TMI Blog2015 (4) TMI 1007X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 - DEL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 prejudici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al I.T. training companies and top amongst such companies outside U.K. and U.S. 2.5. The assessee also derived income from export business, capital gains and income from other sources. The assessee filed its return of income on 31-12-1999 which was processed u/s 143(1) vide order dated 30-5-2000. 2.6. A search was conducted u/s 132(1) of the Income-tax act, 1961 in the office premises of the assessee and the residential premises of its directors on 10-11th November 2004. In response to notice u/s 153A, the assessee filed its return of income on 5-10-2005 declaring income of ₹ 10,11,66,880/-. The assessment order u/s 153A read with section 143(3) of the Act was passed on 1-6-2006 determining the total income at ₹ 10,36,86,880/-, the only addition made being the disallowance on account of claim made u/s 10B in respect of the technical know-how fees of ₹ 25,20,000/-. 2.7. The assessee filed an appeal against the additions made in the aforesaid assessment order and the CIT(A) allowed the same vide order dated 27-9-2006. The revenue preferred appeal before the ITAT against the relief allowed by CIT(A), which is pending disposal. 2.8. While the aforesaid app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee further submitted that it appeared that Mr. Mehta was not satisfied with the investigations carried out by the department and goaded the department to initiate action u/s 132 of the Act against the assessee and in consequence to that search was carried out at the premises of the assessee in November 2004. (viii) The assessee pointed out that as a result of search, there was neither issue of any undisclosed cash nor of any asset etc. The assessment u/s 153A for A.Y. 1999-2000 to 2004-05 were made after making an aggregate disallowance of ₹ 41 crores against the assessee and its group companies, which were substantially deleted in their appeals. The revenue's appeals on the issues are pending with the Tribunal. (ix) The assessee further alleged that Mr. Mehta again, not satisfied with the quality of assessments and the additions made therein, started leveling allegations against the officials of the department and the assessee company in his written complains. (x) The assessee filed a copy of such letter dated 17-5-2007 written by Shri A.L. Mehta to the Member (Investigation), CBDT, instigating the department to initiate proceedings u/s 263 of the Act. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain issues on which no inquiries or inadequate inquiries were made by the assessing officer. Ld. CIT also distinguished the case laws relied upon by assessee. (iv) As regard's assessee's objection that proceedings u/s 263 had been initiated on the basis of correspondence made by informant with the department including CBDT, ld. CIT pointed out that this contention also does not hold good because the assessment records examined by CIT, revealed that assessment was erroneous and prejudicial to the interests of revenue. (v) Ld. CIT, accordingly, disposed of the preliminary objection and then passed the order on various issues raised in the show cause notice. 2.11. The assessee filed a writ petition being WP(C) no. 4722/2008 before the Hon'ble High Court and assailed the order passed u/s 263 mainly on following grounds: (i) The order passed was in violation of principles of natural justice because the assessee requested the ld. CIT to dispose of the preliminary legal objections by passing reasoned speaking order as held by the Hon'ble Supreme Court in the case of GKN Driveshaft v. CIT 259 ITR 19 ( in context of section 148 of the Act). The assessee had r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 19-6-2008 passed by the CIT (Central)-II. However, liberty was granted to the 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 Hon'ble High Court or which intended to raise at the time of fresh hearing. 2.16. The scope of this judgment has been a matter of considerable debate inasmuch as the same was considered by Hon'ble High Court in its judgment dated 3-8-2012 while deciding the writ petition filed by revenue. Since presently we are only narrating the course of events, therefore, we will consider in detail the effect of the findings recorded by Hon'ble High Court later while deciding the jurisdictional issues raised before us by the assessee. 3. An application was filed by the revenue for clarification in regard to the limitation for passing the fresh order and the Hon'ble High Court, vide order dated 5-2-2010 in CWP no. 4722/1987 clarified that period of limitation would also not apply to fresh order to be passed by the Commissioner u/s 263 of the Act for the assessment year 1999-2000 pursuant to the direction of the Hon'ble High Court. 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the decision of Hon'ble Delhi High Court had become final. 4. In consequence to the order of Hon'ble Delhi High Court dated 11-12- 2009, ld. CIT (Central)-II, issued show cause notice to assessee dated 5-2- 2010, contained at pages 186 to 194 of the PB and thereafter another show cause notice dated 19-2-2010 (contained at pages 195 to 196 of the PB). 4.1. The assessee vide its reply dated 10-3-2010, contained at pages 195 to 206, replied to the show cause notices, in which, inter alia, it was submitted that inspection of records as requested by the assessee vide letters dated 16- 12-2008; 23-2-2009; and 12-3-2009 to the assessing officer/ CIT be allowed, particularly, following: (i) All interdepartmental correspondences (including with CBDT) in respect of the assessment proceedings u/s 153A/143(3) of the Act. (ii) All interdepartmental correspondences (including with CBDT) in respect of the proceedings u/s 263 of the Act: (iii) All correspondences of the department with Shri A.L. Mehta: (iv) Copies of office notes of the assessment orders. 4.2. The assessee pointed out that vide letters dated 24-2-2009, 4-3-2009; and 6-3-2009, the department had categ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 19 (SC), wherein the Apex Court in the context of section 147/148 of the Act, held that the assessing officer is duty bound to dispose of the legal objections filed by the assessee in response to the reasons recorded for reassessment before proceedings with the reassessment. Accordingly, assessee submitted that legal objections be disposed off. 5.4. The assessee also relied on the decision of Hon'ble Delhi High Court in the case of Janaki Exports International v. UOI 278 ITR 296 (Del), wherein the decision of Hon'ble Supreme Court in GKN Driveshafts (India) Ltd. (supra), has been followed with reference to the proceedings u/s 158BD, which also talk about the satisfaction of the assessing officer, recorded in proceedings u/s 158BC, Hon'ble Delhi High Court held that, once the satisfaction by the assessing officer, passing the assessment order u/s 158BC, is recorded, the person who is to be proceeded u/s 158BD, must be informed about the satisfaction of the assessing officer, which has been recorded and he must be given a reasonable opportunity to object to the same. 5.5. The assessee further relied on the decision of Hon'ble Supreme Court in the case of BV V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon'ble Calcutta High Court in the case of Sri Sri Kubereswar Mahadeva Thakur, referred by ld. CIT, on the ground that in the said decision the issue was whether in set aside proceedings, the Commissioner could go into the question of year of accrual of capital gains, which went to the root of the matter, when such question was not raised by the assessee before the Commissioner in the original proceedings.The Hon'ble High Court held that the Commissioner could consider such question in the set aside proceedings, since the question went into the root of the matter and the Commissioner could raise all questions in the course of proceedings held de novo. 6. However, in the present case, there is no observation of Hon'ble High Court, vis- -vis the power of the Commissioner's power to raise new grounds in set aside proceedings. The assessee further pointed out that the direction of the High Court that ld. CIT could look into the matter afresh with independent mind, could not be divorced from the context in which the same was rendered to allow fishing and roving enquiries. This direction cannot be read as permitting raising of new issues. 6.1. The assessee also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the petitioner before the said Commissioner and the Commissioner, while passing the order, shall specifically deal with this contention. ..... . The upshot of aforesaid discussion is that WP(C) No 4722/2008 is allowed and the impugned order dated 19/6/2008 passed by the Commissioner of Income Tax (Central-II)/respondent no 4 is hereby set aside. However, liberty is granted to the respondent No 4 to appropriately deal with the matter and pass fresh order after giving opportunity of being heard to the petitioner on various points canvassed before us or which it intends to raise at the time of fresh hearing. We also make it clear that we have not authoritatively pronounced on the contentions raised by the petitioner, either way, and the Commissioner shall deal with such contentions objectively without being influenced by any observations in this judgment. Hon'ble Delhi High Court further clarified vide order dated 05/02/2010 as under: While setting aside the order under section 263 of the Income Tax Act by the respondent, it was made clear in or judgment dated 11/12/2009 that the concerned Commissioner of Income Tax/Respondent No. 4 shall look into the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance. 8.4. None of the letters, written by the CIT/ CBDT indicated that there was any dictate therein by the assessing officer. 8.5. Ld. CIT further pointed out that as per the provisions of the Act, the higher authorities are not to interfere with the independence or unfettered discretion, which is statutorily conferred upon the assessing officer, hence if assessee's allegations were to be accepted, even then it was clear that the said order passed by the assessing officer was contrary to the provisions of law and, accordingly, the same itself becomes erroneous and prejudicial to the interests of revenue. 8.6. As regards the assessee's allegation that the initiation of proceeding u/s 263 was on the dictates/ at the behest of the CCIT/ CBDT, ld. CIT referred to the observations of Hon'ble Delhi High Court noted in para8.1 of this order to conclude that the assessee's objections on these issues were no longer valid. 9. As regards the allegation of assessee that in the set aside proceedings, it is not possible to issue fresh show cause notice in respect of other items, which did not form part of the order passed u/s 263 on 19-6-2008, the ld. CIT pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... framed under section 143(3)/153A of the Act as erroneous and prejudicial to the interest of the Revenue is without jurisdiction, bad in law and void ab-initio. 2. That on the facts and circumstances of the case and in law, the order passed by the CIT without affording adequate opportunity of being heard, in complete violation of principles of natural justice, is void-ab-initio. 3. That on the facts and circumstances of the case and in law, the CIT erred in not allowing inspection of the records prayed by the appellant, preventing the appellant from making submissions on the validity of assumption of jurisdiction under section 263 of the Act. 3.1 That the CIT erred in facts and in law in observing that complete inspection of records had been allowed while the writ petition was pending before the Hon'ble High Court. 