INFINITY INFOTECH,KOLKATA vs. DCIT, CIR-2(1), KOLKATA, KOLKATA

The facts and circumstances under which the order u/s 263 of the Act was passed by CIT are as follows :- The Assessee is a company engaged in the business of development of software technology Park and related infrastructure. For A.Y.2012-13, the assessee filed return of income on 28.09.2014 disclosing a total income of Rs.17,55,09,500/-. An order of assessment dated 23.09.2014 u/s 143(3) of the Act was passed by the AO determining the total income at Rs.17,55,09,500/-.

The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue for the following reasons :-

The assessee by reply dated 11.01.2017 pointed out that there was no error in the order of AO and that all the above issues have been properly examined and dealt with by the AO in the order of assessment. The CIT after receipt of the aforesaid reply did not go into the correctness or otherwise of the contention of the assesse in the reply dated 11.01.2017 to the show cause notice u/s 263 of the Act, but came to the conclusion that the AO did not make proper enquiries on the various issues set out in the show cause notice issued u/s 263 of the Act. The following were the relevant observations of the CIT :- “In response to the said notice the assessee submitted written reply on 12.01.2017. The assessee has sought to justify its claim. However, he could not disagree that the necessary inquiries which were called for and expedient on the set of facts and circumstances were not carried out by the assessing officer. Nevertheless, the assessee's Ld A/R has made a valid point on the issue of disallowance of interest paid by the Assessee because the Ld. CIT(A) - 1, Kolkata in appeal no.828/CIT(A)-1/C-2(1)/2014-15 order dated 10.03.2016 had detected the interest disallowance made by the AO. Therefore, the issue concerning allowability of interest paid on borrowed funds was considered and decided by the Ld. CIT(A) in his appellate order and as a corollary to it and in terms of Clause (c) of the Explanation to Section 263 of I TAct, 1961 show cause notice on the limited issue of allowability of interest may not be proceeded with further. The assessee has argued vehemently on this issue. But regarding other issues, during assessment proceedings all details were not furnished before the AO. The AO passed the impugned assessment orders dated 23.09.2014 without making inquiries or verification which should have been made by the AO. He has failed to apply provisions of section 14A of I TAct, 1961 read with Rule 8D of IT Rules, 1962 correctly and faithfully.”

The CIT thereafter referred to several judicial pronouncements particularly that of the decision of the Hon’ble Delhi High Court in the case of Gee Vee Enterprises vs Addl. CIT 99 ITR 375 (Delhi) wherein it was held that failure on the part of the AO to make an enquiry on an issue which calls for an enquiry, in the given facts and ITA No.329/Kol/2017 Infinity Infotech Parks Ltd A.Y.2012-13 3

Aggrieved by the order of CIT the assessee has preferred the present appeal before the Tribunal.

Before we set out various contentions raised before us it has to be clarified that with reference to the interest cost of Rs.22.51 crores referred to in item-2 & 3 of the show cause notice u/s 263 of the Act dated 20.09.2016 of CIT, the CIT agreed that the issue with regard to the disallowance of interest u/s.14A of the Act was the subject matter of the appeal by the assessee before CIT(A) and that the CIT(A) had also considered the aforesaid issue and therefore the order of AO to that extent would merge with the order of CIT(A) and therefore jurisdiction u/s 263 of the Act cannot be exercised by CIT in view of clause-C of Explanation to section 263 of the Act. The CIT, however, has still thought it fit to come to the conclusion that the provisions of

