COMMISSIONER OF INCOME TAX DELHI IV vs. DLF POWER LTD.

Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest?

The return of income for the assessment year 2002-03 was filed by the respondent/assessee on 30.10.2002 declaring a loss of Rs.4,70,68,429/-. The assessment order under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the „Act‟) was passed on 28.2.2005 and the income was assessed at Rs.11,03,91,000/- under Section 115JB of the Act. Thereafter, the Commissioner of Income Tax (CIT) exercised jurisdiction under Section 263 of the Act and issued a notice to the respondent on 8.3.2007. The CIT was of

The assessee challenged the order of the CIT passed under Section 263 of the Act by filing appeal before the Income Tax Appellate Tribunal (for short, the „Tribunal‟). The Tribunal has allowed the appeal thereby setting aside the order of the CIT. The Tribunal has, inter alia, held that the CIT could not have exercised jurisdiction to cancel the assessment order made under Section 143(3) of the Act more particular when the AO had already passed orders on 13.2.2007 under Section 154 of the Act rectifying the mistake. The validity of this order of the Tribunal is questioned in the present appeal filed by the Revenue. 3. In nutshell, the submission of the Revenue is that the order passed by the Tribunal is against the provisions of law as the scope of Section 154 is very limited to the extent of error apparent on record, whereas the CIT can exercise powers under Section 263 to set aside an assessment order if it is erroneous and prejudicial to the interest of the Revenue. According to the department, for exercising powers under Section 263 of the Act, only these twin conditions are required to be satisfied and passing of an order under Section 154 of the Act is of no consequence. 4. In this backdrop, arguments were addressed by learned counsel for the parties before us on the following questions of law :- 1) Whether the ITAT was correct in law in cancelling/ setting aside the order passed by the CIT under Section 263 of the Income Tax Act, 1961?

As is clear from the narration of facts recapitulated above, insofar as deduction under Section 80-IA is concerned, it was allowed at Rs.2427.79 lacs. However, vide rectification order dated 13.2.2007 the AO himself corrected the same to Rs.1962.55 lacs. The revisional order under Section 263 of the Act came to be passed by the CIT subsequently, i.e. on 8.3.2007. In this revisional order, the CIT opined that admissible deduction under Section 80-IA was Rs.1962.55 lacs as against Rs.2427.79 lacs originally granted by the AO in the assessment order. However, before the CIT could point out this error, the same was corrected by the AO himself in the rectification order. Therefore, even if on this aspect revisional order is treated as correct, on the basis of which the CIT directed the AO to pass fresh orders, that exercise had already been done by the AO. 5We may point out at this stage that while holding that the CIT lacked jurisdiction under Section 263 of the Act to modify the assessment order after the rectification thereof under Section 154 of the Act by the AO, the Tribunal has limited the discussion relating to deduction under Section 80-IA alone. In taking this opinion, the Tribunal has held that it was because of the reason that original assessment order was no longer in existence as it got merged with the order under Section 154 of the Act passed by the AO and for this purpose the Tribunal relied upon the judgment of the Madhya Pradesh High Court in the case of CIT v. Ralson Industries Ltd., 276

Mr. Sharma, ld. counsel appearing for the respondent, per contra, has contended that after the order of assessment was passed by the AO s. 154 of the Act was in vogue in rectification of the mistake and after such an order came into force the doctrine of merger would come into play and, therefore, there cannot be invocation of power under s. 263 of the Act in respect of the order which is not in existence. To buttress his submission he has placed reliance on the decisions rendered in the case of Chunnilal Inkarmal (P) Ltd. v/s. CIT

To appreciate the aforesaid submission, it is relevant to reproduce s. 263(1)(c) of the Act. The said provision reads as under :-

It is not disputed that the revision proceeding was initiated after the rectification. In the case of Chunnilal Onkarmal (P) Ltd. (supra), a Division Bench of this Court held as under :-

Prima facie, this approach of the Tribunal seems to be correct. In any case, in the facts of the present appeal, it is not even necessary to into this question inasmuch as even as per the revisional order passed by the CIT under Section 263 of the Act, the benefit under Section 80-IA should have been restricted to Rs.1962.55 lacs, which had been done by the AO by passing rectification order under Section 154 of the Act.

The second ground for passing revisional order by the CIT under Section 263 of the Act relates to the provision for doubtful debts. As per the CIT, the provision for doubtful debts at Rs.818.03 lacs debited in the Profit and Loss account was not added back for calculating book profit under Section 115JB of the Act, which resulted into underassessment of income to that extent. In forming this opinion, the CIT has governed itself by the judgment of the Madras High Court in the case of Deputy Commissioner of Income Tax v. Beardsell Ltd., 244 ITR 256, wherein the Madras High Court held that where there is a statutory provision contained in explanation to sub-section (2) of Section 115JB of the Act, the provision made for uncertain liabilities are to be disallowed for calculating the book profits under Section 115JB of the Act.

Section 115JB was inserted by the Finance Act, 2000 with effect from 1.4.2001. It is a special provision for payment of tax by certain companies. Since we are concerned with the assessment year 2002- 03, the provisions which were applicable as on that date (as there is an amendment with effect from 1.4.2007) provided that where in the case of an assessee, being a company, the income tax payable on the total income, as computed under the Act in respect of any previous year, is less than 7.5% (which stands amended to 10% with effect from 1.4.2007) of its book profits, such book profits shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income tax @ 7.5% (amended to 10% with effect from 1.4.2007). It is, thus, a MAT provision and the tax is payable on the aforesaid basis calculating notional profits as against the actual book profits. The provision was applicable, at the relevant time, in those cases where total income, as computed under the Act as per normal provisions, is less than 7.5% of its book profits. Explanation to this section defines „book profit‟ to mean the net profit as shown in the Profit and Loss account for the relevant previous year prepared under sub-section

The question in this case is as to whether the provision for doubtful debt made in the books was required to be added back under clause

Before the CIT it was argued by the assessee that their advocates had examined the issue in detail with reference to the various decisions of the Supreme Court and the High Courts and opined that since this was not a provision for any unascertained liability, but it was merely a provision for diminution into the value of the assets and, therefore, it was not to be added back for calculating book profits under Section 115JB of the Act. It was also submitted before the CIT that the AO had decided not to add back this provision made for bad debts for calculating book profit under Section 115JB of the Act after due application of mind and after taking note of the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. Commissioner of Income Tax, Kochi, 255 ITR 273 and, therefore, when such an opinion of the AO was plausible, merely because the CIT was of different opinion could not be a ground to pass an order under Section 263 of the Act. This contention of the assessee was brushed aside by the CIT in the following manner :- “It has been argued that no doubt there are divergent opinions of the High Courts on this issue. In the decision of the Madras High Court reported in 244 ITR 256, it was held that the provision made for liabilities other than ascertained liabilities is to be included in the book profit for calculating the tax liability u/s 155JB whereas there are several decisions holding otherwise. It is further argued that the decision of the Hon‟ble Supreme Court in the Apollo Tyres case, supra, the position is now clear that the profit & loss account prepared under the Companies Act cannot be modified in order to calculate the liability u/s 155JB. From a perusal of the judgment of the Hon‟ble Supreme Court in the Apollo Tyres case, it emerges

The Tribunal, however, has accepted the submission of the assessee and reversed the order of the CIT on the aforesaid issue taking note of various case laws. It is pointed out by the Tribunal that the judgment of the Madras High Court in Beardbell Ltd. (supra) was considered by the Special Bench of the Tribunal (Kolkata) in the case of JCIT v. Usha Martin Industries Ltd., 288 ITR (AT) 64, holding that the provision for bad and doubtful debts is made when the assessee is of the opinion that its entire debt may not be realized and part of the debt may become irrecoverable. Therefore, the question whether it is an ascertained or unascertained liability does not arise as clause (c) of explanation to Section 115JA would not be applicable.

Mr. Sahni, learned counsel appearing for the Revenue, argued that the aforesaid two judgments, namely, that of Special Bench of the Tribunal as well as of this Court, discussed the provisions of Section 115JA of the Act, whereas the present case related to calculation of book profits under Section 115JB of the Act. He further submitted that the Tribunal did not appreciate the scope of Section 263 of the Act and the extent of powers conferred upon the CIT to revise the orders of the AO under the said provision. To highlight this, learned counsel referred to the following discussion contained in the

Mr. Ajay Vohra, learned counsel appearing for the respondent, on the other hand, submitted that Section 115JB of the Act was pari materia with Section 115JA and insofar as calculation of book profits under both these provisions are concerned., he submitted that clause

He further submitted that the AO was to only examine whether books of accounts are certified by the authorities under the Companies Act. He reinforced the submission that where two views are possible, the order of the AO could not be treated as erroneous, giving power to the CIT to pass orders under Section 263 of the Act, as held in Malabar Industrial Co. v. CIT, 243 ITR 83, Max India Ltd. v. CIT, 295 ITR 282 and Commissioner of Income Tax v. Vimgi Investment (P) Ltd., 290 ITR 505.

After considering the respective submissions, we are of the opinion that the order of the Tribunal does not call for any interference.

It is clear that the explanations to Section 115JB is identically worded as explanation to Section 115JA. Both these explanations relate to calculation of book profits, i.e. they give power to the AO to increase net profit determined as per the Profit and Loss account to the extent permissible under the said explanation. For this purpose, even clause (c) under both these provisions is identically worded. In HCL Comnet (supra), the Supreme Court has explained that the said provision refers to bad and doubtful debts and provision for bad and doubtful debts can be added back to the net profits only if the

In fact, having regard to the law on the point, as clarified by the Supreme Court in HCL Comnet (supra), it seems that only one view is possible. In a situation like this, under no circumstance, order under Section 263 could be passed to revise the order passed by the AO, as observed by this Court in Vimgi Investment (P) Ltd. (supra) in the following words :- “We find that in so far as the present case is concerned, only one view is possible and that was taken by the Assessing Officer and that view was valid with reference to the assessment year 2001-02. thereforee, there was no occasion for the Commissioner to exercise his powers under Section 263 of the Act to revise the order passed by the Assessing Officer and tax the assessed on the ground that the transaction was an attempt to avoid tax. The purchase and sale of units by the assessed was undoubtedly bona fide and this was accepted by the Assessing Officer. Under these circumstances, the question of the Commissioner invoking his powers under Section 263 of the Act would not arise. Following the decision of this court in Vikram Aditya and Associates P. Ltd. [2006] 287 ITR268(Delhi), we find no substance on the merits of the case.

Further, even if two views were possible, and the view taken by the AO was plausible one, it by the CIT, that would not provide sufficient ground for the CIT to assume jurisdiction under Section 263 of the Act merely because he had a different view in Malabar Industrial Co. (supra), the Supreme Court gave the following interpretation to this provision :- “A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income Tax Officer 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) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the Income Tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to section 263(1) of the Act. 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 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 conferred to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the Income Tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase 'prejudicial to the interests 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 an order of assessing officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax 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 Income Tax Officer is unsustainable in law.”

Question of law Nos. (1) and (3), thus, stand answered in favour of the assessee and against the Revenue, which would result in dismissal of the present appeal. We, accordingly, dismiss the appeal with costs quantified at Rs.25,000/-.