K.R.OVERSEAS PVT. LTD,KOLKATA vs. PCIT-(CENTRAL)-2, KOLKATA

This appeal filed by the assessee pertaining to the Assessment Year (in short “AY”) 2015-16 is directed against the order passed u/s 263 of the Income Tax Act, 1961 (in short the I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. “Act”) by ld. Pr. CIT (Central), Kolkata-2, Kolkata dated 31.03.2021.

Registry has informed that the appeal filed by the assessee is time barred by 22 days. Condonation application has been filed by the assessee by way of an Affidavit dated 07.09.2021. Perusal of the same shows that the delay was on account of COVID-19 restrictions. We, therefore, in view of the judgment of The Hon’ble Supreme Court vide Miscellaneous Application No. 21 of 2022 find that the limitation period in filing appeal between 15.03.2020 till 28.02.2022 has been excluded for calculating the limitation period. Since the period of limitation in the case of the Revenue falls during this period, the same deserves to be extended and we, therefore, condone the delay and admit the appeal for adjudication. 3. The assessee is in appeal before the Tribunal raising the following grounds: “

That on the facts and in the circumstances of the case and law, the AO after due examination of the relevant facts having already followed one of the courses permissible in law, the Ld. Pr. CIT was unjustified in setting aside the assessment on the issue of addition of Rs. 19,00,000/- made u/s 68 of the Act and directing the AO to tax the same u/s 115BBE of the Act.

For that on the facts and in the circumstances of the case, the order of the CIT passed u/s 263 be cancelled since the assessment order u/s 143(3) dated 28.12.2017 was neither erroneous nor prejudicial to the interest of the revenue.

The Appellant craves leave to add, alter, amend and/or withdraw any of the grounds or ground of appeal

We have heard rival contentions and perused the records placed before us and carefully gone through the decisions referred to by ld. Counsel for the assessee. The assessee is in appeal assailing the order of ld. Pr. CIT for wrongly assuming jurisdiction u/s 263 of the Act and thus, erred in holding the assessment order dated 28.12.2017 u/s 143(3) of the Act as erroneous and prejudicial to the interests of the Revenue on account of following two reasons; firstly, ld. AO has not examined the issue of notional loss of Rs. 3,11,65,725/- claimed on account of diminution in value of equity shares held as investments and secondly, ld. AO erred in not invoking the provisions of Section 115BBE of the Act on the addition made u/s 68 of the Act at Rs. 19 lakh.

Before proceeding to examine the issues stated above, we find that the provision of Section 263 of the Act has direct bearing on the issue raised before us, therefore, it is pertinent to take note of this section which reads as under: "263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded." Page 8 of 21 I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. 10.1. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. fundamental tests propounded in various judgments relevant for judging the action of the ld. Pr. CIT taken u/s 263. 10.2. Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC) has laid down following ratio with regard to provisions of section 263 of the Act: “There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue’ 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 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 Commissioner does not 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. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue - Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC)”. [Emphasis Supplied] 10.3. Hon’ble Apex Court in the case of CIT vs. Max India Limited as reported in 295 ITR 0282 has held that: “2. At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase "prejudicial to the interest of the Revenue" under s. 263 has to be read in conjunction with the expression "erroneous" order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the Revenue. For example, when the ITO adopted one I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. 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 agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law.” 10.4. Hon'ble Madhya Pradesh High court in the case of CIT vs. Associated Food Products (P) Ltd as reported in 280 ITR 0377 has held that: “10. In view of the aforesaid pronouncement of law and taking into consideration the language employed under s. 263 of the Act, it is clear as crystal that before exercise of powers two requisites are imperative to be present. In the absence of such foundation exercise of a suomoto power is impermissible. It should not be presumed that initiation of power under suomoto revision is merely an administrative act. It is an act of a quasi-judicial authority and based on formation of an opinion with regard to existence of adequate material to satisfy that the decision taken by the AO is erroneous as well as prejudicial to the interests of the Revenue. The concept of "prejudicial to the interests of the Revenue" has to be correctly and soundly understood. It precisely means an order which has not been passed in consonance with the principles of law which has in ultimate eventuate affected realization of lawful revenue either by the State has not been realized or it has gone beyond realization. These two basic ingredients have to be satisfied as sine qua non for exercise of such power. On a perusal of the material brought on record and the order passed by the CIT it is perceptible that the said authority has not kept in view the requirement of s. 263 of the Act inasmuch as the order does not reflect any kind of satisfaction. As is manifest the said authority has been governed by a singular factor that the order of the AO is wrong. That may be so but that is not enough. What was the sequitur or consequence of such order qua prejudicial to the interest of the Revenue should have been focused upon. That having not been done, in our considered opinion, exercise of jurisdiction under s. 263 of the Act is totally erroneous and cannot withstand scrutiny. Hence, the Tribunal has correctly unsettled and dislodged the order of the CIT. [Emphasis supplied]” 10.5. In the light of the provisions of section 263 of the Act and a settled position of law, powers u/s 263 of the Act can be exercised I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. by the Pr. Commissioner/Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and also 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 judgment of Hon'ble High Court of Bombay in the case of CIT vs. Nirav Modi, [2016] 71 taxmann.com 272 (Bombay). 10.6. This view is further supported by the decision of the Hon'ble Gujarat High Court in the case of Shri Prakash Bhagchand Khatri in Tax Appeal No. 177 with Tax Appeal No.178 of 2016, wherein the Hon'ble Gujarat High Court was seized with the following substantial question of law: "Whether the Tribunal is right in law and on facts in upholding the order passed by the CIT under section 263 of the Act on merits and still storing the issue of allowability of deduction under section 54 of the Act to the file of Assessing Officer even though the working of allowability of deduction under section 54F is available in the order under section 263 which is not disputed by the assessee before ITAT." 10.7. We find that the Hon'ble Delhi High Court in the case of CIT vs. Anil Kumar reported in 335 ITR 83 has held that where it was discernible from record that the A.O has applied his mind to the Page 12 of 21 I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. issue in question, the ld. CIT cannot invoke section 263 of the Act merely because he has different opinion. Relevant observation of the High Court reads as under:

Since in the instant case the A.O. after considering the various submissions made by the assessee from time to time and has taken a possible view, therefore, merely because the DIT does not agree with the opinion of the A.O., he cannot invoke the provisions of section 263 to substitute his own opinion. It has further been held in several decisions that when the A.O. has made enquiry to his satisfaction and it is not a case of no enquiry and the DIT/CIT wants that the case could have been investigated/ probed in a particular manner, he cannot assume jurisdiction u/s 263 of the Act. In view of the above discussion, we hold that the assumption of jurisdiction by the DIT u/s 263 of the Act is not in accordance with law. We, therefore, quash the same and grounds raised by the assessee are allowed." 10.8. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon'ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263: “(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law (vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. (vii) The AO exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion. (viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction. (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.” 10.9. Apart from above stated broader principles, one more principle needs to be added in view of the judgment of Hon’ble Delhi High Court in the case of ITO vs. D.G. Housing Projects Ltd. [2012] 343 ITR 329 (Delhi) that the ld. CIT has to examine and verify the issue himself and give a finding on merits and form an opinion on merits that the order passed by the AO is erroneous and prejudicial to the interest of the Revenue. Relevant extract is reproduced below: “In the present case, the findings recorded by the Tribunal are correct as the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that "order passed by the Assessing Officer may be erroneous". The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order Page 15 of 21 I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. passed by the Assessing Officer was erroneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent’s computation figures but he had reservations. The CIT in the order has recorded that the consideration receivable was examined by the Assessing Officer but was not properly examined and therefore the assessment order is "erroneous". The said finding will be correct, if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of the Revenue. In latter cases, the CIT has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. In the second set of cases, CIT cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not.”

Now, in light of the above judicial pronouncement and the provisions of u/s 263 of the Act let us also examine the issue regarding the notional loss of Rs. 3,11,65,725/-. We notice that during the course of assessment proceedings ld. AO after issuing detailed questionnaire u/s 142(1) of the Act also called for the details of short term capital loss of Rs. 3,79,31,160/- claimed by the assessee. In response to the same the assessee filed the following details:

Now, the second part of the issue comes that whether by allowing the claim of notional loss any prejudice has caused to the Revenue. We find that the assessee is a non-banking finance company and is registered under the rules and regulations of Reserve Bank of India. The assessee held investments in the form of equity shares of Kailash Auto Finance Ltd. At the year end since the fair market value of the said investment was much lower to its cost price, notional loss was booked and shown in the profit and loss account. Now, whether this action of the assessee of invoking notional loss is within the four corners of law, reference was made by ld. Counsel for the assessee to the judgment of Hon'ble Bombay High Court HDFC Bank Ltd. (supra) wherein the Hon'ble Court has held that the value of stocks being closely connected with the stock market, at the end of financial year while valuing the assets necessarily the bank has to take into consideration the market value of the shares. When the market value is less than the cost price, in law, they are entitled to deduction and it cannot be denied by the authorities under the pretext that it is shown as investment in the balance sheet. We notice that in the case of the assessee also during the course of assessment proceedings it was explained before ld. AO that although the shares of Kailash Auto Finance Ltd. are shown as investments in the balance sheet but for income tax purposes, the investments were treated as commercial assets and accordingly valued at cost or market price, whichever is lower at Page 18 of 21 I.T.A. No.: 185/KOL/2021 Assessment Year: 2015-16 K. R. Overseas Pvt. Ltd. the end of the year and therefore, the fall in the value of investments at the year end was claimed as business loss. Ld. AO was convinced with this submission of the assessee and allowed the said claim. We, therefore find that ld. AO after conducting a thorough enquiry has examined the transactions within the four- corners of law and after proper application of mind allowed the claim of the assessee which is duly supported by judicial pronouncements as discussed herein above. We, therefore, are of the view that ld. Pr. CIT erred in invoking the provisions of Section 263 of the Act on this issue of notional loss on account of diminution in value of equity shares held as investments.

Now, we take up the second issue that whether ld. Pr. CIT was justified in invoking the provisions of Section 263 of the Act alleging that ld. AO failed to note the provisions of Section 115BBE of the Act on the addition made u/s 68 of the Act at Rs. 19 lakh. We notice that an amendment in Section 115BBE of the Act was brought into Finance Act, 2016 with effect from 01.04.2017 not allowing set off of any loss against the additions made u/s 68, 69, 69A, 69B, 69C, 69D of the Act. Central Board of Direct Taxes also came out with the Circular dated 19.06.2019 placed at 61 to 62 of the paperbook regarding non-allowability of set off of losses against the deemed income u/s 115BBE of the Act and stating that the amendment is effective from AY 2017-18 onwards. Therefore, in the case of the assessee also the amended provision of Section 115BBE of the Act could not be applied as the year under appeal is AY 2015-16. Therefore, we fail to find any merit in this issue raised in the show cause notice u/s 263 of the Act.

Therefore, since ld. Pr. CIT erred in invoking the provisions of Section 263 of the Act on the two issues raised in the show cause notice on a wrong assumption and since ld. AO has carried out necessary investigation and examination of the issue, made proper application of mind and took a view permissible under the law, the assessment order in question is neither erroneous nor prejudicial to the interests of the Revenue. We, therefore, quash the order u/s 263 of the Act and restore the assessment order framed u/s 143(3) of the Act dated 28.12.2017.

Since we have already quashed the impugned order dealing with the alternate fold of arguments raised by the assessee in light of the carrying out of the assessment proceedings u/s 153A of the Act subsequent to search u/s 132 of the Act will be merely academic in nature and thus, being infructuous need no adjudication.

Hence all the effective grounds of appeal