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Income Tax Appellate Tribunal, DELHI BENCH “A” DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI PRADIP KUMAR KEDIA
PER PRADIP KUMAR KEDIA, A.M.: The captioned appeal has been filed at the instance of the Revenue against the order of the Commissioner of Income Tax (Appeals)-III, Gurgaon (‘CIT(A)’ in short) dated 29.01.2018 arising from the assessment order dated 29.12.2017 passed by the Assessing Officer (AO) under Section 263 r.w. Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2014-15.
The grounds of appeal raised by the assessee reads as under:
“Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has erred in interpreting the scope of section 263 of the Income Tax Act?
2. Whether on the facts and in the circumstances and in law the Ld.CIT(A) has erred and failed to appreciate the fact that the assessment was set aside by the Pr. CIT(C), Gurgaon and directed the Assessing Officer to complete the assessment de-novo and that the issue of interest expenses is within the scope of the directions given by the Pr.CIT(C), Gurgaon in his order u/s 263 of the Income-tax Act, 1961?
3. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has erred in law in deleting the disallowance of Rs. 11,52,42,000/- made by the Assessing Officer on account of interest expenses incurred on delayed payment of EDC/IDC and deduction claimed by the assessee?
4. The order of the Ld.CIT(A) is erroneous and not tenable in law and on facts.”
When the matter was called for hearing, the ld. CIT-DR relied upon the consequential assessment order passed by the Assessing Officer in pursuance of revisional directions made under Section 263 of the Act.
4. Per contra, the ld. counsel for the Assessee pointed out that the issue in challenge by the Revenue is towards disallowance of Rs.11,52,42,000/- made by the Assessing Officer on account of interest expenses incurred on delayed payment of EDC/IDC and deduction claimed by the assessee. In this regard, the ld. counsel adverted to the revisional order passed by ld. PCIT dated 20th November, 2017 and submitted that the impugned disallowance was not the subject matter of revision under Section 263 at all. In elaboration, it was submitted that the original assessment order was set aside for denovo adjudication on the points alleged in the revisional order passed under Section 263 of the Act which order does not include the issue towards interest charges on EDC and penal interest charges on IDC which is the subject matter of addition by the Assessing Officer in the consequential proceedings there so. It was submitted that scope of assessment in the consequential proceedings in pursuance of order passed under Section 263 is confined to the examination of issues as ordered by the revisional authority and cannot travel beyond the directions passed by the revisional commissioner order. A mere direction for denovo adjudication does not confer plenary powers to the Assessing Officer to rake up issued unconnected with the directions in revisional order. It was submitted that the CIT(A) has rightly taken a cognizance of the aforesaid legal position and reversed the addition so made in the consequential proceedings which were dehors directions of the revisional commissioner. The ld. counsel thus submitted that no inference with the order of the CIT(A) is called for in the facts and circumstances of the case.
We have carefully considered the rival submission. The short preliminary issue which requires to be examined is whether the Assessing Officer is empowered to expand the scope of consequential proceedings under Section 143(3) r.w. Section 263 by making assessment in respect of issues which are not subject matter of revisional order under Section 263.
The CIT(A) has favourably dealt with the contentions of Assessee as under:
“3.3 Ground No. 2(c) relates to AO having expanded the scope of proceedings u/s 143(3) r.w.s 263 by making assessment of all aspects of returned income. 3.3.1 With respect to this ground, the appellant has submitted as follows:-
"The assessee is in appeal before your Honour against the order passed by the Assistant Commissioner of Income Tax, Central Circle Gurgaon u/s 143(3) r.w.s. 263 of the Income Tax Act 1961. The only addition made by Ld. AO pertains to the addition on account of interest cost incurred by the assessee on External Development Charges (EDC) and internal Development charges (IDC') payable to Haryana Urban Development Authority (HUD A) through the Director, Town and Country Planning, Haryana amounting to Rs. 11,52,42,000. In addition to submissions made on 11-Jul-19, the assessee would like to submit as follows:- 1) The assessee has incurred the interest cost on EDC and IDC in terms of agreement entered into been the assessee and Governor of Haryana acting through Director, Town and Country Planning (DTCP) Haryana. Clause 1 (b)(iv) of the agreement states as under: "The unpaid amount of EDC would carry an interest of 12% per annum and in case of any delay in the payment of installment on due date, an additional penal interest of 3% per annum (making total payable interest 15% (simple) per annum would be chargeable " Further, Clause l(b)(viii)(f) of the agreement states as under: "The unpaid amount of IDC shall carry and interest of 18% p.a. (simple) for the delay in payment of installment" 2) In the light of above, it is evident that the interest cost on EDC and IDC incurred by the assessee is on account of delay in payment of installments of EDC and IDC and arising out of the business agreement entered into between the assessee and Governor of Haryana acting through Director, Town and Country Planning (DTCP) Haryana. Therefore, the interest cost on EDC and IDC arising out of the agreement stated above, is purely on account of delay in payment of installments, therefore it is compensatory in nature and not in the nature of penalty due to infraction of any law for time being in force. 3) In this line of business being real estate, such levy of interest on delayed payments is usual. There is no infringement of any law, the failure of which has led to the instant imposition of interest but merely due to inability to comply with certain terms of the contract, the levy was imposed. The statutory prescription contained in the Explanation along with the provisions of sec.
