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Income Tax Appellate Tribunal, LUCKNOW BENCH “A”, LUCKNOW
Before: SHRI ANADEE NATH MISSHRA & SHRI SUBHASH MALGURIAShri Swaran Singh, C.A.
This is an appeal preferred by the assessee against the order of the Ld. Principal Commissioner of Income Tax [hereinafter referred to as the “PCIT”], Kanpur dated 30.03.2015 for assessment year 2011-12 passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. The grounds of appeal
of the assessee are as under: -
1. That the Learned Pr.CIT, Kanpur has erred in law and on facts in passing the Order under section 263 of the Income Tax Act, 1961, because the Assessment passed under section 263 of the Income Tax Act, 1961is liable to be quashed.
That the Ld. Pr. Commissioner of Income Tax-], Kanpur has neither herself conducted any enquiry nor got such enquiry conducted on the issue(s) on which the impugned order under section 263 of the Income Tax Act, 1961 has been set aside, therefore, the Pr. Commissioner of Income Tax-, Kanpur is not justified in exercising powers under section 263 of the Income Tax Act, 1961.
3. That the Order for the Assessment Year 2011-12 was passed under Section 153C of the Income Tax Act, 1961 after approval from the Joint Commissioner of the Income Tax under section 153D of the Income Tax Act, 1961, therefore in view of the Judgment of Hon’ble Allahabad High Court in the case of CIT vs. Dr. Ashok Kumar IT Appeal No. 192 of 2000 and Pr.
Page 2 of 24 Commissioner of Income Tax (Central), Kanpur has no jurisdiction to pass the order under section 263 of the Income Tax Act, 196] in the instant case.
That the reasons for initiating revision proceedings _ under section 263 of the Income Tax Act, 1961 given in show cause notice u/s 263(1) of the Income Tax Act, 1961, dated 24.10.2013, are ambiguous, non specific and different from the reasons for which the impugned assessment order has been set aside hence, the said revision nil order is insupportable in law and on facts and deserves to be quashed and assessment order restored.
5. That the Pr. C.I.T.(Central), Kanpur has failed to bring on record lack of enquiry on the part of the AO during the assessment proceedings on the issues dealt with in the proceedings u/s 263 of the Income Tax Act, 1961 therefore, the assumption of jurisdiction under section 263 of the Income Tax Act, 1961 is void ab-initio and the consequent impugned order passed under section 263 of the Income Tax Act, 1961 is unsustainable in law and on facts and liable to be quashed.
6. That the Order passed under section 263 of the Income Tax Act, 1961, by the Ld. Pr. Commissioner of Income Tax-l, Kanpur is contrary to the principles of natural justice and equity and liable to be quashed.
7. That the twin conditions that the impugned | assessment is erroneous and prejudicial to the interest of revenue are totally absent in the facts of the present case hence the order under appeal is bad in law and deserves to be quashed.
8. That the Ld. Pr. C.I.T.-1, Kanpur has erred in law and on facts in not pointing out specifically and categorically as to how the assessment order was erroneous as well as prejudicial to the interest of the revenue, therefore the impugned revision order passed under section 263 of the Income Tax Act, 1961 is liable to be quashed.
9. That the Order passed by the Ld. Pr Commissioner of the Income Tax(Central), Kanpur has erred in law and on facts in passing the Order under section 263 of the Income Tax Act, 1961 is wholly unjustified, arbitrary and deserves to be deleted.”
At the outset, we find that there is a delay of 2564 days in filing of the appeal before the Income Tax Appellate Tribunal (ITAT), for which, a petition for condonation of delay along with affidavit explaining reasons for such delay has been filed. The relevant part of the application explaining cause of delay is reproduced as under: - “1) Computation of number of days of delay in filing the appeal before the Hon’ble I.T.A.T.:
(a) Date of passing of impugned Order u/s 263 of the Income Tax Act, 1961 - 30.3.2015 (b) Date of receipt of impugned order passed u/s 263 dated 30.3.2015 - 07.04.2015 (c) Date of filing of appeal in ITAT No. 137/LK W/2022 - 13.06.2022 (d) Number of days delay - 2564 2) The assessee is a firm engaged in business of manufacturing and processing leather & leather goods for export & local sales under the name and style of M/s Model Exims.
3) A return of income declaring total income at Rs.52,19,290/was e-filed under section 1391) of the Income Tax Act, 196] on 30.09.2011. An order of assessment in case of M/S Model Exims C/o Sultan Tanners, Jajmau, Kanpur was passed u/s 153C on 31.03.2013 by ACIT, Central Circle-II, Kanpur.
4) Subsequently, an order u/s 263 dated 30.03.2015 was passed by Pr. CIT, Central, Kanpur setting aside the aforesaid assessment order passed u/s 153C dated 31.03.2013.
5) Subsequent to the aforesaid order, an order passed under section 263/143(3) of the Income Tax Act, 1961 was passed by Asstt. Commissioner of Income Tax, Central Circle-Il, Kanpur dated 31.03.2016.
6) That the previous Counsel of the appellant Late C.A. R.R. Jain advised the appellant that if need arises validity of order under section 263 of the Income Tax Act, 1961 (impugned order) will be challenged in the appeal to be filed against assessment order pursuant to impugned order under section 263 of the Income Tax Act, 1961.
