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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B, BANGALORE
Before: SHRI N.V.VASUDEVAN & SHRI INTURI RAMA RAO
This appeal is filed by the assessee company directed against the order of the learned CIT, Bangalore-III, Bangalore dated 20-03-2014 passed u/s 263 of the IT Act, 1961 ( hereinafter referred to as ‘ The Act’) for the assessment year 2007-08.
The assessee company raised the following grounds;
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“1. The conditions precedent for invoking the provisions of Sec.263 of the Act being absent, the order of the ld.CIT is bad in law and liable to be set aside.
2. In law and on the facts and in the circumstances of the case, there being no error in the assessment order dated 30.11.2011 passed u/s 143(3)rws Sec.147 of the Act which is prejudicial to the interest of the revenue, the ld.CIT erred in assuming jurisdiction u/s 263 of the Act t set aside the assessment.
3. The ld. CIT ought to have appreciated that in light of the facts and also the supporting case law, the provision was on account of ascertained liability and was liable to be allowed as a deduction and accordingly there was no error to apply the provisions of Sec.263 of the Act to interfere with the assessment order.
4. The ld.CIT ought to have followed the ratio laid down by the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd Vs CIT(2000) 243 ITR 83(SC) and in the case of CIT Vs Max India Ltd (2007) 295 ITR 282(SC) and refrained from passing the order u/s 263 of the Act.
Without prejudice, the ld.CIT ought to have accepted the explanation offered and held that the provision of Rs.99,80,000/- was on account of ascertained incidence of loss and was liable to be allowed in the relevant year in accordance with the consistent method of accounting followed by the assesee under mercantile basis coupled with 3 IT No.565(Bang)/2014
the Accounting Standard (AS) provided by the Institute of Chartered Accountants of India.
6. On facts, the ld.CIT ought to have appreciated that the deduction as claimed was correct and complete and he ought to have refrained from directing the AO to disallow the claim.
7. The Karnataka High Court judgments referred to by the CIT to justify his case were distinguishable and has no application to the assessee’s case and on the other hand the cases cited by the assessee would squarely apply and the ld.CIT erred in not considering the cases by vaguely observing that facts of those cases were applicable without justifying the conclusion drawn by him.
8. For these and such other grounds that may be urged at the time of hearing, the assessee prays that the appeal may be allowed”
Briefly the facts of the case are that assessee company is duly incorporated under the provisions of Companies Act, 1956. It is engaged in the business of manufacture and sale of Switchgear and components.
The return of income for the assessment year 2007-08 was filed on 24-10- 2007 declaring total income at Rs. NIL, after set off of brought forward unabsorbed loss of Rs.54,56,733/-. Against the said return of income there was no scrutiny assessment. However, subsequently the assessment was 4 IT No.565(Bang)/2014 re-opened by issuance of notice u/s 148 o the IT Act, 1961 dated 22-04- 2011 and the re-assessment was completed at a toal income of Rs.4,49,06,035/- vide order dated 30-11-2011 passed u/s 143(3) r.w.w.s147 of the IT Act, after making a disallowance.
While, the matter stood thus, learned CIT issued a show cause notice u/s 263 of the IT Act dated 29-11-2014 calling upon the assessee to show cause as to why the assessment cannot be revised under the provisions of sec.263 of the IT Act, as the AO had failed to consider an item of provision for anticipatory loss in respect of turnkey projects of Rs.99,80,000/-. In response to the said show cause notice, the assessee- company submitted that it had undertaken a turnkey project from M/s Karnataka Power Transmission Co.Ltd. (M/s KPTCL) for construction of 220 KV DCDC line from Chikkodi to Kudachi on turnkey basis. M/s KPTCXL had issued the total purchase order of Rs.760.44 lakhs comprising material of Rs.634.93 lakhs and Civil contract of Rs.102.55 lakhs. In respect of this transaction, the revenue had been recognized in the books of accounts following the accounting standard-7, in terms of expected loss of any particular contract should be recognized as an expense immediately irrespective of the stage of contract and the amounts of profit, that likely to be made. It was further submitted that this method of accounting standard-7 was followed from year to year, on regular basis. It was contended that it was not a contingent liability as the 5 IT No.565(Bang)/2014 event had already taken place and the liability was measured with great reliability and there is a certainty of outflow of resources and further relied on the following decisions in support of the claim.
