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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI S.S. VISWANETHRA RAVI & DR. DIPAK P. RIPOTE
आदेश / ORDER
PER S.S. VISWANETHRA RAVI, JM :
This appeal by the assessee against the order dated 19-05-2020 passed by the Principal Commissioner of Income Tax-3, Pune (“Pr. CIT”) u/s. 263 of the Act for assessment year 2015-16.
The assessee raised four grounds of appeal amongst which the short point arises for our consideration in respect of Rent and Freight expenses is as to whether the Pr. CIT justified in setting aside the assessment order
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dated 06-12-2017 passed u/s. 143(3) of the Act by holding the same as erroneous and prejudicial to the interest of Revenue without appreciating the fact that the AO completed assessment in detail, and without giving specific direction on the issues raised in the show caused notice.
The ld. AR submitted that the Pr. CIT directed the AO to verify the admissibility of the claims of assessee vide para 3.7 of the impugned order, drew our attention to paras 3.1 to 3.6 of the impugned order and submitted that the Pr. CIT listed out issues therein for verification of the same by the AO. The AO conducted enquiries in the giving effect proceedings in pursuance of 263 directions and made no additions on five issues and made additions on only four issues. The ld. AR drew our attention to chart consisting of nine issues filed earlier, submitted to ignore the same and drew our attention to another chart filed in respect of four issues. The ld. AR placed on record the assessment order dated 29-09- 2021 passed u/s. 143(3) r.w.s. 263 of the Act in support of his contention that there were no additions on five issues and the additions made relating to remaining four issues. The ld. DR did not dispute the same. In view of the same, the earlier chart consisting of nine issues is ignored and we confine proceedings to the latest chart consisting of four issues.
The ld. AR submits that the assessee is not interested to prosecute the issues raised in Sr. Nos. 2 and 3 relating to additions made on account of Employee’s contribution to PF/ESIC and MOH project expenses. Therefore, the same are dismissed as not pressed.
The ld. AR submits that the Pr. CIT show caused on the issues detailed therein in the show cause notice dated 05-03-2019 and drew our
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attention to para 4 of the said notice. He drew our attention to para (ii) of the impugned order and argued that though the Pr. CIT reiterated the issue in respect of claim of rent expenses at Rs.3,38,93,133/- no specific direction was given in para 3 of the impugned order. He submits that the Pr. CIT has to give specific direction to the AO in terms of provisions u/s. 263 of the Act. He drew our attention to paras 3.1 to 3.7 and vehemently argued that there was no clear finding by way of a direction to the AO regarding the issue of claim of rent expenses. He drew our attention to para 4.1 of the impugned order and argued that the Pr. CIT specifically relying on the decisions mentioned therein and held the AO did not carry out requisite inquiries/verification. Further, he also held that the AO did not examine the issues properly, correctly in required/desired manner vide para 3 of the impugned order. The ld. AR argued that the additions made by the AO in pursuance of general directions by the Pr. CIT u/s. 263 of the Act is not maintainable and drew our attention to the case laws Paper Book-1 in support of his contentions.
The ld. DR argued that the Pr. CIT discussed every issue in detail and held the original assessment order passed u/s. 143(3) of the Act is erroneous and prejudicial to the interest of Revenue for the reason that there was no proper inquiries conducted by the AO. He drew our attention to para 5 of the impugned order, in rebutting the arguments of ld. AR, submits that the Pr. CIT restored the matter to AO for proper inquiries on issues indicated in the show cause notice and also in paras 3 to 3.7 of the impugned order. He submits that the Pr. CIT has given consideration to the issues raised in show cause notice and the issues discussed in paras 3.1 to 3.7 of the impugned order which clearly shows the Pr. CIT has given clear finding on all the issues reflected in show cause notice. He
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vehemently argued that there was no substance in the submissions of ld. AR in stating that there was no specific finding by the Pr. CIT in respect of claim of rent expenses. The ld. DR supported the order of Pr. CIT and prayed to reject the arguments of ld. AR.
Heard both the parties and perused the material available on record. We note that the assessee is a company engaged in the business of manufacturing and sale of surgical, medical and diagnostic equipments vide para 3 of the original assessment order. Further, it is noted that the assessee e-filed return of income declaring a total income at Rs.Nil on 30- 11-2015 and later on, a revised return of income filed by the assessee declaring income at Rs.Nil on 20-03-2017. The case was selected under scrutiny as per the CBDT’s action plan, notices u/s. 143(2) and 142(1) of the Act were issued on 16-03-2016. Again another notice u/s. 142(1) of the Act along with detailed questionnaire issued on 27-02-2017 which is emanating from paras 1 and 2 of the original assessment order. Further, it is noted that according to the AO, the assessee made submissions and details/particulars/explanation etc. submitted/produced/offered in the said scrutiny proceedings vide para 4 of the assessment order. The AO completed assessment and made disallowance under the head “Office expenses” and “Other miscellaneous expenses” to an extent of Rs.4,50,000/- and assessed loss at Rs.47,93,92,732/- (Rs.47,98,42,732/- - Rs.4,50,000/-) vide order dated 06-12-2017 passed u/s. 143(3) of the Act. On an examination of the said assessment record, the Pr. CIT in the revision proceedings u/s. 263 of the Act held the above said assessment order is erroneous and prejudicial to the interest of Revenue and restored the matter to the file of AO for proper enquiries on the issues indicated in
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the show cause notice and also in paras 3, 3.1 and 3.7 of the impugned order.
We note that the contention of ld. AR is that the AO conducted inquiries in detail in respect of claim of rent expenses and there was no specific direction by the Pr. CIT in this regard to the AO in the impugned order. In view of the same let us examine the record to find out whether the AO conducted inquiry or not. The ld. AR filed Paper Book-1 containing 525 pages and Paper Book-II in continuation, up to 546. We find notice dated 27-02-2017 issued by the AO u/s. 142(1) of the Act at page Nos. 526 to 532 of the Paper Book-II. On perusal of the same, we note that at point No. 39 the AO asked the assessee to furnish details of lease rent payments shown in profit and loss account for each party in the format tabulated therein. On an examination of the said format, we note that the AO asked the assessee to furnish details of property taken on lease, name, address and PAN of lessee, amount of lease rent paid, closing balance at the end of the year if any, TDS done and rate of TDS and whether party is covered u/s. 40A(2)(b) of the Act. In reply to the said notice u/s. 142(1) of the Act, the assessee explained, vide submissions dated 05-01-2017, 08-05-2017, 10-07-2017, 02-08-2017 and 04-09-2017 which are placed at pages 533 to 546 of the paper Book-II. We find the details of rent expenses furnished to the AO vide submissions dated 10-07-2017 at page 539 of the Paper Book- II, wherein, it is observed that the assessee furnished details of lease rent expenses vide Annexure-7. On an examination of Paper Book-II with reference to the notice u/s. 142(1) of the Act as well as explanation of the assessee, we note that the AO raised a query in respect of claim of rent expenses shown in the profit and loss account and assessee also furnished details in response to the said query raised by the AO in questionnaire
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annexed to the notice u/s. 142(1) of the Act which clearly establishes that the assessee complied the direction of AO in the scrutiny proceedings makes the finding of Pr. CIT in the show cause notice stating no copies of rent agreement, receipts, are brought on record as supporting evidence to the claim of deduction vide para (ii) of the impugned order is contrary to the record. Further, we find the direction of Pr. CIT in para 3 of the impugned order that no requisite inquiries/verification conducted by the AO and further no proper examination of issues by the AO is incorrect for the reason that the assessee furnished all the details/submission which is evident from para 4 of the original assessment, we find the AO made verification in respect of the details of claim of rent expenses and admitted the claim, which means, the AO satisfied with the details furnished by the assessee and allowed deduction.
The ld. AR placed reliance on the decision of Hon’ble High Court of Delhi in the case of Principal Commissioner of Income Tax Vs. Delhi Airport Metro Express Pvt. Ltd. reported in 398 ITR 08 (Delhi) in support of his contentions and drew our attention to paras 11 and 12 of the said decision and argued that the Hon’ble High Court of Delhi confirmed the order of ITAT in dismissing the order of Pr. CIT u/s. 263 of the Act. He submits that the Hon’ble High Court of Delhi observed if the Pr. CIT is of the view that the AO did not undertake any inquiry, it becomes incumbent on the PCIT to conduct such inquiry. He vehemently argued in the present case also there was no specific finding by the PCIT and simply restored the issue to the file of AO for his fresh examination.
The ld. DR placed reliance on the decision of Hon’ble Supreme Court in the case of CIT Vs. M/s. Paville Projects Pvt. Ltd. in Civil Appeal No.
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6126 of 2021 and argued that the facts and circumstances of the present case are identical to the facts before the Hon’ble Supreme Court and submits that the Hon’ble Supreme Court upheld the order passed by the PCIT u/s. 263 of the Act in holding that the assessment order is erroneous and prejudicial to the interest of Revenue for accepting the contention of payment made to shareholders as cost of improvement. He argued that the decision of Hon’ble Supreme Court is applicable to the facts on hand.
We note, in the present case, as has been discussed above already in the aforementioned paragraphs admittedly there was no inquiries conducted by the Pr. CIT in respect of claim of rent expenses. We find the explanation of the assessee in the revision proceedings u/s. 263 of the Act in response to show cause notice at page 60 of the paper book-I. On an examination of the same of page 63 at Sr. No. 4, we find the assessee explained that it has multiple offices and warehouses in multiple cities and all these offices and warehouses were obtained on rental from third parties on which assessee had deducted TDS u/s. 194 I of the Act. Further, it is noted that the assessee furnished copies of rental contracts in soft copy format as Annexure-4. Further, it is also contended all these rental agreements were produced for verification during the course of scrutiny proceedings and the AO made verification, but due to multiple number of contracts, the AO did not refer the same in the record. It is pertinent to note that the AO verified the deduction of TDS on rental expenses and found nothing adverse to the details submitted in the soft copy format in Annexure-4 and also in respect of TDS of all quarters. Having entire details regarding the rent expenses vide Annexure-4, the Pr. CIT did not venture to examine the same, but however, simply directed the AO to conduct inquiries, in our opinion, is not justified as when the details are
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submitted in response to the show cause notice u/s. 263 of the Act, it is incumbent upon the Pr. CIT to examine such details and give specific direction.
Coming to the decision of Hon’ble Supreme Court in the case of M/s. Paville Projects Pvt. Ltd. (supra) as relied on by the ld. DR, we note that the assessee therein is a company engaged in the business of manufacturing and export of garments, shoes etc., the said company shown sale of property/building by name “Paville House” for an amount of Rs.33 Crores. In view of an interim award in arbitration proceedings by way of amicable settlement termed as “family settlement” paid Rs.10.33 Crores to each to the three shareholders by name; (1) Asha, (2) Nandita and (3) Nikhil. The said payment was claimed as deduction under “cost of improvement”. The AO accepted the same. The CIT u/s. 263 of the Act held the said “cost of improvement” did not fall under the definition contained in section 55(1)(b) of the Act. The ITAT by placing reliance on the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs. CIT reported in 243 ITR 83 (SC) held that the CIT wrongly invoked the jurisdiction u/s. 263 of the Act. The Hon’ble High Court of Bombay agreed with the findings recorded by the ITAT. We note that the Hon’ble Supreme Court was pleased to hold that the Hon’ble High Court has committed a very serious error in setting aside the order passed by the CIT in exercise of powers u/s. 263 of the Act and upheld the order passed u/s. 263 of the Act by the CIT. On a careful reading of the decision of Hon’ble Supreme Court, it is noted that the CIT therein concluded that the “cost of improvement” does not fit into the definition of section 55(1)(b) of the Act and held the same is chargeable to tax, which means, that the order passed by the AO therein was based on incorrect assumption of facts and also on incorrect
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application of law, whereas, in the present case is a case of admissibility of claim in respect of rent expenditure incurred under the head “Rent”. The case of Pr. CIT in the present case was that there was no proper inquiries conducted by the AO in the original assessment proceedings. We note that the Pr. CIT did not make any reference or whatsoever that the AO allowed rent expenses as deduction not in accordance with law. We find the AO exercised his jurisdiction in examining the details of rent expenditure and allowed the same as deduction, in accordance with law. We find the action of AO is neither mistake on facts nor deviated from law. The said conclusion arrived by the AO on his satisfaction of details furnished by the assessee cannot be found to be erroneous simply because Pr. CIT does not feel satisfied with the said conclusion. The power of Pr. CIT u/s. 263 of the Act is to find out whether the AO committed any mistake on facts or ignored application of legal principles. Thus, we hold, the facts and circumstances of the case before the Hon’ble Supreme Court in the case of M/s. Paville Projects Pvt. Ltd. (supra) are not similar to the facts on hand, therefore, the law laid down by the Hon’ble Supreme Court is not applicable to the present case. Therefore, the order of Pr. CIT in revising the order of AO in respect of allowance of deduction under rent expenses is not maintainable for the reason the order of AO cannot be held to be erroneous, thus, it is not prejudicial to the interest of Revenue.
The next issue is regarding freight outward expenses to an extent of Rs.26,35,415/-. The ld. AR reiterated the same submissions in respect of this issue as canvassed in the first issue of rent expenses. He argued that the Pr. CIT failed to give any specific direction in this regard. He submitted to adopt the same submissions as advanced in the first issue. The ld. DR vehemently opposed the arguments of ld. AR and supported the order of
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Pr. CIT. We note that the AO vide Point No. 38 in the questionnaire issued u/s. 142(1) of the Act, requested the assessee to furnish breakup of expenses shown under the heads Repairs and Maintenance, Freight forwarding, Miscellaneous Expenses and Sales Promotion in profit and loss account in the format given therein which is at page 531 of the Paper Book-II. In response to the said questionnaire, the assessee furnished details of repairs and maintenance, freight forwarding, miscellaneous expenses and sales promotion expenses vide Annexure-6 (a, b, c, d) which is at page 540 of the Paper Book-II. Further, we find the assessee submitted the details relating to freight outward expenses to an extent of Rs.26,35,415/- as on 31-03-2015 vide Annexure-6 to the Pr. CIT under 263 proceedings which is at page 66 of the Paper Book-I. Further, the details of said expenditure are at page 285 of Paper Book-I, where, we find the assessee shown provision for freight outward charges. The ld. DR vehemently argued the provision cannot be allowed as deduction unless the assessee shows the actual payment. He submits that the assessee is entitled to claim deduction under actual payment but no details were submitted by the assessee even before the Pr. CIT claiming payments were made actually. It is an admitted fact that no details of actual payments were even submitted before the Pr. CIT as well as before us. We note that a provision is made by an assessee as obligation to pay as a result of past event. To meet the said expenditure the assessee can make provision to settle the obligation basing on a reasonable estimation of amount to meet that payment of obligation. In the present case, as discussed above, we find no details of payment were furnished before us. Therefore, we find force in the arguments of ld. DR in supporting the order of Pr. CIT in restoring the said issue to the file of AO for his fresh verification. Thus, we find no infirmity in the order of Pr. CIT in revising the original assessment
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order as erroneous and prejudicial to the interest of Revenue to the extent of freight outward expenses of Rs.26,35,415/-. Accordingly, the order of Pr. CIT is upheld in this aspect.
To sum up, the order of Pr. CIT u/s. 263 of the Act is set aside on the issue of rent expenses and upheld on the issue of freight expenses.
In the result, the appeal of assessee is partly allowed.
Order pronounced in the open court on 3rd May, 2023.
Sd/- Sd/- (Dr. Dipak P. Ripote) (S.S. Viswanethra Ravi) ACCOUNTANT MEMBER JUDICIAL MEMBER पुणे / Pune; ददनाांक / Dated : 3rd May, 2023. रदव
आदेश की प्रधिधलधप अग्रेधर्ि / Copy of the Order forwarded to : अपीलाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The Pr. CIT-3, Pune. दवभागीय प्रदतदनदध, आयकर अपीलीय अदधकरण, “ए” बेंच, 4. पुणे / DR, ITAT, “A” Bench, Pune. गार्ड फ़ाइल / Guard File. 5. //सत्यादपत प्रदत// True Copy// आदेशानुसार / BY ORDER,
वररष्ठ दनजी सदचव / Sr. Private Secretary आयकर अपीलीय अदधकरण ,पुणे / ITAT, Pune