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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO, HON’BLE & SHRI MANJUNATHA. G, HON’BLE
आदेश /O R D E R
PER MANJUNATHA. G, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order passed by the Principal Commissioner of Income Tax (Central), Chennai-1, dated 30.03.2022 u/s. 263 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) and pertains to assessment year 2017-18.
:-2-: ITA. No: 431/Chny/2022
The assessee has raised the following grounds of appeal: “1. The learned Principal Commissioner of Income-tax (Pr. CIT) erred in passing an order u/s.263 and directing the Assessing Officer to modify the order dated 31-12-2019 passed u/s 143(3) of Income Tax Act, 1961. Your appellants submit that the order of the Pr. CIT is illegal, bad in law and void and the same ought to be quashed. 1.1.The learned Pr. CIT erred in holding that there was a lack of enquiry under Explanation 2 to section 263 of the Income Tax Act, 1961. 1.2. The learned Pr. CIT failed to appreciate the fact that the order of the AO is not erroneous and is not prejudicial to the interest of the Revenue. Your appellants therefore submit that the order of the Pr. CIT be quashed. 1.3. The learned Pr. CIT failed to appreciate the fact that in respect of all the issues, the learned Assessing Officer has adopted one of the possible views. 1.4. Without prejudice to the above, the learned Pr. CIT erred in remanding the matter for further verification.
2. The learned Pr. CIT erred in directing the learned Assessing Officer to verify the reduction in profit and de-recognition of income by applying ICDS provisions. 2.1.The learned Pr. CIT failed to appreciate the fact that the reduction in profit and de-recognition of income was made by the Appellant based on the provisions of ICDS. 2.2. The learned Pr. CIT failed to appreciate the fact that the entries in the books of accounts are notional and does not give raise to any income. The learned Pr. CIT erred in directing the learned Assessing Officer to verify the taxability of security premium u/s 56(2)(vii)(b) of the Income Tax Act, 1961. 3.1.The learned Pr. CIT failed to appreciate the fact that there was no issue of fresh shares by the Appellant and receipt of any security premium during the previous year.
:-3-: ITA. No: 431/Chny/2022 4. The learned Pr. CIT erred in directing the learned Assessing Office to verify the correct business loss. 4.1 The learned Pr. CIT failed to appreciate the fact that the business loss was correctly arrived at by the learned Assessing Officer.
The brief facts of the case are that, the assessee, M/s. Shriram Properties Limited, is engaged in the business of construction, development and sale of housing projects and other related activities. The appellant is a company governed by the Companies Act, 2013. The appellant adopted IND-AS (Indian Accounting Standards) as mandated by the Ministry of Corporate Affairs (MCA), the Government of India for the first time in the financial year 2016-17 relevant to assessment year under appeal. As per IND-AS 101, the company had prepared financial statements for the financial year 2016-17 and restated the liabilities and assets as on 01.04.2015 and restated the financial information for the financial year 2015- 16 also. The entire exercise is carried out as mandated by the IND-AS 101, by passing relevant entries during the financial year 2016-17, including those entries which were given effect to restate the opening balances as on 01.04.2015 and 01.04.2016. Further, in order to restate the balances in financial information as on 01.04.2015, various entries were :-4-: ITA. No: 431/Chny/2022 passed as required by the other standards relating to financial instruments, i.e., financial assets and liabilities. Some of these entries were routed through profit and loss account by way of debit and credit. However, for the purpose of income tax those entries were negated in the computation of total income as per the provisions of Income Computation and Disclosure Standards (ICDS). In that process, the appellant company reduced the following items in the computation of total income which were credited to profit and loss account. This reduction has been reflected in Sl. No 33 “any other amount allowable as deduction,” in the Schedule-BP of Form ITR filed for the assessment year 2017-18. Sr. Particulars Amount (Rs.) Amount (Rs.) No. 1. Income from Guarantee Commission 2,06,18,121 Gain on extinguishment of 2 171, 16,24,538 financial liability Unwinding of discount relating 3 5,60, 12,015 to refundable security to refundable security deposit 4 Profit on sale of fixed assets 5,30,455 Sub Total 178,87,85, 129 Fair Value Gain on Financial Instruments 5 16,53,95,001 at FVTPL Interest Income on redeemable financial 6 2,35,25,578 instruments Total 197,77,05,708
The appellant company has filed its return of income for the assessment year 2017-18 on 03.11.2017, admitting a total :-5-: ITA. No: 431/Chny/2022 income of Rs. 11,59,05,730/-. The case was selected for scrutiny and the assessment has been completed u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) on 31.12.2019 and determined total income at Rs. 11,96,55,730/- by making additions towards disallowance of royalty paid amounting to Rs. 37,50,000/-.
The case has been subsequently taken up for revision proceedings by the Pr. CIT and issued show cause notice u/s. 263 of the Act, dated 09.03.2022 and called upon the assessee to explain as to why the assessment order passed by the Assessing Officer u/s. 143(3) dated 31.12.2019, shall not be revised. The PCIT, in the said show cause notice observed that the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, on the issue of various incomes in the profit and loss account having been claimed as deduction in the statement of total income. The PCIT, has taken up the issue of income from guarantee commission, Fair Value Gain on financial instruments at FVTPL, interest income on redeemable financial instruments and gain on extinguishment of financial liability, on the ground that although those items of income have been :-6-: ITA. No: 431/Chny/2022 credited into profit and loss account, but in the statement of total income reduced from the income. The PCIT, has also questioned the issue of receipt of securities premium amounting to Rs. 1,491.42 crores in light of provisions of section 56(2)(viib) of the Act, disallowance of expenditure u/s 14A relatable to exempt income and difference in brought forward business loss available for set off against current year income. According to the PCIT, the Assessing Officer has failed to carry out required enquiries he ought to have been carried out in right perspective of law which rendered the assessment order to be erroneous and prejudicial to the interest of the revenue. Therefore, called upon the assessee to explain as to why the assessment order passed by the Assessing Officer u/s. 143(3) dated 31.12.2019, shall not be revised in terms of section 263 of the Act.
In response to show cause notice, the assessee vide letter dated 18.03.2022 submitted that, the assessment order passed by the Assessing Officer u/s. 143(3) of the Act, dated 31.12.2019 is neither erroneous nor prejudicial to the interest of the revenue because, all the issues taken up for revision proceedings had been thoroughly examined by the Assessing :-7-: ITA. No: 431/Chny/2022 Officer, in light of relevant facts and applicable provisions of the Act, which is evident from the fact that the Assessing Officer had issued notice u/s. 142(1) & 143(2) of the Act on 23.08.2018 and 27.09.2019 with a detailed questionnaire, as per which the issue of claim of any other amount allowable as deduction in Schedule-BP, increase in securities premium and ICDS compliance and adjustment has been specifically called for with necessary evidences. The assessee in response to notice u/s. 143(2) of the Act, has filed all the details including financial statements for the relevant assessment year, copy of tax audit report, statement of total income and also explained various notional entries passed in compliance with adoption of IND-AS. The assessee had also filed detailed reply to 143(2) notice issued by the Assessing Officer and explained notional entries passed in pursuant to IND-AS Accounting Standards with ledger extract of journal entries effecting asset and liabilities of the accounting year. The assessee had also submitted its reply with regard to increase in securities premium in response to specific question no. 6 of Assessing Officer notice and explained that the increase in securities premium is on account of restatement of liability in compliance with IND-AS, however there is no change in number of shares :-8-: ITA. No: 431/Chny/2022 issued during the financial year 2016-17. The Assessing Officer, after considering relevant submissions has rightly completed the assessment and thus, it cannot be said that the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue.