37(1) Act prohibits deduction of expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. In the instant case, incurring of the expenditure on interest though was not claimed in profit and loss account and was not for an offence nor prohibited by law as being opposed to public policy. 4) The Honourable Supreme Court in Prakash Cotton Mills P. Ltd. v. Commissioner of Income Tax 201 ITR 684 while analyzing the scope of Section 37(1) of the Act observed as under: "Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under Section 37(1) of the Income-tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income-tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obliged to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature. " 5) In Standard Batteries Ltd. v. Commissioner of Income-Tax 211 ITR 444, the Supreme Court followed and reiterated the view taken in Prakash Cotton Mills P. Ltd.'s case (supra). In Commissioner of Income-Tax v. Murari Lai Ahuja and sons (P&H) 177 ITR 228, while considering the case of damages for breach of contract, the Punjab & Haryana High Court held that if the amount is expended as payment on account of compensation for breach of contract, the same shall be treated as commercial expediency and the loss incurred thereon shall be exigible to be deducted from the income of the assessee. In the said case, the assessee was engaged in the business of sale of cotton and it had failed to fulfill the contract for supply of cotton to the mills. The assessee settled the deal by paying certain sum as compensation/ damages which was held to be an allowable deduction. That judgment has been followed in a recent judgment in Commissioner of Income Tax v. SA. Builders (PJ Ltd. (2007) 211 CTR 473 by this Court 5) In view of the authoritative pronouncements of the Apex Court and the jurisdictional High Court, it is thus submitted that whenever an assessee has indicated any amount, which had been paid either by way of damages or penalty, to be an allowable expenditure under Section 37(1) of the Act the Assessing Authority is obliged to discover the nature of such amount vis-a-vis two prominent aspects, whether it is compensatory or penal. The Assessing Authority would there upon permit the amount as an allowable deduction that may be discovered to be purely of compensatory nature as payment for damages. It is also respectfully submitted that a claim can be disallowed only when it is claimed by the assessee in the profit and loss account In the instant case, the interest paid on EDC and IDC has not been claimed in the profit and loss account The same have been capitalized to the value of inventory and not claimed as a revenue expenditure. It is a law that a claim can be disallowed only when it is claimed as a revenue expenditure. In view of the same, it is prayed that the additions made may kindly be deleted in the interest of justice." Further, with regard to the addition made by the appellant in assessment u/s 143(3) r.w.s 263, the appellant has submitted as hereunder- The issues raised in the revisionary proceedings by the CIT were again re examined by the Assessing officer during the course of assessment u/s 143(3) rws 263 of the Income Tax Act 1961. However neither any query was raised by the Ld Commissioner of Income tax on the issue of Interest paid on EDC/IDC, nor any direction was given to the assessing officer with reference to the interest paid on External/Internal Development charges paid by the assessee. No reference of examination or in any other manner was raised or even discussed by the Ld Commissioner of Income Tax at any stage of the Revisionary proceedings. It is a trite law that before the CIT can pass any order, he has to give the assessee an opportunity of being heard and thereafter record, at least prima facie, that the original order of the Assessing Officer is erroneous or prejudicial to the interests of the Revenue. The requirement of giving the assessee an opportunity of hearing is for the simple reason that the assessee may be able to refute the belief of the CIT which might be formed on an examination of the record of the proceedings under the Act, that is to say, the assessee may be in a position to point out that the assessment order is just and fair. Therefore, the moment the Assessing Officer is entitled to examine items which did not form part of Section 263 proceedings, the statutory requirement of framing an order under section 263 of the Act after giving the assessee an opportunity of being heard, stands obliterated or made redundant Therefore, what the CIT himself could not have done, cannot be permitted to be done by the Assessing Officer while giving effect to the order under section 263 of the Act. In a recent judgment of the Honourable Bombay High Court in the case of Pr.CIT v. Royal Western India