considered by the Assessing Officer who completed the assessment vide order dated 09.12.2019. Assuming jurisdiction conferred upon him by provisions of section 263 of the Act, the ld. CIT issued notice dated 06.01.2022 which reads as under:
GOVERNMENT OF INDIA MINISTRY OF FINANCE INCOME TAX DEPARTMENT CIT (IT), DELHI-3
SAIF PARTNERS INDIA IV 3RD FLOOR,STANDARD CYBERCITY EBENE MAURITIUS,FOREIGN Mauritius
PAN: Asst Year Dated: DIN & Letter No : AAOCS8595D 2017-18 06/01/2022 ITBA/COM/F/17/202 1-22/1038500707(1)
Sir/ Madam/ M/s,
Subject: Online service of Orders - Letter
Sub: Proceedings initiated under section 263 of the Income-tax Act in the case of M/s Saif Partners India IV Ltd, PAN No. AAOCS8595D for A.Y. 2017-18 - regarding.
Please refer to above.
While carrying out review of scrutiny assessment by the undersigned, it is ascertained that the AO had passed the assessment order for Assessment Year 2017-18 on 09/12/2019 wherein the returned income at NIL was accepted without conducting necessary inquiry/verification and appreciating correct legal positions.
During the year under consideration, the assessee, a tax resident of Mauritius disposed of unlisted shares of A2 Media Pvt. Ltd and arrived at long term capital loss of INR 21,98,65,449 and it also disposed of unlisted shares of Youngmonk Technologies Ltd and arrived at a long term capital gains of INR 4,00,56,781 and short term capital loss of INR 17,94,89,735! However, the AO has not verified the veracity of such claim by calling for the basis of valuation of shares and verification thereof. It also disposed of shares of Manpasand Beverages Ltd with capital loss of 22,91,85,105. No verification what so ever in this regard was also carried out. In the case of a non-resident, the computation of capital gains needs to be carried out as per proviso to under section 48 of the Act. However, no such exercise was carried out by the AO in the assessment proceeding.
Assessee contended that the capital gains are not chargeable to tax in India under Article 13(4) of India- Mauritius DTAA' It also submitted a TRC to support its claim. However, AO had not carried out any inquiry to ascertain whether there existed any commercial substance in Mauritius and whether any tax avoidance arrangement was made where in the form of a conduit company with an objective to obtain tax benefits under the India- Mauritius DTAA. The AO should have verified the details of key personnel who manage the investments decisions of the fund. No details were called for in this regard. This is essential to ascertain whether the fund manager creates a PE for the assessee or in case assessee’s activity is controlled and managed in India, then the assessee may be treated as a resident for tax purposes in India leading to different tax consequences in India.
On the basis of above observation, it is clear that the aforesaid Assessment order passed under section 143(3) was passed without making necessary factual verification and application of correct legal provisions to ascertain the tax liability of the receipts in the hands of the assessee. Therefore, the order is erroneous and therefore prejudicial to the interest of the revenue.
In view of the above, you are requested to show cause as to why necessary action should not be taken in your case under section 263 of the Income-tax Act. You are requested to submit reply along with all necessary details on or before 17.01.2022.
Sd/- Pitambar Das Commissioner of Income tax International taxation, New Delhi
We have given thoughtful consideration to the initiation of proceedings u/s 263 of the Act. We are of the considered view that the ld. CIT has wrongly assumed jurisdiction on wrong facts in as much as, as mentioned elsewhere, the assessee has made its intention very clear in the notes to computation of income wherein it has specifically mentioned and clarified that the assessee is not inclined to claim the carry forward of losses on sale of shares.
We are of the further opinion that the ld. CIT proceeded on the premise that the assessee is a newly incorporated company which has been incorporated solely for tax evasion purposes, without realizing that the assessee is in this line of business since 2010, holding a valid tax residency certificate with a global business license issued by the assessee Financial Services Commission in Mauritius.
Observations of the ld. CIT are nothing but assumptions, surmises and conjectures without any sound basis. The ld. CIT has alleged as under:
“In a nutshell, following facts emerges:
1. The scheme of arrangement employed by the assessee is a tax avoidance through treaty shopping mechanism
The assessee company is just a conduit and the real owner is the shareholders/investors who are tax residents of different countries.
3. The TRC is not sufficient to establish the tax residency if the substance establishes otherwise.
There exists no commercial substance of the assessee company in Mauritius
5. The assessee company is also not a beneficial owner of income as control and dominion of fund is not with the company.
6 There is no commercial rationale of establishment of assessee company in Mauritius as the commercial outcomes would identical irrespective of location of funds.
