BHANDARI ASSOCIATES,PUNE vs. PR. COMMISSIONER OF INCOME TAX 2, PUNE, PUNE

The assessee in response to the same submitted that it has filed all the requisite details during the course of assessment proceedings by giving the name, PAN, amount and addresses of all the parties. The assessee has also provided ledger extract of parties from whom loan is taken and outstanding at the year end along with bank statement. Confirmation from majority of the parties were also field. Further, the assessee had also given the details of loan repayment during the year such as name, PAN, amount and addresses. It was further submitted that after completion of the assessment on the basis of objections raised by the internal audit party the assessee has filed the requisite details. Thereafter, in response to notice u/s 133(6) of the Act, the assessee has also filed all the details before the Assessing Officer. Therefore, when the assessee has supplied full details regarding the unsecured loans, the revisionary proceedings should be dropped.

However, the Ld. PCIT was not satisfied with the arguments advanced by the assessee. According to him, despite receipt of incomplete information relating to unsecured loans, the Assessing Officer accepted the return of income without any adverse inference. He did not mention any details of queries or the assessee’s response on this issue. The documents provided on record by the Assessing Officer are grossly insufficient to draw a positive inference about the issue under consideration. He noted that the assessment order also reveals that no third party inquiry in connection with this issue was made by the Assessing Officer. The Assessing Officer passed the order u/s 143(3) without due application of mind. He noted that even though the case was selected for complete scrutiny on the issue of unsecured loans, however, the Assessing Officer has not properly addressed the issue of creditworthiness of lenders and genuineness of the transactions. He noted that the essential documents such as bank statements, ledger accounts or ITRs of the lenders are not available. The additional documents submitted by the assessee during the revisionary proceedings convinced about the erroneous nature of the decision of the Assessing Officer. In view of the above and relying on various decisions, the Ld. PCIT held the order passed by the Assessing Officer erroneous and prejudicial to the interest of Revenue for which he set aside the order of the Assessing Officer to his file for framing fresh assessment in respect of the issue of unsecured loans.

The Ld. Counsel for the assessee submitted that when the case was selected for complete scrutiny to verify the claim of unsecured loans and the assessee has submitted all the documents that were called for to justify the genuineness of the transaction and creditworthiness of the parties who have extended the unsecured loans and the Assessing Officer after making necessary enquiries had passed the order u/s 143(3) by accepting the returned income, therefore, under these circumstances, it cannot be said that the Assessing Officer has passed the order in a haste and without application of mind. For the above proposition, he relied on the following decisions: a. Amrik Singh V. ITO [2003] 127 Taxman 87 (Chd.)(Mag.) b. Baljees V. Asstt. CIT [2003] 127 Taxman 150 (Chd.)(Mag.) c. Hariyana State Co-operative Supply & Marketing Federation Ltd. v. DCIT 90 ITD 551(Chd.) d. Ashok Kumar Parasramka v. ACIT 65 ITD 1(Cal.) e. Micromatic Grinding Technologies Ltd. Formerly known as (Parishudh Saadhan Yantra) v. Addl. CIT 172 Taxation 35 (Del-Trib) f. CIT v. Giridharilal 258 ITR 331

The Ld. Counsel for the assessee referring to pages 445 to 704 of the paper book-II submitted that the assessee has duly submitted the complete details in respect of unsecured loans of Rs.36,44,08,934/- such as detailed chart of unsecured loans along with confirmations and the bank statements which are crucial in proving the genuineness and creditworthiness of the unsecured loans during the course of assessment proceedings and the Assessing Officer has verified the same at the time of assessment proceedings. Further, after completion of scrutiny assessment, objections by the internal audit party were raised, to which the assessee has also replied and thereafter in response to notice u/s 133(6) of the Act the assessee has again substantiated the unsecured loan creditors.

Referring to pages from 391 and 384 of the paper book, the Ld. Cousnel for the assessee submitted that both the communications were made to the assessee after obtaining the approval from the PCIT-2. Therefore, the revision based upon same set of facts after making extensive enquiry and verification of documentary evidences and explanations furnished by the assessee is bad in law. For the above proposition, he relied on the following decisions: a. CIT vs Hastings Properties 253 ITR 124 b. National Plastic and Allied Industries vs DCIT 67 TTJ 824 c. Mool Raj Singh and others vs ITO 63 TTJ 211 d. CIT vs Smt. Nirmal Anand 245 ITR 836 e. Jay Commercial Ltd vs CIT 66 TTJ 731 f. Hycron India vs ACIT 82 TTJ 450

The Ld. Counsel for the assessee submitted that the Ld. PCIT has completely ignored the fact that the Assessing Officer has made proper and adequate enquiries and the assessee had given proper responses which were duly supported by evidence and it was only after considering these evidences and responses that the Assessing Officer had completed the assessment. Mere stating by the Ld. PCIT that inadequate enquiry was made by the Assessing Officer would not by itself give occasion to the Ld. PCIT to pass order u/s 263 merely based on difference of opinion. He submitted that there is a distinction between "lack of inquiry" and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself give occasion to the Ld. PCIT to pass order u/s 263 of the Act. For the above proposition, he relied on the decision of Hon'ble Delhi High Court in case of CIT vs. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Delhi).

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. PCIT and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case passed the order u/s 143(3) of the Act on 07.04.2021 accepting the returned income. We find the Ld. PCIT on examination of the record noticed that the case was selected for complete scrutiny on three issues. The third issue was the unsecured loans and the assessee has taken unsecured loan of Rs.36,44,08,934/- during the year which appeared in the Balance Sheet. However, the Assessing Officer, without obtaining complete information, accepted the unsecured loans. Therefore, the order has become erroneous and prejudicial to the interest of Revenue for which he set aside the order to the file of the Assessing Officer with a direction to frame the order afresh in respect of unsecured loans. It is the submission of the Ld. Counsel for the assessee that the assessee has filed the requisite details as asked by the Assessing Officer from time to time and the Assessing Officer on the basis of such documents completed the assessment accepting the returned income. Further the assessee has also replied to the queries raised on the basis of internal audit objections. Further the assessee also filed various details in respect of unsecured loans in response to notice u/s 133(6) of the Act which was issued on the basis of audit objections and such letter was issued after obtaining the approval of the PCIT-2. It is his submission that since the Assessing Officer has raised the queries during assessment proceedings which were answered and responded by the assessee, therefore, it cannot be said that no mind has been applied by the Assessing Officer. It is his submission that record includes all the documents available in the record of the department when the PCIT examined the same. It is also his submission that if there was any enquiry, even inadequate, that would not by itself give occasion to the PCIT to pass order u/s 263 of the Act.

We find some force in the arguments of the Ld. Counsel for the assessee. We find the Assessing Officer during the course of assessment proceedings has issued the following queries to the assessee:

We find the assessee in response to the said notice has submitted various details, copy of which is placed at page 374 of the paper book. We find as per para 1 of the said letter the assessee has enclosed the following details: “1. Details of person from whom unsecured loan taken during year above Rs.25 lakh and outstanding as on 31/03/2018 along with Name, PAN and Address is enclosed as (Annexure-1).”

A perusal of the paper book shows that the assessee has filed the bank statements of the loan creditors, copies of which are placed at pages 201 to 279 of the paper book. The confirmations obtained from the various unsecured loan creditors are placed at pages 280 to 371 of the paper book. Similarly, the copies of income tax returns of the loan creditors are placed at pages 687 to 704 of the paper book.

On a pointed query by the Bench at the time of hearing as to what has happened in the proceedings subsequent to the order was set aside by the Ld. PCIT, the Ld. Counsel for the assessee filed a copy of the assessment order dated 24.03.2025 passed u/s 143(3) r.w.s. 263 r.w.s. 144B of the Act wherein out of an amount of Rs.36,44,08,934/-, the Assessing Officer has restricted the addition to Rs.1,81,50,000/- and the balance amount was deleted by the Assessing Officer.

