TMI Blog2005 (1) TMI 600X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Commissioner of Income-tax called for and examined the records of the case. On 13-2-2004 he issued a show-cause notice to the assessee requesting the assessee to explain its stand in respect of the following issues and show cause as to why action under section 263 should not be taken : "( i )Royalty payment of Rs. 41,05,905 was allowed as a revenue expenditure despite the fact that the royalty payment was in lieu of technical know-how and was an advantage of enduring nature. Reference in this context was drawn to the Hon ble Supreme Court s judgment in the case of Southern Switch Gear Ltd. v. CIT 232 ITR 359; ( ii ) Bad debts of Rs. 88.38 lakhs were allowed on the basis of assessee s Chartered Accountant s certificate without making proper enquiry or verification; ( iii )Business promotion expenses of Rs. 84.30 lakhs were allowed without proper examination or verification and without even obtaining the details thereof; ( iv )Discount, commission and incentives amounting to Rs. 1.97 crores were allowed without proper examination or verification and without even obtaining the details thereof; ( v )Interest amounting to Rs. 59,49,355 paid to the directors and others ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business promotion expenses, commission, discount and incentives and rental income. In respect of several other issues, the Assessing Officer routinely accepted the Chartered Accountant s certificate filed by the assessee, for example, bad debts, change in the method of accounting and deviation from provisions of section 145A. In respect of application of section 40A(2)( a ) and royalty, the view taken by the learned Assessing Officer could not be sustained on the facts available on record and it was incumbent upon him to make further enquiries and collect relevant facts. On this basis the learned CIT held that the assessment order was erroneous and prejudicial to the interest of revenue. In support of the view that the Assessing Officer s failure to make the enquiries which were called for in the circumstances of the case would make the assessment order as erroneous, the learned CIT relied upon the judgments Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi); Thalibai F. Jain v. ITO [1975] 101 ITR 1 (Kar.); Rampyari Devi Sarogi v. CIT [1968] 67 ITR 84 (SC); Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC); Tarajan Tea Co. (P.) Ltd. v. CIT [1994 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, therefore, consulted an expert. Alternatively he could consider the option of proposing a special audit under section 142(2A). 6. The learned CIT found that the assessee paid interest @ 14% to the persons specified in section 40A(2)( b ), except that in two cases the interest was paid @ 13%. Considering the prevalent interest rate on bank FDRs in the order of 9 to 10%, the interest rate of 13 to 14% was certainly excessive. According to the learned CIT, the Assessing Officer accepted the assessee s claim without examining the relevant points. Further the assessee had made payment of remuneration and commission amounting to Rs. 31 lakhs each to two directors, namely, Shri R.P. Khaitan and Shri S.K. Jiwarajka. The Assessing Officer had not looked into the reasonableness or justification of those payments. 7. The assessee paid royalty amounting to Rs. 41,05,905 to Kyushu Matsushita Electric Company Ltd. (KME), Japan. During the course of assessment proceedings the learned Assessing Officer asked the assessee to explain why the amount of royalty paid should not be held to be capital expenditure. The assessee stated that the royalties were based on the turnover. The agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those hearings, the learned Assessing Officer required the assessee to furnish clarifications on several points and further information on various points. The assessee filed the details as required by the Assessing Officer from time to time. Thereafter the Assessing Officer completed the assessment under section 143(3) on 28-2-2003 at a total income of Rs. 15,78,77,720 as against the returned income of Rs. 13,92,23,280. Thus, the Assessing Officer made an aggregate addition of Rs. 1,86,54,440, which showed that the learned Assessing Officer had examined the case for assessment very thoroughly and strenuously. In the impugned order under section 263, the learned CIT had been unfair and uncharitable to the Assessing Officer while observing that the assessment had been completed without proper examinat- ion or verification. These were entirely subjective observation of the learned CIT based on no material at all or inadequate material. These observations were also contrary to the material on record. The assessee was in the same line of business for last many years and a number of assessment orders had already been passed in past relating to earlier assessment years. The assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire accounts of the assessee had been examined. There was neither any requirement in law nor any under the rules, whereby the learned Assessing Officer was required to obtain and place on record copies of details by getting extracts from the books of account, particularly in a case where the accounts were duly supported by auditor s certificate and Tax Audit had been carried out. There was no hard and fast rule about keeping any particular extracts from the accounts on the assessment record. It was the matter of mere discretion. The learned CIT for reason only that he did not find certain extracts/details on file, held that the assessment order was erroneous and prejudicial to the interests of revenue. The learned counsel relied upon the judgment of Hon ble Delhi High Court in the case of Addl. CIT v. Jay Engineering Works Ltd. [1978] 113 ITR 389 where the Tribunal accepted the results based upon audit report, where books of account could not be produced and it was held that there was no error in the order of Tribunal. 11. The learned CIT objected also to the Assessing Officer relying upon Chartered Accountant s certificate in respect of certain deductions, such as bad deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of several crores of rupees in the method of accounting in respect of excise duty of raw material and work-in-progress were entirely incorrect. The learned counsel relied upon its letter dated 14-2-2003 addressed to the Assessing Officer and placed at paper book page 350 that the excise duty on work-in-progress and raw-material could not be taken in terms of section 145A of the Act. The assessee had already included the excise duty of Rs. 35,84,455 in the finished stock in hand, which was evident from the report of the auditor under section 43B of the Act. The assessee had valued the finished goods at cost, which included cost of material, labour, manufacturing cost and excise duty. 13. The learned counsel pointed out that in pursuance to the impugned order of the learned CIT, the learned Additional CIT, Range-9, New Delhi has passed the order dated 22-3-2004 wherein no disallowances or additions have been made on any of the points stated by the learned CIT in his notice, except in relation to royalty. While the assessee had claimed the royalty as revenue expenditure, the learned Additional CIT held otherwise. There was no justification to hold that the expenditure was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the CIT was required to see whether various aspects of a case had been properly looked into. Furthermore it was also required to be looked into as to whether the findings of fact had been based on reasoning. On this basis an assessment order could be held to be erroneous and prejudicial to the interest of revenue. In support of this contention, the learned CIT, DR relied upon the judgments Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC); Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 (SC); Mewar Sugar Mills Ltd. v. CIT [1973] 87 ITR 400 (SC) and Southern Switchgear Ltd. v. CIT [1998] 232 ITR 359 (SC). 16. The learned CIT, D.R. specifically emphasized upon the observations of the learned CIT at items 1 to 4 in paragraph 27 in the impugned order. These were the specific issues on the basis of which the learned CIT had held that the assessment had been made without proper enquiry and on perfunctory examination of facts of the case. The learned CIT, D.R. argued that from the order passed by the Assessing Officer after revision under section 263 and the assessment order for next year i.e., assessment year 2001-02, it was clear that there was error and prejudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer had relied on the certificate of Chartered Accountant. The learned counsel argued that while in the impugned order the learned CIT had raked up various issues, there was no specific finding adverse to the assessee in the impugned order. The learned AR referred to page 3 of the assessment order and pointed out that the Assessing Officer had computed assessee s total income in view of the discussion with the assessee and after examining the material on record. Documents from paper book pages 52 to 220 represented various material furnished during the course of assessment proceedings. However, the learned CIT had set aside the entire assessment without specifying any escapement of income. 18. We have carefully considered the rival submissions. We find that by and large the case of the learned CIT in the impugned order under section 263 is that the Assessing Officer completed the assessment order without proper enquiry and in a routine manner. Facts of the case as brought out during the course of hearing before us do not support these conclusions of the learned CIT. The assessee filed return of income declaring total income at Rs. 13,92,23,280, whereas the assessment wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eged that the Assessing Officer routinely accepted Chartered Accountant s certificate in respect of bad debts and deviation from provisions of section 145A. However, the learned CIT has not pointed out any omission or defect or infirmity in the certificate submitted by the Chartered Accountant during the course of assessment proceedings. In respect of expenditure on discount, commission and incentives, the learned CIT has not able to state anything specifically except that according to him, business promotion expenses included entertainment expenditure of Rs. 10,46,913. There is no further finding in the order of the learned CIT that the assessment order resulted into under-assessment on that score. It is pointed by the learned counsel for the assessee that in the order passed by the Assessing Officer in pursuance to the impugned order under section 263, no such disallowance has been made. In respect of MODVAT accounting and its impact on valuation of goods, the learned CIT has held that the Assessing Officer should have consulted an expert. We find that no such expert was consulted while completion of the assessment order for the earlier assessment years as well as the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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