a. CIT Vs Realest Builders & Services Ltd 307 ITR 0202(2008) SC b. CIT Vs Woodward Governer India Pvt.Ltd. 312 ITR 0254(2009) SC c. CIT & Anr. Vs Dinesh Kumar Goel 331 ITR 0010 (2011) Delhi HC d. Prakash Leasing Ltd. Vs DCIT 208 Taxman 0464(2012) Kar.HC. e. Oil and Natural Gas Corpn.Ltd Vs CIT 332 ITR 0180 (2010) SC f. CIT Vs Triveni Engineering & Industries Ltd. 336 ITR 0374 (2011)
Delhi. HC g. Bharath Earth Movers Ltd Vs CIT 245 ITR 428 (2000) SC h. CIT Vs Ansal Housing Finance and Leasing Co. Ltd. and others 354 ITR 180 (2013)-Delhi HC i. CIT Vs Ansal Properties and Ind.Ltd.352 ITR 637 (2000) DHC
5. The learned CIT brushing aside the explanation offered by the assessee company had held that provision of Rs.99,80,000/- is a contingent liability as it is not ascertainable and therefore, held that the claim is not admissible as deduction in computing the taxable income of the assessee company, exercising his power vested u/s 263 of the IT Act directed the AO to make a disallowance of provision of Rs.99,80,000/-
6 IT No.565(Bang)/2014 and drawn the support of the jurisdictional High Court in the case of CIT Vs M/s Infosys Tech.Ltd. Vs 341 ITR 293 in this regard.
Being aggrieved by the order, the assessee company is in appeal before us.
The learned counsel for the assessee submitted that the very same issue was considered by the AO during the re-assessment proceedings and he had drawn our attention to page-24,25 of the paper book wherein the questionnaire dated 26-09-2011 issued by the AO is placed. He had drawn our specific attention to clause-p of tiem-9 of the questionnaire wherein the details for the provisions for anticipated loss of Rs.99,80,000/- was called for by the AO. He further submitted that the questionnaire was duly complied with by filing the explanation and necessary details. He has drawn our attention to page-75 of the paper book wherein the explanation was filed before the AO in respect of the anticipated loss of Rs.99,80,000/- He further submitted that the AO after being satisfied with the explanation filed by the assessee company had chosen not to make any further addition on this item. Therefore, the learned counsel contended that it is a case of substitution of opinion of the AO by the CIT, which is not proper u/s 263 of the Act and he placed reliance on the decision of the Hon’ble SC in the case of Malabar Industrial Co.Ltd Vs CIT (2000) 243 ITR 83 (SC). On the merits of the issue learned counsel for the assessee submits that it is not a provision for contingent liability as the event of incurring loss had occurred
7 IT No.565(Bang)/2014 already, when the assessee is regularly following the accounting standard- 7 for the purpose of recognizing the income and the AS-7 mandates that such loss has to be recognized as the expense immediately when it is known that loss is bound to incur.
On the other hand, learned DR supported the order of the CIT passed u/s 263 of the IT Act and stated that it is the case of non-enquiry on the issue of liability of the provision for the anticipated loss of Rs.99,.80,000/- and also placed reliance on the decision of the jurisdictional High Court in the case of CIT Vs M/s Infosys Tech.Ltd (Supra). On the merits of the issue learned CIT submitted that the provision is purely contingent in nature and cannot be allowed as deduction.
We have heard the rival submissions and perused the material on record. At the outset, we shall deal with the primary ground relating to the validity of assumption of jurisdiction by the learned CIT under the provision of sec.263 of the T Act, 1961. A perusal of the order passed u/s 263 of the Act reveals that the power of revision u/s 263 of the Act was resumed by the learned CIT to disallow the claim of deduction of Rs.99,80,000/- stated to have been made for the anticipated loss on turnkey contract. We find from the assessment order passed u/s 143(3) r.w.s.147 of the IT Act on 30-11-2011 that this issue was not examined by the AO. Even from the questionnaire issued the AO, he merely called for 8 IT No.565(Bang)/2014 the details of the claim and even the explanation filed by the assessee is only about the nature of the claim but does not explain as to how the provision is allowable as an expenditure under the provisions of the Act.
Therefore, it cannot be said that the AO had applied his mind to the issue and formed a opinion about the allowability or otherwise of the claim.
The facts in the present case are identical to the facts in the case CIT Vs M/s Infosys Tech.Ltd(Supra)341 ITR 293 wherein the Hon’ble jurisdictional High Court held that assumption of jurisdiction u/s 263 is justified when no enquiry was made, wherein it was held as follows:
“We are also not in a position to accept the submission that the materials had been placed before the assessing authority and therefore, there should be a conclusion that the authority has applied his mind to the same and there was no question of the Commissioner interfering by taking a different view etc.
Assessing authority performs a quasi-judicial function and the reason for his conclusions and findings should be forthcoming in the assessment order. Though, it is urged on behalf of the assessee by its learned counsel that reasons should be spelt out only in a situation where the assessing authority passes an order against the assessee or adverse to the interest of the assessee and no need for the assessing authority to spell out reasons when the order is accepting the claim of the assessee and the learned counsel submit that this is the legal position on authority, we are afraid that 9 IT No.565(Bang)/2014 to accept a submission of this nature would be to give a free hand to the assessing authority, just to pass orders without reasoning and to spell out reasons only in a situation where the finding is to be against the assessee or any claim put forth by the assesee is denied.
We are of the clear opinion that there cannot be any dichotomy of this nature, as every conclusion and finding by the assessing authority should be supported by reasons, however, brief it may be, and in a situation where it is only a question of computation in accordance with relevant articles of a double taxation avoidance agreements and that should be clearly indicated in the order of the assessing authority, whether or not the assessee had given particulars or details of it. It is the duty of the assessing authority to do that and if the assessing authority had failed in that, more so in extending a tax relief to the assessee, the order definitely constitutes an order not merely erroneous but also prejudicial to the interest of the revenue and therefore, while the Commissioner was justified in exercising the jurisdiction u/s 263 of the Act, the Tribunal was definitely not justified in interfering with this order of the Commissioner in its appellate jurisdiction. The Hon’ble Supreme Court in the case of Malabar Ind. Co.Ltd. (Supra) held that the assessment order is erroneous in the event of an item of expenditure is accepted in the absence of any supporting material without making any enquiry and the assumption of jurisdiction u/s 263 of the IT Act was held to be justified.
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Therefore, adopting the same ratio even in this case in the absence of any material as well as enquiry by the AO on this issue of provision for anticipated loss of Rs.99,80,000/- we hold that the assessment order is erroneous and prejudicial to the interest of revenue and the CIT was justified in revising the order u/s 63 of the IT Act, 1961.
On the merits of the issue, it appears that the CIT had directed the AO to disallow the claim of anticipated loss of Rs.99,80,000/- by making a bald statement that the liability is not ascertainable without properly considering the issue from its proper perspective. Therefore, we are of the considered opinion that the interest of justice would be met if the matter is restored to the file of the CIT for limited purpose of examining the issue on merits on the allowability or otherwise of the claim of anticipated loss of Rs.99,80,000/- after affording due opportunity of hearing to the assessee.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on the 8th January, 2016.