7) An appeal was filed by the assessee against the assessment order dated 30.03.2016 before CIT(A) on 29.04.2016 in which interalia the validity of Order passed u/s 263 was also challenged on the advise of previous counsel. Late CA R.R. Jain and no separate appeal against the order passed w/s 263 was filed before Hon’ ble ITAT, Lucknow on the advise of previous counsel Late CA R.R. Jain.
8) The previous counsel, Late CA R.R. Jain expired on 21.04.2021.
9) Now, the assessee has appointed, new counsel CA Swaran Singh, for appeal matters and he advised the assessee to file a separate appeal against the order passed u/s 263 dated 30.3.2015 before Hon’ble ITAT, Lucknow.
10) On receiving the legal advise by the new counsel, CA Swaran Singh, an appeal before Hon’ble ITAT Lucknow against the order passed under section 263 of the Income Tax Act,1961 is being filed by the assessee firm M/s Model Exims.
11) The aforesaid facts show that the assessee was pursuing its remedy in the wrong forum on the advise of its previous counsel Late CA. R.R. Jain.
12) The appeal before Hon’ble CIT(A)-II, Kanpur against the assessment order passed under section 263/143(3) of the Income Tax Act, 1961 is still pending and following legal ground challenging validity of order passed under section 263 of Income Tax Act, 1961 was taken:
(Quote)
3, That order u/s 263 was non-est and hence unsustainable under law in the facts and circumstances of the case.
(Unquote)
13) Copy of Form-35 filed before CIT(A) dated 29.04.2016 along with grounds of appeal is enclosed at P.B. No. 1-7.
14) Copy of Assessee’s Affidavit is enclosed at P.B. No. 8-9.
The assessee received assessment order passed under section 263/143(3) of the Income Tax Act, 1961 dated 30.03.2016 on 04.04.2016 and filed appeal before CIT(A) within 30 days of receiving an assessment order i.e. on 29.04.2016in which interalia the validity of Order passed u/s 263 was also challenged on the advise of previous counsel. Late CA R.R. Jain and no separate appeal against the order passed u/s 263 was filed before Hon’ble ITAT, Lucknow on the advice of previous counsel Late CA R.R. Jain.
It is further submitted that the order passed under section 263/143(3) of the Income Tax Act, 1961 was received on 04.04.2016 and the time limit for filling appeal Before the Hon’ble ITAT is 60 days from the receipt of the order i.e., till 04.06.2016. Due to lack of knowledge of income tax laws, assessee relied on the advice of the previous counsel Late CA R.R. Jain. An appeal was filed by the assessee against the assessment order dated 30.03.2016 before CIT(A) on 29.04.2016 in which interalia the validity of Order passed u/s 263 was also challenged on the advise of previous counsel and no separate appeal against the order passed u/s 263 was filed before Hon’ble ITAT, Lucknow on the advise of previous counsel Late CA R.R. Jain. The previous counsel, Late CA R.R. Jain expired on 21.04.2021.On receiving the proper legal advice by the new counsel, CA Swaran Singh, an appeal before Hon’ble ITAT Lucknow against the order passed under section 263 of the Income Tax Act, 1961 is being filed by the assessee firm M/s Model Exims.
There was a delay of 2564 days in filing the appeal before Hon’ble ITAT Lucknow against the order passed under section 263 of Income Tax Act, 1961.
Another relevant fact is that there was an outbreak of Covid19 and as per the order of Hon’ble Supreme Court of India In RE: Cognizance for extension of limitation with miscellaneous application No. 29 of 2022 in miscellaneous application No. 665 of 2021 in suomoto writ petition(C) No. 3 of 2020, in cases where the limitation would have expired during the period between 15.03.2020 till 28.02.2022i.e. 715 days, notwithstanding the actual balance period of limitation remaining, all persons shall have a limitation period of 90days from 01.03.2022.
Due to demise of the previous counsel Late CA R.R. Jain on 21.04.2021, the assessee approached the new counsel CA. Swaran Singh and was advised to file the appeal on correct forum.
In view of above facts and circumstances, the assessee was pursuing its remedy in the wrong forum on the advice of its previous counsel Late CA. R. R. Jain. Hence, it is humbly prayed that delay in filling of present appeal in correct forum may kindly be condoned. Further Reliance is to be placed on Judgment of ITAT Banglore in the case of M/s. Bangalore MetroRail Corporation Ltd. Vs. the Deputy Commissioner of Income Tax in enclosed at P.B. No. 10-20 (Quote)
“......9. From the above, it is clear that the period of time that assessee followed the wrong professional advice in preferring the respective appeals are the same. It is also true that the advice of the professional would be the point of time at which the assessee would begin to explore the option of exhausting all legal remedies.
10. Therefore respectfully following the view adopted by this Tribunal in assessee’s own case for A.Y. 2009-10, we accept the reasons given for the delay and thereby condone the same for not able to file an appeal before the Ld.CIT(A). As the Ld.CIT(A) has not decided the issues on merits, we remand this appeal back to La.CIT(A) to pass a detailed order on the merits of the case by granting proper opportunity of being heard to assessee in accordance with law. Accordingly, the grounds raised by assessee stands allowed for statistical purposes, In the result, the appeal filed by assessee stands allowed for statistical purposes...”
