TMI Blog2012 (5) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... f an article or goods – in favour of assessee. Provisionally revising the sales downward on estimate basis as per the earlier norms of CERC, final order yet to be passed in succeeding year – Held that:- An error has crept in the assessment order if an verification of the record, Learned Commissioner formed an opinion that an issue available in the computation of income required verification and investigation at the end of AO before its acceptance or rejection and such inquiry was not conducted - such an error caused a prejudice to the revenue than assessment order on such issue could be set aside - on reduction of sales Learned CIT has rightly taken cognizance u/s. 263 and has rightly remitted this issue to the Assessing Officer for fresh adjudication. - ITA No. 1438/Del/2009 - - - Dated:- 30-4-2012 - SHRI RAJPAL YADAV, SHRI K.G. BANSAL, JJ. Appellant by: S/Shri SE Dastur R. Murlidhar, Adv. Respondent by: Shri Raj Tandon, CIT(DR) ORDER PER RAJPAL YADAV: JUDICIAL MEMBER The present appeal is directed at the instance of assessee against the order of Learned CIT(Appeals) dated 20.02.2009 passed under section 263 of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year and the same was to be passed in succeeding year. The assessee company has provisionally revised the sales downward as on 31.3.2005, it reduced the sales provisionally to ₹ 22128 crores on estimate basis that too without issuing any corresponding credit note to the customers. In the opinion of the Learned CIT(Appeals), learned Assessing Officer has allowed the assessee to reduce sales by a sum of ₹ 938.03 crores without examining the issue, hence his order is erroneous and prejudicial to the interest of the revenue. He issued a detailed show-cause notice under section 263 of the Income-tax Act, 1961 on 19.10.2007 inviting the explanation of the assessee as to why the assessment order be not treated as erroneous and prejudicial to the interest of the revenue. The copy of the show-cause notice is available on page 70 of Volume I of the paper book. Learned Commissioner has also extracted the notice in the impugned order and it reads under: 2. Accordingly, a notice dated 19.10.2007 u/s. 263 as follows was issued to the assessee. (a) Additional Depreciation: During the year under consideration assessee company claimed additional depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment with effect from Ist April, 2004, pending final determination of the tariff by CERC, sales amounting to ₹ 221,280 million for the year have been provisionally recognized on the basis of principles enunciated by the CERC in Regulation, 2004. 3(b) .further, in case of stations for which final tariff orders have been issued by the CERC for the period up to 31.3.2004, sales amounting to ₹ 2768 million has been accounted for during the year. In the previous year there was a reduction effected in sales to the extent of ₹ 9034 million relating to earlier years . In this matter assessee company has provisionally revised the sales downward as on 31.3.2005. Assessee company had raised the total sale bills of the customers of ₹ 23066.3 crores as per earlier norms of CERC. Final order of CERC was not passed during the year and same was to be passed in some succeeding years. There was no occasion to reduce the sales provisionally to ₹ 22128 crores on estimated basis and that too without issuing any corresponding credit note to the customers. The determination of liability as on 31.3.2005 is contingent upon the final order by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this activity has always been treated differently from the other activities, like manufacturer production of article, construction and mining etc. Wherever a deduction has been granted for power generation undertaking separate mechanism has been provided. Referring to section 32(1)(vi) as stood prior to 01.04.1998, Learned Commissioner has observed that additional depreciation was provided by virtue of this section but categorically specifies both the businesses i.e. generation of power and manufacture of production or an article or thing. In this way, Learned Commissioner has held that additional depreciation is not admissible to the assessee. Learned Assessing Officer without conducting proper inquiry has granted the additional depreciation to the assessee. He set aside the assessment order and directed the Assessing Officer to withdraw the additional depreciation of ₹ 187,55,71,000. 5. With regard to the second issue, Learned Commissioner has observed that Central Electricity Regulatory Commission (hereinafter referred to CERC )was established under the Electricity Regulatory Commission Act, 1998. The Central Electricity Regulatory Commission is to regulate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar No. 281 and pointed out that in paragraph No. 93, it has been observed that in order to stimulate investment during the new five year plan period, the Finance Act has inserted a new clause i.e. (iia) in subsection( 1) of sec. 32 of the IT Act, which provides for a further deduction in respect of additional depreciation in respect of new machinery or plant installed in certain cases. Thus, according to the learned counsel for the assessee, the main thrust of granting additional depreciation was to stimulate the investment in certain core sectors. The learned counsel for the assessee thereafter appraised us about the scope of section 263 and when Learned Commissioner can exercise such powers. He placed reliance upon the following decisions: CIT vs. Gabriel 203 ITR 108 (Bom.); Malabar Industrial Vs. CIT 243 ITR 83 (S.C); CIT vs. Honda Siel 333 ITR 547 (Del.); CIT vs. Vikas Polymers 236 CTR 476 (Del.); CIT vs. International Travel House 194 TM 324 (Del.); Piem Hotels vs. DCIT 128 ITD 275 (Mum.); Revenue Principles of consistency Radhasaomi Satsang vs.CIT 193 ITR 321 (S.C); CIT vs. Neo Poly Pack 245 ITR 492 (Del.). 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h these issues which indicate that Assessing Officer has not conducted any inquiry before accepting the accounting entry of the assessee as it is on these two issues. Hence, his order is erroneous which caused prejudice to the revenue. In support of his contentions, he relied upon the judgment of Hon'ble Delhi High Court in the case of CIT vs. Ashok Logani reported in 2011 Taxman.com 208. CIT vs. Nalwa Investment reported in 338 ITR 522, CIT vs. DLF Power Ltd. reported in 17 Taxman.com. 269, CIT vs. Infosys Technologies Ltd. (Karnataka High Court) 17 Taxman.com 203 and Gee Vee Enterprises vs. Addl. CIT 99 ITR 373. He pointed out that in all these decisions, Hon'ble Delhi High Court has observed that if Assessing Officer has failed to conduct proper inquiry then his order is erroneous and deserves to be set aside. Putting emphasis upon the judgment of Hon'ble Delhi High Court in the case of Ashok Logani, he pointed out that in this case, Hon'ble High Court has observed that Assessing Officer was required to go into the issue in proper perspective and could not be perfunctory in his approach. When CIT set aside an assessment order for further inquiry, the ITAT has a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st issue, we are of the view that learned representatives have made reference to a large number of decisions. We do not deem it necessary to recite and recapitulate all the decisions on the legal aspect as to how the order of Learned Commissioner passed under sec. 263 is to be judged. The ITAT in the case of The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO,Mumbai reported in 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon ble Supreme Court in the case of Malabar Industries 243 ITR 83 as well as Hon ble Bombay High Court rendered in the case of Gabriel India Ltd. reported in 203 ITR 108, has propounded the following broader principle to judge the action of CIT taken under section 263. (i) The CIT must record satisfaction that the order of the A.O is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the A,O and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statement made in a pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of the return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would made such an inquiry prudent that the word erroneous in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company follows the policy of determination of tariff based on the norms as notified by CERC in its regulation and sales are thus provisionally accounted on a realistic base so as to avoid major impact on profit and loss account and balance sheet on the final determination of tariff by CERC. He emphasized that the bills raised by the assessee are liable to be adjusted on the basis of the rates notified y the CERC which usually take substantial time. On the strength of past experience, he pointed out that rates are being finalized after 2 to 3 years. He made reference to page No. 102 of the paper book and pointed out that Learned Commissioner has remitted this issue to the file of the Assessing Officer for fresh adjudication but he failed to point out what prejudice has been caused to the revenue by provisionally reducing the sales. Whatever, the sales bills, assessee has raised to the customers, they are not final. As and when the rates are finalized, the assessee has accordingly given effect in the accounts. Thus, there is no prejudice to the revenue and Learned Commissioner failed to establish the prejudice on the record. He further pointed out that reduction of amount by 983 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f opinion about the loss of revenue. He remitted it to the file of the Assessing Officer after satisfying himself that the record cry for an inquiry on this issue. Hon'ble Delhi High Court in the case of Ashok Logani (supra) has specifically observed in paragraph 14 of the judgment that if the matter was relegated to the Assessing Officer to conduct an inquiry then ITAT itself should not take up that inquiry in its hands and adjudicated the issue on merit and thereafter judge the order of the Learned Commissioner. In such circumstances, ITAT has a very limited scope and it should focus its discussion on the proprietary of the order of the Learned Commissioner. At the time of hearing, we have confronted the learned counsel for the assessee that if the Assessing Officer failed to conduct an inquiry then assessment order can be termed as erroneous which ultimately caused a prejudice to the revenue and deserves to be set aside, then learned counsel for the assessee submitted that if hundred items are there in computation of income and no inquiry was conducted by the Assessing Officer on certain items then can the assessment order be erroneous. In our opinion if an verification of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sesa Goa (supra) and all other decisions on the point which contemplate the meaning of expression manufacture as well as production . The relevant discussion made by the Hon ble Court reads as under: 2. As noted above, the core issue is whether activity undertaken was manufacture or production. 3. In Black s Law Dictionary (5th Edition), the word manufacture has been defined as, the process or operation of making goods or any material produced by hand, by machinery or by other agency; by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine . Thus by process of manufacture something is produced and brought into existence which is different from that, out of which it is made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. (See Dy. CST (Law), Board of Revenue (Taxes) Coco Fibres [1992] Supp. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. (See Empire Industries Ltd. v. Union of India [1985] 3 SCC 314). x x x x x x x x x x x x x x x x x x x x x x 19. In this case, assessee was carrying on business of conversion of Jumbo Rolls of photographic films into small flats and rolls in desired sizes. It claimed deduction under sec. 80-HH and 80-I as well as investment allowance under sec. 32AB. The controversy arose whether conversion of jumbo rolls into small sizes amounts to manufacture or production, eligible for deduction under sec. 32AB or deduction under sections 80-HH and 80-I of the Income-tax Act, 1961/ Hon'ble Supreme Court has held that this activity amounts to manufacture or production. Thus, we think it is not necessary to recapitulate and recite all the decision on the construction expression manufacture . But suffice to say that core of all the decisions of the Hon'ble Supreme Court or Hon'ble High Court is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods as a dealer . The expression goods are defined by section 2(d) of the Act, 1947 according to which all kinds of moveable properties other than actionable claim . and include material articles and commodities whether or not to be used in the construction, fitting out, improvement or repair of immoveable property. According to the Hon ble Court, the definition of expression goods contained in section 2(g) of the Act No. 11 of 1959 has almost similar. In the light of these definitions, Hon ble Court has examined whether electricity can be termed as a goods. The discussion made by the Hon ble Court in the judgment reads as under: The reasoning which prevailed with the High Court was that a well defined distinction existed between the sale or purchase of goods and consumption or sale of electricity; otherwise there was no necessity of having Entry No.53. But under Entry 53 taxes can be levied not only on sale of electricity to derive much assistance from the aforesaid entries. What has essentially to be seen is whether electric energy is goods within the meaning of the relevant provisions of the two Acts. The definition in terms is very wide according to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State Government a duty calculated at the rates specified in the table appended thereto on the units of electric energy sold or supplied to a consumer or consumed by himself for his own purpose or for the purpose of his township or colony during the preceding months. Similar steps were taken by the Madhya Pradesh Government for the plants situated in its territorial jurisdiction. The question arose whether electricity sold to other states would be amenable to duties. The Hon ble Court in that context considered, what is an electric energy and made following observations: Before we deal with the constitutional aspects let us first state what electricity is, as understood in law, and what are its relevant characteristics. It is settled with the pronouncement of this Court in Commissioner of Sales-tax, Madhya Pradesh, Indore Vs. Madhya Pradesh Electricity Board, Jabalpur- 1969 (2) SCR 939 that electricity is goods. The definition of goods as given in Article 366(12) of the Constitution was considered by this Court and it was held that the definition in terms is very wide according to which goods means all kinds of moveable property. The term moveable property when consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of supply and consumption starts from the moment the electrical energy passes through the meters and sale simultaneously takes place as soon as meter reading is recorded. All the three steps or phases (i.e. sale, supply and consumption) take place without any hiatus. It is true that from the place of generating electricity, the electricity is supplied to the sub-station installed at the units of the consumers through electrical higher-tension transformers and from there electricity is supplied to the meter. But the moment electricity is supplied through the meter, consumption and sale simultaneously take place. as soon as the electrical energy is supplied to the consumers and is transmitted through the meter, consumption takes place simultaneously with the supply. There is no hiatus in its operation. Simultaneously sale also takes place. These properties of electricity as goods are of immense relevance as we would state hereafter . 21. On due consideration of these two decisions, it is implicitly clear that the Hon'ble Supreme Court has explained the meaning of electricity, the Hon ble Court has considered the definition of goods as given in Article 366(12) of the Cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court itself in the case of Indian Cine Agency (supra). The ITAT in the case of Tamilnadu Chlorates has considered the admissibility of deduction under section 80-HH and in that test held that electricity is not an article. The ITAT has not dealt with these two judgments extensively rather simply observed that decision in the case of Madhya Pradesh Electricity Board was given in the context of the language of a particular statute. The only discussion made by the ITAT with regard to these two judgments of the Hon'ble Supreme Court reads as under: 6. Reference was made to the decisions of Apex Court rendered in the case of M.P. Electricity Board 35 STC 188 (sic). In this case it was held that electricity is goods within the meaning of section 2(3) of Central Province and Virar Sales-tax Act. This decision was rendered in the context of the language of a particular statute. As such this meaning cannot be extended to the facts of the present case . 23. Thus, taking into consideration all these aspects, we are of the view that admissibility of additional depreciation cannot be denied to the assessee merely on the ground that electricity is not an article or thing. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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