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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVANAND SHRI B. R. BASKARAN
Per N. V. Vasudevan, Vice President
This is an appeal by the assessee against the order dated 7.8.2019 of Pr.CIT, Bengaluru-7, passed under section 263 of the Income Tax Act, 1961 (hereinafter called ‘the Act’) relating to Assessment Year 2014-15.
The assessee is a subsidiary of VMware International Unlimited Company, Ireland (formerly known as VMware International Limited), which is an affiliate of VMware Inc., USA. It provides software development services [‘SWD services’ for short], Information Technology Enabled Services [‘ITES’ for short] and marketing support services [‘MSS services’ for short] to VMware group companies, as a captive service provider. For all the above services, the Assessee is compensated by the Associate Enterprise (AE) on a cost plus mark up basis.
For AY 2014-15 the Assessee filed return of income on 29.11.2014 declaring total income of Rs.94,50,38,640. The AO issued notice u/s.143(2) of the Act dated 28.8.2015 and a notice dated 25.7.2017 u/s.142(1) of the Act. In the notice dated 25.7.2017, the AO had called for details of transactions entered into by the Assessee with its related party. The Assessee in reply to the notice dated 25.7.2017 by its letter dated 16.10.2017 provided the details of revenue by submitting the details of invoices raised during the year and reconciling the same with profit and loss account by reporting aggregate amount of audit adjustments (given as annexure to this order). As we have already seen, the Assessee works on cost plus model, wherein the invoices are raised based on an estimated cost after adding the agreed percentage of mark-up on the same on a monthly basis. However, at the year-end, the actual costs would be lesser or more than the estimated cost and therefore the excess or short amount invoiced had to be reversed on account of audit adjustments. Such audit adjustment is made to reverse the excess or less revenue, to the extent understated/overstated. A reconciliation of revenue as per invoices with the financial statements is the annexure to this order and the audit adjustment shown in the last column of the annexure as “Audit adjustment is a sum of Rs.12,02,42,510/-. It can be seen from the annexure that as per the invoices the sales is Rs.659,42,70,435/- whereas as per the financial statement the sales was shown at Rs.647,40,27,925/-. The sum of Rs.12,02,42,510/- being the difference between the sales as per invoice and sales as per financial statement was shown as Audit adjustment entry. It must be pointed out that in AY 2010-11 and 2011-12 such audit adjustment entry was held by the AO to be suppressed sales and added to the total income of the Assessee. In the present AY 2014-15, no such addition was made by the AO in the assessment completed u/s.143(3) of the Act by order dated 11.1.2008.
The Pr.CIT in exercise of his powers u/s.263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue for the reason that the AO failed to obtain any reconciliation of the turnover as per Profit and Loss account with the total invoice value and whether the invoices were raised on cost plus method, which receiving the corresponding amount from the clients. He also observed that the issue was agitated in AY 2010-11 and the AO failed to call for and examine the details and hence the order of the AO in completing the assessment without proper verification is erroneous and prejudicial to the interest of the revenue. A show cause notice dated 15.5.2019 u/s.263 of the Act was accordingly issued by the Pr.CIT.
In reply the Assessee submitted in its reply dated 4.6.2019 that annexure to this order was given by the Assessee to the AO in reply to notice u/s.142(1) of the Act before the AO completed the assessment proceedings and hence the AO had made proper verification and enquiry and therefore the order of the AO was not erroneous and prejudicial to the interest of the revenue. The Assessee also pointed out that during the course of assessment proceedings for Assessment Year 2013-14, the AO had requested the assessee to provide copies of the final assessment orders issued for earlier years. As such, the AO was aware of adjustments made in the final assessment order for earlier years. Thereafter, the AO had issued a notice dated October 7, 2016, for AY 2013-14 under section 142(1) of the Act calling for reconciliation of the revenue reported in the service tax return filed by the assessee with the revenue reported in the return of income. Durin the course of assessment proceedings for Assessment Year 2013-14, the AO had asked for reconciliation of revenue as per the invoices raised vis-à-vis revenue as per P&L A/c. The assessee had filed a detailed submission providing a reconciliation along with the reasons for the difference which pertains to the audit adjustment entries vide its submission dated 13 December, 2016. The AO, upon verifying the information and submission shared by the assessee, formed an opinion that the difference in revenue as per invoices raised by the company vis-à-vis revenue as per financial statements should not be considered as addition to income. Hence, did not make any adjustment to the total income of the Company while issuing the final assessment order for AY 2013-14. It was thus submitted that the AO had examined the revenue recognition and revenue reconciliation in detail during the course of assessment proceedings for AY 2013-14 including audit adjustment entries. Based on the examination, the learned AO concluded that audit adjustment entries should not be considered as addition to total income in AY 2013-14. Moreover, as part of the transfer pricing assessment for AY 2014-15, the learned TPO had examined the cost plus revenue calculation and passed an order under section 92CA of the Act. It was thus submitted that the AO has duly examined the information filed by the assessee in relation to the difference in revenue as per the invoices raised vis-à-vis revenue recognized in the Profit and Loss account for AY 2013-14 and no adjustment was made in the final assessment order for the said year. The assessment was completed by the AO for AY 2014-15 after detailed enquiry and due verification of detailed records submitted to the AO in response to queries raised from time to time, including the revenue reconciliation filed vide submission dated October 16, 2017. Therefore, the AO had applied his mind while passing the final assessment order for AY 2014-15. Merely because adjustments were made in prior years doesn't render the order erroneous, especially when the AO has applied his mind while passing the order for subsequent years. Hence, it was submitted that the final assessment order for AY 2014-15 should not be considered as erroneous and therefore, proposed revision of assessment order under section 263 of the Act should be dropped.
