DUN & BRADSTREET INFORMATION SERVICES INDIA P. LTD,MUMBAI vs. CIT 8, MUMBAI

PER SANDEEP GOSAIN,JUDICIAL MEMBER:

The present appeal has been filed by the assessee against the order No.CIT.8/263(14)/2011-12 of the learned CIT -8, Mumbai dated 18th

March, 2013 passed u/s 263 of the Income Tax Act, 1961 for assessment

year 2007-08 on the following grounds:-

“The under mentioned Grounds of Appeal; are without prejudice to one another: 1. The order dated 18th March,2013 (“The impugned Order”) passed by the CIT-8, Mumbai (“the CIT”) purportedly under Section 263 of the Income Tax Act 1961 (“The Act”) is illegal, without jurisdiction, void, bad-in-law, contrary to the principles of natural justice and without prejudice, is erroneous and deserves to be quashed.

The order dated 25th January 2011 passed by the i) DCIT-8(1), Mumbai (“The AO”) was erroneous and prejudicial to the interest of the Revenue. ii) The computation by the AO of the Capital Gains computed under Section 50B of the Act was erroneous.

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iii) The net worth had to be reduced by depreciation of Rs.19,968,604 while computing capital gains under Section 50B of t he Act. iv) The Appellant’s case was identical to the case of Warner Lambert India Pvt. Ltd. (“The said decision”). v) The AO had erred in not applying the said decision to the Appellant’s case. 3. The CIT failed to appreciate that the said decision was, with respect, erroneous and, in any event, was distinguishable from the Appellant’s case.

business of providing international and domestic business and financial

information services, releasing publications, software development,

support services and financial education services filed its return of income

for assessment year 2007-08 on 30-10-2007 declaring total income of

Rs.14,09,29,031/- after claiming deduction u/s 10A of Rs.4,09,14,952/-.

The return was processed u/s 143(1) of the Act on 29-08-2008 and

subsequently the case was selected for scrutiny. Notices were issued

notices u/s 143(2) and 142(1) of the Act seeking replies and after receipt

of replies from the assessee the draft of the proposed order of

3 ITA No.3989/Mum/2013

assessment was prepared u/s 144C(1) of the Act at an assessed income

of Rs.15,55,83,590 wherein disallowance of Rs.1,43,30,864/- u/s 92CA(3)

and deduction u/s 10A of the Act of Rs.4,05,91,252/- was proposed on

26-12-2010 under normal provisions of the Act. The aforesaid draft

proposed order of assessment proposing total variation of

Rs.1,46,54,564/- to be made in the income returned by the assessee was

held to be prejudicial to the interest of the assessee and hence, the AO

sent the copy of the same to the assessee requiring it u/s 144C(2) of the

Act within thirty days of receipt of the same for (a) acceptance of the

proposed variation or (b) to file objection if any to such variation before

the Dispute Resolution Panel or before the Assessing Officer. The

assessee on receipt of the draft assessment order intimated the AO vide

its letter dated 13-01-2011 that it would prefer to file appeal before the

learned CIT (A) as against approaching to DRP and requested the AO to

issue final assessment order u/s 143(3) of the Act. On this basis, the AO finalized the assessment order u/s 144C (1) of the Act on 25th January,

2011.

assessment order for AY 2007-08 has found that while passing the

assessment order u/s 143(3) r.w.s. 144C(1) of the Act dated 25.01.2011.

The assessing officer has wrongly computed the capital gain u/s 50B of

the Act and therefore show cause notice was issued to the assessee

which is reproduced below: “On perusal of assessment records it is seen that return of income for A.Y. 2007-08 was filed by you on 30.10.2007 declaring total income of

