EAGLE HOME APPLIANCES P. LTD ( FORMERLY M.S, TRDER TEAM LTD) vs. CIT-7,

आदेश आदेश / ORDER आदेश आदेश

PER D. KARUNAKARA RAO, AM :

This appeal is filed by the assessee against the revision order of CIT-7, Mumbai, dated 22-07-2008 u/s.263 of the Act for the Assessment Year 2005-06.

accounts of (1) sales promotion expenses – Rs.50,40,349/- and (2)

foreign travel expenses. AO discussed the issue of Sales Promotion

expenses in a detailed manner before disallowing the issue of

Rs.50,40,348/- out of Rs.2,42,34,806 – Rs.5,66,930. The assessment

has reached finality and there is no appeal by the assessee before the

CIT(A) on these additions.

Subsequently, on 19-05-2008, CIT-7 issued a show cause (SC)

notice u/s.263 of the Act with the proposal to treat the said assessment

order as erroneous in so far as prejudicial to the interest of the revenue.

Originally, CIT issued SC notice to the assessee listing our various

issues on the AO’s failure to examine (1) the source of genuineness of

the unsecured loans in general and new loans amounting to

Rs.5,96,80,600/-; (2) failure to examine the entire advertisement/sales

promotion expenses of Rs.2.43 crores; (3) the total expenditure of

Foreign Travel of the Directors amounting to Rs.1,03,25,223/- and

Rs.4,79,155; (4) claim of office rent amounting to Rs.20,87,304/- and ;

(5) addition to the fixed deposits at Rs.5,12,423/-. Further, another set

of issues were intimated to the assessee vide another letter dated 04-07-

2008 and the same are extracted here as under :

i. The value of closing stock is shown at Rs.6.91 crores. List of stock is furnished without valuation against any item (Annexure – 10 to reply). This was not examined with reference to details filed in Co.28(a) of Form No.3CD. ii. Huge salary and perquisites appear to have been allowed to Directors. However, this has not been compared with the FBT return, if any filed by the assessee. iii. Legal & Professional charges are claimed at Rs.16.92 lakhs as against Rs.36.67 lakhs in the preceding year. This issue was also not verified in detail. iv. As per details of “other liabilities” an amount of Rs.2.28 Cr is payable as Customs duty which is also debited in purchase a/c. The

closing stock was not verified to see as to whether corresponding amount alongwith value of goods imported is included or not. v. Sales tax payable is shown at Rs.55,58,086/-, Provident fund paid and ESIC payable are shown at Rs.8.99 lakhs and Rs.99,000/- respectively. It was not verified whether these payments were actually made.”

contesting all the proposals of the CIT. After considering the same, CIT

discussed each of these issues in his order dated 22-07-2008 from

pages 4 to 9 and finally, set-aside the AO’s order. At the end, the CIT

directed the AO to make a fresh assessment order after conducting

necessary enquiries. The Para No.7 of his order is relevant and the

same is extracted as follows :

“7. In view of the foregoing, the assessment order passed u/s.143(3) dated 31-03-2007 is held to be erroneous and prejudicial to the interest of revenue in so far as it relates to the issues which were raised and are part of this order. The assessee order is, therefore, set aside limited to these issues and the Assessing Officer is directed to make a fresh assessment after calling for all requisite details, scrutinizing them properly and also after conducting necessary enquiries as mentioned above. The assessee shall be allowed a reasonable opportunity of being heard.”

CIT discussed each of the aforesaid issues separately and found

need for setting aside the order of the AO dated 31-12-2007. CIT’s

finding on these issues is culled out in the following paragraph.

(rounded off), the CIT opined adversely based on the information filed

by the assessee before him. Assessee filed the ledger extract and there

are certain discrepancies qua the balances in the books of account.

M/s. Equitable Finance Ltd. is the creditor. Assessee explained the

discrepancy. The reconciliation filed by the assessee in this regard on

the minor difference in figures was found unsatisfactory to the CIT.

