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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAM LAL NEGI
PER G.S. PANNU, VICE PRESIDENT
This appeal by the assessee is directed against the order passed by the CIT – I (in short “the Commissioner”), Mumbai, dated 25.11.2013, holding the assessment order passed by the Assessing Officer under Section 143(3) of the Act, dated 28.03.2013,as erroneous in so far as it was prejudicial to the interest of the Revenue under Section 263 of the Income-tax Act,1961 (in short “the Act”).
The Grounds raised by the assessee in this appeal read as under :-
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“1.0 That on the facts and in the circumstances of the case, the impugned order passed u/s 263 is grossly arbitrary and bad in law in relation to the issues raised and adjudicated therein and needs to be summarily deleted.
1.1 That on the facts and in the circumstances of the case, the Learned Commissioner of Income Tax - I, Thane (here-in-after referred to as ‘Ld. CIT’) was not justified in initiating proceedings u/s 263 of the Income Tax Act, 1961 without appreciating the fact that the order passed by the Assessing Officer (here-in-after referred to as 'AO') was neither erroneous nor prejudicial to interests of the Revenue and therefore the proceedings are bad in law.
1.2 That on the facts and in the circumstances of the case, the assessment u/s 143(3) having been made in accordance with law and after due consideration of the relevant facts through proper application of mind in relation to the issues mentioned in the order u/s 263, the proceedings are void ab initio and the order is to be set aside in full.
2.0 That on the facts and in the circumstances of the case and without prejudice to Ground No. 1.0 to 1.2 taken here-in-above, the Ld. CIT was not justified and grossly erred in contending that Sales Tax Incentive and Excise Duty Exemption availed by the appellant during the year, being in the nature of capital subsidy/incentive, amounting to Rs. 6,74,12,461/- and Rs. 15,67,00,636/- respectively should be excluded in computing Book Profit u/s 115JB.
3.0 That on the facts and in the circumstances of the case and without prejudice to Ground No. 1.0 to 1.2 taken here-in-above the Ld. CIT was not justified and grossly erred in holding that the amount of foreign exchange fluctuation loss of Rs. 12,35,43,256/- is not related to acquisition of any capital asset and consequentially adding it to the cost of the asset and allowance of depreciation on the same is not tenable.
3.1 That on the facts and in the circumstances of the case and without prejudice to Ground No. 3.0 taken here-in-above the Ld. CIT was not justified and grossly erred in holding that depreciation in the relevant year on foreign exchange fluctuation loss of Rs. 12,35,43,256/- which was disallowed and considered as addition to fixed assets in the order u/s 143(3) for AY 2009-10 could not have been allowed by the AO.
4.0 That on the facts and in the circumstances of the case and without prejudice to Ground No. 1.0 to 1.2 taken here-in-above, the Ld. CIT was not justified and grossly
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erred in contending that the Excise Duty Exemption granted to the appellant during the year amounting to Rs. 15,67,00,636/- cannot be considered as capital receipt in computing its Total Income under the provisions of the Act other than sec. 115JB.
4.1 That on the facts and in the circumstances of the case and without prejudice to Ground No. 4.0 taken here-in-above, the Ld. CIT was not justified rather grossly erred in again adjudicating the issue of exclusion of Excise Duty Exemption as capital receipt in computation of total income under the provisions of the Act other than sec. 115JB when the said claim was already disallowed by the AO in the order u/s 143(3).
4.2 That on the facts and in the circumstances of the case and without prejudice to Ground No. 4.0 & 4.1 taken here-in-above, the Ld. CIT was not justified rather grossly erred in contending that the Excise Duty Exemption granted to the appellant cannot be considered as capital receipt when the allowance of the same while computing Total Income under the provisions of the Act other than sec. 115JB was not specifically mentioned in the show-cause notice.
4.3 That on the facts and in the circumstances of the case and without prejudice to Ground No. 4.0, 4.1 & 4.2 taken here-in-above, the Ld. CIT was not justified rather grossly erred in contending that the amount of Excise Duty paid over and above the Cenvat Credit available to the assessee can only be considered as Excise Duty Incentive without appreciating the fact that the appellant is not entitled to avail Cenvat Credit since the final goods manufactured by the appellant are exempt from the levy of Excise Duty.
5.0 That on the facts and in the circumstances of the case and without prejudice to Ground No. 1.0 to 1.2 taken here-in-above, the Ld. CIT was not justified rather grossly erred in contending that sales tax incentive received by the appellant during the year amounting to Rs. 6,74,12,461/- cannot be considered as capital receipt in computing its Total Income under the provisions of the Act other than sec. 115JB.
5.1 That on the facts and in the circumstances of the case and without prejudice to Ground No. 5.0 taken here-in-above, the Ld. CIT was not justified rather grossly erred in again adjudicating the issue of exclusion of Sales Tax Incentive as capital receipt in computation of total income under the provisions of the Act other than sec. 115JB when the said claim was already disallowed by the AO in the order u/s 143(3).
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5.2 That on the facts and in the circumstances of the case and without prejudice to Ground No. 5.0 & 5.1 taken here-in-above, the Ld. CIT was not justified rather grossly erred in contending that Sales Tax Incentive granted to the appellant cannot be considered as capital receipt when the allowance of the same while computing Total Income under the provisions of the Act other than sec. 115JB was not specifically mentioned in the show-cause notice.
5.3 That on the facts and in the circumstances of the case and without prejudice to Ground No. 5.0, 5.1 & 5.2 taken here-in-above, the Ld. CIT was not justified rather grossly erred in contending that Sales Tax Incentive granted to the appellant cannot be considered as capital receipt when the Hon'ble ITAT had decided the issue in favour of the appellant in earlier year.”
Briefly put, the relevant facts are that the assessee is a company incorporated under the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacturing of asbestos cement sheets and accessories and pre- engineering buildings products. It filed its return of income for assessment year 2010-11 on 30.09.2009 declaring total income at NIL under the normal provisions of the Act and at Rs. 18,17,26,878/- under Section 115JB of the Act. Subsequently, the return was revised, wherein a loss of Rs. 1,38,24,200/- was declared under normal provisions of the Act and book profit at Rs. 19,32,01,238/- under Section 115JB of the Act. An assessment under Section 143(3) of the Act dated 28.03.2013 was finalised wherein, inter-alia, additions relevant for the present purpose, on following aspects were made :-
a) Amount of sales tax incentives availed under “New Packages Scheme of Incentives 1992” amounting to Rs. 6,74,12,461/- was treated as revenue receipt by the Assessing Officer as against capital receipt declared by the assessee; and,
b) Amount of Excise duty incentives of Rs. 15,67,00,636/- was treated as
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revenue receipt by the Assessing Officer as against capital receipt declared by the assessee.
In the computation prepared by the assessee for the purpose of Section 115JB of the Act, the assessee had reduced the sales tax incentives amounting to Rs. 6,74,12,461/- and Excise duty incentives of Rs. 15,67,00,636/- to arrive at ‘Book profit’. As the additions made by the Assessing Officer under normal provisions of the Act was higher, the final income was assessed under the normal provisions of the Act; and, the Assessing Officer did not discuss the computation of book profit under Section 115JB of the Act in the assessment order and accepted the computation of Book Profit under Section 115JB of the Act as filed by the assessee. The assessee preferred an appeal to the CIT(A) against the order of the Assessing Officer.
Subsequently, the Commissioner invoked his revisionary jurisdiction and issued a notice under Section 263 of the Act, dated 01.08.2013, proposing that the assessment order dated 28.03.2013 (supra), was erroneous in so far as it was prejudicial to the interests of the Revenue on the following points :-
a) that book profit under Section 115JB of the Act to the tune of Rs.22,31,13,097/- was under assessed on account of reduction of sales tax and excise duty incentives treating the same to be capital receipt by the assessee and the same was wrongly accepted by the Assessing Officer;
b) that allowance of depreciation on the foreign exchange fluctuation loss of Rs. 12,35,43,256/- incurred by the assessee during assessment year 2009- 10 and on which the Assessing Officer allowed depreciation in assessment
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year 2009-10 holding the same to be capital loss was wrong;
c) that the issue of treatment of excise duty incentive of Rs. 15,67,00,636/- as revenue receipt was decided by the Assessing Officer in a routine manner without application of mind and without making proper enquiries; and,
d) that issue of treatment of sales tax incentive of Rs. 6,74,12,461/- was decided by the Assessing Officer in a routine manner without application of mind and without making proper enquiries.
The assessee objected to the action of the Commissioner in invoking his revisionary jurisdiction which did not find any favour with the Commissioner. Aggrieved by the same, assessee is in appeal before us. Both parties have been heard in the above background.
As has been explained by the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. vs CIT, 243 ITR 83, invoking of Section 263 of the Act can be justified only on satisfaction of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and, (ii) it is prejudicial to the interests of the Revenue. It is a trite law that even if one of the aforesaid conditions is absent in a given case, then invoking of Section 263 of the Act is untenable in law. In this background, we may now examine the manner in which the Commissioner has dealt with the conditions prescribed under Section 263 of the Act in his order.
The first issue for which the Commissioner has invoked his revisionary jurisdiction is that assessee while computing the book profit under Section 115JB
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of the Act reduced the sales tax incentives of Rs. 6,74,12,461/- and excise duty incentives of Rs. 15,67,00,636/- from the profit declared in its Profit & Loss Account for the purposes of computing ‘Book profit’. Notably, in the return of income, the assessee declared the final income as per Section 115JB of the Act, whereas in the assessment finalised under Section 143(3) of the Act, the Assessing Officer completed the assessment under the normal provisions of the Act as after various additions in the assessment order, the income under normal provisions of the Act was higher as compared to income declared by the assessee under Section 115JB of the Act. Since the assessment under Section 143(3) of the Act was completed under normal provisions of the Act, the Assessing Officer did not discuss anything regarding the assessee’s computation under Section 115JB of the Act in the assessment order. The Commissioner has observed that the action of the Assessing Officer in accepting the assessee’s computation of Book Profit under Section 115JB of the Act was erroneous and prejudicial to the interest of the revenue as the assessee cannot make additions / deletions other than those specifically provided for under Section 115JB of the Act. Thus, as per the Commissioner, the assessee had wrongly reduced the sales tax and excise incentives while computing book profit under Section 115JB of the Act.
In this regard, the learned Representative for the assessee submitted that the assessee had declared its income under Section 115JB of the Act, however assessment was completed assessing the income under normal provisions of the Act, and therefore the error sought to be pointed out with regard to computation of book profit under Section 115JB of the Act will not have any impact on the finally assessed income for the current year. Secondly, it was submitted that Commissioner has proceeded on the apprehension that if in the appeal proceedings various additions made by the Assessing Officer are
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deleted by CIT(A), the assessee will be liable to tax under Section 115JB of the Act and, therefore, the instant error will become prejudicial to the interest of the Revenue. In this context, it was pointed out that Section 263 of the Act empowers the Commissioner to exercise revisionary jurisdiction on the basis of ‘records’ relating to any proceedings available at the time of examination by the Commissioner, as provided by Clause (b) of Explanation 1 to section 263 of the Act. In the present case, the order of the CIT(A) for the year under consideration was not available at the time of examination of record by the Commissioner and, therefore, the same cannot be understood to be ‘record’, based on which the proceedings under Section 263 of the Act could have been initiated. It has been submitted that proceedings under Section 263 of the Act cannot be initiated based on ‘records’, which are not available before the Commissioner at the time of his examination of record. In this regard, reliance has been placed on the following decisions :- 1) Panyam Cements and Mineral Industries Ltd. vs. Addl. CIT (ITA no. 706/Hyd/2013) 2) Jolly Engineers and Contractors (P) Ltd vs. ITO (1982) 2 ITD 92 (Asr -ITAT) 3) Punjab Wool Syndicate vs. ITO (2012) 17 ITR 0439 (Chd. – ITAT) 4) Ganga Properties vs. ITO (1979) 118 ITR 447 (Kol) (HC) 5) Jai Kumar Kankaria vs. CIT (2001) 251 ITR 707 (Kol) (HC)
It was also submitted that even if the ‘book profit’ is recomputed in terms of the directions of the Commissioner, the assessee will be entitled for MAT credit of equivalent amount which will be eligible for set-off in subsequent years, thereby resulting in neutralising of tax liability. Therefore, the instant assessment order dated 28.03.2013 (supra) cannot be said to be prejudicial to
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the interest of revenue since the instant addition made is tax neutral over the period of time.
On the other hand, the learned CIT-DR defended the order of the Commissioner by placing reliance on the same.
We find that in the present case, the assessment has been completed by the Assessing Officer under the normal provisions of the Act whereas assessee had declared the income under Section 115JB of the Act. The assessee had preferred an appeal to the CIT(A) against the order of the Assessing Officer which was pending disposal at the time of examination of records by the Commissioner. As per clause (b) of Explanation 1 to section 263 of the Act, the expression ‘record’ means records available with Commissioner at the time of examination by him, and based on which he ought to arrive at a conclusion that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the revenue. Ostensibly, the order of the CIT(A) was not available with the Commissioner at the time of arriving at the conclusion that order passed by Assessing Officer is erroneous and prejudicial to the interests of the revenue; and, therefore, the expected decision or finding of the CIT(A) cannot be taken as basis to arrive at a conclusion envisaged in Section 263 of the Act by the Commissioner. Thus, it is only the order of Assessing Officer and other material on record, which can be taken as the basis to arrive at conclusion envisaged in Section 263 of the Act by the Commissioner. In the instant case, on the basis of assessment order and other records, it is evident that the assessment has been completed under normal provisions of the Act. In fact, as per the Commissioner, it is the computation of book profit under Section 115JB of the Act which is erroneous, but that has no relevance to the
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tax liability finally determined. In fact, as per the Commissioner, it is only after the order of CIT(A) that the relevance of computation of book profit under Section 115JB of the Act will arise, which is an aspect in the realm of future uncertainty. Thus, the Commissioner was not justified in exceeding his jurisdiction under Section 263 of the Act in this case. Moreover, even if we go along with the Commissioner and accept that the computation of ‘book profit’ under Section 115JB of the Act accepted by the Assessing Officer is erroneous, yet the assessment order cannot be termed as prejudicial to the interests of the revenue, in so far as it was assessed under normal provisions of the Act.
It is pertinent to refer to the decision of Hyderabad Bench of the Tribunal in the case of M/s. Panyam Cements and Mineral Industries Ltd. (supra), relied on by the assessee wherein it was held as under :-
“6. In our view, since the income determined and tax computed under the normal provisions is much more than the book profit and tax thereon u/s 115JB , action of the AO in not computing/ enforcing the tax demand on the profit computed u/s 115JB cannot be considered to be prejudicial to the interests of revenue. Only because subsequently, ld. CIT(A) while considering assessee’s appeal against assessment order has held that capital gain is taxable in AY 2006-07 and as a result of which income returned by assessee was restored, that will not render assessment order erroneous and prejudicial to the interest of revenue.
While assuming jurisdiction u/s 263 ld. CIT has to examine the error and prejudice caused to revenue by virtue of assessment order on the basis of the facts and materials on record as on the date of completion of assessment. He cannot take into consideration any event subsequent thereto..”
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Further, in the case of Punjab Wool Syndicate (supra), the Chandigarh Bench of the Tribunal held as under :-
“12. ….the powers under section 263 of the Act are to be invoked on satisfaction of twin conditions of the order being both erroneous and prejudicial to the interest of the Revenue. Where the tax effect because of an order passed by the Assessing Officer is nil, such order even if erroneous being not prejudicial to the interest of the Revenue, is not open to revision under section 263 of the Act. We vacate the directions of Commissioner of Income Tax under section 263 on this issue.”
We also find substance in the other argument of the appellant to the effect that even if addition is made in the book profit computed under Section 115JB of the Act, the same will result into equivalent MAT credit being available to the assessee, which can be utilized in subsequent assessment year. As such, at most this may lead to deferment of tax but it does not result in any loss to the revenue.
In light of the above discussion, since there is NIL tax impact on the error noticed by the Commissioner at the time of his examination, the twin conditions of order being erroneous and prejudicial to the interests of the revenue are not satisfied on this issue and thus, the order of the Commissioner on this issue is set-aside.
The second issue pertains to excessive allowance of depreciation on the foreign exchange fluctuation loss of Rs. 12,35,43,256/-. The relevant facts in this regard are that the assessee incurred foreign exchange fluctuation loss of Rs. 12,35,43,256/- during assessment year 2009-10 which was capitalised in the books of account; however in the income tax return, it was claimed as a
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revenue expenditure. In the course of assessment proceedings for assessment year 2009-10, the Assessing Officer noted the above facts and in an assessment completed under Section 143(3) of the Act for assessment year 2009-10, the said loss was treated as a capital loss and it was held that the amount of Rs. 12,18,02,186/- should be added to the block of Plant and Machinery and other assets and after providing for depreciation on this amount, the Assessing Officer made a net addition of Rs. 11,38,85,000/-. The assessee, thus, filed revised return for the year under consideration, i.e. 2010- 11 and claimed further depreciation in respect of the addition to the block of Plant & Machinery made by the Assessing Officer in assessment year 2009-10. The Assessing Officer in the course of assessment proceedings for assessment year 2010-11 allowed the claim of further depreciation made by the assessee in its revised return of income. In the instant order, the Commissioner observed that the loan on which assessee incurred foreign exchange fluctuation loss was for the purpose of business of the assessee and not for the purpose of acquisition of any capital assets and thus, no depreciation on this amount could not have been allowed. The Commissioner further observed that the assessee has increased the WDV based on the order of the Assessing Officer for assessment year 2009-10 but the findings in the assessment order for assessment year 2009-10 on this issue is erroneous and not sustainable in law. The Commissioner in his order has categorically stated that “steps are being taken to set right the wrong findings given by the AO in AY 2009-10.” According to the Commissioner, each assessment year is different and the Assessing Officer is duty bound to check correctness of the claim made by the assessee in its return of income for each year which has not been done in the present case, and thus the order of the Assessing Officer dated 28.03.2013 (supra) on this issue is erroneous and prejudicial to the interests of the
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revenue. He further noted that the assessee has also disputed the action of the Assessing Officer in disallowing foreign exchange fluctuation loss in assessment year 2009-10.
In this regard, the learned Representative for the assessee relied on the following judgments to contend that the Assessing Officer has to allow the depreciation on the brought forward Written Down Value (‘WDV’), and he is precluded in the present assessment year to dispute the opening WDV of the block of asset and he also cannot examine the correctness or otherwise of opening WDV :-
a) DIT (IT) vs. HSBC Asset Management (I) Pvt. Ltd. (ITA No. 254 of 2012)(Bom)(HC) b) DCIT vs. Nutech Corporation Services Ltd (ITA No. 6091/Mum/2007)
On this aspect, the learned CIT-DR has defended the impugned stand of the Commissioner and contended that the depreciation in earlier assessment year of 2009-10 was wrongly allowed, and, therefore the Commissioner was justified in treating the allowance of depreciation as an error.
We have carefully considered the rival submissions and perused the relevant material on record. Undisputedly, the claim of depreciation made by the assessee in its revised return of income for assessment year 2010-11, i.e. year under consideration, relates to the depreciation allowed on the component of cost of asset which was added in the previous year relevant to assessment year 2009-10, and the same was accepted by the Assessing Officer
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in the assessment order passed for assessment year 2009-10. Since the foreign exchange fluctuation loss arose in the hands of the assessee in assessment year 2009-10, the treatment of the said amount has been discussed by the Assessing Officer in assessment year 2009-10. In the instant assessment proceedings for assessment year 2010-11, the assessee as well as the Assessing Officer have followed the treatment given by the Assessing Officer in the assessment order for assessment year 2009-10. Impliedly, even the Commissioner accepts the said position in as much as he has categorically asserted in the impugned order that he was trying to set right the wrong committed by the Assessing Officer in the assessment for assessment year 2009-10. In our considered opinion, the Commissioner exceeded his jurisdiction in this context since the proceedings initiated by him were for assessment year 2010-11 and he ought to have confined himself to applying the provisions of Section 263 of the Act qua the instant assessment year alone. Admittedly, each assessment year is different and by invoking the jurisdiction under Section 263 of the Act, the Commissioner is empowered to revise the assessment order of the relevant assessment year alone. It is not open for the Commissioner to invoke his jurisdiction prescribed in Section 263 of the Act for one assessment year and thereby embark on correcting the order of assessment passed by the Assessing Officer for a different assessment year. Ostensibly, in the instant case, if the Commissioner found that the order of assessment for assessment year 2009-10 was erroneous and prejudicial to the interests of the revenue, he ought to have invoked the provisions of Section 263 of the Act for assessment year 2009-10. Quite clearly, the Commissioner did not do so and instead, he has attempted to revise the assessment for assessment year 2009-10 while invoking his power of revision under Section 263 of the Act qua the assessment year 2010-11. Quite clearly, the action of
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the Assessing Officer of allowing depreciation on foreign exchange fluctuation loss in this year is consequent to the assessment for assessment year 2009-10, which the Commissioner treats to be erroneous. In this context, the following observations of the Hon'ble Bombay High Court in the case of HSBC Asset Management (I) Pvt. Ltd. (supra) are quite relevant :-
“9. Having perused this Appeal Memo including the impugned orders, we are of the opinion that the Delhi High Court judgment has been delivered on 5th November 2012 and the impugned order was passed on 15th June 2011. The Tribunal has essentially based its conclusion on the consistent stand of the Assessee and that of the Assessing Officer. In dealing with the shift in stand for the subject assessment year, the Tribunal found that this claim of depreciation was raised in the assessment year 2003-2004. The Assessee claimed that it is allowable as per the provisions of Income Tax Act on block of assets under the head “intangible assets”. The Assessing Officer allowed the claim for that assessment year by an order under Section 143(3) dated 28.03.2006. The Tribunal then, proceeds to hold that when the Assessing Officer had to allow depreciation on the written down value of the block of assets, then, it cannot in the present assessment year dispute the opening written down value of the block of assets nor can he examine the correctness or otherwise of the opening written down value brought forward from the earlier year. The order under Section 143(3) for the assessment year 2003-2004 continues to operate and no proceedings under the Act were initiated to disturb the same.”
Further, in the case of Nutech Corporate Services Limited (supra), our co- ordinate Mumbai bench of the Tribunal held as under :-
“30…..Thus, once the AO has applied his mind and allowed the deprecation on the assets leased, then, in the subsequent year, the
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AO is obliged to allow depreciation on such assets and cannot take a different view, without bringing, any adverse material on record that would suggest otherwise of the assets acquired in the earlier year(s).
…..If the AO wants to take another view and disallow deprecation, then he has necessarily to reopen the assessment of the earlier year to disallow the deprecation and then and then only, can disallow depreciation in the year under reference; this has not been done by the AO, even though it was open to him to do so while passing the assessment order on 31.3.1991.”
In the above background, in our view, the Commissioner erred in holding the view that in the assessment proceedings culminating in assessment order dated 28.03.2013 (supra) for the instant assessment year, the Assessing Officer should have relooked at his own finding in the earlier year while allowing depreciation on the opening WDV price of foreign exchange fluctuation loss which was accepted in the assessment for assessment year 2009-10 as eligible for depreciation. Quite clearly, the Assessing Officer, in the instant year, allowed the claim as a consequence of the assessment for the preceding assessment year of 2009-10. It is also not the case of the Commissioner that at the time of invoking of Section 263 of the Act by him, the assessment order for assessment year 2009-10 had been altered by any higher authority. In this view of the matter, in our view, the order of the Assessing Officer dated 28.03.2013 (supra) qua the aforesaid aspect, cannot be said to be erroneous and prejudicial to the interests of the revenue within the meaning of Section 263 of the Act. So far as the merit of the claim of depreciation is concerned, we are not inclined to give any opinion in as much as the limited issue before us is about the jurisdiction of the Commissioner under Section 263 of the Act. The only point which is required to be examined in this context is whether the
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Assessing Officer was required to revisit or relook at his own order for earlier assessment year while passing the order of assessment in the instant year, wherein the findings of the earlier order have merely been given effect to, as we have discussed in the earlier part of this order. Thus, on this aspect also, assessee succeeds.
The other two aspects raised by the Commissioner relate to amounts received on account of sales tax and excise duty incentives. The assessee claimed both the incentives as capital receipts and excluded the same from its income while computing the total income as per the normal provisions of the Act. However, in the course of assessment proceedings, the Assessing Officer show caused the assessee as to why the aforesaid incentives be not treated as revenue receipts and added to the total income of the assessee. The assessee furnished written submissions to the Assessing Officer justifying the treatment of excise duty and sales tax incentives as capital receipts not chargeable to tax. The Assessing Officer, however, differed with the assessee and while computing the total income under the normal provisions of the Act, included the amount of excise duty and sales tax incentives as part of the total income of the assessee. On this aspect, the assessee carried the matter in appeal before the CIT(A). By way of the impugned proceedings, the Commissioner observed that the Assessing Officer while passing the assessment order dated 28.03.2013 (supra) has dealt with the issue of excise duty incentive and sales tax incentive in a routine manner and he has directed the Assessing Officer, by invoking his power under Section 263 of the Act, as to the manner in which the inquiries ought to have been conducted by the Assessing Officer. Aggrieved with such direction of the Commissioner, assessee is in appeal before us.
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On this aspect, the argument of the learned Representative is based on clause (c) of Explanation 1 to Section 263(1) of the Act. It is pointed out that where the order passed by the Assessing Officer has been the subject matter of any appeal, the powers of the Commissioner prescribed under Section 263 of the Act are confined only to such matters as have not been considered and decided in such appeal. It is pointed out that in the instant case, the Assessing Officer has considered the aspect of treatment of excise duty and sales tax incentives in the assessment order, which has been challenged by the assessee in appeal before the CIT(A). The said appeal was pending at the time when the Commissioner invoked revisionary jurisdiction under Section 263 of the Act and, therefore, in our view, clause (c) of Explanation 1 to Section 263(1) of the Act could be exercised only in case of lack of inquiry by the Assessing Officer, but not for the level or quality of inquiry. According to the learned Representative, the instant case cannot fall under the category of no inquiry since undisputably, the matter was considered by the Assessing Officer in the assessment proceedings whereby he disagreed with the treatment given by the assessee to the excise duty and sales tax incentives. For the proposition that jurisdiction under Section 263 of the Act can be exercised only in case of lack of inquiry and not in case of inadequate inquiry, reliance was placed on the following decisions :-
a) CIT vs. Shreepati Holdings & Finance (P.) Ltd. (ITA No. 1879 of 2013) (Bom)(HC). b) CIT vs. Sunbeam Auto Ltd. (2011) 332 ITR 0167 (Del)(HC) c) CIT vs. Vikas Polymers (2012) 341 ITR 537 (Del)
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On the other hand, the learned DR appearing for the revenue reiterated the stand of the Commissioner by pointing out that the assessment order has been framed on the aspect of excise duty and sales tax incentives in a routine manner and, therefore, in order to fortify the stand of the revenue, the impugned invocation of Section 263 of the Act by the Commissioner is justified.
We have considered the rival stands on this aspect carefully. Factually speaking, it is quite evident that the issues raised by the Commissioner with regard to the treatment of excise duty and sales tax incentives was indeed dealt with in the course of assessment proceedings by the Assessing Officer. It is also clearly emerging that the stand of the assessee was not accepted by the Assessing Officer and the matter has travelled to the CIT(A) for consideration. In this context, the implications of clause (c) of Explanation 1 to Section 263 of the Act, which read as under is quite relevant.
“(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 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.]”
It is evident from the above that the Commissioner is not empowered to exercise his jurisdiction on an issue which is subject matter of appeal before the CIT(A). In the present case, it is undisputed that the matter on the two issues in question is pending before the CIT(A). Thus, we find that the Commissioner has no jurisdiction to consider these issues in revisionary proceedings under Section 263 of the Act in terms of clause (c) to Explanation 1 to Section 263 of the Act.
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As discussed earlier, to invoke jurisdiction under Section 263 of the Act twin conditions need to be satisfied namely, order should be erroneous and should also be prejudicial to the interests of the revenue. We find that the Assessing Officer has already treated the excise duty exemption and sales tax incentives as revenue receipts and assessed the same as income, an aspect which is in favour of the revenue. The Commissioner by invoking his revisionary jurisdiction under Section 263 of the Act also wants to treat the excise duty exemption and sales tax incentives as revenue receipts. As such there is no difference in the treatment of excise duty exemption and sales tax incentives given by the Assessing Officer and as required by the Commissioner. The only difference is that the reasoning given by the Assessing Officer and the reasoning of the Commissioner is on different footing. However, this difference does not lead to any tax impact in as much as the tax computed by the Assessing Officer and as suggested by the Commissioner will be the same. Thus, it can safely be inferred that the action of the Commissioner is tax neutral and as such, the order of the Assessing Officer cannot be said to be prejudicial to the interests of the revenue.
Furthermore, we also find enough potency in the plea of the assessee that the instant, at best, can be case of inadequate inquiry, and not that of lack of inquiry. The Hon'ble Bombay High Court in the case of Shreepati Holdings and Finance (P.) Ltd. (supra), in this context, observes as under :-
“7. Moreover the CIT in exercise of powers under Section 263 of the Act directed the Assessing Officer to redetermine the rebate allowable under Section 88E of the Act after holding that the same needs more careful examination on the part of the Assessing Officer. This itself
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indication of the fact that this is not the case of lack of enquiry, but at the highest it can be a case of inadequate enquiry. It is settled position in law that inadequate enquiry by itself would not justify invoking the jurisdiction under Section 263 of the Act unless the order is erroneous. In the present facts, the CIT has not exercised jurisdiction under Section 263 of the Act on the ground that the order is erroneous. We find that the impugned order has correctly applied the principles laid down by this Court in Gabriel (I) Ltd. (supra). Accordingly, the question as formulated does not give rise to any substantial question of law. Thus not entertained.”
[underlined for emphasis by us]
Quite clearly, the ratio laid down by the Hon'ble Bombay High Court in the case of Shreepati Holdings and Finance (P.) Ltd. (supra) is attracted in the present case and the assumption of jurisdiction by the Commissioner in the instant case is untenable.
Before parting, we may also refer to the judgment of the Hon'ble Bombay High Court in the case of CIT vs. K. Sera Sera Productions Ltd., [2015] 374 ITR 305 (Bombay) wherein the facts were as follows. The assessee in that case was engaged in production and distribution of films and had shown certain income from a film. Later, it claimed that the same was not an income from production of film, but a sum received as share application money. The Assessing Officer did not accept the assessee's claim and considered said amount as income. He also did not accept the assessee's alternative claim of deduction of cost of production of film in terms of Rule 9A and allowed deduction to the extent of sum debited to Profit & Loss Account only. On appeal, the Commissioner (Appeals) deleted addition except certain amount. Later on, the Commissioner invoked Section 263 of the Act and set-aside the
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order of the Assessing Officer with certain directions. On an appeal before the Tribunal challenging the order of Commissioner under Section 263 of the Act, it was held as under:
“15. During the course of hearing, Ld. DR submitted that ld. CIT(A) had not considered the applicability of Rule 9A and, therefore, clause (c) of Explanation to sec. 263(1) is not applicable. We, on consideration and perusal of the order of ld. CIT(A) read with the remand report before the AO submitted to the ld. CIT(A), do not find merit in her contention. The AO specifically stated in the remand report to make “working of deduction allowable u/r 9A” of I. T. Rules. Further, we also observe from para-10 of the assessment order that the AO called for the details from the assessee by issuing notice u/s 142(1) dated 18-12-2009 to furnish details of cost of productionallowable as per Rule 9A of Rs.27.19 crores. As mentioned hereinabove, the AO after considering the reply filed by the assessee vide letter dated 29-12-2009 as mentioned by the AO in para-10 of the assessment order, considered the claim of the assessee to the extent of Rs. 24,84,37,124/- and disallowed the balance amount of Rs. 2,34,91,380/-. Therefore, it is not factually correct that the AO at the time of making the assessment did not consider the applicability of Rule 9A vis-a-vis claim of the assessee on cost of production of film.
The Bombay High Court has also held in the case of CIT vs. Saraf Bandhu Pvt. Ltd. (supra), that once the original order goes in appeal and the appeal is decided, the original order ceases to exist since it merged in the appellate order and hence the original order cannot be revised under the revisional jurisdiction of the Commissioner u/s 263 of the Act. It is relevant to state that the ld. CIT(A) passed the order on 12- 10-2011 that is much before the notice u/s 263 dated 9-3-2012 was issued by the ld. CIT.
At the time of hearing Ld. DR also made a submission that if the issue has not been considered in entirety of applicability of Rule 9A, ld. CIT u/s 263 of the Act can also exercise his revisional jurisdiction. As mentioned hereinabove there is no dispute to the fact that AO as well
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as ld. CIT(A) considered the applicability of Rule 9A of I. T. Rules while allowing the cost of production of film as claimed by the assessee.
A similar issue came before the ITAT Mumbai Bench in the case of Sonal Garments vs. JCIT (supra), wherein the income of the assessee was assessed u/s 143(3) after allowing the deduction u/s.80HHC. On appeal, the assessee agitated the computation of deduction u/s.80HHC on the ground that AO erred in deducting certain amounts from export turnover. The CIT(A) allowed the appeal of the assessee and directed the AO to reduce FOB value from the export turnover. Thereafter, CIT passed an order u/s 263 holding that the profit for the purpose of sec. 80HHC should be computed after excluding export incentives and after allowing current years depreciation and as the assessee had incurred loss from the export business, deduction u/s.80HHC was erroneously allowed by the AO in the assessment year which caused prejudice to the interests of the revenue. The ld. CIT, thus, directed the AO to recompute the income of the assessee by disallowing deduction u/s.80HHC of the Act. On appeal before the Tribunal it was contended that the order of the AO had merged with the order of the ld. CIT(A) and, thus, power u/s 263 could not be exercised by the Commissioner. In that context, it was held by the Tribunal that the Commissioner (Appeals) had given some finding from the computation of deduction u/s.80HHC. Therefore, the assessment order had merged with the order of the ld. CIT(A). In view of explanation (c) to sec. 263(1), such action of the Commissioner was not permissible. The Tribunal also rejected the contentions of the department that it was difficult to accept the submission of the department that the issue of depreciation being optional or the issue whether the assessee was at all entitled to deduction u/s.80HHC or not, was not a subject matter of appeal filed by the assessee before the ld. CIT(A). It was held that a matter might have many aspects and the above mentioned two factors might be the aspect of the matter, but not the entire matter itself. The “matter”, in the instant case, was deduction u/s.80HHC. Therefore, the assessment order so far as related to deduction u/s.80HHC has merged with the order of the ld. CIT(A) and, therefore, exercise of power by the Commissioner u/s 263 was even not available under explanation (c) to
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sec. 263(1) and held that order u/s 263 passed by the ld. CIT was not a valid order in the eyes of law.
Similar issue also came before the Hon'ble Gujarat High Court in the case of CIT vs. Nirma Chemicals Works P. Ltd. (supra), wherein also it was held that the assessee claimed relief u/s 80I of the Act. AO worked out such claim after making necessary enquiries and partly reduced the claim made by the assessee. The assessee carried the matter in appeal before the CIT(A) who allowed the appeal on this count directing the AO to grant relief u/s 80I of the Act as claimed by the assessee without any disallowance. Subsequently, CIT u/s 263 of the Act disallowed the claim u/s 80I on the ground that the asset used by the assessee in the new industrial undertaking had formed part of old plant & machinery and the new industrial undertaking of the assessee was formed by reconstructing or restructuring or splitting up of the old business. In appeal before the Tribunal, the Tribunal rejected the contention of the assessee that the revisional order had been made without jurisdiction but allowed the appeal on merits. In further appeal before the Hon'ble High Court, it was held in para-19 thereof that when deduction u/s 80I of the Act was granted by the AO after disallowing a part of the claim which was carried in appeal before the CIT(A), the appellate authority was duty bound to examine whether the claim made by the assessee was in accordance with and subjection to the provisions of sec. 80I of the Act. The requirement of fulfillment of condition stipulated by sub-sec(2) of sec. 80I of the Act, is therefore, very much subject matter of the appeal in relation to the income from warehousing which had been disallowed by the AO. The Hon'ble High Court rejected the stand of the assessee that the assessment order was silent. As regards the allowability or otherwise of sec. 80I of the Act, it was inter alia, held that in view of clause (c) of explanation to sec. 263 of the Act, the order passed by the ld. CIT is not valid.
A similar view has also been taken by the ITAT Mumbai Bench in the case of Marico Industries Ltd. vs. ACIT (supra), wherein it was held that CIT had no power to assume jurisdiction in respect of matter covered in appeal as the order of AO had merged with the order of CIT(A).”
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On appeal by Revenue before the Hon’ble High Court, the High Court upholding the decision of Tribunal held as under:
“8. The revisional authority was aware of the fact that against such an order of the Assessing Officer, the Assessee has preferred an Appeal to the Commissioner of Income Tax (Appeals). Ground No. 1 of that Appeal was whether on the facts and circumstances and in law, the Assessing Officer erred in addition of alleged suppressed business profit aggregating to Rs.11 crores as per the order dated 31st December, 2009 (para 9.2). The first appellate authority, in dealing with this ground, in its order dated 12th October, 2011, concluded that after that consideration of the submissions of the Assessee, in the backdrop of the facts of this case, it is evident that the addition made by the Assessing Officer cannot be sustained. In para 1.6 of the order passed by the first appellate authority on 12th October, 2011, this conclusion is reached.
Then, ground No. 2 in that Appeal was whether in the facts and circumstances and in law the Assessing Officer erred in disallowing the alleged cost of production claimed amounting to Rs.2,34,91,380/-as per para 10 of the impugned order. In other words, if the amount of Rs.11,25,00,000/- is not taken to be the income of the Assessee from film "Darna Zaroori Hai", then, by applying Rule 9A, the cost of production of this film deserves to be deducted and in full as claimed by the Assessee. From para 2.1 onwards in the appellate order, this aspect has been dealt with. When this aspect was considered by the first appellate authority, not only did he have before him the record pertaining to the Assessing Officer's order dated 31st December, 2009, but he called for a remand report from the Assessing Officer. The gist of that remand report is reproduced in para 2.3 of the first appellate authority's order. Once the copy of the remand report was given to the Assessee for his comments and the Assessee agreed with the remand report, then, barring the addition of Rs.4,01,467/-, the balance addition made by the Assessing Officer came to be deleted. Thus, as
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against the expenses or cost of production to the tune of Rs.27,19,28,504/- only a sum of Rs.4,01,467/- was deleted.
We find that despite this position emerging from the record and being undisputed, the order under section 263 of the Income Tax Act makes detailed reference to the show cause notice. The show cause notice as also this order passed under section 263 make detailed reference to the claims of the Assessee and which were part of the Appeal before the Commissioner and dealt with by him in his order dated 12th October, 2011. The order of the Commissioner under section 263 dated 29th March, 2012, from paras 8 onwards, makes extensive reference to these aspects. In the circumstances, what further emerges is that not only did the revisional authority purport to revise the Assessing Officer's order, but he purported to deal with the same direction which was issued in the order of the first appellate authority and which was given effect to by the Assessing Officer. Meaning thereby, the contents of the remand report, giving effect to the order of the first appellate authority, as submitted by the Assessing Officer, came to be reconsidered and revisited. In addition thereto, one more aspect of sale of theatrical rights of "Darna Zaroori Hai" to M/s. RGV Enterprises was considered. Naturally, therefore, the doctrine of merger was invoked by the Assessee and it was applied by the Tribunal to uphold the objection raised by the Assessee.
In the above factual circumstances, we do not find that the Tribunal erred in holding that clause (c) of the Explanation to sub section (1) of section 263 of the Income Tax Act, 1961 cannot be applied. In the present case, that has no application because the matters which have been considered and decided in the Appeal by the first appellate authority are being made subject matter of the revisional authority's order. In other words, the power to revise, as conferred by section 263, is sought to be exercised so as to deal with the same matters which have been considered and decided in the Appeal. We do not find any merit in Mr. Mohanty's submission because detailed references have been made in the foregoing paragraphs to the case of the Assessee before the Assessing Officer, his initial order, the order of the first appellate authority, the direction issued by the first
appellate authority and which was given effect to by the Assessing Officer. All these would denote that something which was very much part and parcel of the appellate authority's order and dealt with extensively therein is now sought to be revised and revisited. Firstly, if the income of the Assessee from the film is Rs.11,25,00,000/-, then, whether the explanation of the Assessee that it is not so deserves to be considered or not by the Assessing Officer is grievance No. 1/ground No. 1 before the first appellate authority. Secondly, if that is taken to be the income of the Assessee and without admitting it to be so the cost of production of the film needs to be deducted by applying Rule 9A of the Income Tax Rules. Thus, that is ground No. 2 in the memo of Appeal before the first appellate authority and in his order dated 12th October, 2011. Both these matters are very much part of the revisional authority's order dated 29th March, 2012. The attempt to reopen them cannot be saved as clause (c) of Explanation below sub-section (1) of section 263 of the Income Tax Act, 1961 had no application.”
In the case of K. Sera Sera Productions Ltd. (supra), the Tribunal in its order, which has been affirmed by the Hon'ble High Court, extensively discussed the meaning of the expression “matter” contained in clause (c) of Explanation 1 to Section 263 of the Act. The Tribunal, after referring to an earlier decision of co-ordinate bench in case of Sonal Garments vs. JCIT[2005] 95 ITD 363 (Mum.) and the decision of Hon’ble Gujarat High Court in the case of CIT vs. Nirmal Chemical Works Pvt. Ltd. [2009] 182 taxman 183 (Gujarat) held that a ‘matter’ might have many aspects and the appeal before the appellate authority might be for one of the aspects of the matter, but not the entire matter itself; yet, the ‘matter’ refers to even one aspect of the entire issue pertaining to particular allowance or disallowance. Thus, even though the assessment order has dealt with one aspect of the particular matter and appellate authority while deciding the matter has dealt with only that particular aspect of the matter and has not touched upon the other aspects of the very same matter,
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then also it could be said that the entire matter has merged with the order of the appellate authority and therefore, clause (c) of Explanation 1 to Section 263(1) of the Act was very much applicable and the Commissioner had no jurisdiction to invoke Section 263 of the Act.
Since in the present case the Assessing Officer has already analysed one aspect of the matter which was pending before the CIT(A), the matter cannot be again relooked by the Commissioner on any other aspect as the order of the Assessing Officer gets merged with the order of CIT(A) in view of the decision of the Hon’ble Bombay High Court as above. Thus, the Commissioner had no power to touch upon the issues of treatment of sales tax and excise duty incentives in the impugned proceedings under Section 263 of the Act.
We make it clear that since the matter on the issue of excise duty exemption and sales tax incentive is pending before the CIT(A), we are restricting ourselves to the validity of proceedings under Section 263 of the Act and are not discussing the merits of the issue as doing so may lead to influencing the adjudication pending before the CIT(A). As such, we are not expressing any opinion on the merits of the case.
In light of our above discussion, we hold the Commissioner has wrongly assumed jurisdiction on the above issue under Section 263 of the Act and we thus vacate the order of the Commissioner under Section 263 of the Act as being without authority of law and restore the assessment order dated 28.03.2013 (supra) qua the aforesaid issues.
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In the result, the appeal of the assessee is allowed, as above.
Order pronounced in the open court on 21st August, 2019.
Sd/- Sd/- (RAM LAL NEGI) (G.S. PANNU) JUDICIAL MEMBER VICE PRESIDENT Mumbai, Date : 21st August, 2019 *SSL* Copy to : 1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “E” Bench, Mumbai 6) Guard file By Order
Dy./Asstt. Registrar I.T.A.T, Mumbai