PHILIPS INDIA LTD.,KOLKATA vs. PCIT-IV, KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘C’ BENCH, KOLKATA [Before Sri J. Sudhakar Reddy, Accountant Member & Sri S.S. Viswanethra Ravi, Judicial Member] I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited..........……………………………………....………………..…………………….….Appellant Earlier known as Philips Electronics India Limited 7 No. Justice Chandra Madhab Road Kolkata – 700 020 [PAN : AABCP 9487 A] Principal Commissioner of Income Tax - IV, Kolkata…….............…....................…...Respondent Appearances by: Shri P.J. Pardiwala, Sr. Advocate & Shri Navneet Misra, Advocate, appeared on behalf of the assessee. Shri Robin Choudhury, Addl. CIT D/R, appearing on behalf of the Revenue. Date of concluding the hearing : January 10th, 2019 Date of pronouncing the order : March 27th, 2019 O R D E R Per J. Sudhakar Reddy :-

This appeal filed by the assesse is directed against the order of the ld. Principal Commissioner of Income Tax - 4, Kolkata, (hereinafter the ‘ld. Pr. CIT’), passed u/s 263 of the Income Tax Act, 1961 (the ‘Act’), dt. 29/03/2016.

2 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited a) Under assessment of income by Rs.89,77,934/-, on account of depreciation on moulds being claimed by the company and allowed by the Assessing Officer at a higher rate of 30% instead of the rate of 15%. b) Under assessment of Rs.9,30,00,000/-, on account of allowance of a deduction claimed by the assessee company towards “excise duty not recovered from the sales” being debited directly to the profit and loss account. 2.1. The assessee company filed its reply dt. 11/01/2016 and 11/02/2016 and contested the show cause notice issued by the ld. Pr. CIT proposing to exercise his powers u/s 263 of the Act, on the ground that there is no error which is prejudicial to the interest of the revenue in the impugned assessment order. It pleaded that the proceedings initiated u/s 263 of the Act, should be dropped. The ld. Pr. CIT considered these replies and submissions of the assessee and in an order passed u/s 263 of the Act on 29/03/2016 held that the assessment order dt. 21/01/2014 is erroneous insofar as it is prejudicial to the interest of the revenue and consequentially set aside the matter to the file of the Assessing Officer for de novo adjudication only with respect to the above two issues. 3. Aggrieved the assessee is in appeal before us on the following grounds:- “1. That on the facts and in the circumstances of the case and in law, the order made by the Ld. CIT under section 263 of the Income-tax Act, 1961 ('IT Act') is illegal, invalid and not sustainable in law. 2. That on the facts and in the circumstances of the case and in law, the Ld. CIT grossly erred in passing the order under section 263 even though the assessment order under section 143(3) r.w.s. 144C dated 21 January 2014 passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the interest of the Revenue. 3. That on the facts and in the circumstances of the case and in law, the AO after due examination of the relevant facts having already followed one of the course permissible in law, the Ld. CIT was unjustified in setting aside the assessment on the issue of allowability of "Excise duty not recovered from sales" debited to P&L A/c and allowability of Depreciation on moulds @30% and directing the AO to re-adjudicate the same issue after re-examination of the facts. 4. That on the facts and in the circumstances of the case and in law, the Ld. CIT erred in holding that the Company was not eligible to claim depreciation on moulds @30% as the Company did not have any Rubber/ Plastic factory during the year, without appreciating that the moulds were used in the

3 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited Rubber/ Plastic factory of the job workers of the Company and higher depreciation was claimed by the Company in conformity with the conditions laid out in section 32 of the IT Act read with Rule 5 of the Income-tax Rules, 1962. 5. That on the facts and in the circumstances of the case and in law, the Ld. CIT erred in linking the amount debited to Profit & Loss Account towards "Excise duty not recovered for the Sales" with the CENVAT Credit availed during the year and thereby concluding that “Excise duty not recovered for the Sales” is not allowable.” 4. Under Ground No.1 which challenges the order as invalid and not sustainable in law, the following legal arguments were raised:- “1.1.1. As per the provisions of section 263 of the Act, the Principal Commissioner or Commissioner may revise an order passed by the Assessing Officer if the same is erroneous in so far as it is prejudicial to the interest of the revenue. The Assessment order dated 21 January 2014 in as much as is passed consequent to the directions of the DRP cannot be regarded as an order of the Assessing Officers'. Further, Explanation l(a) to section 263(1) of the Act has clarified the scope of what can be constituted as an order passed by the Assessing Officer, as mentioned below: "Explanation 1. - For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;" 1.1.2. From the above Explanation, it can be seen that the orders passed by the Assessing Officer pursuant to the directions of a superior officer can be revised under section 263 only in cases covered by clause (1) thereof. As such, any provision

4 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited does not cover an order passed by the Assessing Officer in conformity with the directions of the DRP under section 144C of the Act, such orders are not susceptible of being revised in terms of section 263 of the Act. 1.1.3. From a perusal of the memorandum explaining the rationale behind the insertion of section 144C of the Act by the Finance Bill, 2009 as also the Circular No. 5 of 2010 dated 3 June 2010 issued, explaining the said insertion, the notes on clauses, etc., it can be seen that consequential amendments have been made to various provisions of the Act as a result of insertion of section 144C in the Act. Such consequential amendments have been made to sections 131, 246A and 253. However, no amendment is made in section 263 of the Act as a consequence of insertion of section 144C of the Act to deem such orders being capable of being revised. Therefore, the memorandum, circular, etc. support the Appellant's stand that once the Assessing Officer passes an order in accordance with the Directions of DRP the same cannot be revised by the CIT under section 263 of the Act. 1.1.4. Also, it is submitted that once the DRP issues its directions in relation to a draft assessment order and a final assessment order is passed in accordance with such directions, the order does not remain that of an Assessing Officer's order but is an order confirmed by, and hence, merged with, the order/directions of the DRP. Such an order cannot be revised by the CIT under section 263 of the Act.” 5. The ld. Senior Advocate, Shri P.J. Pardiwala, appearing on behalf of the assessee argued as follows:- a) The order passed u/s 263 of the Act on 29/03/2016 is invalid and cannot be sustained in law for the reason that the ld. Pr. CIT does not have the power to revise the order passed by the Assessing Officer in conformity with the directions of the DRP u/s 144C of the Act using his revisionary powers u/s 263 of the Act. He relied on the propositions of law laid down in the order of the Mumbai Bench of the ITAT in the case of Trustees of Parsi Panchayat Funds & Properties v. Director of Income-tax [1996] 57 ITD 328 (BOM.) and submitted that when a view was taken and when an order was passed by the Assessing Officer pursuant to the directions of a superior authority the

5 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited same could not be the subject matter of revision u/s 263 of the Act because:- i. The Assessing Officer could not be said to have applied his mind and merely implemented the binding directions of his superiors and, therefore, his order could not be said to be erroneous, insofar as it is prejudicial to the interest of the revenue. ii. The Act does not contain a provision by which the order of the Commissioner of Income Tax can be revised by another Commissioner of Income Tax. 5.1. He submitted that the Assessing Officer has in this case passed an order u/s 143(3) of the Act in conformity with the directions of the DRP u/s 144C of the Act and argued that in the absence of an enabling provision such as, explanation (a) to Section 263(1) of the Act, revisionary powers cannot be exercised by the ld. Pr. CIT u/s 263 of the Act, on an order passed u/s 143(3) r.w.s. 144C of the Act. He further submitted that when an order is passed as a consequence of the directions issued by the DRP u/s 144C of the Act, the order does not remain that of the Assessing Officer but is an order in conformity with and hence merged with the order/directions of the DRP. He further pointed out that consequent to the insertions to Section 144C of the Act by the Finance Bill, 2009, consequential amendments have been made to various provisions of the Act as a result of insertions to Section 144C of the Act. Such amendments have been made to Section 131, 246A and 253, and submitted that, no amendment has been made to Section 263 of the Act, as a consequence of insertion to Section 144C of the Act. 5.2. Without prejudice to these arguments, the ld. Sr. Advocate submitted that clause (C) of explanation 1 to Section 263 of the Act, provides that “matters not considered and decided by the ld. CIT(A) can be revised by the ld. Pr. CIT u/s 263 of the Act.” He argued that the powers of the DRP is wide enough to extend to such matters which have not been raised by the assessee by filing objections. For this purpose, he pointed out to the Explanation to Section 144C (8) of the Act, which reads as follows:-

6 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited “Explanation.- For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee.” 5.3. He argues that similar explanation, as has been provided by clause (C) of explanation 1 to Section 263 of the Act, was not provided in the Act in the case of an order passed u/s 143(3)/144C(13) of the Act. He further pointed out that the Assessing Officer was required to pass a final assessment order in conformity with the directions issued u/s 144C(13) of the Act, without providing further opportunity of being heard to the assessee and hence there is a complete merger of the assessment order into the directions of the DRP. He contended that in the absence of an enabling provision u/s 263 of the Act, akin to clause (C) of explanation 1 to Section 263, the ld. Pr. CIT does not have the power to revise the impugned assessment order. Referring to the explanation to Section 144C(8) of the Act, he submitted that this explanation was brought in by the Finance Act, 2012 to overcome the judgment of the Hon’ble Karnataka High Court in the case of GE India Technology Centre Pvt. Ltd. [338 ITR 416], which had taken a view that the DRP did not have the jurisdiction to look beyond the variations proposed in the draft assessment order and pointed out that this amendment was made with retrospective effect. He argued that when the DRP has power to consider any matter arising out of an assessment proceedings and hence, even if the DRP does not consider the same, the ld. Pr. CIT does not have the power to revise such an assessment order, u/s 263 of the Act, as the DRP had the jurisdiction to consider that issue. He further submitted that members of the DRP as per Section 144C(15) of the Act, means a collegium comprising of three Principal Commissioners of Income Tax/Commissioners of Income Tax and argued that as these persons are of the same rank as the Commissioner of Income Tax or Principal Commissioner of Income Tax, who was authorised to revise orders u/s 263 of the Act, the ld. Pr. CIT would not have the jurisdiction u/s 263 of the Act to revisit or revise the order of the DRP, which is passed by officers of the same rank. He relied on the provisions of Section 253(1)(d) of the Act, which provides for an appeal from the order of the Assessing Officer pursuant to the order passed consequent to the directions of the DRP, to the

7 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited ITAT and bars an appeal before the Commissioner of Income-tax (Appeals). He argued that the ld. Pr. CIT does not have the jurisdiction to direct the Assessing Officer to revise the assessment, insofar as it relates to the matter which have already been approved by the DIT(TP) as he is a authority having an equal rank as that of an Commissioner of Income-tax as per Section 116 of the Act. He further relied on the decision of the Hon’ble Delhi High Court in the case of CIT vs. K.L. Ahuja [(2001) 116 Taxman 835 (Delhi)] for the proposition that if an Income-tax Officer passes an order, not on his own discretion or wisdom but following the directions of the ld. CIT, to whom he is a subordinates, the Commissioner of Income-tax cannot treat such order of the Income-tax Officer as erroneous or prejudicial to the interest of the revenue because, it would tantamount to reviewing his own order, which is not permissible u/s 263 of the Act. 5.4. Alternatively and without prejudice, the ld. Sr. Advocate, submitted that if the argument of the doctrine of merger is not accepted, since the issues that were raised in the revisionary order u/s 263 were not decided by the DRP, the position that emerges is that, what was actually being revised was the draft assessment order dt. 01/03/2013, passed by the Assessing Officer. He submits that u/s 263(2) of the Act, an order u/s 263 of the Act has to be passed before the expiry of two years from the end of the Assessment Year in which the order sought to be revised was passed. Thus, he submits that the order revising the draft assessment order should have been passed before 31/03/2015 and hence the order passed u/s 263 of the Act, on 29/03/2016 is barred by limitation and has to be struck down as such. 5.5. On merits he submitted that Section 263(1) of the Act, mandates that the order passed by the Assessing Officer should be both erroneous and prejudicial to the interest of the revenue and that both the jurisdictional conditions have to be satisfied for invoking this section. For this proposition he relied on the following case-law:-  Malabar Industrial Co. Ltd. vs. CIT [(243 ITR 83) (SC)]  CIT vs. G.M. Mittal Stainless Steel Pvt. Ltd. [(263 ITR 255)(SC)]

8 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited He submitted that when two view are possible and the Assessing Officer has taken one view, the provisions of Section 263 of the Act, would not be attracted and for this proposition, he relied on the decision of the Hon’ble Apex Court in the case of CIT v. Max India Limited [2007] 295 ITR 282 (SC) & on the decision of the Hon’ble Gujarat High Court in CIT vs. Arvind Jewellers 259 ITR 502 (Guj.). 5.6. On merits he submitted that the assessee has furnished relevant details in connection with the issue of higher depreciation on moulds and the issue of excise duty not recovered from sales debited to profit and loss account, through submission of financial statement and tax audit report before the Assessing Officer during the course of assessment proceedings. It was contended that the relevant details were before the Assessing Officer and based on the said material, the Assessing Officer allowed the claim of the assessee and the Assessing Officer has taken a possible view and hence the assessment order is not erroneous insofar as it is prejudicial to the interest of the revenue. He further argued that the ld. Pr. CIT in the impugned order passed u/s 263 of the Act has simply set aside the issue therein to the file of the Assessing Officer for fresh enquiry without specifying as to how the assessment order was erroneous insofar as it is prejudicial to the interest of the revenue. He relied on the following case-law/s for the proposition that the ld. CIT cannot set aside the matter to the Assessing Officer for fresh examination without commenting or specifying as to how the order passed by the Assessing Officer was erroneous and prejudicial to the interest of the revenue:-  CIT v. Gabriel India Limited (1993) 203 ITR 108 (Bombay)  CIT vs. Vikas Polymers (2010) 341 ITR 537 (Delhi)  CIT vs. R.K. Metal Works (1978) 112 ITR 445 (P&H) 5.7. On the issue of excess depreciation, the ld. Sr. Advocate submitted that the assessee company is engaged in the manufacture of consumer lifestyle products and lighting products interalia through co-makers. Moulds were used by the company for manufacturing of plastic products which form part of the furnished products of the company. He referred to Rule 5 of the Income Tax Rules, 1962

9 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited (‘Rules’) r.w. Section 32 of the Act and submitted that depreciation @ 30% would be available on the moulds for the following conditions are satisfied: a. Moulds are owned by the company; b. Moulds are used for the purpose of company’s business; and c. Moulds are exclusively used in the rubber/plastic factory He argued that all the three conditions have been satisfied by the assessee company. 5.8. On the issue whether the moulds are owned by the assessee company, he submitted that the Assessing Officer has not doubted the same and also produced a copy of the invoice dt. 19/07/2009 issued by M/s. Chhabra & Co. towards purchase of moulds by the company in support of the claim. On the issue whether the moulds were used for the purpose of company’s business, he submitted that the moulds, on which 30% depreciation rate was claimed by the company, were exclusively used in the plastic factory by the job workers/co-makers of the company, to whom moulds were given by the company, under the supervision of the company, for manufacture of various products. He contended that no distinction has been made in the Rules between manufacturing of plastic goods for internal consumption or for outside sale. He relied on the following judicial precedents for the proposition that, though the assessee is not engaged in plastic business but in other businesses such as manufacture of electrical items, batteries etc. and manufactures plastic products which were only used for internal consumption in the manufacture of their own product then also depreciation at higher rate should be made available to the assessee:-  Amco Batteries Ltd. vs. CIT (1993) 203 ITR 614 (Kar.)  BPL Refrigeration Ltd. vs. ACIT (2004) 91 ITD 203 (Bang.)  L.K. India Pvt. Ltd. vs. Department of Income Tax [ITA No. 1458/Ahd/2012 & 1459/Ahd/2012] 5.9. He further submitted that the moulds are exclusively used in the rubber factory and this fact is certified by the tax auditors. He relied on the certificate from M/s. Elin Appliances (a Job worker/Co-maker of the Company), dt. 09/12/2015,

10 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited for proving that moulds were used both in their factory for exclusive development of rubber/plastic products and for the business of the company. He vehemently contended that Rule 5 of the Rules, does not necessitate that the moulds have to be exclusively used in the factory owned by the company only. For this proposition he drew analogy from the higher rate of depreciation available on motor buses, motor lorries and motor taxis used in the business of running them on hire. He relied on the judgment of the Hon’ble Supreme Court in the case of I.C.D.S. Ltd. vs CIT (29 taxman.com 129) for the proposition that even if the assets are leased out and the lessee uses the assets in the business of running them on hire the lesser would be eligible for a higher rate of depreciation. He argued that the Hon’ble Supreme Court has laid emphasis on the functional use of the asset. Thus, he submits that the assessee should be allowed 30% rate of depreciation on moulds applying similar propositions. 5.10. On the issue of excise duty recovered from the sales, he submitted that the accounting process followed by the assessee company is in line with the generally accepted accounting principles and excise duty payable on manufacture of furnished goods is booked as expenses under the head “Excise Duty Expense A/c” and similarly a liability is created under the head “Excise Duty liability”. 5.11. The ld. Sr. Advocate submitted that Rs.43,20,00,000/- which is excise duty relatable to goods sold during the year has been disclosed as a reduction from sales as “excise duty recovered from clients on sale” and that Rs.9,30,00,000/- which is not related to goods sold, was disclosed as debit to the profit and loss account as “excise duty not recovered from sales” and disclosed by way of an explanatory note under the notes to profit and loss account. He further submitted that the utilisation of CENVAT credit has no relation with the taxability of income and it is an input credit which is utilised in discharging excise duty liability of the company. Referring to Section 43B of the Act, he submitted that the assessee company had claimed deduction in respect of excise duty, only on the amount which is paid/discharged before the due date of filing of the return of income.

11 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited 5.12. The ld. Sr. Advocate pointed out that consequent to an order passed by an Assessing Officer u/s 143(3) r.w.s 263 of the Act, the assessee carried the matter in first appeal wherein the ld. CIT(A) has allowed the claim of the assessee of “excise duty not recovered from sales” by recognising the difference between the two. Based on this view of the ld. CIT(A), he argued that the claim of the assessee is correct and the original order of the Assessing Officer which does not disturb this claim was neither erroneous nor prejudicial to the interest of the revenue. Even otherwise, he submitted that the order of the ld. CIT(A) proves that the view in question is a possible view and that when there are two possible views, no revision u/s 263 of the Act, can be done. Thus, the ld. Sr. Advocate submitted that the order of the ld. Pr. CIT passed u/s 263 of the Act, be held as bad in law. 6. The ld. CIT D/R, Mr. P.K. Srihari, on the other hand, opposed the contentions of the ld. Sr. Advocate and submitted that u/s 263 of the Act, the ld. Pr. CIT, has the power to revise any proceedings if he considers the order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the revenue. He argued that what was revised was an order of the Assessing Officer passed us 143(3)/144C(13) of the Act, and that it is immaterial that this order was passed by incorporating directions of the DRP. He contended that those issues in the impugned assessment order and those that were revised by the ld. Pr. CIT were not issues before DRP and under those circumstances it is wrong to argue that this part of the assessment order which is framed by the Assessing Officer, independent of the directions given by the DRP, as an order which cannot be revised u/s 263 of the Act. He disputed the contentions of the assessee that the doctrine of merger would apply and submitted that there would be no merger of the assessment order into the order of the DRP. Thus, he submits that it is well within the rights of the ld. Pr. CIT to examine and revise such issues which were never before the DRP. He further submitted that just because the DRP had wider powers to consider issues other than those which are brought before it by the assessee, it cannot be concluded that the DRP has considered and adjudicated on these issues.

12 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited 6.1. On the argument of the ld. Counsel for the assessee that what is sought to be revised is the draft assessment order and hence the order u/s 263 is barred by limitation, he submitted that the showcause notice was give to revise the order passed u/s 143(3)/144C(13) of the Act, dt. 29/03/2016 and hence the question of the order being barred by limitation does not arise. 6.2. On merits, he submitted that the Assessing Officer has not examined both these issues in question and hence it was a case of total non application of mind by the Assessing Officer. Thus, he argued that the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue on this count alone. He relied on certain case-law in support of this contention that an order is erroneous when an order is passed by the Assessing Officer without application of mind. We would refer to these case-law as and when necessary. He further argued that there is no proof submitted by the assessee that the moulds in question are exclusively used in the rubber/plastic factories. Thus, he submits that this condition for being eligible for claiming higher depreciation was not fulfilled. On the issue of excise duty recovered from sales, he submitted that the Assessing Officer has not examined the fact and simply accepted the claim of the assessee. He relied on the judgment of the Hon’ble Jurisdictional High Court in the case of Commissioner of Income-tax, Central-I, Kolkata v. Maithan International [2015] 375 ITR 123 (Calcutta), for the proposition that if an order is passed without enquiry/investigation it is erroneous insofar as it is prejudicial to the interest of the revenue. He prayed that the order of the ld. Pr. CIT be upheld. 7. We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:- 8. The first issue that is to be adjudicated is whether ld. Pr. CIT has the power u/s 263 of the Act to revise the assessment order passed by an Assessing Officer in compliance with the directions of the DRP u/s 144C(13) r.w.s 144C(5) of the Act. Under Section 144C(10) of the Act, the directions issued by the DRP are binding on the Assessing Officer. Under section 144C(13) of the Act, the Assessing Officer is required to complete the assessment in conformity with the directions of the DRP,

13 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited without providing any further opportunity of being heard to the assessee. The ld. Counsel for the assessee argues that this process results in merger of the assessment order passed u/s 143(3)/144C(13) of the Act, with the order of the DRP. We now examine this argument. 8.1. The logic underlying the doctrine of merger, as laid down by the Hon’ble Supreme Court in the case of “Commissioner Of Income-Tax vs M/S. Amritlal Bhogilal & Co. 1958 AIR 868”, is that; the juristic justification of the doctrine of merger may be sought in the principle that, there cannot be, at one and the same time, more than one operative order governing the same subject-matter. Therefore the judgment of an inferior court, if subjected to an examination by the superior court, ceases to have existence in the eye of law and is treated as being superseded by the judgment of the superior court. In other words, the judgment of the inferior court loses its identity by its merger with the judgment of the superior court. 8.1.1. The order passed by the Assessing Officer u/s 143(3) r.w.s. 144C(13) of the Act, in pursuance of directions of the DRP is appealable before the ITAT as per Section 253(1)(d) of the Act. The directions of the DRP u/s 144(5) of the Act, are not appealable before the ITAT. Under those circumstances, in our view, the directions of the DRP, which is a higher authority cannot be said to have merged with the order of the Assessing Officer, passed u/s 143(3) r.w.s. 144C(13) of the Act, which is a lower authority. Thus we are unable to accept this argument of the ld. Counsel for the assessee. 8.1.2. Without prejudice to our above view, it is also settled that the doctrine of merger applies only on those issues that are considered and adjudicated by a higher appellate authority. In the case on hand, the argument of the ld. Counsel for the assessee, at best, holds good, only on those issues, which the DRP had considered and had adjudicated upon. Those issues which were never considered or looked into by the DRP cannot be considered as those which have merged with the order of the Assessing Officer, simply because, the DRP, has as per the provisions of the Act, had the powers to consider any issue that arises in an assessment order. Such enabling power under the Act, does not lead to a

14 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited conclusion that all issues which were never looked into by the DRP were considered and adjudicated by the DRP.

8.2. In our view at best, without prejudice to our finding that there is no merger of the order of the Assessing Officer with that of the DRP, the doctrine of partial merger may apply to the facts of the case at hand. Thus, on the issues that were not before the DRP and the issues which the DRP had not examined nor has applied its mind to, there can be no merger with the directions of the DRP. In the case on hand, both the issues that were subject matter of revision u/s 263 of the Act, were not issues considered or examined by the DRP.

“7. The contention of the assessee was that the order was framed on the direction given by DDIT under section 144A of the Act and to that extent the Assessing Officer could not be said to have applied his mind and therefore, that portion of the order based on the direction of DDIT under section 144A of the Act, could not be revised under section 263. According to the counsel the amendment to section 263 of the Act which permits revision of orders that are made in pursuance to the directions under section 144A of the Act is intended to cover all those cases and to that part of the order of assessment which is not guided by the directions under section 144A of the Act. The support of the argument was with reference to the earlier decisions which have held that the order could not be erroneous when he follows his superior orders. The Supreme Court decision in CIT v. Elphinstone Spg. & Wvg. Mills Co. Ltd. [1960] 40 ITR 142 was referred to for the proposition that fiction created by the section should not be carried beyond the purpose for which it was intended which was reiterated by the Supreme Court in CIT v. Moon Mills Ltd. [1966] 59 ITR 574, in CIT v. Ajax Products Ltd. [1965] 55 ITR 741 , in CIT v. Amarchand N. Shroff [1963] 48 ITR 59 . It was submitted that the Calcutta High Court in CIT v. Justice R.M. Datta [1989] 180 ITR 86 had held that the words of the statute are precise and unambigugus, they must be accepted as declaring the express intention of the legislation. The departmental representative contended that the amendment including the revision of an order of assessment framed on the directions under section 144A of the Act has to be construed in its true. perspective and should not be broken up as suggested by the learned counsels for the assessee. In support of the above arguments, reliance was placed on the Bombay High Court decision in CIT v. M.M. Virwani [1994] 207 ITR 225. In support of the argument that the Assessing Officer when applies wrong law it gives raise to an error and could be revised by the Commissioner, reliance was placed on the Rajasthan High Court decision in CIT v. Emery Stone Mfg. Co. [1995] 213 ITR 843. It was pointed out that the order did not

15 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited deal with the provisions of section 11(4A) of the Act and therefore, error did creep in the order of Assessing Officer. The contention of the learned counsel for the assessee that the amendment to section 263 of the Act permitting revision of orders has to be limited to that portion of the order not covered by the direction under section 144A of the Act, in our considered opinion deserves to be rejected. Sections 144A and 144B of the Act were introduced with a view to contain litigation by making the immediately superior authority to the Assessing officer to have concurrent jurisdiction in the framing of the assessment and this jurisdiction so exercised by that superior authority is not merely as a superior but as an Assessing Officer as well. To ensure that the assessments framed after obtaining the directions under section 144A do not go unchecked the Legislature in their wisdom had amended the section 263 to include such an order as within the ambit of revision provided of course it could be said that the order is erroneous so as to make it prejudicial to the interests of the revenue. Considering the volume and the tax involved, the CBDT from time to time had issued such notifications to the effect that Inspecting Assistant Commissioners of Income-tax, Deputy Commissioners of Income-tax would also act as Assessing Officer singly or shall have concurrent jurisdiction. The order of assessment passed by Assessing Officer or Assessing Officer under directions of Inspecting Assistant Commissioner (IAC) or by IAC all are performing the functions of an Assessing Officer. This is clearly brought out in the Notes on Clauses to the Taxation Laws Amendment Bill, 1984 by which the Explanation to section 263 was introduced covering the orders framed as per the directions received under section 144A of the Act. This is reproduced below for the sake of facility: "Sub-clause (a) seeks to insert an Explanation to sub-section (1) of section 263. Under the existing provisions, the Commissioner is empowered to revise any order passed by the Income-tax Officer under the Income-tax Act if he considers that such an order is erroneous insofar as prejudicial to the interests of the revenue. The Explanation seeks to clarify that, for the purposes of this section, an order of assessment passed by the Income-tax Officer, on the basis of the directions issued by the Inspecting Assistant Commissioner under section 144A or section 144B or an order passed by the Inspecting Assistant Commissioner in exercise of the powers or in performance of the functions of an Income-tax Officer conferred on or assigned to him under clause (a) of sub-section (1) of section 125 or under sub-section (1) of section 125A shall be regarded as an order passed by the Income-tax Officer." In the case before us the assessment was selected for scrutiny and the DDIT was closely following every stage of the assessment and in the course of such function had issued his directions under section 144A of the Act and was performing the identical functions of the Assessing Officer and the order finally passed according to the directions remain to be an order made by Assessing Officer jointly with DDIT acting as an Assessing Officer. Therefore, there is absolutely no merit in the argument advanced by the learned counsel of the appellant-trust that to the extent of the directions received under section 144A and applied by the Assessing Officer it could not be revised and hence is rejected.” 9.1. A perusal of the above case-law shows that, it can be said that the DRP is also discharging a function of an assessing officer and the assessment order still remains that of the Assessing Officer, though it incorporates the directions of the DRP. The DRP proceedings are a stage of assessment proceedings. If the proposition of law laid down in this case-law is applied to the case at hand, then even the directions given by the DRP and incorporated in the assessment order can be a subject matter of revision u/s 263 of the Act, even in the absence of an

16 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited enabling provisions such as sub-clause (a) to Explanation 1 to Section 263 of the Act, which is clarificatory in nature. Hence the argument that an enabling provision such as explanation 1(a) to Section 263 of the Act, is required for the ld. Pr. CIT to revise an order passed u/s 143(3)/144C of the Act, is in our view not correct as this explanation only clarifies the powers that are inherently held by the Pr. CIT u/s 263 of the Act. In any event, the argument of the assessee cannot be applied to those issues which were not considered by the DRP. 9.2. Another limb of the argument of the ld. Counsel for the assessee is that the DRP’s power extends to such matters that have not been raised in the objections filed by the assessee before it under section 144C sub-section 8 and explanation thereto, and hence the entire order of the Assessing Officer can be said to be have been passed on the directions of the DRP. Simply because there is a power in the Act provided to the DRP, to examine all issues relatable to an assessment, whether raised by the assessee before it or not, it cannot be concluded that all the issues that arise in an assessment are deemed to have been examined or considered by the DRP. Those issues which were not considered or looked into by the DRP cannot be held as decisions taken by the DRP and incorporated in the assessment order passed u/s 143(3) r.w.s. 144C(13) of the Act. 9.3. Another argument raised was that, in the absence of an enabling provision to Section 263 akin to clause (C) to explanation 1 to Section 263, the ld. Pr. CIT does not have the power to revise the order passed in compliance with the directions of the DRP. In our view, the explanation in question only clarifies or explains the position of law. It is not a deviation from the settled position of law. In our view even without such enabling provision, the ld. Pr. CIT has the power to revise u/s 263 of the Act, those issues which were not a matter of consideration by the DRP. 9.4. Reliance was placed on Section 144C(15) of the Act, for bringing to our notice that the DRP comprises of a collegium of three Principal Commissioners of Income Tax /Commissioners of Income Tax and hence when an order is passed by the Assessing Officer pursuant to the DRP’s direction, a Principal Commissioner of Income Tax of equal rank cannot review such order u/s 263 of the Act. Reliance is

17 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited placed on the decision of the Hon’ble Delhi High Court in the case of CIT vs. K.L. Ahuja reported in [2001] 250 ITR 763 (Delhi). In this judgement the proposition of law laid down was that, if an order is passed by the Assessing Officer in pursuance of directions of his superior officers who happens to be a Commissioner of Income Tax, then such Commissioner of Income Tax cannot revise that order, as it would tantamount to revising one’s own order. In the case of K.L. Ahuja (supra), an order under Section 154 of the Act was passed by the Assessing Officer relying upon a general circular issued by CIT which in turn followed an earlier CBDT circular accepting the ITAT Mumbai Bench’s decision. Here the facts are entirely different. In this case, it is not a question of revising one’s own order. Further, neither the Assessing Officer nor the DRP have applied their mind on the issues which are the subject matter of revision. Hence the question of revising one’s own order or orders of authorities of concurrent or equal ranks does not arise. This argument may be accepted only to the extent that the directions given by the DRP and followed by the Assessing Officer may not be subject matter of revision by the ld. CIT u/s 263 of the Act as the persons constituting the DRP are of the same rank as that of the ld Pr. CIT. 9.5. The next argument is that the order passed u/s 263 of the Act is barred by limitation as what was actually being revised was a draft assessment order. We are unable to persuade ourselves to accept this argument. This is not a case where assessment order is being revised. The notice issued by the ld. Pr. CIT was to revise the order passed u/s 143(3)/144C(13) of the Act on 21/01/2014 and what was revised and what is in challenge before us is the revision of this order dt. 21/01/2014 and not the draft assessment order dt. 01/03/2013. We hold that the order passed by the ld. Pr. CIT u/s 263 of the Act is not barred by limitation. There is no dispute that both the issues on which revisionary powers were invoked by the ld. Pr. CIT were not considered by the DRP. Hence in view of the above discussion, we hold that the ld. Pr. CIT has correctly exercised jurisdiction u/s 263 of the Act. 10. We now come to the issues on merits. The ld. Pr. CIT, in the last page of the order held as follows:-

18 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited “The Assessing Officer allowed the claim of the assessee without examination of the facts.”

10.1. A perusal of the draft assessment order demonstrates that the Assessing Officer has passed the order without examination of the facts, without making the requisite enquiries and without application of mind, on the issues of “excise duty recovered from sales” and also on the issue of “excess depreciation claimed on moulds”. It is also not the case of the assessee that these two issues were considered by the Assessing Officer and, that an opinion was formed on these issues by the Assessing Officer. The assessee submitted that the claims were made in accordance with law and that annual accounts etc. were filed before the Assessing Officer and that the Assessing Officer had not disturbed its claim. This claim of the assessee should have been examined by the Assessing Officer. This was not done. Filing of details such as annual accounts etc. does not lead us to a conclusion that the Assessing Officer has taken a possible view.

The undisputed fact is that the Assessing Officer has not raised any queries nor enquired and consequently has not applied his mind to these two issues. The claim made by the assessee may be legally and factually correct but the same has to be examined by the Assessing Officer.

The Hon’ble Calcutta High Court in the case of Commissioner of Income-tax, Central-I, Kolkata v. Maithan International (supra) held as follows:-

“12. The particulars appearing from paragraph-9, quoted above, of the judgment of CIT have not been disputed nor the factual aspects appearing from paragraph-10 of the judgment of the CIT have been disputed. We are, as such, of the opinion that CIT had reasons to hold that creditworthiness of the alleged lenders was not enquired into. Mere examination of the bank pass book, profit and loss account and balance sheet, as we already have indicated, is not enough. When the requisite enquiry was not made, the order is bound to be erroneous and prejudicial to the interest of the revenue. The learned Tribunal proceeded on the theory that it was not a case of no enquiry; that no doubt is true, but that is not enough. If the relevant enquiry was not made it may in appropriate cases amount to no enquiry and may also be a case of non-application of mind. We are supported in our view by the following judgments :— (a) In the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 the Delhi High Court opined as follows :—

"It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer.

19 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited 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 assessee in his return. 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 be adopted 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. 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 enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.''

(b) In the case of Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312 (Guj.) the Assessing Officer had allowed two deductions of a sum of Rs. 2,00,000/- and a sum of Rs. 1,45,000/- without proper enquiry. The question arose whether exercise of power by the Commissioner under Section 263 in the circumstances was proper which was answered in the affirmative. The Division Bench held as follows :—

"that the words "prejudicial to the interests of the revenue" in section 263 have not been defined but they must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. In the present case, it was obvious that the Income-tax Officer had committed an error in not making enquiry into the details as regards both the deductions and also that want of such enquiry had resulted in prejudice to the interests of the revenue. To this extent, the initiation of action under section 263 by the Commissioner was quite proper."

In the case of Addl. CIT v. Krishna Narayan Naik [1984] 150 ITR (c) 513/[1983] 15 Taxman 535 (Bom.) the Division Bench upheld the finding that :—

"An order could be said to be erroneous when either it did not decide a point and record a finding on an issue which ought to have been done or decided it wrongly."

(d) In the case of CIT v. Precision Finance (P.) Ltd. [1994] 208 ITR 465/[1995] 82 Taxman 31 (Cal.) this court also took the following view :—

20 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited "It is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. In our view, on the facts of this case, the Tribunal did not take into account all these ingredients which have to be satisfied by the assessee. Mere furnishing of the particulars is not enough. The enquiry of the Income-tax Officer revealed that either the assessee was not traceable or there was no such file and, accordingly, the first ingredient as to the identity of the creditors had not been established. If the identity of the creditors had not been established, consequently the question of establishment of the genuineness of the transactions or the creditworthiness of the creditors did not and could not arise. The Tribunal did not apply its mind to the facts of this particular case and proceeded on the footing that since the transactions were through the bank account, accordingly, it is to be presumed that the transactions were genuine. It was not for the Income-tax Officer to find out by making investigation from the bank accounts unless the assessee proves the identity of the creditors and their creditworthiness. Mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine."

(e) In the case of CIT v. Emery Stone Mfg. Co. [1995] 213 ITR 843/83 Taxman 643 (Raj.) it was held by the Rajasthan High Court that omission to hold necessary enquiry resulted in non-application of mind reference may be made to the following observations :—

"From the assessment order framed under section 143(3) it is clear that the Inspecting Assistant Commissioner has not applied his mind at all and there is no finding in the assessment order regarding the application or non-application of Explanation 3 to section 43(1). The Inspecting Assistant Commissioner having not applied his mind at all and having allowed the depreciation at the enhanced value without considering Explanation 3, the order was prejudicial to the interest of the Revenue. Not only this, the commissioner of Income-tax found that the depreciation has been allowed on land, which is complete non-application of mind and in such a situation the power under Section 263 could be exercised by the Commissioner of Income-tax. On the point as to whether the main purpose of transfer of the assets was to reduce the tax liability or not, the matter could have been decided by the assessing authority after taking into consideration the oral and written evidence. The Commissioner of Income-tax also in such a situation should have set aside the assessment on this point and should have left it to the assessing authority to come to the conclusion whether the main purpose of transfer of the assets was to reduce the tax liability or not. He could have called for the copy of the partnership deed and dissolution deed and could have taken other evidence into consideration. In the absence of any finding recorded by the assessing authority, though the Commissioner of Income-tax has power to record a finding after giving opportunity to the assessee, the proper course for the Commissioner of Income- tax was to set aside the assessment order on that point so that the assessing authority could record his finding whether the transfer of assets was for the purpose of reduction of tax liability by taking into consideration the earlier dissolution deed, new partnership deed, valuation report and other relevant facts including the oral evidence. The Income-tax Appellate Tribunal has come to the

21 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited conclusion that the Commissioner of Income-tax was not justified in invoking Explanation 3 when the firm was reconstituted after a gap of more than three months with different partners. The gap of three months may or may not be relevant looking to the particular circumstances of a case. Simply because after the dissolution of the firm a new firm was reconstituted after three months, does not mean that the main purpose was not for transfer of assets to reduce the tax liability. The different partners are not outsiders, but family members of the same partner, who was a partner in the earlier firm. It is no doubt true that the burden is on the assessing authority to prove that the main purpose for transfer of the assets was to reduce the tax liability, but he can definitely take into consideration the relevant facts. If the view taken by the Tribunal is accepted as the correct view then the Explanation cannot be invoked in any case, and, therefore, in order to find out whether the Explanation is applicable or not, the entirety of the circumstances has to be taken into consideration and it could not be for one reason or the other. It was a case where the assessing authority has not applied his mind. That was the end of the matter for exercising power under section 263 and, therefore, the matter should have been sent back to the assessing authority for applying his mind to find as to whether the Explanation is applicable or not. The observation of the Tribunal that full facts were brought to the notice of the Inspecting Assistant Commissioner (Assessment) is also not correct inasmuch as after giving statement with regard to the actual cost of the assets and depreciation claimed thereon, the assessing authority was bound to consider the Explanation. Simply because the facts have been disclosed by the assessee, it does not give immunity from revisional jurisdiction which the Commissioner can exercise under section 263 and as such even in a case where the facts have been disclosed by the assessee to the assessing authority and the correct provisions of law have not been examined by the assessing authority, the power under section 263 can be invoked."

(f) In the case of Duggal & Co. v. CIT [1996] 220 ITR 456/[1994] 77 Taxman 331 (Del.) the Delhi High Court upheld the order of exercise of power under Section 263 holding that :-

"The commissioner was perfectly competent to exercise his powers under Section 263 whenever he found, prima facie, that there was need to enquire if the interest of the Revenue had suffered by an order of assessment. He has given certain reasons. The basis for the order of the Commissioner is a question of fact and whether it is correct or not shall have to be found out after enquiry by the Income-tax Officer. The Commissioner has found that the Income- tax Officer has omitted to enquire into this question found by the Commissioner implicit in the manner in which the amounts were borrowed and advanced by the assessee-company."

(g) Reference in this regard may also be made to the judgment in the case of CIT v. Manjunathesware Packing Products & Camphor Works [1998] 231 ITR 53/96 Taxman 1 (SC) wherein the following views were expressed :—

22 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited 'The section did not at first contain any Explanation. An Explanation was added to section 263 (1) by the Taxation Laws (Amendment) Act, 1984. By the Finance Act, 1988, the said Explanation was substituted with effect from June 1, 1988. The Explanation was again amended by the Finance Act, 1989. By the amendments made by the Finance Acts of 1988 and 1989 a definition of the term "record" was provided. It has been provided that "record" shall include and shall be deemed always to have included all records relating to any proceeding under the Act available at the time of examination by the Commissioner. It cannot be said that the correct and settled legal position, with respect to the meaning of the word "record " till June 1, 1988, is that it meant the record which was available to the Income-tax Officer at the time of passing of the assessment order. Such a narrow interpretation of the word "record" is not justified in view of the object of the provision and the nature and scope of the power conferred upon the Commissioner. The revisional power conferred on the Commissioner under Section 263 is of wide amplitude. It enables the Commissioner to call for and examine the record of any proceeding under the Act. It empowers the Commissioner to make or cause to be made such enquiry as he deems necessary in order to find out if any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. After examining the record and after making or causing to be made an enquiry, if he considers the order to be erroneous, then he can pass the order thereon as the circumstances of the case justify. Obviously, as a result of the enquiry he may come into possession of new material and he would be entitled to take that new material into account. If the material, which was not available to the Income-tax Officer when he made the assessment could thus be taken into consideration by the Commissioner after holding an enquiry, there is no reason why the material which had already come on record though subsequent to the making of the assessment, cannot be taken into consideration by him. Moreover, in view of the clear words used in clause (b) of the Explanation to section 263 (1), it has to be held that while calling for and examining the record of any proceeding under section 263 (1), it is and it was open to the Commissioner not only to consider the record of that proceeding but also the record relating to that proceeding available to him at the time of examination.'

(h) Reference may also be made to the judgement in the case of Consolidated Photo & Finvest Ltd. v. Asstt. CIT [2006] 281 ITR 394/151 Taxman 41 (Delhi) wherein the following views were expressed :-

"The principle that a mere change of opinion could not be a basis for reopening completed assessments would be applicable only to situations where the Assessing Officer had applied his mind and taken a conscious decision on a particular matter in issue. It would have no application where the order of assessment did not address itself to the aspect which was the basis for reopening of the assessment. Therefore, it was inconsequential whether or not the material necessary for taking a decision was available to the Assessing officer either generally or in the form of a reply to the questionnaire served upon the assessee. What is important was

23 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited whether the Assessing Officer had, based on the material available to him taken a view. Since he had not done so, the reassessment could not be challenged on the ground that it was based on a change of opinion."

(i) Following the judgment in the case of Mukur Corpn. (supra), in the case of CIT v. Daga Entrade (P.) Ltd. [2010] 327 ITR 467(Gauhati) it was held that :—

"The Gujarat High Court in Mukur Corporation [1978] 111 ITR 312 (Guj.) has held that when the Income-tax Officer at the stage of making assessment fails to make inquiry into relevant details, such assessment has to be considered as erroneous. If fresh assessment is thereafter ordered by the revisional authority, the only proper course for the revisional authority would be to desist from expressing any final opinion on controversial points. Applying the propositions of law laid down above to the facts of this case we have to hold that the order of the Assessing Officer, on the two issues in question is erroneous insofar as it is prejudicial to the interest of the revenue.

10.2. The Hone’ble Andhra Pradesh High Court in the case of Spectra Shares and Scrips Pvt. Ltd. V CIT (AP) 354 ITR 35 had considered a number of judgments on this issue of exercise of jurisdiction u/s 263 of the Act by the Principal Commissioner of Income Tax and culled out the principles laid down in the judgments as below :

“24. In Malabar Industrial Co.Ltd. ( 2 Supra), the Supreme Court held that a bare reading of Sec.263 makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suomotu under it, is the order of the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied 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. If one of them is absent – if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but it is prejudicial to the Revenue – recourse cannot be had to Sec.263 (1) of the Act. It also held at pg-88 as follows: "The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of Revenue: or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such

24 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited will be erroneous and prejudicial to the interests of the Revenue. RampyarideviSaraogi v. CIT (1968) 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal V. CIT (1973) 88 ITR 323 (SC)". 25. In Max India Ltd. (3 Supra), reiterated the view in Malabar Industrial Co.Ltd. (2 Supra) and observed that every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is unsustainable in law. On the facts of that case, Sec.80HHC(3) as it then stood was interpreted by the Assessing Officer but the Revenue contended that in view of the 2005 Amendment which is clarificatory and retrospective in nature, the view of the Assessing Officer was unsustainable in law and the Commissioner was correct in invoking Sec.263. But the Supreme Court rejected the said contention and held that when the Commissioner passed his order disagreeing with the view of the Assessing Officer, there were two views on the word "profits" in that section; that the said section was amended eleven times; that different views existed on the day when the Commissioner passed his order; that the mechanics of the section had become so complicated over the years that two views were inherently possible; and therefore, the subsequent amendment in 2005 even though retrospective will not attract the provision of Sec.263. 26. In Vikas Polymers (4 Supra), the Delhi High Court held that the power of suomotu revision exercisable by the Commissioner under the provisions of Sec.263 is supervisory in nature; that an "erroneous judgment" means one which is not in accordance with law; that if an Income Tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as "erroneous" by the Commissioner simply because, according to him, the order should have been written differently or more elaborately; that the section does not visualize the substitution of the judgment of the Commissioner for that of the Income Tax Officer, who passed the order unless the decision is not in accordance with the law; that to invoke suomotu revisional powers to reopen a concluded assessment under Sec.263, the Commissioner must give reasons; that a bare reiteration by him that the order of the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, will not suffice; that the reasons must be such as to show that the enhancement or modification of the assessment or cancellation of the assessment or directions issued for a fresh assessment were called for, and must irresistibly lead to the conclusion that the order of the Income Tax Officer was not only erroneous but was prejudicial to the interests of the Revenue. Thus, while the Income Tax Officer is not called upon to write an elaborate judgment giving detailed reasons in respect of each and every disallowance, deduction, etc., it is incumbent upon the Commissioner not to exercise his suomotu revisional powers unless supported by adequate reasons for doing so; that if a query is raised during the course of the scrutiny by the Assessing Officer, which was answered to the satisfaction of the Assessing Officer, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the Assessing Officer called for interference and revision. 27. In Sunbeam Auto Ltd.( 5 Supra), the Delhi High Court held that the Assessing Officer in the assessment order is not required to give a detailed reason in respect

25 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited of each and every item of deduction, etc.; that whether there was application of mind before allowing the expenditure in question has to be seen; that if there was an inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under Sec.263 merely because he has a different opinion in the matter; that it is only in cases of lack of inquiry that such a course of action would be open; that an assessment order made by the Income Tax Officer cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately; there must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed. In that case, the Delhi High Court held that the Commissioner in the exercise of revisional power could not have objected to the finding of the Assessing Officer that expenditure on tools and dies by the assessee, a manufacturer of Car parts, is revenue expenditure where the said claim was allowed by the latter on being satisfied with the explanation of the assessee and where the same accounting practice followed by the assessee for number of years with the approval of the Income Tax Authorities. It held that the Assessing Officer had called for explanation on the very item from the assessee and the assessee had furnished its explanation. Merely because the Assessing Officer in his order did not make an elaborate discussion in that regard, his order cannot be termed as erroneous. The opinion of the Assessing Officer is one of the possible views and there was no material before the Commissioner to vary that opinion and ask for fresh inquiry. 28. In Gabriel India Ltd. (6 Supra), the Bombay High Court held that a consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. It held that the Commissioner cannot initiate proceedings with a view to start fishing and roving inquiries in matters or orders which are already concluded; that the department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstance; that if this is permitted, litigation would have no end except when legal ingenuity is exhausted; that to do so is to divide one argument into two and multiply the litigation. It held that cases may be visualized where the Income Tax Officer while making an assessment examines the accounts, makes inquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the account or by making some estimate himself; that the Commissioner, on perusal of the record, may be of the opinion that the estimate made by the Officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income Tax Officer; but that would not vest the Commissioner with power to reexamine the accounts and determine the income himself at a higher figure; there must be material available on the record called for by the Commissioner to satisfy him prima facie that the order is both erroneous and prejudicial to the interests of the Revenue. Otherwise, it would amount to giving unbridled and arbitrary power to the revising authority to initiate proceedings for revision in every case and start re-examination and fresh inquiry in matters which have already been concluded under law.

26 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited 29. In M.S. Raju(15 Supra), this Court has held that the power of the Commissioner under Sec.263 (1) is not limited only to the material which was available before the Assessing Officer and, in order to protect the interests of the Revenue, the Commissioner is entitled to examine any other records which are available at the time of examination by him and to take into consideration even those events which arose subsequent to the order of assessment. 30. In Rampyari Devi Saraogi(21 Supra), the Commissioner in exercise of revisional powers cancelled assessee’s assessment for the years 1952-1953 to 1960-61 because he found that the income tax officer was not justified in accepting the initial capital, the gift received and sale of jewellery, the income from business etc., without any enquiry or evidence whatsoever . He directed the income tax officer to do fresh assessment after making proper enquiry and investigation in regard to the jurisdiction. The assessee complained before the Supreme Court that no fair or reasonable opportunity was given to her. The Supreme Court held that there was ample material to show that the income tax officer made the assessments in undue hurry; that he had passed a short stereo typed assessment order for each assessment year; that on the face of the record, the orders were pre-judicial to the interest of the Revenue; and no prejudice was caused to the assessee on account of failure of the Commissioner to indicate the results of the enquiry made by him, as she would have a full opportunity for showing to the income tax officer whether he had jurisdiction or not and whether the income tax assessed in the assessment years which were originally passed were correct or not" 31. From the above decisions, the following principles as to exercise of jurisdiction by the Commissioner u/s.263 of the Act can be culled out: a) The Commissioner has to be satisfied 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. If erroneous but is not prejudicial to the Revenue or if it is not erroneous but it is prejudicial to the Revenue – recourse cannot be had to Sec.263 (1) of the Act. b) Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of Revenue: or where two views are possible and the Income- tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. c) To invoke suomotu revisional powers to reopen a concluded assessment under Sec.263, the Commissioner must give reasons; that a bare reiteration by him that the order of the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, will not suffice; that the reasons must be such as to show that the and must irresistibly lead to the conclusion that the order of the Income Tax Officer was not only erroneous but was prejudicial to the interests of the Revenue. Thus, while the Income Tax Officer is not called upon to write an elaborate judgment giving detailed reasons in respect of each and every disallowance, deduction, etc., it is incumbent upon the Commissioner not to exercise his suomotu revisional powers unless supported by adequate reasons for doing so; that if a query is raised during the course of the scrutiny by the Assessing Officer, which was answered to the satisfaction of the Assessing Officer, but neither the query nor the answer were reflected in the assessment order, this

27 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited would not by itself lead to the conclusion that the order of the Assessing Officer called for interference and revision. e) The Commissioner cannot initiate proceedings with a view to start fishing and roving inquiries in matters or orders which are already concluded; that the department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new circumstance; that if this is permitted, litigation would have no end except when legal ingenuity is exhausted f) Whether there was application of mind before allowing the expenditure in question has to be seen; that if there was an inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under Sec.263 merely because he has a different opinion in the matter; that it is only in cases of lack of inquiry that such a course of action would be open; that an assessment order made by the Income Tax Officer cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately; there must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed. g) The power of the Commissioner under Sec.263 (1) is not Commissioner is entitled to examine any other records which are available at the time of examination by him and to take into consideration even those events which arose subsequent to the order of assessment.

Now we examine the following judgements. :- DIRECTOR OF INCOME TAX vs. JYOTI FOUNDATION 357 ITR 388 (Delhi High Court ) It was held that revisionary power u/s 263 is conferred on the Commissioner/Director of Income Tax when an order passed by the lower authority is erroneous and prejudicial to the interest of the Revenue. Orders which are passed without inquiry or investigation are treated as erroneous and prejudicial to the interest of the Revenue, but orders which are passed after inquiry/investigation on the question/issue are not per se or normally treated as erroneous and prejudicial to the interest of the Revenue because the revisionary authority feels and opines that further inquiry/investigation was required or deeper or further scrutiny should be undertaken.

INCOME TAX OFFICER vs. DG HOUSING PROJECTS LTD343 ITR 329 (Delhi) Revenue does not have any right to appeal to the first appellate authority against an order passed by the Assessing Officer. S. 263 has been enacted to empower the CIT to exercise power of revision and revise any order passed by the Assessing Officer, if two cumulative conditions are satisfied. Firstly, the order sought to be revised should be erroneous and secondly, it should be prejudicial to the interest of the Revenue. The expression "prejudicial to the interest of the Revenue" is of wide import and is not confined to merely loss of tax. The term "erroneous" means a wrong/incorrect decision deviating from law. This expression postulates an error which makes an order unsustainable in law.

28 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited The Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required to be examined and verified to compute the taxable income. If the Assessing Officer fails to conduct the said investigation, he commits an error and the word "erroneous" includes failure to make the enquiry. In such cases, the order becomes erroneous because enquiry or verification has not been made and not because a wrong order has been passed on merits. Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under s. 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under s. 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question. This distinction must be kept in mind by the CIT while exercising jurisdiction under s. 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged "inadequate investigation", it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. It may be noticed that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT. Nothing bars/prohibits the CIT from

29 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous.

COMMISSIONER OF INCOME TAX vs. J. L. MORRISON (INDIA) LTD. 366 ITR As regard the submission on behalf of the Revenue that power under Section 263 of the Act can be exercised even in a case where the issue is debatable, it was held that the case of CIT vs. M. M. Khambhatwala was not applicable. The observation that the Commissioner can exercise power under Section 263 of the Act even in a case were the issue is debatable was a mere passing remark which is again contrary to the view taken by the Apex Court in thecase of Malabar Industrial Company Ltd. & Max India Ltd. If the Assessing Officer has taken a possible view, it cannot be said that the view taken by him is erroneous nor the order of the Assessing Officer in that case can be set aside in revision. It has to be shown unmistakably that the order of the Assessing Officer is unsustainable. Anything short of that would not clothe the CIT with jurisdiction to exercise power under Section 263 of the Act. CIT vs. M. M. Khambhatwala reported in 198 ITR 144; CIT vs. Ralson Industries Ltd. reported in 288 ITR 322 (SC), not applicable; Malabar Industrial Co. Ltd. v. CIT reported in 243 ITR 83, relied on. (Para 72) As regard the third question as to whether the assessment order was passed by the Assessing Officer without application of mind, it was held that the Court has to start with the presumption that the assessment order was regularly passed. There is evidence to show that the assessing officer had required the assessee to answer 17 questions and to file documents in regard thereto. It is difficult to proceed on the basis that the 17 questions raised by him did not require application of mind. Without application of mind the questions raised by him in the annexure to notice under Section 142 (1) of the Act could not have been formulated. The Assessing Officer was required to examine the return filed by the assessee in order to ascertain his income and to levy appropriate tax on that basis. When the Assessing Officer was satisfied that the return, filed by the assessee, was in accordance with law, he was under no obligation to justify as to why was he satisfied. On the top of that the Assessing Officer by his order dated 28th March, 2008 did not adversely affect any right of the assessee nor was any civil right of the assessee prejudiced. He was as such under no obligation in law to give reasons. The fact, that all requisite papers were summoned and thereafter the matter was heard from time to time coupled with the fact that the view taken by him is not shown by the revenue to be erroneous and was also considered both by the Tribunal as also by us to be a possible view, strengthens the presumption under Clause (e) of Section 114 of the Evidence Act. A prima facie evidence, on the basis of the aforesaid presumption, is thus converted into a conclusive proof of the fact that the order was passed by the assessing officer after due application of mind. Meerut Roller Flour Mills Pvt. Ltd. vs. C.I.T., ITA No. 116 /Coch/ 2012; CIT vs. Infosys Technologies Ltd., 341 ITR 293 (Karnataka); S.N. Mukherjee vs. Union of India, AIR 1990 SC 1984; A. A. Doshi vs. JCIT, 256 ITR 685; Hindusthan Tin Works Ltd. Vs. CIT, 275 ITR 43 (Del), distinguished. (Paras 90-92, 102) COMMISSIONER OF INCOME TAX vs. SOHANA WOOLLEN MILLS 296 ITR 238 (P&H HC)

30 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited A reference to the provisions of s. 263 shows that jurisdiction thereunder can be exercised if the CIT finds that the order of the AO was erroneous and prejudicial to the interest of Revenue. Mere audit objection and merely because a different view could be taken, were not enough to say that the order of the AO was erroneous or prejudicial to the interest of the Revenue. The jurisdiction could be exercised if the CIT was satisfied that the basis for exercise of jurisdiction existed. No rigid rule could be laid down about the situation when the jurisdiction can be exercised. Whether satisfaction of the CIT for exercising jurisdiction was called for or not, has to be decided having regard to a given fact situation. In the present case, the Tribunal has held that the assessee had disclosed that out of sale consideration, a sum of Rs. 1 lakh was to be received for sale of permit. If that is so, there was no error in the view taken by the AO and no case was made out for invoking jurisdiction under s. 263.

31 I.T.A. No. 1142/Kol/2016 Assessment Year: 2009-10 Philips India Limited Pr. CIT has examined the explanation and facts submitted by the assessee and has come to a conclusion that the Assessing Officer has to examine the same. The Assessing Officer is directed to examine both these issues independently, without getting influenced by any of the observations of the ld. CIT on these issues afresh in his order u/s 263 of the Act and adjudicate both these issues in accordance with law. 11. In the result, appeal of the assessee is dismissed.

Kolkata, the 27th day of March, 2019. Sd/- Sd/- [S.S. Viswanethra Ravi] [J. Sudhakar Reddy] Judicial Member Accountant Member

Dated : 27.03.2019 {SC SPS} Copy of the order forwarded to: 1. Philips India Limited Earlier known as Philips Electronics India Limited 7 No. Justice Chandra Madhab Road Kolkata – 700 020 2. Principal Commissioner of Income Tax - IV, Kolkata 3. CIT(A)- 4. CIT- , 5. CIT(DR), Kolkata Benches, Kolkata.