M/S. GUJARAT AMBUJA EXPORTS LTD.,,AHMEDABAD vs. THE PR. CIT-1, AHMEDABAD

Ground No. 4 Direction of Inquiry on Govt Grant of Rs.49,21,852/- on import of Plant & Machinery and reduced depreciation: The Ld. PCIT erred in directing AO to conduct inquiry on Govt. Grant of Rs.49,21,852/- on import of Plant & Machinery and reduced depreciation, whereas, details of EPCG Scheme and saving of custom duty on import of plant & machineries furnished to ld. PCIT and and explained that depreciation claim is reduced against this amount. Hence, the present issue is not fit case under the criteria as envisaged u/s. 263 of the Income Tax Act, 1961. The Ld. PCIT erred in invoking the powers u/s. 263 of the Act on this issue.

Ld. DR, on the other hand, relied on the findings of the Ld.PCIT.

Section 32AC of the Act allows deduction, of a specified percentage (15%), on investment by assessee’s in new plant and machinery, subject to fulfillment of conditions specified therein.

The Ld. PCIT, in the present case, noted that while the details of fixed assets, filed alongwith the tax audit report in Form 3CD certified by the Tax Auditor, revealed addition to fixed assets to the tune of Rs.87,32,20,273/-, the assessee, on the other hand, was noted to have claimed deduction u/s.32AC of the Act on account of investment in plant & machinery to the tune of Rs.144,45,49,407/-.Noting this difference and further finding that the AO had not examined this aspect of the issue while allowing assesses claim of deduction u/s 32AC of the Act, he assumed revisionary jurisdiction u/s.263 of the Act .

During the course of hearing before us, it was pointed out that during assessment proceedings, the assessee vide letter dated 19.03.2021 had submitted the working of its claim of deduction u/s.32AC of the Act of Rs.21,66,82,411/- pointing out that its total addition to plant and machinery during the year was M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 7 – Rs.144,45,49,407/- on which it had claimed deduction u/s.32AC of the Act @15% amounting to Rs.21,66,82,411/-. The assessee had stated the amount to be duly certified and reported in tax audit report by the statutory Auditor and had furnished the working of the same. It was also pointed out to us that vide letter dated 17th February, 2021, the assesse had submitted to the AO the working of claim of deduction u/s.32AC of the Act amounting to Rs.21.66 Crores. The working was stated to be furnished in 13 pages from Page Nos. 444 to 456 of the letter. The said working was not furnished before us. This is all that the assessee submitted before us to have furnished to the AO.

Having noted so, it was not in any way demonstrated before us whether the assessee vide these two letters furnished to the AO had explained the difference in the amount of fixed assets recorded to have been acquired during the year as reported in its fixed assets chart submitted as part of the tax audit report and the fixed assets acquired during the year on which deduction u/s. 32AC of the Act was claimed by the assessee, which was noted by the Ld. PCIT also. No query was shown to have been raised by the AO in this regard during the assessment proceedings. Therefore, it is abundantly clear that this anomaly between the amount of fixed assets stated to be acquired by the assessee during the year as reported its fixed assets chart filed along with the tax audit report, and that on which deduction u/s.32AC of the Act was claimed by the assessee, was not examined by the AO at all during the assessment proceedings. There is no question therefore, we M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 8 – hold, of the AO having taken a plausible view while allowing assesses claim of deduction u/s 32AC of the Act, when clearly he had not sought any clarification from the assessee on the admitted discrepancy in the amount of fixed assets certified by the tax auditor as acquired by the assessee during the year and that on which deduction u/s 32AC of the Act was claimed by the assessee. The argument of the Ld.Counsel for the assessee to this effect, that the AO while allowing claim of deduction u/s 32AC of the Act, had taken a plausible view, is therefore rejected.

Having held so, during the course of hearing before us, it was further demonstrated that before the Ld.PCIT the assessee had explained the difference in the two figures of fixed assets acquired during the year ,as reported in fixed assets chart and that on which deduction u/s.32AC of the Act was claimed by the assessee, as pertaining to fixed assets which were acquired and installed by the assessee in certain plants located in different regions but not put to use by the assessee. The contention of the assessee, it was stated, was that since these assets were not put to use, therefore, they were not included in the fixed assets chart furnished along with the tax audit report, since, the assessee was not eligible to claim depreciation on the same for which purpose the fixed assets chart was prepared. But the assessee being eligible to claim deduction u/s.32AC of the Act on assets acquired and installed, therefore, deduction u/s.32AC of the Act had been claimed by the assessee on these assets, though depreciation had not been claimed M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 9 – on them. Our attention was drawn to this fact noted by the Ld. PCIT at page no.7 of his order as under:

The contention of the Ld.Counsel for the assessee was that the assessee had demonstrated that the deduction claimed by it u/s.32AC of the Act on the excess plant and machinery as compared to that reported in the plant and machinery details filed in the tax audit report was on account of assets acquired and installed but not put to use. That therefore there was no error in the order of the AO nor any prejudice cause to the interest of the M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 11 – revenue since there was no excess claim of deduction u/s.32AC of the Act allowed to the assessee.