4 ITA No.3989/Mum/2013

Rs.14,09,29,030/- after claiming deduction u/s 10A of the Act of Rs.4,09,14,952/-. It is further seen from the record that you have sold your STPI unit on slump sale basis to M/s Dun 7 Bradstreet Predictive Sciences & Analytics Pvt. Ltd. for a consideration of Rs.14,15,00,000/- and Short term capital gain u/s 50b amounting to Rs.1,70,56,696/- on the same has been offered in the return of income. However, while computing Short Term Capital Gains an amount of Rs.12,36,81,923/- has been reduced from the sale consideration in view of provision of section 50B r.w.s. 43(6)(c)(C)(i) and section 32 of the Act. The AO while computing the assessment has accepted the computation of Short term capital gain u/s 50B without reducing the net worth by the current year’s depreciation. As per Explanation 1 to section 50B, the net worth of the assessee is the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in the books of accounts. further in Explanation 2 to section 50B it has been laid down that for computing the net worth the aggregate value of total assets in the case of depreciable assets would be the written down value of the block of assets determined in accordance with the provisions of sub item © of item(i) of sub clause (C) of clause (6) of section 43. The sub clause (C) lays down the specific mode for computation of WDV in the case of a slump sale as produced below: (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced- a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the India Income-tax Act 1922 in respect of any previous year relevant to the assessment commencing before the 1st day of April1988 and b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April 1988 as if the block asset was the only asset in the relevant block of assets. So, however, that the amount of such decrease not exceed the written down value: The above mode of computation has been reiterated in the case of DCIT v. Warner Lambert (India)(P) Ltd. reported in 56 DTR 121 by the ITAT, Mumbai. Accordingly, the net worth of the undertaking should have been computated as under: Sale 14,15,00,000 consideration Less: 1.Fixed 6,26,71,984 Assets(wdv) Less: 1,99,68,604 Depreciation allowable 4,29,03,380 2 Net current 6,08,09,939 assets Net worth as on 10,37,13,319 14.02.2007 Less: Expenses 7,61,381 on transfer Capital Gain 3,70,25,300 (Short term) However, as stated in para 3 above, the AO has erred in not reducing the depreciation of Rs.1,99,68,604/- while computing the net worth of the unit.

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Consequently, the short term capital gains has been under assessed by the said amount of Rs.1,99,68,604/-. Thus, the order passed by the Assessing Officer u/s 143(3) r.w.s. 144C(3) on 25.01.2011 is erroneous and prejudicial to the interest of revenue. Therefore, you are hereby given an opportunity to show cause why the assessment made byt eh assessing officer should not be cancelled/set aside to the extent as detailed above. You are, therefore, required to attend before the undersigned on 28th February, 2012 at 11.30 AM either in person or by a representative duly authorized in writing in this behalf. If you do not wish to avail of this opportunity off being heard in person or through authorized representative you may show cause in writing on or before the said date which will be considered before any such order u/s 263 of the Act is passed.”

is reproduced below.

“(1) (a) The powers conferred on the CIT under Section 263 of the Act can be exercised in a case here the following two circumstances are jointly fulfilled: 1) Order is erroneous; And 2) Order is prejudicial to revenue The Apex Court in the case of Malabar Industrial co. Ltd. vs. Commissioner Of Income Tax (2000) 243 ITR 83 (SC) has opined as under; The phrase prejudicial to the interests of the Revenue has to be read in conjuction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the revenue. A similar view was also taken in case of Vijay Kumar Megotia Vs. commissioner of Income Tax (2010) 3 ITR (Trib.) 760 (Patna). (b) Net worth of the undertaking was computed by the assessee in accordance with the provisions of section 50B read with section 43(6)(c) of the Act, by increasing the opening Written Down Value(WDV) of the block of assets sold under slump sale with the additions made during the year. In computing the net worth, the assessee did not claim and reduce depreciation for the year in which the sale took place (i.e. previous year relevant to AY 2007-08), based on the provisions of the sections 50B read with 43(6)(c) and 32. (c) In reply to the assessing officer’s query, the assessee filed detailed submissions on 9th December 2010 explaining the interpretation taken and computation of Capital Gains for the relevant year. After proper enquiry and due consideration of the prevailing legislation, the Assessing Officer was convinced with the stand taken by the assessee. (II) With regard to the computation of capital gains the assessee contended as under: (a) As per the provisions of section 50B of the Act, any profit or gain arising from slump sale effected during the previous year shall be chargeable to tax as capital gain in the year in which transfer takes place. In computing capital gains net worth of the undertaking sold shall be deemed to be the cost of acquisition and cost of improvement.

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(b) Explanation 1 to section 50B provides that “net worth” shall be the “aggregate value of total assets” of the undertaking, as reduced by the value of liabilities of such undertaking. (c) Further, explanation 2 to section 50B provides that, in the case of depreciable assets, the aggregate value of total assets shall be the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of section 43(6)(c) of the Act. (d) Hence, in view of the provisions of Explanation 2 to section 50B, of the purposes of computing net worth of the undertaking, WDV of the block of assets transferred shall be WDV as on the date of transfer/sale. WDV on the date of transfer/sale should be taken as WDV at the beginning of the previous year, i.e. 1st April, 2006, as per the provisions of section 43(6)(c) read with section 32(1). (e) In view of section 43(6)(c)(i), WDV of a block of assets at the beginning of the previous year has to be adjusted by the following items to arrive at the WDV of the block on which deprecation for the previous year should be calculated. (i) Increase the block by actual cost of assets falling within that block, acquired during the relevant current previous year; (item A) (ii) Reduce the block by monies receivable towards sale of any assets falling within that block during the relevant current previous year: (item B) and (iii) In the case of slump sale reduce the figure arrived at by decreasing from the actual cost of that asset, depreciation that would have been allowable assuming that the asset was the only asset in the relevant block of assets. (item C) (iv) It is further provided that reduction cannot exceed the WDV of the block as at the beginning of the previous year. (f) The above adjustments are required to be made to the opening WDV of the block and hence the WDV as referred for the purpose of reduction is the opening WDV of the relevant block and not the WDV of the block after considering the depreciation for the relevant year. All the above adjustments are prior to determination of WDV on which depreciation has to be allowed. This point is not specifically considered in case of DIT vs. Warner Lambert India Private Limited 56 DTR 121 (Mum). In other words, WDV of the block arrived at after making the aforementioned adjustments shall be WDV of the block of assets as on the first day of the relevant assessment year (hereinafter referred to as the “adjusted WDV”). The adjusted WDV is the figure on which depreciation is to be calculated at the rates applicable on the first day of the relevant assessment year. This aspect also remained unexamined in the case of DIT vs. Warner Lambert India Private Limited 56 DTR 121 (Mum). (g) Since 4the assets sold on slump sale are not in existence on the first day of the relevant assesmsen5t year and since the WDV of the assets sold on slump sale is already reduced from the opening WDV of the relevant block, the question of computing deprecation on the assets sold on slump sale does not arise. (h) It is submitted that it is a well settled judicial position that law applicable and to be applied shall be the law as on the 1st day of April of the relevant assessment year. This is a universally accepted proposition, which was upheld by the Supreme Court in the case of Reliance Jute and Industries Limited vs .CIT [(1979) 120 ITR 921]. Thus, applying the ratio of the above decision, the rate of depreciation is to be applied on the WDV of the block of assets existing as on the 1st day of the relevant assessment year i.e., as on 1 April 2007 in the

7 ITA No.3989/Mum/2013

present case, however, since the assets have been transferred by way of slump sale on 14.02.2007 and are not owned by the assessee on 1 April 2007, no depreciation can be granted to it. (i) Another absurdity that will arise if depreciation is allowed to the assessee for the year in which assets are sold under slump sale, is that both the assessee as well as the purchaser will be allowed depreciation on the same amount. For example, if the opening WDV of the plant is say Rs.100 and it is sold by the assessee on 14 February 2007 at say Rs.200, the assessee will be allowed depreciation at 25% on Rs.100 for the entire year i.e. Rs.25 and purchaser shall also be entitled to depreciation on Rs.200 at 12.5% (since the plant has been purchased after 1 September 2002, i.e. for half year). (j) The proviso to section 32, provides for allowance of depreciation to the “acquirer”of the asset, based on the criteria of usage of the asset for more or less than 180 days. Hence, the claim of depreciation for more or less than 180 days shall apply only to the assets acquired during the year and not to those assets which are sold during the year. In other words, the claim of depreciation is an annual exercise and as on 31 March if it is found that the person is not the owner and user of the assessee then depreciation cannot be granted to him. This aspect is not discussed in case of DIT vs. Warner Lambert India Private Limited 58 DTR 121 (Mum). With the above arguments, the assessee objected to the recomputation of capital gains u/s 50B as proposed in the notice u/s 263 of the Act.” 5. The learned CIT however, rejected the submission of the assessee