We find after completion of the original assessment u/s 143(3) notice u/s 133(6) of the Act was issued to the assessee on the basis of internal audit party objections, copy of which is placed at pages 391 and 392 of the paper book. A perusal of the same shows that it was issued with prior approval of the PCIT. We find the assessee in response to the same filed the requisite details. Again the Assessing Officer has issued a notice to the assessee on 01.02.2023 asking to furnish certain details in respect of unsecured loans on the basis of objections raised by the internal audit party which read as under:

We find the assessee responded to the said notice and filed the requisite details and no query was raised thereafter. A perusal of the above chronology of events shows that the assessee not only filed the requisite details during the course of assessment proceedings but also has filed various other details subsequent to the assessment proceedings in response to notice issued by the Assessing Officer on the basis of internal audit party’s objections in respect of unsecured loans. Under these circumstances we have to see as to whether the revisionary proceedings can be initiated by the Ld. PCIT when the Assessing Officer has applied his mind and considering the various submissions made by the assessee from time to time has completed the assessment. In our opinion, the Ld. PCIT who initiated 263 proceedings on the basis of examination of the assessment record has to consider all the record available.

We find the word ‘record’ as per section 263 of the Act is defined as "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the [Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or] Commissioner.

We find Hon’ble Madras High Court in the case of CIT vs. K. Ramachandran (supra) has observed as under: “6. By the Finance Act, 1988, an Explanation was substituted w.e.f. 1st June, 1988, to Section 263 of the Act. The Explanation was further amended by the Finance Act, 1989, and the definition of the term "record" was explained. It has been provided in the Explanation that "record" shall include and shall deemed always to have included all records relating to any proceeding under the Act available at the time of the examination by the CIT. The apex Court further made it clear that it could not be said that the correct and settled legal position, with respect to the meaning of the word "record" would mean the record which was available to the ITO at the time of passing of the assessment order, but would include the records available with the CIT at the time of passing of the order by the CIT.”

We find Hon’ble Punjab & Haryana High Court in the case of CIT vs. Unique Autofelts (P.) Ltd. (2009) 30 DTR 231 (P&H) has observed as under: “From the finding of the Tribunal, it is clear that the assessee had given proper explanation by filing the necessary confirmations. In view of such a finding, the Tribunal rightly held that power under s. 263 of the Act could be exercised where view taken by an AO was erroneous. While exercising such power, the CIT was bound to take into account all relevant facts. If order invoking the said power proceeds on an erroneous assumption, the same could be set aside by the Tribunal. Finding of the Tribunal is not shown to be perverse. No substantial question of law arises.”

We find Hon’ble Bombay High Court in the case of CIT vs. Fine Jewellery (India) Ltd. (supra) has held that if a query is raised during the course of assessment proceedings which was answered and responded to by the assessee, then the mere fact that it is not dealt with in the assessment order would not lead to a conclusion that no mind had been applied to it and that would not by itself lead to the conclusion that the order of the Assessing Officer called for interference and revision. The relevant observations of Hon’ble High Court read as under:

The grievance of the Revenue is that the Assessment Order dated 24.12.2008 does not reflect the due consideration of the respondent's claim that an amount of Rs.2.94 crores (less Rs.17.98 lakhs which has been considered) was not to be treated as capital in nature. In view of the above it is submitted that the impugned order is unsustainable.

We find that the impugned order of the Tribunal does record the fact that specific queries were made during the Assessment proceedings with regard to details of expenditure claimed under the head “miscellaneous expenses” aggregating to Rs.2.94 crores. The respondent-assessee had responded to the same and on consideration of response of the respondent-assessee, the Assessing Officer held that of an amount of Rs.17.98 lakhs incurred on account of repairs and maintenance out of Rs.2.94 cores is capital expenditure. This itself would be indication of application of mind by the Assessing Officer while passing the impugned order. The fact that the assessment order itself does not contain any discussion with regard to the balance amount of expenditure of Rs.1.76 crores i.e. Rs.2.94 crores less Rs.17.98 lakhs claimed as revenue expenditure would not by itself indicate non application of mind to this issue by the Assessing Officer in view of specific queries made during the assessment proceedings and the Respondent- assessee's response to it. In fact this Court in the case of “Idea Cellular Ltd. Vs. Deputy Commissioner of Income Tax & Ors., [(2008) 301 ITR 407 (Bom.)]” has held that if a query is raised during assessment proceedings and responded to by the Assessee, the mere fact that it is not dealt with in the Assessment Order would not lead to a conclusion that no mind had been applied to it.

