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Income Tax Appellate Tribunal, BENGALURU BENCH A, BENGALURU
Before: SHRI. VIJAY PAL RAO & SHRI. S. JAYARAMAN
PER S. JAYARAMAN, ACCOUNTANT MEMBER :
These are appeals filed by the assessee against the order of the Pr.
CIT (Central), passed u/s.263 of the IT Act, 1961, dt.25.03.2015 and 30.03.2015, for the assessment years 2007-08 and 2008-09 respectively.
The facts in brief are that the assessee company, is engaged in logistics, mining, trading of iron ore and retailing of petroleum products.
Its assessment u/s. 153A rws 143(3) for ay 2007-08 was completed on 31.03.2013 accepting the returned income . On a review of records, the Pr.
ITA.847 & 848/Bang/2015 Page - 2 Commissioner of Income Tax, (Central), (PCIT(C)), Bengaluru, noticed that the assessee had entered into an MoU with Ripple Investments Ltd on 04.08.2005 to purchase upto 25 lakh shares of Valuemart Info Technologies Ltd @ Rs.4 per share through Ripple Investments Ltd for Rs. 1 crore. In continuation to that MoU, on 12.6.2006, it entered into an M0U wherein Ripple Investments Ltd was to buy back the 25 lakh shares @ Rs. 8 per share. During a y 2006-07, it has written off the investment to the extent of Rs. 1 crore and claimed it as a revenue expenditure. In the assessment made for ay 2006-07 u/s.143(3) dated 31.12.2008, the Assessing Officer has disallowed that Rs. 1 crore stating that it is a capital expenditure and hence it was not allowed as an expenditure to be charged to the P & L account under section 37(1). This order attained finality as the assessee has not contested it at all.
Consequent to a search and seizure action, the assessee was required to file a return under sec. 153A. In its revised return filed for a y 2007-08, the assessee , inter alia, credited Rs. 60 lakhs received from Valuemart Info Technologies Ltd on 31.03.2007 as "income from other sources ( as Bad Debts recovered )" in its P& L A/c but reduced Rs.1 crore in the computation memo and arrived its total income. In the assessment made u/s. 153A rws 143(3) for ay 2007-08 on 31.03.2013, the AO accepted such returned income.
ITA.847 & 848/Bang/2015 Page - 3
The Pr. Commissioner of Income Tax, (Central),
Bengaluru considered that the above action of the Assessing Officer, i.e accepting the said claim of the assessee in a y 2007-08 in the assessment order passed u/s. 153A rws
143(3), is erroneous in so far as it is prejudicial to the interests of revenue and hence issued notice under section 263 to the assessee. After hearing the assessee, considering the relevant materials etc, the PCIT(C) held that it is an undisputed fact that in the return for ay 2006-07, the assessee claimed Rs. 1 crore paid for shares of M/s. Valuemart Information
Technologies Limited as "written off'. While completing the assessment, the A O disallowed it which has become final. The assessee recovered Rs. 60 lakhs during the period relevant to a y 2007-08 & Rs. 40 lakhs during the period relevant to a y
2008-09 and claimed the entire Rs. 1 crore in its revised return filed for a y 2007-08 in the computation memo which is an incorrect claim, not allowable and false. The assessee also argued that when its claim of write off of Rs.one crore as an expenditure is not allowed as a deduction in ay 2006-
07 on the ground that it was capital in nature, subsequently, when such amounts are recovered by it and was offered as an income in the ays 2007-08 and 2008-09 , then such receipts should also be treated as capital in nature &they should be reduced from the income of respective ITA.847 & 848/Bang/2015 Page - 4 years. In this regard, the Pr.CIT held that for the sake of argument, if it is considered that the assessee has recovered Rs. 60 lakhs in ay 2007-08 and offered it as an income, even then , there is an excess claim of deduction of Rs.
40 lakhs in that ay. Thus, the acceptance of such claim by the A O is not only erroneous but also prejudicial to the interests of Revenue. The PCIT( C) also held that while completing the assessment , the A O failed to make necessary verification, there is no application of mind, on these counts also, the assessment order passed by the A O is erroneous and prejudicial to the interests of Revenue and placed reliance on the following decisions :- 1. CIT Vs Jawahar Bhattacharjee, 341 ITR 434(Gau)(F.B.) and 2. Assam Tea House 344 ITR 507 (P&H).
Thus, the PCIT( C) held that the assumption of jurisdiction u/s.263 is fully justified both on merits and facts . In view of that, he set aside the assessment order on this specific issue to the file of the AO to re-examine the claim of the assessee and decide in accordance with law after giving a reasonable and sufficient opportunity to the assessee. Aggrieved,
the assessee filed this appeal with following grounds of appeal :
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The AR submitted that the Pr. CIT has rendered the impugned assessment order as erroneous and prejudicial to the interests of the Revenue on the premise that the AO has not examined the impugned reclaim of investment written off . It is not in dispute that the assessee filed the Return in response to notice under sec. 153A along with the statement of total income, the AO directed it to file its financial statements along with all annexures & assessment order of earlier years etc. The assessee has furnished before the AO the statement of total income which clearly disclosed the deduction claimed by it. On the directions of the AO, it has also furnished financial statements and assessment orders of earlier years. All of them points to the fact that the AO has made an ITA.847 & 848/Bang/2015 Page - 6 enquiry with respect to the claim of investment written off for the a y 2006-07, disallowance of the same in that year, subsequent recovery of investment and then the reclaim of investment written off in a y 2007-08. In effect, the AO completed the assessment proceedings under sec. 153A r.w.s. 143(3) after taking due cognizance all of them and found them to be in accordance with law. Where an enquiry was held by the AO and the details/documents sought for was duly provided and accepted, just because the same does not find a mention in the assessment order, the Pr. CIT cannot assume jurisdiction under sec. 263 on the ground that the assessment order was made without conducting any enquiry. Thus, the AR submitted that the basis on which the Pr. CIT has come to the conclusion that the impugned order is erroneous, is contrary to the factual position, the condition prescribed u/s. 263 has not been satisfied and hence the order of the Pr.CIT is liable to be quashed. He also placed reliance on the decisions, viz Malabar Industrial Co Ltd vs CIT 243 ITR 0083 SC , CIT vs Anil Kumar Sharma 335ITR 083 Delhi, CIT vs Sunbeam Auto Ltd 227 CTR 133 Delhi , CIT vs Vikas Polymers 194 Taxman 57 Delhi, Kelvinator of India 320 ITR 561 SC etc.
Per contra, the DR submitted that in the assessment made u/s 153A r.w.s. 143(3) for ay 2007-08, the assessee can not make any fresh claim as was done by it . In this regard, the DR relied on ITA.847 & 848/Bang/2015 Page - 7 the the Hon'ble ITAT , Pune “B” Bench decision in the case of Shri Shankar Junjhunwala v ACIT , Central Circle, Aurangabad in ITA 225/PN/2004-05 dt 31.07.2012 wherein following the special bench decision of the the Hon'ble ITAT, Mumbai in to 5022 & 5059 /M/10 dt 06.07.12 in Al Cargo Global Logistics v DCIT , Cent Circle 44, Mumbai it held that the assessment made u/s 153A is to be made only on the basis of “incriminating material”, and the return filed by the assessee u/s 139 attained finality. In other words, the DR submitted that a new claim of deduction or allowance could not be entertained in the reassessment proceedings and hence the order of the Pr.CIT is in accordance with law.
We heard the rival contentions. The facts remain that during a y 2006-07, the assessee has written off the investment of Rs. One crore & claimed it as a revenue expenditure. In the assessment made for ay 2006-07 u/s.143 (3) dated 31.12.2008, the A O has disallowed it as a capital expenditure and that order had attained finality.
Out of that one crore , the assessee recovered Rs. 60 lakhs on 31.03.2007, ie during the period relevant to the a y 2007-08 & Rs. 40 lakhs on 03.04 & 30.4.2007, ie during the period relevant to the a y 2008-09. Although, the assessee has recovered Rs. 60 lakhs only in ay 2007-08, recognized it as an income & credited it in its P & L account, but claimed a deduction of Rs. One crore in the computation memo of its ITA.847 & 848/Bang/2015 Page - 8 revised return , then arrived the total income and declared such total income which was ultimately accepted by the AO in the impugned assessment order. Such an action is not correct as per the ratio relied on by the DR, supra. Thus, there is an error in the impugned assessment order. Alternatively, as held by the Pr. CIT, even if the assessee’s argument that when its claim of write off at Rs one crore as an expenditure is not allowed as a deduction in ay 2006-07 on the ground that it was capital in nature, subsequently , when such amounts are recovered by it & was offered as an income in the ays 2007-08 and 2008-09 , then such receipts should also be treated as capital in nature & they should be reduced from the income of the respective year is considered in its favour, even then, the assessee has recovered Rs. 60 lakhs only in ay 2007-08 and offered it as an income in that ay. However, it claimed a deduction of Rs. One crore which was accepted by the AO in the impugned assessment order. Thus, an excess deduction of Rs. 40 lakhs was allowed to the assessee in ay 2007- 08, which is an error and it clearly falls within the scope of section 263 of the Act. Thus, the facts of this case are distinguishable vis -a -vis the cases relied on by the assessee. In view of that we do not find any merit in the assessee’s grounds of appeal and hence they are dismissed.
ITA.847 & 848/Bang/2015 Page - 9 Y 2008-09 :
The assessee’s assessment for ay 2008-09 was completed u/s. 153A rws 143(3) on 31.03.2013. The Government of India appointed a Commission of Enquiry under the Chairmanship of Shri M B Shah, former Judge of Supreme Court. This Commission has, inter alia, investigated into the issue of under invoicing of export price of iron in the State of Goa. From its report, the Pr. CIT noticed that the assessee shipped the consignment of iron lumps to China at a price which is below the average sale of FOB price of the same grade of iron ore on the same day. At page No.187 of Volume 2 of that report, it has been stated that this company had shipped a consignment of iron lumps to China on 21.04.2007 weighing 50,650 metric tonnes and FOB value of Rs.9,90,33,413/-. The FOB rate per weighing metric tonne amounted to Rs,1,955/- (under invoicing to the extent of 53%). The extent of under invoicing was calculated on the basis of information provided by the Customs Department of Marmagao and Panjim ports for the year 2008-09.
The report by the Shah Commission Report is on the basis of average sale FOB price for the same grade of iron on the same day since it is based on the average freight on board (FOB). On a review of records, the Pr CIT noticed that the A O has not verified the pricing adopted by the assessee while making exports so as to examine whether there is any under invoicing resorted by them. The A O did not make any enquiries/verification and reconciliation of sales. Since the A O, while ITA.847 & 848/Bang/2015 Page - 10 completing the assessment, has not considered the issue of under invoicing by conducting necessary enquiries, the Pr. CIT considered that the action of the A O resulted in under assessment and the same is erroneous and prejudicial to the interests of Revenue and hence issued a show cause notice under section 263 to the assessee. After hearing the assessee, considering the relevant materials etc, the PCIT(C) held that the Assessing Officer completely failed to examine the under invoicing aspect while completing the assessment. Failure to make enquiries, where such an enquiry is warranted would constitute prejudice to the Revenue, whether any understatement of income is otherwise inferable or not. Prejudice to the Revenue can be inferred not only where an income which should have been brought to tax has not been so brought, but also where there has been no enquiry in matters which warrants enquiry. Therefore, the action of the A O allowing the exports without any enquiry amounted to the assessment order being not only erroneous but also prejudicial to the Revenue. While doing so, the Pr. CIT relied on the ratios of Shree Manjunothesware Packing Products and Camphor Works [1998] 231 ITR 53 Supreme Court, CIT Vs Assam Tea House, 344 ITR 507 (P&H), Sadiq Sheikh (ITA Nos.170 & 172/PNJ/2014 and & 173/PNJ2014 Asst.Years 2006-07 & 201041) the Hon'ble ITAT Panaji Bench . Thus, the Pr. CIT set aside the assessment order on this specific issue to the file of the A O. He held that the assessee can demonstrate before the A O that the said transaction mentioned in the show cause notice did not ITA.847 & 848/Bang/2015 Page - 11 pertain to them by producing necessary evidences and materials as explained in their submission. The AO should duly consider such evidence and make necessary enquiries and complete the assessment in accordance with law by giving reasonable and sufficient opportunity to the assesse before completing the assessment.
Aggrieved, the assessee filed this appeal with following grounds of appeal :
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The AR submitted that during the proceedings under sec. 153A r.w.s. 143(3), the AO has directed the assessee to furnish shipment wise details of sales made during the year, which were duly furnished vide reply dated 24-Dec-2012 (enclosed in page 11 to 15 of the paper book). Subsequently, it furnished the following details in connection with the exports made during the year:
A. Details of iron ore exported (month wise) in abstract with the following information: a. Details of shipment b. Name and address of the buyer c. Date of sales contract along with copy of sale contract / letter of credit d. Contract quantity and description of commodity (MTS and FE%) e. Base price/any penalty or bonus of shipment received f. Port of loading/loaded port certificate of quantity, weight g. Demurrage charges B. Enclosed the following documents pertaining to each shipment a. Copy of sale agreement / letter of credit b. Copies of provisional and final invoice c. Copies of certificate of weight and quality issued at load port d. Copies of CIQ certificate issued at discharge port Acknowledged copy of the submissions is enclosed in page 17 to 21 of the paper book. From them, the Ld. AR submitted that the AO has made a detailed enquiry with respect to the export sales and in doing so has examined the names and addresses of the buyers, sales contracts, letters of credit, provisional and final invoices raised by the assessee on the buyers among other documents. In effect, the AO has gotten into the aspects of pricing and invoicing. The Pr. CIT has relied on the report of the Shah Commission on Illegal Mining of iron and ITA.847 & 848/Bang/2015 Page - 13 manganese ore in the State of Goa published in the month of October 2013 to conclude that prejudice had been caused to the interests of the Revenue on account of under-invoicing resorted to by the Appellant.
The Shah Commission has dealt with the issue of under invoicing, evasion of taxes, duties and others in Chapter II of its Report (enclosed in page 3 - 10 of the paper book). On page 51 of its report (enclosed in page- 3), it is stated that:
"The Commission was not in a position to finalize illegality and irregularity with regard to the export of iron ore by the lessees or their representatives or traders comprehensively due to time constrains.”
Further, on page 52, it is stated that :
"The aforesaid aspect is further required to be investigated by the Central investigating agencies under the Foreign Exchange Management Act (FEMA), Money Laundering Act, etc. preferably by Enforcement Directorate and the Income Tax Department." What emanates from the above is that the findings of Shah Commission are tentative and require further investigation. In other words, the Shah Commission has not conclusively held that the Appellant or any of the other parties have indeed resorted to under invoicing. In the absence of any conclusive finding, the Pr. CIT has relied on the report of the Shah Commission to conclude that the Appellant has under invoiced its sales that has caused prejudice to the interests of the Revenue. The Pr. CIT ought to have made an independent enquiry to satisfy himself that the Appellant had resorted to under invoicing that has caused prejudice to the ITA.847 & 848/Bang/2015 Page - 14 interest of the Revenue. Merely relying on the report of Shah Commission, which in itself is inconclusive to record satisfaction will not satisfy the requirements laid down in sec.
The AR distinguished the judgement of Hon'ble Income Tax Appellate Tribunal, Panaji in the case of Sadiq Seikh in & 172/PNJ/2014 and ITA Nos. 171 & 173/PNJ/2014 viz in that case of Sadiq Seikh, the assessee had failed to submit any reply to the query raised by the AO. The AO was completely debarred from making any examination of the impugned transaction. Whereas in its case, the Appellant duly furnished the specific details to the AO which were carefully examined by him while completing the assessment proceedings. The impugned export of 50,650 MT of iron ore shipped on 21 st April 2007 where the Appellant is alleged to have resorted to under invoicing was sold to M/s. Sinosteel International Macao Commercial Offshore Limited. Sinosteel Corporation is a Central State owned enterprise of the Government of People's Republic of China and M/s. Sinosteel International Macao Commercial Offshore Limited ('Sinosteel International') to whom the impugned export has been made is one of its subsidiary. One of the observations made by the Shah Commission on page 51 of its Report is that some of the companies have their own front or associated companies registered outside India and exporting the iron ore to such companies from their mother company at low rate. In the instant case, Sinosteel International is a Chinese Government Enterprise and not a front or associated ITA.847 & 848/Bang/2015 Page - 15 company of the Appellant. The Appellant would not stand to benefit in any manner by exporting the iron ore to a Chinese government enterprise for a price less than the prevalent market price. Considering the above, the Pr. CIT ought not to have concluded that prejudice is caused to the interests of the Revenue on account of under- invoicing to a State-owned enterprise etc.