(Unquote)
Moreover, in catena of cases it has been held that if remedy is pursued on wrong forum then if assessee is filling appeal in correct forum. In such a case, condonation of delay shall be allowed. Reliance is to be placed on following judgments on a similar grounds: a) Judgment of Hon’ble ITAT Lucknow Bench in the case of Shri Anurag Rastogi Vs. Income Tax Officer-3(1),KanpurITA No.360/Lkw/2019enclosed at P.B. No. 21-25 b) Judgment of Hon’ble High Court of Jharkhand in the case of State of Jharkhand vs. Ashok Kumar Chokhan(AIR 2009 SC 1927) enclosed at P.B. No. 26-38 c) Judgment of Hon’ble High Court of Judicature at Bombay in the case of – Pattherao Narsu Patil & Anr. Vs. Sou. Gangu A. Lad & Ors. (2019(2)Bom.C.R.436) enclosed at P.B. No. 39-45 d) Judgment of Hon’ble Maharashtra Real State Appellate Tribunal in the case of Mysore Sainath Lavanya vs. M/s AkshayGruha in Appeal No. 000600000002117l enclosed at P.B. No. 46-47 Further reliance is placed on the Judgment of Hon’ble Supreme Court of India in the case of Collector Land Acquisition, Anantnag & Anr. Vs Mst. Kataji & Ors. (P.B. No. 48-51) laid down the following guidelines in condonation of delay:
I. Ordinarily a litigant does not stand to benefit by lodging an appeal late.
2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties.
3. "Every day's delay must be explained" does not mean that a pedantic approach should be made. Why not every hour's delay, every second’s delay? The doctrine must be applied in a rational common sense pragmatic manner.
Page 7 of 24 4. When substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay.
5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact he runs a serious risk.
6. It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so.
4. The Ld. CIT-DR strongly opposing the petition filed by the assessee for condonation of delay submitted that there is no merit in the petition filed by the assessee and also affidavit filed by the assessee. Therefore, the delay should not be condoned.
We have heard both the sides and gone through the contents of petition filed by the assessee for condonation of delay in filing of the appeal. From the contents of petition filed by the assessee, we find that there is a delay of 2564 days in filing of the appeal before the ITAT, for which, the assessee has given reasons, as per which late Shri R.R. Jain (C.A.) had given advice no separate appeal against the order passed u/s 263 of the Act was filed before ITAT, Lucknow. The previous counsel, late Shri R.R. Jain expired on 21.04.2021. Therefore, aforesaid facts show that the assessee was pursuing its remedy in the wrong forum on the advise of its previous counsel late Shri R.R. Jain. We have gone through the reasons given by the assessee in their petition filed by the assessee and from contents, we find that there is a bona fide and reasonable cause for the assessee in not filing the appeal before the ITAT within time allowed under the Act, which is evident from the fact that the assessee was pursuing alternate remedy available under the Act, and appeared before the AO for consequential assessment proceedings. From the above, it is very Page 8 of 24 clear that it is not a case for “negligence” of the assessee that it is not filed appeal or not pursuing alternate remedy available under the Act to challenge the order of the Ld. CIT u/s 263 of the Act, because no person will derive any undue benefit by not preferring appeal against any assessment order or other order passed under the Act.
Having said so, let us come back to legal precedents on the issue of condonation of delay. It is well settled principle of law by the decision of various courts including the Hon'ble Supreme Court in the case of Collector Land Acquisition Vs. Mst. Katiji & Ors reported in [1987] 167 ITR 471 (SC), where, the Hon'ble Supreme Court clearly laid down the law in condonation of delay and held that ordinarily a litigant does not stand to benefit by lodging an appeal late. Further, refusing to condone delay result in meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this, when delay is condoned the highest that can happen is cause would be decided on merits after hearing the parties. At the same time, the Hon'ble Supreme Court made it clear that every day of delay must be explained. In case, the applicant explains the delay in filing of the appeal and such delay is bona fide and reasonable, then, the Courts must take a liberal approach and condone the delay in filing of the appeal. In this case, the reasons given by the assessee appears to be bona fide and genuine and further reasonable. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we are inclined to condone the delay in filing of appeal before us and admit the appeal for adjudication.