Moreover, from the nature of expenditure as explained by the petitioner to the Assessing Officer during the assessment proceedings itself indicates that the view that the same were in the realm of revenue expenditure, is a possible view. Therefore, we find no fault in the impugned order having followed the binding decision of the Supreme Court in the case of Max India Ltd.”(supra), while allowing the appeal before it.

Similar view has been taken by Hon’ble Delhi High Court in the case of CIT vs. Vikas Polymers (supra).

We find Hon’ble Punjab & Haryana High Court in the case of CIT vs. Sohana Woollen Mills (2008) 296 ITR 238 (P&H) has held that reply filed to audit objections has to be considered as part and parcel of record as per clause (b) of explanation 1 to section 263 and merely on the basis of audit objections, proceedings u/s 263 could not have been initiated. The relevant observations of Hon’ble High Court read as under:

We find Hon’ble Delhi High Court in the case of CIT vs. Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del) has held that there has to be distinction between “lack of inquiry” and inadequate inquiry and further if there was any inquiry, even inadequate, that would not by itself give occasion to Commissioner to pass orders u/s 263 of the Act. The relevant observations of Hon’ble High Court read as under: “12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income Tax under Section 263 of the Income Tax Act. As noted above, the submission of learned counsel for the Revenue was mat while passing the assessment order, the AO did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as Revenue expenditure. However, that by itself would not be indicative of the fact that the AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO in the assessing order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under Section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabriel India Ltd. (Supra), law on this aspect was discussed in the following manner: "xxx... From a rending of sub-section (1) of section, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he

When we examine the matter in the light of the aforesaid principle, we find that the AO had called for explanation on this very item, from the assessee and the assessee had furnished his explanation vide letter dated 26.09.2002. This fact is even taken note of by the Commissioner himself in Para 3 of his order dated 03.11.2004. This order also reproduces the reply of the respondent in Para 3 of the order in the following manner: "The tools and dies have a very short life and can produce upto maximum 1 lakh permissible shorts and have to be replaced thereafter to retain the accuracy. Most of the parts manufactured are for the automobile industries which have to work on complete accuracy at high speed for a longer period. Since it is an ongoing procedure, a company had produced 10,75,000 sets whose selling rates is inclusive of the reimbursement of the dies cost. The purchase orders indicating the costing includes the reimbursement of dies cost are being produced before your honour. Since the sale rate includes the reimbursement of die cost and to have the matching effect, the cost of the dies has been claimed as a Revenue Expenditure."

This clearly shows that the AO had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyes and tools is to be treated as revenue expenditure or not. It appears that since the AO was satisfied with the aforesaid explanation, he accepted the same. The CIT in his impugned order even accepts this in the following word: “AO accepted the explanation without raising any further questions and as stated earlier, completed the assessment at the returned income."

Having put the records straight on this aspect, let us proceed further. Is it a case where the Commissioner has concluded that the opinion of the AO was clearly erroneous and not warranted on the facts before him and, viz., the expenditure incurred was not the revenue expenditure but should have been treated as capital expenditure? Obviously not. Even the Commissioner in his order, passed under Section 263 of the Act, is not clear as to whether the expenditure can be treated as capital expenditure or it is revenue in nature. No doubt, in certain cases, it may not be possible to come to a definite finding and therefore, it is not necessary that in all cases the Commissioner is bound to express final view, as held by this Court in Geevcc Enterprise [supra]. But, the least that was expected was to record a finding that order sought to be revised was erroneous and prejudicial to the interest of the revenue. [see Sashayee Paper(supra)]. No basis for this is disclosed. In sum and substance, accounting practice of the assessee is questioned. However, that basis of the order vanishes in thin air when we find that this very accounting practice, followed for number of years, had the approval of the income tax authorities. Interestingly, even for future assessment years, the same very accounting practice is accepted.

It is in this context the question that assumes importance is as to whether powers could be exercised under Section 263 of the Act when two views are possible and following observations of the Tribunal, in this backdrop, become relevant: "38. Still further, the Hon'ble Supreme Court in Malabar Industrial Co Ltd (supra) has held that when two views are possible and the AO has taken one of the possible view, then the order cannot be held to be prejudicial to the interest of the Revenue. Since the CIT could not come to a definite finding that the expenditure in question was a capital expenditure in the proceedings under Section 263, in our opinion, the order of the AD could not be held to be erroneous."

Let us look into the matter from another angel. What was the material/information available with the AO on the basis of which he allowed the expenditure as revenue? It was disclosed to him that the assessee is a manufacturer of car parts. In the manufacturing process, dyes are fitted in machines by which the car parts are manufactured. These dyes are thus the components of the machines. These dyes need constant replacement, as their life is not more than a year. The assessee had also explained that since these parts are manufactured for the automobile industry, which have to work on complete accuracy at high speed for a longer period, replacement of these parts at short intervals becomes imperative to retain accuracy. Because of these reasons, these tools and dyes have a very short span of life and it could produce maximum one lakh permissible shorts. Thereafter, they have to be replaced. With the replacement of such tools and dyes, which are the components of a machine, no new assets comes into existence, nor is their benefit of enduring nature. It does not even enhance the life of existing machine of which these tools and dyes are only parts. No production capacity of the existing machines is increased either. The Tribunal, in these circumstances, relied upon the judgment of Mysore Spun Concrete Pipe Pvt Ltd. (supra), wherein Karnataka High Court held that the replacement of moulds was not in the nature of replacement of a capital machinery, but in the nature of replacement a part of the machinery which in him was in the nature of maintenance of machinery installed in the factory. Such an expenditure was treated as revenue expenditure. With this position in law, it is clear that view taken by the AO was one of the possible views and therefore, the assessment order passed by the AO could not be held to be prejudicial to the revenue. Such an order thus has rightly been set aside by the Tribunal.

When we consider the matter in the aforesaid perspective, it also becomes clear that the judgments under which Mr. Sanjeev Sabharwal, learned counsel for the Revenue, had taken umbrage would not be applicable in the instant case and, therefore, would not come to his rescue. In Saravana Spinning Mills Pvt. Ltd. (supra) where the Supreme Court expounded the principle of "current repairs", clear finding recorded was that ring frames would constitute independent and separate machine capable of independent and specific functions, as is clear from the following observations: "In our view, the A.O. was right in holding that each machine including the Ring Frame was an independent and separate machine capable; of independent and specific function and, therefore, the expenditure incurred for replacement of the new machine would not come within the meaning of the words "current repairs". In the present case, it is not the case of the assessee that a part of the machine (out of 25 machines) needed repairs. The entire machine had been replaced. Therefore, the expenditure incurred by the assessee did not fall within the meaning of "current repairs" in Section." In the present case, finding is just the opposite, viz., dyes and tools are part of the machines. Replacing these dyes the purpose is to maintain the existing assets, viz machine and not to bring a new asset. Moreover, case at hand is not a case of "repairs of machinery" which was the situation is Sarvana Prinning (supra). The present case proceeded on the controversy right from the order of A.O. till ITAT as to whether this expenditure was revenue or capital in nature. Even before us, arguments rested on this aspect.

Likewise, whether the Commissioner should have recorded definite finding or not, may not be very relevant factor in the present case where on the facts of this case we have found that the opinion of the AO in treating the expenditure as revenue expenditure was plausible and thus there was no material before the CIT to vary that opinion and ask for fresh Inquiry.

Since in the instant case the Assessing Officer during the course of assessment proceedings has raised queries in respect of unsecured loans to which the assessee has filed its replies and based on the replies the Assessing Officer has completed the assessment and thereafter on the basis of internal audit objections the assessee has also replied which were available before the Ld. PCIT at the time of initiating revisionary proceedings, therefore, in view of the above and in the light of various decisions cited (supra), we are of the considered opinion that the Ld. PCIT was not justified in invoking jurisdiction u/s 263 of the Act. We, therefore, set aside the order passed by the Ld. PCIT and allow the grounds raised by the assessee.

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