The Ld. PCIT, however we find, has noted that after going through all the replies and evidences filed by the assessee that the assessee, though acquired the new eligible assets but did not install them in the impugned year and the AO having not called for these details for verification, therefore, assessment order was erroneous causing prejudice to the interest of the Revenue. His findings in this regard are contained at page 13 of his order:

We have noted that during assessment proceedings the AO had not examined this alleged excess claim of deduction u/s.32AC of the Act by the assessee as noted by the Ld. PCIT and in the revisionary proceedings before the Ld.PCIT, the assessee filed explanation stating that certain assets though acquired and installed by it were not put to use and, therefore, were not included in the fixed assets chart, but, were considered for the purposes of claiming deduction u/s.32AC of the Act by the assessee. Evidences by way of details of such assets acquired along with their bills was furnished to the Ld. PCIT and on the M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 12 – basis of these bills, the assessee claimed that the assets were acquired and installed during the year but not put to use. We are not convinced with the same. What the details and evidences furnished by the assessee only demonstrate are that these assets were acquired during the year. How it establishes the fact that they were installed, we fail to understand and if installed why was the assessee not eligible to claim the assets to have been put to use during the year for claiming depreciation. There is a very thin line of difference between the assets having been “installed” and assets being” put to use”. It is settled law that if an asset is ready for use, it is to be considered as put to use. And any asset claimed to be installed might as well be ready for use also. Therefore, we do not agree with the Ld. Counsel for the assessee that the assessee had demonstrated that the excess plant & machinery on which it had claimed deduction u/s.32AC of the Act were acquired and installed during the year but not put to use, so as to explain the difference between assets acquired during the year eligible for depreciation and those eligible for deduction u/s 32AC of the Act. And the AO having not examined this issue at all, we are in complete agreement with the Ld. PCIT that the assessment order was erroneous and causing prejudice to the interest of the Revenue.

The argument of the Ld.Counsel for the assessee therefore that on merits the assessee had demonstrated the deduction u/s 32AC of the Act to be validly claimed, is therefore rejected, as also all other arguments related to this contention.

As is evident from the above, section 263 empowers Commissioners/ Pr.Commissioners to exercise revisionary power where they find any order passed by the AO to be erroneous so as to cause prejudice to the interest of the Revenue. Explanation 2 to the section lists circumstances in which the assessment order passed will be deemed to be erroneous, which amongst other, includes an order passed without making inquiries or verification which should have been made as per clause (a) of the Explanation, which clause has been invoked by the ld.Pr.CIT in the present case.

Having said so, it is but obvious that what Explanation 2 does is only clarify and enlist the circumstances specifically where an assessment order will be deemed to be erroneous. It only explains the scope of the section and clearly by no stretch expands its scope. The import or object of an Explanation was explained by the Hon’ble apex court in the case of Sundaram Pillai v Pattabiraman AIR 1985 SC 582,593 as : The object of an Explanation has been explained in an earlier case as follows:— (a) to explain the meaning and intendment of the Act itself, (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve, (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful, (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment, and M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 15 – (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same. Explanations are not substantive provisions and are inserted to clear up any ambiguity in the section. They only clarify an existing law. Normally Explanations do not enlarge the scope of the section but only explain the scope. Explanation 2 to section 263, clearly provides additional support to the dominant object of section 263, specifically pointing out situations where assessment orders will be deemed to be erroneous. The main provision of the section and its import has not been altered by the explanation. Therefore where section 263 itself has been invoked and the reason for finding the assessment order erroneous clearly pointed out to the assessee during revisionary proceedings to the effect that adequate inquiries were not conducted by the AO on the issue in question, Explanation 2 to section 263 (a) also being to the same effect of assessment orders being deemed to be erroneous on account of lack of adequate inquiry, we see no reason why pointedly the Explanation also needs to be brought to the notice of the assessee while applying it to the case. 36 Once the ld.Pr.CIT brings to the notice of the assessee the reason why he finds the assessment order to be erroneous, which in the present case was inadequate inquiries conducted by the AO on the nature of disclosure made by the assessee during the survey in excess stock found, he need not specifically point out that he has invoked Explanation-2 to sub-clause (a) to the section which is to the same effect of inadequate inquiries conducted qualifying as error in assessment order. The fact that he clearly brings out the reason why he found assessment order erroneous, is sufficient in itself and self-explanatory. It need not to be technically qualified by pointing out the specific clause in respect to which the reason pertained. The entire objectives of confronting anything to the assessee in the process of rendering justice is to offer an opportunity to other party to come up with his/her arguments or contentions in defense. In the present case, it is not disputed that the assessee had been specifically pointed out the error in the order of the AO of non-conducting inquiry relating to the particular issue. The assessee was required to respond to the same, which he did by pointing out that due inquiry was conducted. The fact of mentioning Explanation 2 sub-clause (a) in the notice by the ld.Pr.CIT which dealt with this specific reason or error in the order of the AO of non-conducting of inquiry, therefore, is of no consequence or relevance, since the assessee in very simple words has been confronted with the error. Mentioning of Explanation 2 to sub-clause (a) is therefore only technical addendum to the same. As we mentioned above, the Explanation did not expand the scope of section but only explained the scope of section, and therefore, once the specific section has been invoked, it is not necessary to mention any specific Explanation thereto which has been invoked. Therefore, this contention of the ld.counsel for the assessee is rejected outrightly that the order needs to be set aside for the reason that ld.Pr.CIT M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 16 – did not confront the assessee before invoking Explanation 2 to sub-clause (a) to section 263 of the Act.

As for the decision of the jurisdictional High Court in the case of Shreeji Prints (supra), relied upon by the ld.counsel for the assessee in support of this contention, the assessee, we hold, cannot derive any benefit from the same.

On going through the decision of the Hon’ble High Court ,we find that the decision is not on the question framed before it whether Explanation to section 263 of the Act can be said to be validly invoked without first confronting it to the assessee. In the case before Hon’ble High Court in the decision relied upon by the Ld.AR, the Revenue had proposed the following questions as substantial question of law before the Hon’ble High Court: "(a) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is correct in holding that the PCIT was not empowered and entitled to revise assessment order u/s. 263 of the Act r/w Explanation 2 thereto by ignoring that the order passed by the AO is erroneous in so far as it is prejudicial to the interest of revenue in as much as the Assessing Officer has passed the assessment order without making inquires/verification in the light of the unsecured loans of Rs. 2.49 Crores received from M/s. Georgette Tradecom Pvt. Ltd (GTPL) and M/s. PurbaAgro Food Pvt. Ltd (PAFPL)? (b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is correct in cancelling the impugned order u/s. 263 of the I.T. Act and allowing all the grounds of the Assessee?"

The Revenue had challenged the order of the ITAT setting aside the order passed by the ld.Pr.CIT under section 263 of the Act on account of inadequate inquiry made by the AO on unsecured loans received by it from two parties. The question framed before the Hon’ble High Court was therefore whether the ITAT order was correct when adequate inquiries were not made by the AO. The Hon’ble High Court answered the question against the Revenue, noting that the ITAT had given a finding of fact that the AO had made full inquiries in detail and accepted the genuineness of the loans received by the assessee, and such view of the AO was plausible view, and therefore the assessment cannot be said to be erroneous or prejudicial to the interest of the Revenue. Hon’ble High Court held that in view of such finding of the fact arrived at by the Tribunal, no question of law arose and the appeal of the Revenue was accordingly dismissed.

At para-5 of the judgment, Hon’ble Court has noted that the Tribunal observed that the ld.Pr.CIT had not mentioned in the show cause notice the invocation of Explanation 2 to section 263 of the Act, though it passed the order M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 17 – invoking the said section and the Tribunal found the order to be not appropriate and sustainable in law. Para-5, as above, is just a noting by the Hon’ble High Court of the findings of the ITAT while allowing the assesses appeal. We find that it is only on the facts of the case as found by the ITAT that the issues were all duly examined by the AO and the AO had taken plausible view, that Hon’ble Court had upheld order of the Tribunal dismissing the appeal of the Revenue.

Thus it is apparent from the above that the decision of the Hon’ble High Court was not to the effect that Expl 2 to section 263 not being confronted to the assessee its invocation was invalid. Neither was the decision rendered in the backdrop of this question before the Hon’ble High Court, nor does the Hon’ble High Court hold so in its order. What is noted in the order to this effect is only its noting of the findings of the ITAT while setting aside the order passed u/s 263 of the Act. Therefore the decision of the Hon’ble jurisdictional High Court cannot be read as holding that order passed u/s 263 of the Act is invalid when Expl to section 263 is invoked without confronting it to the assessee.

It is settled law that a precedent is an authority only for what it actually decides and a decision on a question that has not been argued cannot be treated as a precedent. Judgments must be read as a whole and observations in judgements should be considered in the context in which they are made and in the light of the questions that were before the court. The Hon’ble apex court has held so in the case of CIT vs Sun Engineering Works Pvt. Ltd.198 ITR 297 (SC). In the case of Padma Sundra Rao v State of TN 255 ITR 147(SC) the Hon’ble Apex Court had laid down that a ratio laid down by the Court have to be read in the context of the entire facts leading to the said ratio.

In view of our elaborate discussion as above, we hold that the assessee cannot derive any benefit from the judgment of Hon’ble High Court in the case of Shreeji Prints P. Ld. (supra), to the effect that non-mentioning of Explanation 2 to section 263 in the show cause notice will render entire revisionary order as non-est in the eyes of law. This contention raised by the ld.counsel for the assessee, is therefore, rejected.”

We therefore conclude that on the issue of claim of deduction of the assessee u/s. 32AC of the Act, the same was rightly found by the Ld.PCIT to be not examined by the AO. The assessee also, we find, was unable to demonstrate on merits the eligibility of its claim to excess deduction u/s 32AC of the Act to the Ld.PCIT. Therefore, we hold, that the Ld.PCIT rightly found M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 18 – the assessment order erroneous and prejudicial to the interest of the Revenue on the issue of excess claim of deduction allowed to the assessee by the AO u/s 32AC of the Act.

The Ld. PCIT noted that the case records of the assessee contained a letter from the ITO, Ward -45(1), Delhi regarding sharing of suspicious transaction of Rs.1,23,50,000/- entered into by the assessee with one Shri Ravi, Prop. Of M/s. Ravi Trading Co. It was noted from the said letter that Shri Ravi had deposited substantial cash in his bank account. The Ld.PCIT noted the assessee to have confirmed this transaction with Shri Ravi but the AO, he found, did not take into consideration this information in his possession while passing the assessment order u/s.143(3) of the Act. According to the Ld. PCIT, the entire amount of Rs.1,23,50,000/- purportedly paid by the assessee to Shri Ravi ought to have been disallowed by the AO by invoking Section 40A(3) of the Act for having incurred expenses in cash exceeding the specified limit. The assessment order, accordingly, was found to be erroneous causing prejudice to the interest of the Revenue on this account. The order of the Ld. PCIT further reveals that the assessee to have explained to the Ld. PCIT during revisionary proceedings that the assessee had not made any payment to Shri Ravi, but in fact had received payment from him on account of having sold goods to him and had also received the entire payment through RTGS. The assessee furnished the copy of ledger account M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 19 – along with sale invoices, weigh bridge receipts and loading slip for each and every bill raised on Shri Ravi and also submitted that it had sold oil to Shri Ravi amounting to Rs.1,22,98,467/- and received Rs.1,23,50,000/-. The Ld. PCIT found the contentions of the assessee to be correct after scrutinizing the details furnished by the assessee, and also noted that as per the intimation received from the ITO, Ward-45(1), Delhi, the assessee had actually received funds from Shri Ravi and but however, M/s. Ravi Trading Co. was not located at the given address as found in the local inquiries carried out by the AO of Delhi. The Ld. PCIT also found that invoices contained no name of the transporter, there was no copies of delivery challans duly signed by the receiver of the goods with his rubber stamp and he further noted that these transactions were entered into by the assessee with Shri Ravi just four days prior to demonetization period and never before or after that. He accordingly held that on the basis of information in the possession of the AO that the transactions carried out by the assessee with Shri Ravi were suspicious in nature, he ought to have made more inquiries and having not done so, therefore, the assessment order was erroneous and causing prejudice to the Revenue. He directed the AO to make specific inquiries to ascertain the genuineness of the transactions carried out by the assessee with Shri Ravi which are listed at Page 19 of his order.

Ld. Counsel for the assessee pointed out that the Ld. PCIT began with the premise that the nature of the suspicious transaction with Shri Ravi was on account of purchases made by M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 20 – the assessee from him resulting in cash payment made to Shri Ravi, but subsequently when the assessee furnished all details and evidences of the transaction and demonstrated the transactions to be in the nature of sale made by the assessee to Shri Ravi and the assessee having received payment by way of RTGS, the Ld. PCIT re-visited the information in his possession and found that the assessee did receive payment from the said party but the transaction was dubious since Sh. Ravi was not found to be present at his specified location and, therefore, the AO ought to have conducted further inquiries on the basis of information in his possession. The Ld. Counsel for the assessee contended that this u-turn by the Ld. PCIT on the issue noting the transaction to be a sale transaction with Shri Ravi as opposed to him noting it to be a purchase transaction earlier, and finding it suspicious since the party was not found at the location, was never confronted to the assessee. He pointed out that the Ld. PCIT had only confronted his initial understanding of the transaction being a purchase transaction and the assessee having made payment in cash to Shri Ravi. The entirely converse understanding of the transaction by the Ld. PCIT of the same being a sale transaction was not confronted to the assessee. He contended therefore, that his finding of error in the assessment order for the AO having not inquired into the issue was arrived at against all principles of natural justice without seeking assessee’s response on the same after confronting it to him.

In the light of the same, it is evidently clear that the findings of the Ld. PCIT of the assessment order being erroneous causing prejudicial to the interest of the Revenue on account of the transaction entered into by the assesse with Shri Ravi having not been examined by the AO, has been arrived at without confronting the same to the assessee and we are in complete agreement with the Ld. Counsel for the assessee that the said finding, therefore, is against the principles of natural justice and we, accordingly, hold that the same is not sustainable in law. The order of the Ld. PCIT, therefore, holding the assessment order erroneous on account of asessee’s transaction with Shri Ravi is accordingly set aside.

The order of the Ld. PCIT reveals that on scrutiny of the case records, he found the assessee to have claimed Government grants of Rs.1,49,21,852/-. He further noted that during assessment proceedings, the assessee had explained that it had M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 22 – received Government grants for installation of bio-waste plant amounting to Rs.1 Crore, which was reduced from cost of asset. However, he found that there was no explanation regarding he accounting treatment of the remaining amount of Rs.49,21,825/-. Noting the AO to have not verified this issue, he assumed jurisdiction to revise the order passed by the AO. The order of the Ld. PCIT further reveals the assessee to have explained to him that the amount of Rs.49,21,825/- related to duty on export of goods availed against import of capital assets under Export Promotion Capital Goods (‘EPCG’) Scheme, which had been accounted for by the assessee and the cost of goods imported, therefore, without payment of duty. The depreciation, therefore, had been accordingly reduced. The Ld. PCIT, we note, however, found that the details and working submitted by the assessee to substantiate its explanation did not completely reveal the treatment of grants received by it to the tune of Rs.49.21 Lakhs and the AO having not examined this issue, therefore, he held the assessment order to be erroneous causing prejudicial to the interest of the Revenue directing the AO to carry out necessary inquiries specified at page no.23 of his order. His findings in this regard are contained at page nos. 21 to 23 of his order as under:

We have gone through the order of the Ld. PCIT and we have noted that during assessment proceedings, the assessee had only submitted to have received Government grants of 1.49 Crores and to have received Rs.1 Crore out of the same for installation of Bio-Methanation plant which accordingly was reduced from its cost of assets. The assessee had also furnished ledger of Government grant. Clearly, there was no explanation furnished by the assesse regarding the remaining grant of Rs.49 Lakhs received M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 25 – by it as noted by the Ld. PCIT also during the assessment proceedings. Therefore, it can be safely inferred from the above that the AO had not carried out any inquiry vis-à-vis the accounting treatment of the assessee of the Government grant of Rs.49 Lakhs received by it. The contention of the Ld.Counsel for the assessee therefore that the issue was examined during assessment proceedings is rejected.

Further though, admittedly, the assessee did explain the manner of treating this Government grant of Rs.49 Lakhs to the Ld. PCIT, by reducing claim of depreciation relating to the said grant, however, we find, he has noted that specific details vis-à- vis the same were not furnished by the assessee. The Ld.PCIT has noted the assessee to have provided details of curtailed depreciation in respect of purchases of F.Y. 2015-16 & 2016-17 and claimed to have received custom duty certificates of Rs.1.43 Crores and Rs.2.52 Crores during the year. We agree with the Ld. PCIT that the assessee has not furnished specific details of treatment of grant of Rs.49 Lakhs and in the light of the same, we agree that with the AO having not examined the issue the assessment order is erroneous causing prejudice to the interest of the Revenue. The order of the Ld. PCIT, therefore, on the issue of Government grants is upheld.

In the result the order of the Ld.PCIT holding the assessment order erroneous causing prejudice to the Revenue is upheld on the issue of claim of deduction u/s 32AC of the Act and government M/s. Gujarat Ambuja Exports Ltd. vs. Pr.CIT] A.Y. 2017-18 - 26 – grants to the tune of Rs.49lacs not being examined by the AO , while his findings of the order being erroneous on the issue of non-examination by the AO of transactions with M/s Ravi Trading Co., is set aside.

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