FAIVELEY TRANSPORT TECHNOLOGIES INDIA PVT. LTD.,HOSUR vs. ACIT, CORPORATE CIRCLE-1(1), CHENNAI

Brief facts of the case are that the assessee ‘Faiveley Transport Rail Technologies India Private Limited’ is a company incorporated in India and is engaged in the business of manufacture and sale of brake systems, couplers, heating ventilation and air conditioning systems, pantographs, spares and other parts for railway stock as well as metro car builders. The Assessee has manufacturing plants in Hosur, Tamil Nadu and Baddi, Himachal Pradesh. The Baddi unit commenced its operations in the Financial Year 2008-09 and is eligible for claiming deduction under Section 80-IC of the Act. For the impugned Assessment Year ("AY") 2018-19, being the 10th year of claiming the said deduction, the Appellant had claimed deduction amounting to Rs. 43,89,60,086, being the 30% of the profits and gains derived from business carried on at the Baddi unit. The Assessee's case was selected for complete scrutiny assessment under CASS wherein one of the issues which needed further clarification and detailed verification was the deduction claimed for industrial undertaking under section 80-IC of the Act. During the course of assessment proceedings, the Revenue vide notice dated 22.09.2019 u/s. 143(2) of the Act directed the assessee to submit clarification on the following issues:-

Section 80IC: All undertakings or enterprises which are set up, manufacture or begin to manufacture any article or things or undertake substantial expansion, in Industrial Zones.

The Company filed the ITR and all the applicable audit reports before the due date and the same was correctly disclosed in the ITR. Please find attached the relevant pages of the ITR -6 form for your reference. (Annexure 5) 7. Therefore, it is eligible to claim the deduction of Rs.43,89,60,086 u/s 80-IC since the claim was made at the time of filing the ITR as stipulated in the Act. 8. Hence, the proposed disallowance is not warranted. The assessee vide letters dated 5th, 21st January and 4th March, 2021 submitted details sought by the Department. Based on the enquiry and after Appellant, the scrutiny assessment was concluded by passing an order section 143(3) read with section 143(3A) and 143(3B) of the Act on April 13, 2021 by the Assessing Officer ('AO') accepting the returned income of the Appellant, thereby accepting the claim under Section 80-IC under the Act and without making any addition/disallowance.

Subsequently, proceedings under section 263 of the Act were initiated by the Principal Commissioner of Income tax-1, Chennai (ld. PCIT) initiated proceedings u/s.263 of the Act by issuing a show cause notice dated 16.01.2024 alleging that the ld. Assessing Officer had failed to examine the deduction claimed for industrial undertaking u/s.80IC of the Act. The ld. PCIT set aside the original assessment order passed under section 143(3) of the Act by passing an order under section 263 of the Act dated March 31, 2024 and held that the original assessment order is erroneous and prejudicial to the interest of the revenue and directed the Ld. AO to examine the said issue in detail and pass a consequential order as per law. Aggrieved, assessee preferred an appeal before the Tribunal.

Before us, the ld. Authorized Representative submitted that during the course of assessment proceedings, the AO had made detailed inquiries with respect to the deduction claimed under Section 80-IC of the Act. Notices dated 22nd September, 2019, 22nd December, 2020 and 1st March, 2021 under section 142(1) of the Act were issued and assessee has explained in detail 5th, 21st January, 2021 and 4tth March, 2021. Further, it is relevant to note that the Assessing Officer has conducted further inquiry more specifically in connection with the eligibility for claiming deduction under Section 80-IC of the Act vide notice under dated March 1, 2021 and assessee vide letter dated 4th March, 2021 had submitted submissions. The ld. Assessing Officer thereafter, upon consideration of the submissions of the Appellant and the relevant facts and materials and after applying his mind upon the relevant documents completed the assessment vide order dated April 13, 2021. The ld. AR illustrated the relevant extracts of the assessment order is reproduced below: "2. The reply of the assessee received in response to proceedings initiated under relevant statutory notices of of the IT Act, 1961 is examined vis-a-vis the complete scrutiny parameter for which the case is selected under CASS. After examination, on the basis of material available on record the explanation of the assessee on the issue is accepted and no addition has been made to the total income.

Per contra, the ld. CIT- DR relied upon the order of CIT and contended that in assessment proceedings enquiry was not done properly. He relied upon the impugned order of the ld.PCIT.

Vide order dated 06.11.2019, this Court framed the following question of law:- A. Whether, in the facts and circumstances of the case, the Hon'ble ITAT was justified in quashing the order under Section 263 of the Income Tax Act? 17. The brief controversy involved in the present appeal pertains to the invocation of revisional jurisdiction under Section 263 of the Act by the CIT to set aside the original assessment order dated 30.03.2005.

Before adverting to the merits of the case, it is apposite to refer to the power of the revisional authority of the CIT envisaged as per Section 263 of the Act. For the sake of clarity, the relevant extract of Section 263 of the Act is reproduced as under: ‘’263. Revision of orders prejudicial to revenue (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or 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 [or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify,’ [including,’ (i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or (ii) an order modifying the order under Section 92- CA; or (iii) an order cancelling the order under Section 92-CA and directing a fresh order under the said section.] *** [Explanation 2. ‘For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] 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 [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner, ‘(a) the order is passed without making inquiries or verification which should have been made; (b) the (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 the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.] ***’ 19. A bare reading of sub-Section (1) of Section 263 of the Act makes it abundantly clear that the said provision lays down a two-pronged test to exercise the revisional authority i.e., firstly, the assessment order must be erroneous and secondly, it must be prejudicial to the interests of the Revenue. Further, Explanation 2 to Section 263 of the Act delineates certain conditions and circumstances when the order passed by the AO can be said to be erroneous and prejudicial to the Revenue.

Admittedly, in the instant case, the questionnaire dated 02.11.2004, which has been annexed and brought on record in the present appeal, would manifest that the AO had asked for the allowability of the claims with respect to the issues in question. Consequently, the respondent- assessee duly furnished explanations thereof vide replies dated 09.12.2004, 20.12.2004 and 06.01.2005. Thus, it is not a case where no enquiry whatsoever has been conducted by the AO with respect to the claims under consideration. However, this leads us to an ancillary question? whether the mandate of law for invoking the powers under Section 263 of the Act includes the cases where either an adequate enquiry has not been made and the same has not been recorded in the order of assessment or the said authority is circumscribed to only consider the cases where no enquiry has been conducted at all.

Reliance can be placed on the decision of this Court in the case of CIT v. Sunbeam Auto Ltd. [2009 SCC OnLine Del 4237], wherein, it was held that if the AO has not provided detailed reasons with respect to each and every item of deduction etc. in the assessment order, that by itself would not reflect a non-application of mind by the AO. It was further held that merely inadequacy of enquiry would not confer the power of revision under Section 263 of the Act on the Commissioner. The relevant paragraph of the said decision reads as under:- We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". 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 Act, 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. In Gabriel India Ltd. (1993) 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113) ** 23. A similar view was taken by this Court in the case of CIT v. Anil Kumar Sharma [2010 SCC OnLine Del 838], wherein, it was held that once it is inferred from the record of assessment that AO has applied its mind, the proceedings under Section 263 of the Act would fall in the category of Commissioner having a different opinion. Paragraph 8 of the said decision reads as under:- 8. In view of the above discussion, it is apparent that the Tribunal arrived at a conclusive finding that, though the assessment order does not patently indicate that the issue in question had been considered by the Assessing Officer, the record showed that the Assessing Officer had applied his mind. Once such application of mind is discernible from the record, the proceedings under section 263 would fall into the area of the Commissioner having a different opinion. We are of the view that the findings of facts arrived at by the Tribunal do not warrant interference of this court. That being the position, the present case would not be one of "lack of inquiry" and, even if the inquiry was termed inadequate, following the decision in Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) (page 180) : "that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter." No substantial question of law arises for our consideration.

In Ashish Rajpal as well, this Court was of the view that the fact that a query was raised during the course of scrutiny which was satisfactorily answered by the assessee but did not get reflected in the assessment order, would not by itself lead to a conclusion that there was no enquiry with respect to transactions carried out by the assessee.

Further, the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., enunciates the meaning and intent of the phrase ’prejudicial to the interests of the Revenue’, in the following words:- ’8.The phrase ‘prejudicial to the interests of the Revenue’ is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in ‘Dawjee Dadabhoy & Co.v.S.P. Jain[(1957) 31 ITR 872(Cal)], the High Court of Karnataka in CITv.T. Narayana Pai[(1975) 98 ITR 422(Kant)], the High Court of Bombay in CITv.Gabriel India Ltd.[(1993) 203 ITR 108(Bom)] and the High Court of Gujarat in CITv.Minalben S. Parikh[(1995) 215 ITR 81(Guj)] treated loss of tax as prejudicial to the interests of the Revenue.

Considering the aforesaid judicial pronouncements, it can be safely concluded that inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act. The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. Rather, in our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit.

Notably, the ITAT, while making a categorical finding that the CIT had failed to point out any definite or specific error in the assessment order, has satisfactorily explained both the claims in question in Paragraph 8.2 of its order, which reads as under:- “8.2 In the Impugned Order, the Ld. Commissioner of Income Tax-IV, Delhi held that the AO had not examined the aforesaid two issues properly and, therefore, set aside the issues for further inquiries to be conducted by the AO. As regards the first issue is concerned, we note that out of total provision of Rs. 1114.68 lacs, a sum of Rs. 7,60,76,105/- was suo moto added back in the computation of income and a further sum of Rs. 73,46,160- was disallowed by the AO in the original assessment order dated 30.3.2005. Therefore, out of Rs. 1114.68 lacs, Rs. 834.22 lacs already stood disallowed in the original assessment order. The balance amount represented actual write off which was palpably clear from page 2 of the impugned order itself. No deduction on account of any such provision was, therefore, allowed to the assessee. Hence, there is no error or prejudice to the interest of revenue. As regards second issue it was noted that interest rate swap was an actual loss and only the net loss of Rs. 114.05 lacs after setting of gain of interest rate swap was claimed as deduction. However, we find that both these issues were duly examined by the AO vide Questionnaire dated 2.11.2004 (Page 1-2 of the Paper Book) to which replies dated 9.12.2004, 20.12.2004 and 6.1.2005 (Page No. 3-39 of Paper Book-1) were furnished and, therefore, the finding of the Ld. CIT that the issues were not examined properly was not correct. Even the Ld. CIT has not pointed out the definite and specific error in the original assessment order and observed that the inquiry made by the AO was inadequate or improper without first pointing out the error in the original assessment order passed by the AO, particularly because both the aforesaid issues were duly examined at the stage of the original assessment proceedings, hence, the impugned order is beyond jurisdiction, bad in law and void-ab-initio’’.

It is discernible from the aforenoted findings of the ITAT that both the claims were duly examined during the original assessment proceedings itself and neither there was any error nor the same was prejudicial to the interests of the Revenue. Thus, the findings of fact arrived at by the ITAT do not warrant any interference of this Court.

So far as the reliance placed by the CIT on Umashankar Rice Mill is concerned, the same is misplaced, particularly in light of the insertion of Explanation 2 to Section 263 of the Act, brought in place by the Finance Act, 2015. The said amendment markedly specifies various conditions to exercise the authority vested in the Commissioner under Section 263 of the Act, leaving no ambiguity in the interpretation of the said provision.

In view of the aforesaid, the appeal preferred by the Revenue is dismissed alongwith the pending application(s), if any’’.

The Hon'ble Supreme Court in the case of CIT vs. M.Chandra Sekhar [151 ITR 433 (SC)] has held that the presumption that A.O. has considered the details filed by the assessee was "founded" on the principle that an officer entrusted with a judicial or quasi- judicial duty must be presumed to have discharged his duties in a proper and bonafide manner. This view is confirmed by the full bench decision of the Delhi high court in CIT Vs. Kelvinator of India

The Hon’ble High Court of Bombay in the case of Marico Ltd., vs. ACIT in writ petition No.1917 of 2019 dated 21.08.2019, wherein the Hon’ble High Court has clearly pointed out once a query has been raised by the AO during the assessment proceedings and the assessee has responded to that query, it would necessarily follow that the AO has accepted the assessee’s submission, so as to not deal with that issue in the assessment order.

The Hon’ble High Court of Bombay considering another decision of the same High Court in the case of GKN Sinter Metals Ltd., vs. ACIT reported in 371 ITR 225 has categorically pointed out that an assessment order passed u/s.143(3) of the Act does not reflect any consideration of the issue, it must follow that no opinion was formed by the AO in the regular assessment proceedings. This submission was negatived by the Hon’ble Bombay High Court and the relevant paras 10 & 11 reads as under:- ‘’Another aspect argued by ld.counsel that in term of clause (a) to Explanation 2 to section 263 of the Act, reassessment order is deemed to be erroneous insofar as prejudicial to the interest of revenue. The ld.counsel for the assessee drew our attention to the decision of Hon’ble High Court of Delhi in the case of PCIT vs. Clix Finance India Pvt. Ltd., order dated 01.03.2024 and drew our attention to paras 19 & 20 explaining the provisions and particularly Explanation 2(a) as under:- 19. A bare reading of sub-Section (1) of Section 263 of the Act makes it abundantly clear that the said provision lays down a two- pronged test to exercise the revisional authority i.e., firstly, the assessment order must be erroneous and secondly, it must be prejudicial to the interests of the Revenue. Further, Explanation 2 to Section 263 of the Act AO can be said to be erroneous and prejudicial to the Revenue.

Clause (a) of Explanation 2 to Section 263 of the Act further stipulates that if an order is passed without making an enquiry or verification which should have been made, the same would bestow a revisional power upon the Commissioner. However, the said Clause or any other condition laid down in Explanation 2 does not warrant recording of the said enquiry or verification in its entirety in the assessment order’’.

Even the Hon’ble High Court of Bombay in the case of PCIT vs. Shivshahi Punarvasan Prakalp Ltd., in of 2018, order dated 05.08.2022 has considered the issue of no enquiry case or inadequate enquiry even after the insertion of Explanation 2 in para 32 as under:- “32. In this appeal, we are concerned with the assessment year 2006- 07. Prior to the insertion of Explanation 2, it was the prerogative of the Assessing Officer to determine what enquiry he wants to make while completing the assessment. We have already observed that an enquiry was made by the Assessing Officer and the assessment order passed. Therefore, the CIT could not invoke jurisdiction under Section 263 as the view taken by the Assessing Officer was a possible/plausible view. It was only if the Assessing Officer had not made any enquiry then it could be said that the order passed was erroneous. This is not a case of lack of enquiry though it may be a case of inadequate enquiry. Inadequacy of enquiry as elucidated above does not give jurisdiction to the CIT to invoke provisions of Section 263 prior to the insertion of Explanation 2. In our view, the Explanation 2 does not help the revenue in as much as the same is prospective and applicable with effect from 1st June, 2015.”

Hence in the light of above judgment and cases cited at bar, we are of the considered view that the impugned order is liable to be set aside for the following reasons:- I. During the course of assessment proceedings, the AO had made detailed inquiries with respect to the deduction claimed under Section 80-IC of the Act. Notices dated 22nd September, 2019, 22nd December, 2020 and 1st March, 2021 under section 142(1) of the Act were issued and assessee has explained in detail vide letters dated 5th, 21st January, 2021 and 4th March, 2021; II. In this case, as seen from the particulars, contents, replies and various dates referred supra, the Assessing Officer has rigorously conducted further inquiries more specifically in connection with the eligibility for claiming deduction under Section 80-IC of the Act vide notice under dated March 1, 2021 and assessee vide letter dated 4th March, 2021 had submitted submissions as mentioned supra. The ld.Assessing Officer thereafter, upon consideration of the submissions of the Appellant and the relevant facts and materials and after applying his mind upon the relevant documents completed the assessment vide order dated April 13, 2021; III. The ld. PCIT could not invoke jurisdiction under Section 263 as the view taken by the Assessing Officer was a possible/plausible view; IV. The recent judgment of the Hon’ble Delhi High Court dated 01.03.2024 passed in in the case of Pr. Commissioner of Income Tax -2, Delhi Vs M/s Clix Finance India Pvt. Ltd. which considered various judgments of the Hon’ble Supreme Court and other Hon’ble High Court, is aptly apply in this case. V. The judgment referred by the ld.AR in the case of CIT vs. M.Chandra Sekhar [151 ITR 433 (SC)] wherein the Hon'ble Supreme Court has held A.O. has considered the details filed by the assessee was "founded" on the principle that an officer entrusted with a judicial or quasi- judicial duty must be presumed to have discharged his duties in a proper and bonafide manner. VI. Hence, we find no reason to hold that the original assessment order dated 13.04.2021 u/s 143(3) r.w. section 143(3A) & 143(B) of the Act is erroneous insofar as prejudicial to the interest of revenue. Hence, we quash the revision order passed by PCIT dated 31.03.2024 and allow this appeal of assessee.

In the result, appeal filed by the assessee is allowed.