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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order dated 30/03/2021 passed by Ld.PCIT, Bangalore -2 u/s. 263 of the Act for A.Y. 2016-17 on following grounds of appeal:
1. The order of revision passed by the learned Principal Commissioner of Income tax, Bengaluru -2, Bengaluru, under Section 263 of the Act dated 30/03/2021, in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case.
2. The learned Principal Commissioner of Income tax is not justified in law and on facts to set aside the assessment order passed under section 143[3] of the Act dated 30/12/2018 and direct the assessing officer to modify the original assessment passed by the learned assessing officer, on the facts and circumstance of the case 3. The learned Principal Commissioner of Income tax was not justified in passing an order under section 263 of the Act, as the order passed under section 143[3] of the Act, was pursuant to proper enquiry by the learned assessing officer on the facts and circumstances of the case. 4. The learned Principal Commissioner of Income tax has passed an unsustainable order which is based purely on assumptions and presumptions. The order is arbitrary and full of surmises, without considering the relevant material and assuming irrelevant material. Consequently, the order passed is a perverse order on the facts and circumstance of the case. 5. The learned Principal Commissioner of Income tax has grossly erred in revising the order passed by the learned Assessing officer without appreciating that there is no error, much less prejudicial to the interests of the Revenue to warrant a revision and therefore the order passed by the learned PCIT is ultra vires to the scope of Section 263 and requires to be cancelled under the facts and circumstances of the Appellant's case. The direction to make thorough and detailed enquiry amounts to ordering fishing and roving enquires without any material in support thereof and consequently the impugned order passed is bad in law and is liable to be cancelled. 6. The learned Principal Commissioner of Income tax failed to appreciate that the Assessing Officer before completing the assessment order under section 143[3] of the Act on 30/12/2018 had made detailed enquiries calling for relevant records and documents and explanation pertaining to the matter at hand, the same being produced by the assessee company during various instances during the regular assessment proceedings. Hence on the very same issue no action can be taken under Section 263 of the Act as the actions of the Assessing Officer is pursuant to applying his mind to the matter and in accordance with law. 7. The learned Principal Commissioner of Income Tax erred in holding that the assessee company is not entitled for Page 80-IA of the Act amounting to a sum of Rs. 9,86,36,699/- on wrong interpretation of the provisions and against judicial precedents in favour of the assessee on the facts and circumstances of the case.
8. The learned Principal Commissioner of Income Tax is not justified in arriving at erroneous conclusion that the income generated from interest receipts do not form part of the business income and consequently the appellant is not entitled for eligible deduction under section 80-IA of the Act on the facts and circumstances of the case.
The learned Principal Commissioner of Income-tax failed to appreciate that deduction under Section 80-IA is not restricted to "Business Income" the interest income also partakes the character of income from the industrial undertaking eligible for exemption under section 801A of the Act on the facts and circumstances of the case.
10. The learned Principal Commissioner of Income Tax has further not appreciated and taken into consideration the net interest difference being the interest received and interest paid which resulted into a surplus of Rs.2,21,877/- i.e. [Rs.9,86,36,699- minus Rs.9,84,14,822/-] as forming a part of 'Income from other sources' and eligible for deduction under section 80-IA of the act on the facts and circumstances of the case.
11. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.”
Brief facts of the case are as under: 2.1 The assessee is engaged in the business of development, operation, maintenance of industrial park. The assessee filed its original return of income for the year under consideration on 17.10.2016, declaring total income of ‘Nil’ after claiming deductions under Chapter VIA amounting to Rs.7,54,15,766/- and computed ‘Deemed Total Income' u/s 115 JB of Rs.7,89,00,947/-. 2.2 The assessment was completed under section 143(3) of the Act on 30.12.2018, by accepting the returned income.
