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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Sanjay Arora & Shri Soundararajan K.
Appellant by: Shri Radhesh Bhatt, CA Respondent by: Shri Sanjit Kumar Das, CIT-DR Date of Hearing: 06.05.2024 Date of Pronouncement: 31.05.2024 O R D E R Per: Sanjay Arora, AM This Appeal by the Assessee is directed against the Order dated 08.03.2021 under section 263 of the Income Tax Act, 1961 (the Act) by the Principal Commissioner of Income Tax, Kochi-1 (Pr. CIT) in respect of assessee’s assessment under section 143(3) of the Act dated 30.12.2018 for Assessment Year (AY) 2016-17.
2.1 Opening the arguments for and on behalf of the assessee, it was submitted by Shri Bhatt, it’s learned counsel, that even as the impugned order makes several interventions to the assessee’s assessment, i.e., on which the ld. Pr. CIT, the competent authority, found it as deficient on the ground that the Assessing Officer (AO) had not verified the assessee’s claims, and accepted the same as such, rejecting the assessee’s explanation that due enquiry in the matter had been made by the AO, inasmuch as the assessment stands since modified in appellate proceedings, he would restrict his arguments only to the three surviving the first appeal. The first, he would, (AY : 2016-17) Sud-Chemie India Pvt. Ltd. v. Asst. CIT adverting to para 6.3 of the impugned order, continue, is with reference to the expenditure on SAP Software licence at Rs.2.78 crores, claimed as revenue. To demonstrate enquiry, he would take us to the computation of income called for by the AO vide notice u/s. 142(1) of the Act dated 02.10.2018 (PB Pgs. 1-4). The same stood duly responded to (PB pgs. 37-43). The other two issues, raised per Gd. 11, relate to commission and royalty paid to foreign parties, and being common, were taken-up together. The same stand referred to in para 6.4 of the impugned order, whereby the Pr. CIT notes that payments by way of commission and royalty, at Rs.2.92 cr. and Rs.1.62 cr. respectively, stand made to foreign party/s without deduction of tax at source. Toward enquiry in the matter, he would refer to Annexure to the notice u/s. 142(1) dated 07.12.2018 (PB pgs. 5-6), calling for the details of the said expenditure, as also if TDS had been deducted thereon. And which, he would submit, stand duly responded to by the assessee, furnishing relevant details vide reply dated 15.12.2018 (PB pgs. 27-28) r/w Annexure-H thereto (PB pg. 28a). 2.2 Shri Das, the ld. CIT-DR, would, in reply, submit that the statement of ‘significant accounting policies and notes to the account’, forming part of the financial statements for the relevant year, at para 1(e) (PB pg. 71), clearly states that cost of software is treated as an intangible asset and amortized over a period of 5 years. As regards the commission and royalty expenditure, much less an inquiry into the admitted non-deduction of TDS, even the nature of services rendered by the foreign parties remains to be specified by the assessee.
We have heard the parties, and perused the material on record. 3.1 It would be, to begin with, relevant to visit, even if in brief, the law in the matter. Lack of enquiry would by itself result in the ensuing assessment being erroneous and prejudicial to the interest of the Revenue, liable for revision, toward which the ld. Pr. CIT cites Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83 (SC) and Raja & Co. vs. CIT [2011] 335 ITR 381 (Ker). Non-application of mind, (AY : 2016-17) Sud-Chemie India Pvt. Ltd. v. Asst. CIT as explained by the Apex Court in Malabar Industrial Co. Ltd. (supra), is one of the ingredients that renders an order as prejudicial and erroneous to the interest of the Revenue. Absence or lack of enquiry is an attribute, a manifestation, of this non- application, so that an order imbued therewith would be liable to revision. As explained therein with reference to judicial precedents, where the AO accepts the assessee’s version in the absence of any supporting material and without making any enquiry, his order would be erroneous, and exercise of jurisdiction u/s. 263(1) justified. As an example, it, w.r.t. it’s earlier decisions in Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), cites 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 AO accepting the same would be subject to sec.
The decision by the Hon’ble jurisdictional High Court, reported at [1992] 198 ITR 611 (Ker), holding the assessment as without application of mind, was, accordingly, affirmed. In Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Del), again with reference to judicial precedents, it stands explained that the order of the AO becomes erroneous on a failure to make enquiry where the circumstances call for it. This is not because there is anything wrong in the order if all the facts stated therein are assumed to be correct. However, the AO is not only an adjudicator but also an investigator and, therefore, cannot remain passive in the face of a return which is apparently in order but calls for further enquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an enquiry. This represents trite law, since co-opted on the Statute vide Explanation 2(a) to s. 263(1). 3.2 With reference to the facts of the case, without doubt, book treatment would not dictate the allowance or otherwise of an expenditure, where it is otherwise of revenue nature, which, however, would require a finding by the AO, absent, validating the finding by the competent authority of lack of proper inquiry, resulting in lack of due application of mind by the AO in framing the assessment. For instance, 3 | P a g e (AY : 2016-17) Sud-Chemie India Pvt. Ltd. v. Asst. CIT capitalization of an expenditure in accounts may not be fatal to its claim as revenue, but the contradiction, which is clear, would need to be explained, and which has as much as not been inquired into. An asset, even if intangible, is liable for depreciation, and cannot be claimed as an expense under the Act, which has no concept of deferred revenue expenditure. As regards commission and royalty expenditure, much less the nature of services rendered, there is nothing to suggest that tax has been deducted at source. The inquiries referred to by Sh. Bhatt are the mere beginning of the process of inquiry, to be taken to its logical end. Even as observed by the Bench during hearing, the AO has made only a semblance of an inquiry; rather, a pretence. 3.3 It is only on a proper enquiry, which enables him to form a clear view in the matter, so as to issue definite finding/s of fact/s, on which law can then be applied, that it can be said that there has been due application of mind by the assessing authority, a failure whereof vitiates assessment, rendering it liable to revision. 3.4 The impugned assessment, for the reasons afore-mentioned, clearly suffers from a complete lack of application of mind by the assessing authority, i.e., qua the expenses referred herein. We, accordingly, have no hesitation in upholding the impugned order qua the said aspects. As regards the assessee’s other Grounds, the same being not pressed, are dismissed as not pressed. We decide accordingly.