by holding the assessment order in question to be erroneous and

prejudicial to the interests of the Revenue and directed the AO to compute

the total income of the STP Unit by reducing depreciation both for the

purpose of deduction u/s 10A as wells for the purpose of computing

capital gains u/s 50B of the Act. Being aggrieved, the assessee is now in

appeal before us on the aforementioned grounds.

AO made reasonable enquiries on the issues in response to which the

assessee submitted detailed explanation for the stand taken by the

assessee along with Accountant’s report showing the computation for

Slump Sale, working on sales consideration for Slump Sale and copy of

8 ITA No.3989/Mum/2013

the Transfer Agreement. The AO after perusing the above submissions

was satisfied with the same. It was further submitted that the CIT has

mentioned in the notice that the AO has erred while passing the order but

has not provided the fulcrum for such a claim or justify why such a claim

has been made. Therefore, this issue also does not warrant passing of

any order u/s 263 of the Act. The learned DR representing the Revenue

has supported the order of the learned CIT passed u/s 263 of the Act, with

regard.

on record before us. After considering the order passed by the learned

CIT as well as hearing the parties at length we are of the considered view

that since the assessee itself has submitted all the details as required by

the AO with regard to the issue in question, therefore, any order u/s 263

of the Act in this regard is unwarranted.

Jurisdictional High Court in the case of CIT Vs Gabriel India Ltd. reported

in [1993] 203 ITR 108 (Bom.) / [1993] 71 Taxman 585 (Bombay) wherein

it has been held as under:-

“Section 263 of the Income-tax Act, 1961 – Revision – Of orders prejudicial to interests of revenue – Assessment year 1973-74 – Assessee claimed a sum of Rs.99,326 described ‘as plant relay out expenses’ as revenue expenditure and ITO, after making enquiries in regard to nature of said expenditure and considering explanation furnished by assessee in that regard, allowed assessee’s claim. Subsequently, Commissioner, exercising powers under section 263, cancelled order of the ITO observing that order of ITO did not contain discussion in regard to allowability of claim for deduction which indicated non-application of mind and that claim of assessee

9 ITA No.3989/Mum/2013

required examination as to whether expenditure in question was a revenue or capital expenditure and directed ITO to make a fresh assessment on lines indicated by him – Whether under section 263 substitution of the judgment of the Commissioner for that of the ITO is permissible – Held, no – Whether ITO’s conclusion can be termed as erroneous simply because Commissioner does not agree with his conclusion – Held, no – Whether ITO’s order could be held to be ‘erroneous’ simply because in his order he did not make an elaborate discussion – Held, no – Whether provisions of section 263 were applicable to instant case and Commissioner was justified in setting aside assessment order – Held, no.”

From perusal of the aforesaid judgment it becomes clear that it is well

settled position of law that when an assessee has already submitted a

detailed explanation and the claim of the assessee has been allowed by

the AO on being satisfied with the explanation of the assessee, then, such

a decision of the AO cannot be held to be erroneous and prejudicial to the

interests of the Revenue unless it is found to be legally and factually

unsustainable.

order has made specific queries on account of adjustment of computing

arm’s length price which is mentioned in para no. 4 of the assessment

order which is reproduced below:

“4. Adjustment on account of computation of Arm’s length Price 4.1 As the assessee company had transactions with the Associated Enterprises exceeding Rs.15crores, therefore a reference was made to the Transfer Pricing Officer, Mumbai to ascertain the Arms Length Price. Vide order u/s 92CA(3) of the I.T. Act 1961 dated 28.10.2010, the Transfer Pricing Officer-I(6), Mumbai, has proposed an upward adjustment of Rs.1,43,30,864/- on account of Arms Length price in respect of International transactions. The Transfer Pricing Officer-I(6) has held as under; “In view of the above, the arguments provided by the assessee are not acceptable. Accordingly, the assessee’s arguments are rejected and the operating margin has been considered at 27.96% is applied to the total cost of the assessee, which will give the operating margin of Rs.3,38,28,638/-. The assessee has shown the operating margin of Rs.1,94,97,774/-. Thus, the difference of Rs.1,43,30,864/- would be

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adjusted to the international transaction relating tot his activity to arrive at an Arms Length Price of the transaction. Thus, the AO would require to make an adjustment of Rs.1,43,30,864/- in the said activity of the assessee and the total income of the assessee would accordingly increase. Thus, upward adjustment is required to be made in the income of the assessee on account following: (i) Software Development Rs.1,43,30,864/- 4.2 In terms of section 92CA(4) of the I.T. Act,1961, the Assessing Officer is mandated to compute the total income of the assessee under sub section 4 of section 92CA in conformity with the arms length price as so determined by the Transfer Pricing Officer vide order u/s 92CA(3) dated 15.10.2010. in view of the above, the addition of Rs.1,43,30,864/- is made to the total income of the assessee as per provisions of section 92CA(4) in conformity with the arms length price determined by the Transfer Pricing Officer I(6), Mumbai. No deduction under section 10A or section 10B or Chapter VIA of the I.T. Act, 1961 is allowed on this addition.”

And as far as deduction u/s 10A is concerned, the AO has categorically

mentioned in para no.5 of the assessment order which is reproduced

below:

“During the course of assessment proceedings, vide order sheet noting dated 25.11.2010, the assessee was asked to explain why these expenses should not be apportioned against these unit on the basis of turnover of the business. In reply, the assessee vide letter dated 03.12.2010 has submitted as under: “during the year, the Audit fees of Rs.13,00,000/- was not apportioned to STP unit. This is due to the fact that the STP unit is not a separate entity and it is part of DBIS only and therefore these expenses were not apportioned to STP unit. Further in case of Director’s remuneration, the expenses were allocated to non-STP unit and STP unit on actual basis. There were two directors out of which expense relating to one director was allocated to non-STP unit and expenses related to other director was allocated to STP unit on actual basis.” The explanation offered by the assessee is considered. The contention of the assessee is not acceptable. The expenses like Auditors remuneration are common overhead expenses, which cannot be apportioned only against one unit. The remuneration to auditors are not paid for a particular unit. The Auditor is required to audit the entire accounts of the company as a whole and as such these expenses are also required to be apportioned against each unit. Accordingly, the following expense are apportioned against the 10A Unit. The expenses apportioned are worked out as under: Expenses Total amount 10A Unit Non 10A Unit (24.90%) (75.10%) Audit fees 13,00,000 323700 976300

In view of the above discussion, the Profit u/s 10A is reworked out as under: Net profit of Section 10A Unit Rs.4,09,14,952 Less: Appportionable expenses Rs. 3,23,700 Profit from Section 10A Unit Rs.4,05,91,252

11 ITA No.3989/Mum/2013

In view of the above, the deduction u/s 10A is allowed at Rs.4,05,91,252- as against Rs.4,09,14,952/- claimed by the assessee. The proportionate expenditure related to a non 10A unit is required to be allowed at Rs.9,76,300/- as against Rs.13,00,000/-, thereby an increase of profit of Rs.3,23,700/- in non 10A unit. However, as the total income is computed after taking net profit of whole unit, no separate working of non 10a unit is made.” 10. After considering the details filed by the assessee in its paper book

and upon hearing the arguments of both the sides, we are of the

considered view that in the present case the assessee had submitted a

detailed explanation along with relevant details assessment order was

passed by the AO, prima facie on being satisfied with the explanation of

the assessee. In the present case the learned CIT has passed the order

u/s 263 by concluding that the order passed by the AO is erroneous to the

interests of the Revenue without providing a fulcrum for such a claim or

justify such a claim has been made. We have noticed from the facts of the

present case that simply because the AO in his order did not make an

elaborate discussion or did not call for any further details, that by itself

cannot be a ground to hold the order passed by the AO to be

‘Erroneous” for lack of enquiry. From a careful perusal of the record, we

have also noticed that enquiries were conducted by the AO and,

therefore, in such a circumstance, the learned CIT cannot be allowed to

wrongly assume jurisdiction u/s 263 of the Act under the “Guise” of AO’s

failure to conduct any further enquiry. The learned CIT has passed his

order on this issue on the ground that no enquiry at all was conducted by

the AO. After perusal of the record, we noticed that the stand taken by

CIT is incorrect. The records of assessment establishes that an enquiry

12 ITA No.3989/Mum/2013

was conducted by the AO and the assessee had also participated and

filed reply before the AO on this issue.

we are of the considered view that in the present case on the issue of

computation of capital gains and depreciation, the AO has conducted

enquiries and the assessee had also submitted the detailed explanations

and evidently the claim was allowed by the AO on being satisfied with the

explanations of the assessee. Therefore, the learned CIT in the present

case has wrongly assumed jurisdiction u/s 263 of the Act on all the issues

raised by the assessee. It is also a settled law that when two views are

possible and Assessing Officer takes one view then order cannot be

regarded as erroneous? In this respect we draw support from the case

titled “Commissioner of Income Tax vs. Design & Automation Engineers”

(Bombay)(P) Ltd (2010) 323 ITR 632 (Bom)wherein Bombay High Court

concluded the following:

"We have considered the arguments advanced by the Advocates appearing for the Revenue as well as Assessee. In the instant case as recorded earlier, the ITO had by his order dated 30th October, 1996 sought details/explanation from the assessee which the assessee had given by his letter dated 5th November, 1996. It is evident from the order of the Assessing Officer that he has considered aIl detailed particulars filed before him and after discussion allowed the deduction of the entire profit earned by the assessee pertaining to his export business. We are in complete agreement with the decision of this Court in the case of Commissioner of Income Tax v. Gabriel India Ltd. (supra) and we reject the submission of the revenue that the order of the Assessing Officer is erroneous or is passed without application of mind because in his order he has not made elaborate discussion in that regard. In any event the Revenue has admittedly not argued before the CIT or before the Tribunal that the order passed by the Assessing Officer was without application of mind. CIT(A) has set aside the order of the Assessing Officer only on the ground that the CIT did not agree with the view taken by the Assessing Officer and took a view different than that taken by the Assessing Officer. In our view it cannot be said that the Assessing Officer has not applied his mind while granting deduction to the assessee under Section BOHHC as

13 ITA No.3989/Mum/2013

regards net profit earned by the assessee pertaining to their export business. In our view, the' Tribunal is correct in its view that the view taken by the Assessing Officer was a possible view and that the condition precedent for invoking jurisdiction under Section 263 by the CIT did not exist. 7. In view of the above, we hold that ITAT was justified in upsetting the order passed by CIT(A) under Section 263 of the Income Tax Act, 1961. We, therefore, answer the question of law raised in this appeal in favour of the assessee and against the revenue. The above appeal, therefore, stands dismissed. However, there will be no order as to costs. " A similar stand was again taken in the following cases: • Grasim Industries Limited vs. Commissioner of Income Tax (2010) 321 ITR 92 (80m), • Commissioner of Income Tax vs. Development Credit Bank Limited (2010) 323 ITR 206 (Bom), . • Commissioner of Income Tax vs. R.K. Construction Co. (2009) 3131TR 65 (Guj),”

Hence, considering the facts of the present case as well as while

considering the judicial pronouncement as above and on the basis of

reasoning given above, we cancel the impugned order u/s 263 passed by

the learned CIT and restore the order of the AO for assessment year

2007-08.

Order pronounced in the open court on 28-09-2016

Sd/- Sd/-

(B. R. BASKARAN) (SANDEEP GOSAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dated 28-09-2016. Ps. Ashwini Ps. Ashwini Ps. Ashwini Ps. Ashwini

14 ITA No.3989/Mum/2013

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT (A), Mumbai. 3. CIT 4. 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER,

Assistant Registrar ITAT, MUMBAI