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Income Tax Appellate Tribunal, ‘B’ BENCH, MUMBAI
Before: SHRI B.R. BASKARAN, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER
The present appeal filed by the assessee is directed against the order passed by the Commissioner of Income Tax-18, Mumbai, dated 28.02.2014 u/s 263 of the Income Tax, 1961 (for short „Act‟). The assessee had assailed the revision of the assessment order passed by P a g e | M/s Metacaps Engineering Vs. CIT the A.O for A.Y 2009-10 u/s. 143(3) on 29.11.2011, by raising before us the following grounds of appeal.:- “1. The order passed under section 263 of I.T. Act, 1961 is illegal, invalid and bad in law.
2. The order passed by A.O. u/s. 143(3) of I.T. Act 1961 was after due enquiries and after obtaining complete required details and thus learned CIT erred in holding that order is erroneous and prejudicial to the interest of revenue.
3. The assessee had submitted complete required details in proceedings under section 263 of I.T. Act 1961 before Hon'ble CIT. Inspite of same learned CIT erred in setting aside assessment framed and directed to pass assessment order de novo.
4. Any other ground that shall be taken at the time of hearing.
2. Briefly stated, the facts of the case are that the assessee which is a Joint Venture (AOP) comprising of M/s Metakaps Engineering (a partnership firm) and M/s Mahindra Construction (a proprietary concern) as members, was engaged in the business of civil construction. The assessee had filed its return of income for AY: 2009- 10 on 30.09.2009, declaring total income of Rs. 1,48,828/-. The case of the assessee was taken up for scrutiny assessment and vide order passed u/s 143(3), dated 29.11.2011, its income was assessed at Rs.1,89,670/-.
That after the culmination of the assessment proceedings the Commissioner of Income Tax-18, Mumbai (for short „CIT‟) called for the assessment records of the assessee. The CIT after perusing the records, being of the view that the assessment framed by the A.O u/s 143(3) was erroneous and prejudicial to the interest of the revenue, therefore, initiated proceedings under Sec. 263 of the „Act‟.
That during the course of the revisional proceedings the CIT observed that the assessment framed by the A.O was erroneous and P a g e | M/s Metacaps Engineering Vs. CIT prejudicial to the interest of the revenue on various counts, viz. (i) that though the case was selected for scrutiny assessment with the purpose to examine the high expenses claimed by the assessee, however, the A.O during the course of the assessment proceedings had failed to make the necessary verifications as regards the details of work done by the sub-contractor of the assessee, viz. M/s. Urja Infrastructure; (ii).that during the course of the assessment proceedings no supporting details/documentary evidence was filed by the assessee in respect of the heavy labour charges which were claimed as an expenditure by the assessee in its „Profit and loss A/c‟, and had thus failed to verify/examine the issue of disallowance of labour charges amounting to Rs.1,30,22,495/- in the absence of any documentary evidence in support thereof; (iii). the A.O had failed to examine the basis of valuation of WIP at Rs. 60,00,000/- by the assessee on 31.03.2009; (iv). the A.O had failed to deliberate upon the fact that though the assessee was engaged in the execution of the same project in A.Ys. 2007-08, 2008-09 and 2009-10, however, the net profit reflected by the assessee during the year under consideration at 2.01% was substantially lower than the net profit rate of 6.65% shown in A.Y. 2007-08; (v) that though the „balance sheet‟ of the assessee revealed VAT liability of Rs.1,20,000/- payable /outstanding on 31.03.2009, however, the A.O failed to examine/verify as to whether the said liability was discharged before the „due date‟ of filing of the return of income; (vi). that though the case of the assessee was selected for scrutiny to verify the genuineness of the „Sundry creditors‟ in the backdrop of the fact that the purchases during the year stood reflected at Rs. Nil, however, no verification on the said issue was done by the A.O; (vii). the A.O had failed to examine the huge expenses claimed by the assessee in its „Profit &
P a g e | M/s Metacaps Engineering Vs. CIT loss a/c‟; and (viii) the A.O had failed to examine the system of accounting followed by the assessee.