In view of the aforesaid discussions, the assessee company is not entitled to the treaty benefits of India-Mauritius DTAA. Therefore, the taxability of income of the non-resident assessee company would be decided under the provisions of Income-tax Act only. XXXXX
11.5 In order to ascertain the veracity of the capital loss/gain arrived, the assessee was asked to furnish the basis of cost of acquisition and sale price. In order to ascertain the correctness of the fair market value at the time of acquisition and also at the time of sale adopted by the assessee company.
11.6 For unlisted companies, Income-tax Rule under 11UA provides the methodology of computation of fair market value. Rule 11UA (1) prescribes the manner to find out the fair market value of the various properties. Fair market value of unquoted Equity shares is required to be computed as per the formulae given there in. However, for finding out fair market value of the unquoted equity shares in case of shares issued by the company at premium , there are two options provided under Rule 11 UA(2) at the choice of the assessee. One option is to calculate the fair market value of unquoted equity shares as per formula given. The other one is the fair market value of unquoted equity shares determined by Discounted Free Cash Flow (DCF) Method. However under Rule 11UA(2), if an assessee choose the valuation of unquoted equity shares as per the Discounted Free Cash Flow Method, then he has to obtain a report from Merchant Banker. Assessee has not furnished the valuation reports as required
Under the law. Manpasand Beverages Ltd is a listed company. Therefore, the fair market value of at purchase as well as on sale may be taken from the stock exchange to compute the Capital gains/loss.
11.7 In view of the above AO is directed to conduct further inquiry and call for relevant details to ascertain the fair market value of those shares on the date of acquisition and sale in each case. The capital gain is full value consideration less cost of acquisition. The full value consideration may or may not be identical to sale consideration. The AO, therefore, is directed to ascertain the full value consideration in each case. AO is directed further to compute the capital gains in each case as per the computation mechanism provided in provisos to section 48 of the Act. AO may also conduct other inquiries as she/he deems appropriate to find out the taxability of income in the instant case.
12. In view of the aforesaid discussions of facts and legal provisions, the impugned order of the Assessing Officer dated 09.12.2019 is cancelled and set aside as the same is erroneous being prejudicial to the interest of revenue. As discussed in aforesaid paragraphs, the assessee is not entitled to benefits of India- Mauritius DTAA as the arrangement is tax avoidance through treaty shopping.The AO is directed to frame the assessment afresh as per the directions given above after granting due opportunity of being heard to the assessee.”
As mentioned elsewhere, the ld. CIT has proceeded on the assumption that the assessee is not entitled for any treaty benefit for taxation of capital gain in India. The ld. CIT has clearly ignored the fact the assessee has neither claimed nor carried forward such capital loss in its return of income filed in India.
The Hon'ble Supreme Court in Malabar Industrial Co. Ltd., 243 ITR 83, has laid down the following ratio:
"A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far 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 Income-tax Officer 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) of the Act. 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 ".
The Hon'ble Bombay High Court in the case of Gabriel India Ltd 203 ITR 108 has held as under:
“The power of suo motu revision under subsection (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions "erroneous", "erroneous assessment" and "erroneous judgment" have been defined in Black's Law Dictionary. According to the definition, "erroneous" means "involving error; deviating from the law". "Erroneous assessment" refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, "erroneous judgment" means "one rendered according to course and practice of court, but contrary to law, upon mistaken view of law; or upon erroneous application of legal principles".
12. From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some
estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. We, therefore, hold that in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income- tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power.
It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority.
The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-examine the matter. That, in our opinion, is not permissible. Hence the provisions of section 263 of the Act were not applicable to the instant case and, therefore, the commissioner was not justified in setting aside the assessment order.”
It is a settled position of law that powers u/s 263 of the Act can be exercised by the Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and prejudicial to the interest of the Revenue. By 'erroneous' is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no action to exercise powers of revision can arise, nor can revisional power be exercised for directing a fuller enquiry to find out if the view taken is erroneous. This power of revision can be exercised only where no enquiry, as required under the law, is done. It is not open to enquire in case of inadequate inquiry. Our view is fortified by the decision of Hon'ble High Court of Bombay in the case of CIT vs. Nirav Modi, [2016] 71 Taxmann.com 272 (Bombay).
The Hon'ble High Court of Gujarat in the case of CIT vs. Nirma Chemical Works Ltd. 309 ITR 67 has observed as under:
“if assessment order were to incorporate the reasons for upholding the claim made by an assessee, the result would be an epitome and not an assessment order. In this case, during the assessment proceedings for both the Assessment Years, the Assessing . A.Y. 2009-10 Officer issued a query memo to the assessee, calling upon him to justify the genuineness of the gifts. The Respondent-Assessee responded to the same by giving evidence of the communications received from his father and his sister i.e. the donors of the gifts along with the statement of their Bank accounts. On perusal, the Assessing Officer was satisfied about the creditworthiness/capacity of the donors, the source from where these funds have come and also the creditworthiness/ capacity of the donor. Once the Assessing Officer was satisfied with regard to the same, there was no further requirement on the part of the Assessing Officer to disclose his satisfaction in the Assessment Order passed thereon. Thus, this objection on the part of the Revenue cannot be accepted.”
We find that the Hon'ble Delhi High Court in the case of CIT Vs Sunbeam Auto reported in 332 ITR 167 has held as held as under:
“We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the CIT under s. 263 of the IT Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the AO did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO in the assessing order is not required to give detailed reason 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. Learned counsel for the assessee is right in his submission that 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 CIT to pass orders under s. 263 of the Act, 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”.
Considering the facts of the case in totality from all possible angles, we failed to persuade ourselves to accept the contention of the ld. DR who had strongly supported the findings of the PCIT. We are of the considered view that the order framed u/s 263 of the Act deserves to be set aside and that of the Assessing Officer deserves to be restored. We order accordingly.”
The Hon'ble Delhi High Court in the case of Delhi Airport metro Express [P] Ltd 398 ITR 8 had the occasion to consider a similar issue and the Hon'ble High Court held as under:
“9. It is seen, in the order dated March 30, 2016, the Principal Commissioner of Income-tax has proceeded by setting out the contents of the show-cause notice and the contents of the reply given by the assessee. It appears that no inquiry, as such, was undertaken by the Principal Commissioner of Income- tax to come to the conclusion that the original assessment order was erroneous and prejudicial to the interests of the Revenue.
For the purposes of exercising jurisdiction under section 263 of the Act, the conclusion that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimal inquiry. In fact, if the Principal Commissioner of Income-tax is of the view that the Assessing Officer did not undertake any inquiry. it becomes incumbent on the Principal Commissioner of Income-tax to conduct such inquiry. All that the Principal Commissioner of Income-tax has done in the impugned order is to refer to the circular of the Central Board of Direct Taxes and conclude that "in the case of the assessee-company, the Assessing Officer was duty-bound to calculate and allow depreciation on the BOT inconformity of the Central Board of Direct Taxes Circular No. 9 of 2014 but the Assessing Officer failed to do so. Therefore, the order of the Assessing Officer is erroneous insofar as prejudicial to the interests of the Revenue".
In the considered view of the court, this can hardly constitute the reasons required to be given by the Principal Commissioner of Income-tax to justify the exercise of jurisdiction under section 263 of the Act. In the context of the present case if, as urged by the Revenue, the assessee has wrongly claimed depreciation on assets like land and building, it was incumbent upon the Principal Commissioner of Income-tax to undertake an inquiry as regards which of the assets were purchased and installed by the assessee out of its own funds during the assessment year in question and, which were those assets that were handed over to it by the DMRC. That basic exercise of determining to what extent the depreciation was claimed in excess has not been undertaken by the Principal Commissioner of Income-tax.
Mr. Asheesh Jain then volunteered that the Principal Commissioner of Income-tax had exercised the second option available to him under section 262(1) of the Act bu sending the entire matter back to the Assessing Officer for afresh assessment. That option, in the considered view of the court, can be exercised only after the Principal Commissioner of Income- tax undertakes an inquiry himself in the manner indicated hereinbefore. That is missing in the present case.
13. Therefore, the court is of the view that the Income-tax Appellate Tribunal was not in error in setting aside the impugned order of the Principal Commissioner of Income-tax under section 263 of the Act. No substantial question of law arises.”
If we consider the aforementioned judgment of the Hon'ble Jurisdictional High Court on the facts of the case in hand, we find that in the appeal under consideration, the ld. CIT called for valuation report in revisionary proceedings. However, when the valuation reports were filed by the assessee, the ld. CIT chose to set aside the entire matter back to the file of the Assessing Officer without appreciating that it was incumbent upon the ld. CIT to himself examine the valuation reports and verify as to how the case of the assessee was erroneous and prejudicial to the interest of the Revenue following the ration laid down by the Hon'ble Jurisdiction High Court in the case of the Delhi Airport Metro Express [P] Ltd [supra].
Similar view was taken by the Hon'ble Delhi High Court in the case of Jyoti Foundation 357 ITR 388 wherein the Hon'ble High Court has observed as under:
“In the present case, inquiries were certainly conducted but the Assessing Officer. It is not a case of no inquiry. The order under Section 263 itself records that the Director felt that the inquiries were not sufficient and further inquiries or details should have been called. However, in such cases, as observed in the case of DG Housing Projects Limited (supra), the inquiry should have been conducted but the Commissioner or Director himself to record the finding that the assessment order was erroneous. He should not have set aside the order and directed the Assessing Officer to conduct the said inquiry.”
Considering the facts of the case in hand in light of judicial decisions discussed hereinabove, we set aside the order of the ld. CIT and restore that of the Assessing Officer dated 09.12.2019 framed u/s 143(3) of the Act.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 13.02.2023.