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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI P. K. BANSAL & SHRI PAWAN SINGH
PER P. K. BANSAL:
This appeal is filed by the assessee against the order of the Principal Commissioner of Income Tax-32, Mumbai dated 22/03/2016 passed u/s 263 of the I.T. Act.
At the very outset, it was noticed that the present appeal is barred by limitation by 112 days. The assessee has submitted an application dated 19th September, 2016 for condonation of delay explaining the reasons for the delay in filing the appeal. Finding force in the submission of the assessee made in the condonation application and being satisfied with the same, we condone the delay of 112 days and admit the appeal for hearing.
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The only issue involved in various grounds taken by the assessee is that the order passed by the Principal Commissioner of Income Tax cancelling the assessment order and directing the Assessing Officer to reframe the assessment as per the direction given in the impugned order passed u/s 263 is bad in law inasmuch as the order of the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue. The Principal Commissioner of Income Tax has not appreciated the facts and law correctly and hence arrived at incorrect conclusion.
The facts of the case, in brief, are that the assessment u/s 143(3) of the I.T. Act was completed in this case vide order dated 31/01/2014 by ACIT-25(2), Mumbai at a total income of nil. The Principal Commissioner of Income Tax called for the record and was of the opinion that the order passed by the Assessing Officer is erroneous in so far it is prejudicial to the interest of the Revenue. Accordingly, he issued show cause notice dated 03/03/2016 to the assessee as to why proceedings u/s 263 should not be initiated against him and the assessment order passed be revised. The said show cause notice gives the following reasons:
“3. From the perusal of records, it is seen that :-
i. The assessee has neither followed the Project Completion Method nor the Percentage Completion Method as is evident from the details filed during the assessment proceedings. As per the chart furnished with regard to advances received and sale deeds executed for F.Y.2009-10 & F.Y.2010-11, it is noticed that in some of the cases the assessee has received entire sale consideration and executed the sale deeds in the years mentioned.
From the aforementioned details, it is clear that in respect of the above cases, the assessee has completed the project and risk and reward has been transferred as such the project to that extent was completed and accordingly as such
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as per the Project Completion Method also the income pertaining to the above sale deeds executed and consideration received was required to be brought to tax in respective year.
From the AIR details, it also noticed that the assessee has not shown any sale during the year under consideration whereas during the F.Y. 2010-11 the assessee has executed 5 sales deeds for a consideration of Rs.4,59,17,000/-.
ii. It is also noticed that in the Profit and Loss Account, the assessee has claimed expenses of Rs.42,32,511/- which includes cost of interest on loans of Rs.26,35,150/- and interest to partners of Rs.15,83,065/-. The assessee has not shown any sale during the year under consideration as such the entire interest of Rs.26,36,150/- was to be added to the WIP but the assessee has claimed a loss Rs.42,32,511/- which is not allowable due to matching concept of income and expenditure.
iii. The assessee has received interest of Rs.5,11.472/- on FDs. The assessee has not shown any income and the interest has been reduced from the value of inventory which is not correct as the interest income on FDs is to be taxed under the head Income from Other Sources.
In view of the above, it is evident that while completing the assessment, the Assessing Officer has failed to carry out necessary verification to examine the genuineness of assessee's claim of loss. Considering this, income of the assessee was under assessed. As such the assessment order passed by Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue on this issue and therefore, need to be revised under the provision of section 263 of the I.T. Act to disallow such claim of expenses not allowable and compute the correct income of the assessee.”
4.1 In reply thereto the assessee, vide its letter dated 10/03/2016, made the submission before the Principal Commissioner of Income Tax that the assessment is neither erroneous nor prejudicial to the interest of the Revenue, the copy of which is available at pages A1 to A9 of the
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paper book. Briefly, in respect of point No. 1 regarding the non following of the project completion method or percentage completion method, it was submitted that the assessee followed project completion method and offered sale in the year of the completion of the project. This fact has duly been submitted before the Assessing Officer vide letter dated 21/08/2013 and 03/10/2013. In the impugned assessment year, since the project was still under consideration, the assessee offered the income when the project was completed. The project was partly completed in the financial year 2011-12. The copy of occupancy certificate dated 11/05/2011 was filed to prove that the project was completed during the financial year 2011-12 relevant to assessment year 2012-13 in which the assessee has offered the revenue. The sale deeds were executed in favour of the buyer as per the terms of agreement to sell but the possessions were handed over to the buyer only when the project was fully completed. A project is said to be fully completed when the assessee obtains the occupancy certificate from the appropriate authority. Passing of the legal title is merely to comply with the conditions stipulated in the sale deed. Until the project is completed fully, possession cannot be handed over to the buyer. In this regard the reliance was placed on the Accounting Standards Interpretation on Recognition of Revenue by Real Estate Developers, issued by Accounting Standard Board, The Institute of Chartered Accountants of India in which it is stated that revenue in case of Real Estate sales should be recognized when the following conditions are satisfied:
“The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate transferred to a degree usually associated with ownership.”
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Until and unless the possession is delivered, it cannot be said that all significant risks and rewards of ownership are transferred. The assessee has undertaken substantial work during the financial year 2011-12 which is reflected from the coast of the project incurred during the said year amounting to Rs.6,51,61,222/- which consists of compensation paid to the tenants Rs.1,13,94,378/-, contract charges Rs.92,35,741/-, facility charges Rs.4,09,126/-, lifts Rs.84,48,488/- and fire fighting equipments Rs.6,55,504/-, purchase of misc. material, doors etc. Rs.1,39,75,560/- and electrical expenses Rs.4,59,463/-. Thus, the total cost incurred during financial year 2011-12 was Rs.6.51 crore while in the financial year 2010-11 it was only Rs.4.28 crore. The project was partly completed during financial year 2010-11 and part occupancy certificate was obtained in the financial year 2011-12. Merely the property has been registered in favour of the buyer does not necessarily imply that the project has been completed.
4.2 In respect of the interest claim to the extent of Rs.42,18,215/-, it was stated that the said interest is paid on the loan taken from various parties on partner’s capital. Interest cost is a period cost and hence debited to the profit & loss account. All the direct cost expenses related to the project have been considered as work-in-progress while the interest cost being indirect cost has been considered as revenue expenses. In the preceding years also, the assessee has debited the interest to the profit & loss account and such interest was allowed as deduction. The claim of the interest made by the assessee, presuming but not accepting the fact, that even if the said interest were to be added to work-in-progress in assessment year 2011-12, the loss of Rs.42,32,511/- would have been reduced by that extent and the loss to be carry forward to assessment year 2012-13 would be reduced and there
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would not be any tax implication. In respect of interest income, it was stated that the same has been offered to tax under the head ‘income from business & profession’. It should have been considered as business income as it was made out of idle working in capital funds. Interest income has been offered for tax and has not been reduced from work-in- progress of the project but that would not have any impact on the loss to be carry forward for that year as the interest income if would not have been considered under the head income from business and profession would have been considered the income from other sources. Mere change of head of income with no tax implication would not result any prejudice to the Revenue. It was specifically stated that the Assessing Officer issued the notice u/s 143(2) as well as 142(1) along with the questionnaire and made all necessary inquiry and after making all the necessary inquiry, as he deemed fit, the Assessing Officer ultimately completed the assessment. The Principal Commissioner of Income Tax did not agree with the contention of the assessee and cancelled the assessment order by observing as under:
“5. I have considered the facts of the case assessment records and assesses’s submission. It is not in dispute that the case was selected for scrutiny to examine the taxability of sale of property as reported in AIR. From the perusal of records and details filed before me it is seen that :-
(i) In the notes on Accounts in A. Y. 2010-11 the assessee has mentioned as under:-
“3. Revenue recognition
Revenue from sale of finished properties/buildings is recognized on transfer of property and once significant risks and rewards of ownership have been transferred to the buyer.
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Revenue from sale of incomplete properties is recognized on the basis of percentage of completion method determined on the basis of physical proportion of the work completed, as certified by the Firm’s technical personnel in relation to a contract or a group of contracts within a project only after the work has progressed to the extent 35% of the total work involved. Variations in estimates are updated periodically by technical certification. Further, revenue recognized in the aforesaid manner and related costs are both restricted to 90% until the construction activity and related formalities are substantially completed.”
In A.Y. 2011-12 there is a change in the accounting Policy and the assessee has shifted the revenue recognition from Percentage Completion Method to Project Completion Method. In view of this change the Auditor was required to report the changes and impact of the change in the Accounting Policy in Column No. 11(h)&(c) of form 3CD. The Auditor has failed in reporting the change in Accounting Policy as well as impact therof in determining profit of the year under consideration. As a result of change in accounting policy the assessee has not disclosed the revenue on account of sale of properties for which the sale deeds were executed and a substantial work of more than 35% was completed. During the course of assessment proceedings the AO has failed in examining this aspect which has resulted in under assessment of income.
(ii) The assessee’s submission filed on 17.03.2016 at point no. 11 is inconsistent to the extent that the details with regard to Architect’s letter dated 25.02.2012 as well the application filed before the comptent authority for issuance of occupancy certificate dated 06.03.2012 were submitted during the original assessment plroceedings. This aspect was never examined by the AO while completing the assessment. As such the AO has failed to ascertain the date of completion of the project.
(iii) The assessee’s contention that the major work was completed in F.Y. 2011-12 relevant to A.Y. 2012-13 is factually incorrect as the WIP as on 31.03.2011 has been shown of Rs.16,55,35,103/- and in subsequent F.Y. 2011-12 the value addition is of Rs. 6.51 crores only which shows
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that a substantial work was completed upto A.Y. 2011-12. This aspect has not been examined by the AO while completing the assessment.
(iv) Assessing Officer has not at all examined the AIR details and the income shown by the assessee during the assessment proceedings. During the year under consideration in the profit and loss account the assessee has claimed a loss of Rs. 45917000/-. The assessee has received interest of Rs. 511472/- on FD’s as per AIR. The assessee has not shown any income under the head income from other sources and it was reduced from the value of inventory.
(v) Further during the course of scrutiny assessment proceedings, the assessee has also furnished a chart which shows that the project was started in F.Y. 2008-09 and advances were received from F.Y. 2009-10 till F.Y. 2012-13 In F.Y. 2012-13 the assessee has claimed that the project was completed and profit of Rs. 19949963/- was declared in the F.Y. 2012-13 relevant to A.Y. 2013-14. Where as in the submission dated 17.03.2016 submitted during the proceedings u/s 263, the assessee in para 2 of the said submission claimed that the construction of the project was completed in F.Y. 2011-12. Therefore, the assessee has offered revenue in the F.Y. 2011-12, relevant to A.Y. 2012- 13. It shows that the assessee’s submissions are contradictory to its claim.”
Learned counsel for the assessee vehemently contended before us that the order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue. The Assessing Officer has duly examined all the three issues. The assessee has given complete details in this regard during the course of hearing. Our attention was drawn to the fact that the assessee was following the project completion method to page No. 8 para 3, page No. 9 Note No. III to the audit report, page Nos. 13 & 14 as well as the copy of the details filed at page Nos. 123, 126, 127, 131, 133 and 135 of the paper book. Similarly in respect of interest
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income as well as interest expenses, our attention was drawn towards page Nos. 124, 136 and 138 of the paper book. It was also contended that the project completion method has duly been accepted by the Assessing Officer even during the assessment year 2012-13 and for which attention was drawn towards the copy of the assessment order passed u/s 143(3) which is available at pages 139 and 140 of the paper book. Reliance was also placed on the submissions made before the Principal Commissioner of Income Tax in response to show cause notice issued u/s 263 of the Act. In respect of the interest on the borrowed capital, reliance was placed on the decision of Hon'ble Jurisdictional High Court in the case of CIT vs. Lokhandwala Construction Inds. Ltd. [2003] 260 ITR 579 (Bom) in which it was held that the interest on borrowed capital for obtaining the stock in trade is a revenue expenditure.
Learned D. R., on the other hand, relied on the order passed by learned Principal Commissioner of Income Tax u/s 263 of the I.T. Act.
We have heard the rival submissions and carefully considered the same along with the order of the tax authorities below before deciding the order passed by the CIT u/s 263 is valid or not, it is necessary to discuss the provisions of section 263 which are stipulated as under:-
“263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
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Explanation-I.-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section, - (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include - (i) an order of assessment made by the Assistant Commissioner or Deputy Director or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the power or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120; (b) "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (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 Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. 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 ; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119 ; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by
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the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.” (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court. Explanation.-In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”
From the perusal of the aforesaid section, it is apparent that there are four main features of the power of revision to be exercised u/s 263 by the Commissioner of Income-tax. Firstly, the Commissioner may call for and examine the records of any proceedings under the Act and for this purpose he need not to show any reason or record any reason to believe as is required u/s 147 or 148(2). It is a part of his administrative power to call for the record and examine them relating to any assessee which falls under his jurisdiction. Secondly, he may consider any order passed by the Assessing Officer as erroneous as well as prejudicial to the interest of the Revenue. This is exercised by calling for and examining the record available at this stage. There is no question of the assessee to appear and make submission at this stage. Thirdly, if after calling for and examining the records the Commissioner considers that the order of the Assessing Officer is erroneous in so far it is prejudicial to the interest of the Revenue, he is bound to give an opportunity to the assessee of being
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heard and after making or causing to be made such enquiry as he may deem fit, pass such order thereon as the circumstances of the case may justify including an order enhancing or modifying the assessment or cancelling assessment and directing a fresh assessment. This empowers the CIT to cause or make such enquiries as he deems necessary. Fourthly, the CIT u/s 263 can enhance or modify the assessment as a result of enquiry conducted and hearing of the assessee.
For invoking the provisions of section 263, both the conditions that the order passed by the A.O. is erroneous and also that it is prejudicial to the interest of Revenue must be satisfied. If one of them is absent, the provisions of section 263 cannot be invoked. The term ‘erroneous’ has not been defined under the Income-tax Act but it is well settled that each and every type of mistake or error committed by the A.O. cannot be said to be an error. The expressions ‘erroneous’, ‘erroneous assessment’ and ‘erroneous judgment have been defined in Black’s Law Dictionary, Sixth Edition, page 542. According to the definition, ‘erroneous’ means ‘involving error, deviating from the law’. ‘Erroneous assessment’ refers to an assessment that deviates from the law and is therefore invalid, and is defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, ‘erroneous judgement’ means ‘one rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles’. Thus, an order can be said to be erroneous if there is incorrect assumption of facts or incorrect application of law by the A.O. If the A.O. after making the enquiries and examining the records taken one of the possible view, it cannot be said that the order passed by the A.O. was erroneous until and unless the view taken by the assessing officer is unsustainable in law. If
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the assessing officer has not carried out any enquiry, it can be said that the order passed is erroneous as due process of legal principals have not been followed. From the show cause notice of the CIT, it is apparent that the CIT has treated the order to be erroneous as well as pre-judicial to the interest of the revenue as the assessing officer has not examined the effect of change in accounting policy from percentage completion method to project completion method. The Ld. AR relied in this regard on certain decisions also and submitted that inadequacy of enquiry according to the whims and caprice of CIT does not give jurisdiction to the CIT to invoke section 263 and set aside the assessment. Now, the question before us is whether the assessing officer has examined each and every issue relating to the question which has been raised by the CIT in the show cause notice and after examining the same he has taken a conscious decision to make the addition to the extent, he found it to be justified or he did not make the addition as he is satisfied with the disclosure made by the assessee in the returns filed by him. Whether the income in respect of which the AO has not made any addition is duly supported by the disclosure made by the assessee in the return filed.
The first issue in respect of which the Principal Commissioner of Income Tax has exercised the jurisdiction u/s 263 of the Act relates to the project completion method adopted by the assessee. We noted the fact that the assessee has followed the project completion method and this fact has duly been mentioned by the assessee in the accounting policies and notes forming part of the accounts as given at page No. 8 of the paper book which reads as under:
“Revenue Recognition
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Revenue from sale of finished properties / buildings is recognized on transfer of property and once significant risks and rewards of ownership have been transferred to the buyer.
The partners of the firm have changed the accounting policy to project completion method. Looking at the type of project - redevelopment project and the extent of the work completed, the partners are of the view that project completion method would be more appropriate. The accounting during the year has been done accordingly.”
The assessee has also mentioned this fact again as Note No. III, which reads as under:
“The firm has followed the accounting policy of project completion method. The firm is currently carrying out the only project of redevelopment of a building. As on 31st March 2011, the project of the firm has not been completed up to a reasonable stage from which the financial result can be reliably measured. Accordingly the firm has changed the accounting policy to completed project method.”
10.1 Even we noted that the assessee has stated this fact subsequently to the Assessing Officer in reply to the notice u/s 142(1) vide his letter dated 21/08/2013, the copy of which is available at page No. 123 of the paper book that the assessee follows the project completion method and therefore, no sales are recorded during the year under consideration. Even the assessee has stated this fact before the Assessing Officer vide his letter dated 3rd October, 2013 when the Assessing Officer subsequently asked the assessee in respect of the AIR transaction entered into by the assessee in respect of five flats during the year, the copy of which is available at pages 126 and 127 of the paper book that the assessee follows the project completion method and thus, the assessee records the sale only during the year when the project is completed. Not only this, the assessee has given complete details party-
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wise in respect of the area booked by him which is available at pages 131 and 132 of the paper book. Thus, we noted that this is a case where the assessee has duly explained to the Assessing Officer in response to the notice u/s 142(1) that the assessee has changed the revenue recognition method to project completion method and the assessee thereafter consistently following the project completion method. This fact has duly been examined and verified by the AO. The assessee has not shown any sale during the impugned assessment year as he was following the project completion method. Thus, this is not a case of lack of inquiry on the part of the Assessing Officer so far as following the project completion method by the assessee is concerned.
10.2 The second issue on the basis of which the Principal Commissioner of Income Tax invoked the jurisdiction u/s 263 relates to the claim of loss by the assessee at Rs.42,35,011/- in respect of interest paid by the assessee during the year. According to the Principal Commissioner of Income Tax, the interest should have been added to the work-in-progress instead of claiming it as a deduction. We noted that this issue is duly covered by the decision of Hon'ble Jurisdictional High Court in the case of CIT vs. Lokhandwala Construction Inds. Ltd. [2003] 260 ITR 579 (Bom) in which the Hon'ble High Court has held that the interest paid by a builder following a project completion method of accounting was allowable in the year of the payment in accordance with the provisions of section 36(1)(iii) of the Act. The fact that the assessee has claimed this expenditure as a deduction is apparent from page No. 136 of the paper book. The Assessing Officer has duly looked into this issue.
10.3 Similarly in respect of interest received, which is the third reason for invoking the jurisdiction u/s 263 of the Act, we noted that the
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assessee has duly shown bank interest on FDR as its income in the profit & loss account, the copy of which is available at page No. 3 of the paper book. Even vide letter dated 21/02/2013, the assessee has referred to the computation statement of the income during the year. The details of the interest received were also submitted before the Assessing Officer when inquired of as per page 124 of the paper book. This proves that the Assessing Officer was duly informed by the assessee during the course of hearing in respect of the interest income shown by the assessee. This is not a case where the Assessing Officer has not made the inquiry and completed the assessment just accepting the return filed by the assessee. In our opinion, the Principal Commissioner of Income Tax cannot enter into the shoes of the Assessing Officer if the Assessing Officer has taken one of the possible view. Until and unless the view taken by the Assessing Officer is unsustainable in law, the Principal Commissioner of Income Tax cannot take action u/s 263 holding that the order passed by the Assessing Officer to be erroneous. If the Assessing Officer had made the inquiry and duly considered the evidence as submitted and on the basis of such inquiry he has taken the view in favour of the assessee, that does not empower the Principal Commissioner of Income Tax to invoke the jurisdiction u/s 263 of the Act unless the view taken by the Assessing Officer is unsustainable in law. This is not a case of lack of inquiry.
10.4 We have examined Explanation 2 to section 263 which is inserted by the Finance Act, 2015 with effect from 01/06/2015. This explanation empowers the CIT from 01.06.2015 to invoke the provision of section 263 to the assessment order to be erroneous in so far as it is prejudicial to the interest of the revenue, if, in the opinion of the Principal CIT,-
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(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; (c) the order has not been in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”
No doubt clause (a) of this explanation deems the order to be erroneous and prejudicial to the interest of the revenue in case order is passed without making enquiries or verification which should have been made in the opinion of the Principal Commissioner or Commissioner. In our opinion, for the applicability of clause (a) of Explanation, it is necessary that the Principal Commissioner must mention in the order what inquiries or verification the Principal Commissioner desires to have been carried out by the Assessing Officer. The Principal Commissioner in this case even though stated that the Assessing Officer failed to examine during the course of the assessment proceedings the affect of change in the accounting policy on the Revenue not disclosed by the assessee but did not point out what type of inquiry or verification should have been carried out in this regard by the AO. How non examination of this aspect has resulted in under assessment. The order passed by the AO, in our opinion, shall be deemed to be erroneous in so far as prejudicial to the interest of the Revenue if the Principal Commissioner would have specifically pointed out which of the inquiries or verification should have been carried out by the AO in this regard and the AO failed to carry out those inquiries and verification as desired by the Principal Commissioner.
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Since the Principal Commissioner has not suggested the basis of the inquiry or verification to be carried out by the AO, the order passed by the AO cannot be deemed to be erroneous in so far as it is prejudicial to the interest of the Revenue.
Coming to the contention of the Ld. AR that it is not necessary that Assessing Officer to discuss in the order of the contentions of the assessee, we do agree with the Ld. AR that there is no provision in the Income Tax act which provides that the Assessing Officer should passed the assessment order in the manner so that all the queries raised by him as well as submission made by the assessee should be incorporated in the assessment order. In our opinion, where the Assessing Officer do not agree with the assessee he should discuss the same in the assessment order so that the assessee should know the reasons thereon and file the appeal. In this case the Assessing Officer after examining the issue on the points as has been referred by the CIT preferred not to make the addition. Therefore, in our opinion there is no error in order of the Assessing Officer if he has not discussed the issue relating to each and every issue in the assessment order. It is only the query raised by the Assessing Officer and the submission made by the assessee will speak of where the Assessing Officer has applied his mind or not. We find the Hon’ble Bombay High Court in the case of CIT Vs. Gabriel India Ltd. 203 ITR 108 Bombay (1993) has held in this regard as under:
"Held, that the Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. All these were part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the
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assessee. This decision of the Income-tax Officer could not be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-examine the matter. That was not permissible. The Tribunal was justified in setting aside the order passed by the Commissioner of Income- tax under section 263."
Similar view has been taken by the Hon’ble Allahabad High Court in the case of CIT vs. Mahender Kumar Bansal, 297 ITR 0099 in which respectfully following the decision of Allahabad High Court in the case of CIT vs. Goyal Private Family Specific Trust, 171 ITR 698 (Alld.) has held under para no.12 as under :-
“As held by this Court in the case of Goyal Private Family Specific Trust (supra,) we are of the considered opinion that merely because the ITO had not written lengthy order, it would not establish that the Assessment Order passed under section 143(3)/148 of the Act is erroneous and prejudicial to the interest of the Revenue without bringing on record specific instances, which in the present case, the CIT has failed to do.”
A perusal of the order passed by the CIT indicated that the assessment order passed by the Assessing Officer was cancelled on the ground that the Assessing Officer has not made proper enquiry and verification in respect of the issue as discussed above. This, in our considered opinion, cannot be sufficient ground for cancelling the assessment. While making the assessment order, it is the satisfaction of the Assessing Officer who made the enquiry and it should be touchstone
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of assessment order passed by him. No cogent material or evidence was brought to our knowledge by the Ld. DR which may prove that view taken by the Assessing Officer in the case of the assessee was unsustainable in law. Therefore, we are of the view that the order passed by the CIT is illegal and without jurisdiction. If the order passed by the CIT is sustained then this will permit the illegality to continue and the subsequent action is carried out on the illegal order is also illegal per se.
We find this case of the assessee is duly covered by the decision of
the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs.
CIT 243 ITR 83 (SC) wherein their lordships has held as under:
"The pre-requisite to the exercise of jurisdiction by the Commissioner under section 263 is that the order of the AO is erroneous insofar as it is prejudicial to the interests of the revenue. The commissioner has to be satisfied of twin conditions, namely, (i) the order of the assessing officer sought to be revised is erroneous; and (ii) is prejudicial to the interests of the revenue. If one of them is absent- if the order of the Assessing office is erroneous but is not prejudicial to the revenue - recourse cannot be had to section 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the assessing officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interest of the revenue' has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of the order of the assessing officer cannot be treated as prejudicial to the interests of the revenue.
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For example, if the assessing officer has adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the assessing officer has taken one view with which the commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the assessing officer is unsustainable in law. Where a sum not earned by a person is assessed as income in his hands on his so offering the order passed by the assessing officer accepting the same without application of mind as such will be erroneous and prejudicial to the interest of the revenue."
In the case of CIT vs. R.K. Construction Co., Hon’ble Gujarat High
court 313 ITR 65 (Guj.) as confirmed by supreme court, confirming the
order of the ITAT for which the undersigned was the author, has held as
under:-
“The details of sub-contractors examined by the AO as per the directions of CIT in revision proceedings, inter alia, include the names of these sub-contractors, their permanent account numbers, their permanent addresses, amount given to them, name of work entrusted to them, nature of such work and statements recorded by the AO, etc. These details reveal that during the course of examination under s. 131, no question was put to many of these sub-contractors as to the variation in their signatures. Similarly, no question was put to them for the reasons of discounting with the Shroff. It is the stand of the assessee right from the beginning that all these sub-contractors were mainly working for the assessee and they did not have any office set up and since they were working for the assessee, they have used assessee’s address for correspondence, especially with the Government for timely communication. These persons are eligible under s. 44AD to file their returns under presumptive scheme of taxation. All these persons were produced before the AO in revision proceedings and no question was put to
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them though their statements on oath were recorded. All these persons have confirmed in revision proceedings that the money was not returned by them to any person and was used for their personal benefit. The payments were made to these persons by banking channels and tax was deducted at source in accordance with law. The assessee has also given complete details with respect to labour expenses called for in assessment proceedings. These details were duly verified by the AO with the books and records. No adverse observation was made by the AO and hence, no addition was made in the regular assessment. The AO has also randomly selected two labourers and examined them and their statements were recorded under s. 131. Since all necessary details were furnished by the assessee, there was no reason for the CIT to invoke the revisional jurisdiction under s. 263. The CIT has not stopped merely by issuance of notice under s. 263. Once compliance is made, he went on issuing notice after notice and certain adverse inference were drawn by him from the details collected by him during the revisional proceedings. Those details were thoroughly checked and examined by the Tribunal and it arrived at a factual finding that there was no illegality committed by the assessee in entrusting the work to sub-contractors nor there was any illegality in making all due payments to them. The Tribunal has also given specific finding to the effect that there was no evidence on record that these contractors were related to the assessee or were associates or sister concerns of the assessee. The Tribunal has also given finding that the Revenue has not discharged the onus that the payments to sub-contractors were not genuine. Thus the Tribunal has come to the conclusion that no disallowances can be made merely on the basis of suspicion, howsoever strong may it be, and the suspicion cannot take the place of actuality. AO has taken a particular view on the basis of evidence produced before him. On the basis of the said material and materials which were collected by the CIT in revisional proceedings, the CIT has taken a different view. However, in the revisional proceedings under s. 263, it is not open for the CIT to take such a different view. No substantial questions of law arise out of the order of the Tribunal and hence, the appeal filed
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by the Revenue deserves to be dismissed. – CIT vs. Arvind Jewellers (2002) 177 CTR (Guj) 546 : (2003) 259 ITR 502 (Guj) and Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) relied on).”
In our opinion, the impugned case is duly covered by this decision also.
Hon’ble Supreme Court in the case of CIT vs. Max India Limited,
295 ITR 282 (SC) has held as under :-
“The phrase “prejudicial to the interests of the Revenue” in section 263 of the Income-tax Act, 1961, has to be read in conjunction with the expression “erroneous” order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when the Assessing Officer adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the Assessing Officer is unsustainable in law.”
We have also gone through the decision of CIT vs. Vodafone Essar
South Ltd. 212 Taxmann 184 (Del.) on which the ld . AR vehemently
relied. In this decision, we noted that the Hon’ble High Court relied on
the earlier decision of the High Court in the case of CIT vs. Sunbeam Auto
Ltd., 332 ITR 167 in which it was held that if there is some inquiry by the
AO in the original proceedings, even if inadequate, that cannot clothe the
Commissioner with jurisdiction u/s 263 merely because he can form
another opinion. At the most the case of the assessee can be regarded to
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be the lack of inquiry in accordance with CIT if he has different opinion
how to proceed with the assessment of the assessee.
Similar view has been taken by Hon’ble Delhi High court in the
case of CIT Vs Software Consultants 341 ITR 240 (Del.) in which it has
held as under :-
“The assessee-company did not file its return of income for the assessment year 1993-94. During the course of assessment proceedings for the assessment year 1997-98, it was noticed that the central Bureau of Investigation had conducted search in the premises in which fixed deposit receipts worth Rs.20 lakhs relating to assessment year 1993-94 were found in the possession of P, a director of the company. However, P claimed that the fixed deposits though in her name, actually belonged to the assessee. This stand was accepted by the Commissioner (Appeals) in the appeal filed by P. Thereafter, the Assessing Officer in the case of the assessee issued notice under section 148 of the income-tax Act, 1961. In response to this notice, the assessee filed a return showing loss of Rs.1,02,756. By assessment order the Assessing officer accepted that the assessee had established and proved the source and its capacity to invest Rs. 20 lakhs and accordingly no addition was made on this account. In this assessment order the Assessing Officer had also noted that during the year share application money was increased by Rs. 47 lakhs. In order to verify the genuineness of share application money summonses under section 131 of the Act were issued to persons on random basis and their statements were recorded for confirming these investments made by them in the assessee-company. The Commissioner under section 263 of the Act directed the Assessing Officer to conduct further enquiries in respect of the share application money of Rs. 47 lakhs. He also held that the Assessing Officer had erred in determining the loss after issue of notice under section 148 of the Act. He mentioned lacunas and defects in the
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statements of the seven share applicants and the manner in which they were recorded. Accordingly, he held that the Assessing Officer had failed to make necessary verification and enquiries, which were required. The Tribunal quashed the order under section 263 of the Act passed by the Commissioner. On appeal: Held, dismissing the appeal, that the Tribunal had held that the order of the Assessing Officer could not be regarded as erroneous even if the Assessing Officer had failed to carry out necessary verification and required enquiries in respect of the share application money, as no addition had been made on account of the reasons for reopening, which were recorded before issue of notice under section 148 of the Act. It had held that the Assessing Officer could not have made an addition on account of the share application money as no addition had been made on account of fixed deposits of Rs. 20 lakhs. The Tribunal had noticed and recorded that in the reasons for reopening it was mentioned that the assessee had made investment in the form of fixed deposits of Rs.20 lakhs but in the assessment order passed under section 147/143(3) of the Act it had been held that the assessee had been able to show and establish the genuineness and capacity of the share applicants to make the investment. The Assessing Officer did not make any addition for the reasons recorded at the time of issue of notice under section 148 of the Act. This position was not disputed or disturbed by the Commissioner in his order under section 263 of the Act. The assessment order was not erroneous. Thus, the Commissioner could not have exercised jurisdiction under section 263 of the Act.”