The brief facts of the case are that the assessee is a firm engaged in the business of manufacturing and export of finished leather and sale of license. The assessee company had filed its Page 9 of 24 return of income for the A.Y. 2011-12 on 30.09.2011 declaring total income at Rs.52,19,290/-. Subsequently a search and seizure was carried out u/s 132 of the Act on 24.09.2010 on M/s. Model Tanners Group to seizure of cash of Rs.2 crore from Mehtab Alam & his wife Smt. Farah Lari at Amousi Airport, Lucknow and the assessment was completed u/s 153C of the Act vide order dated 31.03.2013. During the assessment proceedings, the income of the assessee is computed as under: - Income returned 52,19,290/- Add back: Disallowances as discussed above 1,55,287/- Deduction under chapter VI 7,47,510/- 9,02,797/- 61,22,087/-
The assessment was completed u/s 153C of the Act on 31.03.2013. The Principal Commissioner of Income Tax called for the record and was of the opinion that the order passed by the Assessing Officer is erroneous in so far it is prejudicial to the interest of the Revenue. Accordingly, he issued show cause notice dated 24/10/2013 to the assessee as to why proceedings u/s 263 should not be initiated against him and the assessment order passed be revised. The said show cause notice gives the following reasons: - “On perusal of assessment record relating to the Assessment Year 2010- 11 in your case has been examined. On examination of assessment record, it is found that assessment order dated 31/03/2013 for the AY. 2010-11 passed by the Asstt. Commissioner of income Tax, Central Circle-2, Kanpur under section 153C of the Income Tax Act, 1961 on total income of Rs. 31,42,952/is erroneous and prejudicial to the interests of revenue for the following facts and reasons: Applicability of section 195 of the IT Act, 1961 on Commission paid to foreign agents (sales commission) The assessee firm has paid a sum of Rs. 83,89,773/- to the overseas entities and debited in profit & loss account under head ‘Sales promotion’ without deduction of income tax at source u/s 195 of the IT Act. As per provisions of section 195 of the IT Act, 1961 read with section 9(1)(vii), it is mandatory to deduct tax at source. The applicable provision has been contained under section 9 and 195 of the IT Act, 1961 which define the term “income deemed to accrue or arise in India” and liability of the assessee to deduct income tax at source on “other sums”, Section 9(1)(vii) of IT 1961 under: The following income deemed to accrue or arise in India:
(vii). Income by way of fees for technical services payable by (a). the Government; or (b) a person who Is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India; or (c). a person who is a non-resident, where the fees are payable in r/o services utilized in a business or profession carried on by such person in India or for the purpose of making or earning any income from any source in India: (Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the Ist day of April 1976, shall be deemed to have been made before the date it the agreement is made in accordance with proposals approved by the Central Government. ] Explanation (1). For the purpose of the foregoing proviso, an agreement made on or after the Ist day of April 1976, shall be deemed to have been made before the date if the agreement is made in accordance with proposals approved by the Central Govt before that date.] Explanation(2]for the purpose of this clause, “fee for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries” A subsequent amendment has also been introduced by Finance Act, 2010 with retrospective effect from 01-06-1976 which reads as under: “In section 9 of the Income Tax Act, for the Explanation occurring after sub- section (2) the following Explanation shall be submitted and shall be deemed to have been substituted with effect from the 1* day of June 1976, namely: “ Explanation For the removal of doubts it is hereby declared that for the purposes of this Section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) Or Clause (vi) or clause (vii) or sub- section (1) and shall be included in the total income of the non-resident, whether or not: (iii), The non-resident has a residence or place of business or business connection in India; or (iv). The non-resident has rendered services in India A perusal of these provisions makes it clear that these classify and cover all income as accruing and arising in India which partake the character of payment on account of “fee for technical services” which is very preciously defined in Explanation(2) to include any Payment for rendering of any managerial or consultancy services rendered by the Non-Resident agent. In the case of the assessee since he was not able to sell his goods on his own to the foreign buyers, he had to avail the managerial acumen and the expertise of the non-resident in lieu of the consideration debited by the assessee in his book of accounts as Commission. It makes it clear that the payment by the assessee in connection with his business expediencies in India to a person outside Indian territory for availing his expertise i Sale of his goods is nothing but a fee paid by the assessee to the non-resident against tee technical services rendered by him. Section 195 of the Income Tax Act, 1961 read as under:
Other sums” 195. [(1) Any person responsible for paying to a non-resident, not being a company or to a foreign company, any interest[*] or any other sum chargeable under the provision of this Act (not being income chargeable under the head “ Salaries”[*] shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: (Provided that in case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode;] (Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O] Explanation For the purpose of this section, where any interest or other sum as aforesaid is credited to any account, whether called “ Interest payable account” or “ suspense account” or by any other name, in the book of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provision of this section shall apply.] (2). Where the person responsible for paying any sum chargeable under this Act, (other than salary) to a non resident considers that the whole of such sum would not be income chargeable in the case of recipient, he may make an application to the [Assessing] Officer to determine,[by general or special order], the appropriate proportion of such sum so chargeable and upon such determination, tax shall be deducted under sub-section(10) only on that Proportion of the sum which is so chargeable. ((3) Subject to rules made under sub-section (5) any person entitled to receive any interest or other sum on which income tax has to be deducted under sub-section (1) may make an application in the prescribed form to the[Assessing] Officer for the grant of a certificate authorizing him to receive such tax interest or other sum without deduction of tax under subsection, and where any such certificate is granted every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the Certificate is in force, make payment of such interest or than sum without deduction tax thereon under sub-section(1). From the above facts, which have been brought on record that there was mandatory liability on part of the assessee under section 195 of the IT Act, 1961 read with section 9(1)(vii) thereof to deduct income tax at source from the sum of Rs. 36,37,279/- which he has debited in Profit & Loss account as ‘Sales promotion’. Therefore there was a clear cut liable for deduct tax at source and having failed in deducting the same amount was liable to be disallowed as per provisions of section 40(a)(i) of the IT Act, 1961. The AO while passing the order u/s 153C of the Act in this case has not examined the above facts, accordingly order on this point is erroneous as well as prejudicial to the interest of Revenue. Deduction u/s 801B of the IT Act, 1961. On examination of record, it is seen that the assessee has claimed a deduction of Rs.7,47,500/- u/s 80IB, it is further seen that the date of formation of firm is 01-04-1996, which is more than 10 years of claiming of said deduction. As per provisions of sub-sections (5) of section 80IB, the total period should not be exceeded ten consecutive assessment years. For sack of convenience the relevant portion of section is reproduced as under: (5). The amount of deduction in the case of an industrial undertaking located in such industrially backward districts as the Central Government may, having regard to the prescribed guidelines, by notification in the Official Gazette, specify in this behalf as industrially backward district of category ’A’ or an industrially backward district of category ‘B’ shall be- Page 12 of 24 (i). hundred percent of the profits and gains derived from an industrial undertaking located in a backward district of category ‘A’ for five assessment years beginning with the initial assessment year and thereafter, twenty-five percent (or thirty per cent where the assessee is a company) of the profits and gains of an industrial undertaking: provided that the total period of deduction shall not exceed ten consecutive years or where the assessee is a co-operative society, twelve consecutive assessment years: Provided further that the industrial undertaking begins to manufacture or produce article or things or to operate its cold storage plant or plants at anytime during the period beginning on the 1" day of October 1994 and ending on the 31% day of March. (ii). Hundred percent of the profit and gains derived from an industrial undertaking located in a backward district of category ’B’ for three assessment year beginning with initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains of an industrial undertaking.: Provided that the total period of deduction does not exceed eight consecutive assessment years (or where the assessee is a cooperative society, twelve consecutive assessment years): Provided further that the industrial undertaking begins to manufacture or produce articles or things or the operate its cold storage plant or plants at any time during the period beginning on the 1st day of October 1994 and ending on the 31" day of March. From the perusal of above facts, it is observed that the assessee has wrongly Claimed deduction u/s 80IB at Rs. 7,47,500/-. On ‘examination of record, it is also seen that assessee has not filed Form No. 10CCB (Form of audit report for claiming deduction u/s 80IB). The AO while passing the order u/s 153C of the Act in this case has not examined the above facts, accordingly order on this point is erroneous as well as prejudicial to the interest of the revenue.”
On both the aforesaid reasons, according to the Ld. PCIT, the AO has not conducted proper inquiry. Therefore, according to him, the order of the AO was erroneous as well as prejudicial to the revenue. Therefore, he set aside the assessment order dated 31/03/2013 and directed the AO to frame afresh order de nova. This impugned action of Ld. PCIT has been challenged before us by the assessee.
Assailing the action of the Ld. PCIT, the assessee submitted a detailed reply in respect of all the above allegation which are reproduced in brief as under:-
“That the order u/s 153C has been passed after due examination of facts, by raising queries and diligently examining the same. There is no failure on the part of the AO not to examine the issues in details. The order passed under section 153C has been approved by the Joint Commissioner of Income Tax.
Disallowance of Commissioner paid to the Foreign Agent:
The assessee company has paid a sum of Rs.83,89,773/- to the Overseas entities and debited in the Profit & Loss Account under the head ‘Sales Promotion with TDS u/s 195 of the IT. Act. In his reply the assessee has stated the disallowance of the commission under section 9(1)(vii) as FTS is not applicable to the facts of the case as per reason given in the reply. In support of his claim he has relied upon the following case laws in his favour: -
1. 1. CIT Vs. Toshoku Ltd (125 ITR 525 SC) 2. CIT Vs. Eon Technology P Ltd (ITA. No.1167 dated 8th Nov, 2011 Delhi HC) 3. CIT Vs. Sheraton International Inc (2009) 313 ITR 267 4. CIT Vs. Indopel Garments (P)Ltd Vs. DCIT (2001 72 TTJ Mad 702) 5. Spahi Projects (P) Ltd, In Re (315 ITR 374 AAR.
6. Ind Telesoft P Ltd., (543 of 2001) 7. DCIT Vs. Ardeshi B Cursetjee & Sons Ltd (2008 115 TTJ Mumbai 916) 8. JCIT Vs. George Williamson (Assam) Ltd., (2009 116 ITD 328) 9. DCIT Vs. Sanjiv Gupta (2011 135 TTJ Lucknow 641) 10. TVS Motor Company Vs. ACIT (ITA. Nos. 697 & 757/Mds/2009)
In conclusion it is clear from the reading of the provisions of Section 9 as well as a number of case laws that none of the section 9 tests would succeed (specifically section 9(1)(i), 9(1)(vi) and 9(1)(vii) and therefore the income of foreign agents from commission payments made by the Indian company would not be deemed to accrue or arise in India and hence is not taxable in India under the Indian Income Tax Act, 1961. That the commission has been paid only for the purpose of procuring orders and not for technical or managerial consultancy services as mentioned in section 9(1){vii). Such payment of commission has not been paid for any services rendered in India. All these above Issues were examined by the AO while framing the assessment: “Notice u/s 148 dated 21-01-13 was issued and served on the assessee on 22- 01-13. In compliance to which the assessee filed written submission on 25-01- 13 stating that the return already filed may be treated as return in compliance to the said notice u/s 143(2) and 142(1) dated 28-01-13 were issued and served on the assessee on 30-01-13. In compliance of these notices Shri Ravi Shukla AR of the assessee attended and submitted written reply, copy of ITR, statement of income, copy of bank statement. The books of accounts were produced and test checked. The assessee filed return on line on 30-09-11. Return has been shown at Rs. 52,19,290/- after claiming rebate u/s 80IB of the Act. The assessee is a manufacturer and exporter of the leather allied products. The copy of audited account has been filed. The valuation of closing stock which has been show at Rs. 9.24 crore of both units. The inventory of the closing stock has also been filed. The domestic sales which form major part of sales are fully verifiable. The AO vide notice u/s 142(1) dt. 24-01-13 directed the assessee to furnish the details of the Commission paid. The assessee vide reply dated 18-11-13 submitted as under: “Details of commission debited to profit & loss account is being filed. The commission has been paid to foreign agents against sale of exports. Copy of their accounts alongwith agreement is being filed. No tax has been deducted at the source.” Further vide reply dated nil received in this office on 05-12-13 the assessee submitted as under:
Page 14 of 24 As regards claim u/s 80Ib and its examination as well as allow ability it is submitted that the AO has already denied the said deduction and as such there is no error in the order of the AO. This order passed by the AO u/s 143(3) has been passed after being duly approved by the JCIT, Central Circle. The JCIT Central must have given his approval to the order only after applying his mind, examining the issues involved with due diligence. Once an order has been passed with the prior approval of the Range JCIT, it ceases to be an order passed by the AO. The order of the AO gets managed with that of the JCIT. The order passed by the JCIT would hot fall within the frame work of the section 263 of the Act. In view of the above it cannot be said that the order passed by the AO is erroneous or prejudicial to the interest of the revenue.”
The Principal Commissioner of Income Tax did not agree with the contention of the assessee and set aside the assessment order with the direction to frame denovo assessment order, observing as under:
In view of the above factual position and legal precedents and after having considered all the facts, arguments of the assessee, it is an unescapable conclusion that the order passed by the AO is erroneous as indicated above as well as prejudicial to the interest of the Revenue since the Assessing Officer did not verify several issues and facts and did not carry out necessary investigations to come to a conclusion before passing the assessment order. Therefore, the assessment orders for A.Y. 2010-11 passed by the AO is hereby set aside w/s 263 of the IT Act, 1961 to be framed afresh after taking into account the points made above on the merits of the case as well as the documents submitted by the assessee during the course of assessment proceedings, documents and other information found during the course of search, after verifying issues and facts, carrying out necessary investigations and after giving the assessee due opportunity of being heard. The issue of disallowance w/s 14(a)(i) for failure to deduct tax at source u/s 195 on commission paid to non- resident agents, which was mentioned in the show cause notice would not, however, be open to Assessing Officer for adjudication as in the appellate stage the issue has already been decided in favour of the assessee, Accordingly in term of clause (c) to explanation to section 263 this issue is not covered by this order. It is also seen that the order u/s 153C of the A.O. has been passed after obtaining approval from the Joint Commissioner of Income Tax, Central Range, Kanpur in terms of provisions of section 153D of the IT Act. Since the order is erroneous as well as prejudicial to the interest of revenue, the approval has been granted by the Joint Commissioner of Income Tax, Central Range, Kanpur without application of mind, the same is also set aside to be granted afresh as provided w/s 153D of the Income Tax Act. 1961.
12. Learned counsel for the assessee vehemently contended before us that the order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue.
The Assessing Officer has duly examined all the issues. The assessee has given complete details in this regard during the course of hearing. Further, the Ld AR submitted that the Ld. PCIT has erroneously presumed that AO had not inquired into the issue. According to the Ld. AR, during the course of assessment proceedings, the assessee submitted the details with regard to Rs. 2 crore which is as under: - a. Model Tanners (India) Pvt. Ltd. Rs.50,00,000/- b. Model Echoes (P) Ltd., Rs.25,00,000/- c. Model Exims Rs.25,00,000/- d. S.K. Enterprises Rs.30,00,000/- e. AI Razeeq Traders Rs.70,00,000/- Rs.2,00,00,000/-
So according to assessee, the Ld. PCIT could not have invoked the revisional jurisdiction on this issue which has been inquired into by the AO. So the impugned action of Ld. PCIT is without jurisdiction.
14. In the course of appellate proceedings in ITAT, the assessee filed a paper book containing the following particulars: -
15. Learned D. R., on the other hand, relied on the order passed by learned Principal Commissioner of Income Tax u/s 263 of the I.T. Act.
Having heard both the parties, and on a careful consideration of the facts and circumstances, we find that in the case in hand the Ld. Pr. CIT invoked jurisdiction u/s 263 of the Act principally on the broad allegation that there was failure to conduct enquiries which the facts of the case required the AO to make. According to Ld. Pr. CIT assessment order suffered from lack of enquiry & application of mind to the facts as also by incorrect application of applicable legal provisions to the facts of the case. As a result, in the opinion of Ld. Pr. CIT, AO’s order was erroneous and therefore liable for revision u/s 263 of the Act.The said findings of the Ld Pr. CIT have been seriously contested by the appellant in the grounds. In the circumstances therefore before adjudicating the issues arising from the impugned order, we have to first examine the scope of revisional jurisdiction u/s. Page 18 of 24 263 of the Act. For that, let us take the guidance of judicial precedence laid down by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the ld. CIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous and (ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed by the without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only the order passed by the Assessing Officer can be termed as erroneous for the purpose of Section 263 of the Act. Coming next to the second limb, the AO's erroneous order can be revised by the Ld. CIT only when it is shown that the said order is prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon'ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the Assessing Officer. The Hon’ble Supreme Court, held that for invoking powers conferred by Section 263 of the Act; the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue. Their Lordship in the said judgment held that every loss of revenue as a consequence of an order of Assessing Page 19 of 24 Officer cannot be treated as prejudicial to the interest of the revenue. It was further observed that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law. In the circumstances it was necessary for the Ld. Pr. CIT to show in the impugned order that the AO’s order was erroneous because the view followed by him in respect of each of the reason set out in clauses of SCN was unsustainable in law and therefore the order was liable for revision u/s 263 of the Act.
We also note that both in the reasons set out in SCN as well as in the impugned order, the Ld. Pr. CIT observed that in respect of issues proper enquiry was not conducted by the AO which the circumstances of the case demanded and for absence of proper enquiry, the assessment order was considered by the Ld. Pr. CIT to be erroneous and prejudicial to the interests of the Revenue. It is true that the courts have held that an order of assessment can be considered to be erroneous if there was lack or total absence of enquiry with regard to an issue which has material bearing on the assessment of total income for the relevant year. However in such a case the CIT has to first demonstrate that no enquiry at all was conducted and consequent to which not only the order became erroneous but such an error also caused prejudice to the revenue. In our considered view one also has understand the difference between "lack of inquiry" and "inadequate inquiry" and when it can be termed as erroneous for usurpation of jurisdiction u/s 263 of the Act. For better understanding of this aspect, we can take help of the judgment of the Hon’ble jurisdictional Calcutta High Court in the case of CIT Vs J.L. Morrison (I) Ltd (366 ITR 593), wherein their Lordships explained the difference between the two as follows:- "86. Whether the assessment order dated 28th March, 2008 was passed without application of mind is basically a question of fact. The learned Tribunal has held that the assessment order was not passed without application of mind. The records of the assessment including the order sheets go to show that appropriate enquiry was made and the assessee was heard from time to time. In deciding the question Court has to bear in mind the presumption in law laid down in Section 114 Clause - e of the Evidence Act:-- "that judicial and official acts have been regularly performed;"
Therefore, the Court has to start with the presumption that the assessment order dated 28th March 2008 was regularly passed. There is evidence to show that the assessing officer had required the assessee to answer 17 questions and to file documents in regard thereto. It is difficult to proceed on the basis that the 17 questions raised by him did not require application of mind. Without application of mind the questions raised by him in the annexure to notice under Section 142 (1) of the Act could not have been formulated.
The Assessing Officer was required to examine the return filed by the assessee in order to ascertain his income and to levy appropriate tax on that basis. When the Assessing Officer was satisfied that the return, filed by the assessee, was in accordance with law, he was under no obligation to justify as to why was he satisfied. On the top of that the Assessing Officer by his order dated 28th March, 2008 did not adversely affect any right of the assessee nor was any civil right of the assessee prejudiced. He was as such under no obligation in law to give reasons.
The fact, that all requisite papers were summoned and thereafter the matter was heard from time to time coupled with the fact that the view taken by him is not shown by the revenue to be erroneous and was also considered both by the Tribunal as also by us to be a possible view, strengthens the presumption under Clause (e) of Section 114 of the Evidence Act. A prima facie evidence, on the basis of the aforesaid presumption, is thus converted into a conclusive proof of the fact the order was passed by the assessing officer after due application of mind.
The judgments cited by Mr. Nizamuddin do not really support his contention. The judgment in the case of Meerut Roller Flour Mills (P.) Ltd. (supra) does not apply because the High court in that case was satisfied that the assessment order was passed without enquiry.
The judgment of Cochin Bench of Income Tax Appellate Tribunal in /Coch/ 2012 relied upon by Mr. Nizamuddin is evidently based on an erroneous impression that "the proceedings before the Assessing Officer are judicial proceedings". This impression, which is patently contrary to the views expressed by Apex Court in the case of S.S. Gadgill (supra), was responsible for the views taken by the Tribunal. When the premise is wrong, the conclusion is bound to be wrong.
The judgment in the case of Infosys Technologies Ltd. (supra) is distinguishable on facts. The step taken by the CIT under Section 263 in that case was justified because the Income Tax records produced before him did not show that the assessing officer had considered the double taxation avoidance agreement on the basis whereof the claims were made by the assessee. Therefore, that was a clear case to show that the assessment order was passed without considering the relevant pieces of evidence.
The judgment in the case of Anusayaban. A. Doshi (supra) does not apply because the High Court in that case was dealing with the need on the part of the learned Tribunal to give reasons in support of its order.
The judgment in the case of Hindustan Tin Works Ltd. (supra) also does not apply because there the Delhi High Court was dealing with the duty of the learned Tribunal to disclose reasons in support of its appellate order. 95. The judgment in the case of S.N. Mukherjee (supra) is clearly distinguishable. The point for consideration in that case was whether it was incumbent for the Chief of Army Staff while confirming the findings and the sentence of the General Court Martial, and for the Central Govt. while rejecting the post confirmation petition of the appellant, to record reasons for the orders passed by them.
The function of an Assessing Officer is to estimate the income of the assessee and to recover tax on the basis of such estimate as laid down by the Apex Court in the case of S.S Gadgil (supra). Their Lordships opined that the income tax proceedings do not partake the character of a judicial proceeding between the State and the citizen. Therefore, the principles applicable to a proceeding before a judicial or a quasi-judicial authority where there are two contesting parties cannot be made applicable to the proceedings before an Assessing Officer.
Mr. Nizamuddin contended the judgments cited by Mr. Poddar indicate that the Assessing Officer is not required to write an elaborate judgment. He contended that the assessing officer may not have any such obligation but it cannot be said, according to him, that the Assessing Officer is under no obligation to record anything in his assessment order. It is not in the first place a fact that he has not recorded anything. From the assessment order, the following facts and circumstances appear:-- "Return was filed on 29/11/06 showing total income of Rs.3,80,66,940/-. In response to notices u/s. 143(2) and 142(1) of the I. T. Act, 1961, Sri P. R. Kothari, A/r appeared from time to time and explained the return. Necessary details and particulars were filed. The business of the assessee is manufacturing and trading of cosmetics and dental care products as in earlier years. In view of above total income is computed is under:"
Unless the aforesaid recital is factually incorrect or the computation is legally wrong, it is not possible to hold that the assessment order was passed without application of mind. On the top of that when the Assessing Officer accepted the contention of the assessee there was no occasion for him to make any discussion in his order.
If the assessing officer cannot be shown to have violated any form prescribed for writing an assessment order, it would not be correct to hold Page 22 of 24 that he acted illegally or without applying his mind. The third question is, for the reasons discussed above, answered in the negative." 18. This aspect was also explained by the Hon’ble Delhi High Court in its judgment in the case of CIT Vs Sunbeam Auto Ltd (332 ITR 167). The relevant extracts of the judgment is as follows:
We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons 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 on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason 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. Learned counsel for the assessee is right in his submission that 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 of the Act, 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. In Gabriel India Ltd.'s case (supra), law on this aspect was discussed in the following manner : ". . . From a reading of sub-section (1) of section, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is 'erroneous insofar as it is prejudicial to the interests of the revenue'. It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous insofar as it is prejudicial to the interests of the revenue must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. [See :Parashuram Pottery Works Co. Ltd. v. ITO[1977] 106 ITR 1 (SC) at page 10]. ****** 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 Income-tax Officer 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 Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer 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 Income-tax Officer. That would not vest the Commissioner with power to re- examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. . . . 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. ****** We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation on that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard . . ." (pp. 113-117) 13. When we examine the matter in the light of the aforesaid principle, we find that the Assessing Officer had called for explanation on this very items, from the assessee and the assessee had furnished his explanation vide letter dated 26-9- 2002. This fact is even taken note of by the Commissioner himself in Para 3 of his order dated 3-11-2004. This order also reproduces the reply of the respondent in Para 3 of the order in the following manner : "The tools and dies have a very short life and can produce up to maximum 1 lakh permissible shorts and have to be replaced thereafter to retain the accuracy. Most of the parts manufactured are for the automobile industries which have to work on complete accuracy at high speed for a longer period. Since it is an ongoing procedure, a company had produced 10,75,000 sets whose selling rates is inclusive of the reimbursement of the dies cost. The purchase orders indicating the costing includes the reimbursement of dies cost are being produced before your honour. Since the sale rate includes the reimbursement of dies cost and to have the matching effect the cost of the dies has been claimed as a revenue expenditure."
This clearly shows 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 is to be treated as revenue expenditure or not. It appears that since the Assessing Officer was satisfied with the aforesaid explanation, he accepted the same. The CIT in his impugned order even accepts this in the following words : "Assessing Officer accepted the explanation without raising any further questions, and as stated earlier, completed the assessment at the returned income."
Thus, 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 inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of 'lack of inquiry'.
Page 24 of 24 Therefore, per-se the action of the AO cannot be called as a case of “no inquiry”. According to us, AO while passing the assessment order on an issue had conducted inquiry and has taken a plausible view, and the Ld PCIT can be said to have validly invoked the revisional jurisdiction. Since we find in the present case that the AO had carried out inquiry on the issue which the Ld. PCIT holds erroneous for lack of inquiry, the Ld PCIT ought not to have interdicted the assessment order. Therefore, we hold the impugned action of the Ld. PCIT to be without jurisdiction. Accordingly, the impugned order u/s 263 of the Act is set aside; and the assessment order dated 31/03/2013 is restored.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 05/11/2024.