ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(1),, HYDERABAD vs. LYCOS INTERNET LIMITED,, HYDERABAD

We further note that in the case of the assessee, the details of the investment in shares of various subsidiaries as well as the other companies are given in Note (13) to the financial statement as under:

Thus, all these investments are in the foreign based subsidiaries and the dividend income, if any, is taxable and not exempt u/s 10(34) of the I.T. Act, 1961. Therefore, the disallowance to the extent of these investments in the foreign subsidiaries cannot be made u/s 14A of the I.T. Act, 1961. The only investment in the Indian company is made by the assessee in the preceding year and not during the year under consideration and therefore, when there is no dividend income for the year under consideration, the provisions of section 14A are not applicable. Hence, in view of the various judgments on this point

With regard to grounds of appeal No.5 & 6 are concerned, the Assessing Officer has made an addition on account of belated payment of employees’ contribution towards PF u/s 36(1)(va) r.w.s. 2(24)(x) of the I.T. Act, 1961. In appeal, the learned CIT (A) has deleted the said addition by following various decisions of the Hon'ble High Courts wherein it was held that if the assessee has made the payment on or before the due date of filing the return of income u/s 139(1), then the same is allowable u/s 43B of the Act.

We have heard the learned DR as well as the learned AR and considered the relevant material available on record. At the outset, we note that this issue is now covered by the judgment of the Hon'ble Supreme Court in the case of Checkmate Services (P) Ltd vs CIT (2022) 448 ITR 518. Thus, the issue now stands decided against the assessee by the Hon'ble Supreme Court in the case of Checkmate Services (P) vs. CIT (Supra), wherein it has Page 8 of 32 been held that the employees’ contribution to PF & ESI, if not remitted before the due date prescribed in the respective enactments, cannot be allowed as a deduction. Accordingly, the impugned order of the learned CIT (A) qua this issue is set aside and the order of the Assessing Officer is also restored.

The assessee company filed its return of income for the A.Y under consideration on 29/09/2012 admitting Nil income after claiming deduction u/s 10AA of the Act and after setting off brought forward depreciation loss. However, the assessee declared the book profit u/s 115JB of the Act at Rs.32,82,86,986/-. The assessment u/s 143(3) was completed on 29/03/2016 at a total income of Rs.3,37,52,244/- under the normal provisions of the Act and book profit at Rs.32,82,86,986/- u/s 115JB of the Act. Thereafter, on perusal of the assessment record, the learned Pr. CIT noted that the net profit as per P&L Account furnished in the annual report of the assessee company which stood at Rs.59,84,33,318/- whereas as per the P&L Account furnished in the return of income, the net profit is declared at Rs.32,82,86,986/-. The learned Pr. CIT further noted that from the fixed asset schedule as per the books of account, the assessee has assets in US Branch indicating the possibility that the variation in the net profit is due to exclusion of the profit of US Branch. Referring to Article 7 & 25 of the DTAA between India and USA, the Pr. CIT observed that the profit of the US Branch would be taxable in India and the assessee would be entitled to credit of taxes paid by the assessee in USA. However, there is no evidence of tax paid in USA and also the assessee has not claimed credit of such taxes. The learned Pr. CIT further observed that the assessment was completed u/s 143(3) of the Act without examining/verifying the above issue. Therefore, the order passed by the Assessing Officer without making inquiries or verification which should have been made is erroneous and prejudicial to the Page 12 of 32 interest of the Revenue. Accordingly, a show-cause notice u/s 263 of the Act, dated 20/12/2017 was issued by the learned Pr. CIT. The assessee filed a reply to the show-cause notice and questioned the jurisdiction of the learned Pr. CIT to invoke provisions of section 263 of the I.T. Act, 1961 when the Assessing Officer has duly carried out the inquiry by issuing notice u/s 142(1) of the Act which were duly replied by the assessee by furnishing the relevant record and details. It was contended by the assessee that the Assessing Officer was satisfied with the reply filed by the assessee and hence it is not a case of lack of inquiry on the part of the Assessing Officer. The learned Pr. CIT was not impressed with the reply of the assessee and passed the impugned order whereby the order of the Assessing Officer has been held as erroneous on account of lack of inquiry on the part of the Assessing Officer on the issue of discrepancy between the net profit as per P&L account forming part of the Annual Report of the assessee as well as P&L account filed along with return of income by the assessee for the year under consideration. Accordingly, the assessment order was set aside with the direction to the Assessing Officer to examine the discrepancies and assess the correct income by redoing the assessment afresh after affording opportunity of being heard to the assessee.

Before the Tribunal, the learned AR of the assessee has submitted that in the return of income, the assessee admitted nil income after claiming exemption u/s 10AA of the Act. The assessee also set off brought forward unabsorbed depreciation of Page 13 of 32 Rs.11,68,93,844/- and book profit u/s 115JB of the Act was admitted at Rs.32,82,86,986/-. During the scrutiny assessment u/s 143(3), the Assessing Officer has made various disallowances and computed the taxable income under the normal provisions of the Act at Rs.3,37,52,244/- and book profit as per MAT provisions for Rs.32,82,86,986/-. The assessee challenged the order of the Assessing Officer before the learned CIT (A) which was partly allowed vide order dated 23/06/2017 and the Revenue has filed an appeal against the order of the learned CIT (A) in . Thus, the learned AR has submitted that all the details and return of income was under the scrutiny assessment u/s 143(3) and further it was subjected to scrutiny by the learned CIT (A). He has referred the show-cause notice issued by the Assessing Officer u/s 142(1) of the Act dated 15/06/2015 and 06/07/2015 and submitted that the Assessing Officer has issued exhausted questionnaire and raised as many as 30 questions in one notice and 6 questions in another notice issued u/s 142(1) of the Act. He has further submitted that specific questions were raised by the Assessing Officer about the details of the addresses of all offices i.e. registered, corporate, factory site, branches etc., of the assessee company and reconciliation from revenue from operations as well as non-operating revenue which were duly explained and replied by the assessee. Thus, the learned AR has submitted that the learned Pr. CIT wrongly invoked the jurisdiction u/s 263 of the Act without appreciating the facts and circumstances of the case that the Assessing Officer has duly conducted an inquiry and only on satisfaction of the Page 14 of 32 reply filed by the assessee he has accepted the book profit u/s 115JB of the Act though various additions have been made in computation of income under the normal provisions of the Act which were challenged before the learned CIT (A) by the assessee. He has further contended that the assessment order passed by the Assessing Officer can be revised only after satisfying the twin conditions namely (i) the order of the Assessing Officer sought to be erroneous and (ii) it is prejudice to the interest of the Revenue. These conditions are mutually exclusive. He has further contended that during the course of assessement proceedings, the Assessing Officer has examined all the issues including the issue in question, taken by the learned Pr. CIT in the proceedings u/s 263 of the Act. Thus, the assessment order was passed by the Assessing Officer after due application of mind. The assessee explained the issue before the learned Pr. CIT, however, the same was rejected merely on the presumption that there was no inquiry by the Assessing Officer about the discrepancy between the net profit as per P&L Account forming part of Annual Report and schedule to profit & loss account of ITR-6. The Assessing Officer has issued a questionnaire regarding the taxability of income of the US Branch and the assessee explained the same. After considering the explanation of the assessee, the Assessing Officer has taken a view for not disturbing the book profit of the assessee. The learned AR has thus, contended that once the Assessing Officer has examined the return of income and financial statements filed before him, he need to record each and every aspect of the assessement proceedings and therefore, it cannot be Page 15 of 32 presumed that the order passed by the Assessing Officer is erroneous for want of inquiry. In support of his contentions, he has relied upon the decision of the Hon'ble Andhra Pradesh High Court in the case of Spectra Share & Scrips (P) Ltd vs. CIT (36 Taxmann.com 348) and submitted that the Hon'ble High Court has clarified that the Assessing Officer is not required to give detailed reasonings and once it is clear that there was application of mind by an inquiry, Commissioner merely because he entertained a different opinion in matter, cannot invok his power u/s 263 of the I.T. Act, 1961. He has also relied upon the decision of the Hon'ble Bombay High Court in the case of CIT vs. Development Credit Bank (196 Taxmann.com 329) as well as the decision of the Hon'ble Delhi High Court in the case of Income Tax Officer vs. D.G. Housing Project Ltd reported in 29 Taxmann.com 587. Thus, the learned AR has submitted that the order of the Assessing Officer cannot be held to be erroneous as he has duly applied his mind. The learned AR has further contended that since the relevant record and material was available before the Assessing Officer as well as before the learned Pr. CIT, therefore, setting aside the order of the Assessing Officer without examining the issue and conducting further inquiry to prove that the order of the Assessing Officer is erroneous is not sustainable in law.

