BSES RAJDHANI POWER LTD.,,NEW DELHI vs. PR.CIT, NEW DELHI

(A). This appeal filed by the assessee is directed against the order of Ld.CIT (Appeals) New Delhi dt. 31.3.2016 for the Assessment Year 2010-11 on the following grounds :-

1. That on the facts and circumstances of the case and in law, the impugned order dated 31.3.2016 passed by the Commissioner of Income-tax (CIT), under section 263 of the Income-tax Act, 1961 (‘the Act’) is without jurisdiction, illegal, bad in law and void-ab-initio.

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(B) Assessment order was passed by the Assessing Officer u/s 143(3) of Income Tax Act on 29.10.2013. The assessee filed appeal before Ld. CIT(A) which was disposed off vide order dated 3.5.2014 of the Ld. CIT(A). Ld. Pr. CIT issued a show cause notice dated 16.3.2016 relevant portion of the show cause notice is reproduced as under :-

“On an examination and review of the assessment order along with the data submitted by the company in the course of the assessment, proceedings there are certain omissions in the body of the assessment order, which has a cascading effect on the total assessable income for the year under consideration. The company had claimed depreciation on fixed assets amounting to Rs. 299 crores approximately. The depreciation on these assets was allowed as claimed except for a sum of Rs. 13,02,778/- was held as inadmissible under the head addition on account of recapitalise assets. In the questionnaire issued by the A.O requisite details on the issues were called for, the company vide its letter dated 28.10.2013 the company has admitted as under :- “The company has admitted that there is a variation in cost. The cost of repairs is being charged to revenue even though it should be capitalized.” The examination of the record further reveal that the variation is not limited to Transformers only but it also include Panels’, Cables, Capacitators, Circuit Breaker and Feeder Pillars etc. The company had submitted that :- “It will take a substantial time to prepare the exhaustive details as required in the questionnaire. All these aspects of the matter pertaining to cost of the fixed assets actually installed by the company , which were wholly, and exclusively for the FIT For PUBLICATION Sd/- Sd/- (AM) (JM) purpose of its day to day running of the business had remained unverified. In view of the above facts, I have reason to believe that the assessment order passed u/s 143(3) dated 29.10.2013 for the year under consideration needs a review u/s 263 of the I.T. Act, 1961. In accordance with the section 263 of the Income Tax Act , 1961. I hereby require you to appear before the undersigned in Room No. 394, 3rd Floor, C.R. Building at 11 A.M. on 22.3.2016 and to submit your reply on the issue on or before the said date.”

(B.1) The assessee filed written submissions before the Ld. Pr. CIT vide reply dated 29.3.2016 and vide supplementary submissions dated 30.3.2016. Ld. Pr. CIT passed order dated 31.3.2016 u/s 263 of I.T. Act whereby he set aside the order of the AO with a direction to the AO to pass an order afresh after making due inquiries and verifications. The operative portion of the order dated 31.3.2016 u/s 263 passed by the Ld. CIT is reproduced as under for ready reference :-

“I have carefully perused the assessment records and considered the assessee's submissions. The assessee has emphasized upon -a legal point that the CIT(A) had already considered the issue of depreciation of Rs. 66,27,782/- disallowed by the AO and, therefore, the assessment order merges with the order of the CIT(A) and proceedings u/s 263- could not be initiated. Facts are actually not so. The AO considered depreciation in respect of total assets of Rs. 6,44,81,091/- only while the same should have been considered with reference to total fixed assets amounting to Rs. 2,98,93,99,552/- which is clear from a perusal of the Tax Audit Report. The present proceedings, therefore, are validly initiated because these relate to an omission on the part of the AO which was not there before the CIT(A). The reply of the assessee vide letter dated 28.10.2013 before the AO during the assessment proceedings was that there was a variation is cost. The statement of the assessee called for extensive examination which was not done by the AO. Besides Transformers, there was variation in cost in respect of Panels, Cables, Capacitor, Circuit Breakers, Feeder Pillar etc. which has not at all been looked into by the AO. It 4 FIT For PUBLICATION Sd/- Sd/- (AM) (JM) has been assessee's own admission before the AO that it was going to take substantial time for them to prepare the exhaustive details called for by the AO. Obviously, the details called for were neither furnished nor examined. It is also seen that the applicability of TDS provisions u/s 194 r.w. 40(a)(ia) in respect of Lease rentals was not examined by the AO. The AO further ought to have verified whether security expenses of Rs. 4.88 Crores, satellite call centre expenses of Rs 1.30 crores & advertising expenses of Rs. 0.70 crores were subject to TDS or not. The Auditor has given a break-ip of expenses debited to P & L account w.r.t transactions with group concerns. The AO has not considered and examined these transactions with group concerns for determining whether the dealings with group companies were at Arms Length Price. In view of the points as discussed above, the order of the AO is clearly erroneous in so far as it is prejudicial to the interest of revenue in terms of Explanation 2 below section 263(1). The order of the AO, is therefore, set aside with a direction to pass an order afresh after making due inquiries and verifications. He shall give an opportunity of being heard to the assessee while doing so.”