The ld. Counsel for the assessee firstly pointed out that in the show cause notice u/.s 263 of the Act dated 20.09.2016 the CIT had not raised the issue of lack of enquiry on the part of the AO before completing the assessment except on item-4 with regard to the computation of long term capital gain and item-5 with regard to the expenditure debited in the profit and loss account under the head ‘Commission and brokerage’. In respect of the other issues raised by CIT in his show cause notice dated 20.09.2016 u/s 263 of the Act, the assessee has given a specific reply pointing out as how the order of AO on these issues was not erroneous and prejudicial to the interest of the revenue. The CIT without dealing with those objections, has proceeded to pass the impugned order on the ground of lack of enquiry by the AO. It was submitted by him that even in respect of computation of long term capital gain and expenditure on account of commission and brokerage even proper enquiries were made by the AO while completing the assessment. It was therefore submitted by him that the impugned order should be quashed for the reason that (a) the AO before completing the assessment had made proper enquiries with regard to computation of long term capital gain and expenditure on account of commission and brokerage. (b) in respect of other items the show cause notice u/s 263 of the Act did not contain the allegation that there was failure on the part of the AO to make and proper enquiries before completing the assessment but the order has been passed on that ground holding that order of the AO was erroneous and prejudicial to the interest of the revenue. It was his submission that the assessee was not put to notice at any stage of the proceedings u/s.263 of the Act, with regard to the other issues set out in the show cause notice u/s 263 of the Act, on the aspect of lack of enquiry by the AO before completing the assessment and therefore order of CIT should be quashed. In this regard it was also pointed out that the Hon’ble Supreme Court in the recent decision rendered in the case of CIT Vs. Amitabh Bhachan 384 ITR 200 (SC) has

The next submission of the ld. Counsel for the assessee was that when CIT’s specific objection in the show cause notice u/s 263 of the Act was met with adequate explanation he ought to have given his own specific finding on those objections and without doing so, the CIT cannot exercise jurisdiction u/s 263 of the Act. In this regard the ld. Counsel for the assesse placed reliance on the following decisions :- - DIT Vs Jyoti Foundation (357ITR 388) (Bom HC) - ITO Vs D.G. Housing Projects Ltd (343 ITR 329) (Bom HC) - CIT Vs Leisure War Exports Ltd (341 ITR 166) (Del HC) - C.S.E. Ltd Vs CIT (ITA No. 268/K/15) (ITAT Kol) - Crisil Ltd Vs Addl.CIT (142 TIK 62) (ITAT Mum)

The Ld. DR, on the other hand, submitted that the AO in the notice issued u/s 142(1) of the Act did not call for the books of accounts of the assessee. However in the order of assessment, he has made reference to the fact that books of accounts were produced by the assessee. He drew our attention to para-8 of the impugned order of CIT wherein the CIT has observed that the AO failed to examine the books of

We have given a very careful consideration to the rival submissions. We shall deal with each of the issues set out in the show cause notice dated 20.09.2016 of CIT and deal with them individually.

The first issue raised by CIT in the show cause notice dated 20.09.2016 is that in Form No. 3 CD of Tax Audit Report (TAR), the Assessee had claimed exemption of Rs. 76,00,000/- u/s 35 AC of the I.T. Act, 1961 apart from claim of exemption u/s 35(1)(iii) of Rs. 1,04,50,000/-. However, there was no mention of claim of exemption u/s 35AC of the Act in point no 29 of the form of return of income "Computation of income from business and profession". Exemption of Rs. 76,00,000/- u/s 35AC of the IT Act has been allowed in assessment but the same has not been claimed in the IT Return, as found from the records.

It is seen from the paper book filed by the Assessee that tax audit report filed before the AO by the Assessee in Para - 15 specifically states that the amount admissible u/s 35AC was Rs.76 Lacs. In Para - 15(a) the Auditor has provided the following specific information:

With regard to the issue on interest expenses debited in the profit and loss account of Rs.22.51 crores, the following transpired in the course of completion of assessment by the AO. In the course of assessment, the assessee had furnished before the AO full particulars of the interest/finance cost incurred during the relevant year. The Assessee had also furnished before the AO full particulars or the short term & long term borrowings made and which were outstanding as on 31.01.2012. The Assessee had also furnished before the AO full particulars of the investments which the Assessee

In a notice dated 28.7.2014 issued u/s.142(1) of the Act, the AO had during the course of assessment proceedings, specifically required the Assessee to furnish its explanation with regard to allowability of interest paid on borrowings in item No.21 of the said notice. In the record of proceedings before the AO in respect of hearings before the AO on 29.08.2014 & 04.09.2014, the AO had specifically directed the Assessee to submit explanation for disallowance of interest relatable to non- productive investment and has recorded the fact in the hearing conducted on 04.09.2014 that the Assessee had furnished his explanation.

It is material to submit that against the disallowance made by the AO out of interest paid the Assessee had filed appeal before the CIT (A). The CIT (A)-1Kolkata vide his order dated 10.03.2016 in Appeal No. 828/CIT(A)-1/C-2(1)/2014-15 after considering the AO's finding, deleted the interest disallowance made by the AO. Therefore the issue with regard to allowability of the interest paid on borrowings made had merged in the order of the CIT (A) and therefore in terms of Clause (c) of ITA No.329/Kol/2017 Infinity Infotech Parks Ltd A.Y.2012-13 10

The above discussion would show that as far as disallowance of interest expenses u/s.14A of the Act, the AO has applied Rule 8D(2)(ii) of the Act and determined the disallowance u/s.14A of the Act. The disallowance u/s.14A of the Act in terms of other direct expenses contemplated under rule 8D(2)(i) and other expenses contemplated under rule 8D(2)(iii) has neither been considered by the AO nor explained by the Assessee. To this extent there was lack of enquiry on the part of the AO. As we have already seen in the show cause notice u/s.263 of the Act dated 20.9.2016, the CIT was of the view that the disallowance u/s.14A of the Act ought to have been 66% of the interest expenses claimed by the Assessee as against a sum of Rs.75,24,000/- disallowed by the AO. However in the order passed u/s.14A of the Act when the Assessee pointed out that interest disallowance u/s.14A of the Act was already subject matter of appeal filed by the Assessee before CIT(A) and that the order of the AO had merged with the order of the CIT(A) and therefore jurisdiction u/s.263 of the Act cannot be invoked by the AO in view of Explnation (c ) to Sec.263(1) of the Act, the CIT has taken the plea of lack of full enquiry on applicability of Sec.14A of the Act. In this regard it is seen that the show cause notice u/s.263 of the Act issued by the CIT was dated 20.9.2016. The Assessee had filed his reply to the said show cause notice on 12.1.2017 and on the very same date, the CIT had passed the impugned order. It is thus clear that the Assessee was not put on notice that the CIT intends to invoke jurisdiction u/s.263 of the Act on the ground of lack of enquiry by the AO. It has been held by the ITAT Kolkata in the case of Damodar Valley Corporation Vs. DCIT (2016) 72 Taxmann.com 127 (Kolkata-Trib.) that the CIT can pass order u/s.263 of the Act on a ground other than the one set out in the show cause notice u/s.263 of the Act. The said position in law was laid down by the Hon’ble Supreme Court in the case of CIT Vs. Amitabh Bachan (supra) but with a rider that the Assessee should be given opportunity of the intended ground to be

In our opinion, the issue with regard to the disallowance of interest u/s 14A of the Act was the subject matter of the appeal by the assessee before CIT(A) against the order of assessment and the CIT had already decided the said issue prior to the impugned order of CIT and therefore the CIT cannot exercise jurisdiction on an issue which is already merged with the order of CIT(A). The disallowance u/s.14A of the Act in terms of other direct expenses contemplated under rule 8D(2)(i) and other expenses contemplated under rule 8D(2)(iii) has neither been considered by the AO nor explained by the Assessee. To this extent there was lack of enquiry on the part of the AO. However show cause notice u/s.263 of the Act dated 20.9.2016, the CIT was of the view that the disallowance u/s.14A of the Act ought to have been 66% of the interest expenses claimed by the Assessee as against a sum of Rs.75,24,000/- disallowed by the AO. However in the order passed u/s.14A of the Act when the Assessee pointed out that interest disallowance u/s.14A of the Act was already subject matter of appeal filed by the Assessee before CIT(A) and that the order of the AO had merged with the order of the CIT(A) and therefore jurisdiction u/s.263 of the Act cannot be invoked by the AO in view of Explanation (c ) to Sec.263(1) of the Act, the CIT has taken the plea of lack of full enquiry on applicability of Sec.14A of the Act. In this regard it is seen that the show cause notice u/s.263 of the Act issued by the CIT was dated 20.9.2016. The Assessee had filed his reply to the said show cause notice on 12.1.2017 and on the very same date, the CIT had passed the impugned order. It is thus clear that the Assessee was not put on notice that the CIT intends to invoke jurisdiction u/s.263 of the Act on the ground of lack of enquiry by the AO. Therefore exercise of jurisdiction u/s 263 of the Act on the issue of disallowance u/s.14A of the Act cannot be sustained and the impugned order to this extent is quashed.

The next issue considered by CIT in the show cause notice u/s 263 of the Act dated 20.09.2016 is with regard to computation of long term capital gain of Rs.60.05 crores. On this issue the allegation of the CIT in the show cause notice is that the AO did not call for any details or documentary evidence with regard to long term capital gain and he did not examine anything on this aspect. Examination of the record reveals that in the notice issued u/s 142(1) the Assessee was required to provide computation of total income and the same was furnished before the AO. The said computation statement contained a detailed working of the income under the head 'Long Term Capital Gain' assessable in A.Y. 2012- 13. In the proceedings before the AO vide record of proceedings (order-sheet entry) dated 04.09.2014, the AO directed the Assessee to submit details of LTCG appearing in the computation of income. The Order-sheet entry dated 08.09.2014 further shows that in the hearing conducted on that date, the Assessee had filed details of LTCG and also furnished related valuation report. The supporting documents with reference to long term capital gain are available at page 128 to 135 of the assessee’s paper book. At pages 128 to 130 of the paper book the assessee has given complete history of the fact giving rise to long term capital gain. Page 131 of the paper book is the notification in the official gazette by Government of West Bengal increasing the permission fee for transfer of lease hold rights in respect of lease granted by the Government of West Bengal. Page 133 is the statement of expenses incurred on the capital work in progress for the period upto 31.03.2011. Pages 134 and 135 are the letter of handing over the possession to the assessee by Godrej Waterside Properties Pvt. Ltd., the person who carried out the development. Pages 136 to 155 is the report of the valuer in support of the long term capital gain in the light of the documentary evidence filed by the assessee it cannot be said that there was no failure on the part of AO to make proper and adequate enquiries with regard to the computation of long term capital gain. The exercise of jurisdiction by CIT on this ground is therefore held to be unsustainable.

The next issue for consideration raised in the impugned order is non examination of commission and brokerage of Rs.1,16,10,615/- expenses by the AO before

The evidence filed by the Assessee in the course of assessment proceedings the assessee were details with regard to brokerage and commission namely copy of ledger of revenue expenditure at page 156 of the paper book, details of brokerage and commission paid during the year ended 31.03.2012 at page 157 of the paper book, details of legal fees paid for the year ended 31.03.2012 at page 158 of the paper book. In the light of the evidence filed as above it cannot be said that there is any failure on the part of the AO to make adequate and proper enquiries before completing the assessment on the aforesaid issue. Exercise of jurisdiction on this issue is therefore held to be not sustainable and the order u/s.263 of the Act to this extent is quashed.

The last issue set out in the show cause notice u/s 263 of the Act is with regard to depreciation on unsold building wrongly allowed by the AO. On this aspect the following aspects are noticed from perusal of the record. We have already seen that the Assessee is in the business of developing IT park and either selling the space so developed or giving it on lease with all amenities for operating a software development business. The "IT Park buildings" constructed and developed by the Assessee is always held and accordingly disclosed in the Assessee's books as "Fixed Assets" and not as "stock-in-trade" as alleged in the show cause notice.

It is also seen from the Assessee’s assessment records for AYs 2002-03 and onwards the block of "IT Park buildings" came into being and got recognized for tax purposes for the first time in AY 2002-03 when first phase of Assessee's project known as "Infinity Think Tank" got completed. In the assessment for the year under consideration as also for the earlier years, the nature of Assessee's business is considered as "Development of software Technology Parks and related infrastructure facilities for IT, ITES, Electronics etc". For the purposes of carrying on this business the Assessee had obtained on long term lease basis plots of land in Sector V, Salt Lake City from WEBEL a Govt. of West Bengal Undertaking, After the Assessee obtained the lease hold rights in the lands the Assessee developed its first Information Technology Park building known as Infinity Think Tank at Plot No, A3, Block GP, Sector V, Salt Lake City, Kolkata. The development and construction of the said IT Park building was completed in 2 phases. The first phase of the construction comprising of Tower I was completed ill AY 2002-03 and 2nd phase comprising of Tower II was Completed in AY 2006-07. Besides completing development of the said building the Assessee continued to operate and maintain the said building as Information Technology Park and derive income from lease rent and service charges which is assessed under the head profits & gains of business. The said IT Park was approved by the CBDT as an Industrial Park for the purpose of Sec 80IA(4) of the Act.

The Assessee similarly developed another IT Park Building known as Infinity Benchmark situated at Plot G 1, Block- EP&GP, Sector V, Salt Lake City, Kolkata. The development and construction of this IT Park got completed in FY 2008-09 relevant to AY 2009-10. The said IT Park building was also approved by the CBDT u/s 80IA(4) of the Act. The said I T Park was also .being operated and maintained by the Assessee during AY 2012-13 and income in the form of lease rent and service charges was assessed as our business income. These IT Parks comprised constructed spaces which were used for carrying on IT ITES businesses. Some parts of these buildings were leased by the Assessee on long term basis after collecting lump sum

It is also seen that in the Income Tax Assessments of the Assessee for AYs 2002- 03 & 2003-04 were completed u/s 143(1). The assessments for the AYs 2004-05 and onwards were however completed u/s 143(3) of the Act. While completing the assessments u/s 143(3) of the Act, the AOs have consistently allowed deduction for depreciation u/s 32 on the WDV of the block of fixed assets comprised in the IT· Park -including WDV of the buildings. Deduction for depreciation was allowed in the

The dispute with regard to the character of the IT Park building was again raised by the AO while faming the assessment order for the AY 2007 -08. In the return filed for AY 2007-08 the Assessee had claimed depreciation of Rs.4,17,62,205/- respect of Assessee's. IT Park being Infinity Think Tank, Towers I & 11. The AO noted that during FY 2006-07 Assessee granted long term lease of 6872 sq. ft of the developed space against lump sum lease premium of Rs. 2,40,95,000/-. Besides the Assessee received refundable deposit of Rs. 86,74,200/-. In AO's opinion both the sums totalling Rs.3,27,69,200 were in the nature of lease premium and therefore he considered it as the consideration received for granting long term lease. The AO further noted that for the purpose of computing depreciation allowance Assessee had reduced lease premium of Rs. 2,40,95,000/ - from the opening WDV of the building block and on the reduced WDV depreciation was claimed. In AO's opinion however the assessee should have offered "short term capital gain" on grant of long term lease of 6972 sq.ft of office space after deducting proportionate WDV of the office space. The AO computed the prorate WDV of the building attributable to 6972 sq.ft. at Re.l, 77,42,577 / -. Deducting such prorata WDV of the building block from the gross lump sum premium of Rs.3,27,69,200 / - (24095000 + 8674200) the AO assessed Rs.l,50,26,623/- as Assessee's "short term capital gain". Even though the AO assessed pro rata income on transfer of long term lease of 6972 sq.ft. of constructed

Thus in the appellate order for AY 2007-08 the CIT(A) specifically dealt with the nature and character of the IT Park building and held it to be "depreciable asset" whose WDV had to be dealt with in accordance with provisions of Sec 43(6) and Sec 50 of the I T Act. Since the CIT(A) found that only a part of the depreciable block was transferred by the Assessee and the proceeds realized on such transfer did not exceed the opening WDV of the building block, Sec 50 was not applicable. Even though the CIT(A) allowed the relief by deleting the addition made on account of prorata computation of short term capital gain the Commissioner of Income Tax did not recommend filing of second appeal against CIT(A)'s said finding. It will therefore be appreciated that in the AY 2007-08 the administrative CIT in principle accepted that the Assessee's IT Park building was its "depreciable asset. The CIT however recommended the appeal against the relief allowed by the CIT(A) in respect of

Thus in AY 2007-08 the CIT(A) and the ITAT concurrently considered the nature and character of the IT Park building and held the same depreciable asset on which depreciation was allowed. The orders of the and ITAT for the AY 2007-08 became final.

The IT Park buildings in respect of which depreciation was claimed and allowed in the order for AYs 2012-13 were brought forward from earlier years. In the regular assessments u/s 143(3) passed for all the earlier years depreciation allowance u/s 32 on actual cost/WDV of the block of the IT Park building as also on the plant & machineries and fixtures installed therein have always been allowed on the footing that these assets were "fixed assets” of the Assessee's business. In the audited accounts of the Assessee IT park building as also the plant & machineries installed therein have been capitalized. In the Balance Sheet the IT Park building as also the plant and machinery, fixtures installed therein have always been shown under the head “Fixed Assets". At no point in time in the past, any of the IT Park buildings were shown in the Assessee's books as forming part of the circulating capital or trading stock or as current assets, In all the past assessments beginning from Ays 2002-03 and onwards the AOs have always considered and treated the IT Park buildings, plant & machineries, fixtures situated therein to be part of the block of depreciable assets and accordingly the depreciation has always been allowed u/s 32. In view of the consistent ITA No.329/Kol/2017 Infinity Infotech Parks Ltd A.Y.2012-13 20

In respect of other items set out in the show cause notice u/s 263 of the Act where there was no allegation that there was failure on the part of the AO to make and proper enquiries before completing the assessment, the CIT in the impugned order has held that the order of the AO on those items were also liable to be set aside on that ground holding that order of the AO was erroneous and prejudicial to the interest of the revenue. In this regard it is seen that the show cause notice u/s.263 of the Act issued by the CIT was dated 20.9.2016. The Assessee had filed his reply to the said show cause notice on 12.1.2017 and on the very same date, the CIT had passed the impugned order. It is thus clear that the Assessee was not put on notice that the CIT intends to invoke jurisdiction u/s.263 of the Act on the ground of lack of enquiry by the AO. It is also seen that when CIT’s specific objection in the show cause notice u/s 263 of the Act on issues other than the issues on which the CIT in his show cause notice has alleged lack of enquiry on the part of the AO, the Assessee has given his explanation as to how on those issues the order of the AO was not erroneous. The CIT before exercising jurisdiction u/s.263 of the Act by setting aside the order of the AO, ought to have given his own specific finding on those objections and without doing so, the CIT cannot exercise jurisdiction u/s 263 of the Act. The Hon’ble Delhi High Court in the case of ITO Vs. D.G.Housing Projects Ltd. (supra) has taken the view that while the AO is both an investigator and an adjudicator, a distinction has to be drawn between a case where the AO has not conducted any enquiry or examined any evidence whatsoever (“lack of inquiry”) from one (i) where there is enquiry but the findings are erroneous; and (ii) where there is failure to make proper or full verification or enquiry (“inadequate inquiry”). The fact that the assessment order does not give any reasons for allowing the claim is not by itself indicative of the fact that the AO has not applied his mind on the issue. All the circumstances have to be seen. A case of lack of enquiry would by itself render the order being erroneous and prejudicial to the interest of the Revenue. In a case where there is inquiry by the AO, even if inadequate, the CIT would not be entitled to revise u/s 263 on the ground that he has a different opinion in the matter. Also, in a case where the AO has formed a wrong opinion or finding on merits, the CIT has to come to the conclusion and

In the following cases, similar proposition has laid down by Hon’ble High Courts as well as various Benches of ITAT :- - DIT Vs Jyoti Foundation (357ITR 388) (Bom HC) - CIT Vs Leisure War Exports Ltd (3411TR 166) (Del HC) - C.S.E. Ltd Vs CIT (ITA No. 268/K/15) (ITAT Kol) - Crisil Ltd Vs Addl.CIT (142 TIK 62) (ITAT Mum)

We therefore agree with the submission of the learned counsel for the Assessee that when CIT’s specific objection in the show cause notice u/s 263 of the Act was met with adequate explanation he ought to have given his own specific finding on those objections and without doing so, the CIT cannot exercise jurisdiction u/s 263 of the Act. Even on this ground the order u/s.263 of the Act, in so far it concerns, issues other than the issues for which the allegation in the show cause notice was lack of enquiry on the part of the AO before concluding the assessment rendering the order of the AO erroneous and prejudicial to the interest of the revenue.

For the reasons given above we are of the view that jurisdiction u/s 263 of the Act in the facts and circumstances of the case was not proper. Accordingly order u/s 263 of the Act is quashed and the appeal of the assessee is allowed.

In the result the appeal by the assessee is allowed.