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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri P. M. Jagtap, AM & Shri K. Narasimha Chary, JM]
This appeal by assessee is arising out of revision order of Ld. Pr. CIT, Kolkata-1 vide M. No. Pr.CIT,Kol-1,Kol/263/2014-15/12, 193-95 dated 20.03.2015. Assessment was framed by JCIT, R-2, Kolkata u/s. 143(3) of the Income-tax Act, 1961(hereinafter referred to as the “Act”) for AY 2011-12 vide his order dated 24.03.2014.
Brief facts of the case are that the assessee is a company dealing in trading of iron and steel. It had accepted purchase order dated 20.11.2010 from one Kharkia Steels (P) Ltd. for supply of 5295 MT of structural items deliverable between December 2010 and February 2011 with a penalty clause that that in the event of failure to supply by such date the buyer had the right to claim damages or compensation from the assessee. In the said purchase order it was further stated that the penalty for late delivery would be Rs.1000 per MT up to 15 days and for any beyond 30 days the same shall be settled between the parties mutually and in case of any dispute it has to be settled by an arbitrator. The assessee could not supply the material within the period as per the contract, and their plea is that by admitting their failure and obligation they were agreeable to pay the sums specified in the agreement for the first fifteen days and there was a dispute in respect of the sums payable for the period beyond it, as such, the matter went before an Arbitrator who passed an award 2 Durable Ispat & Alloys (P) Ltd., AY 2011-12 on 25.06.2011. Such passing of award was, according to the assessee, before finalization of the audited accounts for the year ended 31.03.2011.
The assessee filed their return of income for the relevant assessment year i.e. 2011-12 on 29.09.2011 declaring a total sum of Rs.1,56,05,312/- and the assessment was concluded by an order dated 24.03.2014. But on perusal of the material the Ld. Pr. CIT felt that a sum of Rs.1,34,37,500/- which was the liability arising out of a contractual obligation, was to be allowed for a deduction only in the assessment year relevant to the previous year in which the dispute was finally adjudicated upon. On this premise, the Ld. Pr. CIT set aside the order and directed the AO to complete the assessment de novo.
4. Aggrieved by this order of Ld. Pr. CIT passed u/s. 263 of the Act the assessee preferred this appeal on the following grounds: “
1. That on the facts and in the circumstances of the case, Ld. CIT, Kolkata-1 erred in initiating proceeding u/s. 263 of Income Tax Act.
2. That on the facts and in the circumstances of the case, Ld. CIT, Kolkata-I erred in holding that the assessment order u/s.143(3) dated 24.03.2014 is erroneous & prejudicial to the interest of revenue.
3. That on the fact and in the circumstances of the case, Ld. CIT, Kolkata-I erred in passing order u/s. 263 of the Income Tax Act, 1961 in a biased and arbitrary manner by ignoring the fact that order was passed by the Assessing Officer on the basis of binding decision.
4. That on the facts and in the circumstances of the case and in law, the order passed by Ld. CIT, Kolkata-1 u/s. 263 of the Income Tax Act, 1961 dated 20.03.2015 is bad in law and is liable to be quashed.
5. That on the facts and in the circumstances of the case, Ld. CIT, Kolkata-1 erred in not relying upon the decision in Metal Box Co. of India Ltd. - Their Workmen (1969),73 ITR 53(SC).
6. That on the facts and in the circumstances of the case, Ld. CIT erred in passing order u/s. 263 by relying upon the decision in CIT - Vs - Phalton Sugar Works Ltd. 162 ITR 622 (Bom) which was explained as distinguishable on facts.
7. That on the facts and in the circumstances of the case, Ld. CIT erred in not appreciating the facts properly that the A.O. has conducted proper enquiry pertinent to the case and circumstances and after examining all the relevant issues, has framed an opinion.
8. That the order u/s.263 of the Income Tax Act, 1961 passed by the Ld. CIT, Kolkata-I is vitiated for violating the principles of natural justice.”
5. It is the argument of the Ld. AR that the facts in this matter are admitted, but the only question is the application of correct law to these facts. His first objection is that the AO during the assessment proceedings called for the information relating to the details of 3 Durable Ispat & Alloys (P) Ltd., AY 2011-12 purchase, wages/salaries and other allowances, rent repairs and maintenance, brokerage and commission, compensation paid vide clause 6(ii) annexure to notice u/s. 142(1) of the Act and having considered the facts and circumstances of the case allowed the deduction, as such it is not open for the Ld. Pr. CIT to substitute his opinion for one of the probable views that was taken by the AO. His argument on merit is that insofar as the liability of the assessee is concerned, absolutely there is no dispute because at no point of time assessee disputed their liability to pay penalty or compensation, as the case may be, and they also never disputed their liability to pay Rs.1000/- as penalty for the delay occurred for the initial fifteen days of time, according to them the entire dispute that had to be resolved by the Arbitrator was in respect of the compensation over and above Rs.1000/- agreed to have been payable by the assessee in the agreement and hence since such liability was crystallized in the year before the finalization of the account, it is not justified for the Ld. Pr. CIT to say that such a liability has invariably be crystallized only in the next assessment year.
6. Per contra, it is the argument of the Ld. DR that the order of the AO does not speak anything specific on this aspect or considering the plea of the assessee in respect of the compensation amount as such, not dealing with this matter in detail amounts to order erroneous insofar as prejudicial to the interest of the revenue as such, the Ld. Pr. CIT is justified in invoking the jurisdiction u/s. 263 of the Act. On merits he heavily relied on the impugned order and submitted that the Ld. Pr. CIT placed reliance on a decision reported in CIT Vs. Phalton Sugar Works Ltd. (1986) 162 ITR 622 (Bom) while holding that the liability arising out of contractual obligation is disputed, the assessee is entitled in the assessment year relevant to the previous year in which the dispute finally adjudicated upon are settled, the claim of deduction in that behalf. He, therefore, prayed to dismiss the appeal.
We have heard rival submissions and perused the material available on record. Page Nos. 6 to 12 of the paper book is the purchase order dated 20.11.2010 wherein page no. 7, there is a penalty clause which reads that “the penalty for late delivery would be Rs.1000/- per MT upto fifteen days, for delay beyond 30 days it will be settled between parties mutually and in case of any dispute to be settled by Arbitrator.” Assessee’s case is that when the AO sought the information on the aspect of compensation also in the notice u/s. 142(1) of the Act (page no. 38 to 40 of the paper book), the assessee submitted his version that insofar as the liability and the quantum of Rs.1000/- per MT in the first fifteen days is concerned absolutely no dispute and it was crystallized in the month of March 2011 itself.
4 Durable Ispat & Alloys (P) Ltd., AY 2011-12 The only dispute that had to be settled by the Arbitrator was in respect of the amount that was to be payable beyond this Rs.1000/- for the failure of the assessee to comply with the purchase order as such, the assessee is justified in claiming deduction in the assessment order 2011-12 itself. It is submitted by the Ld. AR that having sought such an information the AO did not consider it necessary to add back such an amount to the income of the assessee and it is one of the probable views that could have been taken by the AO in view of the judgment in Metal Box Co. of India Ltd. Vs. Their Workmen (1969) 73 ITR 53 (SC). On this premise, it is further submitted by the Ld. AR that when the AO had taken a probable view by following a binding precedent, invoking jurisdiction u/s. 263 of the Act by the Ld. Pr. CIT does not arise. For this proposition, he placed reliance on a decision reported in CIT Vs. Paul Brothers (1995) 216 ITR 548 (Bom).
Para no. 6 of the order of ITO reads that AO has failed to deal with the specific facts of the case as per law and has not scrutinized/verified the details in respect of the issues raised i.e. disputed compensation charged under the head in selling and distribution expenses u/s. 37(1) of the Act and it appeared to be erroneous insofar as prejudicial to the interest of the revenue and hence, the same is set aside in respect of the abovementioned issue to the file of AO. A careful reading of this observation of the Ld. Pr. CIT makes it amply clear that the Ld. Pr. CIT did not consider the aspect that in the annexure to the notice issued u/s. 142(1) of the Act vide clause 6(ii) the AO called for the information relating to this confirmation also and dropped the further proceedings in this respect to add back the same. Further, ld. Pr. CIT is also not sure whether the order was erroneous insofar as prejudicial to the interest of revenue inasmuch as his finding is not to that effect but his finding is only that it appears to be so. The long distance between ‘is’ and ‘appears to be’ has to be covered by the Ld. Pr. CIT in his order by giving cogent reasons and taking it to a logical conclusion that the order of AO is erroneous insofar as prejudicial to the interest of revenue instead of appears to be erroneous. When the Ld. Pr. CIT himself is not sure and he would not reach such definite conclusion that the order of AO is erroneous insofar it is prejudicial to the interest of revenue, invoking of jurisdiction u/s. 263 of the Act is not justified and the same is liable to be quashed more particularly in view of the fact that the AO made some enquiry into this aspect also. Invoking jurisdiction u/s. 263 of the Act is not proper in these circumstances. It cannot be ruled out that considering the aspect of crystallization of liability before the finalization of accounts, AO could have taken the 5 Durable Ispat & Alloys (P) Ltd., AY 2011-12 probable view in his order. Hence we find it difficult to sustain the impugned order, and accordingly find that it is liable to be quashed. We do so accordingly.
In the result, appeal of assessee is allowed. Order is pronounced in the open court on 14.12.2016 Sd/- Sd/- (P. M. Jagtap) (K. Narasimha Chary) Accountant Member Judicial Member Dated :14th December, 2016 Jd.(Sr.P.S.) Copy of the order forwarded to: Appellant – Durable Ispat & Alloys (P) Ltd., 7, Laha House, 4th floor, 1. C.R. Avenue, Kolkata-700 072. Respondent –Pr. CIT, Kolkata-1 2 The CIT(A), Kolkata 3.