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Income Tax Appellate Tribunal, DELHI BENCH : C : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER Assessment Year: 2007-08 Honda Siel Power Products Ltd., Vs ACIT, Plot No.5, Sector-41 (Kasna), Circle-12(1), Greater Noida Industrial New Delhi. Development Area, Gautam Budh Nagar PAN: AAACH8464L (Appellant) (Respondent) Assessee by : Shri Neeraj Jain, Advocate Ms Shaily Gupta, CA & Ms Mrinal Goyal, CA Revenue by : Ms Sunit Singh, CIT-DR Date of Hearing : 12.10.2020 Date of Pronouncement : 23.10.2020 ORDER
PER R.K. PANDA, AM:
This appeal filed by the assessee is directed against the order dated 14th February 2014 passed u/s 263 by the CIT, Delhi-4, Delhi, for assessment year 2007-08.
Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing of portable generating sets, IC engines, water pumping sets and manufacture and processing of pressure die-casting parts. It filed it's return of income on 27th October 2007 declaring Nil income. Subsequently, the assessee filed a revised return on 29th October 2007 declaring total income at Rs.31,49,18,923/-. The AO passed the order under section 143(3) read with section 144C of the Act on 24th October 2011, determining the total income of the assessee at Rs.44,78,49,680/- wherein he made addition of Rs.13,29,30,660/- under various heads such as royalty, technical guidance, expert commission and on account of TP adjustment.
Subsequently, the ld. CIT called for records and examined the same and found that the assessment order passed by the AO was erroneous insofar as it was prejudicial to the interest of the Revenue for the following reasons:- “(i) On scrutiny of assessment record it was seen that that as per para 17 (k) of the 3CD report the assessee had booked an amount of Rs. 36,82,645/- being entry tax payable for Pondicherry works. This expenditure was clearly mentioned as of contingent nature hence was an unascertained liability and, therefore, should have been added back to the income of the assessee. (ii) It was further noticed that the assess.ee had booked an amount of Rs. 27,65,000/- on account of provision for slow moving inventory. As this expenditure was also in the nature of a provision it should have added back to the income of the assessee. (iii) It was also noticed that as per para 18 of schedule 11, the assessee had booked an amount of Rs. 75,95,000/- on account of provision free of cost services and debited to profit and loss account under the item service charges, ft was further revealed that even the provision made for the said item had not been consumed fully. Thus as this expenditure was in the nature of a provision it should have added back to the income of the assessee. (iv) It was found that interest u/s 234B was charged to the tune of Rs. 2,43,90,156 instead of correct amount of Rs.2,74,21,525/- and was thus undercharged to the extent of Rs. 30,31,369/-.”
He, therefore, issued a notice dated 27th December 2013 under section 263 4. of the Act to the assessee to explain as to why proceedings under section 263 of the Act should not be initiated. It was explained that assessment in the instant case was passed pursuant to directions of the DRP and scope of DRP and powers conferred under section 144C to the DRP was in essence in the nature and power of review to safeguard the interests of the Revenue. It was accordingly argued that once draft assessment order was approved by the DRP, the CIT has no jurisdiction to review the matter again under the provisions of section 263 of the Act. It was argued that the DRP has the power to confirm, reduce or enhance the variations proposed in the draft order and the DRP was also empowered to consider any matter arising out of the assessment proceedings relating to the draft order. Therefore, the inherent power of review is available with the DRP and when the DRP has examined the matter and given the direction after due application of mind, the assessment order cannot be held as erroneous so as to warrant exercise of revisionary jurisdiction under section 263 of the Act. It was further argued that the DRP is a collegium of three commissioners and, therefore, the order passed in accordance with the directions of the DRP cannot be reviewed by a single commissioner under section 263 of the Act. It was submitted that the twin conditions that the order is erroneous and that the order is prejudicial to the interest of the Revenue are not being fulfilled in the instant case and, therefore, the CIT was not justified in exercising jurisdiction under section 263 of the Act.
So far as the merit of the case is concerned, it was argued that the sum of Rs.36,82,645/- being entry tax payable being mentioned as contingent nature was already added back in the disallowance made under section 43B of the Act. The assessee filed the working of disallowance made under section 43B of the Act. On the issue of provision of Rs.27,65,000/- on account of slow/non-moving inventory, it was submitted that such provision for slow/non-moving items was made by the assessee as per it's internal policy based on industrial norms, i.e., 100% of closing stock if inventory is not sold for a period of one year and 50% of closing stock if inventory is not sold for a period of 6 months to one year. It was argued that such provision was also in accordance with schedule-14 of the Companies Act, 1956. Further, this policy has consistently been followed by the assessee and no adversity has ever been reported by the auditor in this regard. It was further argued that the AO’s order allowing the provision was supported by judicial precedents and there was no error in this regard. It was further argued that even otherwise also no prejudice was caused to the Revenue as the provision was written off in the subsequent assessment year.
6. So far as the issue of allowability of 2% of Rs.75.95 lacs in respect of service coupons, it was explained that this claim was part of service expenses under the head ‘other expenses.’ On the issue of interest under section 234B of the Act, it was submitted that the very issue of levy of interest under section 234B was pursuant to the additions made in the assessment which was subjudice before the ITAT and the calculation of interest as made in the notice under section 263 of the Act was also not correct. It was accordingly requested to drop the proceedings initiated under section 263 of the Act.
However, the CIT was not satisfied with the arguments advanced by the assessee. So far as the argument of the ld. counsel that the order was passed as per direction of the DRP under section 144C of the Act, who has got the power to review any issue and therefore, the CIT could not have exercised jurisdiction under section 263 of the Act is concerned, the ld. CIT held that there is no stipulation in the provisions that any order passed by the AO as per the direction of the DRP under section 144C of the Act cannot be subject to review of CIT under section 263. Therefore, in absence of any such exceptional power under section 263 the objection raised by the assessee has to be rejected. According to him, the provision of section 144C is only a mechanism to complete the assessment and the assessee has been allowed the option either to file an appeal before the CIT(A) or approach the DRP against the above assessment order issued under section 144C of the Act by the AO. He observed that the power of the DRP to enhance the variations or for that matter to make enhancement on any issue not being subject matter of the draft order is similar to the power available with the CIT(A) to enhance the assessment. This power of enhancement in no way interferes with the power of the CIT to invoke the proceedings u/s 263, if the twin conditions as mentioned in this section are found to be satisfied.
So far as the argument of the ld. counsel that the DRP being a collegium of three Commissions, and, therefore, the administrative CIT being a single Commissioner has no power to review the directions of the DRP is concerned, he rejected the same holding that if the CIT can review the order of the DRP and file an appeal against their direction before the ITAT, then, in that case, there can be no bar to invoke provisions of section 263 in cases completed pursuant to direction of the DRP.
8.1 He further observed that none of the issues on which the proceedings under section 263 of the Act has been initiated were considered by the DRP and no direction has been issued in this regard. Therefore, he held that there is no illegality in assuming jurisdiction under section 263.
8.2 So far as the notice issued under section 263 on account of contingent liability of entry tax payable, he accepted the plea of the assessee and dropped the proceedings on this issue. He also accepted the plea of the assessee that levy of interest under section 234B of the Act was pursuant to additions made in the assessment and only consequential in nature and such interest leviable has to be recomputed on each occasion when the total income is revised. However, on account of the other two issues, i.e., provision for slow moving inventory of Rs.27,65,000/- and the provision for Rs.75.95 lakhs in respect of service coupons, he held that the order of the AO is erroneous and prejudicial to the interests of the Revenue.
So far as the provision for slow moving inventory of Rs.27.65 lakhs is concerned, he observed that no provision for slow moving inventory was debited in the preceding year and the claim was made for the first time in the current year. Therefore, the claim of the assessee that the policy for making the provision for slow moving inventory has been consistently followed was not found to be correct. He further noted that apart from the provision for inventory of Rs.27.65 lakhs the assessee had also debited another amount of inventory written off of Rs.11.52 lakhs in the schedule ‘other expenses’ account. The assessee could not explain as to why the claim for provision for slow moving inventory was made for the first time in the current year considering the fact that the assessee had already made this claim on account of inventory written off. He, therefore, held that the order of the AO is erroneous and prejudicial to the interest of the Revenue on this issue.
So far as the provision of Rs.75.95 lakh in respect of service coupons is concerned, he noted that the explanation of the assessee that during the course of assessment proceedings the assessee has filed explanation was not found available on record. Further, the exact basis and the working of this provision was also not found available on record. He, therefore, held that in absence of any verification the AO could not have allowed this claim of the assessee. According to the ld. CIT, the matter is not of allowability of the claim but also the year in which the claim is made. The AO was required to compute the income for the current year correctly and it is not open to him to allow certain claim allowable in the next year in the current year or vice versa. Any such mistake according to him renders the order erroneous and prejudicial to the interest of the Revenue. He, therefore, set aside the order of the AO on the issue of provision of slow moving items and also directed him to examine the exact basis for making the provision for free service coupons as made by the assessee. Relying on various decisions he observed that since the AO has passed the order under section 143(3)/144C without proper appreciation of the facts of the case and without due application of provisions of the law, therefore, the order has become erroneous as well as prejudicial to the interest of the Revenue. He, therefore, set aside the order of the AO and directed him to pass fresh assessment order after making the verification of the issue as directed and after giving reasonable opportunity of being heard to the assessee.
Aggrieved with such order of the CIT, the assessee is in appeal before the Tribunal by raising the following grounds:- “
1. That on the facts and circumstances of the case and in law, the order passed by the Commissioner of Income-tax (CIT), under section 263 of the Income-tax Act, 1961 (‘the Act’) is without jurisdiction, bad in law and void- ab-initio.
2. That on the facts and circumstances of the case and in law, the CIT erred in exercising jurisdiction under section 263 of the Act without appreciating that the original assessment order under section 143(3)/144C of the Act was passed with the approval/sanction of the DRP, comprising of a collegium of three CIT’s exercising similar power and as such an assessment was not amenable to revision under section 263 of the Act. 2.1. That on the facts and circumstances of the case and in law, the CIT erred in not appreciating that Commissioner of co-ordinate rank cannot assume jurisdiction under section 263 of the Act in respect of assessment order passed under section 144C(13) of the Act, passed with the statutory approval of another Commissioner, in the present case by DRP comprising of three CITs. 2.2 Without prejudice, that on the facts and circumstances of the case and in law, the CIT failed to appreciate that the order sought to be revised under section 263 of the Act was an order passed under section 144C(13) of the Act, in pursuance of the directions of the DRP and such order could not be construed to be an order passed by the assessing officer.
3. That on the facts and circumstances of the case and in law, the CIT erred in exercising reversionary powers under section 263 of the Act without appreciating that the twin conditions of that section viz., assessment order being erroneous as well as prejudicial to the interests of the Revenue, were not satisfied in the appellant’s case. Without prejudice: 4. That on the facts and circumstances of the case and in law, the CIT erred in disallowing provision made for slow/ non moving inventory aggregating to Rs.27,65,000/- in respect of goods sold by the appellant. 4.1 That on the facts and circumstances of the case and in law, the CIT failed to appreciate that there was no prejudice caused to the Revenue in as much as the provision created during the AY 2007-08 was written off in the subsequent years 2008-09 and 2009-10.
5. That on facts and circumstances of the case and in law, the CIT erred in setting aside to the assessing officer the issue of allowance of provision for free service coupons, for examining the basis and working of provision made to the extent of Rs. 75.95 lacs in respect of such provision. 5.1 That on facts and circumstances of the case and in law, the CIT erred in failing to appreciate that the provision for service coupons is an ascertained liability created on a scientific basis after considering technical estimates and is consistently followed by the appellant. 5.2 Without prejudice, that on facts and circumstances of the case and in law, the CIT erred in not directing the assessing officer to alternatively allow deduction of expenses aggregating to Rs. 66.75 lacs.
On proper appreciation of facts of the case and correct construction of law the CIT should have dropped the proceedings initiated under Section 263 of the Act. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing.”
The ld. counsel for the assessee strongly challenged the order of the CIT in invoking the powers under section 263. He submitted that the AO passed the order through the DRP process. Referring to the provisions of section 144C(8) of the Act he submitted that the DRP has the power to confirm, reduce or enhance the variations proposed in the draft order. Therefore, the CIT should not have assumed jurisdiction under section 263 when the DRP has not raised any objection and the assessment has been completed pursuant to the direction of the DRP.
So far as the merit of the case is concerned, he submitted that adequate disclosure was made by the auditors in the notes to accounts and such item is also appearing in the tax audit report. It is also in conformity with the accounting standards-2 according to which the auditors should estimate the cost of inventory the assessee is carrying. He submitted that it is the consistent policy of the company to value the cost of inventory and to make provision for such inventory at 100% if not sold for more than one year and to make 50% provision if such inventory is not sold for a period of more than 6 months to one year. Referring to the letter addressed to DCIT on 10th March 2014, he submitted that in response to notice of assessment proposed under section 263 read with section 143(2)/142(1) of the Act, the assessee had submitted that with effect from 01.04.2006, the assessee has adopted a policy for creating provision for slow moving/obsolete stock in the books of account if there was no movement in stock for unused material for more than one year at the rate of 100% of stock value and more than 6 months and less than one year @ 50% of stock value. He submitted that the assessee has not claimed any double deduction and it is a revenue neutral exercise. Referring to the decision of the Hon’ble Supreme Court in the case of CIT vs. Glaxo Smithkline Asia (P) Ltd., reported in 236 CTR 113, he submitted that if the allowance is on account of consistent policy and revenue neutral, no 263 proceeding is possible since it is not prejudicial to the interest of the Revenue. He submitted that in any case the provision for slow moving inventory is based on prudent accounting policy which has consistently been followed and the accounts of the assessee are being prepared on a conservative basis and therefore there is no error in the order of the AO in granting such claim to the assessee.
13.1 So far as the provision for service warranty of Rs.75.95 lakhs is concerned he submitted that such service coupons are issued to the customers who within a period of one year can get the product repaired. He submitted that such provision has been made on a reasonable and scientific basis. He submitted that the basis of my making such provision has been upheld by the Tribunal and also the Hon’ble High Court in subsequent assessment years. Therefore, there is no error in the order of the AO in allowing both the provisions.
The ld. counsel submitted that disallowance of provision for slow/non moving inventory has been allowed by the Tribunal in assessee’s own case for assessment year 2009-10 and 2010-11 vide order dated 13th April 2016 in and ITA No.636/Del/2015 for assessment year 2009-10 and 2010-11 respectively. Similarly the provision for free service coupons was upheld by the Tribunal for assessment year 2011-12 and 2012-13 and the Hon’ble Delhi High Court has upheld the decision of the Tribunal in allowing the provision for free service coupons. Relying on the following decisions, he submitted that the CIT is not justified in exercising jurisdiction under section 263 in the facts of the present case:- i. Malabar Industrial Co. Ltd. v CIT: 243 ITR 83 (SC) ii. R. Srinivasan v ACIT: 260 CTR 201 (Mad) iii. Hari Iron Trading Co. v CIT: 263 ITR 437 (P&H) iv. Decision of the Chennai Bench of the Tribunal in the case of SICAL Logistics Ltd. v Addtl.CIT: 127 ITD 187 (TM) v. Decision of the Cuttack Bench of the Tribunal in the case of Kailash Chandra Sahoo v ITO: (2014) 65 SOT 163 vi. Decision of the Kolkata Bench of the Tribunal in the case of Garden Reach Shipbuilderes & Engineers Ltd v CIT: 40 ITR(T) 475 vii. Decision of the Delhi Bench of the Tribunal in assessee’s own case for assessment year 2010-11: ITA No. 636/Del/2015 viii. Decision of the Delhi Bench of the Tribunal in assessee’s own case for assessment year 2011-12: ITA No. 1573/Del/2016 ix. Decision of the Pune Bench of the Tribunal in the case of Orient (Goa) Ltd. v DCIT: 66 ITD 479 x. Decision of the Pune Bench of the Tribunal in the case of J R. Agarwal v ACIT: 75 ITD 270 xi. Decision of the Bombay Bench of the Tribunal in the case of Trustees of Parsi Panchayat Funds & Properties v DIT: 57 ITD 328 xii. Decision of the Bombay High Court in the case of Virendra Kumar Jhamb v N.K. Vohra: 222 CTR 88
The ld. DR, on the other hand, heavily relied on the order of the CIT in exercising the powers under section 263. So far as the argument of the ld. counsel that since the order was passed under section 144C pursuant to the direction of the DRP which is a body of three commissioners who have the powers to confirm, reduce or enhance the variations proposed in the draft order and, therefore, the CIT has no power under section 263 is concerned, he submitted that there is no stipulation in the provision u/s 263 that any order passed by the AO as per the direction of the DRP under section 144C of the Act cannot be subject to review by the CIT under section 263 of the Act. Further, when the CIT can review the order of the DRP and file an appeal before the ITAT against the direction, then there can be no bar to invoke the provisions of section 263 in the cases completed pursuant to the direction of the DRP. Further, none of the issues on which the proceedings under section 263 has been initiated were considered by the DRP and any direction issued in this regard. She accordingly submitted that there is absolutely no error in assuming jurisdiction under section 263 by CIT on this issue.
15.1 So far as the two issues on which the ld. CIT has assumed jurisdiction under section 263 is concerned, she submitted that the assessee for the first time has made a provision for slow moving inventory of Rs.27,65,000/-. When this claim was made for the first time, the AO should have examined the issue since this is not a recurring issue or a consistent business policy of the assessee. Further, there was another amount of inventory written off for Rs.11.52 lakh shown under the head ‘other expenses’ account. The AO should have asked the assessee regarding the nature and allowability of provision for inventory of Rs.27.65 lakhs. Since the AO has not examined the issue, therefore, the order has become erroneous and prejudicial to the interest of the Revenue and the CIT is fully justified in assuming jurisdiction the section 263 on this issue.
