M/S.COMBINED FOODS P. LTD,COCHIN vs. THE ACIT, COCHIN

Per CHANDRA POOJARI, AM:

This appeal of the assessee is directed against the order passed u/s. 263

of the Act by the Pr. CIT, Kochi dated 15/03/2017 and pertains to the

assessment year 2012-13.

manufacture of ice creams. For the assessment year 2012-13, the assessee filed

return of income admitting a total income of Rs.67,92,620/-. The assessment

u/s. 143(3) was completed vide order dated 23/03/2015, determining the total income at Rs.99,44,117/-. After going through the records, the CIT observed

that the assessment order passed by the Assessing Officer was erroneous in so

far as it was prejudicial to the interest of the revenue for the reasons mentioned

below:

Accordingly, the CIT issued notice u/s. 263 proposing for revision of assessment

u/s. 263 of the Act . The CIT was not satisfied with the reply of the assessee.

He observed as follows:

1) Disallowance u/s. 36(1)(iii)

Assessing Officer in the assessment order passed had not considered the

applicability of the provisions of section 36(1)(iii) in respect of interest

paid on borrowed funds in capital work-in-progress. It is seen from

records that Assessing Officer had not verified the claim and passed a

detailed speaking order on this issue. In response to the show cause

notice on this issue assessee contends that no loans were utilized during

the year for capital work-in-progress and hence disallowance U/s 36(1)(iii)

is not attracted. Since the AO had not verified the claims and passed a

speaking order on this issue, this issue is remanded to AO for verification of the claim and passing of a detailed speaking order in accordance with

law after affording due opportunity to the assessee.

2) Disallowance of expenses u/s. 14A A read_with Rule 8D

In the assessment order passed AO had omitted to examine the

applicability of section 14A r.w. rule 8D in respect of dividend income from

investments in equity shares. In response to the show cause notice on

this issue, assessee contends that no borrowed funds were utilized for

investment for earning tax free income. It was further stated that there

was no fresh investments during the year. Since the Assessing Officer had

not verified the details and passed a speaking order on this issue, this

issue is remanded to AO for denovo consideration and passing a speaking

order in accordance with law after affording due opportunity to the

assessee.

3) Income on account of lapsed liability of freezer deposit

It is seen from records that income on account of issue of taxability of

income on account of lapsed liability of freezer deposit of Rs. 29,72,034 /-

was not examined with reference to statutory provisions of actual cost as

per explanation 10 to Section 43(1) of IT Act. In reply to show cause

notice the assessee contends that 1TAT, Cochin Bench, Cochin in the

assessee's own appeal had deleted the addition towards the lapsed liability on freezer deposits. The applicability of Section 43(1) -

Explanation 10 had not been examined by AO. Therefore, this issue is

remitted to AO for considering the factual position and passing necessary

orders in accordance with law after affording due opportunity to the

assessee.

263 of the Act by the CIT.

the Income-tax Act seeks to remove the prejudice caused to the revenue by the

erroneous order passed by the Assessing Officer. It empowers the Commissioner

to initiate suo moto proceedings either where the Assessing Officer takes a

wrong decision without considering the materials available on record or he takes

a decision without making an enquiry into the matters, where such inquiry was

prima facie warranted. The Commissioner is well within his powers to treat an

order as erroneous on the ground that the Assessing Officer should have made

further inquiries before accepting the wrong claims made by the assessee. The

Assessing Officer cannot remain passive in the face of a claim, which calls for

further enquiry to know the genuineness of it. In other words, he must carry out investigation where the facts of the case so require and also decide the matter

judiciously on the basis of materials collected by him as also those produced by

the assessee before him. The Assessing Officer was statutorily required to make

the assessment under Section 143(3) after scrutiny and not in a summary

manner as contemplated by Sub-section (1) of Section 143. The Assessing

Officer is therefore, required to act fairly while accepting or rejecting the claim of

the assessee in cases of scrutiny assessments. The Assessing Officer should

protect the interests of the revenue and to see that no one dodged the revenue

and escaped without paying the legitimate tax. The Assessing Officer is not

expected to put blinkers on his eyes and mechanically accept what the assessee

claims before him. It is his duty to ascertain the truth of the facts stated and the

genuineness of the claims made in the return. The order passed by the Assessing

Officer becomes erroneous when an enquiry has not been made before

accepting the genuineness of the claim which resulted in loss of revenue.

5.1 In the present case, the Assessing Officer has not enquired into and no

proper efforts were made to find out the true position with reference to the issue

raised by the CIT. Without making any enquiry at all, the Assessing Officer

accepted the assessee’s claim. The failure on the part of the Assessing Officer to

make necessary enquiry rendered the assessment order erroneous which also

resulted in loss to the revenue. The CIT had observed in his order that the issue

is to be decided by the Assessing Officer after fresh examination. Hence, the order of the CIT cannot be held as erroneous. The CIT’s approach was correct.

If the CIT had recorded that it was an income not arising out of business, then

further enquiry by the Assessing Officer would have been influenced by that

observation. Further, CIT had only observed that no proper enquiry has been

made that resulted in erroneous order and further it resulted in loss of revenue.

Hence the Assessing Officer has to pass the order after hearing the assessee.

Therefore, the CIT exercised his power conferred u/s. 263 of the Act in setting

aside the assessment and remanded the case back to the file of the Assessing

Officer to make enquiry into the issue and decide the same. As such, the CIT

remitted the issue back to the file of the Assessing Officer for de novo

consideration.

5.2 Further, even before us the assessee has not explained the correct position

of law on this issue. Being so, we find no merit in the argument of the Ld. AR.

This ground of appeal of the assessee is rejected.

u/s. 36(1)(iii) of the Act.

21.1.2015 had asked for complete books of account with bills and

vouchers which were produced. It was submitted that the assessee filed detailed reply vide letter dated 19.2.2015 and further details called for

during hearing were furnished vide letters dated 23.2.2015 and

27.3.2015. In particular vide notice dated 21.1.2015, the AO had called

for an examined the details of all bank accounts, loans and after

examining all the records did not make any disallowance either under

section 36(1)(iii) or under section 14A. The Ld. AR submitted that the only

reason given by Commissioner of Income Tax in the revision order under

section 263 was that the AO had not passed a speaking order on the two

issues, the CIT had concluded that the AO had omitted to examine the

same. In this connection, the Ld. AR relied on the judgment of the Kolkota

High Court in the case of CIT vs J L Morrison (India) Ltd wherein it was

held as under:

“85. Whether the assessment order dated March 28, 2008, was passed with- out application of mind is basically a question of fact. The learned Tribunal has held that the assessment order was not passed without application of mind. The records of the assessment including the order-sheets go to show that appropriate enquiry was made and the assessee was heard from time to time. In deciding the question the court has to bear in mind the presumption in law laid down in section 114 clause (e) of the Evidence Act :

"that judicial and official acts have been regularly performed;"

7.1 Hence, it was submitted that the CIT was not correct in his conclusion that

the issues were not examined by the AO because there was no speaking order

on these issues. During the course of hearing before the CIT, it was submitted

that the assessee had furnished the details of the bank accounts. It was

explained that no fresh loans were taken during the year for the acquisition of

any assets and all the term loan accounts were continuing from the earlier year.

It was submitted that there was no disallowance u/s 36(1)(iii) even during the

earlier year as may be observed from the assessment order for AY 2011-12

enclosed. Thus, according to the Ld. AR, there was no error in the assessment

order warranting revision under section 263 of the Act.

gone through the case law cited before us. Section 36(1)(iii) reads as follows:

The deductions provided for in the following clause shall be allowed in respect of the matter dealt with therein, in computing referred to in section 28; (iii) the amount of interest paid in respect of capital borrowed for the purposes of the business or profession.”

9.1 With effect from 1/4/2003, the proviso was inserted by Finance Act,

2003,which reads as follows:

“Provided that any amount of the interest paid in respect of capital borrowings for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.”

9.2 As per the new proviso, the interest would not be allowable till the new

asset is brought to use. Such interest is to be capitalized. In other words, due to

the above proviso u/s.36(1)(iii) inserted with effect from 1/4/2004, applicable

from the assessment year 2004-05, interest is to be disallowed on money

borrowed for acquiring capital asset till the date on which the asset is brought to

use, even if it is for expansion of the existing business. In the present case, the

assessee claimed interest on borrowings. The contention of the assessee is that

the interest payable was liable for deduction. Any interest paid on borrowings

used for the purpose of expansion of existing business cannot be allowed. There

is no dispute that the assessee had borrowed funds used for setting up of a new capital asset. Being so, such interest cannot be allowed in view of the said

proviso to section 36(1)(iii) of the Act. In the present case, the issue is whether

interest payable on borrowed capital for setting up of capital asset till such time

it comes into commercial production is allowable as revenue expenditure u/s.

36(1)(iii) of the Act while computing the income of the assessee or to be treated

as capital expenditure to be added to the cost of asset. Section 43 of the Act

defines certain terms relevant to determination of income from profits and gains

of business or profession. Sub-section 1 of section 43 provides for fixing of

actual cost of asset. Explanation 8 to section 43 was added by Finance Act,

1986 w.e.f. 1/4/1974. The object of the said amendment as contained in the

Finance Bill, 1986 as it appears in 158 ITR (St.) 88 reads as under:

“Under the existing provisions of clause (1) of that section, ‘actual cost’ means the actual cost of the asset to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any person or authority. The proposed amendment seeks to clarify that any amount paid or payable as interest in connection with acquisition of an asset and relatable to a period after the asset is first put to use shall not form part and shall deemed never to have been formed part of the actual cost of the asset.”

9.3 A perusal of Explanation 8 of section 43(1) of the Act and the object for

which the same was inserted with retrospective effect shows that no interest

paid or payable by the assessee in connection with the acquisition of the asset

for any period after the asset is first put to use shall not form part of the actual

cost of the asset. The proposition in the present case is just reverse. The

natural consequences of Explanation 8 would be that in case of any expansion, interest paid or payable on loans raised in connection with the acquisition of an

asset before the same is first put to use shall form part of the actual cost of the

asset. Meaning thereby that it will be capitalized to be added to the cost of the

asset. Explanation 8 to section 43(1) of the Act was added with retrospective

effect from 1/4/1974. We find that Supreme Court in the case of Challapalli

Sugars Ltd. vs. CIT reported in 98 ITR 167 observed that the expression actual

cost under the Income-tax Act, 1922 was under consideration, which had not

been defined therein. An identical issue therein was as to whether interest paid

before commencement of production on the amount borrowed for the acquisition

and installation of plant and machinery has to be considered as part of the actual

cost of the assets. While referring to and relying on various principles and Rules

on accountancy prevailing in commerce and industries, the Supreme Court held

that correct method for determination of the cost of capital asset is to include all

expenditure necessary to bring such asset into existence and to put them in

working condition. In case money was borrowed by a newly started company in

the process of construction and erecting its plant, the interest incurred before

the commencement of production on such borrowed money can be capitalized

and added to the total cost of fixed assets which have been created as a result

of such expenditure and such rule of accountancy should be adopted for

determining the actual cost of the assets in the absence of any statutory

definition or other indication to the contrary. A perusal of Explanation 8 to

section 43(1) of the Act, referred to above, clearly shows that the same is nothing but reiteration of the principles laid down in M/s. Challapalli Sugars Ltd.

(supra). The expression does not make any distinction whether the asset is

acquired for setting up of an entirely new business or in the process of expansion

of its existing business. It merely provides for determination of actual cost of

asset on a date when the asset first is put to use. Unless an asset, which is being

acquired, starts generating income, it cannot be said that the same is being used

for the purpose of business. Once it is established that interest paid after asset is

put to use is not to be included in the actual cost of an asset. There would be

no alternate but to hold that the interest paid before the asset was first put to

use would be included in the actual cost thereof and is to be treated as capital

expenditure and not revenue in nature.

9.4 In view of the above discussion, we hold that the interest paid by the

assessee used for the purpose of expansion of existing business cannot be

allowed so as to claim deduction u/s. 36(1)(iii) of the I.T. Act. We do not find

any infirmity in the direction of the CIT given u/. 263 of the Act. Hence, this

ground of appeal of the assessee is rejected.

investments in mutual funds during the year and there was a reduction in the

investments as at 31.3.2012. It was also submitted that the investments were

made out own funds in the form of Capital and Reserves and the tax free investments were only 7% of the own funds. Thus the investments were out of

own funds in the form of capital and reserves. When the investment is made out

of own funds, disallowance u/s 14A is not attracted. The Ld. AR relied on the

following judgments:

10.1 Hence, according to the Ld. AR, there was no error in the assessment

order warranting revision under section 263 of the Act. It was submitted that on

the above both issues the assessing authority has taken one of the possible

views and the CIT has no power to interfere.

sufficient own funds to make investment in exempted income yielding

investment. In our opinion, it is the duty of the assessee to show the availability

of interest free funds to make investment. There should be sufficient interest

free funds available with the assessee. Since the assessee had not show

availability of interest free funds at the time of making investment and there was

no examination of the issue by the Assessing Officer, the CIT was right in

exercising jurisdiction u/s. 263 of the Act and directing the Assessing Officer to re-examine the issue. Since the issue involved u/s.14A is having tax effect and

there is loss of revenue, it cannot be said that CIT has committed error in

directing the Assessing Officer to re-examine the issue. Accordingly, this ground

of appeal of the assessee is rejected.

liability.

and gave reasons in paragraph 3.1 to 3.7 of the assessment order and made an

addition of Rs.29,72,034/-. Thus, it was submitted that the conclusion of the CIT

that the issue had not been examined was not correct. It was only in the order

u/s 263 that the CIT pointed out that the AO had failed to examine the

applicability of explanation 10 to section 43(1). It was submitted that the said

explanation was relating to considering the reimbursement received towards

acquisition of fixed assets and its impact on the cost/WDV of the assets and this

had nothing to do with the issue of lapsed liability for which notice u/s. 263 was

issued. According to the Ld. AR, in the revision proceedings u/s 263, CIT can

consider only those items for which notice was issued. The Ld. AR relied on the

following judgment:

CIT vs Ashish Rajpal (320 ITR 674) (Delhi)

14.1 Further, it was submitted that explanation 10 to section 43(1) was

attracted only when a portion of the cost of an asset acquired by the assesse

had been met directly or indirectly by the Central Government or State

Government or any authority established under any law in the form of a subsidy

or grant or reimbursement. According to the Ld. AR, the freezer deposit

collected by the assessee from the dealers represent the liability of the assessee

and the same cannot be considered as subsidy for the acquisition

of freezers. The Ld. AR relied on the decision of the co-ordinate bench in the

case of Acumen Capital Market Ltd vs DCIT ( 163 ITD 633) where it was held as

follows:

“6.7 Section 263 is attracted only if order of assessing officer is erroneous in so far asit is prejudicial to the interest of the revenue. Thus, if one of the twin conditions namely; (i) the assessment order is erroneous and (ii) prejudicial to the interest of revenue, is not satisfied, the CIT does not have power to exercise his revisionary powers u/s 263 of the Act. In the instant case, as mentioned earlier, on examination of facts, we find there is no error in the assessment order for the CFT to invoke his powers u/s 263 of the Act, hence, we quash the same. It is ordered accordingly.”

In the light of the above arguments, it was prayed that the order of the CIT u/s

263 be quashed.

a similar issue came up for consideration before this Tribunal in assessee’s own case alongwith others in ITA Nos. 73-79/Coch/2014 and vide order dated

25/2014, it was held as under:

“4. We have considered the rival submissions on either side and relevant material on record. The issue arises is whether the deposits in respect of the freezer has to be considered as income of the assessee or not. As rightly submitted by the Ld. AR of the assessee that this issue was considered by the Tribunal in one of the assessees for the earlier assessment year and found that such deposits cannot be considered as income of the assessee. For the sake of convenience, we extract below the order dated 08.08.2012 passed by the Tribunal in the case of M/s. Kreem Foods (P) Ltd. In ITA No. 597/Coch/2010 relating to assessment year 2007-08:-

“3. At the time of hearing, the Ld. Counsel for the assessee submitted a copy of the order dated 25-05-2012 passed by this Bench in the case of Jojo Frozen Food (P) Ltd. and Cream Packs (P) Ltd. in I.T.A. Nos. 655 & 654/Coch/2010 wherein the Tribunal has considered an identical issue and decided the same in favour of the assessee. For the sake of convenience, we extract below the operative portion of the said order in respect of the above said issue.

“6. We have considered the rival submissions and carefully perused the record. We have also gone through the copy of the order passed by the co-ordinate bench of the Tribunal in the case of High Range Foods (P) Ltd, referred supra. In respect of the first issue, i.e., Whether the deposits received from the dealers can be considered as income of the assessee, the Tribunal has observed as under.

“The assessee received Deposit for the supply of freezer from the concerned vendors. The freezers are required to safe keep the edible ice-creams. They are required for the purpose of business. The small vendors may not be inclined to purchase the freezers as they are not affordable to them considering their status. This made the assessee company to supply freezer on the receipt of fixed deposit and the compensation of the spread-over period. They are attached with a liability. The accrual comes only on termination of agreement. The business necessity requires cordial relationship with vendors. The assessee cannot treat these two amounts as receipts in the nature of income unless the so-called agreement terminated. In other words it is not a debt owned by the assessee. Hence, under the above facts and circumstances of the case, this issue to be decided in favour of the assessee by setting aside the orders of the authorities.

Besides the assessee never treated this as income in the books. The assessee consistently holding it so as the amount attached with a liability to refund. The assessee never admitted this amount as income in the books. Only accrued income arose to the assessee during the relevant previous year also can be brought to tax under the Income-tax provisions which is a settled law. In other words, there must be a debt owed to the assessee and until this is created in favour of the assessee as a debt due to the assessee, it cannot be said as income accrued. Hence, the decision relied by the Jr. D.R. in the case of CIT vs. T.V. Sundaram Iyengar and Sons cited supra, is clearly distinguishable on facts. In that case, assessee itself admitted this as income as per the book entries. Hence, it is distinguishable.

The decision relied by the ld. counsel for the assessee in the case of CIT vs. Realest Builders and Services Ltd. – 307 ITR 202 (SC) in addition to the following cases –

(a) Siddheswar Sahakari Sakhar Karkhana Ltd. vs. CIT & Others – 270 ITR 1 (SC);

(b) Bharat Petroleum Corporation Ltd. vs. CIT – 202 ITR 492 (Cal).

(c) Sugauli Sugar Works (Impugned) Ltd. – 236 ITR 518 (SC);

(d) Star India P. Ltd. vs. Addl. CIT – 311 ITR (ST) 235 (Mumbai).

(e) Govind Prasad Prabhu Nath – 171 ITR 417 (All.);

(f) Hindustan Housing and Land Development Trust Ltd. – 161 ITR 524 (SC);

(g) Ace Builders Pvt. Ltd. vs. CIT – 225 ITR 746 (SC);

(h) Mantra Tanta Yantra Vigyan vs. CIT – 300 ITR 140 (Raj.); and (i) Guardian Industries Corpn. vs. Assistant Director of Income- tax – 7 DTR 594 (Del.).

are also supports the plea of the assessee. The accrual has been dealt with in the relied judgments. Hence, under the given set of facts and circumstances, we by relying on the above decisions set aside the orders of the authorities and allow this ground of the assessee as it cannot be treated as income for the year relevant under appeal.”

16.1 In view of the above order of the Tribunal, to that extent, this issue is

covered in favour of the assessee.

16.2 However, there was no issue before any of the authorities on earlier

occasion with reference to applicability of Explanation 10 to section 43(1) of the

I.T. Act. Being so, the CIT was right in exercising jurisdiction u/s. 263 and

directing the Assessing Officer to consider the applicability of Explanation 10 to

section 43(1) of the Act. Thus, this ground of appeal of the assessee is rejected.

sd/- sd/- (GEORGE GEORGE K.) ( CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 27th December, 2018 GJ Copy to: 1. M/s. Combined Foods Private Limited, 28/3030, Elamkulam, Cheruparambath Road, Kadavanthara, Kochi-682 020. 2. The Pr. Commissioner of Income-tax, Kochi. 3. D.R., I.T.A.T., Cochin Bench, Cochin. 4. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin