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Income Tax Appellate Tribunal, BENCH “B” KOLKATA
Before: Shri Sanjay Garg & Shri Girish Agrawal
आदेश /O R D E R
Per Girish Agrawal, Accountant Member:
This appeal by the assessee is against the order passed by the Principal Commissioner of Income Tax, Kolkata - 1 (in short, herein after referred to as the ‘Ld. PCIT’) vide Order No. ITBA/REV/F/REV5/2020-21/1031817558(1) dated 27.03.2021 for the A.Y. 2016-17 u/s. 263 of the Income-tax Act, 1961 (hereinafter, referred to as the ‘Act’).
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The assessee has raised the following grounds of appeal challenging the jurisdiction assumed by the Ld. PCIT invoking the provisions of section 263 of the Act and passing a revision order therein:-
That on the facts and in the circumstances of the case and in law, the order made by the Ld. Pr.CIT under section 263 of the Income-tax Act, 1961 ('IT Act') is illegal, invalid and not sustainable in law.
That on the facts and in the circumstances of the case and in law, the Ld. Pr. CIT grossly erred in passing the order under section 263 even though the assessment order under section 143(3) dated 30th December 2018 passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the interest of the Revenue.
That on the facts and in the circumstances of the case and in law, the AO after due examination of the relevant facts having already followed one of the course permissible in law, the Ld. Pr. CIT was unjustified in setting aside the assessment on the issue of disallowance of amount of Rs.1,34,45,166/- under section 35 of the Act and directing the AO to re-adjudicate the same issue after re-examination of the facts.
That on the facts and in the circumstances of the case and in law, the AO after due examination of the relevant facts having already followed one of the course permissible in law, the Ld. Pr. CIT was unjustified in setting aside the assessment on the issue of prior period expense on Advertisement of Rs.9,89,485/- debited to P&L A/c and directing the AO to re-adjudicate the same issue after re- examination of the facts.
For that on the facts and in the circumstances of the case, the order of the CIT passed u/s 263 be cancelled since the assessment order u/s 143(3) dated 30.12.2018 was neither erroneous nor prejudicial to the interest of the revenue.
Brief facts as culled out from records are that the assessee filed its return of income on 30.11.2016 showing total income at Rs. 1062,44,65,120/-. This return was subsequently revised on 27.03.2018 at total income of Rs. 1054,14,38,420/-. The case of the assessee was selected for scrutiny assessment and statutory notices u/s 143(2) & 142(1) of the Act were issued and served which were complied upon by the assessee. During the course of assessment, Ld. AO examined various issues and made additions / disallowances including the claim of deduction made by the assessee u/s 35(2AB) of the Act. Ld. AO issued a show cause notice dated 23.12.2018 on various issues placed
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at page 17 of the Paper Book (PB) against which detailed reply was submitted by the assessee placed at PB 19. The assessment u/s. 143(3) of the Act was completed by the ACIT, Circle – 7(1), Kolkata (Ld. AO) vide order dated 30.12.2018 at a total income of Rs. 1072,31,76,609/-.
Subsequent to the said assessment, Ld. PCIT called for and examined the assessment records and formed an opinion to invoke the provisions of 263 of the Act because the assessment order is erroneous which has caused prejudice to the interest of the Revenue. Pursuant to such consideration, Ld. PCIT issued a show cause notice (SCN) under the provisions of section 263 of the Act on 15.03.2021 for the following two reasons, referred to in Para 2 of the impugned order:-
In Schedule 19 of Tax Audit Report (TAR) it has been stated that the assessee debited an amount of Rs. 21,95,56,764/- in the Profit & Loss Account. However, the amount admissible u/s 35 of the Act is Rs. 20,61,11,598/- only. In the computation of total income, excess debited amount of Rs. 1,34,45,166/- (i.e. Rs. 21,95,56,764 - Rs. 20,61,11,598) has not been added back to the total income.
Schedule 27(b) of the TAR reveals that the assessee company has debited Rs. 9,89,485/- under the head advertisement in the Profit & Loss A/c which pertains to F.Y. 2014-15 relating to the A.Y. 2015-16, which is a prior period expense. This expense does not relate to the current year and therefore is to be disallowed. It is noticed that neither the assessee company has considered the same as current year income nor the assessing officer disallowed in his assessment order.
AO has passed the impugned assessment order without conducting any enquiries or verifications which should have been made in this case.
The assessee furnished its reply on 24.03.2021 before the Ld. PCIT as reproduced in the impugned order, explaining its case against the two issues raised in the SCN corroborating it with the relevant facts and documents.
On 27.03.2021, the Ld. PCIT passed the impugned order, inter alia, observing in Para 5 as under:
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“5. I have considered the facts of the case and the submissions of the assessee. On perusal of the assessment record it is seen that the assessee debited an amount of Rs. 21,95,56,764/- to the profit & loss account. However, the amount admissible u/s. 35 of the act is Rs. 20,61,11,598/- only. In the computation of total income, excess debited amount of Rs. 1,34,45,166/- (i.e. Rs. 21.95,56,764/- - Rs. 20,61,11,598/-) has not been added back to total income.
Further, the assessee company debited an amount of Rs. 9,89,485/- on account of advertisement to the profit & loss account. The expenditure is related to F.Y 2014-15, i.e. Prior period expenses as per the Tax Audit Report. As this expense does not relate to current year and therefore the same deserves to be disallowed. But it is noticed that neither the assessee company has considered the same as current year income nor the assessing officer disallowed in his assessment order.
The A.O. has passed the assessment order without making enquiries or verification which should have been made in the instant case. Clause (a) of Explanation-2 to section 263(1) is attracted in this case. Accordingly, it is held that the assessment order is erroneous in so far as it is prejudicial to the interest of revenue.”
With the aforesaid observations, Ld. PCIT concluded the revisionary proceedings u/s 263 of the Act by giving a direction to the Ld. AO in Para 11 and 12 as under: “11. Having regard to the facts and circumstance of the case and in the light of aforesaid decisions of Hon’ble Supreme Court and Hon’ble High Court, and in accordance with the amendment made in Section-263 of the Act with effect from 01.06.2015, I hold that the impugned assessment order dated 30.12.2018 passed by the A.O. is erroneous in so far as prejudicial to the interests of revenue. I further hold, after giving the assessee an opportunity of being heard, that the impugned assessment order dated 29.12.2017 is liable to be set-aside. Therefore, I set aside the said assessment order directing the A.O. to frame the assessment afresh after considering the aforesaid observations, Hon’ble Supreme Court and Hon’ble High Court decisions and as per law.
In the result, the assessment order u/s 143(3) dated 30.12.2018 for A.Y. 2016-17 is set-aside to the file of Assessing Officer with a direction to pass a fresh assessment order after considering the issues discussed in para 2 above, the aforesaid observations, as per law and after giving an opportunity of being heard to the assessee.” [emphasis supplied by us]
Learned Counsels for the assessee Shri N.S. Saini and Ms. Priyanka Salarpuria, represented the matter and took us through the facts of the case corroborating with the
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material placed on record in the paper book and written submission. Ld. CIT(DR) Shri Sudipta Guha represented the matter for the Revenue.
At the outset, Learned Counsel for the assessee submitted that Ld. PCIT has grossly erred in assuming his jurisdiction and initiating proceedings u/s. 263 of the Act since in the assessment order passed by the Ld. AO, he had not only made adequate enquiries but also undertaken necessary verification of the details which were furnished during the course of assessment proceedings and on the basis of which he had taken permissible views. It was further contended that nowhere in the impugned order the Ld. PCIT has held as to how the order of the Ld. AO is erroneous in so far as it is prejudicial to the interest of the revenue. Ld. Counsel also submitted that Ld. PCIT has to establish from the records by giving cogent reasons as to how and why the order of the Ld. AO is erroneous in so far as it is prejudicial to the interest of the revenue before cancelling or setting aside the assessment order. Therefore, according to the Ld. Counsel, neither in law nor on facts, the Ld. PCIT is justified in assuming the jurisdiction u/s 263 of the Act setting aside the order of the Ld. AO to pass a fresh assessment order. Ld. Counsel placed reliance on various judgments including in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 109 Taxman 66 (SC) by Hon’ble Supreme Court and DG Housing Projects Ltd [2012] 343 ITR 329 (Del) by Hon’ble Delhi High Court. Relevant extracts from the decision of DG Housing Projects Ltd. (supra) are reproduced as under – “16. Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, 5. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.
This distinction must be kept in mind by the CIT while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged "inadequate investigation", it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT v. Shree Manjunathesware Packing & Products Camphor Works [1998] 231 ITR 53 / 98 Taxman 1 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous.
In the present case, the findings recorded by the Tribunal are correct as the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that "order passed by the Assessing Officer may be erroneous". The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order passed by the Assessing Officer was erroneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent's computation figures but he had reservations. The CIT in the order has recorded that the consideration receivable was examined by the Assessing Officer but was not properly examined and 6. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
therefore the assessment order is "erroneous". The said finding will be correct, if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of the Revenue. In latter cases, the CIT has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. In the second set of cases, CIT cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not.” [emphasis supplied by us]
In respect of the first issue raised by the Ld. PCIT in the show cause notice (supra) regarding the addition of Rs. 1,34,45,166/- made u/s. 35 of the Act as amount inadmissible, Ld. Counsel submitted that the assessee had filed its written submissions on 24.03.2021 which is reproduced in the impugned order to explain that the said amount was added back in the computation of income by the assessee itself. To demonstrate the same and for the sake of convenience a break up of amount of Rs. 21,95,56,764/- debited in the P & L A/c as reported in Schedule 19 of the TAR was referred by the Ld. Counsel as under:-
Table 1: Details of Scientific Research Expenditure reported in Schedule 19 of TAR
S. No. Particulars Amount (Rs.) A Operating Expenses on SR 20,61,11,598 B Depreciation on SR Assets 94,90,862 C SR Assets written off 39,81,203 D Loss on sale of SR Assets 4,295 E Profit on Sale of SR Assets (-)31,194 F TOTAL 21,95,56,764 G Amount allowable u/s. 35 (Schedule 19 of TAR) 20,61,11,598 H Difference [B+C+D+E] 1,34,45,166 *SR= Scientific Research * FS= Financial Statements
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Ld. Counsel pointed out that items B, C, D & E in the above table were debited in the Profit & Loss A/c under the respective Heads, viz., Depreciation, Assets Written off, Profit/Loss on Sale of Assets. The relevant extracts of the Financial Statements for the FY 2015-16 highlighting the same was enclosed and marked as Annexure-1.
He further stated that location wise break up of these items of expenses as reflected in the Profit & Loss A/c are given in Table-2 as below:- Location Depreciation Asset Profit on Loss on Total W/off Sale of Sale of Asset Asset Note No. (Statement (Note 25 (Note 25 (Note 25 of Page 110 Page 110 Page 110 Profit and Loss Page 85) Kolkata 6.05 0.21 - - 6.26 Chennai 20.71 0.44 - - 21.15 Delhi 11.15 2.98 -0.07 0.04 13.40 Mumbai 4.93 0.12 -0.11 - 4.94 Uttaranchal 10.30 - -0.03 0.05 10.31 Hajipur 5.57 - - - 5.57 Khurda 5.91 0.07 - - 5.98 Bidadi 0.16 - - - 0.16 Jhagadia 7.68 - - - 7.68 Perunduraj 3.59 - 3.59 R&D 0.94 0.40 -0.003 0.0004 1.34 Bangalore 9.90 1.66 -0.02 - 11.54 Corp Office TOTAL 86.89 5.18 -0.23 0.09 91.93
It is submitted by the Ld. Counsel that from the above Table 2, it can be observed that the items set out in B, C, D & E in Table 1 formed part of the (i) depreciation on scientific research assets (ii) assets written off & (iii) profit / loss on sale on assets debited in the Profit & Loss Account. Each of these items set out in Table 2 above aggregating to Rs. 91.93 Crores was added in the computation of income from business. Copy of the relevant page is enclosed as Annexure-2. Copy of the Computation of income, highlighting these of addition made to the total income as
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well as relevant extracts of Schedule- BP of the return of income evidencing the same is given in Table 3 as below:-
9.
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Ld. Counsel for the assessee stated that on the basis of the above submission on factual position reflected in the financial statements and computation of income, it is evident that sum of Rs.1,34,15,166/- was added back in the computation of income by the assessee itself which proves that the allegation mentioned in the show cause notice is factually incorrect and unsustainable both in facts and law. It was further submitted that on this issue the Ld. AO had made enquiry and after being satisfied that the excess sum had been added back to the total income the assessment was completed u/s. 143(3) of the Act. It was stated by the Ld. Counsel that the Ld. AO had issued notice u/s. 142(1) dated 08.10.2018 and required the assessee to furnish the complete details on “any other amount allowed as deduction” which inter alia included the claim of Scientific Research Expenditure. The Ld. AO had also required the assessee to furnish the details of expenditure claimed during the year along with opening and closing balances reconciliation of the earlier year and current year. All the details were furnished before the AO by letters dated 20.11.2018 and 03.12.2018 forming part of the Paper Book, which were examined by the Ld. AO. The Ld. Counsel thus submitted that the Ld. AO had gone through the Tax Audit Report, income-tax return and submissions made in response to the notices and has taken a plausible view after due verification and examination.
In respect of the second issue raised by the Ld. PCIT in the show cause notice (supra) relating to claim of Rs. 9,89,485/- debited towards advertisement in the Profit & Loss A/c, as prior period expenses, which deserves to be disallowed, the Ld. Counsel submitted that this sum of Rs. 9,89,485/- pertains to the advertisement expenses for employment charged by “Linkedin” and bank charges thereon, details of which is tabulated as under:-
Invoice Number Invoice Value in Value in Prior Current Date USD Rs. Period Period 780431611 05.06.2014 7.425 4,943,134 4,94,134 (Linkedin invoice-1) 780446288 05.09.2014 7.425 4,94,134 4,94,134 (Linkedin invoice-2) 780702997 10.12.2015 7.525 5,00,789 5,00,789
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(Linkedin invoice-3) 780703000 10.12.2015 9,942 6,61,639 6,61,639 (Linkedin invoice-4) Total invoice value 32,317 21,50,696 9,88,268 11,62,428 Bank Charges 2,649 1,217 1,432 Total expenditure 21,53,345 9,89,485 11,63,860
The Ld. Counsel pointed out that “Linkedin” had raised the invoices as tabulated above in the month of June 2014, but it being a non-resident, essential documents like copy of Tax Residency Certificate (TRC), No Permanent Establishment Certificate (PEC), etc. were made available to the assessee by it only during FY 2015-16 and therefore, the assessee could account and pay for all these invoices during FY 2015-16 only, relevant to the AY 2016-17. The Ld. Counsel submitted that the advertisement expenses pertaining to the preceding year were quantified and were allowable expenses. It was claimed by him that both in facts and as per judicial precedence, the amount of Rs.9,89,845/- was eligible for deduction in AY 2016-17 and therefore, there was no error in the order of the Ld. AO leading to invocation of provisions of section 263. It was further submitted that there was no revenue implication since the tax rate applicable to the assessee during A.Y. 2015-16 to which the invoices relate and the A.Y. 2016-17 in which the invoices were accounted and paid, was the same. The Ld. Counsel relied upon several judgment including the decision of the Hon’ble Jurisdictional High Court of Calcutta in the case of CIT v. Todi Tea Co. Ltd [1999] 105 Taxman 697 (Cal). In the said decision, the assessee had entered into a supply agreement. The assessee subsequently violated the terms of the agreement and therefore the vendor raised a claim for compensation for breach of contract. The assessee disputed the claim of the vendor. The dispute was however settled in the subsequent financial year and the assessee agreed to pay a certain amount of compensation. The said payment was claimed as deduction in the subsequent year in which the liability was created in the books. The AO however disallowed the said expense holding it to be expenditure pertaining to the earlier year. On appeal, the Hon’ble High Court held that since the assessee was following the mercantile system of accounting, the assessee could claim the deduction of the liability created in its books based on the admission of liability. The Court held that 11. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
the assessee had agreed to pay the compensation only in the previous year relevant to the assessment year in question and created that liability in its books. It was therefore held that the assessee would be entitled to the deduction of liability to pay in the year in which liability is created in its books. Attention was further invited to the decision of the co-ordinate bench of ITAT Ahemdabad in the case of Patwa Kinariwala Electronics v. Dy. CIT [1998] 96 Taxman 192 (Ahd) (Mag). In this case, it had been held that the expenses pertaining to earlier years, which were quantified & crystallized during the previous year based on the maintaining of accounts on a mercantile basis, was allowable deduction.
Per contra, Ld. CIT (DR) relied upon the impugned order of the Ld. PCIT. He submitted that the AO failed to conduct proper enquiry on both the issues and the Ld. PCIT has rightly invoked the action u/s 263 of the Act. He has merely remitted these issues to the file of the assessing officer for fresh enquiry and no prejudice is caused to the assessee, if these issues are being examined afresh.
Before we advert to the facts and law involved in this appeal before us, it is worth apprising ourselves on the law governing the issue involved. Therefore, to examine the aspect whether Ld. PCIT is justified in holding the order of Ld. AO as erroneous and prejudicial to the interest of revenue, we will first go through the relevant provision of Section 263 of the Act which is reproduced as under for ease of reference:
(1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,— (a) an order passed on or before or after the 1st day of June, 1988 by 12. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
the Assessing Officer shall include— (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120; (b) "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; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.
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Explanation.—In computing the period of limitation for the purposes of sub- section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.
From perusal of the aforesaid section, it is apparent that there are mainly four features / stages of the power for revision to be exercised u/s 263 of the Act by the Ld. PCIT – i. The PCIT may call for and examine the records of any proceedings under the Act and for this purpose he/she need not show any reason or record any reason to believe as it is required u/s 147 or 143(2) of the Act. It is a part of his/her administrative control to call for the records and examine them.
ii. The PCIT on an analysis of both, the records and the order passed by the Assessing Officer arrives at a consideration that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. This is exercised by calling for and examining the records relating to any proceeding under this Act available at the time of examination by the PCIT. Till this stage, assistance of the assessee is not required by the PCIT.
iii. If after calling for and examining the records and the assessment order, the PCIT considers that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue, he/she is bound to give an opportunity of being heard to the assessee by issuing a show cause notice pointing out the reasons for arriving at such a consideration that action u/s 263 is required on a particular issue. The PCIT has to conduct an inquiry as he may deem fit and after hearing the assessee, he/she will pass the order as deem fit.
iv. The PCIT can annul or enhance or modify the assessment as a result of inquiry conducted and hearing the assessee by directing the Assessing Officer for a fresh assessment or to make such enquiries as he/she deem necessary.
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At this stage, before considering the multi-fold contentions of the Ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the Ld. PCIT taken u/s 263 of the Act. The co-ordinate bench of ITAT Mumbai in the case of Mrs. Khatiza S. Oomerbhoy v. ITO, Mumbai reported in [2006] 101 TTJ 1095 (Mum) analyzed in detail, various authoritative pronouncements including the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) and has propounded the following broad principle to judge the action of CIT taken under section 263 –
(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under the law. (vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. (vii) The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. (viii) The CIT, before exercising his jurisdiction under section 263 must have material on record to arrive at a satisfaction. 15. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
(ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order, he does not make an elaborate discussion in that regard. 16. In the first place, the assessee company has challenged the very invocation of jurisdiction by Ld. PCIT of his revisionary powers u/s 263 of the Act. Therefore, let us first look at the rightful exercise of revisionary powers by the Ld. PCIT for which we have to examine whether the order of the Assessing Officer found fault by the Ld. PCIT is erroneous in so far as it is prejudicial to the interest of the Revenue.
16.1 For that, let us take the guidance of judicial precedence laid down by the Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd. vs. CIT (supra) wherein their Lordships have held that twin conditions needs to be satisfied by the CIT before exercising revisionary jurisdiction u/s 263 of the Act. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue.
16.2 In the following circumstances, the order of the AO can be held to be erroneous order, that is – (i) order of Assessing Officer was passed on an incorrect assumption of fact; or (ii) incorrect application of law; or (iii) order of Assessing Officer is in violation of the principle of natural justice; or (iv) order passed by the Assessing Officer is without application of mind; or (v) Assessing Officer has not investigated the issue before him [because AO has to discharge dual role of an investigator as well as that of an adjudicator]; then, in aforesaid any of the events, the order passed by the AO can be termed as erroneous order.
16.3 Looking at the second limb as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue, one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar 16. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
Industrial Co. Ltd. (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the AO. Their Lordships held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.
In the light of above exposition on law enunciated in section 263 of the Act, let us examine the facts of the present case. We observe that in the course of proceedings u/s 263 of the Act before the Ld. PCIT, the assessee had furnished the relevant details and explained the two issues supporting its contentions by various judicial precedents. It is well settled law that for invoking the provisions of section 263 of the Act, both the conditions that the order must be erroneous and prejudicial to the interest of revenue needs to be satisfied. This ratio stands laid down by various Hon'ble Courts.
17.1 The first issue on which the assessment order has been treated as erroneous which has caused prejudice to the interest of the revenue relates to claim of deduction towards scientific research expenditure by the assessee for which the Ld. PCIT noted in his SCN (supra) that in Schedule 19 of Tax Audit Report (TAR) it has been stated that the assessee debited an amount of Rs. 21,95,56,764/- in the Profit & Loss Account. However, the amount admissible u/s 35 of the Act is Rs. 20,61,11,598/- only. In the computation of total income, excess debited amount of Rs. 1,34,45,166/- (i.e. Rs. 21,95,56,764 - Rs. 20,61,11,598) has not been added back to the total income.
17.2 The Ld. Counsel of the assessee made exhaustive submissions in the course of hearing before us and took us through the material placed on record to verify that the assessee while computing its income from business did add back the amount of Rs. 21,95,56,764/- debited in the Profit and Loss A/c against its claim of Rs. 17. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
20,61,11,598/- as reflected in Schedule 19 of the Tax Audit Report. We find that it is an issue purely on facts which is verifiable from the records of the assessee. Examination and verification of the financial statements vis-à-vis the computation of income of the assessee in this regard which are all on record, brings out the correct set of facts on the issue in hand. It is observed from the impugned order that the Ld. PCIT merely reproduced the exhaustive tabulated details submitted by the assessee but did not dwell on the same by giving observations on his examination of the details and data, to point out how and what was erroneous in respect of the claim made by the assessee towards scientific research expenses u/s 35 of the Act except for noting of a mere arithmetic difference of amount debited in the Profit and Loss A/c and actual claim in the computation of income reported in the Tax Audit Report which formed the basis to trigger the proceedings u/s 263 of the Act (i.e. Rs. 21,95,56,764 - Rs. 20,61,11,598). We observe that to invoke provisions of section 263, Ld. PCIT is required to examine the record of any proceeding under this Act and conduct such enquiries as he deems necessary. In the above paragraphs, while expounding on the law as enunciated in section 263, we have noted that the Ld. PCIT on an analysis of both, the records and the order passed by the Assessing Officer has to arrive at a consideration that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. This is exercised by calling for and examining the records relating to any proceeding under this Act available at the time of examination by the PCIT. The term ‘record’ has been explained in Explanation 1(b) to section 263 of the Act 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 Commissioner or Commissioner. Record shall include all the documentary evidences which were submitted before Ld. AO and also those submitted before Ld. PCIT against the SCN issued to invoke the provisions of section 263. Ld. PCIT is required to examine all the documentary evidences including those which were before Ld. AO and submitted before him. We find that in the Table – 1 above as submitted by the assessee, items B, C, D & E in the said table were debited in the Profit & Loss A/c under the respective Heads, viz., 18. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
Depreciation, Assets Written off, Profit/Loss on Sale of Assets and to corroborate this, relevant extracts of the Financial Statements for the FY 2015-16 (relevant to A.Y. 2016-17) highlighting the same was mapped with Annexure placed in the Paper Book. We also find from the perusal of Computation of income from business reproduced above that these items were added to the net profit as per Profit & Loss A/c to arrive at the income from business of the assessee for the year under consideration. Ld. PCIT erred in not bringing any material on record to controvert this verifiable factual position. For the above finding of ours, we find force from the decision of Hon’ble Bombay High Court in the case Gabriel India Ltd. [1993] 203 ITR 108 (Bom) wherein it is observed as under (page 113) – " . . . From a rending of sub-section (1) of section 263, 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 considers that any order passed therein by the Income-tax Officer is 'erroneous in so far as it is prejudicial to the interests of the Revenue'. It is not an arbitrary or unchartered power, it can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction.” [Emphasis supplied by us]
17.3 Further, we find that it is not a case where there was no enquiry at all by the Ld. AO. Our perusal of the show cause notice dated 23.12.2018 issued by the Ld. AO and the replies dated 26.12.2018 filed by the assessee in the course of assessment, reveals that Ld. AO did enquire in to the claim of assessee in respect of section 35(2AB) which deals with expenditure on scientific research. Here, in support of our finding, we would like to refer the judgment of Hon'ble Delhi High Court in the case of CIT vs. Anil Kumar Sharma [2011] 335 ITR 83 (Del) wherein it has been held dismissing the appeal “that the present case would not be one of, “lack of inquiry” even if the inquiry was termed inadequate. The Tribunal
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found that complete details were filed before the Assessing Officer and that he applied his mind to the relevant material and fact, although such application of mind is not discernable from the assessment order. The Tribunal held that, the Commissioner in proceedings under Section 263 also had all these details and material available before him, but not been able to point out defects conclusively in the material, for arriving at a conclusion that particular income had escaped assessment on account of non application of mind by the Assessing Officer. The Tribunal was right and the order of revision was not valid”. We also find that co-ordinate bench of ITAT Kolkata in the case of Satya Prakash Sharma v. Pr.CIT vide ITA No.2574 to 2576/Kol/2018 order dated 22.11.2019 on a similar issue laid down the proposition that “wherein enquiry was conducted by the assessing officer, even if inadequate, that would not by itself give occasion to the ld. Pr. CIT to interdict and interfere by exercising his revisional jurisdiction merely because he is of the opinion that some more enquiries should have been conducted in the matter.”
17.4 The issue regarding whether the assessment order is erroneous or prejudicial on the ground of insufficiency of enquiry has been dealt by the Hon'ble Delhi High Court in the judgment of ITO v. DG Housing Projects Ltd. (supra), which has been followed by various co-ordinate benches of the ITAT in various cases. Hon’ble High Court while adverting to the issue held that in cases of wrong opinion for finding on merit, the CIT has to come to the conclusion and himself decide that order is erroneous, by conducting necessary enquiry, if required and necessary before the order u/s 263 of the Act is passed. In such cases, the order of the AO will be erroneous because the order passed is not sustainable in law and the said finding must be recorded by CIT who cannot remand the matter to the assessing officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/enquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the AO, making the order unsustainable in law. In some cases, possibly though rarely, the CIT can also 20. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the AO had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the AO to conduct further enquiries without a finding that the order is erroneous, the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In such matters, to remand the matter/issue to the AO would imply and mean that the CIT has not examined and decided whether or not the order is erroneous but has directed the AO to decide the aspect/question. The Hon'ble Court further held that this distinction must be kept in mind by the CIT while exercising jurisdiction u/s 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged “inadequate investigation”, it will be difficult to hold that the order of the AO, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/enquiry himself. The order of the AO may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the AO to decide whether the order was erroneous. This is not permissible. An order is erroneous, unless the CIT holds and records reason why it is erroneous. Therefore, CIT must after recording reasons, hold that order is erroneous. The jurisdictional pre-condition stipulated is that CIT must come to the conclusion that the order is erroneous and is unsustainable in law. It was further observed by the Hon’ble High Court that the material, which the CIT can rely up on includes not only the records as it stands at the time when the order in question was passed by the AO but also records as it stands at the time of the examination by the CIT. Nothing prohibits CIT from collecting and relying new/additional material which evidence to show and state that the order of the AO is erroneous.
17.5 We find that Ld. PCIT in the present case has not carried out any enquiry of his own and has merely set aside the assessment to the file of the AO to re-examine the issue of claim of scientific research expenditure on account of difference in the 21. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
amount debited in the Profit and Loss A/c and the amount claimed as deduction in the Tax Audit Report not added back in the Computation of income from business of the assessee. Therefore, it is contrary to the guidelines as mandated in the Hon'ble Delhi High Court decision in the case of ITO v. DG Housing Projects Ltd. (supra) coupled with the fact that the assessee both, during the assessment proceedings and before the Ld. PCIT had submitted evidences in support of adding back the amount of Rs. 21,95,56,764/- debited by it in the Profit & Loss A/c towards scientific research expenditure. Therefore, the consideration arrived at by the Ld. PCIT invoking provisions of section 263 of the Act on the first issue is not justified and cannot be sustained under the facts and circumstances of the present case.
The second issue on which the assessment order has been treated as erroneous which has caused prejudice to the interest of the revenue relates to claim of deduction towards advertisement expenses in the Profit & Loss A/c for which the Ld. PCIT noted in his SCN (supra) that Schedule 27(b) of the TAR reveals that the assessee company has debited Rs. 9,89,485/- under the head advertisement in the Profit & Loss A/c which pertains to F.Y. 2014-15 relating to the A.Y. 2015-16, which is a prior period expense. This expense does not relate to the current year and therefore is to be disallowed. It is noticed that neither the assessee company has considered the same as current year income nor the assessing officer disallowed in his assessment order.
18.1 On this issue also the Ld. Counsel of the assessee brought on record the factual position that invoices issued by ‘Linkedin’ towards advertisement expenses in June 2014 were admitted as liability and crystallized for payment in the year under consideration owing to the fact that ‘Linkedin’ being non-resident, made available the its necessary documents of TRC and No PE Certificate, etc. in the impugned year only. It is not a case where these expenses were charged as deduction in the preceding year also by way of making a provision leading to claim of double deduction by the assessee. We note that there is no revenue implication and no prejudice is caused to the revenue since the tax rate applicable to the assessee during A.Y. 2015-16 to which the invoices relate and the A.Y. 2016-17 in which the invoices were accounted and 22. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
paid, was the same. In this context it is important to keep in mind the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd (supra) wherein it has observed that “every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under the law.”
18.2 Further, perusal of the observations and finding/direction given by the Ld. PCIT shows that no examination and verification has been done by the Ld. PCIT before arriving at the consideration of holding assessment order being erroneous in so far as it is prejudicial to the interest of the revenue. We find that Ld. PCIT in the present case has not carried out any enquiry of his own and has merely set aside the assessment to the file of the AO to re-examine the issue of claim of advertisement expenses alleged to be held as prior period expenses. Therefore, it is contrary to the guidelines as mandated in the Hon'ble Delhi High Court decision in the case of ITO v. DG Housing Projects Ltd. (supra). Accordingly, the consideration arrived at by the Ld. PCIT invoking provisions of section 263 of the Act on the second issue also is not justified and cannot be sustained under the facts and circumstances of the present case.
We find that Ld. PCIT in Para 11 of the impugned order has taken note of the amendment made in section 263 w.e.f. 01.06.2015. This amendment relates to Explanation 2 inserted in section 263 of the Act. The co-ordinate bench of Mumbai ITAT has dealt with Explanation 2 as inserted by the Finance Act, 2015 in the case of Narayan Tatu Rane v. Income Tax Officer [2016] 70 taxmann.com 227 (Mum) to hold that the said Explanation cannot be said to have overridden the law as interpreted by the Hon'ble Delhi High Court in DG Housing Projects Ltd (supra), according to which the Ld. PCIT has to conduct an enquiry and verification to establish and show that the assessment order is unsustainable in law. The co-ordinate bench of Mumbai ITAT has further held that the intention of the legislature could not have been to enable the Ld. PCIT to find fault with each and every assessment order, without conducting any 23. ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.
enquiry or verification in order to establish that the assessment order is not sustainable in law, since such an interpretation will lead to unending litigation and there would not be any point of finality in the legal proceedings. The opinion of the Ld. PCIT referred to in section 263 of the Act has to be understood as legal and judicious opinion and not arbitrary opinion.
On the two issues considered by the Ld. PCIT in the impugned order, no action u/s 263 of the Act is justifiable which cannot be sustained under the facts and circumstances of the present case and judicial precedents dealt herein above. We, therefore, quash the impugned order u/s 263 of the Act and allow the grounds raised by the assessee.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 28 March, 2022
Sd/- Sd/- (SANJAY GARG) (GIRISH AGRAWAL) Judicial Member Accountant Member
Dated:28 .03.2022 **PP. Sr. PS Copy of the order forwarded to: 1.Assessee – M/s. Britannia Industries Ltd, Prestige Shantiniketan Tower ‘C ‘The Business, 16th& 17th Floor, Whitefield Main Road, Mahadevpura Post, Bangalore-560048. 2.Revenue – PCIT-1, Kolkata, AaykarBhawan, P-7 Chowringhee Square, Kolkata-69 3.CIT, Kolkata. 4.CIT(A) 5.DR, ITAT, Kolkata, (sent through e-mail).. True Copy By Order Assistant Registrar ITAT, Kolkata Bench, Kolkata
ITA No. 150/Kol/2021 AY 2016-17 Britannia Industries Ltd.