(C) At the time of hearing before us the Ld. Counsel for assessee explained to us that Ld. Pr. CIT has exercised powers u/s 263 of I.T. Act on the following three issues

I. Depreciation on fixed assets as far as variation in cost of fixed assets is concerned. II. Applicability of TDS provisions u/s 194 r.w.s 40 (a) (ia) of I.T. Act in respect of lease rentals, security expenses, satellite call center expenses and advertising expenses. III. Examination of arms length nature of the transactions undertaken by the assessee with group concerns.

(C.1) As far as the first issue is concerned, the Ld. Counsel for assessee submitted that this issue had already been considered by the AO before he passed the assessment order and drew our attention to the fact that an amount of Rs. FIT For PUBLICATION Sd/- Sd/- (AM) (JM)

66,27,782/- was even disallowed by the AO out of depreciation claimed by the assessee on the ground that the assessee failed to furnish evidence regarding cost of the capitalised assets. He also informed that this disallowance was contested by the assessee in appeal before Ld. CIT(A) and the Ld. CIT(A) had decided the issue vide order dated 31.3.2016. . Ld. Counsel further drew our attention to the fact that before the assessment order was passed the AO already had the benefit of special audit conducted u/s 142 (2A) of I.T. Act. While admitting that all the details called for by the Assessing Officer as required in the questionnaire during the assessment proceedings had not been submitted because, in the words of the assessee, “it will take a substantial time to prepare the exhaustive details as required in the questionnaire.”; the ld counsel for the assessee, however, emphasized with the help of paper book filed in appellate proceedings in ITAT, that substantial volume of details had in any case been submitted to the Assessing Officer. Ld. Counsel contended that the impugned order dated 31.3.2016 u/s 263 of I.T. act is unsustainable because of the following reasons :- i) Proceedings u/s 263 of I.T. Act were initiated and order passed by Ld. Pr. CIT on a mere change of opinion as regards the allowability of depreciation as the AO had passed assessment order after due and adequate inquiries / investigations and application of mind. ii) The assessment order of the AO had merged with the order of the Ld. CIT(A) and consequently revisionary jurisdiction u/s 263 of I.T. Act stood ousted. iii) Reasonable opportunity of being heard was not provided to the assessee during proceedings u/s 263 of I.T. Act iv) The impugned order dated 31.3.2016 u/s 263 of I.T. Act does not clearly bring out how the order of the AO was erroneous and prejudicial to interests of revenue. 6 FIT For PUBLICATION Sd/- Sd/- (AM) (JM)

(C.2) As far as the second and third issues mentioned in aforesaid paragraph (C) is concerned the Ld. Counsel for the assessee submitted that the impugned order dated 31.3.2016 u/s 263 of I.T. Act is unsustainable especially because these issues were not included in show cause notice dated 16.3.2016 issued to the assessee; and secondly because reasonable opportunity of being heard was not provided by the ld Pr. CIT to the assessee on these issues in the course of proceedings u/s 263 of I.T.

Act.

(C.3) Ld. Counsel for the assessee relied on the following case laws :

(E) We have heard both sides and we have also perused the materials on record carefully. As far as first issue, numbered (I) in foregoing paragraph C of this order is concerned, we find that it is not in dispute that the details as required by the Assessing Officer in the questionnaire during the assessment proceedings were not submitted by the assessee either during the assessment proceedings or during proceedings u/s 263 of IT Act before ld Pr. CIT; although as claimed by the ld Counsel for the assessee, substantial volume of details had been submitted to the Assessing Officer. It is also not the case of the assessee that inquiries / verification proposed to be done by the Assessing Officer should not have been made. The case of the assessee before the Assessing Officer , and before Ld. Pr. CIT was that it will take a substantial time to prepare the exhaustive details as required in the 8 FIT For PUBLICATION Sd/- Sd/- (AM) (JM) questionnaire. The Assessing officer completed assessment without obtaining details asked for by him through the questionnaire. Therefore, it can be said that the Assessing Officer concluded the assessment and allowed depreciation without making inquiries / verification which should have been made and which he himself had initiated through questionnaire issued by him; and allowed relief (depreciation) without completing inquiries / verification into the claim of depreciation initiated by himself. In that view of the matter, explanations 2(a) and 2(b) to section 263 (1) of the IT Act are applicable and the reliance by ld Pr. CIT , in his impugned order u/s 263 of I.T. Act , on explanation 2 below section 263(1) of IT Act is, therefore, acceptable. Relevant part of explanation 2 to section 263(1) of IT Act is reproduced below for ready reference:-

“Explanation 2.- For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if , in the opinion of the Principal Commissioner or Commissioner- (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; “

(E.1) Also, as the Ld. Pr.CIT specifically referred to explanation 2 below s.263 (1) of I.T.Act in his impugned order dated 31.3.2016 u/s 263 of I.T. Act ; it cannot be said, in the facts and circumstances of this case, that the impugned order does not clearly bring out how the order of the AO was erroneous and prejudicial to interests of revenue.