Thus, the AR submitted that the basis on which the Pr. CIT has come to the conclusion that the impugned order is erroneous, is contrary to the factual position, the condition prescribed u/s. 263 has not been satisfied and hence the order of the Pr.CIT is liable to be quashed. He also placed reliance on the decisions, viz Malabar Industrial Co Ltd vs CIT 243 ITR 0083 SC , CIT vs Anil Kumar Sharma 335ITR 083 Delhi, CIT vs Sunbeam Auto Ltd 227 CTR 133 Delhi , CIT vs Vikas Polymers 194 Taxman 57 Delhi, Kelvinator of India 320 ITR 561 SC etc.
We heard the rival contentions and gone through relevant material.
The facts remain that the impugned assessment was completed u/s. 153A rws 143(3) on 31.03.2013. The Government of India appointed a Commission of Enquiry under the Chairmanship of Shri M B Shah, former Judge of Supreme Court, on Illegal Mining of iron and manganese ore in the State of Goa. The Shah commission published its report in the month of October 2013 only, ie after the completion of the impugned assessment. It ITA.847 & 848/Bang/2015 Page - 16 dealt with the issue of under invoicing, evasion of taxes, duties and others. At page No.187 of Volume 2 of that report, it has been stated that the assessee company had shipped a consignment of iron lumps to China on 21.04.2007 weighing 50,650 metric tonnes and FOB value of Rs.9,90,33,413/-. The FOB rate per weighing metric tonne amounted to Rs,1,955/- (under invoicing to the extent of 53%). The extent of under invoicing was calculated on the basis of information provided by the Customs Department of Marmagao and Panjim ports for the year 2008-09.
The Shah Commission report is on the basis of average sale FOB price for the same grade of iron on the same day since it is based on the average freight on board (FOB). On a review of records, the Pr CIT found that the AO has not verified the pricing adopted by the assessee while making exports so as to examine whether there is any under invoicing resorted by them. The A O did not make any enquiries/verification and reconciliation of sales. Since the A O has not considered the issue of under invoicing by conducting necessary enquiries, on the transactions recorded by the Shah commission, the Pr. CIT held that his action resulted in under assessment and the same is erroneous and prejudicial to the interests of Revenue. On the other hand, the assessee could not furnish any material to dislodge the findings of the Pr. CIT to say that the AO has examined this issue and then recorded his findings in the impugned order. The Hon’ble jurisdictional High Court in the case of CIT v Infosys Technologies Ltd 17 taxmann.com 203 (Kar), held as an under :
ITA.847 & 848/Bang/2015 Page - 17
“24. In the present situation, the Commissioner having only directed the assessing authority to compute it or re-compute it and make it explicit as to the entitlement of the assessee, an order of this nature, in fact, could not have been contended as detrimental to the interest of the assessee, as it was always open to the assessee to justify the claim in terms of the double taxation avoidance agreements. In a situation of this nature, we are also of the opinion that it was not a case which warranted interference by the tribunal, more so for setting aside the order of the commissioner and for ensuring that the order passed by the assessing authority was left in tact.
We are also not in a position to accept the submission that, the materials had been placed before the assessing authority and therefore there should be a conclusion that the authority has applied his mind to the same and there was no question of the commissioner interfering by taking a different view etc.”
When the AO has not examined the impugned issue and did not record a finding in his order, his order clearly falls within the scope of Section 263 of the Act. In pursuance of Section 263, when the Pr. CIT passed an order holding that the assessee can demonstrate before the A O that the said transaction mentioned in the show cause notice did not pertain to them by producing necessary evidences and materials as explained in their submission. The AO should duly consider such evidence and make necessary enquiries and complete the assessment in accordance with law by giving reasonable and sufficient opportunity to the assesse before completing the assessment, such an order could not have been contended as detrimental to the interest of the assessee, as it was always open to the assessee to justify its claim as held by the Hon’ble jurisdictional High Court, supra. In view of that we do not find any merit in the assessee’s grounds of appeal and hence ITA.847 & 848/Bang/2015 Page - 18 they are dismissed.
In the result, both the appeals of the assessee are dismissed.
Order pronounced in the open court on 9th December, 2016.