In the case of CIT Vs Sunbeam Auto Ltd, 332 ITR 167 (Del.)
High court has held that inadequacy of enquiry will not give the
jurisdiction to CIT u/s 263. In this Hon’ble High court has held as under :-
“The Assessing Officer in the assessment order is not required to give a detailed reason in respect of each and every item of deduction, etc. Whether there was application of mind before allowing the expenditure in
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question has to be seen. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Income-tax Act, 1961, merely because he has a different opinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open.
An order cannot be termed erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, it cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. Section 263 does not visualise a case of substitution of the judgement of the Commissioner for that of the Income-tax Officer who passed the order unless the decision is held to be erroneous. Where the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion such a conclusion cannot be found to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. 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.
The assessee was a manufacturer of car parts. Its return for the assessment year 2001-02 was taken up for scrutiny and assessment was completed. In revisional proceedings, the solitary objection of the Commissioner was that the expenditure on tools and dyes aggregating to Rs. 10 56,69,367/- was allowed as revenue expenditure without a detailed investigation. After considering all the materials furnished by the assessee the Commissioner took the view that the accounting practice followed by the assessee to debit the entire cost of tools and dyes in the year of installation was not correct and he remitted the case to the Assessing officer for re-examination. The Tribunal allowed the claim of the assessee. On appeal:
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Held, dismissing the appeal, (i) that the Assessing Officer allowed the claim on being satisfied with the explanation of the assessee. Such decision of the Assessing Officer could not be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. The Assessing Officer had called for explanation on the very item from the assessee and the assessee had furnished its explanation. This fact was conceded by the Commissioner himself in his order. This showed that the Assessing Officer had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyes and tools was to be treated as revenue expenditure or not. Therefore, it could not be said that it was a case of lack of inquiry. The accounting practice followed for a number of years had the approval of the income-tax authorities. Even for future assessment years, the very same accounting practice was accepted.
(ii) That the dyes were components of the machines. They needed constant replacement, as their life was not more than a year. The assessee also explained that since the parts were manufactures for the automobile industry, which had to work on complete accuracy at high speed for a longer period, replacement of the parts at short intervals become imperative to retain the accuracy. Neither with the replacement of tools and dyes to new asset comes into existence nor was their benefit of enduring nature. They did not even enhance the life of the existing machine of which the tools and dyes were only parts. Therefore, the view taken by the Assessing Officer was one of the possible views and the assessment order passed by him could not be held to be prejudicial to the interests of the revenue. The opinion of the Assessing Officer in treating the expenditure as revenue expenditure was plausible and thus there was no material before the Commissioner to vary that opinion and ask for fresh inquiry.”
In view of various decisions as discuss by us in the preceding
paragraphs and finding given by us, we are of the view that the CIT was
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not correct in law in exercising the jurisdiction u/s 263, and cancelling the
assessment and accordingly we quash the order passed u/s 263.
In the result, the appeal of the assessee stands allowed.
(Order pronounced by putting on notice board as per Rule 34(4) on 16/01/2017
Sd/. Sd/. (PAWAN SINGH) ( P. K. BANSAL ) Judicial Member Accountant Member
Dated:16/01/2016 *Singh
Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) Asstt. Registrar 5. D.R.,