2015 (4) TMI 1007 - ITAT DELHI

Revision u/s 263 - assessee's plea that the assessment u/s 153A was completed under the monitoring of the CIT/CCIT/ CBDT and such order could not be regarded as erroneous much less prejudicial to the interest of revenue - Held that:- As per the directions of the Hon'ble High Court fresh notice was issued and the proceedings under section 263 have been initiated for giving assessee opportunity to respond. The fresh order u/s 263 is being passed after considering all the submissions of the assessee and with an independent mind without being influenced by the observations made in the earlier order. In these circumstances the relevance of showing old files containing interdepartmental correspondence, has no relevance. Therefore, the assessee's stand that while passing the fresh order the Commissioner will again be influenced by the alleged correspondence, cannot be accepted.

Whether the present proceedings are fresh proceedings or the continuation of earlier proceedings, initiated vide issue of show cause notice dated 23-7-2007? - Held that:- in the order passed by the Hon'ble High Court on 11-12-2009, it was specifically clarified in para 24 of its order that since the writ petitions were pending before the Hon'ble High Court, issue of limitation could not be raised by the assessee. Therefore, it cannot be inferred that the directions were only in regard to passing of the order u/s 263 and not for taking up fresh revisional proceedings. There is no separate limitation prescribed for initiation and passing of order u/s 263. As a matter of fact, Hon'ble High Court granted liberty to ld. CIT to appropriately deal with the matter and pass fresh order, after giving opportunity of being heard to the assessee on various points, canvassed before him, or which it intended to raise at the time of fresh hearing. This implied that ld. CIT had to apply his mind independently and for appropriately dealing with the matter had to re-examine the records before embarking upon to take revisional proceedings.

Whether issues which had been discussed and scrutinized by the AO in detail while framing the assessment u/s 143(3)/ 153A could not be set aside to AO? - CIT exercised powers u/s 263 on the ground that while passing the assessment order, the AO did not consider whether the expenditure in question was revenue or capital expenditure - Held that:- An inquiry which is just farce or mere pretence of inquiry, cannot be said to be an inquiry at all, much less an inquiry needed to reach the level of satisfaction of the AO on the given issue. The level of satisfaction would obviously mean that he has conducted the inquiry in a manner whereby he places on record the material enough to reach the satisfaction, which a rational person, being informed of the nuances of tax laws would reach after due appreciation of such material. If this component is missing, it will always be a case of lack of inquiry and not inadequate inquiry. We find that ld. Commissioner, while considering this argument of assessee has observed that the representative of the assessee was assured that this issue will be considered with independent application of mind while passing the order u/s 263. Therefore, when specific issues will be considered, it will be examined whether the AO had reached the level of satisfaction by carrying out necessary inquiries qua that issue or not. Ground is disposed of accordingly.

Whether exercise of jurisdiction by CIT u/s 263 on the ground that the various claims, which were duly supported by judicial precedents, could, at best, be said to be debatable ousting jurisdiction of Commissioner under the said section? - Held that:- Issues in hand have to be examined in the light of various decisions relied by both the sides including the decision of Hon'ble Delhi High Court in the case of Goetz India (2013 (12) TMI 607 - DELHI HIGH COURT). The main thrust is on the level of inquiries conducted by AO to arrive at a particular conclusion. A possible view taken by AO after due appreciation of evidence on record particularly found during course of search, in present context, will not render the Assessment Order erroneous and prejudicial to the interest of revenue merely because another view could be taken which was beneficial to the interest of revenue. However, the position will be entirely different if AO merely raises various queries and accepts the assessee's explanation without proper appreciation of evidence on record.This aspect will be taken into consideration while deciding the various issues, keeping in view the arguments of both the sides.