On the other hand, the learned DR has submitted that the assessee has not disputed the discrepancies in the profit & loss account reported by the assessee in the return of income in comparison to the P&L Account forming part of the Annual Report

We have considered the rival submissions as well as the relevant material available on record. The learned Pr. CIT has invoked the provisions of section 263 of the I.T. Act, 1961, on the premises that there is a discrepancy in the net profit shown in the P&L Account forming part of the Annual Report in comparison to the P&L Account schedule to the ITR-6. The relevant reasons for invoking the provisions of section 263 are recorded in Para-2 of the impugned order: “2. On perusal of Return of Income and other financial statements filed by assessee company for the Asst. Year 2012-13, It seen that the net profit asper profit and loss account furnished in the Annual Report of the assessee company amounted to Rs.59,84,33,318/ whereas as per P&L Ac furnished in the Return of Income (Part A P&L) the net profit amounted to Rs.37 82,86.986/-. In the computation of taxable income, the net profit was taken as Rs.32,82,86,986/-. Book profit us115JB was also computed on the basis of P&L A/c furnished in the ROI It is seen that figures of all incomes credited (sales etc.) and expenses debited in the two P&L Account are different. Reasons for adopting lower figures are not ascertainable from the record. !t is seen from the fixed assets schedule as per books of account that the assessee has assets in US Branch, indicating the possibility that the variation in net

The assessee objected to the invoking the provisions of 263 by the learned Pr. CIT and filed a detailed reply/written submissions which are reproduced by the learned Pr. CIT in the impugned order. The written submission of the assessee are reproduced from page No.2 to 8 of the impugned order and therefore, 6 pages of the impugned order are nothing, but reproduction of written submissions filed by the assessee. The Pr. CIT has not dealt with the objections raised by the assessee in the written submission and reply to the show cause notice issued u/s 263 of the Act and set aside the order of the Assessing Officer on the grounds and reasons as stated in para 5 of the impugned order as under:

Thus, the Assessing Officer asked the assessee to file computation of total income statement including MAT computation and enclosures, copy of Annual Report, Audit Report, balance sheet, P&L Account and relevant schedules. All audit reports as applicable and prescribed under the IT Act such as 44AB, form 3CB, Form CEB etc., The detailed note on the business activities carried out during the year under consideration along with details and present addresses of all offices i.e. registered, corporate, factory site, branches etc., of the company. Further, the Assessing Officer has also issued a Page 23 of 32 questionnaire running into 30 questions and asked the assessee to furnish details of other operating revenue and non-operating income, details of forex income. The assessee has filed a reply as under:

Thereafter, the assessee has also furnished the relevant details and explanations in response to the notices issued u/s 142(1) of the I.T. Act, 1961. Even the comparative financial statements of the past years were also furnished by the assessee. Thus, all the records including the P&L Account forming part of the Annual Report as well as expenses in respect of the alleged US Branch were also furnished before the Assessing Officer. It is pertinent to note that the assessee is having various foreign subsidiaries including 100% subsidiaries in US and other countries, the details of which have already been reproduced in in para No.8 of this order. The subsidiaries of the assessee in US and other foreign countries are separate tax entities under the foreign tax jurisdiction and therefore, their income cannot be considered as income of the assessee for the purpose of income tax Act. However, the assessee may report the income of the 100% subsidiaries in the Annual Report for disclosure purpose and other compliances. Therefore, merely because the assessee is having an entity in the foreign country does not ipso fact liable to tax on the income, such entity assessable to tax in foreign jurisdiction. Further, the international transactions of the assessee were subject to transfer pricing proceedings and were found to be at Arms’ Length and therefore, it is apparent that the Assessing Officer has conducted a thorough inquiry on all these issues including the issue of the income of US entity reported in the consolidated and standalone financial statements as per of the annual report. Once all the relevant record was available before the Assessing Officer as well as before the Pr. CIT, then the Page 25 of 32 learned Pr. CIT ought to have given a conclusive findings as to how the discrepancy has resulted a loss of revenue falling in the ambit of prejudicial to the interest of Revenue. The learned Pr. CIT has not disputed that the income of the US based branch of the assessee is taxable in US and therefore, even if the said income is included in the income of the assessee, the assessee would get tax rebate as per the provisions of the Income Tax Act as well as DTAA between India and US.

Since the income of the assessee was assessed u/s 115JB of the I.T. Act, 1961, therefore, it is also required that the alleged discrepancy in the profit is liable to be adjusted as per the provisions of section 115JB of the Act. The learned Pr. CIT has not given any finding as to whether this discrepancy is liable to be added while computing the book profit u/s 115JB of the Act or not.

Once the Assessing Officer has conducted an inquiry, then the case does not fall in the category of complete lack of inquiry on the part of the Assessing Officer while passing the assessment order and therefore, the order of the Assessing Officer cannot be set aside on the ground of lack of inquiry. It is a settled proposition of law that when the Assessing Officer has conducted an inquiry and accepted the claim of the assessee, then it is not mandatory for the Assessing Officer to give a finding on each and every issue he has undertaken during the scrutiny proceedings. The Hon'ble jurisdictional High Court in the case of Spectra

Admittedly, the assessee had given full details of these transactions in its letter/reply dated 29.08.2008 to the Assessing Officers letter dated 04.08.2008, giving details of dates of acquisition of the shares in question and dates of sale of shares. As such this material was available before the Assessing Officer. In its reply dt. 09-03-2011 to the revised show cause notice issued by the respondent also, the appellant had enclosed the list of transactions in relation to the scrips of M/s. Amara Raja Battery, M/s. Reliance Industries, M/s. Gujarat NRE Coke and M/s. Andhra Sugars Limited contending that having purchased the shares of the said companies, it had retained them for periods ranging from 1 year 2 months to 3 years 6 months before selling them. The counsel for the appellants has taken us through the said statements/list of transactions.”

Therefore, merely because, the Assessing Officer has not given an elaborate reasoning and findings does not lead to the conclusion that the order of the Assessing Officer is erroneous for want of an inquiry. A similar view has been taken by the Hon'ble

It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, [2000] 243 ITR 83 / 109 Taxman 66 (SC), had observed that the phrase 'prejudicial to the interest of 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 interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue.

Therefore, once the Assessing Officer has adopted one of the courses permissible and available to him, and this has resulted in loss to the Revenue to which the learned Pr. CIT may not agree, the said order cannot be treated as an erroneous order prejudice to the interest of the Revenue unless the view taken by the Assessing Officer is unsustainable in law. In setting aside the matter, the learned Pr. CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and therefore, the order is erroneous. The setting aside the order for doing fresh exercise on the part of the Assessing Officer reveals that the Page 30 of 32 learned Pr. Cit was not sure about the correctness of the claim of the assessee and therefore, the learned Pr. CIT must be not sure about the correctness and erroneousness of the order passed by the Assessing Officer. Accordingly, in view of the facts and circumstances as discussed above, we are of the considered opinion that once the Assessing Officer has conducted an inquiry and the case of the assessee does not fall in the category of complete lack of inquiry, the learned Pr. CIT while passing the revision impugned order u/s 263 ought to have given a conclusive findings about the taxability of the income in India as well as the loss of revenue for not including the said income as part of the P&L declared in the ITR. Hence, the impugned order is not sustainable and liable to be quashed. We order accordingly.

In the result, appeal filed by the assessee is allowed.