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TMI Blog2013 (12) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 2. On the facts and circumstances of the case and in law, the order passed by the learned Commissioner of Income-tax is perverse, bad in law and void ab initio since : 2.1 The learned Commissioner of Income-tax has erred in placing reliance on the draft assessment order issued by the Additional Commissioner of Income-tax, Range 1, Chandigarh ("learned AO") under section 144C of the Act for the assessment year ("AY") 2006-07 in the appellant's case, which neither has attained finality, nor is based on correct appreciation of the facts. 2.2 The learned Commissioner of Income-tax has erred in not appreciating and considering the evidence placed on record during the revisionary proceedings under section 263 of the Act. 2.3 The learned Commissioner of Income-tax has erred in holding that no enquiries in respect of allowance of deduction under section 80-IA of the Act, were conducted by the learned Assessing Officer and hence, has erred in remanding the matter back to the learned Assessing Officer. 3. On the facts and in circumstances of the case and in law, the learned Commissioner of Income-tax has erred in disallowing deduction under section 80-IA of the Act. 3.1 O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e during a block of fifteen years. 4. On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax erred in holding that interest income amounting to Rs. 6,09,99,174 is not eligible for deduction under section 80-IA of the Act. 5. On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax erred in holding that miscellaneous receipts amounting to Rs. 4,98,14,610 is not eligible for deduction under section 80-IA of the Act." 3. The brief facts of the case are that the assessee-company had filed its return of income declaring total income at "nil". The Assessing Officer accepted the returned income of the assessee vide order passed under section 143(3) of the Income-tax Act dated September 3, 2007. The Assessing Officer, however, made adjustment of Rs. 30,79,21,638 to the book profits determined under section 115JB of the Income-tax Act. The book profits were determined at Rs. 348.58 crores as against declared book profit of Rs. 317.78 crores. The Commissioner of Income-tax on examination of the assessment records found that the assessment order passed by the Assessing Officer to be a non-speaking assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on this issue also as to how this income is eligible for the deduction of section 80-IA of the Income-tax Act. As such this issue could not be examined during the course of assessment proceedings. 2. It has further been observed that the serial No. 8 of form No. 10CCB submitted by the company regarding date of commencement of operation/activity by the undertaking or enterprises has been left blank. The Assessing Officer finalised the assessment without placing any document on record as to when the business has been commenced and further as to whether the company fulfils the necessary conditions laid down under the Income-tax Act for claiming deduction under section 80-IA. However the company claimed that the undertaking has not been formed by the splitting up or reconstruction of a business already in existence and the company was already in the same telecommunications business. But the Assessing Officer did not verify as to whether any new business was actually set up by the company or the deduction has been claimed on the business already in existence. 3. During the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oneous not only if it contains some apparent error of reasoning or of law or fact on the face of it but also because it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries which are called for in the circumstances of the case. 6. In view of the facts stated above, it is apparent that the order of assessment framed in your case on September 3, 2007 is not only erroneous but also prejudicial to the interests of the Revenue, to the extent indicated in the foregoing paragraphs. Consequently, I propose to take recourse to the provisions of section 263 of the Income-tax Act. You are therefore, requested to show cause as to why the aforesaid order of assessment dated May 18, 2007 should not be set aside by resorting to the provisions of section 263 of the Act. 5. The assessee, vide letter dated November 26, 2009 filed written submissions which are incorporated under para 5.1 at pages 6 to 32 of the order under section 263 of the Income-tax Act. The assessee had primarily raised objections against the initiation of proceedings under section 263 of the Income-tax Act. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts or incorrect application of law will satisfy the requirement of order being erroneous". Similarly, the orders passed without applying the principles of natural justice or without application of mind are also covered being erroneous order. The Commissioner of Income-tax, vide para 6.5 notes that the Assessing Officer had not even called for the basic facts before allowing deduction under section 80-IA of the Act. The Commissioner of Income-tax observed that "the deduction of Rs. 3,07,93,70,059 under section 80-IA of the Act was granted to the assessee-company without raising a single query on the order sheet on the issue". The Commissioner of Income-tax held that the Assessing Officer had mechanically allowed the deduction in the scrutiny proceedings without satisfying as to whether the assessee had fulfilled all the conditions laid down under section 80-IA of the Act. The Commissioner of Income-tax was of the view that the Assessing Officer had erred in applying wrong law in respect of the allowability of deduction under section 80-IA of the Act, i.e., without discussion on the merits. The Commissioner of Income-tax observed that in view of the various judicial precedents the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the issue of allowability of deduction under section 80-IA of the Act. The first plank of submissions of the assessee was that the deduction under section 80-IA of the Act prescribes fulfilment of the following key conditions : Condition (1) : As per section 80-IA(4)(ii) of the Act, the section applies to any undertaking which has started or starts providing telecommunication services, whether basic or cellular, on or after April 1, 1995, but on or before March 31, 2005. Condition (2) : As per section 80-IA(3) of the Act, the section applies to an undertaking provided it is not formed by splitting up or reconstruction of a business, already in existence ; and not formed by transfer to a new business of machinery or plant previously used for any purpose. Condition (3) : As per section 80-IA(7) of the Act, the deduction under the section was admissible where the accounts for the financial year relating to the assessment year for which deduction was claimed had been audited by an accountant and the assessee had furnished along with return of income, the report of such audit in form No. 10CB duly signed and verified by its accountant. 9. The assessee made written submissions wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding review of memorandum and articles of association, bid/tender documents, etc. It was amply clear and evident before the Assessing Officer that VEL was a new company and not formed by splitting up or reconstruction of a business already in existence. This fact is also evident from the fact that VEL was one of the pioneers in commencing the telecommunication services in India. Further, the fact that the "date of set-up of business" was being litigated, itself proves the stand that VEL was a new company. Had it been formed through splitting up of an existing business, it would have been in a condition to commence its operation immediately upon its incorporation. Therefore, such facts were duly available with the office of the Assessing Officer and hence, these facts may not have been re-examined during the course of assessment proceedings for the subject at. The above fact was duly verified and certified by the auditor in Form 10CCB as well, which was filed along with the return of income for subject assessment year. With respect to condition 3, we wish to submit that the accounts of VEL for the financial year releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusal of assessment record relating to the assessment year 2005-06, it was noted by the Commissioner of Income-tax that date of commencing of operation/activity to the undertaken had been left blank. (ii) As per the Commissioner of Income-tax, the Assessing Officer had finalised the assessment without placing any document on record as to when the business had commenced or/and to whether the company fulfils the necessary condition laid down in the Income-tax Act for claiming deduction under section 80-IA of the Act as per para 8.1 of the order of the Commissioner of Income-tax. The said observation that the issue regarding claim of deduction under section 80-IA of the Act and deduction claimed under section 80-IA on other income came up for consideration before the Additional Commissioner of Income-tax, Range-I, Chandigarh, for the assessment year 2006-07 in the assessee's own case. As per order dated December 30, 2009, it was concluded after detailed discussion that the assessee-company was not eligible for deduction under section 80-IA of the Act in the assessment year 2006-07. The claim of deduction under section 80-IA on other income was also rejected by the Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttp://www.moneycontrol.com/company-facts/maxindia/history/MI the cellular service was started by the assessee-company in Mumbai by the name "Max Torch" in the year 1994. Further in the year 1994, 17 paging networks of the assessee-company were commissioned. This clearly reflects that the assessee-company has commenced its business activities and started giving services to its customers in the year 1994. (e) Further information on the web reveals that the assessee-company has merged its cellular and paging divisions, Max Touch and Max Page. Also the details furnished during the course of the assessment proceedings for the assessment year 2006-07 reveals that the assessee-company has from the financial year 2001-02 onwards discontinued the paging business. Thus there has been reconstructions and merged in the case of the assessee-company, since the company was originally established in 1992 and hence is not eligible for deduction under section 80-IA as per the provisions contained in clause (i) of sub-section (3) of section 80-IA. (f) The assessee-company has signed the original licence agreement with the Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the block of 10 years as per the provisions of sub-section (5) of section 80-IA. 14. The Commissioner of Income-tax further noted that the assessee to have claimed deduction under section 80-IA of the Act on the interest income and other income. The interest income of Rs. 6.09 crores was earned on temporary deployment of surplus funds generated out of business of telecommunication services. The assessee had recorded the said as income derived from undertaking carrying on telecom business being eligible for deduction under section 80-IA of the Act. Further, in the other income of Rs. 11.09 crores, the assessee had included the miscellaneous receipts amounting to Rs. 4.98 crores. The said income was also held not to have been derived from or had direct nexus with the undertaking eligible for deduction under section 80-IA of the Act. 15. In view of the facts and legal position emanating from the assessment order passed for the assessment year 2006-07, the Commissioner of Income-tax was of the view that it was apparent from the assessment order relating to assessment year 2005-06 dated September 3, 2007, that the order passed by the Assessing Officer was not only erroneous but also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t licence fee is paid whereas as per para 1.1 of the terms of conditions in Schedule "C", Part-III to the licence agreement as the effective date was November 29, 1994. The learned authorised representative pointed out that the assessee commenced the operations of providing cellular service on November 16, 1995, for which provisional approval dated October 13, 1995 was received on October 20, 1995 as per the letter of the Government of India placed at page 177 of the paper book. Thus, it was stressed that the cellular services stated on November 16, 1995. A reference was made to the notes to accounts for the period ending March 31, 1996 placed at pages 175 and 176 of the paper book in which under Note 5, it was stated that the company started commercial operations of pager and cellular services on May 1, 1995 and November 16, 1995 respectively. The learned authorised representative further pointed out that a status report of cellular, telecom services licence was prepared on April 30, 1996 in which it is provided that date of signing of licence agreement was November 29, 1994 in respect of Mumbai area and the date of start of initial services was October 29, 1995 The said status re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the same with effect from the financial year beginning from April 2004. It was further reported that though the section entitles the company to 100 per cent. deduction on the profit earned on such business, however, the company was required to pay tax as under the minimum alternate tax provisions of the of the Act. The learned authorised representative thereafter pointed out that the audit report placed at page 27 onwards of the paper book in which at page 32, item 26, it was reported that the deduction under section 80-IA of the Act had been claimed at Rs.307.93 crores. The assessee further pointed out that the Form No. 10CCB for claiming the said deduction under section 80-IA of the Act was also filed by the assessee though in column 8, the date of commencement of operation/activity by the undertaking had inadvertently remained to be typed. The said audit report is placed at pages 61 to 66 of the paper book. Though in item 9, it was reported that the initial assessment year from when the deduction was being claimed was the assessment year 2005-06 and also item 13, the eligible business under section 80-IA was reported to be on account of telecom services and cellular mobile ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable to the assessee at 100 per cent. for the first five assessment year commencing at any time during the period of 15 years at the option of the assessee-company and 30 per cent. for the further five assessment years. It was further reported that the assessee had opted for the deduction under section 80-IA from the assessment years 2005-06 to 2010-11 and for the assessment years 2005-06 to 2009-10, the assessee was entitled to deduction at 100 per cent. and in the assessment year 2010-11 at 30 per cent. The learned authorised representative pointed out that in order to be eligible for claim of deduction under section 80-IA(4) of the Act, the assessee should be an entity and vide order dated April 21, 2006 the approval was granted under section 10(23G) of the Act. 17. Referring to the proceedings initiated under section 263 of the Act, the learned authorised representative pointed out that show-cause notice issued by the Commissioner of Income-tax is placed at page 93 of the paper book with the reply of the assessee to the show cause notice at page 97 onwards and thereafter at page 189 of the paper book, which was the reply to the second letter issued by the Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le were incorrect. Further plea of the learned authorised representative for the assessee was that the findings of the Commissioner of Income-tax were on the basis of draft assessment order relating to the assessment year 2006-07. The next aspect considered by the Commissioner of Income-tax was interest income and other income, and admittedly no enquiries were made by the Assessing Officer. The conclusion of the Commissioner of Income-tax holding assessee ineligible for deduction, as per the learned authorised representative for the assessee, was incorrect. 20. The learned Departmental representative for the Revenue pointed out that the Commissioner of Income-tax passed the order under section 263 of the Act as no enquiries were made by the Assessing Officer. Even the date of commencement of operation was left blank in the audit report. As per the learned Departmental representative for the Revenue, the Assessing Officer failed to enquire when the business commenced or whether the assessee fulfils the necessary conditions, making it eligible for the deduction under section 80-IA of the Act. The Assessing Officer had even failed to verify whether any new business had actually been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Thus, taxable income has been shown at nil." 23. Vide para 3, the computation of book profits under section 115JB of the Act was worked out by the Assessing Officer. 