Whether jurisdiction u/s 263, in respect of issues, which were beyond the jurisdiction of the AO, while framing the original assessment u/s 143(3)/ 153A, cannot be exercised? - Held that:- In the present case material in the form of e-mails, copies of a/cs, documents etc., was seized during search and statements were also recorded, which have been filed before us by way of compilation and the same had direct nexus with the issue raised by ld. CIT. Therefore, assessments had to be made after proper scrutiny of those documents as well as on the basis of books of a/c found in course of search. There is no quarrel with the proposition advanced by ld. counsel for the assessee, as fairly accepted by ld. Special Counsel, that the bar which apply to the AO equally applies to the CIT for the purposes of section 263 of the Act, as was held by the Hon'ble Kerala High Court in the case of CIT Vs. Paul John, Delicious Cashew Co. [2010 (1) TMI 646 - KERALA HIGH COURT ]

Whether Commissioner erred in setting aside the various issues without recording any prima facie finding on the merits of the issue? - Held that:- Ratio laid down in the case of Gee Vee Enterprise [1974 (10) TMI 29 - DELHI High Court] as well as DG Housing Projects Ltd. [2012 (3) TMI 227 - DELHI HIGH COURT ] have to be taken into consideration depending upon the facts obtaining in a particular case while deciding various issues. The broad principle that emerges from various decisions is that if AO has merely accepted the assessee's explanation on various issues without proper inquiry then the same would come within the ambit of 'lack of enquiry'and not ' inadequate inquiry' . If a particular issue comes within the ambit of complete lack of inquiry then the order is to be considered as erroneous as well as prejudicial to the interests of revenue but if the case is of inadequate inquiry, then ld. CIT has to demonstrate that how the order was erroneous and prejudicial to the interests of revenue. This aspect we will take into consideration while deciding various issues on merits. In the result, this ground is disposed of accordingly.

Setting aside the claim for exemption u/s 10B as erroneous and prejudicial to the interests of the revenue on the ground that the same was not examined by the AO while passing the order u/s 143(3)/153A - Held that:- Admittedly the deduction u/s 10B was being claimed and allowed to assessee since AY 1994-95. In response to the AO's notice dated 17-3-2006, the assessee had furnished vide letter dated 24-3-2006 all the approvals received from STPI authorities of relevant states, where the EOU unit was established along with note on various business units including EOU units, the nature of operations carried out by them. Ld. Counsel has rightly relied on the decision of Tribunal dated 30-5-2014 in the case of HCL Technologies Ltd. Vs. ACIT (2014 (10) TMI 356 - ITAT DELHI) wherein it had been held that it is beyond the power of the AO to examine whether the undertakings were formed in the earlier years by splitting up or reconstruction of existing business. Therefore, this could not be held to be a case where AO had not applied his mind to the assessee's claim regarding eligibility u/s 10B and, therefore, this, in our opinion, does not come within the revisionary powers of ld. CIT. Therefore, we hold that , as regards the eligibility of claim u/s 10B, the revisional proceedings taken were not in accordance with law.

Determination of assessee's claim u/s 10B - Held that:- Ld. CIT's main objection was that the common expenses had not been allocated on an appropriate basis. He also, after considering the assessee's reply, observed that assessee's reply was quite dumb and it had not given any bifurcation or specific distribution of expenses between EOU and non EOU units. The contention of ld. CIT was that even as per the submission of the assessee there was no consistent method of distribution of expenses. Ld. CIT had arrived at this conclusion after observing that assessee had, inter alia, claimed that service expenses were charged on the basis of revenue of EOU and non EOU units and had in other reply stated that service expenses had been allocated on the basis of man power. Thus, there was no consistency in assessee's claim.

AO failed to bring even primary facts on record to justify his conclusion in accepting the assessee's claim particularly when assessee never provided any bifurcation of common expenses amongst EOU and non EOU units. Thus, AO failed to examine whether the expenses had been distributed in proportionate manner on the basis of some specific and scientific basis between EOU and non EOU units. As regards the plea of assessee on the basis of doctrine of merger in principle, we do not agree with Ld. Special Counsel's submission that if a particular aspect permeates through all the assessment years within the block period then, if, in one year the issue has been examined by ld. CIT(A), then doctrine of merger will not apply to other assessment years. However, ld. CIT has clearly demonstrated that the issue of allocation of expenses was not examined in assessment year 2001-02. In view of above discussion, we concur with the finding of ld. CIT on this issue.

Non maintaining separate books of account for each eligible undertaking - Held that:- The assessee's submission was that the accounts were maintained through FAMS/ SAP software, which contained separate code for each head of expenditure and for each of the units of the asessee. We find that this reply of assessee was sufficient enough for dropping the objection raised on this count by ld. CIT. We further find force in the submission of ld. counsel for the assessee that in view of the decision of Hon'ble Supreme Court in the case of Bongaigaon Refinery and Petrochemical Ltd. [2012 (9) TMI 371 - SUPREME COURT] and CBDT Circular no. 01/13 dated 17-1-201, in any view of the matter, non- maintenance of separate books of a/c was not detrimental to the claim of deduction u/s 10B. We, accordingly, reverse the finding of CIT on this aspect.

Acceptance by the AO of revenue of the export oriented unit without calling for any details on this ground - Held that:- The AO was required to verify whether software was actually exported or the payments were in realty in regard to transaction not amounting to export of software. The AO failed to conduct the basic and preliminary inquiry with regard to nature of the so called export revenue. The AO had disallowed the claim of ₹ 25.20 lacs on the ground that the amount received from Kwetliso Holdings was in lieu of technical know how fees as opposed to export of technical reference material Softec. These findings were reversed by ld. CIT(A). The AO was required to bring the primary facts on record in respect of all the invoices and not bringing the said details on record resulted into error creeping into the assessment order, which caused prejudice also to the revenue.We do not find much substance in the submission of ld. counsel for the assessee that it is a case of merger with CIT(A)'s finding because CIT(A) deleted the disallowance made by AO. The same finding will be relevant only with reference to the invoices considered by AO and not with respect to invoices in respect of rest of the parties. We accordingly uphold the order of CIT on this aspect.

Non allocation of foreign exchange fluctuation loss to EOU unit - Held that:- Admittedly, the AO had not made any inquiries on this count. Assessee failed to furnish transactions which resulted into loss on account of foreign exchange fluctuations. Considering the fact that assessee was having EOU and non EOU units and was regularly exporting the software and getting the profits in foreign exchange, it was incumbent upon the AO to at least bring the primary facts on record so as to reach the level of satisfaction where he could come to the correct conclusion as to whether the foreign exchange loss pertained to EOU or non EOU units. We, therefore, sustain the finding of ld. CIT on this count.

Netting off of interest income and expenses in the order passed u/s 143(3)/153A - AO failed to appreciate that this issue had already been examined and scrutinized in detail during the original assessment proceedings u/s 143(3)/153A - Held that:- The assessee had netted this interest income against the interest expenditure of ₹ 17,03,49,186/-. This claim of netting off of interest made by assessee was accepted by the AO without examining the primary details regarding nexus of interest received against interest paid. Interest expenditure incurred for the purpose of business could be adjusted against business profits and not against income from other sources and, therefore, the AO was required to examine this aspect. Further, when assessee was claiming exemption u/s 10B in respect of certain EOUs, it was incumbent upon AO to carry out basic inquiry as to against which business unit expenses were to be allocated. Ld. Counsel has demonstrated that interest relating to EOU was debited in the particular unit. But the fact remains whether AO enquired into this aspect to find out the correctness of claim or not. There is nothing on record to suggest that this issue at all was examined by AO. The lack of necessary inquiries being made by AO resulted in passing of an erroneous order, which was prejudicial to the interest of revenue. We accordingly, sustain the findings of ld. CIT on this count.

Interest free advances/ loans/ investments having been made by the assessee for non-business purpose out of interest bearing funds - AO having failed to examine the aforesaid issue - Held that:- The present issue is to be examined with reference to the decision of Hon'ble Delhi High Court in the case of GeeVee Electronics (supra), as it is a case of complete lack of inquiry. We, accordingly, sustain the findings of ld. CIT on this count.

Repair expenses claimed by the assessee and allowed by the AO without any verification or enquiry - Held that:- Assessee in his submissions has submitted that ld. CIT did not give any finding/ pin point any expenditure or gave reasons as to why and on what basis particulars of the repairs expenses were to be considered as capital expenditure. In our opinion since the present issue comes within the ambit of lack of inquiry, therefore, ld. CIT was justified in setting aside the issue to the file of AO for examining the entire issue as per law. In the result, this ground is rejected.

Steep rise in course execution charges incurred by the assesee was accepted by the AO without any verification and inquiry - Held that:- CIT did not take into consideration the further query raised by AO vide letter dated 8-2-2006, contained at page 959 of PB wherein he has specifically required the assessee to give justification for increase, inter alia, in course execution expenses. This was duly replied by assessee vide reply dated 27-2-2006 contained at pages 900-961, wherein assessee, inter alia, specifically pointed out as to why the percentage of expenses worked out 30-32% as compared to 22% in the FY 1997-98. Therefore, the very premise of ld. CIT, in holding the order as erroneous and prejudicial to the interest of revenue, does not survive. Once the AO had applied his mind to this issue, then at best this issue could be held to be a case of inadequate inquiry and, therefore, ld. CIT was required to give his findings as to how the assessment order was erroneous and prejudicial to the interest of revenue. Ld. CIT has not given any such finding and, therefore, we are not inclined to accept the finding of ld. CIT on this issue.

Setting aside the assessment on the issue of deduction on account of bad debts on the ground that same had been allowed without any verification or enquiry by the AO - Held that:- CIT has not disputed that the bad debts had been written off in the books of account. It is now settled law that post 1-4-1989, the only requirement for allowing bad debts is that the same should have been written off in the books of account. The assessee in its replies had given the details of bad debts written off. Ld. CIT has not disputed that the impugned debts were trade debts. Therefore, it could not be said that the assessment order was erroneous, in any view of the matter, as the assessee's claim was legally sustainable. If assessee's claim is legally allowable and the quantum of amount claimed is not disputed by ld. CIT, then it cannot be said that the assessment order was erroneous and prejudicial to the interest of revenue

AO failed to verify whether any expenses were incurred for earning exempt income, which were required to be disallowed u/s 14A - order of the AO was erroneous and prejudicial to the interests of revenue - Held that:- Admittedly no query qua applicability of section 14A was raised by the AO during the course of assessment proceedings and, therefore, it was a case of lack of enquiry which justified the action of the CIT. Section 14A is a specific section for making disallowance in respect of exempt income. Therefore, the AO was duty bound to consider the applicability of section 14A, particularly because the assessment was finalized by AO on 1- 6-2006, which date fell after the date given in the Circular no. 14 of 2001.The AO has to pass a fresh assessment order u/s 153A and in doing so he has to consider the applicability of all relevant provisions of Act. Even otherwise, ld. CIT has elaborately considered as to why the said decision is not applicable. We concur with his findings noted earlier. We, therefore, uphold the order of ld. CIT on this count.

Technical service fee paid to various non- residents without deduction of tax at source - Held that:- If we closely examine the queries raised by AO on different dates, we find that queries were raised on 2-11-2005, 10-2-2006 and then on 1-3- 2006, which were replied by assessee. In its query letter the AO specifically stated that assessee was acting as distributor but the distributorship agreement was not brought on record by assessee. It is pertinent to note that in letter dated 1-3-2006, the AO had referred to various documents leading to conclusion that the payments were towards AMC. In regard to payment to M/s Conversant Group Corporation, the AO had referred to agreement dated 22-9-2000, E-mail dated 17-11-2000 and note of Rajesh Mathur to NIIT GIS Ltd. The assessee in its reply did not give specific replies on these counts and only gave a general reply. Similarly, AO had raised specific queries with respect to M/s Relativity Technologies and payment to M/s Prosoft Training Company. The assessee did not give specific replies and yet AO accepted the replies without assigning any reason. The AO was required to give proper reasoning before coming to any conclusion. This aspect definitely can be examined by ld. CIT because if AO has not properly appreciated the facts on record, which is demonstrated by ld. CIT in his order, then ld. CIT can resort to revisionary proceedings u/s 263. We find that ld. CIT has given his finding with reference to various e-mails to come to the conclusion that bogus purchase orders were raised to remit money for AMC contract. Therefore, it is clear that AO had not arrived at a rational conclusion. He has merely accepted the assessee's plea on this issue without proper scrutiny of documents found during the course of search. We, accordingly, confirm the order of CIT setting aside the assessment order on this issue and restore the matter to the file of AO for fresh consideration