The assessee submitted before the CIT that as the A.O had deliberated on the issues under consideration at length, therefore, the assessment order passed by him u/s 143(3) was not erroneous and prejudicial to the interest of the revenue. The CIT however did not find favor with the submissions of the assessee, and held a conviction that the order passed by the A.O u/s 143(3) was found to be erroneous and prejudicial to the interest of the revenue, on the following counts:-
(i). That without making any verification as regards the expenses of Rs. 1,30,22,495/- the A.O had wrongly allowed the same while computing the income of the assessee; (ii). That the A.O had failed to examine the basis of valuation of WIP at Rs. 60,00,000/- on 31.03.2009; (iii). The A.O had failed to examine/verify very low Net profit declared by the assessee as compared to the huge contractual receipts; (iv). The A.O had failed to examine/verify payment of Rs. 1,20,000/- on account of works VAT tax; (v). The A.O had failed to verify the genuineness of Sundry Creditors, huge expenses claimed and the system of accounting followed by the assessee; (vi). That the fact that the assessee and the sub-contractor concern, viz. M/s Urja Infrastructure were „Sister concerns‟ within the meaning of Sec. 40A(2)(b) was not disclosed in the „Audit report‟ filed by the assessee, therefore, no inquiry was conducted by the A.O to verify the P a g e | M/s Metacaps Engineering Vs. CIT genuineness as well as comparable rates charged by the independent sub-contractors vis-à-vis M/s Urja Infrastructure Pvt. Ltd.; (vii). The fact that payments made to M/s Urja Infrastructure were in respect of construction of C.C lining (by paver) of Branch Canal-1 from Km. 1.00 to 19.28 of Bawanthadi Project and not for supply of labour was also not factually verified by the A.O; (viii). That the net amount of Rs. 1,30,22,475/- received by the assessee from the client, i.e Vidharbha Irrigation Development Corporation has been directly transferred to M/s Urja Infrastructure and claimed as expense by the assessee under the head „Labour charges‟ was also not verified by the A.O; (ix). The A.O had not verified the exact breakup of the amount paid by the assessee to the sub-contractor, viz. M/s Urja Infrastructure , viz. its component elements such as labour, material, overheads, reimbursements, TDS etc; (x). The A.O had failed to verify the exact nature of work carried out by M/s Urja Infrastructure, nor any bills/challans etc. submitted by the said concern were called for and verified by the A.O during the course of the assessment proceedings.
(xi). That the A.O had failed to verify the documents forming the basis of valuation of the WIP, as claimed by the assessee during the course of the revisional proceedings; (xii). The A.O had failed to verify that as to how the assessee had paid an amount of Rs. 1,30,22,495/- to M/s Urja Infrastructure, i.e without calling for or, examining and estimating the actual expenditure incurred by the sub-contractor; and P a g e | M/s Metacaps Engineering Vs. CIT (xiii.) The A.O had failed to verify the expenses under the head „Labour Charges‟ as claimed by the assessee to have been paid to M/s Urja Infrastructure by calling for the documentary evidences pertaining to these expenses, viz. bills, vouchers, bank statements, copies of Cheques/Demand drafts/Pay orders issued and also by calling for corroborative evidence u/s 133(6)
That on the basis of his aforesaid observations the CIT exercised his revisional jurisdiction under Sec. 263. The CIT holding the assessment order passed by the A.O under Sec. 143(3) as erroneous and prejudicial to the interest of the revenue, directed the A.O to frame a de novo assessment, keeping in view his observations and after affording an opportunity of being heard to the assessee.
The assessee being aggrieved with the order passed by the CIT u/s 263, had carried the matter in appeal before us. The ld. Authorized representative (for short „A.R‟) for the assessee took us through the facts of the case and submitted that the assessee is engaged in the business of civil construction and undertakes various government contracts, mainly from Irrigation Department, Government of Maharashtra. It was submitted by the ld. A.R that the assessee had undertaken contracts awarded by Ex. Engineer, Medium Project Division, Gondiaya, vide agreement No B-1/97/Divisional/2006-07, dated 7.11.2006. However, as the project was of medium size and the assessee was not equipped with sufficient capital and infrastructure required to handle such size of projects, therefore, it sub-contracted the said project to M/s Urja Infrastructure, a concern which had wide experience and infrastructure facility to handle various
P a g e | M/s Metacaps Engineering Vs. CIT projects of the government, on back to back basis, as per pre agreed terms and conditions. It was submitted by ld. A.R that as per the subject work order, it was agreed that the entire responsibility to execute the contract in accordance with the terms and conditions between the government and the principal contractor would solely be that of the subcontractor and the amount received by the assessee from the concerned government department under the said contract would be passed on to the sub-contractor, subject to statutory deductions. It was submitted by the ld. A.R that in pursuance of the said work order the assessee had paid to M/s Urja Infrastructure entire amount received in respect of each „Running account‟ bill („RA‟ Bill) raised on the government department after making statutory deductions, viz. VAT, TDS against the bills submitted by M/s Urja Infrastructure etc. The ld. A.R averred that during the year under consideration, viz. A.Y 2009-10 the assessee had received contract receipts of Rs. 73,97,282/-, against which an amount of Rs. 70,22,495/- was paid towards sub-contracting charges to M/s Urja Infrastructure, which was debited by the assessee under the head „Labour Charges‟. It was submitted by the ld. A.R that the assessee after making the aforesaid payment to the sub-contractor, viz. M/s Urja Infrastructure, was left with a balance amount of Rs. 3,74,787/-, out of which the VAT liability of Rs.1,47,946/- was paid. The ld. A.R submitted that from the remaining balance amount as was left available with the assessee, the administration and establishment expenses aggregating to Rs.78,013/- were adjusted and the balance amount of Rs. 1,48,828/- was offered as Income/Profit by the assessee for tax.
