RELIANCE INDUSTRIES LTD.,MUMBAI vs. PR. CIT (PCIT)-3, MUMBAI

O R D E R Manoj Kumar Aggarwal (Accountant Member) 1.1 As per the provisions of Section 263 of Income Tax Act, 1961, the revenue authorities namely Pr. Commissioner of Income Tax / Commissioner of Income Tax is vested with the supervisory powers of suo-moto revision of any order passed by the Assessing Officer [AO]. For the said purpose, the appropriate authority may call for and examine the record of any proceedings under the Act and may proceed to revise the same provided two conditions are satisfied-(i) the order of the 2 M/s Reliance Industries Limited Assessment Year: 2011-12 assessing officer sought to be revised is erroneous; and (ii) it is prejudicial to the interest of the revenue. If one of the condition is absent i.e. if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but it is prejudicial to the revenue - recourse cannot be had to Section 263 of the Act as held by Hon’ble Supreme Court in Malabar Industrial Co. Ltd. V/s CIT [243 ITR 83 10/02/2000] & noted by Hon’ble Delhi High Court in CIT V/s Vikas Polymers [194 Taxman 57 16/08/2010]. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. V/s CIT (supra) has held that the phrase 'prejudicial to the interests of the 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 the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. The said principal has been reiterated by Hon’ble Court in its subsequent judgment titled as CIT V/s Max India Ltd. (295 ITR 282). Similar principal has been followed by jurisdictional High Court in Grasim Industries Ltd. V/s CIT (321 ITR 92). 1.2 The Hon’ble Delhi High Court in CIT V/s Vikas Polymers (supra), further observed that as regards the scope and ambit of the expression "erroneous", Hon’ble Bombay High Court in CIT vs. Gabriel India Ltd. [1993 203 ITR 108 (Bombay)], held with reference to Black's Law 3 M/s Reliance Industries Limited Assessment Year: 2011-12 Dictionary that an "erroneous judgment" means "one rendered according to course and practice of Court, but contrary to law, upon mistaken view of law; or upon erroneous application of legal principles" and thus it is clear that an order cannot be termed as "erroneous" unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as "erroneous" by the Commissioner simply because, according to him, the order should have been written differently or more elaborately. The Section does not visualize the substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is not in accordance with law. 1.3 Further, any and every erroneous order cannot be the subject matter of revision because the second requirement also must be fulfilled. There must be material on record to show that tax which was lawfully leviable has not been imposed as held in Gabriel India Ltd.(supra). However, the expression "prejudicial to the interest of the revenue", as held by the Supreme Court in the Malabar Industrial Co. Ltd. case, is not an expression of art and is not defined in the Act and, therefore, must be understood in its ordinary meaning. It is of wide import and is not confined to the loss of tax as held in various judicial pronouncements. At the same time, the words "prejudicial to the interest of the revenue", as observed in Dawjee Dadabhoy and Co. vs. S.P. Jain, (1957) 311 ITR 872 (Calcutta), can only mean that "the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realized or cannot be realized." Thus, the Commissioner's exercise of revisional jurisdiction under the provisions of Section 263 cannot be based on whims or 4 M/s Reliance Industries Limited Assessment Year: 2011-12 caprice. It is trite law that it is a quasi-judicial power hedged in with limitation and not an unbridled and unchartered arbitrary power. The exercise of the power is limited to cases where the Commissioner on examining the records comes to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interest of the revenue and that fresh determination of the case is warranted. There must be material to justify the Commissioner's finding that the order of the assessment was erroneous insofar as it was prejudicial to the interest of the revenue. 1.4 The Hon’ble Delhi Court, in the cited decision, further observed that there is a fine though subtle distinction between "lack of inquiry" and "inadequate inquiry". It is only in cases of "lack of inquiry" that the Commissioner is empowered to exercise his revisional powers by calling for and examining the records of any proceedings under the Act and passing orders thereon. In Gabriel India Ltd. (supra), it was expressly observed: - "The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi- judicial controversies as it must in other spheres of human activity [Parashuram Pottery Works Co. Ltd. vs. ITO, (1977) 106 ITR 1 (SC)].

6 M/s Reliance Industries Limited Assessment Year: 2011-12 Regarding applicability of Section 263, what has to be seen is that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the revenue is the basic pre- condition for exercise of jurisdiction under section 263. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the section to give the assessee an opportunity of being heard. Further, there could be no doubt that so long as the view taken by the Assessing Officer is a possible view, the same ought not to be interfered with by the Commissioner under Section 263 merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority. This is a course of action that must be desisted from. 1.6 The Hon’ble Bombay High Court in Moil Ltd. Vs. CIT [81 Taxmann.com 420] observed that if a query is raised during the assessment proceedings which was responded to by the assessee, the mere fact that the query was not dealt with in the assessment order then it would not lead to a conclusion that no mind has been applied to it and the Assessing Officer is not expected to raise more queries, if he was satisfied about the admissibility of claim on the basis of the material and the details supplied. 1.7 An Explanation-2 has been inserted by Finance Act 2015 in Section 263 with effect from 01/06/2015 to declare that order shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of appropriate authority-(1) the order was 7 M/s Reliance Industries Limited Assessment Year: 2011-12 passed without making inquiries or verifications which should have been made; (ii) the order is passed allowing any relief without inquiring into the claim; (iii) the order is not in accordance with any direction or instructions etc. issued by the Board u/s 119; or (iv) the order was not in accordance with binding judicial precedent. 2.1 Keeping in mind aforesaid principle, we proceed to adjudicate the captioned appeal. In this appeal, the assessee has challenged the validity of revisional jurisdiction u/s 263 as exercised by Ld. Pr. Commissioner of Income Tax-Mumbai-3 (Pr. CIT) for Assessment Year 2011-12 vide order dated 30/03/2021. The grounds raised by the assessee read as under: - On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income tax, Mumbai 3 (hereinafter referred to as PCIT-3) - Order u/s.263 of the Act is bad in law, illegal and ultra-virus

1. Erred in passing the order under section 263 of the Act, setting aside the assessment order dated 31.12.2008 passed u/s 143(3) r.w.s 147 of the Income tax Act, 1961 (Act) by holding that it is erroneous and prejudicial to the interest of the revenue;

2. Failed to appreciate that the assessment order was neither erroneous nor prejudicial to the interest of the revenue and thus order u/s 263 is bad in law, illegal, ultra-virus, in excess of and/or in want of jurisdiction and otherwise void;

3. Erred in holding that AO has not applied his mind on the issue under consideration of taxability of principal component of lease rent without appreciating that said issue was one of the reasons for reopening of the assessment and for which specific query was raised in the assessment proceedings and all relevant details in response thereof was filed; Taxability of principal component of lease rent of Rs.24,97,13,828/- under section 115JB of the Income Tax Act

4. Erred in holding that principal component of lease rent of Rs.24,97,13,828 is liable to tax under section 115JB of the Income Tax Act, though same was not routed through the Profit and Loss Account; As evident, the assessee has contested the validity of revisional jurisdiction u/s 263 as exercised by Ld. Pr. CIT on the ground that there was no error in the order and the conditions of Sec.263 were not fulfilled. The assessee being resident corporate assessee is stated to be engaged in the business of manufacturing / trading of petrochemicals, 8 M/s Reliance Industries Limited Assessment Year: 2011-12 polyester, fiber intermediates textiles, generation and distribution of power, operation of jetties, making investment etc. 2.2 The material facts are that an assessment for the year under consideration was framed by Ld. AO u/s 143(3) r.w.s. 147 of the Act on 31/12/2018. The original return of income filed by the assessee was already scrutinized u/s 143(3) on 28/04/2015. However, the case was reopened for various reasons. One of the reasons to reopen the assessment, as enumerated in para-3 of assessment order, was as follows: - 7. Para 8 It is observed from the record that assessee company had not routed the interest of Rs.30,94,61,521/- received on the refund of Income Tax & income from assets given on lease of Rs.24,97,13,828/- through P&L A/c, though, this income is offered to tax under income computed under normal provision of the Act. However, in view of decision of Hon'ble ITAT in the case of M/s. Avada Trading Company Ltd (100 ITO 131), interest granted to the assessee under section 244A is assessable in the year in which refund is actually received by the assessee.

2.3 During reassessment proceedings, the assessee submitted that lease rental had two parts viz. (i) interest portion of Rs.577.69 Lacs which was already credited to Profit & Loss Account & (ii) Principal portion of Rs.2497.13 Lacs which was deducted from the value of ‘Lease Receivable’ as reflected on asset side of the Balance Sheet and not routed through Profit & Loss Account. The said accounting treatment was stated to be in accordance with Accounting Standard-19 (AS-19) issued by The Institute of Chartered Accountants of India (ICAI) dealing with ‘Accounting Treatment of Leased Assets’. The said AS-19 was stated to have come into effect from 01/04/2001 and the assessee was mandatorily required to follow the same. It was further submitted that lease term was for major part of the economic life of the asset and it was a case of finance lease. As per 9 M/s Reliance Industries Limited Assessment Year: 2011-12 AS-19, the assessee as a lessor was to recognize such asset in its Balance Sheet as ‘lease receivable’ under the head loans and advances which would be at an amount equal to the net investment in the lease. Whenever lease installments were received, the principal portion of lease rent received was to be reduced from ‘Lease Receivable’. Since the aforesaid treatment was in accordance with mandatory AS-9 and therefore, the principal portion was not routed through Profit & Loss Account. However, interest portion of lease rent was credited to Profit and Loss Account and the same was offered to tax while computing income under normal provisions as well as while computing Book Profits under MAT Provisions. On the other hand, since no fixed asset was appearing in the books of the assessee (based on AS-19), no depreciation was claimed in the books of the assessee and therefore the principal portion of lease rent was not considered for computing Book Profits u/s 115JB of the Act. The principal component of lease rent was reduced from the total lease rent receivable appearing in the Balance Sheet under the head "Loans and Advances" and therefore the same was not credited to Profit and Loss Account and hence not considered for book profits u/s 115JB of the Act. It was further submitted that for computing income under normal provisions, the assessee being lessor was entitled to claim depreciation in terms of CBDT Circular No.2/2001 dated 09/02/2001 and consequently, principal component of lease rent was also offered to tax while computing Income under normal provisions. Since the accounting of lease rent was in accordance with AS-19 and consequently was in accordance with Schedule VI of the erstwhile Companies Act, 1956, no adjustment was made to book profits 10 M/s Reliance Industries Limited Assessment Year: 2011-12 computed u/s 115JB of the Act. Reliance was placed on the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd (255 ITR 273) as affirmed in the case of Malayala Manorama Co. Ltd (300 ITR 251), for the submissions that the Assessing Officer could not go beyond the Profit and loss Account except to the extent of adjustment as enumerated in explanation to section 115JB of the Act. 2.4 It is evident from assessment order that though the case was reopened for multiple reasons, however, Ld.AO chose to make additions only against few reasons with following concluding observations: - 7. It is to be noted that on the remaining issues, the submissions made by the assessee are considered and accepted on the basis of merit of the issues and stand taken by the department in earlier years. Upon perusal of assessment order, it could be gathered that the assessee’s explanation qua lease was accepted by Ld. AO and no such adjustment of principal component of lease assets have finally been made while computing Book Profits u/s 115JB. At the same time, from the above observations, it could also be concluded that Ld.AO applied his mind to the issue and after considering assessee’s submissions, accepted the stand of the assessee on merits and chose not to disturb Book Profits u/s 115JB on this account. Invocation of Revisional Jurisdiction u/s 263 3.1 Subsequently, Ld. Pr.CIT, after perusal of case records, sought revision of this order on the ground that though the lease rental was offered to tax under normal provisions, however, it was not offered to tax while computing Book Profits u/s115JB. Therefore, the Book Profits were short computed to the extent of Rs.2497.13 Lacs. Accordingly, a show- cause notice was issued to the assessee on 18/03/2020 proposing to set aside / cancel the order, on this issue.

11 M/s Reliance Industries Limited Assessment Year: 2011-12 3.2 In response, the assessee reiterated its stand that the accounting treatment was in accordance with mandatory AS-19. The assessee consistently followed this accounting practice over the years in accordance with AS-19. The assessee also drew attention to the fact that Ld.AO accepted the issue on merits and applied his mind on the basis on the issue and found that no income had escaped assessment. The view taken by Ld. AO was one of the possible view and therefore, the revision was not valid as per the decision of Hon’ble Supreme Court in Malabar Industries Co. Ltd. (243 ITR 83). The attention was also drawn to the fact that similar adjustment was proposed by way of rectification u/s 154 by Ld. AO for immediately preceding AY 2010-11 vide rectification notice dated 21/05/2017. However, after considering the submissions of the assessee, Ld.AO, vide order dated 30/11/2018, accepted the accounting treatment of lease income as adopted by the assessee and again decided not to make any such adjustment to the Book profit on the very same issue. Reliance was also placed on the decision of Tribunal in the case of group concern M/s Reliance Corporate IT Park (ITA No.2748/Mum/2015 order dated 08/03/2017) wherein it was held that once a particular view was taken which was a possible view then unless it is shown that the view is not tenable either in law or on facts, the assessment order could not be cancelled u/s 263. However, not concurring with aforesaid submissions, Ld. Pr. CIT, directed Ld. AO to redo the assessment, in this respect, with following observations: - 12 M/s Reliance Industries Limited Assessment Year: 2011-12

13 M/s Reliance Industries Limited Assessment Year: 2011-12 6. Considering all the facts as narrated above, hold the order 143(3) rws 147 of the Income Tax Act, 1961 dated 31.12.2018 to be erroneous and prejudicial to the interest of revenue.

Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 4. We have carefully considered the factual matrix as well as arguments advances by both the representatives. Our adjudication to the issue, in the light of settled legal position as enumerated in opening paragraphs, would be as given in succeeding paragraphs.

5. Upon perusal of assessment order under consideration, it is quite evident that an order was passed by Ld. AO u/s 143(3) r.w.s. 147 of the Act. One of the reasons to reopen the case was the allegation of Ld. AO that income from assets given on lease, though offered to tax under normal provisions, was not routed through Profit & Loss Account which has led to short-computation of Book Profits under MAT provisions. However, the assessee well explained the fact that the accounting treatment given by the assessee was in accordance with mandatory AS- 19 which mandate the assessee to reflect investment in asset under finance lease as ‘Lease Receivable’ in Balance Sheet on asset side under the head ‘Loans & Advances’. Whenever, the installment was received, the principal component was to be reduced from that head and the same was not to be routed through profit & Loss Account. This practice was being followed consistently over various years. Therefore, 14 M/s Reliance Industries Limited Assessment Year: 2011-12 since the income was not to be routed through Profit & Loss Account, the same was not added back to the Book Profits under MAT provisions as per the decision of Hon’ble Supreme Court in Apollo Tyres Ltd (255 ITR 273) as affirmed in the case of Malayala Manorama Co. Ltd (300 ITR 251). Upon perusal of assessment order, it could be seen that the case was reopened for various specific reasons, one of which was the fact that income from lease assets was not added in Book Profits. However, no such adjustment has finally been made in the assessment order. Pertinently, Ld.AO, in para-7, observed that on the remaining issues, the submissions made by the assessee are considered and accepted on the basis of merit of the issues and stand taken by the department in earlier years. Therefore, it could very well be said that Ld.AO duly applied his mind to the issue under consideration and took a possible view in the matter which is not contrary to law. Therefore, the observation of Ld. Pr. CIT that Ld. AO did not applied his mind to the issue, is without much substance. Merely because similar adjustment was made in subsequent years, the same would not lead to a conclusion that the orders passed in earlier years would require revision unless it was shown that the order was erroneous as well as prejudicial to the interest of the revenue. In the present case, we find that the issue was duly considered by Ld. AO after considering assessee’s detailed submissions. The view could not be said to be unsustainable view and it was one of the possible view. Therefore, on the given facts and circumstances, we find that the subject matter of proposed revision was already deliberated upon by Ld. AO and a possible was taken in the matter. That view could not be said to be contrary to law, perverse or unsustainable in law, in any manner and the same would be a possible view keeping in mind the assessee’s 15 M/s Reliance Industries Limited Assessment Year: 2011-12 submissions during reassessment proceedings. This being the case, the assessment order could not be subjected to revision u/s 263 and the action of Ld. Pr.CIT in invoking jurisdiction u/s 263 could not be sustained in the eyes of law. Similar is the view of the Tribunal in assessee’s group concern i.e. M/s Reliance Corporate IT Park Ltd. V/s Pr. CIT (ITA No.2748/Mum/2015 dated 08/03/2017) wherein it has been observed by the coordinate bench that when Ld. AO had applied his mind on the given facts and material on record and took a possible view then such an assessment order could not be cancelled u/s 263 unless it was shown that the view was not tenable either in law or on facts.

7. Finally, on the facts and circumstances of the case, we quash the order passed by Ld. Pr. CIT in terms of settled legal position as enumerated by us in opening paragraphs. Ground nos. 1 to 3 stands allowed which render adjudication of ground no.4 merely academic in nature.