'Net Varsity' from NIIT USA was fictitious, the order of the AO allowing depreciation on the value of Net Varsity, was erroneous and prejudicial to the interest of the revenue - Held that:- The AO was required to record a finding how the allegation of 'Net Varsity' software being developed in India, on the basis of details found at web site of NIIT were met by assessee and whether the same was duly rebutted asessee or not. The AO was also required to give his specific findings with reference to queries raised by him in connection with e-mail dated 8-2-2000 from Mr. Nicholas George to Ms. Nilangana Paul. 83.2. The findings of Enforcement Directorate were recorded on 30-4-2004 and search took place on 10-11-2004. Therefore, though ED's findings could not be ignored, but they had to be considered by AO along with material found during course of search. We, therefore, uphold the order of ld.CIT on this issue.

Assessee had imported obsolete CBTs from NETg (UK) in order to remit payments in the nature of 'royalty' to NETg - AO having failed to examine the said issue, the assessment order in this regard was erroneous and prejudicial to the interest of the Revenue - Held that:- During search operations certain e-mails were found and the statement of employees was gathered. The detailed scrutiny of these e-mails was necessary to find out the true import of the e- mails as to whether the payment made was towards royalty or towards purchase of software. Ld. Counsel submitted that payment made to NETg was in terms of distributorship agreement and in respect of physical import of CBTs only for which invoices relating to import were produced before AO. However, in course of search proceedings, certain evidences were brought on record, which suggested a contrary state of affair and, therefore, it was incumbent upon the AO to resort to detailed inquiry and not accept the assessee's contention based on documents available with it on the basis of which it had earlier advanced its claim. Proper appreciation of evidence on record is sine qua non under such circumstances.Merely bringing the evidence on record without proper appreciation of import of such documents cannot be said to be a case of proper inquiry. Under such circumstances, ld. CIT was fully justified in restoring the matter to the file of AO.

AO having allowed deduction u/s 35D of the Act in respect of public issue expenses without verification/ inquiry the assessment order was erroneous and prejudicial to the interest of revenue - Held that:- It is not disputed that the claim of assessee was accepted in AY 1993-94 and, therefore, we are in agreement with ld. Counsel for the assessee that mere non-examination of this issue by AO will not render the assessment order as erroneous and prejudicial to the interest of revenue, particularly when assessee's claim was legally allwoable. We, accordingly, do not concur with the finding of ld. CIT on this issue.

Setting aside the issue of loan transactions between the assessee and various business and other parties - CIT(A) alleging that the said issue was not examined by the AO - Held that:- The AO merely accepted the assessee's contention without carrying out necessary inquiries in this regard. Ld. CIT, as noted earlier, has pointed out that in none of the cases details of PAN were given. Therefore, it cannot be said that ld. CIT has restored the matter without recording any specific finding as to how the assessment order was erroneous and prejudicial to the interest of revenue on account of inadequate inquiries carried out by the AO. We, accordingly, confirm the order of ld. CIT on this issue for the detailed reasons given by the ld. CIT in his order.

Credit for taxes paid/ deducted abroad was claimed by the assessee and allowed by the AO without verification - Held that:- The assessee had claimed credit of ₹ 47,81,828/- in respect of tax paid in foreign jurisdiction as per the applicable laws of the said countries. The AO had not verified this claim and allowed relief to assessee and, therefore, ld. CIT rightly held that assessment order was erroneous and prejudicial to the interest of revenue, in the absence of proper verification. We, accordingly, uphold the finding of ld. CIT on this issue. - Appeal decided partly in favour of assessee.