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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI YOGESH KUMAR U.S.
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in for AY 2018-19, arises out of the order of the Commissioner of Income Tax (Appeals)-37, New Delhi [hereinafter referred to as „ld. CIT(A)‟, in short] in Appeal No. 37/10221/2018-19, A.Y. 2015-16 dated 22.09.2020 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 28.12.2017 by the Assessing Officer, DCIT, Circle-16 (2), New Delhi (hereinafter referred to as „ld. AO‟).
Though the assessee has raised several grounds of appeal before us, the preliminary issue to be decided is as to whether the ld PCIT was justified in invoking revision jurisdiction u/s 263 of the Act in the facts and circumstances of the instant case.
We have heard the rival submissions and perused the materials available on record. The assessee company is a Non-Banking Finance Company (NBFC) and had filed its original return of income u/s 139(1) of the Act for AY 2018-19 on 29.09.2018. It had filed revised return on 29.03.2019 declaring loss of Rs. 10,68,63,896/-. The case of the assessee was selected for complete scrutiny to examine the following issues:- i. Claim of Any Other Amount Allowable as Deduction in Schedule BP ii. Depreciation Claim iii. Investments/Advances/Loans iv. Refund Claim v. Business Loss vi. ICDS Compliance and adjustment vii. Expenses Incurred for Earning Exempt Income viii. Other Income Reported in Schedule A-OI not Credited to P&L Account
The assessment was completed u/s 143(3) read with Section 144B of the Act dated 15.09.2021 determining the total loss of Rs. 10,29,20,424/- after making an addition of Rs. 39,43,471/- on account of employees contribution towards PF and ESI which was remitted beyond the due date prescribed under the respective acts. This assessment was sought to be revised by the ld PCIT by invoking revision jurisdiction u/s 263 of the Act on the ground that the order of the ld AO is erroneous and in as much as it is prejudicial to the interest of the revenue on the following grounds:- A. Legal and professional expense amounting to Rs. 15.99 crores, loan origination cost of Rs. 15.19 crores and Direct Selling Agent (DSA) cost of Rs. 10.16 crores need to be examined for their
allowability u/s 37 of the Act in the light of observation of the auditors and notes to the financial statement for the year ending on 31.03.2018 and its proportion to commensurate with income related to this expenses.
B. Other expenses amounting to Rs. 43.11 which includes year end provision of Rs. 7.91 crores, where correctness of claim of every expenses was directed to be adequately verified by the ld AO in the light of Note 24 of Profit and Loss Account and accordingly determine the admissibility thereon. The year end provision of expenses was also directed to be added back in the computation of income.
C. Cost allocation charges amounting to Rs. 12.07 crores was sought to be verified and examined.
D. Finance cost amounting Rs. 40.35 which includes interest on term loan from banks amounting to Rs. 29.57 crores, finance lease obligation of Rs. 14 lakhs, discount on commercial papers of Rs. 9.49 crores is also not fully allowable as they are not co- terminus and proportionate to the incomes disclosed with a direction to ld AO to examine nature of each of these expenses and also examine these amounts via-a-vis income disclosed relating to these expenses and allow the claim after such verification.
E. Depreciation expenses amounting to Rs. 23.68 crores is not correctly claimed since the assessee had offered interest and principal of only Rs. 90 lacs for those depreciated assets. Further, the interest on borrowing need to be capitalized while claiming Page | 3 depreciation and the ld AO may examine the allowability of depreciation in view of ownership not established on the basis of lease documents.
F. Employee benefit expense amounting to Rs. 28.50 crores was directed to be examined in detail and determine the admissibility of the same.
Aggrieved by the aforesaid directions of the ld PCIT, the assessee is in appeal before us.
We find that assessee company, being a NBFC, was incorporated on 11.02.1994 and duly registered with Reserve Bank of India (RBI). The assessee is engaged in the business of commercial, consumer and MSME lending. Hence, obviously the main business of the assessee would be financing wherein the assessee would be deriving interest income on amount advanced as loan. The amount of loan would be advanced out of own funds or out of borrowed funds. Whenever the funds are borrowed, obviously the assessee would be paying the interest thereon. Hence, interest expenditure per se / finance cost becomes a raw material for the assessee being the finance company. On perusal of the 79 pages order of the ld PCIT passed u/s 263 of the Act, we do not find on any of the issues, the ld PCIT had whispered as to either no enquiries were made by the ld AO or the order of the ld AO is erroneous due to a particular fact not being examined by him. In our considered opinion, the ld PCIT had merely directed the ld AO to make fishing and roving enquiries on the details which are already placed on record either in the form of explanation given by the assessee or in the various notes on account disclosed in the financial statements or in the auditors‟ report enclosed in the financial statements. This fact is very clear from the directions given by the ld PCIT or grounds on which he has passed a revision order u/s 263 of the Act. The law is very well settled with the ld PCIT is duty bound to bring on record the satisfaction of twin conditions cumulatively i.e. (i) order of the ld AO must be erroneous and (ii) it is prejudicial to the interest of the revenue. Even if one of the pre requisite twin conditions is not satisfied, then ld PCIT cannot invoke revision jurisdiction u/s 263 of the Act. Reliance in this regard is placed on the decision of the Hon‟ble Supreme Court in the case of Malabar Industrial Co Ltd reported in 243 ITR 83 (SC) and Max India Ltd reported in 295 ITR 282 (SC) , among others.
In our considered opinion, when due enquiries have been made by the ld AO in the course of assessment proceedings, merely because the fact of making enquiries were not recorded by him in the assessment order, the order of the ld AO does not become erroneous. There is no need for the ld AO to state in his assessment order as to what enquiry he had made with regard to various issues in the assessment. He is expected to address only those issues where he is not in agreement with the claim of the assessee and he is not expected to write a thesis in the assessment order. Merely because a particular fact of enquiry is not reflected in the assessment order of the ld AO, it does not automatically tantamount to non-enquiry by the ld AO and assessment being framed with non application of mind by the ld AO. Reliance in this regard is rightly placed by the ld AR on the following decisions:- a. CIT Vs. Sunbeam Auto Ltd reported in 332 ITR 167 (Del) b. CIT Vs. Anil Kumar Sharma reported in 335 ITR 83 (Del) c. CIT Vs. Amalgamations Ltd reported in 238 ITR 963 (Mad) d. Hari Iron Trading Company Vs. CIT reported in 263 ITR 437 (P&H) e. CIT Vs. Eicher Ltd reported in 294 ITR 310 (Del) f. CIT Vs. Gabriel India Ltd reported in 203 ITR 108 (Bom)
Respectfully following the aforesaid decisions, we dismiss the preliminary argument of the ld DR that the ld AO had not indicated his mind in the assessment order by stating as to whether any enquiry was made on the issues that are sought to be revised by the ld PCIT u/s 263 of the Act.
Now let us examine whether in respect of each of the issues that were directed by the ld PCIT to be examined by the ld AO falls within the ambit of „making order of the ld AO erroneous‟.
Legal and Professional charges, loan origination cost and DSA cost 10.1 During the course of original assessment proceedings, a notice u/s 142(1) of the Act dated 22.03.2021 was issued to the assessee wherein specific enquiry was raised vide question No. 1 with regard to loan origination cost, details of other expenses of Rs. 43.11 crores which included legal and professional expenses at Rs. 15.19 crores vide Question No. 6 thereon. The assessee filed its reply on 07.04.2021 which was enclosed in pages 57-61 of the Paper Book. The assessee explained that legal and professional charges includes the payment made on account of services obtained from the various professional consultants, tax consultants, IT professionals and auditors, legal professionals etc. Further, these includes expenses incurred for obtaining IT consultants and outsourcing of manpower for support in various operations and other services. 10.2. With regard to loan origination cost, the assessee submitted that it incurred origination fee related for corporate deals / referred/ sourced through Clix Finance India Pvt. Ltd. Fee so incurred for the new loans disbursed are recognized as expenses over the tenor of the loan by applying the Internal rate of return (IRR). The method being consistently followed by assessee is that cost incurred on account of loan origination is claimed under income tax on upfront basis. The same is however reflected on deferred basis in the books of account over the tenure of the loan. Hence, the amount of cost incurred during the year of Rs. 10.16 crores has been claimed as deduction in the computation of income on upfront basis and amount of Rs. 15.18 crores debited to profit and loss account has been added back to the computation of income since the same would have been claimed in earlier years on upfront basis. This explanation offered by the assessee was duly accepted by the ld AO after due verification. Further, the said claim has been made consistently by the assessee in the past also. It was submitted that the assessee while computing taxable income has been consistently disallowing the loan origination cost amortized during the year and claiming deduction for loan origination cost incurred during the year, in accordance with the accounting principle followed and ICDS-IV “Revenue Recognition”. The same is duly reflected in the computation of income for the year under consideration which was verified by the ld AO during the assessment proceedings. Another notice was issued by the ld AO on 24.12.2020 during the course of original assessment proceedings u/s 142(1) of the Act wherein, vide query No. 7 and 8, the assessee was asked a specific query to justify the allowability of deduction on account of loan origination cost of Rs. 10.16 crores. The assessee vide reply dated 08.01.2021 filed detailed submissions giving the nature of the said expenses and justification with regard to allowability of deduction qua the same under the Act together with computation of income for earlier