P a g e | M/s Metacaps Engineering Vs. CIT 8. The ld. A.R submitted that though it remained as a matter of fact that the A.O had during the course of the assessment proceedings called for the requisite details from the assessee, and only after deliberating on the various aspects of the case had framed assessment, however, without prejudice to the same, replies to all the queries and the doubts raised by the CIT during the course of the revisional proceedings were furnished by the assessee. The ld. A.R submitted that the aforesaid contract work was assigned by the assessee to the sub-contractor, viz. M/s Urja Infrastructure in the period relevant to A.Y. 2007-08, on „back to back‟ basis. It was averred by the ld. A.R that the aforesaid arrangement of passing over of the entire amounts received by the assessee from the government department in lieu of the aforesaid contract to the sub-contractor, after making statutory deductions, was continuing since the last two years preceding the year under consideration, viz. A.Y. 2007-08 and A.Y. 2008-09. The ld. A.R submitted that the aforesaid business arrangement of the assessee had been deliberated upon and accepted by the department in the respective assessments framed in the hands of the assessee for both of the aforesaid two years u/s 143(3). The ld. A.R in order to fortify his aforesaid contention drew our attention to the „Profit & loss a/c‟ and the respective assessment orders passed under Sec. 143(3) by the A.O in the case of the assessee for A.Ys: 2007-08 and 2008-09 (Page 76-79) of his „Paper book‟ (for short „APB‟). The ld. A.R taking us through the „Balance sheet‟ of the assessee for the year under consideration submitted that the assessee did not own any asset. The ld. A.R drew our attention to the findings recorded by the CIT in his order passed u/s 263.
P a g e | M/s Metacaps Engineering Vs. CIT The ld. A.R submitted that all the queries and the doubts raised by the CIT were clarified during the course of the revisional proceedings. It was averred by the ld. A.R that the assessee had clarified before the CIT that it was following the „Mercantile system‟ of accountancy, which fact rather emerged beyond any scope of doubt from the „Audit report‟ (Page 12 of „APB‟) and the „Return of income‟ of the assessee (Page 33 of „APB‟). It was submitted by the ld. A.R that as regards the query raised by the CIT in respect of the basis of valuation of WIP, the assessee had furnished complete details as regards the same before him. The ld. A.R submitted that it was brought to the notice of the CIT that „Running account‟ bills (RA Bills) were raised by the assessee on the government department in stages, i.e after receipt of the bill from the sub contractor and verification and inspection of the site by the Ex. Engineer or Site Engineer of the government department. It was submitted before the CIT that the WIP represents the aggregate value of the bills received from sub-contractors for work completed on their part, against which corresponding RA bill had not been raised by assessee on the government department, due to pending inspection of the site etc. by the department on 31 st day of March of the relevant financial year. The ld. A.R submitted that vide its reply dated 10.01.2014 (Page 49 of „APB‟), the entire basis of the valuation of WIP was demonstrated before the CIT, and thereafter no query was raised on his part. The ld. A.R further submitted that the complete details of the expenses claimed by the assessee was furnished before the CIT, alongwith an explanation supported by facts and figures, both as regards the reason for high expenses and lower net
P a g e | M/s Metacaps Engineering Vs. CIT profit in comparison to the preceding year, viz. A.Y. 2007 - 08 (Page 49 of „APB‟). It was averred by the ld. A.R that the CIT after perusing the details of the expenses furnished with him, was thereafter not justified in directing the A.O to look into the same. The ld. A.R submitted that now when M/s Urja Infrastructure was being assessed to tax and the „Labour charges‟ claimed as an expense by the assessee in the „Profit & loss a/c‟ was assessed as income in the hands of the sub-contractor, viz. M/s Urja Infrastructure, therefore, the allowability of the said „Labour charges‟ could by no means be inferred as prejudicial to the interest of the revenue. The ld. A.R submitted that the assessee had not only vide his reply dated. 10.01.2014 raised the said contention before the CIT, but rather, to fortify his claim had placed on record the complete income-tax credentials of the sub-contractor, viz. M/s Urja Infrastructure, as well as furnished the latters copy of „Return of income‟ for the year under consideration, viz. A.Y. 2009-10, as an enclosure to the reply filed with the CIT. The ld. A.R further submitted that the issue raised by the CIT that M/s Urja Infrastructure was a „sister concern‟ of the assessee, was also clarified by the assessee, vide its reply dated. 11.02.2014 filed with the CIT (Page 73 -74 of „APB‟). The ld. A.R submitted that it was clarified to the CIT that as the sub-contractor concern, viz. M/s Urja Infrastructure had no substantial interest in the „AOP‟, viz. M/s Metakaps Engineering Mahindra Constructions J.V, therefore, the payments made to the said concern did not fall within the purview of Sec. 40A(2)(b). Te ld. A.R submitted that without prejudice to the aforesaid, the assessee further placing
