TMI Blog2013 (9) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of tax at source, out of certain expenses incurred by the assessee and order passed by the Commissioner of Income Tax under section 263 of the Act directing the Assessing Officer to re-determine the income of the assessee by applying a rate other than the rate applied by the Assessing Officer, being without jurisdiction, is not tenable in law - The provisions of section 263 of the Act are clear and absolute that the power is to be exercised by the Commissioner of Income Tax from the examination of the records of the proceedings under the Act. The explanation under section 263 of the Act defines 'records' as all records relating to any proceedings under the Act available at the time of examination by the Commissioner. The audit objections under no circumstances can be called as record empowering the Commissioner of Income Tax to exercise jurisdiction under section 263 of the Act. Further it is apparent that the Commissioner of Income Tax has initiated the revision proceedings only on the basis of Audit Objection. Such exercise of power under section 263 of the Act is not tenable in law. The grounds of appeal raised by the assessee are thus allowed – Decided in favor of Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on record. In the entirety of the above said facts and circumstances of the case, we condone the delay in filing the present appeal late by 40 days and proceed to decide the appeal. 5. The brief facts of the case are that the assessment in this case was completed under section 143(3) of the Act by Addl.CIT, Range-V, Ludhiana vide order dated 29.12.2009. The Commissioner of Income Tax, Ludhiana on the perusal of the assessment record observed that in respect of few points the order of assessment was erroneous and prejudicial to the interest of the Revenue and the show cause notice under section 263(1) of the Act was issued to the assessee. In response to the said notice, the assessee furnished its reply wherein the first plea of the assessee was that the figures mentioned in the said show cause notice do not match with the figures reflected in the Balance Sheet and related documents of the assessee. The learned A.R. for the assessee also submitted that it had furnished complete information before the Assessing Officer in respect of the above said items/points raised in the show cause notice issued by the Commissioner of Income Tax under section 263 of the Act. The Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind. In respect of the first issue raised by the Commissioner of Income Tax with regard to the capitalization of interest vis- -vis work in progress, the learned A.R. for the assessee pointed out that the figures as reflected in the show cause notice were at variance with the figures reflected in the Balance Sheet and it was not known from where the figures were picked up. The learned A.R. for the assessee referred to the reply filed by the assessee to the show cause notice issued in the case placed at page 3 of the Paper Book with special reference to page 5 of the Paper Book and also the copy of Balance Sheet placed at page 7 of the Paper Book. The learned A.R. for the assessee pointed out that the working of the total interest less subsidy received is placed at page 9 of the Paper Book and balance of Rs.5,84,115/- being the interest expenditure was capitalized. The total investment in building and machinery was from loans on which interest of Rs.10.41% was incurred on loans of Rs.12 crores borrowed from 23.2.2007. The investment in land was out of its own funds. The learned A.R. for the assessee drew our attention to the bank account of the period under consideration placed at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1)(iii) and 10B of the Act. In respect of disallowance made under section 14A of the Act, reliance was placed on the order of the Commissioner of Income Tax. The learned D.R. for the Revenue thereafter placed reliance on the undermentioned decisions: (1) Sukhjeet Singh Vs. CIT-II, Chandigarh ITA No.422/Chandigarh/2011- date of decision 18.1.2012 (2) CIT Vs. Assam Tea House 344 ITR 507 (P H) (3) M/s Rico Auto Industries Ltd. Vs. Addl.CIT ITA No.547/Chd/2011 - date of decision 21.9.2011 4. CIT Vs. Usha International Ltd. ITA No.2026/2010 (Del)/348 ITR 485 (Del) 5. CIT Vs. Shree Manjunathesware Packing Products 231 ITR 53(SC) 8. It was further pointed out by the learned D.R. for the Revenue that the assessment order in the case was passed by the Addl.CIT who is only an administrative head and there was no application of mind in passing the said order. 9. The learned A.R. for the assessee in rejoinder stressed that from the facts of the case it is apparent that there was no application of mind by Commissioner of Income Tax as is apparent from the perusal of the audit objections raised in the case and show cause notice issued by the Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for and examined by the undersigned and the following features have been noticed:- 1. From the depreciation chart filed alongwith the return, it is observed that the following assets had not been put to use during the. relevant previous year. S.No. Current Year Last Year (i) Building under 7,07,36,051/- 12,21,49,715/- (ii) Machinery under installation 2,09,92,893/- 14,30,232/- (iii) Advance against capital expenditure 4,50,48,775/- 27,80,3041- Total 13,67,77,719/- 126360251/- In addition to the above, land amounting to Rs.34,98,68,640/- was purchased during the year, on which no construction was made and, accordingly the same too was not put to use. In this way total amount of Rs.48,66,46,359/- stood invested in such fixed assets which were not put to use during the previous year. Accordingly, interest pertaining to borrowed funds invested in these assets was liable to be capitalized and added back to your income under provisio to section 36(1)(iii) of the Income Tax act, 1961. The disallowance @ 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue raised by the AO for making disallowance on the investment made in WIP. It was clearly mentioned in para 5 of our submission that the amounts invested were out of our own sources and no borrowing were made for making these investment except the investment made in the plant machinery which was made out of the term loan on which interest of Rs.5,84,115/-was capitalized. This was further clarified in para 11 our reply. 2. As regards the figures mentioned in para 1 of your notice, it is submitted that the figures do not tally with the figures given, in our balance sheet. It is again submitted that an audit objection dated 10.05.2010 was raised by the Addl. Commissioner of Income Tax(Audit) Chandigarh, on similar issue which was duly replied on 24.05.2010 and the AO felt duly satisfied with the reply and it appears that no action was taken and the proceedings were dropped. 3. The objection raised in your notice para 2 of the letter regarding adjustment of director's and auditor's remuneration of Rs.6,61,000/- onproportionatebasisin Unit No.II where exemption has been claimed u/s 10B, again reply stood filed before the Addl. Commissioner of Income Tax, Range-V, Ludhiana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn funds and no borrowings were made for making the investment except the investment made in plant and machinery, which was made out of term loan on which interest of Rs.5,84,115/- was capitalized. The second contention of the assessee in this regard was that the figures in the show cause notice do not match with the figures reflected in the Balance Sheet. The assessee also clarified that the audit objection dated 10.5.2010 was raised by the Commissioner of Income Tax (Audit) on similar issue to which reply was filed and no action was taken and the proceedings were dropped. In respect of the investments in purchase of land it was explained that the details were furnished before the Assessing Officer during the course of assessment proceedings that the investments had been made out of own sources and no money was borrowed for making the said investments. The copies of the title deed and the bank account were produced before the Assessing Officer and no addition was made on this account. The Commissioner of Income Tax, however, observed that Assessing Officer has not applied his mind. Investment in bank account suggest to the contrary. Investments made were not out of own funds. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the I.T. Act. The order of the AO on this issue is also set aside to his file for making afresh order keeping in view the above directions and after allowing due opportunities to the assessee." 17. The third issue raised by the CIT (Appeals) was in relation to the disallowance to be made under section 14A of the Act. The explanation of the assessee in this regard was that the Assessing Officer had elaborately discussed the issue in the assessment order and made disallowance of Rs.75.77 lacs which was reduced to Rs.11.48 lacs by the Commissioner of Income Tax (Appeals) and deleted by the Tribunal. The Commissioner of Income Tax vide para 4.1 observed as under: "4.1 I have carefully considered the contentions of the ld. Counsels for the assessee and have perused the relevant record. The contention that the provisions of section 263 of the I.T.Act are not applicable since the issue have gone through appellate proceedings is not acceptable because the issue in question was not before the appellate authorities at any stage. The issue was neither raised in the assessment order nor taken up in the appellate proceedings. Therefore, the assessee is not justified in taking this plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been written back is not to be reduced. Please give working of depreciation claimed at 19,65,30,310/- and how much out of it is the depreciation on account of revaluation of assets. Why the same be not added back. 28. Details of addition in fixed assets with evidence. Copies of Land Account, Building Account, Plant Machinery Account, Misc. Fixed Assets account, Building under construction, Machinery under installation, Advance against capital expenditure preoperative expenditure accounts. Source of funds used in creating these assets. Why interest expenses till the assets are put to use be not capitalized. Please workout the figure of interest to be so capitalized. 29. Investment in shares is shown to be made at Rs.22.97 crores, dividend income wherefrom is exempt from tax while on one side you are paying interest on borrowed funds on the other side you have diverted funds to tax free investments. Please explain as to why proportionate interest expenses be not disallowed u/s 14A." 19. The second questionnaire was issued on 22.9.2009 which is placed at pages 75 to 80. The first reply of the assessee is placed at pages 81 to 83 of the Paper Book and point-wise reply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets or in stocks and book debts, that is all for business purpose." 20. The second reply before the Assessing Officer is dated 5.9.2009 and is placed at pages 84 to 86 of the Paper Book. The Assessing Officer vide order-sheet entries dated December, 2009 raised the following queries: 2. Comparative chart of GP/NP etc. for the 3 years as demanded by you has already been submitted. 3. Details of Income tax assessments for the earlier 5 years as demanded by you is enclosed. 4. Detail of addresses of various places of business as demanded by you is enclosed. 6. Details of transactions with associate concerns as demanded by you is enclosed. " 21. The copy of the order-sheet entries for the relevant year are placed at pages 65 to 71 of the Paper Book. 22. In the third reply filed on 18.12.2009, the relevant portion was as under: 2. Balance Sheet, Profit Loss A/c of Unit-I II alongwith computation of deduction U/s 10B enclosed. 3. Regarding investment made in shares, it is submitted that no money was borrowed for making investment, which was made from the internal cash accruals of the company. Further the interest paid during the year was mainly to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to section 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remit, the Assessing Officer may decide that the order is erroneous. Therefore, the Commissioner must after recording reasons hold that the order is erroneous. A distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of revenue. In latter cases, the Commissioner has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. In the second set of cases, the Commissioner cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not." 27. The Hon'ble Delhi High Court in CIT Vs. Sunbeam Auto Ltd.(supra) had also held that: "The submission of the revenue was that while passing the assessment order, the Assessing Officer did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f stock as per books and that in fact there was no discrepancy in stock. The record also showed that purchases from various parties had duly been verified as the Assessing Officer had placed on record certified copies from such parties. In the light of the above factual background, it could not be appreciated as to how the Commissioner had recorded a finding that the assessment had been framed without application of mind or that difference the stock had not been properly examined. Unfortunately, his order was totally non-speaking and it did not convey as to what according to him should have been the proper examination by the Assessing Officer. The assessee had filed a detailed reply to his notice under section 263(1) which had been rejected without giving any reasons whatsoever. The Commissioner did not appear to have either perused the records or applied his mind to the detailed reply filed by the assessee. He had not discussed even a single contention raised therein. The Tribunal had done no better. The Tribunal had based its findings entirely on the fact that there was no mention in the assessment order about the inquiries made by the Assessing Officer about the discrepancy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the surmises that there was no application of mind by the Commissioner of Income Tax. In the facts of the present case as referred to by us in the paras herein above, the Assessing Officer had raised the queries in respect of the investment in land and other assets which were put to use during the year itself and the source of investment in the above said assets was explained. Part of investment was made out of borrowed funds raised on 23/02/2007. The assessee itself had disallowed sum of Rs.5,84,115/- out of interest expenditure account which was accepted by the Assessing Officer. The second aspect of this issue raised by the Commissioner of Income Tax vide his show cause notice issued under section 263 of the Act was narration of the figures in respect of the investment made by the assessee during the year under consideration. We have perused the show cause notice issued by the Commissioner of Income Tax under section 263 of the Act and the audit objections raised by the Commissioner of Income Tax(Audit) in this case and find that the figures and contents are identical. We will address the issue of invoking of jurisdiction under section 263 of the Act on the basis of the objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out in paras hereinabove, the Assessing Officer had applied his mind by raising queries in respect of the claim of exemption under section 10B of the Act and after the reply was filed by the assessee further enquiries were made by the Assessing Officer and elaborate working was forwarded by the assessee which was accepted and no disallowance was made under section 10B of the Act. In view thereof where the Assessing Officer has decided the issue after making enquiries and applying his mind and also in view of the ratio laid down by the Hon'ble Delhi High Court in ITO Vs. D.G. Housing Projects Ltd. (supra) and Hon'ble Delhi High Court in CIT Vs. Sunbeam Auto Ltd.(supra), we find no merit in invoking of jurisdiction by the Commissioner of Income Tax under section 263 of the Act in relation to the exemption claimed under section 10B of the Act and the same is satisfied. 32. The third issue raised by the Commissioner of Income Tax in the show cause notice is in respect of the disallowance made under section 14A of the Act. Admittedly, the Assessing Officer had disallowed sum of Rs.75.77 lacs which is reduced to Rs.11.48 lacs by the CIT (Appeals). The Tribunal had deleted addition in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt framed without making any enquiries and without application of mind and consideration of issues by the Assessing Officer. However, in the facts of the present case before us, due enquiries were made by the Assessing Officer, as referred to by us in paras hereinabove. The assessment was completed after due application of mind, as held by us in the paras hereinabove. Consequently, the decision in Sukhjeet Singh Vs. CIT-II (supra) is not applicable to the facts of the present case. It is a settled position of law that the ratio laid down in any decision is applicable wherein the facts are identical. The learned D.R. for the Revenue further placed reliance on the ratio laid down in CIT Vs. M/s Usha International Ltd. (supra) which is in respect of the issue or re-assessment under section 147/148 of the Act and the issue raised before us is invoking of jurisdiction under section 263 of the Act and hence, the said ratio laid down by the Hon'ble Delhi High Court cannot be invoked for deciding the issue before us. Another reliance was placed by the learned D.R. for the Revenue in the case of M/s Rico Auto Industries Ltd. Vs. Addl.CIT, Ludhi an a (supra). 34. In the facts of the case b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest of the Revenue on mere surmises that the Assessing Officer had not made certain enquiries. Further plea of the assessee was that the figures appearing in the show cause notice do not tally with the figures shown in the Balance Sheet of the assessee and also the basis for the said figures were the audit objections raised in the case of the assessee after the completion of assessment, which proceedings were dropped by the Commissioner of Income Tax (Audit) as notice under section 263 of the Act was issued. In the totality of the above said facts and circumstances we find no merit in the exercise of jurisdiction by the Commissioner of Income Tax under section 263 of the Act and the same is quashed. 37. The second aspect which was brought to our attention was the audit objections raised in the case pursuant to the assessment order passed. The copy of the audit objections dated 10.5.2010 are placed at pages 24 to 27 of the Paper Book. The show cause notice issued by the Commissioner of Income Tax is placed at pages 1 and 2 of the Paper Book. The perusal of the audit objections raised in the case and the show cause notice issued by the Commissioner of Income Tax under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial authority, such as a Commissioner of Income-tax, to be influenced by any other authority. Thus, the Commissioner, in the present case, could not have initiated a suo motu revisional proceeding on the basis of the said audit report. Had, on the basis of the audit report, the Commissioner came to his own finding that the assessing authority, while making the assessment, or the authority empowered to rectify a turnover, which had escaped assessment, has acted without jurisdiction, revisional jurisdiction could have been exercised. Emphasised the Supreme Court, in the case of Sirpur Paper Mill Ltd. v. CWT [1970] 77 ITR 6, that while exercising power, the Commissioner must have an unbiased mind and decide the dispute according to the procedure which is consistent with the principles of natural justice and cannot permit his mind to be influenced by the dictation of another authority. The relevant observations made by a three-judge Bench of the Supreme Court, in the case of Sirpur Paper Mill Ltd. [1970] 77 ITR 6, read as follows (page 7): "In exercise of the power the Commissioner must bring to bear and unbiased mind, consider impartially the objections raised by the aggriev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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