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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B R BASKARAN
Per N.V. Vasudevan, Vice President
This appeal by the assessee is against the order dated 20.04.2018 of the Principal Commissioner of Income-tax, Bengaluru-4, Bengaluru [hereinafter referred to as “Pr.CIT”] passed u/s. 263 of the Income-tax Act, 1961 [the Act] in relation to assessment year 2014-15.
The assessee is a company engaged in the business of rendering software development services. For the AY 2014-15, the assessee filed a return of income declaring a total income of Rs.22,85,60,630. The order of
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assessment u/s. 143(3) of the Act was passed by the AO accepting the total income returned by the assessee.
The Pr. CIT in exercise of his powers u/s. 263 of the Act was of the view that the aforesaid order dated 27.9.2016 passed by the AO was erroneous and prejudicial to the interests of the revenue for the following reasons:-
“1. On verification of assessment record it was noticed that the assessee had debited Rs.2,15,89,831/- towards Service Tax input receivable written off in the P&L account/Notc- 20/Other Expenses. However, the service tax receipts and expenditure were not routed through the P&L account. The same are maintained in a separate ledger account and therefore. does not qualify as an admissible expenditure. 3. The AO has failed to conduct adequate enquiries regarding the above issue and has failed to bring to tax the correct income while completing the assessment U/s 143(3). Therefore, action u/s.263 is warranted and the assessment for the A.Y.2014-15 was proposed to be revised according1y.” 4. In reply to the aforesaid show cause notice of the Pr.CIT, the assessee filed reply pointing out that the Assessee was engaged in the business of development of software services. These software development services are provided to its Holding company MetricStream Inc, USA. During the financial year relevant to AY 2014-15, the Assessee exported software services to MetricStream Inc to the tune of Rs. 1,68,77,13,290/- and as per the relevant Service tax law prevalent during FY 2013-14, no service tax was required to be paid by any exporter of service. However, various vendors who provided services to the Assessee in India had charged service tax on the services they provided to the Assessee during the relevant previous year. The service tax so charged was a cost/expenditure for the Assessee which was incurred wholly and exclusively for the purpose of business. The Assessee
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could not utilize the service tax so charged as input service tax because the services provided by the Assessee to its parent company was export of service which is not subject to levy of service tax. Since service tax which was charged by the service providers to the Assessee and since the service tax so charged was not available for use as service tax input credit, the service tax charged by the vendors who provided services to the Assessee had to be regarded as an expenditure which was incurred wholly and exclusively for the purpose of business and hence allowable as deduction under section 37(1) of the Act. The service tax input credit to the extent not available to the Assessee was written off and the same should be regarded as expenditure that should be allowed as deduction u/s.37(1) of the Act.
It was further submitted that the service tax paid and written off in the books of account was actually paid by the Assessee to various vendors who provided services to the Assessee during the year and therefore the service tax paid was allowable deduction under section 43B of the Act also.
The Assessee also pointed that as per the provisions of section 145A of the Act, the cost of goods for the purposes of determining the income chargeable under the head "profits & gains of business or profession" shall be adjusted to include any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the dale of valuation. Applying the same principles to even the valuation of services utilized by the assessee, the input service tax being of revenue nature has been rightly claimed by as deductible expenditure as part of the valuation of the services utilized during the year under the provisions of section 37 r.w.s. 145 of the Act. In this regard the assessee relied on the following cases laws.
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TVC Sky Shop Ltd vs. DCIT ITA No. 7907/Mum/2011 (I TAT. Mumbai) (A.Y2008-09) NCS Distilleries Pvt. Ltd v ITO ITA No. 699/Hyd/2012 (ITAT, Hyderabad) 7. Without prejudice to the above contention, the Assessee contended that the service tax input credit written off is also allowable as a 'business loss' under section 28 itself in computing the business income for the year under consideration. The write off of service tax input credit which was already paid by the Assessee and would amount amount to business loss and hence was allowable in computing the business income. The contention that write off of service tax input credit amounting to Rs.2,15,89,831 does not qualify as an admissible expenditure is therefore incorrect.
