INTERNATIONAL SEAPORT DREDGING PRIVATE LIMITED,CHENNAI vs. PCIT - 1, CHENNAI

Brief facts of the case are that the assessee company filed its revised ITR for the A.Y. 2016-17 on 30.03.2017 declaring total income of Rs 27,91,58,970/-. Assessment proceedings under section 143(3) of the Act were completed for the assessee vide order dated 29.12.2019 and the income assessable to tax was arrived at Rs.39,41,18,508/-. Thereafter taking prior approval u/s 148 of the Act from the Principal Commissioner of income Tax, as per the proviso of section 151 of the Act, the case was reopened u/s 147 of the Income Tax Act, 1961.

The AO in his order has stated the ‘reason’ for reopening of the case as under: “As per the information available the assessee has arrived at business income of Rs.27,91,57,970/- after setting of losses amounting to Rs.95,36,80,348/-. It is seen that the assessee's entitlement to carry forward losses was revised due to application of provision u/s 79 of the Income Tax Act, 1961”.

Pending appeal before the ld.CIT(A) against the order of the ld.AO dated 28.03.2022, the ld.CIT issued notice under section 263 dated 22.02.2024 to the assessee by observing as under: ‘On a scrutiny of the computation statement, it was noticed that brought forward loss of Rs.59,82,73,179/- was allowed (brought forward loss of Rs.95,36,80,348/- unexplained income of Rs.35,54,07,169/-) as deduction from the total income, details of loss of Rs.59.82 crs allowed to set off were not available.’

Before the ld. PCIT, the assessee has submitted that the issues are covered in the appeal filed before CIT(Appeals). The appellant also submitted before ld.CIT the very same issue which is sought to be revised is already investigated and enquired by the ld.AO in earlier re-assessment proceedings. However, the ld. PCIT after examining form 35, the statement of facts, figures of addition made by the assessing officer are not matching with the show cause notice given by under section 263. Ld. PCIT found that grounds of appeal are general in nature and do not reflect the correct amount of addition made against which appeal has been filed and it was not determinable clearly from the form 35 as to what is the addition which has been contested against. The ld. PCIT directed the ld. Assessing Officer to reconcile the same along with other records and documents. Ld. PCIT further stated that this decision of partly set aside will apply only to the extent of the issues and quantum which are not covered and before CIT(appeals). The ld. CIT further recorded as under: “The assessee submitted that the connotation of the expression "loss" occurring in section 79 of the Act has to be understood in the context of the provisions contained in Chapter VI only. Therefore, section 79 of the Act does not override the Chapter IV-D. Further, the assessee placed reliance on the judgment of Hon’ble Supreme Court in the case of CIT v Shri Subhulaxmi Mills Ltd [1983] 249 ITR 795 (SC), wherein it was held as under:- "The High Court has answered the question saying that when section 79 speaks of loss, it does not include unabsorbed depreciation or unabsorbed development rebate. We agree with the High Court." In view of the above decision of Hon’ble Supreme Court in the case of Shri Subhulaxmi Mills Ltd, (supra) the assessee has claimed that the position is thus settled that the carry forward and set off of unabsorbed depreciation is not governed by section 79 of the Act. However, ld.CIT directed the ld.AO to verify if the judgment of Hon’ble Supreme Court in the case of Shri Subhulaxmi Mills Ltd (supra) is applicable or not in this case. Further, the ld. PCIT was of the view that this is a fit case to invoke the provisions of Sec. 263 of the Act since the Assessing Officer has not made complete verification and not appreciated the facts while passing the order u/s 147 read with section 144B of the Act without due verification. The assessment order so passed, therefore, is considered both erroneous and prejudicial to the interest of the revenue. Accordingly, the ld. PCIT partly set aside the assessment order u/s 263 of the Act, with a direction to the Assessing Officer to examine the aspects, during the Accounting Year in question and pass a fresh order after granting opportunity to the assessee, within the stipulated time. Further, the ld. PCIT stated that the assessee can furnish documents which were not available at the time of assessment in the records of the Assessing Officer for fresh examination.” Aggrieved, assessee preferred an appeal before the Tribunal.

Per contra, the ld. DR supported the findings of the ld. CIT and further contended that issue had not been examined by the AO during the course of assessment proceedings.

We have heard the rival submissions and perused the records of the lower authorities and Schedule UD: “Unabsorbed Depreciation and allowance under section 35(4)” in Income Tax Return for AY 2016-17 and find that the impugned order is not sustainable for the following reasons: i. The observation of the ld.CIT that Assessment order dated 28.03.2022 u/s 147 read with section 144B of the Act was passed without due/complete verification is factually incorrect. In fact, same income tax return for AY 2016-17 was take into consideration by the both ld.AO and ld.CIT wherein Schedule UD: “Unabsorbed Depreciation and allowance under section 35(4)” is finding mentioned therein as under: Assessment year Amount of brought Amount of forward unabsorbed depreciation set off Sl.No depreciation against the current year income (1) (2) (3) (4) i 2016-17 ii 2013-14 14491494 14491494 iii 2012-13 148847374 148847374 iv 2010-11 270130659 270130659 v 2009-10 164803652 164803652 vi Total 598273179 598273179 ii. Facts and figures and issues recorded in ‘Reasons for reopening u/s 147’ (para 3 supra) is similar as observed by the ld.CIT in his notice u/s 263 of the Act dated 22.02.2023 (para 4 supra); iii. The ld. CIT cannot sit in appeal on the reassessment order 23.03.2023 reversing findings of the AO and impose his own view of decision making process on same material; iv. There is legal presumption as per Section 114(f) of the Evidence Act that AO passed the reassessment order properly to the best of his ability. Section 114(f) of the evidence Act says: ‘The Court may presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public v. The issue of set off of brought of losses admittedly was duly deliberated upon by the AO in Section 147 proceedings after the notice u/s 142(1) dated 31.12.2021 and reply dated 12.01.2022; The ld.CIT wrong in saying that AO has not done complete verification.

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 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 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.

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.

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 (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:-

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. 9. Mr. Abraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Co.v.CIT[(1987) 163 ITR 129(Mad)] interpreting ‘prejudicial to the interests of the Revenue’. The High Court held: ‘ ‘’In this context, (it must) be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration’’. In our view this interpretation is too narrow to merit acceptance. 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 the 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. It has been held by this Court that 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 as such will be erroneous and prejudicial to the interests of the Revenue. (See ‘Rampyari Devi Saraogiv CIT[(1968) 67 ITR 84(SC)] and in ‘’Tara Devi Aggarwalv.CIT[(1973) 3 SCC 482:1973 SCC (Tax) 318:(1973) 88 ITR 323].) [Emphasis supplied] 26. Recently, the Hon’ble Supreme Court in the case of CIT v. Paville Projects (P) Ltd. [2023 SCC OnLine SC 371], while relying upon Malabar Industrial Co. Ltd., has discussed the sanctity of two-fold conditions for the purpose of invoking jurisdiction under Section 263 of the Act. The relevant paragraph of the said decision reads as under:- Learned counsel appearing on behalf of the assessee has heavily relied upon the decision of this Court in the case of Malabar Industrial Co. Ltd.(supra). It is true that in the said decision and on interpretation of Section 263of the Income Tax Act, it is observed and held that in order to exercise the jurisdiction under Section 263(1)of theIncome tax Act, 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. It is further observed that if one of them is absent, recourse cannot be had to Section 263(1) of the Act. ***’.

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 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’’.