M/S.COCHIN SHIPYARD LTD,COCHIN vs. THE ADCIT, COCHIN

Per ABRAHAM P.GEORGE, ACCOUNTANT MEMBER:

This appeal filed by the assessee challenges the order dated 13/01/2016 by

Ld. PCIT, Kochi, passed u/s. 263 of the Income Tax Act, 1963 (in short the Act).

and small crafts, had filed its return for the impugned assessment year declaring

income of Rs. 2,33,18,11,800/-. During the course of assessment proceedings,

Assessing Officer had issued a notice u/s. 142(1) of the Act on 09/11/2013

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calling for certain details. Assessee had replied through a letter dated

29/01/2014. The said letter gave details of services rendered by one M/s. R.S.

Platou Asia Pvt. Ltd. for brokerage payments and details of expenses incurred for

corporate social responsibility. Assessment was thereafter completed on 26-03-

2014, u/s. 143(3) of the Act making certain disallowances, inter alia, including a

disallowance of advertisement cost of Rs.61,60,000/-, which formed part of

corporate social responsibility (CSR) expenditure for want of deduction of tax at

source. Apart from the disallowance of a part of CSR expenses, there were

disallowances for additional depreciation, depreciation on computer peripherals,

foreign commission payment, revaluation expenses, travelling expenses and

disallowance u/s. 14A of the Act.

issued a notice to the assessee requiring it to show cause why revisionary

proceedings u/s. 263 of the Act should not be initiated. Two reasons were

mentioned in such notice. As per Ld. PCIT, CSR expenditure of Rs.3,25,08,521/-

de bited by the assessee included a sum of Rs.2,20,50,000/- which was a

provision, a sum of Rs.69,31,952/- for advertisement and a sum of

Rs.1,12,19,473/- which was expenditure incurred for the benefit of the assessee

company and its employees. As per Ld. PCIT, in the computation statement filed

by the assessee along with the return, assessee had added back Rs.

1,51,18,048/- only and claimed the balance as business expenditure. According

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to Ld. PCIT, main activity of the assessee was ship building and the sum of

Rs.1,12,19,473/- claimed by the assessee as incurred for its own benefit and

benefit of its employees, did not relate to its business. Secondly, as per Ld. PCIT,

assessee had debited a sum of Rs.26,66,81,000/- in its profit and loss account as

interest on loans but the balance sheets of the assessee did not reflect any

secured or unsecured loans in the preceding two years. As per Ld. PCIT, even in

the cash flow statement filed by the assessee, no borrowings or repayment of

borrowed funds were shown. Thus, according to Ld. PCIT, Assessing Officer

had passed the assessment order without looking into the above aspects and

such order was erroneous and prejudicial to the interests of Revenue.

incurred for corporate social responsibility were for the purpose of its own

business. Relying on the judgment of Hon’ble Jurisdictional High Court in the

case of CIT vs. Travancore Cochin Chemicals Ltd. (243 ITR 284), assessee

contended that expenses which were incurred for the welfare of the employees

and their children formed a part of the corporate social responsibility expenses.

In so far as interest payments were concerned, reply of the assessee was that

such interests were paid to banks and Indian Navy. As per the assessee, loans

were taken and squared up during currency of the relevant previous year and

this was the reason why there were no loans appearing in the balance sheets.

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expenditure debited by the assessee under the head corporate social

responsibility was not fully and exclusively for the purposes of its business. As

per Ld. PCIT, such expenditure was incurred on various organizations which

included hospitals and other institutions. In any case, as per Ld. PCIT, Assessing

Officer had not examined the nature of such expenses before allowing the claim.

Similarly, as per Ld. PCIT, Assessing Officer has also not verified the purpose of

the loans taken by the assessee during the relevant assessment year before

allowing the claim of interest. Thus, as per Ld. PCIT, the order of the Assessing

Officer was erroneous and prejudicial to the interests of Revenue. He set aside

the order on these two issues and directed Assessing Officer to examine the

facts of the case and pass an order as per the provisions of the Act, after giving

appropriate opportunity to the assessee.

assessee with regard to corporate social responsibility is that assessee itself had

added back in its computation a sum of Rs.1,51,18,048/- as expenditure not

allowable and claimed only the balance sum of Rs.1,73,90,473/-. As per Ld. AR,

conclusion of Ld. PCIT is that such expenditure were incurred for activities not

relating to the assessee‘s businesss, was incorrect. Contention of Ld. AR was that

Assessing Officer had asked for the details of corporate social responsibility

expenses during the course of original assessment proceedings and assessee had

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furnished such details vide its letter dated 29/01/2014. Ld. AR pointed out that

in paragraph 7 of the original assessment order, examination done by the Ld.

Assessing Officer on such details was clearly indicated. Further as per Ld. AR,

the Assessing Officer had made a disallowance of Rs.61,60,000/- for the

advertisement expenses forming a part of the claim of CSR expenditure for want

of deduction of tax at source. As per the Ld. AR, by virtue of the judgment of

Hon’ble Jurisdictional High court in the case of Travancore Cochin Chemicals Ltd.

(supra), expenses incurred for the benefit of the employees was allowable, since

these were for the smooth functioning of the business of the assessee. Ld. AR

submitted that payments made to various organizations like hospitals and

institutions were in the nature of corporate social responsibility outgoing.

Contention of Ld.AR was t hat the Assessing Officer had taken a lawful view by

allowing the expenses incurred for the benefit of the employees of the assessee-

company. Reliance was placed on the judgment of Hon’ble Madras High Court in

the case of CIT vs. Madras Refineries Ltd. (266 ITR 170) and the decision of

ITAT, Chennai Bench in the case of ITO vs. Velumanickam Lodge (123 ITD 25).

For his argument that assessment made in accordance with a judgment of

Hon’ble Jurisdictional High Court could not be subjected to revision u/s. 263 of

the Act, Ld. AR relied on the judgment of Hon’ble Calcutta High Court in the

case of CIT vs. Pradeep KumarTodi (325 ITR 96).

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that no error whatsoever was pointed out by Ld. PCIT in the assessment order.

As per Ld. AR, Ld. PCIT had expressed only an apprehension. According to him

absence of opening or closing balance of loans, would not mean that the

assessee had not taken any loans during the previous year. Ld. AR pointed out

that assessee was engaged in building indigenous aircraft for Indian Navy and

India Navy had advanced funds for such purpose on which assessee had to pay

interest. Relying on the judgment of Hon’ble Delhi High Court in the case of

DCIT vs. Jyothi Foundation (357 ITR 388), Ld. AR submitted that without making

any enquiry, Ld. PCIT could not come to a conclusion that the interest payment

was incorrectly claimed. According to him, the order of the Assessing Officer was

not erroneous and prejudicial to the interests of Revenue and had to be

quashed.

that there was no enquiry whatsoever conducted by the Assessing Officer with

regard to the claim of corporate social responsibility expenses. According to him,

just because Assessing Officer disallowed a part of such expenses for want of

deduction of tax at source, would not, per se, mean that an enquiry was done by

the Assessing Officer on the nature of such expenses. According to him, lack of

enquiry by itself would render the order erroneous and prejudicial to the

interests of Revenue. Relying on the judgment of Apex Court in the case of

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Toyota Motor Corporation vs. CIT (306 ITR 52), Ld. DR submitted that the

Assessing Officer ought have given reasons before accepting the claim of

corporate social responsibility expenses. As per Ld. DR, a cryptic order passed

by the Assessing Officer would by itself be erroneous and prejudicial to the

interests of Revenue.

Ld. DR was that the Assessing Officer never made any enquiries despite assessee

showing no opening or closing balance of loans. Further, according to him, no

prejudice would be caused to the assessee since Ld. PCIT had only directed

examination of these aspects after giving proper opportunity to the assessee.

of the Assessing Officer in the original assessment order with regard to claim of

corporate social responsibility expenses as it appear at paragraph 7 of that order

is reproduced hereunder:-

“7. Disallowance out of Corporate Social Responsibility Expenses 7.1 On verification of details of expenses shown under the head corporate Social Responsibility (CSR), it is seen that the following expenses are of the nature of advertisement and publicity:-

Sl. No, Name of the Party Amount(in Remarks Rs.) 1. The Secretary, Payipad Jalolsava Samity 70000 3. Academy of Magical Sciences 930000 4. Kerala State Youth Welfare board 400000 Paid to Kerala Government 5. Prathyasha Foundation 400000 Paid to Organization of

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Physically Handicapped 6. Off Shore Sailing Club of India, Naval 200000 Paid to Indian Navy Base 7. Director, Grand Kerala Shopping 800000 Paid to Kerala Government Festival 8. Kerala Football Association 800000 Paid to Sports Association 9. Govt. UP School, Valampoor 900000 Paid to Government School 10. M/s. Pratasha Foundation 310000 Paid to Organization of Physically Handicapped 11. Ernakulam Sailing Association 1000000 Paid to Sports Association 12 Cultural Academy for Peace 150000 Paid to Home for Destitute for work

TOTAL: Rs.61,60,000/-

7.2 The assessee was required to deduct TDS on the said payments. As the assessee company failed to deduct TDS on the said payments, the claim of the assessee in respect of the aforesaid advertisement expenses of Rs.61,60,000/- is disallowed in terms of Sec. 40(a)(ia) of the Act and added to total income. (Amount Disallowed:Rs.61,60,000/-)

Disallowance of the above amount was made for a reason that assessee had not

deducted tax at source. The nature of payments does indicate its nature as

advertisement expenses. It might be true that out of total corporate social

responsibility expenses of Rs.3,25,08,521/- debited by the assessee in its books

of accounts, it had by itself disallowed Rs.1,51,18,048/- in its computation of

income for tax purpose. In other words, the assessee had claimed under

corporate social responsibility expenditure only Rs.1,73,90,473/-, out of which

the Assessing Officer had disallowed Rs.61,60,000/- for want of deduction of tax

at source. Admittedly expenses incurred under corporate social responsibility

included payments to various hospitals and institutions, donations to various

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organizations and expenses incurred for the employees of the assessee-

company. Obviously, verification by the Assessing Officer was only with regard to

application of section 40(a)(ia) of the Act. Questionnaire issued by the Assessing

Officer during the course of assessment proceedings which has been strongly

relied on by Ld. AR is actually nothing but a notice u/s. 142(1) of the Act. What

was required from the assessee in such notice dated 09/12/2013 were the

following details:-

“1. Details of parties from whom income from work and services’’ received

S. No. Name and Address Amount received during the year

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Reply of the assessee which is claimed by Ld.AR to be an explanation of the

nature of the expenses reads as under:

“2. Details of Expenditure for Corporate Responsibility

Corporate Social Responsibility expenditure mainly comprises of two category of expenses such as:-

a) Expenditure for the benefit of the company and employees and for general public utility – Details are enclosed.

b) Expenditure in the nature of Corporate advertisements – Details are enclosed.”

reply, what was highlighted in such reply and an nexed details were only

categories and nature of expenses incurred under the head corporate social

responsibility. Assessee had given two separate categories of the expenses. Any

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prudent Assessing Officer would have been prodded to make further enquiries

since a part of the expenses was claimed to be for the benefit of the employees

and part of the expenses was claimed to be for corporate advertisement..

Whether these expenses would fall in the category of corporate social

responsibility, was an issue which should have been looked into by the Assessing

Officer before completing the assessment. What he did was only to verify

advertisement expenses and make a disallowance u/s. 40(a)(ia) of the Act for

want of deduction of tax at source. In our opinion, not making enquiries which

was required to be done on the face of the reply given by an assessee, was as

good as not making any enquiry. It is trite law that failure to make any enquiry

which is required to be done under law by the Assessing Officer in an

assessment proceedings, would render the assessment order erroneous and

prejudicial to the interests of Revenue.

Travancore Cochin Chemicals Ltd. (supra) relied on by the Ld. AR, it is true that

Their Lordships held expenses incurred exclusively for the welfare of its

employees and for carrying on the business more efficiently to be allowable.

However, the question that is to be addressed is whether such expenses were

indeed incurred for efficiently doing the business of the assessee. This could

have been answered only if an enquiry was done by the Assessing Officer, which

was not done. It is not a case where the Assessing Officer had taken a lawful

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view of the claim of the assessee. Assessing Officer having not examined the

claim, he had not taken any view at all. He simply went by what was given by

the assessee in reply to his notice u/s. 142(1) of the Act and did not make the

enquiries which a prudent man would have done under the circumstances of the

case,

the Assessing Officer nor any reply given by the assessee during the original

assessment, despite the fact that assessee did not show any secured loans or

unsecured loans in its balance sheet for the two preceding years. Such

circumstances also would clearly indicate that the claim of interest expenditure

requires verification. Assessing Officer failed to do this also.

aspects mentioned by Ld. PCIT. As held by Hon’ble Apex Court in the case of

Toyota Motor Corporation (supra), a cryptic order given by the Assessing Officer

would be erroneous and prejudicial to the interests of Revenue where the issues

require clear reasonings for accepting the claims of the assessee. Cases relied

on by Ld. AR would not further the cause of the assessee. Considering the

absence of enquiry in the assessment proceedings, we are of the opinion that Ld.

PCIT was justified in invoking the powers vested in him u/s. 263 of the Act.

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Directions given by Ld. PCIT were very fair. We do not find any reason to

interfere with the order of the Ld. PCIT.

Pronounced in the open court on 23-03-2017.

sd/- sd/- (GEORGE GEORGE K.) ( ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 23rd March, 2017 GJ Copy to: 1. M/s. Cochin Shipyard Ltd., Administrative Building, Shipyard Premises, M.G. Road, Perumanoor P.O., Cochin-682 015. 2. The Addl. Commissioner of Income-tax, Range-1, Kochi. 3. The Principal Commissioner of Income-tax, Kochi 4. D.R., I.T.A.T., Cochin Bench, Cochin. 5. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin