M/S HIMADRI INDUSTRIES LTD,KOLKATA vs. C.I.T CENTRAL - III,KOLKATA, KOLKATA

ORDER

Per Shri M. Balaganesh, AM:

2 Himadri Industries Ltd. AY 2009-10 he passed the assessment order for AY.2009-10, u/s 143(3) of the Act, on 31.12.2010, accepting the said disallowance u/s 14A of the Act as offered by the assessee company. The Ld. CIT issued show cause notice u/s. 263 of the Act and the Ld. CIT revised the said assessment order passed u/s. 143(3) of the Act, by his order u/s 263 of the Act passed on 05.03.2013. In the said Revision order, the learned CIT held that in accordance with the provisions of section 14A(2) of the Act, it was mandatory for the Ld. AO to make disallowance u/s. 14A of the Act, by strictly applying Rule 8D of the Income Tax Rules, 1962 (hereinafter referred to as “the Rules”. He held that for not doing so, there had been under-assessment of Rs.10,20,594/- and consequent undercharge of Rs.3,15,564/-. Aggrieved, the assessee is in appeal before us on the following grounds: “

1. The order passed by the CIT u/s 263 of the Income-tax Act, 1961, is arbitrary, erroneous, without proper reasons, invalid and bad in law.

2. On the facts and in the circumstances of the case, the learned CIT erred in holding that the assessment had been completed by the A.O. without application of mind and hence, the assessment was required to be treated as 'erroneous' in so far as it was prejudicial to the interest of revenue.

3. On the facts and in the circumstances of the case, the learned CIT erred in holding that the A.O. is ‘duty-bound to follow provisions of Rule 8D of the LT. Rules, 1962 for determination of the amount of disallowance u/s 14A of the I. T. Act'.

4. On the facts and in the circumstances of the case, the learned CIT erred in revising the assessment order passed by the A.O. u/s 143(3) of the Act; on the basis of his own views on the matter of making disallowance u/s 14 A of the Income-tax Act, 1961; and in directing the A. O. to re-compute the said disallowance by applying Rule 8D of the Income Tax Rules, 1962.”

4. The Ld. AR argued that the issue of disallowance was examined by the AO in original scrutiny assessment proceedings. In support of his contention, he referred to pages 1 to 4 of the paper book containing the detailed questionnaire issued by the AO wherein vide question no. 12 the following query was raised by AO vide notice u/s. 142(1) of the Act dated 18.01.2010: “12. Please submit details of other income, Details of insurance claim received, details of STCG with evidences. Furnish details of interest income, Furnish details of dividend income & Expenses related to earning exempted income (as per section 14A of I. T. Act, 1961 read with rule 8D of I. T. Rules, 1962.)” The assessee replied to the said questionnaire and presented detailed workings of disallowance u/s. 14A of the Act and offered a sum of Rs.22,584/- with proper rationale by referring to each and every expenses debited in the P&L Account. The said workings are reproduced hereinbelow for the sake of convenience:

The Ld. AO accepted the said workings and on being satisfied with the same disallowed a sum of Rs. 22,584/- in the assessment. Accordingly, the Ld. AR argued that the issue

4 Himadri Industries Ltd. AY 2009-10 of disallowance u/s. 14A of the Act was examined in detail by the Ld. AO. Hence, he has objected to the exercise of revisionary Jurisdiction u/s. 263 of the Act by the CIT on this very same issue. He also argued that Ld. CIT had erroneously held that invoking the provisions of Rule 8D of the Rules is mandatory and automatic for making disallowance u/s. 14A of the Act.

“14A [1] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:]”

The power of suo motu revision under sub-section (1) 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; and (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. One finds that the expressions 'erroneous', 'erroneous assessment' and 'erroneous judgment' have been defined in Black's Law Dictionary. According to the definition, 'erroneous' means 'involving error; deviating from the law'. 'Erroneous assessment' refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, 'erroneous judgment' means 'one rendered according to course and practice of Court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles'. From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes a 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 the judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the Commissioner with power to re-exmine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revison because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. Therefore, in order to exercise power under section 263(1) there must be material before the Commissioner to consider that the order passed by the ITO was erroneous insofar as it is prejudicial to the interests of the revenue and that it must be an order which is not in accordance with the law or which has been passed by the ITO without making any enquiry in undue haste. An order can be said to be prejudicial to the interests of the revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of su motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the Court, it would be open to the Courts to examine whether the relevant objectives were available from the records called for and examined by such authority. The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assssee. The assessee had given a detailed explanation in that regard by a letter in writing. All these were part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. This decision of the ITO could not be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter. That was not permissible. Hence, the provisions of section 263 were not applicable to the instant case and, therefore, the Commissioner was not justified in setting aside the assessment order.

The submission of the revenue was that while passing the assessment order, the Assessing Officer did not consider the aspect specifically whether the expenditure in question was revenue or capital expenditure. That argument predicated on the assessment order, which apparently did not give any reason while allowing the entire expenditure as revenue expenditure. However, that, by itself, would not be indicative of the fact that the Assessing Officer had not applied his mind to the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reasons in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. One has to keep in mind the distinction between 'lack of inquiry' and 'inadequate inquiry'. If there was any inquiry, even inadequate, that would not, by itself, give occasion to the Commissioner to pass orders under section 263 merely because he has different opinion in the matter. It is only in cases of 'lack of inquiry' that such a course of action would be open. [Para 12] In the instant case, the Assessing Officer had called for explanation on items in question from the assessee and the assessee had furnished his explanation. Said fact was even taken note of by the Commissioner himself in his order. [Para 13]

That clearly showed that the Assessing Officer had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyes and tools was to be treated as revenue expenditure or not. It appeared that since the Assessing Officer was satisfied with the assessee's explanation, he accepted the same. [Para 14] Even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquiries rather than accepting the assessee's explanation. Therefore, it could not be said that it was a case of 'lack of inquiry'. [Para 15] The instant case was not a case where the Commissioner had concluded that the opinion of the Assessing Officer was clearly erroneous and not warranted on the facts before him, viz., the expenditure incurred was not the revenue expenditure, but should have been treated as capital expenditure. Even the Commissioner in his order passed under section 263 was not clear as to whether the expenditure could be treated as capital expenditure or it was revenue in nature. No doubt, in certain cases it may not be possible to come to a definite finding and, therefore, it is not necessary that in all cases the Commissioner is bound to express final view, but the least that was expected was to record a finding that order sought to be revised was erroneous and prejudicial to the interest of the revenue. No basis for that was disclosed. In sum and substance, accounting practice of the assessee was questioned. However, that basis of the order vanished in thin air when it was found that very accounting practice followed for a number of years had the approval of the income-tax authorities. Interestingly, even for future assessment years, the very same accounting practice was accepted. [Para 16] It was in that context, the question that assumed importance was as to whether powers could be exercised under section 263 when two views were possible. [Para 17] The matter could be looked from another angel. What was the material/ information available with the Assessing Officer on the basis of which he allowed the expenditure as revenue? It was disclosed to the Assessing Officer that the assessee was a manufacturer of car parts. In the manufacturing process, dyes were fitted in machines by which the car parts were manufactured. Those dyes were, thus, the components of the machines. Those dyes needed constant replacement, as their life was not more than a year. The assessee had also explained that since those parts were manufactured for the automobile industry, which had to work accurately at high speed for a longer period, replacement of those parts at short intervals became imperative to retain accuracy. Because of those reasons, those tools and dyes had a very short span of life and could produce maximum one lakh permissible shorts. Thereafter, they had to be replaced. With the replacement of such tools and dyes which were the components of a machine, no new assets came into existence, nor was their benefit of an enduring nature. It neither enhanced the life of existing machines of which these tools and dyes were only parts, nor had their production capacity increased. In CIT v. Mysore Spun Concrete Pipe (P.) Ltd. [1992] 194ITR 159/60 Taxman 170 (Kar.), the High Court held that the replacement of moulds was not in the nature of replacement of a capital machinery but in the nature of replacement of a part of the machinery which, in turn, was in the nature of maintenance of machinery installed in the factory. Such an expenditure was treated as revenue expenditure. With this position in law, it was clear that view taken by the Assessing Officer was one of the possible views and,therefore, the assessment order passed by him could not be held to be prejudicial to the revenue. Such an order, thus, had rightly been set aside by the Tribunal. [Para 18] In the instant case, the purpose of replacing the dyes was to maintain the existing assets, viz., machines and not to bring a new asset. Moreover, case at hand was one of 'repairs of machinery'. The case proceeded on the controversy right from the order of the Assessing Officer till the Tribunal as to whether the expenditure was revenue or capital in nature. [Para 19] Likewise, whether the Commissioner should have recorded definite finding or not, may not be very relevant factor in the instant case where on the facts it was found that the opinion of the Assessing Officer in treating the expenditure as revenue expenditure was plausible and, thus, there was no material before the Commissioner to vary that opinion and ask for fresh inquiry. [Para 20] Thus, the conclusion would be that the order of the Tribunal did not call for any interference, as the question of law had rightly been decided. [Para 21]

8 Himadri Industries Ltd. AY 2009-10 9. We find that the Ld. DR had only tried to argue on flimsy ground that the Ld. AR had not furnished the covering letter before the AO while replying to section 142(1) questionnaire dated 18.01.2010. It is not in dispute that the Ld. AO disallowed a sum of Rs.22,584/- being the disallowance offered by the assessee based on workings given above. Under these circumstances, the claim of the assessee requires to be accepted and that of revenue deserves to be rejected. In view of the aforesaid findings and judicial precedents relied on hereinabove, we quash the revisionary proceedings u/s. 263 of the Act by the Ld. CIT and allow the ground of appeal of assessee.