The Pr.CIT, after considering relevant written submissions filed by the assessee and also taken note of various facts, has accepted the issue of disallowance u/s. 14A of the Act, on the ground that the assessee has not received any dividend income for the year under consideration. The PCIT, had also accepted the issue of difference in brought forward business loss set off against current year income, on the ground that the Assessing Officer may examine the reconciliation submitted with reference to the available records. In regard to other issues, the PCIT was of the opinion that although the main contention of the assessee is that these are notional entries passed in accordance with adoption of IND-AS Standards, which it was mandated to adopt as per MCA Regulations and are not taxable as income, but fact remains that, the assessee failed to show the relevant ICDS guidelines which enabled it to claim reduction in profit :-9-: ITA. No: 431/Chny/2022 admitted in the P&L account. Further, the assessee has not placed any records or reference to such guidelines which enables it to seek negation of entries. Although, the assessee not filed any information before the Assessing Officer, but the Assessing Officer accepted explanation furnished by the assessee without examining the issues, which he ought to have been enquired in light of explanation (2) to section 263 of the Act, which rendered the assessment order erroneous in so far as it is prejudicial to the interest of the revenue. The PCIT, discussed the issues at length in light of the decision of Hon’ble Supreme Court in the case of Deniel Merchants Pvt Ltd (Appeal No. 2396/2017) dated 29.11.2017, and also the decision of Hon’ble Calcutta High Court in the CIT vs Maithan Investment (56 Taxman.com), and observed that the assessment order passed u/s. 143(3) of the Act, dated 31.12.2019 is held to be erroneous and prejudicial to the interest of the revenue and thus, set aside the assessment order u/s. 263 of the Act and directed the Assessing Officer to make fresh assessment after carrying out necessary enquires and verification in respect of reduction in profit and de- recognition of income claiming application of ICDS Standards, taxability of security premium u/s. 56(2)(viib) of the Act and :-10-: ITA. No: 431/Chny/2022 all other connected issues relating to the above issues. The relevant findings of the PCIT are as under: 10. I have considered the written submissions filed along with certain details enclosed. The arguments and pleas raised during the hearing were also Considered. I have also perused the assessment record. On perusal l of the submissions, the assessee's plea that the allegation in the notice that the company received dividend income of Rs.135.53 crore is wrong and that no dividend was received by the company during A.Y. 2017-18 is acceptable. Regarding difference in business loss, the AO may examine the reconciliation submitted with reference to the records available.
11. In regard to the other issues, the assessee's main contention is that these are notional entries passed in accordance with adoption of IND AS standards, which it was mandated to adopt as per MCA regulations and are not taxable as income. It was Contended that as per IND AS, the gain or loss has to be recognized in the P&L Account, and that as per lCDS the assessee has negated these gains and claimed deduction. However, the assessee failed to show the relevant ICDS guidelines which enabled it to claim deduction of profit admitted in the Profit and Loss account. As the assessee has adopted IND AS standards, it would not be left to its option to reverse the entries while computing the total income. Such reversal ought to be followed as per IND AS guidelines or ICDS guidelines. However, the assessee has not placed before me any record or reference to such guidelines which enabled it to seek negation of the entries. I also note that no information regarding this was filed before the AO. The AO without examining has allowed deduction to the total income which is erroneous and prejudicial to the interests of revenue.
12. In regard to the issues referred at A to E, the ARs during the hearing represented that the financial instruments were classified, restated and the fair value measurement was adopted, which has resulted in certain gain or loss. The method and basis of such valuation was not given as part of the submission. However, when a gain or loss was recognized based on certain fair value measurement, it may not be appropriate to contend that they are mere notional entries.
13. In regard to guarantee commission, the accounting :-11-: ITA. No: 431/Chny/2022 standard requires to recognize the fair value in an arm's length scenario. It was contended that the assessee was merely required to pass certain notional entries as per AS 109. As per Note 2 to the Accounting Policy, financial guarantee contracts are recognized initially as liability, at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Thus, the plea that they are mere notional entries is not acceptable. In the guarantee transaction, the assessee clearly assumes certain liabilities and risks, it is only the corresponding compensation for such risks assumed is reflected as guarantee commission and has income character. I have perused the sample guarantee deeds filed as part of the submission. Under the guarantee to Central Bank of India and Andhra Bank, the guarantor assessee is constricted not to allow or permit change of shareholding pattern below 51%, not to amalgamate/merge/de-merge etc. Under the guarantee with Yes Bank, the assessee guarantor is liable to discharge the liability on demand by the sender. These liabilities cannot be construed notional.
In regard to the issues on fair value gain or financial instruments, interest income on redeemable financial instruments, the assessee has not furnished the supporting documentation as to the manner and basis of valuations and the entries passed. The investments in debentures in Shriprop Builders Pvt. Ltd., Shrivision Homes Pvt. Ltd. And Shriprop Housing Pvt. Ltd. were fair valued as per submission. It is not evident why the debenture investment in Shrivision Builders Pvt. Ltd. was not so fair valued. As per submission, preference share investment in Shriprop Housing Pvt. Ltd. was fair valued. It is not evident why the investment in Bengal Shriram Hitec City Pvt. Ltd. was not so valued.
15. In regard to gain on extinguishment of financial liability and accretion to security premium, the assessee represented that its investor initially had a put- option under which there was liability to pay interest at 8% under certain conditions, and that such agreement was modified, and as a result, the financial instrument was not reclassified, restated, fair measure of liability done and subsequently reversed. It was submitted that under IND AS, they are considered compound financial instruments. The assessee has not furnished the contracts under which interest liability arose and terminated, though called for. As per the information in the financial statement under Note 39, there are also references to put :-12-: ITA. No: 431/Chny/2022 option given to investors in joint ventures, but there is no information as to the fair value measure adopted for these transactions. As per information under Schedule 4 of the Balance Sheet, some 2,68,61,895 equity shares in Shriram Properties & Infrastructure Pvt. Ltd. were pledged with Deutsche Pfandbrief Bank AG against compulsory convertible debenture issued by Shriram Properties & Infrastructure Pvt.Ltd. There is no information as to fair value measurement adopted to these combined financial instruments. As per information in Schedule 15, shares and debenture bonds were pledged with banks to avail certain loan or Credit facilities. As these equity instruments are also linked to debt, they ought to have been fair valued under IND AS. But no such valuation seems to have been done. The AO has also not examined these aspects.
A careful perusal of the Accounting Policies stated in the financial statements of the assessee filed for the year show that the assessee has adopted IND AS in regard to recognition to revenue transactions relating to joint development agreements, etc. Therefore, prima facie, I do not find any justification for negating certain entries as mere notional entries. l also do not find any justification as to why some of the financial instruments were not fair valued under a consistent approach. Hence, I find the assessment order to be erroneous.
The discussion above and perusal of records clearly show that the AO had not verified any of these issues relating to de- recognition of income in the computation statement. It is seen that the case was selected for scrutiny to examine large share premium received, applicability of section 56(2)(vi)(b), reduction in profit in the computation of income due to ICDS etc. But the AO has completed the assessment without examining and verifying the issues. It is evident from record that there was no submission from the assessee's side to explain any of these matters with the relevant contracts and valuation process/reports, The AO had merely accepted the claims without any verification, which makes the assessment order erroneous and prejudicial to the interests of revenue.
In this regard, it is relevant to refer to the Explanation 2 to sec. 263 which reads as under:
Explanation 2. -For the purposes of this section, it is :-13-: ITA. No: 431/Chny/2022 hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner (a) the order is passed without making inquiries or verification which should have been made: (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
The Hon’ble Calcutta High Court in the case of CIT V. Maithan Investment (56taxmann.com) observed, "when the requisite enquiry was not made, the order is bound to be erroneous and prejudicial to the interest of revenue.... If the relevant enquiry was not made, it may in appropriate cases amount to no enquiry and may also be a case of non- application of mind. The Hon'ble Supreme Court in the case of Deniel Merchants Pvt. Ltd. vs. ITO (Appeal No. 2396/2017) dated 29.11.2017 upheld the view that the CIT is justified in invoking sec. 263 if the AO did not make any proper inquiry while making the assessment.
20.Thus, the order passed by the AO without making any inquiry and verification on the issues discussed above, without obtaining the necessary evidences during the assessment proceedings makes the assessment order erroneous and prejudicial to the interests of revenue.
21. In view of the foregoing discussion, the assessment order dated 31.12.2019 passed u/s 143(3) for the AY 2017-18 in the assessee's case is held to be erroneous and prejudicial to the interest of revenue and the same is set-aside u/s 263 of the Income tax Act to the file of the Assessing Officer with a direction to make assessment after carrying out necessary inquiries and verification on the following issues: a) Reduction in profit and de-recognition of income claiming application of ICDS standards.
:-14-: ITA. No: 431/Chny/2022 b) Taxability of Security premium u/s.56(2)(vi)(b) c) Allowance of correct business loss d) All other connected issues relating to the above. 22. Accordingly, the assessment order dated 31.12.2019 is set aside for the above purpose. The AO is directed to carry out the above directions and pass consequential order after giving an opportunity of hearing to the assessee.”
The ld. Counsel for the assessee, Shri Ananthan, CA submitted that the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue, because the Assessing Officer has completed assessment u/s. 143(3) of the Act, after considering relevant submissions of the assessee on various issues questioned by the PCIT, in his show cause notice issued u/s. 263 of the Act, which is evident from the fact that the Assessing Officer has issued various notices u/s. 142(1) & 143(2) on 23.08.2018 and 27.09.2019, for which the assessee has filed relevant details including financial statements for the assessment year 2017-18, relevant tax audit reports, statement of total income, notes on accounts and also furnished applicable IND-AS Standards which is the bone of contention. The assessee had also filed detailed written submission on various issues including the issues questioned by the Assessing Officer which covers all the issues forming part of 263 proceedings. The ld. :-15-: ITA. No: 431/Chny/2022 Counsel for the assessee, referring to paper book page no. 5 which refers to 143(2) notice dated 27.09.2019, where the Assessing Officer has called for specific explanation on the issue of claim of any other amount allowable as deduction in schedule BP, share premium and ICDS compliance and adjustment, submitted that the assessee has filed all details and also explained how entries passed in compliance with adoption of IND-AS standards has been negated in the statement of total income. The Assessing Officer, after considering relevant facts has completed the assessment u/s. 143(3) of the Act and thus, it cannot be said that the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue.
The Ld. Counsel for the assessee submitted that, before the ld. PCIT, the assessee has submitted all details including relevant IND-AS provisions and records of the company such as journal entries, ledger account, guarantee agreements, CA certificate etc., and argued that entries passed were purely notional in nature and not liable to tax. It is because of this reason, these entries were negated in the computation, by reducing the amount credited to profit and loss account and :-16-: ITA. No: 431/Chny/2022 adding the amount debited to profit and loss account. The reduction in the computation was shown in the ITR under the head any other amount allowable as deduction in the schedule-BP. He further, submitted that with regard to guarantee commission, as per tri-party agreement between the assessee and bankers, there is a specific clause for not charging any kind of commission for providing guarantee and because of this, the assessee has not charged any guarantee commission. But, in order to comply to IND-AS standards a notional entry has been passed and credited to profit and loss account. Since, income on account of guarantee commission is not accrued or arises to the assessee, the same has been reduced from the total income. Further, in so far as security premium is concerned, there was no fresh issue of equity shares during the financial year to any resident and the increase in share premium of Rs. 1491.42 crores was purely on account of notional entries passed as per IND-AS provisions. He further submitted that, these entries pertain to reclassification of shares issued earlier to the previous year under appeal and thus, the provisions of section 56(2)(viib) of the Act cannot be invoked, because there was no receipt of consideration on account of issue of shares either during the :-17-: ITA. No: 431/Chny/2022 financial year 2016-17 or in the financial year 2015-16. These share premium account was credited in those years when shares have been issued. Therefore, no addition can be made in the financial year 2016-17, in respect of share premium and thus, it cannot be said that there is error in the order of the Assessing Officer. He further submitted that, in so far as fair value gain on financial instruments, the assessee had invested in Optionally Convertible Debentures (OCD) and Optionally Convertible Preference (OCPS) shares with subsidiary companies. These investments are characterized as financial assets and ought to be accounted at the fair value, and that valuation of any gain or loss arising from the change in the fair value shall be recognized as a gain or loss in the profit and loss account. As per valuation of the financial assets, the assessee had passed a notional entry for an amount of Rs. 16.53 crores to the profit and loss account. Further, as and when these OCDs and OCPS were redeemed, the gain or loss has been recognized as income. It was further submitted that, part of debentures invested in one of the subsidiary was redeemed on 20.01.2017, on which the company offered capital gains of Rs. 12.30 crores in the financial year relevant to assessment year 2017-18.
:-18-: ITA. No: 431/Chny/2022 10. The Ld. Counsel further submitted, in so far as interest income on redeemable financial instruments, the company had investments in Shriprop Housing Pvt Ltd in the form of preference shares, which are treated as debt under IND-AS and the fair value gain of Rs. 2.35 crores is credited in P&L account. However, fact remains that unless preference shares are redeemed the investor does not get any right to receive gain or loss and thus, it cannot be treated as income. Therefore, the same has been reduced from the total income. The Ld. Counsel for the assessee, had also explained gain on extinguishment of financial liability, is nothing but a reversal of liability credited on the basis of re-working of fair value and thus, same cannot be treated as income which is taxable under the law. However, as per IND-AS provisions all these changes in value of liabilities and assets needs to be routed through P&L account, and thus, the same has been credited in P&L account. Since, it was only a notional entry, and there is no actual receipt or accrual of income and hence, while computing income the assessee has reduced from the total income. From the above, it is very clear that all those entries passed in compliance with IND-AS standards are notional :-19-: ITA. No: 431/Chny/2022 entries, does not give rise to any income in the hands of the assessee and thus, are reduced from the income.
11. The Ld Counsel for the assessee further submitted that, these facts have been explained to the Pr. CIT with relevant evidences. The PCIT has ignored explanation furnished by the assessee without any rebuttal as to how those entries passed in the books of accounts in compliance with IND-AS standards does give raise to income in the hands of the assessee with reasons. However, he simply remitted the matter back to the Ld. Assessing Officer for further verification. From the above, it is very clear that the Pr. CIT failed to make out a case of erroneous order passed by the Assessing Officer which caused prejudice to the interest of the revenue. He further submitted that, the provisions of section 263 does not give power to the PCIT to set aside the assessment order for further verification, because in order to invoke jurisdiction, he must satisfy himself that the assessment order passed by the Assessing Officer is erroneous and it is prejudicial to the interest of the revenue. If you go through the order of the PCIT, nowhere it was stated that how and why the assessment order is erroneous and prejudicial to the interest of the revenue.
:-20-: ITA. No: 431/Chny/2022 12. The ld. Counsel for the assessee further submitted that, it is a settled principle of law that income has to be computed as per the provisions of the Income Tax Act, 1961 and the ICDS principles. In the books of accounts, an Assessee may be following any other Standard as may be prescribed by the Statute governing the Assessee. For eg., in the case of Companies, like that of the Appellant, they need to follow Ind AS. However, for the purpose of computation of taxable income, they need to adopt ICDS principles and the taxable income has to be computed as per the provisions of the Income Tax Act, 1961. This has been clearly explained by the Board in its circular no. 10/2017 dated 23-03-2017 (refer page 33 & 34 of the Paper Book). In question no. 1, the CBDT has made it very clear that ICDS is not for maintenance of books of accounts. However, ICDS being fundamental in nature, shall be applicable for computing the income under the heads Profits & Gains from Business or Profession & Income from other sources. Further, to the answer to question no. 5, CBDT clarified very clearly that ICDS shall apply for computation of taxable income under the head Profits & Gains from Business or Profession irrespective of :-21-: ITA. No: 431/Chny/2022 the Accounting Standards adopted by the companies ie., either Accounting Standards or Ind-AS.
In this regard, he relied upon plethora of judicial precedents including the decision of Hon’ble Supreme Court in the case of Godhra Electricity Company Ltd CIT [1997] 225 ITR 746. The relevant case laws cited by the Counsel for the assessee are as under: Sl. Party Name Citation No 1 Godhra Electricity Company 1997 (4) TMI 4 – Supreme Court Limited 2 Bokaro Steel Limited 1998 (12) TMI 4 – Supreme Court 3 Excel Industries Ltd 2013 (10) TMI 324 – Supreme Court 4 Southern Technologies Ltd [2010] 187 Taxman 346 (SC) 5 Shreeji Prints Pvt Ltd 2020 (2) TMI 1021- Gujarat High Court 6 Britannia Industries Limited 2022 (12) TMI 1129- Calcutta High Court 7 DG Housing Projects Ltd 2012 (3) TMI 227- Delhi High Court 8 Usha International ltd 2012 (9) TMI 767 – Delhi High Court 9 Dena Bank 2020 (1) TMI 1035- ITAT Mumbai 10 Trivitron Healthcare P Ltd 2022 (7) TMI 160- ITAT Chennai 11 S.R. Trust 2022 (11) TMI 476- ITAT Chennai 12 Sri Sai Contractors 2012 (11) TMI 533- ITAT Visakhapatnam 13 Maharaja Shopping Complex 2014 (10) TMI 880 – Karnataka High Court 14 B J N Hotels Ltd [2017] 79taxmann.com 336 (Kartnataka) 15 Sankeshwar Printers Pvt Ltd 2013 911) TMI 282 _ Karnataka High Court 16 Sanjay Sawhney 2020-TIOL-943-HC-DEL-IT 17 Sakthi Charities [2000] 244 ITR 226 (Mad)
:-22-: ITA. No: 431/Chny/2022 14. Shri. S. Senthil Kumaran, the ld. CIT-DR supporting order of the CIT(A), submitted that the assessment order passed by the Assessing Officer is erroneous in so far it is prejudicial to the interest of the revenue, because the Assessing Officer has failed to carry out required enquiries he ought to have been carried out in the given facts and circumstances of the case. But, he had simply accepted explanation furnished by the assessee without application of mind to relevant facts in light of relevant provisions of the Act, which is clearly evident from reasons given by the PCIT in their order passed u/s. 263 of the Act. The Ld. DR further submitted that, the entire argument of the assessee in light of IND-AS standards is that entries passed in the books of accounts is notional entries, but fact remains that gain on extinguishment of liability and share premium is not a notional entries. He further submitted that, under the provisions of section 263 of the Act, if Assessing Officer not called for any information on the issues then it can be said that it is a case of lack of enquiry. In a case where the Assessing Officer called for information but not applied his mind to relevant facts, then it is a case of non-application of mind. In both the situation, the PCIT has power to step in and set aside the assessment :-23-: ITA. No: 431/Chny/2022 order, in case the PCIT satisfies that the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the revenue. The Ld. DR further submitted that, it is a settle principle of law, by the decision of Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd vs CIT [2000] 243 ITR 83, that if Assessing Officer has not carried out required enquires he ought to have been carried out, then it can be said that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue.
The Ld. DR further submitted that, the assessee has classified the share capital as loan in the earlier financial years and converted into capital. Since, capital has been classified as loan in earlier years, when it has been transferred to capital account it has to be examined in light of fair valuation of shares. The assessee did not furnished any details including so called shareholder agreement dated 14.07.2014 to the Assessing Officer. The Assessing Officer also not called for any specific details about premium charged on issue of shares in light of fair value of equity shares and analyzed the issue in light of provisions of section 56(2)(viib) of the Act. Similarly, :-24-: ITA. No: 431/Chny/2022 the assessee has recognized guarantee commission in the books of account, but reduced from the total income in the statement of computation of total income by stating that it is a notional entry. But, fact remains that the assessee has provided guarantee to bankers on behalf of their subsidiaries however, not recognized any commission even though there is certain liabilities and risks on the assessee and same need to be suitably compensated. The arguments of the assessee that because of tri-party agreement with subsidiary companies and its bankers it was compelled not to charge guarantee commission is devoid of merits, because the terms of contract between the parties does not decide the taxability of income. Since, the assessee has provided guarantee and thus, commission on said guarantee needs to be offered to tax. The PCIT, after considering relevant facts has rightly revised the assessment order passed by the Assessing Officer u/s. 143(3) and their order should be upheld. In this regard, he relied upon the decision of Hon’ble Supreme Court in the case of Denial Merchants Vs ITO [2018] 95 Taxmann.com 366 SC and Rajmandir Estates Pvt Ltd vs PCIT [2017] 245 Taxman 127 SC.
:-25-: ITA. No: 431/Chny/2022 16. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The PCIT, set aside the assessment order passed by the Assessing Officer u/s. 143(3) dated 31.12.2019, in exercising his powers conferred u/s. 263 of the Act, on the ground that the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue. The PCIT, has taken up the issue of income from guarantee commission, Fair Value Gain on financial instruments at FVTPL, interest income on redeemable financial instruments and gain on extinguishment of financial liability, on the ground that although those items of income have been credited into profit and loss account, but in the statement of total income reduced from the income. The PCIT, had also questioned the issue of receipt of securities premium amounting to Rs. 1,491.42 crores in light of provisions of section 56(2)(viib) of the Act, and difference in brought forward business loss available for set off against current year income. According to the PCIT, the Assessing Officer has failed to carry out required enquiries he ought to have been carried out in right perspective of law which rendered the assessment order to be erroneous and prejudicial to the :-26-: ITA. No: 431/Chny/2022 interest of the revenue. The PCIT, has discussed the issue at length on each issue and came to the conclusion that although the assessee claims that entries passed in books of accounts in compliance with IND-AS standards are notional entries and also negated these entries in the statement of total income by adding and reducing from the total income, but could not explain how such entries can be excluded while computing income as per relevant ICDS guidelines. He further observed that, once assessee has adopted IND-AS standards it would not be left to its option to reverse its entries while computing the total income. Such reversal ought to be followed as per IND-AS guidelines or ICDS guidelines. However, the assessee has not placed any record or reference to such guidelines which enabled to seek negation of the entries. Although, the Assessing Officer seems to have called for certain details in respect of gain on extinguishment of liability and other issues during assessment proceedings, but fail to carry out required enquiries he ought to have been carried out in light of explanation 2 to section 263 of the Act, which rendered the assessment order erroneous and prejudicial to the interest of the revenue.
:-27-: ITA. No: 431/Chny/2022 17. The provisions of section 263 of the Act, deals with powers of the Pr. CIT to revise the assessment order, in case the PCIT satisfies that the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue. In order to invoke jurisdiction u/s. 263 of the Act, the Pr.CIT must come to the conclusion that because of erroneous order passed by the Assessing Officer lawful revenue payable to the Government has not been paid and because of wrong appreciation of facts, the lawful taxes payable to the Government is not paid. In other words, to assume jurisdiction u/s. 263 of the Act, twin conditions provided therein must be satisfied, i.e., (i) the order of the Assessing Officer should be erroneous and further (ii) it should be prejudicial to the interest of the revenue. Unless twin conditions embedded therein are satisfied, there is no scope for the Pr. CIT to revise the assessment order, this is because even if an erroneous order is passed but said order is not prejudicial to the interest of the revenue or vice-versa, then the PCIT cannot exercise his powers and revise the assessment order. In other words, merely because the officer's order is erroneous, the PCIT cannot interfere. Again, merely because the order of the officer is prejudicial to the interests of :-28-: ITA. No: 431/Chny/2022 the Revenue, then again, that is not enough to confer jurisdiction on the CIT to interfere in revision. These two elements must co-exist. This is because, the first of the two requirements namely, (i) the order is erroneous and (ii) the same is also prejudicial to the interests of the Revenue, is not satisfied. 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 payable 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. The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not :-29-: ITA. No: 431/Chny/2022 agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law. An order of assessment passed by the ITO without making necessary enquiries on certain important points connected with the assessment would be erroneous and prejudicial to the interests of the Revenue; when the ITO is expected to make an enquiry of a particular item of income and he does not make an enquiry as expected, that would be a ground for the CIT to interfere with the order passed by the ITO, since such an order passed by the ITO is erroneous and prejudicial to the interests of Revenue. Where the ITO had made enquiries in regard to various issues and the assessee who had given detailed explanation in that regard by a letter in writing and all these are part of the record of the case and the claim was allowed by the ITO on being satisfied with the explanation of the assessee, such decision of the ITO cannot be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. This principle is supported by plethora of judicial precedents, including the decision of Hon’ble Supreme Court in the case of CIT vs Max India Ltd (295 ITR 282).
:-30-: ITA. No: 431/Chny/2022 18. In this factual and legal background, if we examine the facts of the present case, we find that the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue, because all issues considered by the Pr. CIT in revision proceedings u/s. 263 of the Act has been thoroughly considered by the Assessing Officer in assessment proceedings completed u/s. 143(3) of the Act. During assessment proceedings, the Assessing Officer has issued various notices u/s. 142(1) and 143(2) of the Act, for which the assessee has filed all details and explained its case. To be more precise, the Assessing Officer had issued notice u/s. 143(2) of the Act dated 23.08.2018, and called for various details for which the assessee has submitted relevant books of accounts, tax audit reports, notes on accounts and statement of total income. The Assessing Officer had also issued one more notice u/s. 143(2) of the Act on 27.09.2019 and specifically called for various details in respect of claim of any other amount allowable as deduction in schedule–BP, details about share premium and ICDS compliance and adjustment. For which, the assessee has filed a detailed note and explained each entry passed in compliance with IND-AS Standards and how such entries have been negated in the :-31-: ITA. No: 431/Chny/2022 statement of total income, which is not affecting taxable income for the impugned assessment year. The Assessing Officer had also issued notice u/s. 142(1) of the Act, dated 07.11.2019, which is available in pages 162 to 172 of the appeal memorandum in which 37 queries were raised. Further, items (i), (iv) & (v) of the 143(2) notice, and item 6 & 37 of 142(1) notice deals with the issues covered by the impugned 263 proceedings. The assessee has furnished details to the said notices and also furnished breakup of amount reduced from the net profit towards amount credited to P&L account amounting to Rs 197.77 crores. Further, on the issue relating to share capital and share premium a specific query was raised vide query no. 6 of the 142(1) notice apart from query no. (iv) of the 143(3) notice,. The appellant gave a detailed submissions on 14.11.2019 & 26.12.2019 which is available in page no. 173 of appeal memorandum. The above details furnished are self explanatory and even a mere reading of the same will give the apparent meaning of the entries and that they are notional in nature. From the above, it is very clear that all issues questioned by the Pr. CIT including the issue of securities premium has been thoroughly examined by the Assessing Officer during assessment :-32-: ITA. No: 431/Chny/2022 proceedings and after being satisfied with explanation furnished by the assessee, the AO has completed the assessment. Therefore, it cannot be said that the Assessing Officer has not verified the issue which he ought to have been verified in light of explanation 2 to section 263 of the Act. At this stage, it is relevant to refer to the observation of Hon’ble Delhi High Court in the case of CIT vs Usha International Limited [2012] 348 ITR 485 (Delhi), where it has been clearly held that the Assessing Officer can examine the claim or subject matter even without raising a written query. There can be cases, where an aspect and question is too apparent or obvious to hold that the Assessing Officer did not examine a particular subject matter, claim etc. The stand and stance of the assessee and the Assessing Officer in such cases are relevant. In this case, from the details available on record, there is no dispute of whatsoever with regard to enquiries conducted by the Assessing Officer on the issues taken by the PCIT for revision proceedings and thus, we are of the considered view that the PCIT is completely erred in coming to the conclusion that the Assessing Officer has not verified the issue.
:-33-: ITA. No: 431/Chny/2022 19. We further noted that, it is not a case of the PCIT that the Assessing Officer has not verified the issue. In fact, from the details filed by the assessee it is obvious and patent that the Assessing Officer has carried out enquiries on the issues. Therefore, once there is an enquiry from the Assessing Officer even if such enquiry is inadequate, the PCIT cannot assume jurisdiction and revise assessment order, because in a case of lack of enquiry there is a scope for revision of order, but in a case of inadequate enquiry the question of revision does not arise because if the Assessing Officer has taken one of the view which may not be in the opinion of the Pr.CIT is correct, but, unless view taken by the Assessing Officer is not sustainable in law it cannot be said that the Assessing Officer has passed erroneous order. This view is supported by the decision of Hon’ble Delhi High Court in the case of ITO vs D G Housing Projects Ltd [2012] 343 ITR 329, it has been held that in a case where there is an inadequate enquiry, but not lack of enquiry, again the CIT must give and record a finding that the order/enquiry made is erroneous. An order is not erroneous and prejudicial to the interest of the revenue, unless the CIT holds and record reasons why it is erroneous. In this case, on perusal of order of the PCIT passed u/s. 263 of the :-34-: ITA. No: 431/Chny/2022 Act, we find that the Pr. CIT has simply set aside the issue to the Assessing Officer for further verification without specifying how and why the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, on various issues discussed in revision proceedings. Therefore, we are of the considered view that the order of the Assessing Officer in the given facts and circumstances of this case cannot be held to be erroneous and prejudicial to the interest of the revenue.
Having said so, let us come back to the issues on merit to decide whether there is an error in the order of the ld. Assessing Officer, which requires interference from the PCIT u/s. 263 of the Act. As we have already stated in earlier part of this order, the assessee has passed various entries in compliance with IND-AS standards to give effect to liabilities and asset as on the date of application of said standards. The assessee has adopted IND-AS standards for the first time in the financial year 2016-17 relevant to the assessment year under appeal. As per IND-AS, it passed certain notional fair valuation entries in the books in order to restate the balance sheet as on 01.04.2015 & 31.03.2016. These entries were :-35-: ITA. No: 431/Chny/2022 passed during the financial year 2016-17 only. Some of these entries were routed through P&L account by way of debited and credit. However, for the purpose of income tax these entries were negated in the computation of total income as per the provisions of ICDS. The assessee has added back amount debit to P&L account and reduced amount credited to P&L account. The PCIT, conveniently ignored amount debited to P&L account and added back in the statement of total income, but questioned amount credited into the P&L account and reduced in the statement of total income. The said reduction from the total income has been disclosed in Sl.no. 33 of ITR under the head any other amount allowable as deduction in the schedule-BP of ITR which includes income from guarantee commission, gain on extinguishment of financial liability, unwinding of discount relating to refundable security deposit and profit on sale of fixed assets.
Let us come back to each of the amount credited into P&L account and examine whether any tax implication for the impugned assessment year. The assessee has recognized income from guarantee commission of Rs. 2.06 crores and credited into P&L account. Said entry represents notional :-36-: ITA. No: 431/Chny/2022 income towards guarantee commission in respect of guarantee given to Central bank of India and Andhra bank, in terms of IND-AS standards which mandate disclosure of necessary income which effects the financial position of the appellant company. But fact remains that, as per terms of agreement between the appellant company and bankers, there is a restrictive covenant for not charging any kind of monetary benefits including commission. Therefore, although for the purpose of books the assessee recognized notional income from guarantee commission, but because it has not received any consideration for providing guarantee, the same has been reduced from the total income in the computation of income. In our considered view, when there is a contractual obligation for not charging any commission, merely for the reason that the assessee has passed notional entries in the books for better representation of financial statements, it cannot be said that income accrues to the assessee which is chargeable to tax for the impugned assessment year. Therefore, we are of the considered view that on this issue it cannot be said that there is an error in the order of the Assessing Officer.
:-37-: ITA. No: 431/Chny/2022 22. As regards fair value gain on financial instruments at FVTLP, it was explained that the company has invested in optional convertible debentures (OCD) and optionally convertible preference shares (OCPS) in certain joint ventures and subsidiaries and these instruments are classified as financial assets. The assessee has revalued these financial instruments at fair value as at the balance sheet date as required under IND-AS 39 and gain in respect of investment with Shriprop Builders Pvt Ltd, Shrivision Homes Pvt Ltd and Shriprop Housing Pvt Ltd., amounting to Rs. 16.54 crores has been credited into P&L account in terms of IND-AS 39. But, the same has been reduced from the total income in the statement of total income, because the entry passed in the books of account is only a notional entry but not actual accrual of income, because the assessee has recognized gain or loss in respect of these investments in subsidiaries as and when the debentures and preference shares are redeemed in terms of agreement. It is pertinent to note that part of OCD which the company had invested in Shrivision Homes Pvt Ltd was partially redeemed on 20.01.2017 and assessee has derived capital gain amounting to Rs. 12.30 crores for the assessment year 2017-18 and the same has been offered to tax.
:-38-: ITA. No: 431/Chny/2022 Therefore, we are of the considered view that, when the assessee has offered gain or loss arising out of financial instruments in the year in which such investments are redeemed, then the question of taxation of notional gain accounted in the books of the assessee in terms of certain accounting standards does not give raise to any income which can be taxed when the entries has been passed in the books. Therefore, on this issue also there is no error in the order of the Assessing Officer.
In so far as interest income on redeemable financial instruments of Rs. 2.35 crores, we find that the assessee has revalued preferences shares in one of the subsidiaries and resultant gain has been credited into P&L account. Since, it is notional entry passed in the books in compliance with IND-AS provisions, the same has been reduced from the total income in the statement of income. The preference shares are redeemable at the end of agreed period and as such any gain/loss on redemption of shares will be recognized as income or loss in the year in which such preference share are redeemed. The preference shareholders received dividend as per law and when the dividend is declared by the investee :-39-: ITA. No: 431/Chny/2022 company. Therefore, it cannot be said that notional gain on fair value of investments in preference shares of a subsidiary can be considered as income accrued to the assessee which can be taxed under the law. It is a well settled principle of law by the decision of Hon’ble Supreme Court in the case of Kikabhai Premchand Vs CIT [1953] 24 ITR 506 (SC), where it was held that no one can profit to himself. Therefore, we are of the considered view that notional gain on fair value of investment in preference shares of a subsidiary cannot be at any stretch of imagination be considered as income. Thus, on this issue, the order of the Assessing Officer cannot be considered as erroneous.
The PCIT, has also questioned the issue of gain on extinguishment of financial liability and also increase in securities premium of Rs. 1491.42 crores. These two issues are inter linked. Therefore, it is necessary to examine whether any tax implication on gain on extinguishment of financial liability of Rs. 171.16 crore and increase in securities premium of Rs. 1491.42 crores. It was explained before the PCIT, that as per the shareholders agreement dated 19.07.2014, the investor shareholders had a put on option by virtue of which :-40-: ITA. No: 431/Chny/2022 they had the right to require the company to buy back their shares for a consideration comprising the principal amount invested plus interest thereon calculated at 8% per annum in the event of non-fulfillment of prescribed conditions in the agreement. Under IND-AS standards these equity shares including security premium has been considered as compound financial instruments and have accordingly been segregated between liability and equity components based on their fair value measurement. Accordingly, equity shares amounting to Rs. 8516.29 millions (including securities premium of Rs. 7650.25 millions) have been accounted for as ‘non-current borrowings’ as on the transition date i.e., on 01.04.2015. During the financial year ended 31.03.2017, the shareholders have entered into a new agreement where these preferential rights with a guaranteed return have been removed. Consequent to the above, the liability option of the instrument has been derecognized and equity instrument including security premium has been recorded at the fair value as on 31.03.2017. The difference between the fair value of the equity and carrying amount of the liability aggregating to Rs. 171.16 crores has been treated as gain on extinguishment of financial liability and credited to P&L account. From the above, :-41-: ITA. No: 431/Chny/2022 it is very clear that, the entry passed in the books of the accounts is only a notional entry for accounting gain in connection with equity instrument in terms of IND-AS standards. Therefore, it cannot be said that there is a commercial value and it requires receipt of any amount. Further, the liability was not claimed as expenditure while computing the total income. Since, gain on extinguishment of liability is only a disclosure requirement as per IND-AS standards, the assessee has rightly credited gain in P&L account, but excluded in the statement of total income because said entry does not constitute an income. Therefore, we are of the considered view that the Assessing Officer after considering relevant facts has taken a possible view and thus, it cannot be said that there is an error in the order of the Assessing Officer and on this ground also the assumption of jurisdiction by the PCIT fails.
In so far as increase in security premium of Rs. 1,491.42 crores, as explained in the previous paragraphs, as per shareholder agreement dated July, 2014 the assessee has received investment in equity shares amounting to Rs. 8,516.29 millions which includes security premium of Rs. :-42-: ITA. No: 431/Chny/2022 7650.25 million and the same has been accounted in the financial year ended 31.03.2015. Further, the assessee has adopted IND-AS standards for the first time in the financial year 2016-17. As per said standards it has restated its asset and liabilities as at 01.04.2015 and 31.03.2016. Due to this, equity capital received in the financial year 2014-15 has been reclassified as non-current borrowings because there was a option to buy back the shares with a agreed rate of return. Since, the shareholders have modified the agreement by entering into a new agreement in the FY 2016-17 by derecognizing the liability option the same has been re- characterized as other equity in compliance with IND-AS standards. In other words, there is no fresh issue of share capital in the FY relevant to assessment year 2017-18, which is evident from details submitted by the assessee as per which the number of equity shares as on 31.03.2016 was at 14,84,11,448 shares, which remain same as on 31.03.2017. From the above, it is very clear that there is no issue of fresh capital in the impugned assessment year and thus, the question of receipt of security premium does not arise. Thus, there is no question of application of provisions of section 56(2)(viib) of the Act. This fact has been explained to the :-43-: ITA. No: 431/Chny/2022 PCIT, however, he has misunderstood the facts merely for the reason that there is increase in security premium account when compare to year ending 31.03.2016. But, fact remains that said entry is only a disclosure requirement in compliance with IND-AS standards. Therefore, we are of the considered view that the Assessing Officer after considering relevant facts has taken a possible view and hence, jurisdiction assumed by the PCIT on this issue also fails.
In so far as difference in business loss available for set off, we find that the total losses brought forward from assessment year 2016-17 was at Rs. 34,27,71,352/- including unobserved depreciation of Rs. 2,67,93,481/-. The reconciliation of carried forwards loss and its adjustment and also the balance of loss available as at 31.03.2016 along with supporting evidences has been furnished to the Assessing Officer. From the above, it is clear that there is no difference in brought forward losses of earlier years as considered by the ld. PCIT. The Assessing Officer after considering relevant facts has rightly accepted the claim of the assessee and thus, it cannot be said that there is an error in the order of the Assessing Officer, which can be interfered by the PCIT.
:-44-: ITA. No: 431/Chny/2022 27. It is settled principle of law that income has to be computed as per the provisions of the Income Tax Act, 1961 and the ICDS principles. In the books of accounts, an Assessee may be following any other Standard as may be prescribed by the Statute governing the Assessee. For eg., in the case of Companies, like that of the Appellant, they need to follow IND-AS. However, for the purpose of computation of taxable income, they need to adopt ICDS principles and the taxable income has to be computed as per the provisions of the Income Tax Act, 1961. This has been clearly explained by the Board in its circular no. 10/2017 dated 23-03-2017 (refer page 33 & 34 of the Paper Book). In question no. 1, the CBDT has made it very clear that ICDS is not for maintenance of books of accounts. However, ICDS being fundamental in nature, shall be applicable for computing the income under the heads Profits & Gains from Business or Profession & Income from other sources. Further, to the answer to question no. 5, CBDT clarified very clearly that ICDS shall apply for computation of taxable income under the head Profits & Gains from Business or Profession irrespective of the Accounting Standards adopted by the companies ie., :-45-: ITA. No: 431/Chny/2022 either Accounting Standards or Ind-AS. In this case, the assessee has rightly followed IND-AS standards for the purpose of disclosure of financial assets and liabilities whereas computed income for the purpose of income tax in compliance with ICDS standards which is clearly evident from the entries passed in the books and negated in the statement of total income. Further, the entry in the books which was made on a hypothetical income which did not materialized and the entry was reversed in the next year, then it could not be brought to tax as income because only real income can be brought to tax as held by the Hon’ble Supreme Court in the case of CIT vs Bokaro Steel Ltd [1999] 236 ITR 315 (SC).
A similar view has been taken by the Hon’ble Supreme Court in the Godhra Electricity Company Ltd vs CIT (supra), where it has been held as under:
“Under the Act income charged to tax is the income that is received or is deemed to be received in India in the previous year relevant to the year for which assessment is made or on the income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method or accounting with the method or accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual :-46-: ITA. No: 431/Chny/2022 outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis i.e. accrual of the right to receive payment and the accrual of the liability to disburse or pay. In commissioner of Income tax Bombay city-I v. Messrs. Shoorji Vallabhdas and co.(supra) it has been laid down :- "Income tax is a levy on income no doubt the Income Tax act takes into account two points of time all which the liability to tax is attracted viz the accrual of the income or its receipt; but the substance of the matter is the income. if income does not result at all there cannot be a tax even though in book keeping an entry is made about a hypothetical income which does not materialise."[P. 148] This principle is applicable whether the accounts are maintained on case system or under the mercantile system. If the accounts are maintained under the mercantile system what has to be seen is whether income can be said to have really accrued to the assessee-company. in H.M. Kashiparekh & co. ltd. v. commissioner of Income Tax (1960) 39 ITR 706 the Bombay High court had said :- "Even so, (the failure to produce account losses we shall proceed on the footing that the assessee- company having followed the mercantile system of account there must have been entries made in its books in the accounting year in respect of the amount of commission in our judgment we would not be justified in attaching any particular importance in this case to the fact that the company followed mercantile system of accounting. They would not have any particular bearing in applying the principle of real income in the facts of this case". The said view was approved by this court in commissioner of Income Tax v. Birla Gwalior (p) Ltd. (supra) where the assessee maintained its accounts on the mercantile system. In that case this court after referring to the decision in Morvi Industries Ltd. V. commissioner of Income Tax, (1971)82 ITR 835 which was also a case where the accounts were maintained on mercantile system has said :- "Hence it is clear that this court in Morvi Industries case did emphasise the fact that the real question for decision was whether the income had really accrued of not it is not a :-47-: ITA. No: 431/Chny/2022 hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income "[p. 273] In Poona Electric supply co. Ltd. V. commissioner of Income Tax Bombay city-I (supra ) this court has said :- "Income tax is a tax on the real income i.e. the profits arrived at on commercial principles subject to the provisions of the income tax act."
At this stage, it is relevant to consider various case laws relied upon by the assessee on the proposition of powers of the PCIT u/s. 263 of the Act. The assessee has relied upon the decision of Hon’ble Delhi High Court in the case of ITO vs D G Housing Projects Ltd [2012] 343 ITR 329. The Hon’ble Delhi High Court in light of provisions of section 263 of the Act and also by following the decision of Hon’ble Supreme Court in the case of Malabar Industries Co Ltd vs CIT (supra), held as under: “16. Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on :-48-: ITA. No: 431/Chny/2022 record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.
17. This distinction must be kept in mind by the CIT while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section 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 CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT 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 CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT vs. Shree Manjunathesware Packing Products, 231 ITR 53 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous.
:-49-: ITA. No: 431/Chny/2022 18. It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax, (2000) 243 ITR 83 (SC), had observed that the phrase „prejudicial to the interest of Revenue‟ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue.
The assessee has also relied upon the decision of ITAT Mumbai Benches in the case of Dena Bank vs PCIT [2020] 1 TMI 1035-ITAT Mumbai. The tribunal, after considering relevant facts and also by following various judicial precedence held as under: “The order of the ITO in question must not only be erroneous but also the error in the ITO order must be of such a kind that it can be said of it that it is prejudicial to the interests of the Revenue. In other words, merely because the officer's order is erroneous, the PCIT cannot interfere. Again, merely because the order of the officer is prejudicial to the interests of the Revenue, then again, that is not enough to confer jurisdiction on the PCIT to interfere in revision. These two elements must co-exist, this is because, the first of the two requirements namely, (i) the order is erroneous and (ii) the same is also prejudicial to the Interests of the Revenue, is not satisfied. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision :-50-: ITA. No: 431/Chny/2022 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.”
The assessee has also relied upon the decision of ITAT Chennai Benches in the case of Trivitron Healthcare Pvt Ltd vs PCIT [2022] 98 ITR (Trib) 105 ITAT Chennai. The Tribunal after considering relevant facts and also by following the decision of Hon’ble Supreme Court in the case of CIT vs Max India Ltd [2007] 11 TMI 12 held as under: 13. In this case, there was no goodwill in the books of account of the amalgamating company and further, goodwill has been acquired by amalgamated company by paying consideration over and above net value of assets at amalgamating company. Therefore, in our considered view, case of the assessee squarely comes under ratio laid down by the Hon'ble Supreme Court in the case of M/s.Smifs Securities Ltd.(supra). In any way, in a subsequent decision, ITAT ., Bangalore Bench in the case of M/s. Altimetrik India Pvt.Ltd, Vs. DCIT (2022) 137 taxmann.com 9 had considered an identical issue and after considering decision of the United Breweries Ltd. (supra) held that consideration paid by the amalgamated company over and above net assets of amalgamating company should be considered as goodwill arising on amalgamation and such goodwill is a capital asset eligible for depreciation. Therefore, from the above facts, it is very clear that in the given facts & circumstances of the case, the 5th proviso to section 32(1) has no application and further, in absence of any other possible view, view taken by the Assessing Officer while allowing depreciation on goodwill in the assessment :-51-: ITA. No: 431/Chny/2022 proceedings, cannot be held to be erroneous or unsustainable under the law. Since, foundation for assuming jurisdiction u/s.263 of the Act, is completely erroneous on account of wrong assumption of applicability of 5th proviso to section 32(1) of the Income Tax Act, 1961, to the facts of the present case, assessment order passed by the Assessing Officer needs no revision, as there is no error committed by the Assessing Officer in claim of depreciation on purchase of goodwill. It is well settled principle of law by decisions of various Courts, including decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co.Vs. CIT 243 ITR 83 (SC), where it has been clearly held that the PCIT cannot assume jurisdiction to revise assessment order, unless the PCIT satisfies that assessment order passed by the Assessing Officer is erroneous, insofar as it is prejudicial to the interests of the Revenue. In this case, on the issue of depreciation on goodwill, the Assessing Officer has taken one possible view with which the PCIT does not agree, however, it cannot be treated as erroneous & prejudicial to the interests of the Revenue, unless view taken by the Assessing Officer is erroneous and unsustainable in law. This legal principle is also laid down by the Hon'ble Supreme Court in the case of CIT Vs. Max India Ltd. 295 ITR 282. In our considered view, view taken by the Assessing Officer on the issue of depreciation on goodwill is a possible view, because when 5th proviso to section 32(1) of the Act, has no application to the given facts and circumstances of the case, the Assessing Officer cannot take any view, which is contrary to provisions of section 32(1) of the Act. Since, the Assessing Officer has taken one of the possible view for which the PCIT may not agree, however, this may not be a reason for the PCIT to assume jurisdiction to revise assessment order passed by the Assessing Officer.
The assessee has also relied upon the decision of ITAT Chennai Benches in the case of M/s. SR Trust vs PCIT [2022] 11 TMI 476- ITAT Chennai, where the tribunal after considering relevant facts and also by following the decision of :-52-: ITA. No: 431/Chny/2022 Hon’ble Supreme Court in the case Malabar Industrial Company Ltd vs CIT (supra) , held as under: 10. In this factual and legal back ground, if we examine the facts of the present case, we find that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue, for the simple reason that all four issues finding place in the show cause notice of the PCIT, are emanating from the balance sheet and financial statement filed by the assessee for the relevant assessment year. Further, the PCIT has questioned payment made to M/s.Sun Med Health Care Pvt. Ltd., and procurement of medical equipments from the parties. We find that said issue is emanating from the financial statement filed by the assessee and during the course of assessment proceedings which is a primary document placed before the AO and the AO has considered financial statement of the assessee and has chosen not to make any additions on this issue, which means, the assessee has furnished complete details on the issue and the AO has examined the case in right perspective of law. As regards depreciation on improvement to building, the only objection of the PCIT is that no proper evidence was filed, otherwise, the PCIT did not make any observations with regard to ‘how and why’ depreciation claimed on improvement to building is incorrect. The PCIT has also simply set aside the assessment order for further verification without any observations as to how depreciation on building under construction, is not in accordance with law. Further, the PCIT has also not observed anything about creditors appear in books of accounts to direct the AO to bring said creditors within the provisions of Sec.68 of the Act. If you go through the order of the PCIT u/s.263 of the Act, dated 18.03.2022, it is very cryptic and brief. The PCIT has simply by relying upon the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) held that failure on the part of the AO to apply his mind during the course of assessment proceedings, is sufficient ground for invoking sec.263 of the Act, and the order in such case is erroneous in so far as it is prejudicial to the interest of the Revenue. In our considered view, the PCIT is grossly erred in setting aside the assessment order with one-line cryptic observation that the AO has not applied :-53-: ITA. No: 431/Chny/2022 his mind on four issues without bringing on record, how the Revenue is prejudiced from those issues. Further, in the show cause notice also the PCIT has failed to give any plausible reasons ‘as to how’ the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. From the above, it is clear that the PCIT has simply assumed jurisdiction and set aside the assessment order without satisfying himself about erroneous order passed by the AO, which caused prejudicial to the interest of the Revenue on four issues.
It is a well settled principle of law by the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra), where it has been held that the phrase ‘prejudicial to the interest of the Revenue u/s.263 of the Act’, has to be read in conjunction with the expression erroneous order of the AO. Further the Courts observed that every loss of Revenue as a consequent of an order of the AO, cannot be treated as prejudicial to the interest of the Revenue. At this juncture, it is relevant to discuss various case laws relied upon by the Ld.Counsel for the assessee, on provisions of Sec.263 of the Act: • The Hon'ble Apex Court in the case of CIT Vs. Max India Ltd.(295 ITR 282) has held that when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the CIT did not agree, it cannot be treated as an erroneous order prejudicial to the interest of revenue. The Madras High Court followed the above decision of the Supreme Court in the case of CIT Vs. Tamilnadu Warehousing Corpn. (292 ITR 310). • The Punjab and Haryana High Court followed the above decision of Supreme Court in the case of CIT Vs. Nahar Exports Ltd. (173 Taxman 3 P & H). • The jurisdictional Madras High Court in the case of CIT Vs. Mepco Industries Ltd. (294 ITR 121) has held that the order to be revised under section 263 should not only be erroneous but also prejudicial to the interest of revenue. It held that where two views are possible order cannot be termed as erroneous. The powers under section 263 cannot be exercised merely because a different view is possible - SC dismissed the SLP against 259 ITR 502 CIT Vs. Arvind Jewellery (266 ITR 101) St.
:-54-: ITA. No: 431/Chny/2022 • In the case of CIT vs. Bharat Aluminum Co. Ltd. (303 ITR 256), the Hon'ble High 'Court of Delhi has held that for revision under section 263, the Commissioner of Income-tax has to be satisfied of two conditions viz. (i) the order of the AO sought to be revised is erroneous and (ii) It is prejudicial to the interest of Revenue. If one of them is absent, he cannot invoke the provisions of section 263. • Hon'ble Delhi High Court in the case of Commissioner of Income-tax v. Sunbeam Auto Ltd [2010] 189 Taxman 436 (Delhi) where in it was 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 dawn 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 this case, on perusal of facts available on record, we find that four issues questioned by the PCIT in their show cause notice issued u/s.263 of the Act, has been thoroughly examined by the AO during the course of assessment proceedings, which is evident from notice issued by the AO and reply furnished by the assessee. Even during revision proceedings, the PCIT did not specify’ how and why’ the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. Further, if you go by the observations of the PCIT, it is abundantly clear that the PCIT has set aside the assessment order for :-55-: ITA. No: 431/Chny/2022 further verification which in our considered view is not permissible u/s.263 of the Act, even after insertion of Explanation (2) to sec. u/s.263 of the Act. Therefore, considering the facts and circumstances of the case and also by following the ratio laid down by various case laws discussed hereinabove, we are of the considered view that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue and thus, we quashed the order passed by the PCIT u/s.263 of the Act.”
In this view of the matter and considering facts and circumstances of this case and also by following the ratios of various case laws discussed hereinabove, we are of the considered view that the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue. It was only the PCIT has exercised his powers and set aside the assessment order u/s. 263 of the Act, without recording any reasons as to how and why the assessment order is erroneous which caused prejudice to the interest of the revenue. Further the PCIT, has simply set aside the issue to the Assessing Officer for further verification, without pointing out how issues discussed in their order passed u/s., 263 of the Act is caused prejudice to the interest of the revenue. Therefore, we are of the considered view that the PCIT is erred in invoking jurisdiction u/s. 263 of the Act and set aside the assessment order passed by the Assessing :-56-: ITA. No: 431/Chny/2022 Officer u/s. 143(3) dated 31.12.2019 and thus, we quash order passed by the PCIT u/s. 263 of the Act.