24. The assessee had claimed deduction under section 80-IA of the Act amounting to Rs. 3,07,93,70,059 which was allowed as per order passed under section 143(3) of the Act. The Commissioner of Income-tax on perusal of assessment records noted several facts as referred to by us in paras hereinabove and passed the order under section 263 of the Act and observed that the Assessing Officer had failed to have called for basic fact before allowing the deduction to the assessee-company under section 80-IA of the Act. It was observed by the Commissioner of Income-tax vide para 6.5 that the said deduction was granted to the assessee-company without raising a single query on the order sheet on the issue. The Commissioner of Income-tax was of the view that the Assessing Officer had not at all applied his mind in determining the eligible amount of deduction. Further the Assessing Officer had failed to appreciate that deduction under section 80-IA of the Act was not allowable on other income like interest and miscellaneous inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue administration.' In our view, this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue". (emphasis supplied) 26. Further, the hon'ble Supreme Court in Max India Ltd. [2007] 295 ITR 282 (SC) upheld the judgment of the hon'ble Punjab and Haryana High Court ([2004] 268 ITR 128 (P & H)). In the said case, it was held that if the view expressed by the Assessing Officer was a possible view, the Commissioner of Income-tax would have no jurisdiction to interfere with such a view while exercising the power under section 263 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lid as the order of the Assessing Officer found to be passed on due application of mind. 28. Section 263 of the Act is to be invoked where the order passed by the Assessing Officer is erroneous and an order passed without application of mind would fall under the category of erroneous order. Though every loss of Revenue cannot be treated as prejudicial to the interests of the Revenue, however, loss of tax lawfully payable pursuant to an erroneous order passed by the Authority has been held to be prejudicial to the interests of the Revenue by the hon'ble Bombay High Court in CIT v. Gabrial India Ltd. [1993] 203 ITR 108 (Bom), and several other courts. Where the Assessing Officer fails to exercise the quasi judicial power vested in him and passes an order without application of mind and not in accordance with law, and without making proper verification, the conclusion drawn by the Assessing Officer makes the order erroneous, open to exercise of jurisdiction of the Commissioner of Income-tax under section 263 of the Act, coupled with the fact that such an order had resulted in loss of tax, thus making it an order prejudicial to the interests of the Revenue. 29. Now, coming to the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act by the Commissioner of Income-tax, we do not deem it necessary to address the issue on the merits of claim of deduction under section 80-IA of the Act. We find that the Assessing Officer completed the assessment without looking into the merits of the claim of the assessee in relation to its eligibility of deduction available under section 80-IA of the Act. The assessment order passed by the Assessing Officer is without making any investigation and without application of mind in granting the deduction under section 80-IA of the Act, both on the profits of the business and also on the interest income and other income earned by the assessee. The Assessing Officer having failed to look into the merits of the claim of the assessee and also it being eligible or otherwise to the said claim under section 80-IA of the Act, and the assessee having failed to furnish the requisite information pertaining to the deduction claimed under section 80-IA of the Act during the assessment proceedings, makes the order of the Assessing Officer erroneous. The assessee had failed to produce before us any record or evidence of having produced the requisite information/documents in relation to its cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u Gupta v. CIT [2008] 301 ITR 45, we confirm the order of the Commissioner of Income-tax in setting aside and restoring the matter back to the file of the Assessing Officer for fresh adjudication in accordance with law. However, we find that the Commissioner of Income-tax had deliberated upon the issues at length and had directed the Assessing Officer to pass fresh assessment order after carefully looking into and critically examining all the aforementioned issues raised in the assessment order for the assessment year 2006-07. The learned authorised representative for the assessee placed reliance on the ratio laid down by the hon'ble apex court in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC), Civil Appeal No. 8457 of 2010 arising out of SLP (C) No. 2708 of 2010 date of judgment October 1, 2010, where the matter was remitted back to the Transfer Pricing Officer, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in the impugned judgment dated July 1, 2010. The Commissioner of Income-tax while remitting the matter to the file of the Assessing Officer had observed that the assessee was not entitled to ..... 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