Similarly, on the issue of sales promotion expenses, CIT noted mere

disallowance of Rs.50,43,349/- is not adequate as certain other items of

capital nature requires capitalization or disallowance. Further, the

claim of expenditure of Rs.8,69,336/- is debited by the assessee on

account of New Product Development. Another amount of Rs.2.70

lakhs was debited towards Salton Service Franchisee Charges. Finally,

the CIT held that these expenses incurred in connection with the

development of branch “Sanjeev Kapoor Tandoor” are of capital in

nature.

debited to M/s. Simran International Pvt. Ltd., the CIT held that the AO

failed to obtain details from the assessee. The fact that the AO accepted

the claim of Foreign Travel Expenditure/Tour Expenses, Travelling

expenses of the Directors and others without calling for information,

was also held by the CIT, as the failure of the AO in conducting proper

verification of facts. Further, the failure of the AO in not verifying the

claim of rent paid to various landlords, failure to call for the purchase

bills of the new assets added to the depreciation schedule, closing stock

valuation details, salary and perquisite details of the Directors, claims

relating to the provision of sales tax, PF, ESI payments, legal and

professional charges for want of custom duty payable amounting to

Rs.2.28 crores etc., were also highlighted by the CIT for considering the

order of the AO as erroneous in so far as it is prejudicial to the interest

of the revenue. Eventually, the assessment order was set aside on

these accounts and the AO was directed to make a fresh assessment

after calling for the requisite details, proper scrutiny after conducting

necessary enquiries etc.

filed the following concise grounds of appeal :

Grounds of appeal

“1. On the facts and in the circumstances of the case and in law the order passed by Ld.CIT-7, Mumbai u/s.263 is without jurisdiction inasmuch as he failed to point out the exact error in the assessment order of the A.O. only observing what the Assessing Officer should have done and what should not have been done and the show cause notice reveals that no such satisfaction is recorded on which ground the action u/s.263 is taken (Original Ground Nos. 1 & 2 &3).

From the above concise grounds, it is evident that all of them

revolves around the legal issue of assuming jurisdiction by the CIT

u/s.263 of the Act. According to the assessee, the CIT’s failure to

pinpoint the errors in the regular assessment order of the AO

contributes to the unsustainability of his revision order passed u/s.263

of the Act. As per the assessee, the CIT should be satisfied about the

exact errors in AO’s order leading to the loss of revenue in the regular

assessment order in as much as it is prejudicial to the interest of the

revenue. Further, as per the assessee, the CIT should resist from

thrusting his views in any matter when the AO already took a possible

view on the same. Assessee claims that the change of opinion-based

revision order of the CIT is invalid and unsustainable. According to the

assessee, failure of the CIT in not recording the satisfaction makes his

order unsustainable in law.

raised series of issues as discussed above for coming to the conclusion

that the regular assessment order passed by the AO is erroneous in so

far as prejudicial to the interest of the revenue. According to the Ld.

Counsel for the assessee, all these issues were subject matter of

scrutiny by the AO in the regular assessment dated 31-12-2007. As per

the Ld. Counsel, AO like any other AO, picked up certain crucial claims

like the unsecured loan and the sales promotion expenses and not all

the items listed by the CIT. AO examined those issues and made the

additions as discussed above. In support of the same, Ld. Counsel for

the assessee brought our attention to the paper book in general and the

contents of pages 1 (assessee’s letter dated 07-06-2007), page 10

(assessee-s letter dated 26-06-2007 and page 61 (order sheet entries,

page 62 (assessee’s letter dated 26-06-2007, page 63, assessee’s letter

dated 07-07-2007 and page 66 (list of items through notice u/s. 142(1)

of the Act and service of notice issued u/s.143(2) and submitted that all

the list of issues discussed in the revision order of the CIT were

scrutinised by the AO during the regular assessment proceedings itself.

Referring to the unscrutinized ones, Ld. Counsel submitted that they

are not under the lens of the AO. As such, the CIT also did not find any

exact error in the claim of the assessee on such issues.

relating to ‘unsecured loans of Rs.5.97 crores (rounded off), Ld. Counsel

for the assessee brought our attention to item No.7 of page 3 and

submitted that the details of loans taken were furnished by the

assessee. Ld. Counsel for the assessee submitted that this issue was

undisputedly examined but for the technical defects such as lack of

proper signature, lack of PAN Number, etc. identified by the CIT.

Otherwise, this is a case where the issues were examined and a view

was taken by the AO. Similarly, regarding the capitalisation of certain

other expenditures in conjunction with disallowance of amount of

Rs.50,40,349/-, Ld. Counsel for the assessee brought our attention to

pages 27 to 39 of the paper book and submitted that the assessee

complied with the requirement of filing the details during the regular

assessment proceedings. After due examination of the same, the AO

opined to capitalise the expenditure only to the extent of

Rs.50,40,349/-. Therefore, as per the Ld. Counsel, it is a case of

thrusting the opinion of the CIT in place of view taken by the AO. This

kind of decision of CIT in the revision order is unsustainable within the

scope of section 263 of the Act. Same is the case with rest of the areas

identified by the CIT in pointing out the failure of the AO in verifying the

details during the regular assessment proceedings. Therefore, relying

on the jurisdictional High Court’s judgment in the case of CIT Vs.

Gabriel India Ltd. 203 ITR 108, Ld. Counsel for the assessee submitted

that section 263 of the Act ought not be invoked in cases where

multiple views are possible on an issue and a view is already taken by

the AO in the matter during the regular assessment.

in matters of investigation or enquiry on an issue undertaken by the AO

during the regular assessment proceedings, cannot grant the power of

jurisdiction to the CIT u/s.263 of the Act on the same; moreso, when

the CIT himself failed to indicate the exact errors in the order of the AO

which has the effect of loss to the Revenue. Further, referring to the

satisfaction related issues, Ld. Counsel for the assessee submitted that

in none of the 9 issues undertaken by the CIT during proceedings

u/s.263 of the Act, CIT did not pinpoint any quantifiable revenue loss

against the interest of revenue. He merely mentioned that there is

failure of verification. In such cases, as per the assessee’s counsel, the

order u/s.263 of the Act passed by the CIT is unsustainable.

order of the CIT and suggested that the AO failed miserably in making

any enquiry to its logical end. Referring to the claim of unsecured loans

of Rs.5.97 crores, Ld. DR submitted that AO should have examined the

solitary creditor, i.e. M/s. Equitable Finance Ltd. by issue of a notice

u/s.131 of the Act. Further, referring to the sales promotion expenses

too, Ld. DR submitted that AO is conservative in restricting the

capitalisation to only Rs.50,40,349/- leaving other related items, which

are otherwise eligible for capitalisation legally.

submitted that these issues are debatable ones. As such, there is no

law to support the fact that such items require disallowance. Referring

to the rest of the issues, Ld. DR submitted that there is failure on the

part of the AO in undertaking the due verification of various claims of

the assessee as indicted by the CIT in his revision order. Referring to

the provisions of Explanation 2 to section 263 of the Act, Ld. DR

submitted that failure to undertake due verification, which should have

been done, makes the order of the AO erroneous in so far as it is

prejudicial to the interest of the revenue and there is no requirement for

identifying the errors and quantifying the loss of revenue.

the provisions of the said Explanation 2 to section 263 of the Act does

not apply to the assessment year under consideration, i.e. A.Y. 2005-

the assessee submitted that this is a case where assessee filed the

return of loss and the assessed income is quantified at Rs.47,97,160/-

by the AO in the assessment made u/s.143(3) of the Act. In the

process, the AO issued various letters/notices and conducted scrutiny

of accounts and claims. According to the same, the assessment order,

which is made after considering the details, submission and

information, cannot be revised u/s.263 of the Act. Relying on the

judgments of jurisdictional High Court in the case CIT Vs. Gabriel India

Ltd. 203 ITR 108, CIT Vs. Development Credit Bank Ltd. 323 ITR 206

and the decision of Ahmedabad Bench of the Tribunal in the case of

Rupali R. Desai Vs. ACIT 88 ITD 118 (TM), Ld. Counsel for the assessee

submitted the present order of the CIT is unsustainable as the AO has

already examined the issues and followed due process of law in making

the regular assessment order.

and arguments raised by both the parties. We have also perused the

paper book filed before us and the decisions relied on by the Ld.

Counsel for the assessee.

At the end of hearing, we find the arguments by the Ld. Counsel for the assessee revolve around (1) the change of opinion on certain issues, (2) the absence of satisfaction of the CIT on loss of revenue, (3) the failure of CIT to pinpoint the exact errors in the decisions of the AO, (4) the failure to quantify the loss of revenue/prejudiciality of the decision of the AO, and (5) the lack of proper verification/enquiry into the listed issues by the CIT etc. We need to attend to the same and shall take up these objections for adjudication if they are sustainable legally.

A. Regarding the allegation of change of opinion, we find that the AO

examined the claims relating to the (1) unsecured loans of Rs.5.97

crores and also (2) the issue of capitalization of certain promotion

expenses. AO made disallowance on this account too to the extent of

Rs.50,43,349/-. The questionnaires, reply from the assessee, the

details gathered by the AO supports our finding. Thus, AO took a view

on these issues and therefore, the observations of the CIT in the

revision order constitute a case of change of opinion on these issues.

Consequently, the order of AO need not be set-aside on account of these

issues. As such, the failure of the AO to capitalize some more items of

expenditure cannot be held as sustainable one as such issue suffers

from the debatability and multiple views are possible on the same.

Therefore, the same is outside the scope of section 263 of the Act. We

order AO accordingly.

B. Regarding the other items picked up by the CIT never verified by

the AO, we find that it is true certain items were not examined at all by

the AO, in the regular assessment on these issues. In this regard, we

find that it is not the case of the CIT that these issues were initially

identified by the AO for enquiries in the regular assessment and AO

failed to examine the same at all. On facts, these are the fresh issues

shortlisted by the CIT and in his opinion, they need verification. It is

also not the case of the CIT that these items of claims in his fresh list

bleed the tax causing the loss of revenue in so far prejudicial to the

interest of revenue. In fact, the CIT failed to pinpoint the exact errors in

the claim of the assessee, which has the effect of erroneous/prejudicial

nature of the order of the AO. Therefore, in our view, it is the case of

surmises, that the CIT picked up the list of items for picking the lacuna

in the order of the AO. In our view, the same is outside the scope of

section 263 of the Act. Accordingly, we order.

Further, on failure of AO in taking up verification on certain

issues, we find mere allegation of failure to verify certain claims and

failure to complete the enquiry process to the logical end cannot make

the order of the AO erroneous when the errors are not identified and

prima-facie loss of revenue is not reasonably quantified. As such, the

pre-amended provisions of section 263 of the Act apply to the facts of

the case for the A.Y. 2005-06. Therefore, on the ground of improper

verification, the allegations of the CIT cannot be upheld on other issues

raised in the order of the CIT. Further, if there are many claims made

by the assessee in the return of income and couple of them were

examined by the AO for deep scrutiny leaving rest of them, the CIT

cannot pick up rest of the issues for invoking the provisions of section

263 of the Act without recording satisfaction about the loss of revenue

on rest of the issues. It is a settled legal position of law that the CIT is

under obligation to give satisfaction or indicate the erroneous

assumption of law or a fact on any issue picked up or discussed by the

CIT in his revision order u/s.263 of the Act. In this case, CIT failed to

do so. Therefore, the Ld. Counsels’ arguments revolving around the

absence of satisfaction of CIT about the erroneous assumption of law or

fact leading to the loss of Revenue, are allowed. Per contra, the

arguments of Ld. DR for the Revenue stands dismissed. Accordingly,

on the legal issues, the grounds raised by the assessee are allowed.

Consequently, the grounds of assessee on merits stand dismissed as

academic.

Order pronounced in the open court on this 24th day of May, 2018.

Sd/- Sd/- (SUSHMA CHOWLA) (D.KARUNAKARA RAO) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER पुणे Pune; �दनांक Dated : 24th May, 2018 सतीश

आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : अ�ेिषत

अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. 3. The CIT-7, Mumbai िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “A Bench” Pune; 4. गाड� फाईल / Guard file. 5.

आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार आदेशानुसार

स�यािपत �ित //True Copy// //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune