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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI PRAMOD KUMAR, VP & SHRI ABY T. VARKEY, JM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee against the order of the Ld. Principal Commissioner of Income Tax-05, [hereinafter referred to as the “PCIT”], Mumbai dated 10.03.2022 for assessment year 2017-18 passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
The main grievance of the assessee is against the action of the Ld. PCIT to have invoked the revisional jurisdiction u/s 263 of the Act without validly holding that the AO’s action/assessment order was erroneous as well as prejudicial to the interest of the revenue. Thus, we note that this is a legal ground which challenges the assumption of jurisdiction by Ld. PCIT. 3. Brief facts as discerned from perusal of the records is that the assessee had filed return of income declaring an income of 2 A.Y. 2017-18 Bombay Fluid Systems Components Rs.6,08,45,580/- which was processed it u/s 143(1) of the Act; and later it was picked-up for scrutiny through CASS for complete scrutiny. The AO notes in the assessment order that the assessee company is engaged in the business of distribution/sale of products of M/s. Swagelok company USA in Western, Central and Eastern India.Further the AO acknowledges that he has made inquiries before framing of the assessment order by issuing notice u/s 142(1) of the Act dated 31.01.2019, 20.09.2019 and 31.10.2019 and in that process had collected various details/documents. And the AO admits that pursuant to his notices/queries, the assessee had filed replies/documents which he had gone through and after scrutiny of the material available on the records, being satisfied, he accepted the return filed by the assessee. Thereafter, the Ld. PCIT issued a show cause notice dated 4. 11.01.2022 (page no. 62-63 of the P.B.) to the assessee conveying his desire to invoke his revisional jurisdiction u/s 263 of the Act. Pursuant to which, the assessee filed the reply dated 20.01.2022 (refer page no. 32 to 38 of the P.B). And not satisfied with the reply of the assessee, the Ld. PCIT passed the impugned order dated 10.03.2022 wherein he was pleased to set aside the assessment order dated 11.12.2019 and directed the AO to reframe/denovo the assessment order on the two issues raised by him. Aggrieved by the aforesaid action of the Ld. PCIT, the assessee is before us.
3 A.Y. 2017-18 Bombay Fluid Systems Components 5. We have heard both the parties and perused the records. Since the assessee has challenged the jurisdiction of the Ld. PCIT to pass the impugned order, let us first examine the scope of revisional jurisdiction u/s. 263 of the Act. For that, let us take the guidance of judicial precedence laid down by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the ld. CIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous and (ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above the order passed by the Assessing Officer can be termed as erroneous for the purpose of section 263 of the Act. It has to be borne in mind that even if the Ld. PCIT/CIT finds that the assessment order is erroneous, he cannot invoke the revisional jurisdiction u/s 263 of the Act without satisfying the requirement of second limb [i.e. the Ld. PCIT/CIT has to show that due to the erroneous assessment order, prejudice has been caused to the interest of revenue]. This essential requirement of law needs to be satisfied before the Ld PCIT/CIT invokes revisional jurisdiction. This 4 A.Y. 2017-18 Bombay Fluid Systems Components proposition of law has been laid down by the Hon'ble Supreme Court in the case of Malabar Industries (supra) wherein their Lordship’s held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the Assessing Officer. Further the Hon’ble Supreme Court held ‘that for invoking powers conferred by section 263 of the Act, the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue’. At this juncture, one has to understand what is prejudicial to the interest of revenue. Their Lordship explaining about this in the said judgment (Malabar supra) held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further held that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law. On the aforesaid principle of law laid by the Hon’ble Supreme 6. Court let us examine the validity of impugned action of the Ld. PCIT u/s 263 of the Act and adjudicate as to whether he had the requisite jurisdiction to invoke the same. We note that in order to invoke the revisional jurisdiction the Ld. PCIT has racked up two issues on which 5 A.Y. 2017-18 Bombay Fluid Systems Components he found fault with the action of AO while passing the assessment order, one (i) is regarding the special additional duty (SAD) of Rs.98,26,373/- which has been credited in the P & L account under the head “other income” which according to the Ld. PCIT was reduced in the computation of income which action of assessee was wrong, and resultantly it led to under-assessment of income. In this context, according to the Ld. PCIT, the AO failed to conduct any inquiries regarding the admissibility of deduction although this amount has accrued and assessee follows the mercantile system of accounting. The next (Second) issue is regarding expenditure of Rs.20.26 Lakhs which was debited on account of club membership & subscription expenses which we will deal separately (infra).
Assailing the action of Ld. PCIT to have invoked the revisional jurisdiction, the Ld. AR brought to our notice that both the issues have been inquired into by the AO. Therefore, according to Ld. AR assertion of the Ld. PCIT that both issues have not been inquired into by the AO is incorrect per-se; and in order to buttress this submission, the Ld. AR drew our attention to the notice of AO u/s 142(1) of the Act dated 31.10.2019, which is found placed at page no. 39 to 41 of the P.B wherein the question regarding the special additional duty (SAD) is seen asked at page no. 41 of the P.B. [after question no. 6 number it is wrongly numbered as one (1)]; and pursuant to the query, the assessee has answered the same by letter dated 01.11.219 which is found placed at page no. 42 to 44 of the P.B wherein the assessee has 6 A.Y. 2017-18 Bombay Fluid Systems Components given the details about the special additional duty (SAD) which has been received by the assessee. From perusal of the reply (refer page 43), we note that the assessee has brought to the notice of the AO that though the amount of Rs.98,26,373/- has been credited in the P & L account under the head “other income”, the same was not received and therefore not considered as ‘income“. And further it was brought to our notice that from the perusal of tax audit report at clause no. 13(e) the disclosure in respect of revenue recognition for SAD receivable is given as per the requirements of Income Computation & Disclosure Standard (ICDS). Here also it is mentioned that the amount of SAD received during the year (AY 2017-18) is Rs.1,05,92,772/- which has the effect of increase in the profit and the amount of Rs.98,26,373/- accrued in the books has the effect of decrease in the profit. Thus, it was brought to our notice that the net result is increase in profit in this assessment year by Rs.7,66,399/- which assessee had offered to tax.
Thus, it was brought to our notice that the SAD receivable has been shown as per the requirement of Income Computation of Disclosure Standard (ICDS) and accordingly an amount of SAD received during the year Rs.1,05,92,772/- has been offered for taxation and thus it has increased the profit [even though the amount of Rs.98,26,373/- has been credited in P & L account] to the tune of Rs.7,66,399/-. We also note that it was brought to the notice of the AO that the entire SAD outstanding as on 31.03.2017 has been received by the assessee in the AY 2019-20 and had been duly offered to tax and that the SAD refund the was extremely uncertain and indifferent. It 7 A.Y. 2017-18 Bombay Fluid Systems Components was brought to AO’s notice that the assessee company while importing goods had to give custom duty which includes special additional duty (SAD). Further it was also brought to the notice of the AO that this duty (SAD) is refundable on fulfilment of certain conditions; and one of the conditions for eligibility to claim refund SAD from the custom department is that amount which is refundable must be accounted for in the books of account (although it is uncertain). In view of this essential condition for refund, in its books, the assessee company had shown the amount as refundable in its balance-sheet which is actually outstanding in its accounts. It was pointed out by the Ld AR that the assessee duly offered the SAD refund as income when it is actually received and this system of accounting assessee has been consistently following from the AY2009-10 onwards and has been regularly accepted by the department which fact is evident from the assessment completed under scrutiny u/s 143(3) of the Act for AY 2014-15 & AY 2015-16 (refer copies of the assessment order for AY. 2014-15 & 2015-16). The Ld. AR drew our attention page no. 64 of the P.B wherein the details of the SAD actually received and offered to income tax and the action of the department has been given in the chart (infra): - AY SAD receivable for the SAD actually received & Income Tax Assessments year but not offered to offered to income tax accepted income tax 2009-10 51,29,004 143(1) 2010-11 61,10,863 26,17,464 143(1) 2011-12 61,56,001 71,42,223 143(1) 2012-13 79,30,064 40,68,318 143(1) 2013-14 84,29,792 72,40,850 Scrutiny u/s 143(3) 2014-15 77,50,000 77,91,992 Scrutiny u/s 143(1)
8 A.Y. 2017-18 Bombay Fluid Systems Components 2015-16 95,00,000 94,33,380 Scrutiny u/s 143(3) 2016-17 1,00,00,000 1,27,18,561 143(1) 2017-18 98,26,373 1,05,92,772 Scrutiny u/s 143(1)
According to the Ld. AR, since the AO has inquired into this 9. issue and since the assessee has been able to satisfy the AO in respect of the SAD, this issue cannot be racked up again by the Ld. PCIT without making a clear finding that AO’s action on this issue is unsustainable in law. Coming to the issue of club expense are concerned. The Ld. AR 10. drew our attention to the copy of notice of the AO dated 31.10.2019 page no. 39 to 41 of the P.B. And drew our attention to the page no. 41 wherein the question no. 4 the AO has clearly asked about the detail of the membership/subscription expenditure to the tune of Rs.20.26 lakhs along with supporting documents; and pursuant to the same, the assessee had filed reply dated 5.11.2019 wherein the assessee has given the details of membership subscription paid to the tune of Rs.20.26 Lakhs. It was also brought to our notice that the Ld. PCIT was wrong to assume/suggest that the tax auditor of the assessee has at column no. 21A has disclosed that the assessee has incurred personal expenditure in respect of the club expenses. And he drew our attention to the page no. 22 & 23 of the tax auditor report therein. We find that there is no such averment of the tax auditor to the effect that these expenses were personal expenditure. In this context, it was also brought to our notice that the assessee company is engaged in the 9 A.Y. 2017-18 Bombay Fluid Systems Components business of distributing of products of M/s. Swagelok USA in different part of the India and it is engaged in the trading activity of valves imported from USA. Therefore, delegates of USA company Swagelok holds client meeting with officials of assessee company and the nature of expenses in this regard can be seen to have nexus with the import/business of assessee and the amount of Rs.4,48,200/- is very small as compared to turnover of the assessee to the tune of Rs.74,40,91,674/- which comes to 0.06%, according to the Ld. AR such expenses incurred which is a necessity for business does not call for any disallowance u/s 37(1) of the Act as held by the Hon’ble Jurisdiction High Court in the case of CIT Vs. Infrastructure leasing and financial services Ltd. (69 taxman.com 20) (Bom). Per contra, the Ld. CIT-DR vehemently opposed the submission of the Ld. AR and submitted the AO failed to inquire into the issues pointed out by Ld. PCIT and if the AO had enquired properly into the same, he would not have allowed it. Therefore, the action of AO is erroneous as well as prejudicial to the revenue and therefore Ld. PCIT rightly interdicted the AO’s assessment order and he does not want us to interfere with the action of Ld. PCIT.
After having gone through the records and after hearing the Ld. AR of assessee and the Ld. CIT- DR, we note that the Ld. PCIT erred in assuming that the special additional duty (SAD) of Rs.98,26,373/- has accrued to the assessee during the year. This finding of the fact by 10 A.Y. 2017-18 Bombay Fluid Systems Components Ld PCIT cannot be accepted for the simple reason that the special additional duty (SAD) was not realisable in this assessment year because it was contingent in nature. Even though the assessee has made entries in the books regarding the SAD, no real income has accrued to the assessee company. It has been brought to our notice that in order to claim refund one of the essential condition was that the SAD amount which is refundable must be accounted for in the books of accounts even though it was uncertain. In order to satisfy this condition, the assessee has made entries of SAD refundable in the books and it is shown as actually outstanding in its accounts. We note that the assessee would be able realise this SAD refund only once the assessee has sold the imported goods/item in domestic market and charged the same to the VAT. Then only second condition will be satisfied for being eligible for the refund and thereafter only it will receive the SAD refund. Therefore, the amount of Rs.98,26,373/- has not accrued to the assessee as wrongly assumed by Ld. PCIT. We note that the Ld. PCIT has invoked the revisional jurisdiction on the wrong assumption that Rs.98,26,373/- (SAD refund) had accrued to the assessee and thus his invocation of revisional jurisdiction was fundamentally flawed. It is noted that the actual realization of SAD refund to the tune of Rs.98,26,273/- will only happen after satisfaction of both conditions as stated above. Further, we note that the assessee has in this assessment year even though has shown SAD of Rs.98,26,373/- as credited in the P & L account has actually received and offered to tax Rs.1,05,92,772/- [which means there is increase in 11 A.Y. 2017-18 Bombay Fluid Systems Components profit of Rs.7,76,399/- which has been offered to tax]. It has also been brought to our notice that the assessee company has paid total custom duty of Rs.7,80,87,738/-on imports of the goods and that the entire SAD outstanding as on 31.03.2017 (AY. 2017-18) has been received by the assessee in the AY. 2019-20 and offered to tax. We also note that the assessee has been regularly following this practice from AY 2009-10 by offering to tax on the SAD amount when it is actually received by it, which practice of assessee has been accepted by the department in earlier assessment years even in scrutiny assessment for AY. 2014-15 and AY 2015-16. Thus, we note that even by applying the principles of consistently there was no reason for the Ld. PCIT to have taken different view on the issue of SAD refund. Thus, we find force in the submission of the Ld. AR that the AO’s action of accepting the assessee’s consistent practice of recognition the SAD refund after conducting inquiry cannot have been held by Ld. PCIT to be erroneous as well as prejudicial to the revenue. Therefore, the Ld. PCIT’s impugned action on this issue is held to be without jurisdiction.
Coming to the next ground of fault i.e. club expenses to the tune of Rs.20.26 Lakhs. We note that this issues have already been looked into by the AO vide letter dated 31.10.2019 which is discernible from question raised by the AO as point no. 4 and the assessee having replied which is also seen from the reply dated 05.11.2019 (refer page no. 42 of the P.B.) Thus we note that the issue has also been inquired 12 A.Y. 2017-18 Bombay Fluid Systems Components into by the AO. Further we note that the assessee is into the business of import of goods/products from USA and sale of the same in the domestic market and the assessee is required to carry out client meeting at the clubs and therefore the expenses claimed by the assessee on club/subscription expenses have nexus to the business & is allowable expenses; and moreover we note that expenses claimed are very small when compared to the huge turnover of the assessee. And since the AO as noted (supra) has already looked into the club expenses, so the Ld. PCIT’s assertion that the AO has not inquired into about it is on wrong assumption of facts. And therefore, we are of the opinion that the Ld. PCIT has not rightly invoked the jurisdiction u/s 263 of the Act. And therefore, we hold that on both issues, the Ld PCIT has invoked revisional jurisdiction without satisfying the requisite jurisdiction, so we are inclined to quash it.