M/S RELIANCE CHEMOTEX INDUSTRIES LTD.,KOLKATA vs. DCIT, CIR-10(1), KOLKATA, KOLKATA

The Assessee is a company. It is engaged in the business of manufacture and dealing and exporting of yarn. For A.Y.2010-11, the assessee filed return of income on 29.09.2010 disclosing loss of Rs.2,47,65,293/-. In arriving at the loss from the business which was declared in the return of income, the assessee had debited (or say claimed as a deduction) a sum of Rs.1,54,08,480/-. The aforesaid sum debited in the profit and loss Account was a sum paid by the assessee to Rajasthan Rajya Vidut Prasaran Nigam Ltd for electric installation for getting electricity in the assessee’s factory. The electric installations for which the aforesaid expenditure was incurred were not owned by the assessee and was to be property of the Nigam. The sum in question was admittedly incurred in the previous year relevant to A.Y.2009-10. In A.Y.2009-10 the aforesaid sum was capitalised by the assessee in the books of account and depreciation over such assets was claimed in A.Y.2009-10. The same is also evident from Note-7 (xi) of the Schedule to accounts for the year ended 31.03.2009. The said note reads as follows :- ITA NO.715/Kol/2015-M/s. Reliance Chemotex Industries Ltd. A.Y.2010-11

However, while finalising the accounts for the year ended 31.03.2010 it was felt capitalisation of the said amount of Rs.1,54,08,480/- in AY 2009-10 referred to in the earlier paragraph was wrong in view of the Accounting standard and certain Court decisions. As such the capitalisation was reversed and the depreciation provided thereon and claimed in the earlier year was also reversed in the books of accounts for AY 2010-11. As a result of the same the said sum was charged to profit & loss account for the assessment year 2010-11. The said factual details are reflected in Note No.7(xi) to the Schedules of the Annual Accounts for the year ended 31.03.2010. The said Note being Note No.7(xi) reads as follows: “In view of certain court decisions and to fall strictly in line with relative Accounting Standards, the company has this year reversed the capitalisation under the head “Plant and Machinery” in earlier year in respect of payments of Rs.1,54,08,480/- to Rajasthan Rajya Vidyut Prasaran Nigam Ltd., for Electric Installations (not owned by the Company) and so also depreciation provided thereon in earlier year. Consequently such expenditure of Rs.1,54,08,480/- has this year been charged to profit and loss account as per Schedule “19” of “Manufacturing cost” and has written back depreciation of Rs.98,704/-. As a result of such change in method of accounting, the profits of the Company are reduced by Rs.1,53,10,406/- (net of weite of Depreciation) and so also the Fixed Assets of the Company. The related liabilities for taxation are also to be accordingly affected, the amounts whereof have not been ascertained and stated.”

In course of the assessment proceedings for AY 2010-11, the Assessing Officer enquired about the said claim of the Assessee. The Assessee filed letters giving all the evidence for the said expenses of Rs. 1,54,08,480/- and it was also explained that the said expenses was previously debited in the plant & machinery account and in this year the same has been transferred and charged to manufacturing cost and the reference to the Note 7(xi) was also made. The assessing Officer being not fully ITA NO.715/Kol/2015-M/s. Reliance Chemotex Industries Ltd. A.Y.2010-11 satisfied with the said explanation made further enquiries. By another letter the said claim was explained with reference to the judicial precedents of Gujarat, Rajasthan and Bombay High Courts and copies of the said judgements were also filed. Subsequently again by a letter dated 11.12.2012 the case laws relating to charging of the said sum to Profit & Loss Account in respect of reverse capitalisation in earlier years due to the reason mentioned in Note No.7(xi) in schedule 23 was also filed.

The AO passed an order of assessment u/s 143(3) of the Act dated 18.03.2013 wherein the amount claimed as deduction of the sum of Rs.1,54,08,480/- in A.Y.2010- 11 was not disallowed by the AO. There is no discussion in the order of assessment about the claim of assessee but it is clear from the letters written by the assessee to the AO that this issue was raised by the AO and proper replies were given by the assessee to the queries of the AO and the AO was seized of the issue while concluding the assessment for AY 2010-11.

The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of the AO in allowing the claim of the assessee of deduction of a sum of Rs.1,54,08,480/- was erroneous and prejudicial to the interest of the revenue for the reason that reversal of capitalised expenditure relating to AY 2009-10 cannot and was not an expenditure of the previous year relevant to A.Y.2010-11 and the same ought not to have been allowed under the mercantile system of accounting as a deduction while computing income from business for A.Y.2010-11.

In reply to the aforesaid show cause notice the assessee explained in detail the accounting entries as well as the enquiries made by the AO before concluding the assessment. The said reply dated 23.03.2015 of the assessee to the show cause notice dated 12.03.2015 of the CIT u/s 263 of the Act is placed at pages 2 to 6 of the assessee’s paper book. In the said reply the assessee pointed out the legal position with regard to the expenditure incurred on electrical installation which by the terms of the agreement will be owned by the State Electricity Board and that expenditure so incurred was revenue expenditure allowable as deduction. The assessee contended that the AO after due application of mind has accepted the claim of the assessee. It was pointed out that the view taken by the AO in allowing the claim of the assessee was a ITA NO.715/Kol/2015-M/s. Reliance Chemotex Industries Ltd. A.Y.2010-11 possible legal view which was taken after full and proper enquiries. It was submitted that the CIT just because he does not agree with the view of the AO cannot seek to revise the order of AO. In this regard the assessee placed reliance on the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs CIT 243 ITR 83 and the decision of the Hon’ble Calcutta High Court in the case of CIT vs J.L.Morrison (I)Ltd. 366 ITR 593. In both the aforesaid decisions the view taken is that if the AO takes a view which is permissible in law and if the CIT does not agree with such view or where two views are possible and the AO has taken one view that alone will not be sufficient for the CIT to invoke powers u/s 263 of the Act. Attention of the CIT was also brought to the decision of the Hon’ble Bombay High Court in the case of CIT vs Gabriel India Ltd. 203 ITR 108 (Bom) wherein it was held that by exercising of powers u/s 263 of the Act the CIT cannot direct making of a rowing and fishing enquiry.

The CIT however did not consider any of the submissions and set aside the order of AO on this issue and directed the AO to consider the issue afresh after giving opportunity of being heard to the Assessee. The following was the relevant finding and direction of the CIT in the impugned order: “After going through the facts of the case, available assessment records and submission of the assessee company and as per discussion, I am of the view that the assessee company had wrongly debited the prior period expenses in the P&L Account for the AY 2010-11. As the said expenses was related to AY 2009-10. In the submission, assessee accepted that the said expense was related to AY 2009-10 and therefore it was wrongly allowed in AY 2010.11. Therefore, the order dated 18.03.2013 passed u/s 143(3) of the I.T Act by the A.O. stands erroneous and prejudicial to the interest of revenue and deserves to be set aside with direction to the AO to examine whether the assets were actually purchased in FY 2009-10 and insue that the assets were actually purchased for the purpose of the company and were put to use. AO. may further examine if the claim of assessee for this financial year 2009-10 is allowable . Further, the Range Head is directed to supervise the assessment proceedings properly. The assessment proceedings may be initiated in the first quarter of financial year and to be finalized at the earliest, without waiting time barring date and due opportunity of being heard must be given to ssessee before finalizing assessment.” -M/s. Reliance Chemotex Industries Ltd. A.Y.2010-11

Aggrieved by the order of CIT the assessee has preferred the present appeal before the Tribunal.

We have heard the submissions of the ld. Counsel for the assessee, who reiterated the submissions as were made before CIT. It was submitted by him that the law is well settled that the expenditure incurred by the assessee for electric installations for the purpose of getting power for his factory is to be regarded as revenue expenditure. In this regard reliance was placed by him on the decision of the Hon’ble Calcutta High Court in the case of CIT vs Birla Jute Mfg. Co. Ltd. 51 Taxman 402 (Calcutta) wherein it was held that “Although the cost of service lines and apparatus has been borne by the assessee, the Board was the owner of such service lines and apparatus. By payment of the amount in question, the assessee has acquired the right to use the service lines and apparatus for the purpose of having energy from the Board. By the expenditure in question, the assessee did not acquire any asset. The service lines and apparatus did not belong to the assessee but continued to belong to the Board. An amount spent by the assessee may be deductible as a revenue expenditure even though it results in the acquisition of a capital asset by the third party. In the instant case, the expenditure had been incurred by the assessee only to run its own business more profitably and more advantageously. The expenditure in question had been incurred not in elation to the assets owned by the assessee but in order to obtain electric supply to enable the business operations of the assessee, The expenditure in question did not create any asset for the assessee. “

Reliance was also placed on the decision of the Hon’ble Supreme Court in the case of CIT vs Associated Cement Companies Ltd (1988) 38 Taxman 110A(SC) wherein similar expenditure incurred for laying a road in return for exemption from payment of municipal taxes for 15 years was held to be a revenue expenditure.

It was submitted by him that in the light of the above judicial pronouncements. The expenditure in question cannot be considered as capital expenditure. It was also pointed out that the CIT in the impugned order has not concluded that the expenditure in question was a capital expenditure not allowable as deduction. The only issue was the year in which the expenditure was to be allowed. According to him the deduction in question was wrongly claimed in A.Y.2009-10. After due appraisal of the correct legal position, the claim was made in A.Y.2010-11. Our attention was drawn to the Hon’ble Delhi High Court in the case of Vishnu Industrial Gases Ltd. 229/1988 dated ITA NO.715/Kol/2015-M/s. Reliance Chemotex Industries Ltd. A.Y.2010-11 06.05.2008 wherein the Hon’ble Delhi High Court took a view that year in which deduction is allowable would be material only when the rate of tax chargeable on the assessee in different years is different but in a case where tax is attracted at a uniform rate it does not matter as to whether deduction is allowed in one year or in some other year. It was further submitted that there is no finding in the impugned order by the CIT that order of AO was erroneous and prejudicial to the interest of the revenue. In this regard attention was drawn to the decision of the Hon’ble Delhi High Court in the case of ITO vs DG Housing Projects Ltd. 343 ITR 329 (Delhi).

The ld. DR relied on the order of CIT. According to him the action of the assessee in capitalising the expenditure in the books of account in A.Y.2009-10 is by itself an admission that the expenditure in question was a capital expenditure. It was emphasised by him that admittedly expenditure was claimed in A.Y.2009-10 and therefore it cannot be allowed in A.Y.2010-11. It was submitted by him that that the assessee followed mercantile system of accounting. Therefore the claim for deduction by the assessee in A.Y.2010-11 was not correct and the action of the AO in allowing the said deduction in A.Y.2010-11 was erroneous and prejudicial to the interest of the revenue. Therefore the CIT rightly invoked the provision u/s 263 of the Act.

We have given a very careful consideration to the rival submissions. It is not in dispute before us that the Assessee had incurred expenditure to the tune of Rs.1,54,08,480/- which was a payment made to Rajasthan Rajya Vidhyut Prasaran Nigam Ltd., for electric installations for the purpose of supply of power to its factory premises. It is also not in dispute that this expenditure was incurred in the previous year relevant to AY 2009-10. It is also not in dispute that in AY 2009-10, the Assessee capitalized the expenditure so incurred in its books of accounts and claimed depreciation of Rs.98,074/- on the sum so capitalized. However in AY 2010-11 the Assessee was appraised of decisions of Courts in which it was held that expenditure purpose of laying electric cables and other transmission lines to its factory premises for carrying on its business of manufacturing was allowable as revenue expenditure in the year in which the plant starts functioning. The following are the decisions of various High Courts on this issue: ITA NO.715/Kol/2015-M/s. Reliance Chemotex Industries Ltd. A.Y.2010-11

In view of the aforesaid decisions and keeping mind the relevant accounting standards which mandate treatment of such expenditure as revenue expenditure, the Assessee reversed the entries in the books of accounts for AY 2010-11 by debiting the expenditure of Rs.1,54,08,480 to the profit and loss account and writing back the depreciation claimed in AY 2009-10 of Rs.98,074/-. In the course of assessment proceedings for AY 2010-11, the AO made enquires on all the above aspects and was appraised about all these facts as well as decisions of Hon’ble High Courts on the issue. The AO was satisfied with the claim of the Assessee and allowed the claim of the Assessee. Though there is no discussion in the order of assessment on this aspect, the evidence on record clearly shows that the AO was duly appraised of the factual and legal position on the claim of the Assessee for deduction of the sum of Rs.1,54,08,480/-. There was thus due application of mind by the AO to the issue and his action in not disallowing the claim of the Assessee only shows that he has accepted the claim of the Assessee. The view taken by the AO is a possible view and is in accordance with the various decisions of Hon’ble High Courts on this issue.

The CIT in the impugned order does not come to any conclusion that the claim of the Assessee is not to be allowed as revenue expenditure of AY 2010-11. His grievance is that this was a prior period expenditure relating to AY 2009-10 and therefore ought not to have been allowed as a deduction in AY 2010-11. As rightly contended by the learned counsel for the Assessee, in that event the CIT ought to have directed that the entire claim for deduction ought to have been allowed in AY 2009- 10. Having not done so, the CIT further went on to direct the AO to verify whether the assets were actually purchased in FY 2009-10 for the purpose of the business of the Assessee and were put to use. The direction is nothing but a direction to make fishing or a roving enquiry, which is not permissible in proceedings u/s.263 of the Act. The order sought to be revised is the order of Assessment passed by the AO for AY 2010-11 and any direction to the AO in relation to AY 2009-10 would not be ITA NO.715/Kol/2015-M/s. Reliance Chemotex Industries Ltd. A.Y.2010-11 appropriate in proceedings u/s.263 of the Act for AY 2010-11. Apart from the above the facts with regard to the nature of expenditure and the fact that it was actually incurred already stood examined by the AO. In one of the letters filed before the AO in the assessment proceedings for AY 2010-11, a copy of which is placed at page-11 and 12 of the Assessee’s paper book, the Assessee has furnished copies of evidence for electric instalments expenses that were debited in Profit and Loss account. Therefore the above direction of the CIT in our view is contrary to the evidence on record and cannot be sustained.

As pointed out by the Supreme Court in Malabar Industrial Co.’s case (supra), the prerequisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent—if the order of the Income-tax Officer is erroneous but is not prejudicial to the interests of Revenue or if it is not erroneous but is prejudicial to the interests of Revenue— recourse cannot be had to section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase ‘prejudicial to the interests of the Revenue’ is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an ITO adopted one of the courses permissible in law and it has ITA NO.715/Kol/2015-M/s. Reliance Chemotex Industries Ltd. A.Y.2010-11 resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law.

The Hon’ble Bombay High Court in the case of Gabriel India Ltd. (supra) has held that the power of suo motu revision under sub-s. (1) of s. 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous.

There cannot be dispute that the nature of the expenditure is revenue and that it ought to be allowed as deduction. Even the CIT does not dispute this position. In such circumstances, the action of the CIT u/s.263 of the Act is a revenue neutral exercise as the deduction in any case should be allowed in AY 2009-10. The Hon’ble Delhi High Court in the case of Vishnu Industrial Gases (P) Ltd. (supra) has held that where disputes are in relation to the year in which deduction is to be allowed and where the tax rates applicable are same in both the AYs, then the department should not raises issues and fritter away its energies in fighting such matters.

We are of the view that in the present case the view taken by the AO in allowing the claim of the Assessee for deduction of a sum of Rs.1,54,08,480/- is a possible view, especially in the light of the fact that the depreciation claimed and allowed in ITA NO.715/Kol/2015-M/s. Reliance Chemotex Industries Ltd. A.Y.2010-11 AY 2009-10 was written back in the accounts for AY 2010-11. The CIT therefore could not have exercised his powers u/s.263 of the Act terming the order of the AO erroneous and prejudicial to the interest of the revenue. We therefore quash the order u/s.263 of the Act and allow the appeal of the Assessee.

In the result, appeal of the Assessee is allowed. Order pronounced in the Court on 09.12.2016.