Turf Club Ltd (2019 (2) TMI241) the Honourable Bombay High Court held- Held Revision u/s 263 - addition towards entrance fees and annual subscription made by the Assessing Officer in the proceedings under Section 143(3) read with Section 263 - Held that:- This order would suggest that the Commissioner found fault with the Assessing Officer on clear four specific aspects arising out of the order of the assessment and require that the Assessing Officer passes fresh order after making proper inquiries. The question of the treatment to the entrance fees was by then nowhere in picture. The Assessing Officer on his own examined said issue. The Commissioner, undoubtedly, has powers under Section 263 of the Act to annul the entire assessment and required passing of fresh assessment order, However, when the Commissioner, as in the, present, case, requires the Assessing Officer to carry out inquiries with respect to specified issues, the jurisdiction of the Assessing Officer to pass fresh order must be confined to such issues, falling which would be giving the power to the Assessing Officer to make reassessment In the case of CIT v. DN Dosani in of 1994 (153 Taxmann 13), the Honourable Gujarat High Court held- Section 263 of the Income Tax Act 1961- Revision- of orders prejudicial to interests of revenue- Assessment Year 1979-80 to 1983-84- Whether powers of revision can be exercised only by Commissioner and, therefore. Assessing Officer cannot under guise of framing fresh assessment exercise said powers in relation to other items framing part of assessment record- Held, yes- whether therefore. Assessing Officer while passing fresh assessment order in pursuance of an order of Commissioner under section 263 is entitled to consider only such items which had been considered by Commissioner, and he cannot consider any other item afresh for making additions-Held. yes. In view of the above facts and circumstances of the case your Honour will appreciate that the issue of interest on external development charges/internal development charges did not form part of the show cause notice issued by the CIT as well as the proceedings before him. In view of the same and the above judicial pronouncements it is amply clear that the said addition could not have been made by the Assessing officer. In view of the same it is prayed that the addition made may kindly be dropped in the interest of justices. 3.3.2 I have verified the contentions of appellant and it is seen that the additions made by the AO on account of interest charges on EDC (Rs. 11,22,56,000/-) and penal interest on IDC (Rs. 29,86,000) were not covered in the issues specified in the order of Pr.CIT u/s 263 of the Act whereby AO was directed to make enquiries on other issues and thereafter re-decide the issue. It has been held by the Hon'ble Courts as discussed in the appellant's submissions that the jurisdiction of the Assessing Officer to pass fresh order in consequence to order u/s 263 is confined to the examination of issues as ordered by Pr.CIT in the order, Hence, the AO while passing fresh order in pursuance to an order of CIT u/s 263 is entitled to consider only such items which have been considered by Pr. CIT, and he cannot consider any other item afresh for making additions. In view of the facts of the case and judicial pronouncements referred to by the appellant, it is held that EDC/IDC charges added by the AO in order under consideration were not part of the issues ordered to be examined in order u/s 263 by Pr.CIT. Hence, the addition made by the AO is deleted on legal grounds. As the addition has been deleted on legal grounds, the other grounds including related to merit of the case are not adjudicated.
As a result, appeal of the appellant for the year under consideration is allowed.
We notice that the CIT(A) has examined the issue in the light of the decision rendered by Hon’ble High Court and Co- ordinate Benches. The Hon’ble Gujarat High Court in the case of CIT vs. D.N. Dosani as reported in (2006) 280 ITR 275 (Guj) has observed that the powers of the Assessing Officer is confined to items for which revisional directions have been given and the Assessing Officer is not entitled to consider any other item afresh for making additions under guise of framing fresh assessment in pursuance of revisional directions. The same view has been echoed in plethora of other judicial precedents, many of which has been noticed by the CIT(A) as well. 8. We are thus not inclined to reiterate the sacro sanct principles. The action of the CIT(A) in reversing the additions made by Assessing Officer wholly unconnected to the directions given in revisional order is thus in consonance with law delineated in judicial precedents and hence does not warrant any interference. We thus see no merit in the appeal of the Revenue.