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Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
O R D E R Per INTURI RAMA RAO, AM :
This is an appeal filed by the assessee-company against the order dated 28th March 2014 passed u/s 263 of the Income- tax Act, 1961 [‘the Act’ for short] by the learned Commissioner of Income-tax, [‘CIT’ for short], Bangalore-III, for the assessment year 2008-09.
Page 2 of 10 2. The assessee-company raised the following grounds of appeal:
“The following grounds of appeal are independent of, and without prejudice, to one another.
1. On the facts and in the circumstances of the case, the impugned order passed by the learned Commissioner of Income-tax, Bangalore-III ['the CIT] under Section 263 of the Act is bad in law and void ab initio. The learned CIT erred in concluding that the order of the Asst. Commissioner of Income- tax, Circle 12(1), Bangalore ('the ACIT') is erroneous and prejudicial to the interest of the revenue. The conditions precedent for assumption/exercise of jurisdiction under section 263 not being satisfied, the order passed under section 263 is bad in law and liable to be quashed.
2. The Learned CIT erred in concluding that the order of ACIT is erroneous and prejudicial to the interest of the revenue as the appellant had not offered Rs.7,650,875/- received from Insurance Companies to tax.
3. The learned CIT in its order has stated that in the absence of complete evidence as to whether the income has already being offered to tax in the earlier years, has erred in setting aside the issue to the file of Assessing Officer, without appreciating the facts that details/documents were already filed with the CIT as well as before the learned assessing officer ill to audit objection note.
4. Without prejudice, the learned CIT erred in setting aside the issue back to the Assessing Officer, without appreciating the fact that the tax effect because of an order passed by the Assessing Officer is NIL since the sum of Rs.853.859/-(net) was offered to tax is three different Assessment Year and also assessed to tax by the learned assessing officer in the order passed under section 143(3).
5. The Appellant therefore prays that the order passed by the CIT under section 263 of the Act and the consequential effect thereof is bad in law and consequently the said order should be quashed/annulled.
Page 3 of 10 The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal.”
3. Briefly facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of providing software development services, IT Consultancy and IT Enabled services. Return of income for assessment year 2008-09 was filed on 27/09/2008 declaring a total income of Rs.5,24,75,777/-. Against the said return of income, assessment was completed u/s 143(3) r.w.s 144C(3) of the Act on a total income of Rs.41,26,61,651/-. Disparity between returned income and assessed income is on account of additions made u/s 92C of the Act of Rs.34,93,45,736/- and addition on account of 10A of Rs.1,08,40,135/-.
Being aggrieved by the addition, an appeal was filed before the ld.CIT(A). While the matter stood thus, the ld.CIT issued a show cause notice u/s 263 calling upon the assessee- company to show cause as to why the assessment order passed cannot be treated as erroneous and prejudicial to the interest of revenue, as the amount of Rs.76,50,877/- received from insurance company and Rs.1,07,32,170/- received from clients i.e. Citibank, were not reflected in the financial statements of the assessee-company. The ld.CIT was of the opinion that the amount of Rs.76,50,877/- received from the insurance companies Page 4 of 10 was not offered to tax. In response to show cause notice, assessee-company had filed a detailed note vide its letters dated 26/2/2014 and 28/3/2014. The assessee-company’s submissions were extracted by the ld.CIT at pages 3 & 4 of his order passed u/s 263. The sum and substance of the submissions of the assessee-company is that the net effect of the transactions were reflected in the Profit & Loss account over a period of 3 years i.e. in the financial year 2005-06, 2006-07 and 2007-08. It was further submitted that there was no loss of revenue. Therefore, exercise of power u/s 263 by the ld.CIT was not justified.
After considering the above submissions, ld.CIT felt that since the issue was not verified by the AO during the course of assessment proceedings, he was of the opinion that non- verification of an issue renders the assessment order erroneous and prejudicial to the interest of the revenue. He also cited the decision of the Hon’ble Apex Court in the case of Malabar Industrial Co. vs. CIT (243 ITR 833) in support of the proposition that an order passed without application of mind renders the assessment order erroneous. He, accordingly, set aside the assessment order to the file of the AO with a direction to verify the contention of the appellant that the amounts were offered to tax during the financial years 2005-06, 2006-07 and 2007-08. He also placed reliance upon the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Infosys Technologies Ltd. (341 ITR 293) in support of the contention that when the Page 5 of 10 issue was set aside to the file of the AO, no prejudice was caused to the assessee-company. He, accordingly, passed the order u/s 263 dated 28/3/2014.
Being aggrieved, the assessee-company is in the present appeal before this Tribunal. The learned AR of the assessee submitted that the amount received from the insurance company as well as the clients were duly reflected in the books of account maintained by the assessee-company. The net effect of the transactions on account of this is reflected through P&L Account. Hence, there was no loss of revenue to the department. As a result, twin conditions for assuming jurisdiction u/s 263 of the ld.CIT that the order being erroneous and prejudicial to the interest of the revenue are not satisfied. In the result, the ld.CIT ought not to have exercised jurisdiction u/s 263 of the Act. He further submitted that the receipt of money from insurance company as well as from clients is very much clear and obvious from the notes to accounts filed before the AO. Merely because the AO had chosen not to mention any thing in the assessment order on this issue does not mean that the issue was not examined by the AO. Finally he submitted that the ratio laid down by the Hon’ble Karnataka High Court in the case of Infosys Technologies Ltd. (supra) is not applicable as subsequently, the jurisdiction High Court in ld.CWT(A) 67/2014 dated 21/01/2016 in the case of CIT vs. M/s.Saravana Developers clearly laid down that jurisdiction u/s 263 can be assumed by the Page 6 of 10 CIT in a case where there is a lack of enquiry. He also placed reliance on the decision of the Hon'ble jurisdictional High Court in ITA No.203 of 2009 dated 06/04/2015 in the case of CIT vs. Sun Micro systems India Pvt. Ltd. and CIT vs. Kurlon Ltd. (52 taxmann.com 92). He also placed reliance on the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. D.G.Gopala Gowda (34 taxmann.com 154).
On the other hand, learned CIT(DR) submitted that it is a case of total lack of enquiry on the part of the AO while passing the assessment order and the ratio laid down by the Hon’ble High Court in the case of Infosys Technologies Ltd. (supra) is squarely applicable. Therefore, he submitted that the order passed u/s 263 should be sustained in view of the decision of the jurisdictional High Court in the case of Infosys Technologies Ltd. (supra).
We heard the rival submissions and perused material on record. Short issue in the present appeal is whether the ld.CIT, in the facts and circumstances of the case, is justified to assume jurisdiction u/s 263 of the Act. The background surrounding the issue is as under: The assessee-company is 100% subsidiary of M/s.Msource Corporation; US based company, hereinafter referred to as ‘parent company’. The parent company obtained some work from Citibank. In India, the assessee-company was executing work on Page 7 of 10 behalf of its parent company in India. In the year 2004-05, some employees of the assessee-company had fraudulently transferred funds of Citibank to their personal account. On coming to know of this fraudulent activity and involvement of the employees of the assessee-company, parent company paid money to the Citibank a sum of Rs.1,75,29,186/- on behalf of assessee- company on 26/8/2005. Further the liquid assets and properties of the alleged offenders were frozen and legal actions were initiated against them. Under a separate deed of assignment, the Citibank assigned amount recoverable from the frozen assets of alleged offenders to the assessee-company. In the month of July 2007, assessee-company received an amount of Rs.1,07,32,170/- including interest from the frozen assets. The assessee-company also reached settlement of Rs.76,70,875/- with the insurance company. Treatment given in the books of account was explained during the course of proceedings before the ld.CIT as follows:
Further note that the net amount of profit arising from the whole transaction for INR 853859 is reflected in Miscellaneous income comprising of Interest income earned on Citibank FD & Forex Gain on ERF accrued in books and routed thru P/L account for revaluation of Forex denominated intercompany liability and Bank FDs in terms of Accounting Standard 11 as at each Balance Sheet date.” Therefore, the contention of the assessee-company is that the net effect of the transaction is duly reflected in the books of account, profit or loss arising out of this transaction is shown in the P&L A/c. It may be further noted that in the notes to accounts forming part of the financial statements, this was also stated. However, on perusal of assessment order, it is clear that neither there is mention about this issue in the assessment order nor the assessee-company could demonstrate before us that this issue Page 9 of 10 was examined by the AO during the course of assessment proceedings. Therefore, it is a case of total non-application of mind by the AO on this issue. As held by the Hon’ble Supreme Court in the case of Malabar Industrial Co.(supra), non application of mind by the AO confers jurisdiction u/s 263 of the Act. The submission of the assessee-company that in absence of loss of revenue, jurisdiction u/s 263 cannot be exercised, though it is settled principle of law that absence of loss of revenue does not confer jurisdiction u/s 263. The crux of the issue is that the fact that there was no loss of revenue has to be conclusively demonstrated. In the present case, one cannot come to a conclusion that there was no loss of revenue without verification of the assessment records for the assessment years 2006-07, 2007-08 and 2008-09. The ld.CIT had only set aside the issue to the file of the AO to verify this fact from the assessment records for the years 2006-07, 2007-08 and 2008-09. Hence, the ratio laid down by the Hon’ble Karnataka High Court in the case of Infosys Technologies Ltd.(supra) is squarely applicable to the facts of the case. Where the issue was not examined by the AO the ld.CIT was justified to remand the issue to the file of the AO for de novo verification. The decisions in the case of M/s.Sun Microsystems India Pvt. Ltd. (supra) and D.G.Gopala Gowda (supra), relied on by the learned AR of the assessee, are not applicable to the facts of the present case as the decisions relates to cases where there was an enquiry by the AO during the course Page 10 of 10 of assessment proceedings on the issues which are sought to be revised by the ld.CIT. Whereas in the present case, as mentioned supra, assessee-company could not demonstrate before us that this issue was examined by the AO during the course of assessment proceedings. Hence, we are of the considered opinion that the order passed by the ld.CIT , in exercise of his power vested under the provisions of sec.263 of the Act, is proper and valid in law and the ld.CIT is justified in assuming jurisdiction u/s 263 of the Act.
In the result, the appeal filed by the assessee-company is dismissed.