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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: JUSTICE (RETD.) SHRI C.V. BHADANG & SHRI B.R. BASKARAN
O R D E R PER B.R. BASKARAN, A.M :
The assessee has filed this appeal challenging the revision order dt.26-03-2024 passed by the Ld. Principal Commissioner of Income Tax (Central), Mumbai-1 [„Ld. PCIT‟] and it relates toAssessment Year (AY.) 2017-18. In this appeal, the assessee is challenging the validity of revision order passed by the Ld.PCIT u/s. 263 of the Income Tax Act, 1961 („the Act‟).
The assessee was earlier known as „Essar Oil Limited‟. It is running an oil refinery. The original assessment of the year under consideration was completed by the AO on 30-09-2021 u/s.143(3) of the Act. Upon examination of the assessment record, the Ld PCIT noticed that the assessee has credited a sum of Rs.377.35 croresin the Profit & Loss Account with the narration “Gain on extinguishment of lease agreement”. However, the assessee did not offer the said amount for taxation, i.e., while computing total income, the above said amount was reduced from the Net profit. The Ld.PCIT took the view that the above said amount should have been offered as business income by the assessee. The Ld PCIT took the view that the AOhas failed to examine the same and hence theimpugnedassessment order is renderederroneous and prejudicial to the interests of the Revenue. Accordingly, he initiated the revision proceedings u/s. 263 of the Act.
Before the Ld.PCIT, the assessee submitted that the AO had made due enquiries about the adjustments made by the assessee and he has accepted the same. Accordingly, it was contended that the assessment order cannot be termed as „erroneous and prejudicial to the interest of the Revenue‟. However, the Ld.PCIT did not agree with the above said contentions of the assessee. He held that the AO has passed the assessment order without making due enquiries and has allowed the relief without making enquires into the above said claim. Accordingly, by placing reliance on Explanation-2 to section 263 of the Actof the Act, the Ld.PCIT held that the assessment order is rendered erroneous and prejudicial to the interest of the Revenue. Accordingly, he set aside the assessment order passed by the AO u/s.143(3) of the Act and restored the same to the file of the AO with a direction to complete the assessment denovo, after conducting due enquiries with regard to the issue discussed above. The assessee is aggrieved.
The Ld.AR submitted that the assessee was having “long term take or pay arrangement” pertaining to terminal facilities of the company (Tank storage facilities) with Vadinar Oil Terminal Ltd (VOTL) and the said arrangement was calssified as “financial lease” with effect from 1 April 2016 in the books of accounts as per Ind AS-17 – Appendix C. A change in the remaining term of the arrangement on 30 March 2017 has resulted in reclassification of the arrangement from finance lease to operating lease as per requirement of Ind AS. Accordingly, the assessee had to make certain accounting adjustments in the Books of Account, but the same did not affect the amount of deduction claimed by the assessee towards Tank storage charges. Hence, the above said accounting adjustments did not impact the total income computed by the assessee. Accordingly, the assessee eliminated the accounting adjustments from the Net profit while computing total income and claimed deduction of Rs.956.69 crores as “Product, Crude and intermediate material handling charges”.
The Ld.AR further submitted that the Ld PCIT was not correct in observing that the AO did not conduct proper enquiries on this issue. He submitted that the AO has raised a specific query in this regard in the notice dt. 16-09-2021 issued by him u/s. 142(1) of the Act. The specific query asked by the AO reads as under:-
“As per Note to financial statement 3E-modification in terms of lease asset, derecognised and the resultant loss charge to P/L a/c. Furnish the details of such loss with amount of the same. Explain why such loss should not be treated as capital loss and disallowed from P/L account”.
The Ld A.R submitted that, in response to the above said query, the assessee has furnished a detailed reply specifically stating that the net effect of the entries was „Zero‟. He further submitted that the AO has considered the reply given by the assessee and thereafter passed the order accepting the explanations of the assessee. Accordingly, he contended that the AO has allowed the claim after proper application of mind and hence, it cannot be said that the AO did not conduct due enquiries. The Ld.AR further submitted that it is the Ld PCIT, who did not appreciate the facts properly. Accordingly, he contended that the assessment order cannot be termed as „erroneous and prejudicial to the interest of the Revenue‟.
On the contrary, the Ld.DR, submitted that the assessee has credited the Profit & Loss Account with a sum of Rs.377.35 crores, but did not offer the same to tax i.e., the assessee deducted the above said amount from the net profit while computing the total income. Even though the assessee claims that it had furnished the details relating to adjustment made on account of conversion of financial lease into operating lease, it can be noticed that the AO did not examine those details, particularly the terms and conditions relating to a financial lease, operating lease etc. Hence, the Ld PCIT has rightly held that the AO did not conduct due enquiries. Further the AO has allowed deduction of above said income from the Net profit without making any enquiry and the AO has simply accepted the explanation given by the assessee. Accordingly, the Ld D.R submitted that there was no application of mind on the part of the AO and hence the impugned revision order passed by the Ld.PCIT does not call for any interference.
We heard rival contentions and perused the record. The scope of revision proceedings initiated under section 263 of the Act was examined by Hon'ble Bombay High Court, in the case of Grasim Industries Ltd. V CIT (321 ITR 92) and following the law laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, it was held as under:- “Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the 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, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous
in so far as it is prejudicial to the interests of the Revenue”. This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer” and “it is only when an order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interests of the Revenue”, the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court (head note) : “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 Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer 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 Income-tax Officer is unsustainable in law.” The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.” The principles laid down by the courts are that the Learned CIT cannot invoke his powers of revision under section 263 if the Assessing Officer has conducted enquiries and applied his mind and has taken a possible view of the matter. The consideration of the Commissioner as to whether an order is erroneous in so far it is prejudicial to the interests of Revenue must be based on materials on record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to start fishing and roving enquiries in matters or orders which are already concluded.
We shall now examine the facts prevailing in the instant case. We notice that the Ld PCIT was of the view that the amount of Rs.377.35 crores deducted by the assessee from the Net profit while computing total income was not correct, since it has got direct link with the business of the assessee. However, the assessee has explained that it was constrained to pass certain accounting entries in order to comply with Ind-AS requirements, i.e., for converting the financial lease into Operating lease. It was submitted that net effect of those adjustments did not result in making of any additional claim, i.e., those adjustments did not affect the computation of total income.
Though the Ld.PCIT observes that the AO did not examine the issue of deducting the income of Rs.377.35 crores, yet we notice that the AO has raised a specific query on the issue of loss and it reads as under:- “As per Note to financial statement 3E-modification in terms of lease asset, derecognised and the resultant loss charge to P/L a/c. Furnish the details of such loss with amount of the same. Explain why such loss should not be treated as capital loss and disallowed from P/L account”. It can be seen that the AO has raised this query on the basis of a Note given in the financial statement, which mentions about amount de-recognised and the resultant loss charged to P & L Account. In response to the query, we notice that the assessee has given detailed explanations. From the explanations given by the assessee, we notice that the assessee had debited/credited the P & L account with the following items:-
DEBIT TO P & L ACCOUNT:- Depreciation on Assets 239.66 crores Finance cost on account of lease 1,084.22 crores Forex Loss debited to Other income 10.16 crores ------------------- 1,334.04 crores Less:- CREDIT TO P & L ACCOUNT: - Gain on extinguishment of lease Arrangement 377.35 crores ------------------ Net Debit 956.69 crores ============ If the assessee was not required to convert the financial lease into operating lease, the net expenditure claimed by the assessee would be Rs.956.69 crores only. Since the assessee was required to convert the financial lease into operating lease, the assessee has removed the above said claims (debit items) as well as the Gain on extinguishment of lease arrangement (credit item) from the net profit, while computing the total income under the Income tax Act. Instead, the assessee has claimed the amount of Rs.956.69 crores as “VOTL product, crude and intermediate material handling charges”. Hence, the net amount claimed by the assessee as deduction from the net profit was only Rs.956.69 crores only. Hence, the adjustment made by the assessee is tax neutral. We notice that the Ld PCIT did not object to the disallowance of depreciation, finance cost, forex loss aggregating to Rs.1,334.04 crores, but was concerned with the reduction of extinguishment gain of Rs.377.34 crores only. As rightly pointed out by Ld A.R, all these adjustments made by the assessee are part of same transactions only and hence, it was not proper on the part of Ld PCIT to pick up only credit entries ignoring the debit entries. Accordingly, we are of the view that the Ld PCIT has not properly appreciated the adjustments made by the assessee.
We noticed that the assessing officer has raised a specific query with regard to the lease transactions and the assessee has given a detailed reply, specifically mentioning that the net effect of said accounting adjustments is ZERO. The assessee has also furnished a table containing the adjustments made and we have analysed the same in the earlier paragraphs. We noticed that the net claim for deduction was Rs.956.69 crores, even if the accounting adjustments were not made. Hence, it cannot be said that the AO did not make proper enquiries. At this stage, we may gainfully refer to the decision rendered by the Hon‟ble Bombay High Court in the case of Gabriel India Ltd (203 ITR 108), wherein it was observed as under:-
“From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an income tax officer acting in accordance with the law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the Income tax officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income tax officer. That would not vest theCommissioner with power to examine the accounts and determine the income himself at a higher figure. It is because the Income tax officer has exercised the quasi judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.... There must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed”
Hence, it cannot be said that the AO did not apply his mind, merely because he did not discuss about this issue in the assessment order.
The settled position of law is that the revision proceeding u/s 263 of the Act can be initiated by Ld PCIT only if both the conditions mentioned in sec.263, viz., (a) the assessment order is erroneous and (b) it is prejudicial to the interests of revenue are satisfied. The facts surrounding the issue under consideration would show that the net effect of accounting adjustments made by the assessee did not result in either increasing the quantum of deduction or reducing the quantum of income. Further, we noticed that the AO has made specific enquiries with regard to this issue and has accepted the detailed explanations given by the assessee. Accordingly, we are of the view that the Ld PCIT was not justified in holding the assessment order as erroneous and prejudicial to the interests of revenue.
Accordingly, we set aside the impugned revision order passed by Ld PCIT.
In the result, the appeal filed by the assessee is allowed.