P a g e | M/s Metacaps Engineering Vs. CIT reliance on the order of the ITAT, Hyderabad, in the case of M/s IVR CL-KBL–MEIL–JV Vs. Department of Income-tax (Hyd); dated. 12.07.2012, had submitted that as the whole contract was sub-contracted under „back to back‟ basis, therefore, the same would not be covered by the provisions of Sec. 40A(2)(b). The ld. A.R further averred that it was also brought to the notice of the CIT, that though the facts in context of Sc. 40A(2)(b) were not mentioned in the „Audit report‟ in „Form 3CD‟, however, the same was duly disclosed by way of a note which was furnished during the course of the assessment proceedings. The ld. A.R assailing the order of the CIT submitted that despite the fact that the assessee had clarified beyond any scope of doubt all the issues which were raised by the CIT during the course of the revisional proceedings, however, the latter without pin pointing out any infirmity in the explanation of the assessee, had acted most arbitrarily, and without any rhyme and reason concluded that he does not find any merit in the objections/submissions made by the assessee. The ld. A.R averred that the CIT had most casually set aside the assessment and directed the A.O to frame de novo assessment. The ld. A.R in order to drive home his contention that the order passed by the CIT under Sec. 263 was not sustainable in the eyes of law, relied on the following judicial pronouncements:
(i). CIT Vs. Vikas Polymers (2012) 341 ITR 537 (Del) (ii). DIT Vs. Jyoti Foundation P a g e | M/s Metacaps Engineering Vs. CIT (2013) 357 ITR 388 (Del) (iii). CIT Vs. Escorts Ltd. (2011) 338 ITR 435 (Del) (iv). A.V. Industries Vs. DCIT (Mum) (ITA No. 3469/Mum/2010; dated. 06.11.2015) (v). Jayanth Murthy Vs. DCIT (ITA No. 870 and 1234/Ahd/2014; dated. 20.05.2016) (vi).Narayan Tatu Rane Vs. ITO (70 taxmann.com 227)
Per contra, the ld. Departmental representative (for short „D.R‟) submitted that as the order passed by the A.O was erroneous and prejudicial to the interest of the revenue, therefore, the CIT had rightly exercised his revisional powers and set aside the assessment to the file of the A.O for framing de novo assessment. The ld. D.R averred that the A.O while framing the assessment had neither verified the factum of huge expenses claimed by the assessee in its „Profit & loss a/c‟, despite the fact that the purchased were reflected at Rs. Nil, nor looked into the method of accounting which was being followed by the assessee. It was submitted by the ld. D.R that the A.O had failed to even look into the issues on the basis of which the case of the assessee was taken up for scrutiny assessment, nor made the enquiries which he was obliged to make during the course of the assessment proceedings. The ld. D.R also referring to the Explanation 2 of Section 263, P a g e | M/s Metacaps Engineering Vs. CIT which was made available on the statute vide the „Finance Act, 2015‟, w.e.f 01.06.2015, submitted that as the same was declaratory in nature, therefore, the same would be applicable to the case of the assessee. The ld. D.R thus taking support of the post-amended Sec. 263, submitted that as the A.O had passed the assessment order without making inquiries and verifications which he should have made in the opinion of the CIT, therefore, the same rendered the order passed by him amenable for revision under Sec.
263. The ld. D.R in support of his contention that the CIT had rightly exercised his jurisdiction under Sec. 263 and revised the order passed by the A.O under Sec. 143(3) relied on the judgment of the Hon’ble High Court of Delhi in the case of CIT Vs. Ashok Logani (ITA No. 553 of 2010; Dated. 11.05.2011).
The ld. A.R rebutting the aforesaid contentions of the revenue submitted that the assessment record has to be looked into in order to verify as to whether the A.O while framing the assessment had applied his mind, or not. The ld. A.R relied on the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Fine Jewellery (2015) 372 ITR 303 (Bom), wherein the Hon‟ble High Court has held that if query is raised during the assessment proceedings and responded to by assessee, then the mere fact that it is not dealt with by the AO would not lead to a conclusion that no mind had been applied to it. The ld. A.R in order to support his aforesaid contention that there had been due application of mind by the A.O to the respective issues at the time of framing of the assessment, therein once again relied on the assessment order passed under Sec. 143(3)
P a g e | M/s Metacaps Engineering Vs. CIT by the same A.O for A.Y. 2007-08 (Page 78 of „APB‟) and for A.Y. 2008- 09 (Page 80 of „APB‟). The ld. A.R took us through Page 7 – Para 9 of the judgment of the Hon‟ble High Court in the case of Ashok Logani (supra) relied upon by the ld. D.R, and submitted that the facts involved in the said case were distinguishable as against those involved in the case of the present assessee.
We have heard the authorised representatives for both the parties, perused the orders of the lower authorities, judicial pronouncements relied upon by both the parties and the material available on record. We have deliberated on the facts of the case and find that the assessee which is a „Joint Venture‟ (AOP) engaged in the business of civil construction was awarded a contract for construction of C.C lining (by paver) of Branch Canal-1 from Km. 1.00 to 19.28 of Bawanthadi Project by Vidarbha Irrigation Development Corporation, Nagpur, through Medium Project Division, Gondiaya, vide agreement No B-1/97/Divisional/2006-07, dated 7.11.2006. The assessee vide a „Sub-Contractors Agreement‟, dated. 20.12.2006, had sub-contracted the execution of the complete project to M/s Urja Infrastructure, a concern which had wide experience and infrastructure facility to handle various projects of the government, on back to back basis, as per pre agreed terms and conditions. That as stands gathered from the „Agreement‟, the entire responsibility for execution and completion of the contract work in accordance with the terms and conditions between the government and the principal contractor, i.e the assessee, was taken over by the sub-contractor, viz. M/s Urja Infrastructure. We have deliberated on the modus operandi of the business arrangement between the assessee and the sub- contractor, viz. M/s Urja Infrastructure, and find that the sub-
P a g e | M/s Metacaps Engineering Vs. CIT contractor on completion of a part of the project would raise its „bill‟ on the assessee. That after the Ex. Engineer or Site Engineer of the government department would carry out inspection of the site, the assessee would raise its „Running Account‟ bill („RA‟ bill) in respect of the part of work completed by the sub-contractor, on the government. The amount (Net of „TDS‟) received by the assessee from the concerned government department under the said contract, would thereafter be passed on to the sub-contractor, viz. M/s Urja Infrastructure, after making certain statutory deductions, viz. VAT liability etc. Thus, in light of the aforesaid arrangement between the assessee and the sub-contractor, viz. M/s Urja Infrastructure, the business interest of the assessee in the aforesaid project was restricted to the amount of TDS by the government department. We find that the aforesaid business arrangement having emerged on the basis of the „Agreement‟ dated. 20.12.2006 between the assessee and M/s Urja Infrastructure was deliberated upon, scrutinized and accepted by the department while framing the assessments under Sec. 143(3) in the case of the assessee for both the preceding two years, viz. A.Ys 2007-08 and 2008-09. Interestingly, we find that the A.O who had framed the assessment in the case of the assessee for the year under consideration, i.e A.Y. 2009-10, had also framed the assessment in the case of the assessee for the immediately preceding year, i.e A.Y. 2008-09. We are of the considered view that in the backdrop of the aforesaid factual matrix, the department cannot claim to have been oblivious of the nature of business arrangement of the assessee, which as observed by us hereinabove, had consistently been accepted after scrutinizing the case of the assessee in the preceding P a g e | M/s Metacaps Engineering Vs. CIT years. We find that our aforesaid view stands fortified by the judgment of the Hon’ble High Court of Delhi in the case of CIT Vs. Escorts Ltd. (2011) 338 ITR 435 (Del), wherein the Hon‟ble High Court in context of order passed by the CIT under Sec. 263, therein deliberating on the issue as to whether the Department could reopen an assessment based on a fresh inference of transactions which have been carried on by the assessee and accepted in turn by the revenue for several preceding years on the pretext of dubbing them as erroneous, had observed as under:- “13. Therefore, in our opinion, given the fact that the assessee had been engaged in these transactions in the preceding assessment years, CIT could have had no occasion to take recourse to revisional powers under s. 263 of the Act on the fundamental aspects of the transactions in issue on which a view had been taken and, not shown to us as having been challenged.”
We are of the view that it is only where an order passed by the A.O is considered by the CIT to be erroneous and prejudicial to the interest of the revenue, it is only then that the same can be revised by the CIT in exercise of his powers under Sec.
263. We find that in the present case the CIT after perusing the assessment records of the assessee, therein held a conviction that the assessment framed by the A.O was erroneous and prejudicial to the interest of the revenue on various counts, viz. (i) that though the case was selected for scrutiny assessment with the purpose to examine the high expenses claimed by the assessee, however, the A.O during the course of the assessment proceedings had failed to make the necessary verifications as regards the details of work done by the sub-contractor of the assessee, viz. M/s. Urja Infrastructure; (ii).that during the P a g e | M/s Metacaps Engineering Vs. CIT course of the assessment proceedings no supporting details/documentary evidence was filed by the assessee in respect of the heavy labour charges which were claimed as an expenditure by the assessee in its „Profit and loss A/c‟, and the A.O had thus failed to verify/examine the issue of disallowance of labour charges amounting to Rs.1,30,22,495/- in the absence of any documentary evidence in support thereof; (iii). the A.O had failed to examine the basis of valuation of WIP at Rs. 60,00,000/- by the assessee on 31.03.2009; (iv). the A.O had failed to deliberate upon the fact that though the assessee was engaged in the same contract and for the same project in A.Ys. 2007-08, 2008-09 and 2009-10, however, the net profit reflected by the assessee during the year under consideration at 2.01% was substantially lower than the net profit rate of 6.65% shown by it in A.Y. 2007-08; (v) that though the „balance sheet‟ of the assessee revealed VAT liability of Rs.1,20,000/- payable/outstanding on 31.03.2009, however, the A.O failed to examine/verify as to whether the said liability was discharged before the „due date‟ of filing of the return of income; (vi). that though the case of the assessee was selected for scrutiny to verify the genuineness of the „Sundry creditors‟ in the backdrop of the fact that the purchases during the year stood reflected at Rs. Nil, however, no verification on the said issue was done by the A.O; (vii). the A.O had failed to examine the huge expenses claimed by the assessee in its „Profit & loss a/c‟; and (viii) the A.O had failed to examine the system of accounting followed by the assessee. The CIT thus issued a „Show cause‟ notice to the assessee to explain as to why in the backdrop of the aforesaid facts which rendered the assessment order passed by the A.O under Sec. 143(3) as erroneous and prejudicial to the interest of the revenue, the same may not be revised.
P a g e | M/s Metacaps Engineering Vs. CIT 13. We find that as observed by us at length hereinabove, the assessee by way of exhaustive replies filed with the CIT in respect of all of the aforesaid issues, on the basis of which the order passed by the A.O was sought to be revised, had thus furnished clarifications as regards all of the said issues and demonstrated that the assessment order was not erroneous and prejudicial to the interest of the revenue. However, we find that the CIT without pointing out any infirmity in the reply/explanation of the assessee, and as to why the same could not be accepted had rather hushed through the matter and concluded that the assessment order passed by the A.O was found to be erroneous and prejudicial to the interest of the revenue.
We have given a thoughtful consideration to the order passed by the CIT and are unable to persuade ourselves to uphold the same. We find that as per the mandate of Sec. 263, a statutory obligation is cast upon the CIT to afford an opportunity of being heard to the assessee, before an order passed by the A.O is revised in exercise of the revisional jurisdiction vested with him under the said statutory provision. The underlying purpose of affording of such an opportunity of being heard to the assessee is to give an opportunity to him to explain as to how the order passed by the A.O on the issues on which the same is sought to be revised by the CIT, is not erroneous and prejudicial to the interest of the revenue. We are of the considered view that the very purpose of affording of an opportunity of being heard to the assessee, on the issues on which the order passed by the A.O is sought to be revised by the CIT would be lost and rendered otiose, in case the reply of the assessee explaining as to why the order sought to be revised is not erroneous and prejudicial to the interest of the revenue is not judicially deliberated upon by the CIT. We are of the considered view that it is obligatory on the part of the CIT to consider
P a g e | M/s Metacaps Engineering Vs. CIT the reply of the assessee in respect of the issues on which the order of the A.O is sought to be revised by him. It is only if the conviction of the CIT that the order of the A.O is erroneous and prejudicial to the interest of the revenue outweighs the reply/explanation furnished by the assessee, that the CIT remains vested with the jurisdiction to proceed with and revise the order of the A.O. We though are not oblivious of the fact that the view that an order passed by the A.O is found to be erroneous and prejudicial to the interest of the revenue remains within the exclusive realm of the wisdom of the CIT, but then the legislature by contemplating an opportunity of being heard to the assessee, can thus safely be held to have presupposed due application of mind by the revisional authority before revising the order passed by the A.O. We are of the considered view that the CIT after receiving the reply/objections of the assessee in respect of the issues on which the order of the A.O is sought to be revised, in all fairness, is required to deliberate on the same, and thereafter on the basis of logical reasoning conclude as to whether in the backdrop of the reply/explanation of the assessee can the order of the A.O be characterized as both erroneous and prejudicial to the interest of the revenue. We are of the considered view that mere placing on record the reply/explanation of the assessee on the issues on which the order of the A.O is sought to be revised as a mere formality, would therein render the very affording of opportunity of being heard to the assessee as nothing better than being a farce and an eye wash, defeating the very legislative intent. We are afraid that in the case of the present assessee, though the CIT had placed on record the reply of the assessee in respect of the issues on which the order passed by the A.O was sought to be revised and had also referred about the same in the body of his order passed under Sec. 263, however, neither any reason had been given by the CIT, nor it can be gathered from the impugned order, as to why the explanation
P a g e | M/s Metacaps Engineering Vs. CIT of the assessee that the order passed by the A.O was not erroneous and prejudicial to the interest of the revenue on the issues on which it was sought to be revised, was not found to be acceptable. We may clarify that though there is no doubt that the jurisdiction to revise the order passed by the A.O remains within the exclusive domain of the jurisdiction of the CIT, but however, the internal safeguard provided by the legislature by affording an opportunity of being heard to the assessee would fail if the explanation/objections raised by the assessee during the course of such proceedings, therein demonstrating that the order of the A.O is not erroneous and prejudicial to the interest of the revenue are not judicially considered and brought to a logical end by the CIT. We would not hesitate to observe that despite the fact the assessee had during the course of the revisional proceedings placed on record irrebutable material which inescapably established that the order of the A.O was not erroneous and prejudicial to the interest of the revenue in respect of certain issues on which the same was sought to be revised, however, the same did never see the light of the day and except for forming part of the record and finding a mention in the order passed by the CIT u/s 263, were however as a matter of fact never deliberated upon and brought to a logical end by the CIT. We are of the considered view that in the backdrop of the explanation/objections filed by the assessee during the course of revisional proceedings in respect of certain issues on which the CIT had sought to revise the order passed by the A.O under Sec. 143(3), the CIT had failed to point out as to how the order of the A.O was found to be “erroneous”. We are of the considered view that in the absence of clear observations of the CIT as to how the order of the A.O after considering the explanation/objections filed by the assessee was found to be erroneous in respect of the said respective issues, thus, can safely be held to have failed the fundamental requirement
P a g e | M/s Metacaps Engineering Vs. CIT for valid assumption of jurisdiction as per the mandate of law. We find our aforesaid view to be supported by the judgment of the Hon’ble High Court of Delhi in the case of : CIT Vs. Vikas Polymers (2012) 341 ITR 537 (Del), wherein it was observed, as under:-
“18. We are thus of the opinion that the provisions of s. 263 of the Act, when read as a composite whole make it incumbent upon the CIT before exercising revisional powers to : (i) call for and examine the record, and (ii) give the assessee an opportunity of being heard and thereafter to make or cause to be made such enquiry as he deems necessary. It is only on fulfilment of these twin conditions that the CIT may pass an order exercising his power of revision. Minutely examined, the provisions of the section envisage that the CIT may call for the records and if he prima facie considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interest of the Revenue, he may after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify. The twin requirements of the section are manifestly for a purpose. Merely because the CIT considers on examination of the record that the order has been erroneously passed so as to prejudice the interest of the Revenue will not suffice. The assessee must be called, his explanation sought for and examined by the CIT and thereafter if the CIT still feels that the order is erroneous and prejudicial to the interest of the Revenue, the CIT may pass revisional orders. If, on the other hand, the CIT is satisfied, after hearing the assessee, that the orders are not erroneous and prejudicial to the interest of the Revenue, he may choose not to exercise his power of revision. This is for the reason that if a query is raised during the course of scrutiny by the AO, which was answered to the satisfaction of the AO, 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 AO called for interference and revision. In the instant case, for example, the CIT has observed in the order passed by him that the assessee has not filed certain documents on the record at the time of assessment. Assuming it to be so, in our opinion, this does not justify the conclusion arrived at by the CIT that the AO had shirked his responsibility of examining and investigating the case. More so, in view of the fact that the assessee explained that the capital investment made by the partners, which had been called into question by the CIT was duly reflected in the respective assessments of the partners who were income-tax assessees and the unsecured loan taken from M/s Stutee Chit & Finance (P) Ltd. was duly reflected in the assessment order of the said chit fund which was also an assessee.”
P a g e | M/s Metacaps Engineering Vs. CIT We find that a similar view was also arrived at by the Hon’ble High Court of Punjab & Haryana in the case of CIT Vs. R.K. Metal Works (1978) 112 ITR 445 (P&H), wherein stressing on the statutory obligation on the part of the CIT to deal with the points raised by the assessee in its explanation/objection filed with him during the course of the revisional proceedings to show that the order passed by the A.O was not erroneous and prejudicial to the interest of the revenue, in context of the issues on which it was sought to be revised, the Hon‟ble High Court held as under:-
“There is no indication in the order of the CIT as to the basis on which he came to the prima facie conclusion that the capital borrowed by the firm was utilised for purposes other than that of the firm's business. When the assessee filed a detailed written statement before him, the CIT did not deal with any of the points raised in the statement. He thought that the best course in the circumstances was to remand the matter to the ITO for consideration of the points raised in the assessee's written statement. That certainly was not the proper course to be adopted by him. It was necessary for the CIT to state in what manner he considered that the order of the ITO was erroneous and prejudicial to the interests of the Revenue and what the basis was for such a conclusion. After indicating his reasons for such a conclusion, it would certainly have been open to him to remand the matter to the ITO for such other investigation or enquiry as might be necessary.”
We further find that the CIT had in the course of the revisional proceedings taken recourse to certain fishing and roving enquiries, which neither did form the basis on which the order passed by the A.O was sought to be revised, nor were relevant to the issues under consideration. We find that the CIT while deliberating on the issue as regards the „labour charges‟ of Rs. 1,30,22,495/- paid by the assessee to the sib-contractor, viz. Urja Infrastructure, had therein observed that no documentary evidence such as bills pertaining to expenditure incurred on sand, cement, brick, steel and other things required/essential for constructing pipeline by M/s Urja
P a g e | M/s Metacaps Engineering Vs. CIT Infrastructure Ltd., were submitted by M/s Metakaps Engineering & Mahendra Construction Co, J.V, i.e the assessee. We are of the considered view that seeking of the aforesaid information in respect of the expenses incurred by the sub-contractor, viz. M/s Urja Infrastructure can safely be characterized as a fishing and roving enquiry on the part of the CIT, which had never formed the basis on which the order of A.O was sought to be revised by the CIT. We are further of the considered view that from a perusal of the order of the CIT it can safely be gathered that the CIT had as a matter of fact, not being in agreement with the mode and manner of verifications done by the A.O, had thus tried to impose the manner in which the same were required to be done. We would not hesitate to observe that unless the CIT is able to show as to how the manner in which the verifications in respect of the issues under consideration were carried out by the A.O, had rendered the assessment as erroneous and prejudicial to the interest of the revenue, he cannot in the garb of the revisional proceedings be permitted to substitute and impose his choice of mode and manner of carrying out the verifications on the A.O. We are constrained to record the aforesaid observations in order to make it clear beyond any doubt that the scope of revision under Sc. 263 is restricted only for the purpose of revising an order passed by the A.O, which is found to be both erroneous and prejudicial to the interest of the revenue, and failing the said fundamental requirements, the same cannot in guise of the said powers be exercised by the CIT to impose his view as against that of the A.O. We find that our aforesaid view that now when the A.O in the present case had after examining the accounts, making enquires and applying his mind to the facts and circumstances of the case in accordance with law had framed assessment in the hands of the assessee, then merely for the reason that the CIT is not satisfied with the manner of the verifications and P a g e | M/s Metacaps Engineering Vs. CIT investigations carried out or conclusion arrived at by the A.O cannot form the basis for branding the assessment as erroneous, stands fortified by the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Gabrial India Ltd. (1993) 203 ITR 108 (Bom), held as under:
12. From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where ITO, while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The Commissioner, on perusal of the records, 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 higher figure than the one determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that, in the opinion of the Commissioner, the order in question is prejudicial to the interest of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, the order is erroneous, is absent. Similarly if an order is erroneous but not prejudicial to the interest of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that 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
We further are persuaded to be in agreement with the contention of the ld. A.R that the CIT had even otherwise failed to show as to how the order passed by the A.O was P a g e | M/s Metacaps Engineering Vs. CIT found to be “prejudicial” to the interest of the revenue. We find that the specific contention raised by the assessee during the course of the revisional proceedings that the order passed by the A.O was in no way prejudicial to the interest of the revenue, had however not been addressed by the CIT. We are of the considered view that as per the mandate of law, for valid assumption of jurisdiction u/s 263 the order passed by the A.O must be found to be both erroneous and prejudicial to the interest of the revenue. The term „erroneous‟ used in conjunction with the term „prejudicial‟ makes it clear beyond any scope of doubt that both the preconditions have to be cumulatively satisfied, before the order passed by the A.O is revised by the CIT. Reliance in support of our aforesaid view is drawn from the judgment of the Hon’ble Supreme Court in the case of Malabar Industrial Ltd. Vs. CIT (2000) 243 ITR 83 (SC) .
We now advert to the contentions raised and the judicial pronouncements which had been relied upon by the ld. D.R. before us. The ld. D.R had during the course of hearing of the appeal relied on the judgment of the Hon’ble High Court of Delhi in the case of CIT Vs. Ashok logani (2012) 347 ITR 22 (Del). We find that the facts involved in the case before the Hon‟ble High Court revolved around the aspect that though the assessee had surrendered certain amount during the course of survey proceedings conducted on him, however, the same was not offered as income by the assessee in his „return of income‟. That it was in the backdrop of the aforesaid facts, that the CIT observing that P a g e | M/s Metacaps Engineering Vs. CIT though the income surrendered by the assessee was thereafter retracted by him, however, no mention of the said material facts, i.e either as regards the „disclosure‟ made by the assessee or the validity of the retraction made by him thereafter did find a mention in the assessment order passed by the A.O, had thus for the said reason revised the order u/s 263, which thereafter was upheld by the Hon‟be High Court. We are of the considered view that as the facts involved in the said case are distinguishable as against those involved in the case of the present assessee, therefore, the reliance placed by the ld. D.R would not assist his case. That still further we are also unable to persuade ourselves to be in agreement with the contention raised by the ld. D.R that the Explanation 2 of Section 263 which had been made available on the statute vide the „Finance Act, 2015‟, w.e.f 01.06.2015, was to be construed as being retrospective in nature and thus would be applicable to the present case of the assessee for A.Y. 2009- 10. We are not impressed by the contention of the ld. D.R that as the A.O had passed the assessment order without making inquiries and verifications which he should have made in the opinion of the CIT, therefore, the same rendered the order passed by him amenable for revision under Sec.
We have given a thoughtful consideration to the contentions of the assessee and do not find ourselves to be in agreement with his view. We are of the considered view that the Explanation 2 of Sec. 263 as had been had been made available on the statute vide the „Finance Act, 2015‟, w.e.f 01.06.2015, cannot be construed to be retrospective in nature. We are of the considered view that P a g e | M/s Metacaps Engineering Vs. CIT if the legislative would have intended a retrospective applicability of the same, then there would have been a specific mention as regards the same, which we find is not available. We find that a similar view in respect of prospective applicability of the Explanation 2 of Sec. 263 had been taken by the coordinate benches of the Tribunal in the following cases:
(i). A.V Industries Vs. ACIT (ITA No. 3469/Mum/2010; dated, 06.11.2015)(Mum)
(ii). Jayanth Murthy Vs. DCIT (ITA No. 870 and 1234/Ahd/2014; dated. 20.05.2016)
Thus in the backdrop of our aforesaid observations, we are not persuaded to accept the contention of the ld. D.R that as the A.O had passed the assessment order without making inquiries and verifications which he should have made in the opinion of the CIT, therefore, the same rendered the order passed by him amenable for revision under Sec. 263. We thus decline to accept the aforesaid contentions raised by the ld. D.R before us.
We thus after giving a thoughtful consideration to the order passed by the CIT under Sec. 263 in the backdrop of the submissions raised by the authorized representatives of both the parties, perusing the order passed by the A.O under Sec. 143(3) deliberating on the judicial pronouncements relied upon by the parties and the material available on record, thus, focusing on the proprietary of the order
P a g e | M/s Metacaps Engineering Vs. CIT passed by the CIT by invoking his powers under s. 263, keeping in view the scope of the said statutory provision, are unable persuade ourselves to uphold the order passed by the CIT under Sec. 263 of the „Act‟. We thus in light of the observations and reasonings recorded hereinabove, set aside the order passed by the CIT under Sec. 263. 19. The appeal of the assessee is allowed. Order passed in the open court on 11/09/2017.
Sd/- Sd/- (B.R.BASKARAN) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER भ ुंफई Mumbai; ददन ुंक 11.09.2017 Ps. Rohit Kumar आदेश की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to : 1. अऩीर थी / The Appellant प्रत्मथी / The Respondent. 2. आमकय आम क्त(अऩीर) / The CIT(A)- 3. आमकय आम क्त / CIT 4. विब गीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भ ुंफई / 5. DR, ITAT, Mumbai ग र्ड प ईर / Guard file. 6. सत्म वऩत प्रतत //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीऱीय अधिकरण, भ ुंफई / ITAT, Mumbai
P a g e | M/s Metacaps Engineering Vs. CIT