The CIT was not convinced with the aforesaid reply of the Assessee and he proceeded to revise the order of the AO by the impugned order by setting aside the order of the AO and remading the question of verification and examination of the turnover as per profit and loss account and turnover as per invoices raised and reconcile the difference and how the difference, if any, and how these cannot be regarded as income. He held that the AO failed to make proper and adequate enquiries on the issue especially when the issue is recurring and was subject matter of addition from AY 2010-11 to 2012-13.
Aggrieved by the order of the aforesaid order, the Assessee is in appeal before the Tribunal. The learned counsel for the Assessee reiterated submissions made in the reply to the show cause notice u/s.263 of the Act. He also placed reliance on decision of Hon’ble Karnataka High Court in the case of CIT Vs. Saravana Developers (2018) 95 taxmann.com 261 and Hon’ble Gujarat High Court in the case of CIT Vs. Kamal Galani (2018) 95 taxmann.com 261 (Guj.). He pointed out that SLP against the said decision of Hon’ble Gujarat High Court was dismissed by the Hon’ble Supreme Court reported in (2019) 110 taxmann.com 213 (SC). The sum and substance of the aforesaid decisions are that once the AO has carried out enquiries and applied his mind, then it cannot be said that the order is erreoneous and prejudicial to the interest of the revenue. The learned counsel submitted that the enquiries made by the very same AO in AY 2013-14 will hold good for his conclusion in AY 2014- 15 also and therefore the impugned order should be quashed. The learned DR relied on the order of the Pr.CIT.
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 & 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 sections 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) (II) 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 (10) 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 assesseds 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 ground for the review of a quasijudicial 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. Commissioner of Income Tax, (1968)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 partics to whom the loans were advanced." In Tara Devi Aggarwai v. Commissioner of Income Tax, (1973) 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 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 (12) 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 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 any thing wrong with the order if all the facts stated therein are assumed to be correct.
We are of the view that the mere fact the Assessee gave a reconciliation of sales as per invoices and as per the profit and loss account and the fact that the very same AO made enquiries in AY 2013-14 and therefore he was well aware of the issue and accepted the reconciliation given by the Assessee cannot be the basis to hold that the AO made necessary enquires. 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 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,— (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.” 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 there is no need to take recourse to the deeming provisions.
We however find that the Tribunal in (2021) 125 Taxmann.com 224 (Bangalore-Trib.) IT (TP) A No.322, 323 and 417 & 418/Bang/2018 for AY 2010- 11 & 2011-12 order dated 23.12.2020 decided identical issue by observing as follows:
After hearing the rival submissions, we are of the view that the issue has to be remanded to the AO for fresh consideration. The assessee works on a cost + mark-up as its margin. The revenue that the assessee shows in the financial statements is dependent on cost and if due to an incorrect estimation of cost or other reasons as submitted by the learned counsel for the Assessee before us, there is change in the revenue shown by the assessee then the corresponding cost which was wrongly estimated also needs to be identified. It is only when there is reconciliation of the incorrect estimate of the cost can it be said that the audit adjustment suggested would be correct. In other words, the restatement of revenue has to be matched by corresponding reduction in the estimated cost only then can it be said that the audit adjustment suggested will not have any effect on the income of the assessee. The submissions made before us as well as the revenue authorities are general and do not give one to one tally or reconciliation of the differences and the reasons for such differences. The assessee is, therefore, directed to give a complete breakup of the difference between the revenue recorded in financial statements and as per the invoices and correlate the same with the cost estimates and as to how both are reflected in the financial statements. The AO will afford opportunity of being heard to the assessee before deciding the issue. 12. We are of the view that the scope of enquiry in the set aside proceedings will be restricted to the directions as set out above and to this extent the impugned order is modified. With these observations, we partly allow the appeal of the Assessee.
In the result, appeal by the Assessee is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.