Besides the above, the assessee also submitted that the condition precedent for exercise of jurisdiction u/s. 263 of the Act by the Pr.CIT was not present in the case of assessee. In this regard, the assessee pointed out that AO before concluding the assessment has issued a notice u/s. 143(2) of the Act dated 29.8.2015 and in response to the same, the assessee filed audited financial statement, tax audit report, IT return, etc. on 29.4.2015. The assessee also pointed out that in Note 20 to the financial statement, the details of Other Expenses which include service tax input receivable written off has been specifically mentioned. The assessee therefore claimed that the AO is deemed to have made enquiry with regard to service tax input receivable written off in the P&L account.
The assessee also pointed out that the AO after conclusion of the assessment proceedings issued a notice u/s. 154 of the Act 5.12.2017 proposing to disallow service tax input receivable written off amounting to Rs.2,15,89,831. The assessee sent a reply to the aforesaid notice u/s. 154 of the Act dated 5.12.2017. After receipt of the said reply dated
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19.12.2017, the AO did not proceed further. However, proceedings u/s.263 of the Act has been initiated by the Principal CIT. The assessee therefore requested that the proceedings u/s. 263 of the Act should be dropped.
The Pr.CIT, however, did not agree with the submissions of the assessee. She found that on facts, scrutiny of records revealed that the AO did not make any enquiries on the aspect of service tax input receivable written off in the P&L account and therefore there was a failure on the part of the AO to make any enquiries on this aspect before concluding the assessment and consequently the order of AO was erroneous and prejudicial to the interests of revenue.
The Pr.CIT also dealt with the case laws cited on behalf of assessee in the following manner:-
“6. The other contention of the assessee is that the service tax paid has to be allowed as deduction even though the same is not claimed in the Profit and Loss account. In this regard the assessee relied on the following case laws. TVC Sky Shop Ltd vs. DCIT ITA No: 7907/Mum /2011 (ITAT, Mumbai) (A.Y.2008-09) NCS Distilleries Pvt. Ltd v ITO ITA No. 699/Hyd/2012 (ITAT , Hyderabad) In the case of TVC Sky Shop Ltd vs. DCIT service tax is allowed as the relevant assessee company is neither a manufacturing company nor a service providing company paying service tax against which such service tax on input services can be adjusted. The assessee company is merely a trading company. There is no provision under the service tax law to refund such input service tax in the absence of any adjustment for the same with the output service tax liability of the company. Therefore, the amount has been held as allowable as it is not adjustable against any liability of the assessee or refundable by the Service Tax Department. However, the facts and circumstances of the present case are
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entirely different and the assessee is entitled to refund from Service tax department. It is admitted that this refund of Rs.2,04,68,882 has been received in the A.Y.2017-18 as per its letter dated 28.03.2018. In view of the above the case law cited by the assessee is not avail to the assessee. In the case of NCS Distilleries Pvt. Ltd v ITO the service tax is allowed on the ground that the relevant company has closed down its manufacturing unit and consequently the benefit of the CENVAT credit remained un-adjusted. In the present case the assessee is a goi11g concern and not stopped its activities in the year under consideration. Therefore, this case law also not help the assessee's case. Since the assessee has not debited the service tax paid to Profit & Loss account and the assessee has alternate remedy to get refund of the entire service tax input from the Service tax department , the claim of the assessee is not sustainable in law. 7. In the case of CIT Vs Noble And Hewitt (I) (P) Ltd (305 ITR 324), the Hon'ble High Court of Delhi held in the context of 43B payments held that when the assessee did not debit the amount to the Profit & Loss Account as an expenditure, the question of disallowing the deduction not claimed would not arise. In view of the above decision the expenditure i.e., service tax not debited to Profit & Loss account cannot be disallowed U/s 43B on actual payment basis. Taking the same analogy, the expenditure not debited to Profit & Loss is not allowable as an expenditure. Further it is necessary to note that in the assessee's case, the claim made is on account of write off which is not in accordance with the accepted accounting principles or provisions of law.” 12. Finally, the Pr. CIT gave the following directions to the AO:-
“9. From the foregoing discussion, it is manifestly clear that the assessment order dated 27.09.2016 passed by the Assessing Officer in the case of the assessee for A.Y. 2014-15 is not only erroneous but also prejudicial to the interests of revenue and the twin conditions as contemplated in sec. 263 are satisfied in the present case. Consequently, the assessment is set aside to the file of the AO with a direction to the Assessing Officer to
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examine the aforesaid issues and redo the assessment afresh as per law after affording reasonable opportunity of being heard to the assessee.” 13. Aggrieved by the aforesaid order of the Pr.CIT, the assessee is in appeal before the Tribunal.
The ld. counsel for the assessee reiterated the submissions as were made before the Pr. CIT in the form of reply to the show cause notice u/s. 263 of the Act. According to him, the service tax input that was written off in the P&L a/c was offered to tax in the subsequent assessment year and therefore there was no loss of revenue and therefore the condition for exercise of jurisdiction u/s. 263 of the Act that there should be loss of revenue is not satisfied in the case of assessee. In this regard, he relied on the decision of the Hon’ble Supreme Court in the case of CIT v. NTPC Ltd. (2017) 88 taxmann.com 561 (SC) wherein the Hon’ble Supreme Court held that when subsequent events demonstrate that there was no leakage of revenue, jurisdiction u/s. 263 of the Act was not required to be exercised. He also relied on the decision of Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd. v. CIT 243 ITR 83 (SC) for the proposition that two conditions are required to be satisfied for invoking jurisdiction u/s. 263 of the Act viz., the order sought to be revised must be erroneous and also prejudicial to the interests of revenue. He also submitted that the jurisdiction u/s. 263 of the Act should be exercised only when the orders challenged are unsustainable in law.
On merits of the issue which was subject matter of the order u/s. 263 of the Act, the ld. counsel for the assessee placed reliance on the decision of ITAT Delhi Bench in the case of Maruti Suzuki (I) Ltd. v. ACIT [2015] 60 taxmann.com 411 wherein the Delhi ITAT has dealt with the unutilised balance of excise duty under PLA in the context of provisions of section
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43B and section 145A of the Act and the ratio laid down therein is in favour of assessee.
The ld. DR relied on the order of Pr.CIT and highlighted the fact that this aspect of service tax input receivable written off was not specifically enquired into by the AO before concluding the assessment proceedings, nor was any enquiry raised in the notice issued u/s. 143(2) dated 29.8.2015 and notice u/s. 142(1) dated 12.4.2016.
We have given a careful consideration to the rival submissions. The Assessee was engaged in the business of development of software services. These software development services are provided to its Holding company MetricStream Inc, USA. During the financial year relevant to AY 2014-15, the Assessee exported software services to MetricStream Inc to the tune of Rs. 1,68,77,13,290/- and as per the relevant Service tax law prevalent during FY 2013-14, no service tax was required to be paid by any exporter of service. However, various vendors who provided services to the Assessee in India had charged service tax on the services they provided to the Assessee during the relevant previous year. The service tax so charged was a cost/expenditure for the Assessee which was incurred wholly and exclusively for the purpose of business. The Assessee could not utilize the service tax so charged as input service tax because the services provided by the Assessee to its parent company was export of service which is not subject to levy of service tax. Since service tax which was charged by the service providers to the Assessee and since the service tax so charged was not available for use as service tax input credit, the service tax charged by the vendors who provided services to the Assessee had to be regarded as an expenditure which was incurred wholly and exclusively for the purpose of business and hence allowable as deduction under section 37(1) of the Act. The service tax input credit to the extent not available to the Assessee was written off
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and the same should be regarded as expenditure that should be allowed as deduction u/s.37(1) of the Act.
The first aspect which needs to be examined is as to whether the AO before concluding the Assessment did make any enquiry on this aspect. Admittedly the AO before concluding the assessment proceedings did not make any enquiries with regard to the deduction claimed in the profit and loss account while computing income from business on account of service tax input written off. The question whether liability on account of service tax input written off was allowable as deduction or not is not the issue in these proceedings. The issue is whether the AO failed to make enquiries on this aspect while concluding the original Assessment. From the notice issued u/s.143(2) and 142(1) of the Act, we do not find any query having been raised by the AO on how service tax input written off was an expenditure which can be claimed while computing income from business. The ld. Counsel for the assessee could not substantiate before us as to how the AO made enquiries on this issue before concluding the assessment, except by pointing out that all facts were laid before the AO and it can be presumed that he had taken note of this aspect while concluding the assessment. The fact that the AO himself initiated proceedings u/s.154 of the Act to rectify error apparent on record on the aspect of having allowed service tax input written off as a deduction goes to show that he had while completing the Assessment not enquired or was not conscious of the merits of the claim for deduction of the aforesaid sum while computing income. The law is well settled that if there is a failure on the part of AO to make an enquiry on the issue which calls for an enquiry, that by itself will render the order of assessment erroneous and prejudicial to the interests of the revenue. It has been so held by the Hon’ble Delhi High Court in the case of Gee Vee Enterprises Vs. DCIT 99 ITR 375 &
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386(Delhi). The following passage from the said decision would explain clearly the legal position in this regard:-
“(13) Shri G.C. Sharma argued that the orders passed by Income- tax authorities under sections 34 and 33B of the old Act corresponding to Section 147, and 263 of the new Act stood on the same footing when they were challenged as being without jurisdiction by way of a writ petitions We do not, however, think that he can derive any assistance from the decision in Calcutta Discount Company's case. As pointed out by the Supreme Court in Mysore State Road Transport Corporation V. The Mysore road Appellate Tribunal, (Civil Appeal No.1801 of 1970 decided on August 8, 1974) referring to an essay on "Determining the Ratio Decidendi of a case" by Dr. A. L. Goodhart, "the principle of a' case is determined by taking into account the facts treated by the Judge deciding a case as material and his decision as based thereon." The ratio of the decision in Calcutta Discount Company's case cannot apply to the facts of the present case for the following reasons :-
(I) Under section 34, the duty of the assessed is only to state the material facts necessary for the purpose of .assessment. Once these facts are accepted and an assessment is made, the Income Tax Officer cannot reopen the assessment unless he had reason to believe that the material facts were not truly disclosed.. The reason why the reopening of the assessment is thus made somewhat difficult is to preserve the finality of the previous decision which should not be destroyed except for a good reason. Once it is found that the disclosure of facts was complete, no jurisdiction could arise for the reopening of the assessment.
(II) On the other hand, the condition for the assumption of jurisdiction under old section 33B and the new section 263 is easier to fulfill. The reason is that it is not the Income Tax Officer but a superior Officer like the Commissioner who is exercising a revisional jurisdiction suo motu there under. The superior officer could be trusted with a larger power. The only requirement for the exercise of this power is that the Commissioner should consider that the order passed by the. Income Tax Officer is "erroneous in so far as it is prejudicial to the interests of the Revenue." What is the meaning of "erroneous" in this context? It was argued for the assessee by Shri G. C. Sharma that the word "erroneous" means that the order must appear to be wrong on the face of it. In other words, he equated the "error" with "error of law apparent on the face of record" which is a well-known
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ground for the review of a quasi-judicial order by this Court under Article 226. We are unable to agree with this interpretation. The intention of the legislature was to give a wide power to the Commissioner. He may consider the order of the Income Tax Officer as erroneous not only because it contains some apparent error of reasoning or of law or of fact on the face of it but also because it is a stereo-typed order which simply accepts what the assessed has stated in his return and fails to make inquiries which are called for in the circumstances of the case. Shri Sharma's contention that this would give the Commissioner the power to revise the order of the Income Tax Officer merely on the ground of suspicion is. untenable in view of the following two Supreme Court decisions which have already construed the old Section 33B contrary to Shri Sharma's contention. In Rampyari Devi Saraogi V. CIT, 67 I.T.R. 84, the Income Tax Officer accepted the return of the assessed in respect of the initial capital, the gift received and the sale of jewellery, the income from business, etc., without any inquiry or evidence whatsoever. For this reason the Commissioner held the order to be erroneous. In revision, he cancelled the order and ordered the Income Tax Officer to make a fresh assessment. In his order the Commissioner had used certain new grounds which had not been disclosed to the assessed in the notice given to him to show cause why the order of the Income Tax Officer should not be revised. But apart from these new grounds, the Supreme Court observed at page 88 of the report that-
"THERE was ample material to show that the Income Tax Officer made the assessments in undue hurry........,...The assessed made a declaration giving the facts regarding initial capital, the ornaments and presents received at the time of marriage, other gifts received from her father-in law, etc., which should have put any Income Tax Officer on his guard. But the Income Tax Officer without making any inquiries to satisfy himself passed the assessment order ....... A short- typed assessment order was made for each assessment year......No evidence whatsoever was produced in respect of the money-lending business done. ............No names were given as to the parties to whom the loans were advanced."
In Tara Devi Aggarwal Vs. CIT, 88 I.T.R. 323, also the Income Tax Officer, Howrah, while remarking that the source of income of the assessed was income from speculation and interest on investments stated that neither the assessed , able to produce the details and
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vouchers of the speculative transactions made during the accounting year nor was there any evidence regarding the interest received by the assessed from different parties on her investments. Notwithstanding these defects the Income Tax Officer did not investigate into the various sources but assessed the assessed on a total income of Rs. 9037.00 . The inquiries made by the Commissioner revealed that the assessed did not reside or carry on business at the address given in the return. The Commissioner was also of the view that the Income Tax Officer was not justified in according the initial capital, the sale of ornaments, the income from business, the investments, etc., without any inquiry or evidence whatsoever and that the order of assessment was erroneous and prejudicial to the interests of the Revenue. The High Court held that there were materials to justify the Commissioner's finding that the order of assessment was erroneous insofar as it was prejudicial to the interests of the Revenue. Shri Sharma tried to distinguish this decision on the ground that the address of the assessed in that case was given incorrectly. The decision of the High Court and that of the Supreme Court were not, however, based on that ground at all. On the contrary, the Supreme Court followed their previous decision in Rampyari Devi's case and upheld the decision of the High Court precisely on the same grounds. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income Tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income Tax Officer should have made further inquiries before accepting the statements made by the assessed in his return. (14) The reason is obvious. The position and function of the Income Tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may he accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out of this contract. It is because it is incumbent on the Income Tax Officer to further
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investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. (emphasis supplied)” 19. Since there was a failure on the part of AO to make necessary enquiry, we are of the view that the CIT was justified in invoking jurisdiction u/s. 263 of the Act in the facts and circumstances of the present case.
The decision in the case of NTPC Ltd. (supra) is not relevant in the present case because the jurisdiction u/s.263 of the Act is exercised on the ground that the AO failed to make necessary enquiries which he ought to have been made and if that ground is found to be correct then that by itself is enough to conclude that the order of the AO is both erroneous and prejudicial to the interest of the revenue. The decision in the case of Malabar Industries Ltd. (supra) is again on the general principles for invocation of power u/s.263 of the Act and those conditions are satisfied in the present case.
The learned counsel for the Assessee submitted that Explanation 2 to Sec.263 of the Act which was introduced by the Finance Act, 2015 w.e.f. 1.6.2015 is not applicable to the present case which relates to AY 2014-15 and is applicable only from AY 2015-16 onwards. Explanation-2 to Sec.263 reads thus:-
“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 Commissioner or Commissioner,—
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(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.” 22. We are of the view that we need not examine the arguments of the learned counsel for the Assessee in this regard because Explnation-2 is only a deeming provision and if on facts it is found that the AO did not make any enquiries before concluding the assessment on the question whether service tax input written off can be allowed as a deduction in computing income from business, there is no need to take recourse to the deeming provisions.
As far as the merits of the claim made by the learned counsel for the Assessee that the service tax input written off is an allowable deduction, he relied on the decision of Delhi ITAT in the case of Maruti Suzuki Ltd. (supra). We do not think it necessary to deal with the merits of the claim of the Assessee as the same will be examined by the AO in the set aside proceedings. We, however, make it clear that the observations of the CIT in paragraphs 6 & 7 of the impugned order with regard to correctness of the claim of the Assessee regarding deductibility of the sum in question are not warranted because the jurisdiction u/s.263 of the Act is invoked on the ground that the AO failed to make necessary enquiry which he ought to have made before completing the assessment. The aforesaid observations in the impugned order should not therefore have any effect in
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the set aside proceedings before the AO and the subsequent appellate authorities.
With the above observations, the appeal of the assessee is dismissed.
Pronounced in the open court on this 10th day of January, 2020.
Sd/- Sd/-
( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT
Bangalore, Dated, the 10th January, 2020.
/Desai S Murthy /
Copy to:
Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar ITAT, Bangalore.