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(E.2) Also the ld Pr. CIT, in his order dated 31.03.2016 u/s 263 of IT Act has explained why doctrine of merger will not apply, and his jurisdiction u/s 263 of IT Act does not get ousted despite the order of ld CIT(A), relevant portion of his order is reproduced as under:-

“I have carefully perused the assessment records and considered the assessee’s submission. The assessee has emphasized upon a legal point that the CIT(A) had already considered the issue of depreciation of Rs. 66,27,782/- disallowed by the AO and, therefore, the assessment order merges with the order of the CIT(A) and proceedings u/s 263 could not be initiated. Facts are actually not so. The AO considered depreciation in respect of total assets of Rs. 6,44,81,091/- only while the same should have been considered with reference to total fixed assets amounting to Rs. 2,98,93,99,552/- which is clear from a perusal of the Tax Audit Report. The present proceedings, therefore, are validly initiated because these relate to an omission on the part of the AO which was not there before the CIT(A).”

(E.2.1) Further, legal position regarding the doctrine of merger and the related legal issue regarding jurisdiction u/s 263 of IT Act is stated in explanation 1(c) of Section 263(1) of IT Act, wherein, it is explicitly stated that powers of the Pr.

Commissioner/ Commissioner shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in appeal.

Explanation 1(c) of Section 263(1) of IT Act is reproduced as under for ready reference:-

“(Explanation.1.) For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) ......................... (b) ........................

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(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal (filed on or before or after the 1st day of June, 1988), the powers of the (Principal Commissioner or) Commissioner under this sub-section shall be deemed always to have extended) to such matters as had not been considered and decided in such appeal.”

(E.2.2) As the Assessing Officer considered disallowance of depreciation in respect of total assets of Rs. 6,44,81,091/- only and not in respect of total fixed assets amounting to Rs. 2,98,93,99,552/- ; the subject matter of appeal before the learned CIT(A) was limited to depreciation in respect of total assets of Rs. 6,44,81,091/- only and not in respect of claim of depreciation in respect of total fixed assets amounting to Rs. 2,98,93,99,552/- . Thus, in respect of those assets which were not part of the assets amounting to aforesaid Rs. 6,44,81,091/-, allowability of depreciation had not been the subject matter of appeal before the learned CIT(A), and had not been considered or decided by him. A perusal of grounds of appeal filed by the assessee in appeal before Ld.CIT(A) and a further perusal of appellate order of Ld. CIT(A) also shows that neither was allowability of depreciation in respect of those assets which were not part of the assets amounting to aforesaid Rs. 6,44,81,091/- a subject matter of appeal before the Ld. CIT(A), nor had the matter been considered or decided by him. Thus, the jurisdiction of Ld. Pr.CIT u/s 263 of I.T.Act, in the specific facts and circumstances of this case, was not ousted in respect of those assets which were not part of the assets amounting to aforesaid Rs. 6,44,81,091/- . In view of the foregoing discussion, including foregoing paragraphs (E .2) and (E.2.1) of this order, we are of the view that the exercise of jurisdiction by ld Pr. CIT u/s 263 of IT Act was correct and valid in law in 11. FIT For PUBLICATION Sd/- Sd/- (AM) (JM) respect of those assets which were not part of the assets amounting to aforesaid Rs. 6,44,81,091/- .

(E.3) We find that ld Pr. CIT has not directed the Assessing Officer, in his impugned order u/s 263 of IT Act, to make any addition, or to disallow the claim of depreciation partly or wholly. The ld Pr. CIT has merely set aside the assessment order with a direction to the Assessing Officer to pass an order afresh after making due inquiries and verifications. A direction of ld Pr. CIT to pass a fresh assessment order after due inquiries and verifications does not amount to a direction to disallow depreciation partly or wholly or to make any addition and therefore, it cannot be said that order passed by the ld Pr. CIT amounted to a change of opinion as regards allowability of depreciation.

(E.4) As far as reasonable opportunity of being heard during proceedings u/s 263 of IT Act is concerned, we find that notice u/s 263 of IT Act was issued on 16.03.2016. The assessee submitted written submissions vide letter dated 29.03.2016 (pages 109 to 121) of Paper Book filed during appellate proceedings before ITAT and supplementary submission dated 30.03.2016 were also filed by the assessee before ld Pr CIT (pages 122 to 349) of paper book filed during appellate proceedings before ITAT. Thus, we find that the assessee made detailed submissions before the ld Pr. CIT for which the assessee got reasonable opportunity.