So far as the provision of Rs.75.95 lakhs in respect of service coupons is concerned, she submitted that the AO has not at all called for any explanation from the assessee on this issue regarding its allowability and the basis of such working. Since the AO has not verified this claim made by the assessee, and therefore the order has become erroneous and prejudicial to the interest of the Revenue on this issue. So far as the argument of the ld. counsel that such claim has been allowed in subsequent years, the ld. DR submitted that in those years the AO has examined the issue and thereafter the appellate authorities have allowed such claim after examining its basis and allowability. However, the order of the AO for this year is completely silent and, therefore, the order has become erroneous. Relying on various decisions the ld. DR submitted that the ld.CIT has rightly assumed jurisdiction under section 263 on the two issues, i.e., provision for slow moving inventory of Rs.27.65 lakhs and provision for 75.95 lakhs in respect of service coupons.
We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT and the paper book filed on behalf of the assessee.
We have also considered the various decisions cited before us. We find the AO, in the instant case, completed the assessment u/s 143(3) read with section 144C on 24th October 2011, determining the total income at Rs.44,78,49,600/- as against the revised returned income of Rs.31,49,18,923/-. We find the ld. CIT held the order to be erroneous and prejudicial to the interest of the Revenue on two issues, i.e., provision for slow moving inventory of 27.65 lakhs and provision for Rs.75.95 lakhs in respect of service coupons which was claimed by the assessee in the P&L account and which were not examined by the AO during the course of assessment proceedings. It is the submission of the ld. Counsel that when the order was passed pursuant to the direction of the DRP and when the scope of DRP and powers conferred under section 144C to the DRP was in essence in the nature of power of review to safeguard the interests of the Revenue, the CIT has no jurisdiction to review the matter again under the provisions of section 263. Further, the DRP is a collegium of three commissioners and, therefore, the order passed in accordance with the direction of the DRP cannot be reviewed by a single commissioner under section 263. It is also the submission of the ld. counsel that the twin conditions, namely, the order is erroneous and prejudicial to the interest of the Revenue must be satisfied. However, in the instant case, the twin conditions are not satisfied. According to him, the provision for slow moving inventory of Rs.27.65 lakhs is policy decision of the assessee and it is revenue neutral. Further, such claim has been accepted in subsequent years by the Tribunal and the Hon’ble High Court therefore, even though the AO has not considered this issue in black and white, 15 however, the same may be prejudicial to the interest of the Revenue but cannot be said to be erroneous. Similarly the provision for Rs.75.95 lakhs in respect of free service coupons is also based on reasonable and scientific basis which has been accepted by the Tribunal and upheld by the High Court in subsequent years. Therefore, on both the issues the order of the AO cannot be held to be erroneous although it may be prejudicial to the interest of the Revenue.
We do not find any force in the above argument of the ld. Counsel for the assessee. So far as the argument that when the order was passed by the AO as per the direction of the DRP under section 144C of the Act who has got the power to review any issue and that the DRP being a collegium of three commissioners the CIT should not have exercised jurisdiction under section 263 is concerned, we find there is no stipulation in the provisions of section 263 that any order passed by the AO as per direction of DRP under section 144C of the Act cannot be subject to review by the CIT under section 263 of the Act. In our opinion, the provision of section 144C of the Act is only a mechanism to complete the assessment and the assessee has an option either to file an appeal before the CIT(A) or approach the DRP against the draft assessment order issued under section 144C of the Act by the AO. We find force in the argument of the ld. CIT-DR that the power of the DRP to confirm, reduce or enhance the variations proposed in the draft assessment order or for that matter to make enhancement on any issue not being subject matter of the draft order is similar to the power available to the CIT(A) to enhance the assessment u/s 251 of the IT Act, 1961. This power of enhancement in no way interferes with the power of CIT to invoke the proceedings under section 263 if the twin conditions, namely, the order is erroneous and prejudicial to the interests of the Revenue are satisfied. In our opinion, if the CIT can review the order of the DRP and file an appeal against their directions before the Tribunal, then there can be no bar to invoke provisions under section 263 in the cases completed pursuant to direction of the DRP. Further, we find none of the issues on which the proceedings under section 263 has been initiated was considered by the DRP and any direction issued in this regard. Therefore, we find no illegality on the part of the CIT in initiating proceedings under section 263 of the Act when the order has been passed under the direction of the DRP. Therefore, the argument of the ld. Counsel on this issue fails.