Page 2.3 Subsequently the Ld.PCIT observed that, the assessee is into the business of development, operation, maintenance of industrial park at NR enclave, Plot Nos.143,21,213,214 and 215, EPIP Industrial area K.R. Puram Bangalore-48. He noted that, during the financial year relevant to assessment year 2016-17, the assessee computed profit and gains of business of Rs.7,54,15,767/- and claimed entire amount as deduction u/s 80IA of the Act. On perusal of the assessment records, the Ld.PCIT found that, the assessee received rental income of Rs.19,12,20,033/-, interest income on loans and advances from related parties of Rs. 7,20,46,931/-, interest income from fixed deposits of Rs. 1,08,79,022/- and other income of Rs.1,57,10,756/. The Ld.PCIT observed that, deduction under section 80IA(4)(iii) was claimed and allowed on interest receipts and other income etc., interalia, included in the profit and gains of the eligible business. The Ld.PCIT was of the view that the Ld.AO, while concluding the assessment, did not excluded interest receipts and other income from the business profit of the undertaking, and therefore, the amount of deduction claimed by the assessee u/s 80IA of Rs. 9,86,36,699/- (restricted to the profit computed of Rs. 7,54,15,767/-) was allowed in excess. The Ld.PCIT, therefore, was of the view that the assessment order passed is erroneous and prejudicial to the interests of the revenue. 2.4 A notice u/s. 263 of the Act was, issued to the assessee on 18/03/2021 to appear before the Principal Commissioner of Income-tax-2 on 23.03.2021. The assessee sought an adjournment of hearing to 26.03.2021 which was granted. On Page behalf of the assessee, representative of the assessee appeared and filed written submissions. 2.5 In reply to the show cause notice u/s. 263, assessee vide letter dated 25/03/2021, filed its objections by submitting as under:
2.6 Based on the above submissions, the Ld.PCIT was of the opinion that the claim of deduction u/s. 80IA made by the assessee with respect to interest income received was not acceptable as assessee had not established any nexus between the interest receipts and other income and eligible business undertaking. On facts of this issue, the Ld.PCIT observed as under: “7.5. I have perused financial statements and other documents furnished by the assessee before the assessing officer and noticed that, Company had borrowed from Standard Chartered Bank and IndusindBank.by mortgaging land, building and assignment of lease rentals. Facility of Rs.365 Cr in aggregate is availed jointly with its associated enterprises M/s Divyashreesoftech Realtors Pvt Ltd and M/s DivyashreeTarbus Builders Pvt ltd. and repayment terms are accordingly fixed on an aggregate basis across all three borrowers. Such borrowings are diverted to its sister concerns in order to support the operations of the entities in a group which have lower cash Page resources or which cannot raise finance through a bank or another institution. Further assessee company did not have sufficient reserves on its own, hence, borrowed by mortgaging its assets to support associated enterprises” 2.7 Thereafter the Ld.PCIT referring to the merits of the case, held that as the source of the income is not directly connected with the business of the eligible undertaking, and it cannot be held that interest receipts from inter company lending and other income to be directly derived from the eligible international undertaking to be considered for the purpose of computing deduction u/s. 80IA of the Act. The Ld.Pr.CIT thus held the assessment order passed to be erroneous and prejudicial to the interest of revenue by observing as under: “7.11. The assessing officer while concluding assessment order failed to appreciate these facts on record and concluded assessments without examining relevance of judicial pronouncements submitted by the assessee to facts of the assessee. Had assessing officer carefully verified all the facts available on record, he would have taken only possible view in the facts of the case. i.e. interest receivable from sister concerns and other income of shall not be part of profit and gains of the business which is eligible to claim deduction u/s 80IA of the Act. Hence such assessment which resulted into loss of revenue is erroneous and prejudicial to the interest of revenue.
In the light of foregoing, it very clear that the Assessing Officer has failed to perform his duty by not applying his mind to the issue at hand and failed to arrive at the only view possible in given set of facts. A combination of incorrect assumption of facts and incorrect application of law by the AO, therefore, made the order of assessment erroneous and prejudicial to the interest of the Revenue. Accordingly, the assessment order is set aside with respect to exclude interest income from sister concerns and other income while computing eligible deduction under section 80IA of the Act. The Assessing Officer is directed to carryout thorough and detailed enquiry. The assessee must be provided with reasonable opportunity of being heard during the course of the assessment proceedings in Page Order and the Assessing Officer must pass a speaking order on the basis of the facts and law.” 2.8 Aggrieved by the above observations of the Ld.Pr.CIT, assessee filed the present appeal before this Tribunal.
Before us the Ld.AR submitted that all relevant details were filed before the Ld.AO at the time of original assessment proceedings. He referred to the notice u/s. 143(2) placed at page 1 of the paper book and reply filed in response to the same by the assessee at page 3 of the paper book.
The Ld.AR referred to the questionnaire issued by the Ld.AO u/s. 142(1) which is placed at pages 83-84 of the paper book wherein following details were called for. “In continuation to the assessment proceedings u/s 143(3) for AY 2016-17, kindly furnish the following details: (1) Please provide details of receipts for which certificate u/s 197 was obtained. Further reconcile above receipts with receipts shown in P&L Account. (2) Please reconcile tax credit claimed (and receipts) in ITR with tax credit available in 26AS. (3) Please provide details of sales turnover reported in Audit Report (Form 3CD) and ITR (Total Sales / Gross Receipt in Part A-P&L of ITR) and reconcile the difference if any (4) Please provide details of deduction claimed under Chapter VI-A and furnish documents in support of your claim. (5) Please furnish details of all the loans/deposits/advances given/made during the year including squared up loans and nature of income generation out of such investment and source of the investment”
Assessee in response has filed letter dated 22/10/2018 submitting the required details. The scanned copy of the submissions are as under:
Thereafter in response to show cause notice issued by the Ld.AO on 27/12/2018 wherein a query in respect of the interest income and other income was raised by the Ld.AO, assessee filed letter dated 28/12/2018 furnished as under:
The Ld.AR thus submitted that the assessment order has been passed after considering various submissions called by the Ld.AO in respect of the deduction claimed u/s. 80IA of the Act and on furnishing of the necessary details, the Ld.AR submitted that, the assessing officer was convinced and accepted the claim of assessee. The Ld.AR placed reliance on following decisions in support of the argument that 263 proceedings are therefore bad in law. Malabar Industrial Co Ltd v CT [2000] 243 ITR 83 (SC) Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd. (2021) 130 taxmann.com 294 (SC) CIT, Central Circle v. D.G. Gopala. Gowda [2013] 34 taxmann.com 154 (Karnataka) CIT v Saravana Developers [2016] 68 taxmann.com 148 (Kamataka) Commissioner of Income-tax v. Honda Siel Power Products Ltd 194 Taxman 175 (Delhi)
Page CIT v. Cyber Park Development & Construction Ltd. [2020] 121 taxmann. com 172 (Karnataka) KR. Satyanarayana v. Commissioner of Income Tax, Mysuru [2021] 126 taxmann. com 22 (Kamnataka) -----e-tax v. International Society for Krishna Commissioner of Incom Consciousness [2020] 117 taxmann.com 799 (Kamataka) Commissioner of Income-tax, Bangalore v. Kurlon Ltd. [2014] 52 taxmann. com 92 (Karnataka) CIT v. Gokuldas Exports [2012] 20 laxmann.com 491 (Karnataka) Commissioner of Income-tax (Central), Ludhiana v. Max India Ltd. 166 Taxman 188 (SC) 8. The Ld.DR on the contrary relied on the orders passed by the authorities below.
9. He also referred to the various decisions of Hon’ble Supreme Court wherein it is held that the nexus on earning of interest must be established having connected to the business of the eligible undertaking in order to include the same for computation of deduction u/s. 80IA of the Act.
We have perused the submissions advanced by both sides in the light of records placed before us.
Hon’ble Supreme Court in case of Malabar Industries Co. Ltd. vs. CIT reported in 243 ITR 83 (SC), the Commissioner can exercise revision jurisdictional u/s 263 if he is satisfied that the order of the assessing officer sought to be revised is (i) erroneous; and also (ii) prejudicial to the interests of the revenue.
Therefore both the limbs being erroneous as well as prejudicial to the interest of revenue has to be satisfied for invoking the jurisdiction u/s. 263 of the Act.
In Malabar Industrial Co. Ltd. (supra), the Hon'ble Court has held as under: “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 Page incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall the orders passed without applying the principles of natural justice or without application of mind. In our humble view, arbitrariness in decision-making would always need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the Commissioner under Section 263. Arbitrariness in decision-making causing prejudice to either party cannot therefore be allowed to stand and stare at the legal system. It is difficult to countenance such arbitrariness in the actions of the Assessing Officer. It is the duty of the Assessing Officer to adequately protect the interest of both the parties, namely, the assessee as well as the State. If he fails to discharge his duties fairly, his arbitrary actions culminating in erroneous orders can always be corrected either at the instance of the assessee, if the assessee is prejudiced or at the instance of the Commissioner, if the revenue is prejudiced. While making an assessment, the ITO has a varied role to play. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor. In S.N. Mukherjee v. Union of India AIR 1990 SC 1984, it has been observed by the Hon'ble Supreme Court as follows: “Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances or arbitrariness and Page ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge.”
In view of the foregoing, it can be said that an order passed by the Assessing Officer becomes erroneous and prejudicial to the interests of the Revenue under Section 263 in the following cases: (i) The order sought to be revised contains error of reasoning or of law or of fact on the face of it. (ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind. (iii) The order passed by the Assessing Officer is a stereotype order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case.
In the present facts of the case, the Ld.AO has issued specific notice to assessee to verify the claim of deduction u/s. 80IA on 27/12/2018 which is scanned and reproduced hereinabove.
The response filed by the assessee dated 28/12/2018 in respect of the same also details the submissions in response to Page the notice. The assessment order then passed on 30/12/2018 does not contain any discussion regarding the claim for which the assessee was show caused by the Ld.AO. It is mandatory on the part of the Ld.AO not to close an issue in a haste. Hon’ble Supreme Court in following cases, including the decision of Malabar Industrial Co. Ltd. (supra) observed that, AO is not supposed to accept a claim in the absence of supporting materials: Rampyari Devi Saraogi v.CIT reported in (1968) 67 ITR 84 Smt. Tara Devi Aggarwal v. CIT reported in (1973) 88 ITR 323 Hon’ble Delhi High Court in case of Duggal & Co. v. CIT reported in (1996) 220 ITR 456 and GeeVee Enterprises reported in (1975) 99ITR 375, observed that, failure of the AO to investigate into facts in the return calling for enquiries makes the order erroneous.
In case of lack of enquiry or in case of failure of the Ld.AO to investigate the claim made in the return, the order of the Ld.AO would be considered to be erroneous. Perusal of following decisions of Hon’ble Delhi High Court, shows that, as an investigator it is incumbent upon the AO to undertake investigation into the disclosures made in the return and also to probe into other facts required to be examined and verified to compute the taxable income and if he fails to do so, he commits an error. Hon’ble Delhi High Court has held that order becomes erroneous because enquiry or verification has not been made and not because a wrong order has been passed on merits. CIT v. Nagesh Knitwears (P.) Ltd., reported in (2012) 22 taxmann.com 309; CIT v. New Delhi Television Ltd., reported in (2013) 39 taxmann.com 135; CIT v. Goetze (India) Ltd.reported in (2014) 44 taxmann.com 138
The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. Thus, in cases of non-investigation the CIT will be justified to revise the order. But at the same time while doing so, it would be necessary for the CIT to show as to how non-investigation has made the order erroneous? 19. In the facts and circumstances of a given case what enquiries have to be conducted are to be decided by the AO, considering that, the AO performs quasi judicial functions. Hence, it will not be proper for any other person to dispute the adequacy of the enquiries conducted. Nevertheless, considering the fact that the AO, being Revenue's Representative, discharges functions as an Investigator also, it is very important for him to conduct the enquiries as adequately as the facts and circumstances of a case demand. If the enquiries conducted by the AO are inadequate, and there is omission of enquiries on certain vital aspects of the Page CIT will be within his powers conferred on him under section 263 to revise the order. 20. In the present facts of the case there was specific query raised by the Ld.AO in respect of the issue that is subjected to revision, and a reply was also filed by the assessee. However there was no further enquiry made by the Ld.AO, and the assessment order was passed within 2 days of the reply by the assessee. The Ld.AO accepted that claim and concluded the assessment without undertaking enquiries or investigations, when ex-facie facts and circumstances warranted him to do so. The Ld.PCIT has recorded a clear finding that the enquiries by the Ld.AO were in adequate and on assumption of wrong facts. We therefore up hold the order passed by the Ld.PCIT on this issue. Accordingly, grounds raised by the assessee stands dismissed. In the result, the appeal filed by the assessee stands dismissed. Order pronounced in open court on 29th July, 2022.