assessment year showing the consistent approach followed by the assessee in this regard. These replies are enclosed in pages 184 to 226 of the Paper Book, the relevant pages qua this issue are enclosed in pages 189, 190, 217-222 of the Paper Book. Further yet another notice was issued u/s 142(1) of the Act on 22.03.2021 again asking for the justification for allowability of deduction of Rs. 10.16 crores on account of loan origination cost wherein copy of agreement/ contract with Clix Finance India Ltd was called along with the justification of debiting loan origination cost of Rs. 15.19 crores against the interest income of loans and advances. The assessee in response to the said notice vide reply dated 07.04.2021 furnished the copy of agreement entered into between the assessee and Clix India Finance Ltd which is enclosed in Pages 232 to 238 of the Paper Book; copy of invoice wise details of top 10 Direct Selling Agents (DSA) which are enclosed in pages 239 to 244 of the Paper Book along with copy of sample agreement with DSAs together with copy of invoice sample basis which are enclosed in pages 245 to 287 of the Paper Book. 10.3. All these facts clearly proved that more than adequate enquires have been made by the ld AO with regard to legal and professional charges and loan origination cost in the assessment proceedings itself. Hence, it cannot be said by any stretch of imagination that adequate enquiries were not made by the ld AO. This is not the case of no enquiry by the ld AO qua the impugned issue. The ld PCIT had merely directed the ld AO to examine the allowability of the same u/s 37 of the Act in the light of the observation given by the auditors in the financial statements. The ld PCIT had not even stated as to why the observations made in the financial statements by the auditors have any adverse impact on the computation of income of the assessee qua these issues. On the other hand, the assessee had furnished complete details and had also proved before the ld AO that this has been claimed by it on a consistent basis by clearly bringing on record the differential treatment given in the books of account and in the income tax computation. The ld PCIT , in our considered opinion, had merely directed the ld AO to make fishing and roving enquiries on the impugned issue, without bringing on record the error committed by the ld AO in the assessment order. Hence, we have no hesitation to hold that the ld PCIT grossly erred in invoking the revision jurisdiction u/s 263 of the Act qua this issue.
Other expenses amounting to RS. 43.11 crores which includes year-end provision of Rs. 7.91 crores. We find that the assessee vide note No. 39 of the audited financial statements had given the break-up of other expenses for the year and in the immediately preceding year together with the foot note thereon which is reproduced as under:- “24 Other expenses
For the year For the year Particulars ended 31 March ended 31 March 2018 2017 Advertisements and sales promotion 120 62 Travelling and conveyance 58 221 Rent (refer to note 24.4) 230 91 Legal and professional charges (refer to note 24.2) 1,599 1,086 Rates and taxes 321 398 Repairs and maintenance 142 140 Loss on foreign exchange 3 - Loan origination cost 1,519 553 CSR expenditure (refer to note 24.3) - - Printing and stationery 44 1 Insurance 45 12 Postage, Telegrams & Telephones 37 30 - Miscellaneous expenses 30 Total 4,311 2,431
The Company accounts for expenses in the respective expense account as and when vendor invoices are received and processed. At the year end, provision is made for all expenses that have been incurred upto the end of the year (including expenses that may have been incurred in earlier years) where vendor invoices are yet to be received, Such provisions are reversed at the beginning of the next year. Such year-end provision for expenses included in the above schedules for the year aggregates Rs 791 (previous year Rs 542).”
11.1 The ld AO issued notice u/s 142(1) of the Act dated 24.12.2020 where specific query was raised vide question No. 8 for justification of allowability of sum of Rs. 49,69,73,707/- reflected in any other amount allowable as deduction in column 33 of schedule BP of the ITR. In response to the same, the assessee vide reply dated 08.01.2021 filed the complete break up amounting to Rs. 49.69 crores including the nature of expenses and justification for allowability of the said expenses with supporting documents which are enclosed in pages 184-191 of the Paper Book and pages 217 to 222 of the Paper Book. Further another notice was issued u/s 142(1) of the Act on 22.03.2021 by the ld AO specifically asking for details of other expenses of Rs. 43.11 crores vide question No.
6. The assessee furnished the reply dated 07.04.2021 giving the details of various expenses in a tabular form explaining the nature and the amount incurred under the respective head. The assessee also submitted that the revenue had increased three fold during the year from its business operations whereas the expenditure had increased only less than 2 fold during the year. Accordingly, it justified the claim of expenses to be in consonance with the revenue earned during the year. The assessee also gave the specific explanation with regard to year-end provision of Rs. 7.91 crores by drawing direct attention to Note No. 24 of the audited financial statements which is already reproduced supra as to how the year-end provision for expenses are accounted and reflected. Even before us, the assessee explained that in the computation of income, the amount of Rs. 6.77 crores being year-end provision created, was suo moto disallowed by the assessee and the balance provision of Rs. 1.13 crores pertains to the provision for capital expenditure which has not been included in the capital work in progress and not all debited to profit and loss account. Hence, Page | 10 there is no question of disallowing year-end provision again for Rs. 7.91 cores as directed by the ld PCIT in his revision order.
11.2. In view of the above observations, we have no hesitation to hold that the ld PCIT grossly erred in assuming revision jurisdiction u/s 263 of the Act qua the issue of other expenses and year-end provision for expenses. Hence, we hold that there is no error in the order of the ld AO in this regard warranting revision u/s 263 of the Act.
Cost Allocation charges amounting to Rs. 12.07 crores. The ld AR drew our attention to para 24.1 of notes of account to the financial statement enclosed in pages 34 of the Paper Book wherein, it was clearly mentioned that other expenses are net off cost allocation charges of Rs. 12.07 crores to group companies. It represents amount of expenses recovered by the assessee from its group company in relation to common cost incurred by the assessee. Accordingly, these expenses are credited to the corresponding expenditure reflected in other expenses. We find that the ld PCIT had not understood the basic fact that this cost allocation charges of Rs. 12.07 represent income of the assessee and not expenditure. Without understanding this preliminary fact, he had directed the ld AO to verify and examine the same. Either way, this is not even prejudicial to the interest of the revenue as it only represent income of the assessee. Hence, revision jurisdiction u/s 263 of the Act could not be exercised by the ld PCIT for the same.
Finance Cost amounting to Rs. 40.35 crores As stated in the earlier part of this order, the assessee being a NBFC engaged in the business of financing, would have to incur finance cost on its borrowing and accordingly, the financing cost becomes raw material for the finance company. The raw material cost can never be doubted unless it is incurred outside the books or sources of which is not properly explained by the assessee. The total finance cost incurred of Rs. 40.35 crores is one of the major expenditure reflected glaringly in the face of the profit and loss account. Further, we find a specific query was raised by the ld AO vide notice u/s 142(1) of the Act dated 24.12.2020 vide question No. 5 specifically asking details of borrowings made by the assessee and interest paid thereon. The assessee filed its reply dated 08.01.2021 giving the complete details of long term and short term borrowings obtained from various banks and financial institutions together with the details of interest paid thereon. Hence, it cannot be said that the ld AO had made any enquiry on the finance cost of Rs. 40.35 crores. Accordingly, the ld PCIT erred in assuming revision jurisdiction u/s 263 of the Act qua this issue. Further, we also find the ld PCIT absolutely without any basis had concluded that the finance cost is not allowable as deduction. As stated earlier, the finance cost is the raw material for a finance company. How the raw material (interest paid in this case) be not allowed as deduction. It is not even the case of the ld PCIT that the borrowed funds were not utilized by the assessee for its business. The assessee is engaged in the business of financing i.e. advanced loan to others and earning interest income. For this purpose, it had used own funds as well as borrowed funds. For the borrowed funds, it has to pay interest. That interest cost becomes an allowable deduction under the head business. How can that claim of finance cost as a deduction be questioned by the ld PCIT in these facts and circumstances. Hence, we have no hesitation to hold that the ld PCIT grossly erred in assuming revision jurisdiction u/s 263 of the Act and hold that he had given unwarranted and illegal direction to the ld AO to make fishing and roving enquiry which is not permissible u/s 263 of the Act.
Depreciation-23.68 crores During the year, the assessee had claimed deduction of Rs. 23.68 crores as depreciation and had disallowed the amount of depreciation debited in the profit and loss account amounting to Rs. 35.90 crores. The assessee had claimed depreciation under the income tax act as under:- g. Plant and machinery @15%- Rs. 17,25,73,269/- h. On furniture and fixtures @10% Rs. 55,31,683/- i. On plant and machinery 40% in respect of assets and lease Rs.5,87,68,357/- Total Rs. 23,68,73,309/- 14.1. These details are also reflected in Form 3CD of the Tax Audit Report while reply to question No. 18 thereon. The various details of addition of fixed assets were also given as annexure to tax audit report along with return which are enclosed in pages 440 to 442 of the Paper Book. Further the ld AO issued a specific query u/s 142(1) of the Act dated 24.12.2020 raising a specific query on allowability of depreciation of Rs. 23.68 crores. The assessee filed its reply dated 08.01.2021 giving the entire details of depreciation together with a detailed explanation for allowability of depreciation on assets given on finance lease by specifically placing reliance on the decision of the Hon'ble Supreme Court in the case of ICDS Vs. CIT reported in 350 ITR 527 (SC), wherein, it was held that the lessee is the owner of the assets given on finance lease and hence, eligible to the claim of depreciation. It was also clarified that assessee had duly offered the principal portion of the lease rental for assets given by finance lease to tax in the return of income itself. The ld AO on appreciating this reply and also placing reliance on the decision of the Hon'ble Supreme Court which is in favour of the assessee had taken only plausible view and had allowed Page | 13 the depreciation to the assessee. How this could be treated as lack of enquiry by the ld AO. Further, we also find that the very same issue was also subject matter of adjudication in assessee‟s own case for AYs 2001- 02, 2003-04, 2004-05, 2005-06 in 4256/Del/2016; 4206/Del/2011 and 13/Del/2012 respectively dated 29.08.2016 wherein, the very same issue was allowed in favour of the assessee by this Tribunal. Hence, there is absolutely no reason for the ld AO to take a divergent view in this regard. Very strangely the ld PCIT goes to conclude that the depreciation has not been correctly claimed which is without any basis and the decision of the Hon'ble Supreme Court in the case of ICDS Ltd had to be rejected without adducing any reasons. The directions given by the ld PCIT to the ld AO are merely to make fishing and roving enquiry which, in our considered opinion, is not permissible in proceedings u/s 263 of the Act. Hence, we have no hesitation to quash the assumption of revision jurisdiction u/s 263 of the Act of the ld PCIT qua this issue.
Employee benefit expenditure-Rs. 28.50 crores The employee benefit expenditure based on actual and based on actuarial valuation are reflected in the audited financial statements at pages 3 to 53 of the Paper Book vide Note No. 23 of the audited financial statement. The ld PCIT does not find any error in the said working. In fact the assessee had already made suo moto disallowance of amount debited to the profit and loss Account with regard to provisions made on account of employee benefit expenditure and had claimed the actual amount of payment of gratuity and earned leave encashment in accordance with provisions of Section 43B of the Act. This fact is also duly reflected in the tax audit report. Whatever is the unpaid portion, the assessee had voluntarily added back in the computation. We find that the ld PCIT does not point out any error in the action of the assessee or in the action of the ld AO in accepting to the contentions of the assessee. Hence, we have no hesitation to hold that the ld PCIT erred in assuming revision jurisdiction u/s 263 of the Act qua this issue.
The ld DR before us made a detailed submission by placing reliance on various case laws. He also placed heavy reliance on the deeming provision provided in Explanation 2 to section 263 of the Act. According to the ld DR, any assessment order could be subjected to revision proceedings u/s 263 of the Act by applying the provisions of Explanation 2 to section 263 of the Act. We are unable to comprehend ourselves to accept to this argument of the ld DR in view of the fact that if the proposition of the ld DR is accepted, then all the assessments would be eligible for revision u/s 263 of the Act irrespective of the fact whether adequate enquiries were indeed made by the ld AO or not in assessment proceedings. In that scenario, if every assessment is sought to be revised u/s 263 of the Act, then there is no need for the ld AO to even make any enquiry while framing the assessment. The ld AO could simply accept the returned income of the assessee and thereafter the said order could be subject matter of revision proceedings u/s 263 of the Act and in the second round, the ld AO could make adequate enquiry as directed by the ld PCIT in the revision order. Hence, we hold that the argument advanced by the ld DR are not in consonance with the true intent of the legislature. In our considered opinion, even before invoking Explanation 2 to section 263 of the Act, the ld PCIT should give a finding that the ld AO had not made any enquiry on the issue that are sought to be revised. The ld PCIT cannot be substitute his own opinion by taking shelter to Explanation 2 to section 263 of the Act in lieu of a opinion already framed by the ld AO. All the case laws relied by the ld DR were rendered in the context of non- enquiry of the ld AO whereas in the instant case, for all the issues that are sought to be revised, the ld AO had indeed made adequate enquiry hence, those case laws are relied on the ld DR are clearly distinguishable.
In view of the aforesaid observations, we have no hesitation to quash the entire revision order u/s 263 of the Act by the ld PCIT by holding that revision jurisdiction have been invalidly assumed by PCIT and his action cannot be sustained in the eyes of law. Accordingly, grounds raised by the assessee are allowed.
In the result the appeal of the assessee is allowed.