4. That on the facts and circumstances of the case and in law the proceedings under section 263 of the Act having been initiated at the dictates of superior authorities (CCIT/CBDT) were bad in law and void ab-initio. 4.1 That on the facts and circumstances of the case and in law, the CIT erred in holding that while setting aside the original order pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndividual units of the appellant, deduction in respect of which was claimed under section 10B of the Act, were not separate industrial undertakings but mere extension of already existing business of the appellant. 11.2 That on the facts and circumstances of the case and in law, the CIT erred in alleging that since the assessing officer failed to examine the basis of allocation of expenses between the appellant's EOU and non-EOU units, the order of the assessing officer was erroneous and prejudicial to the interest of the Revenue. 11.3 That on the facts and circumstances of the case and in law, the CIT erred in holding that since the appellant had not allocated foreign exchange fluctuation loss of ₹ 2.76 crores to the EOU units and the assessing officer having failed to examine the said issue, the order of the assessing officer in this regard was erroneous and prejudicial to the interest of the Revenue. 11.4 That on the facts and circumstances of the case and in law, the CIT erred in exercising jurisdiction under section 263 of the Act in respect of the aforesaid issue without appreciating that the said issue was subject matter of appeal before the CIT (A) in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case and in law, the CIT failed to point out any error in the order of the assessing officer in allowing the aforesaid claim of the appellant, which is sine qua non for initiation of proceedings under section 263 of the Act. 14.2 That on the facts and circumstances of the case and in law, the CIT erred in setting aside the assessment order in this regard, without appreciating that the aforesaid expenses were in the nature of routine maintenance and repair expenses, deduction whereof was allowable under section 31137 of the Act. 15. That on the facts and circumstances of the case and in law, the CIT erred in holding that the alleged steep rise in course execution charges incurred by the appellant was accepted by the assessing officer without any verification and enquiry and, therefore, the order of the assessing officer in this regard was erroneous and prejudicial to the interest of the Revenue. 15.1 That on the facts and circumstances of the case and in law, the CIT failed to appreciate that the aforesaid issue was duly examined by the assessing officer during the original assessment proceedings and, therefore, was not amenable to revisionary jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since import of 'NetVarsity' from NUT USA was fictitious, the order of the assessing officer allowing depreciation on the value of NetVarsity, was erroneous and prejudicial to the interest of the Revenue. 19.1 That on the facts and circumstances of the case and in law, the CIT erred in holding that 'NetVarsity' was developed in India and, therefore, the question of importing the said software from NUT USA did not arise. 19.2 That on the facts and circumstances of the case and in law, the CIT erred in alleging that the said software having not been put to use during the year under consideration, the order of the assessing officer allowing depreciation thereon, was erroneous and prejudicial to the interest of the Revenue. 19.3 That in holding as aforesaid, the CIT failed to appreciate that aforesaid software, viz., Netvarsity had already been put to use from financial year 1997-98 onwards and formed part of the block of assets thereafter. 19.4 That on the facts and circumstances of the case and in law, the CIT failed to appreciate that the aforesaid issue having already been examined and scrutinized in detail during the original assessment proceedings und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee sought stay of proceedings before Tribunal u/s 143(3) read with sec. 263 of the Act, which were taken by assessing officer pursuant to the order of ld. CIT on 1-4-2010. The main submissions before the Tribunal in the stay application was that since appeals had been filed against the order (passed by the CIT u/s 263 on 1-4-2010), there would be multiplicity of proceedings and if the assessing officer was permitted to complete fresh assessment, such an exercise on the part of the assessing officer would be rendered futile if the Tribunal accepts the appeals filed by the assessee against the order passed u/s 263 and were to hold that the CIT had erroneously assumed jurisdiction to revise the assessments. 10.1. The Tribunal passed orders on 21-5-2010 granting stay of the assessment proceedings pending before the assessing officer. 10.2. The Tribunal took up for hearing the appeals filed by the assessee against the order passed by the ld. CIT u/s 263 immediately after the passing of the stay order and order was passed on 6-7-2010 which is reproduced hereunder: Present for the assessee : Shri Ajay Vohra, Advocate Present for the revenue: Smt. S. Narasamma Sr. DR The Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the Commissioner, assuming jurisdiction u/s 263. (d) The assessee was merely trying to delay the assessment proceedings by taking frivolous and untenable claims. (e) The Revenue placed strong reliance on the order passed by the Hon'ble High Court on 11-12-2009 in the assessee's writ petition and it was contended that the observations of Hon'ble High Court, if properly understood, would clearly show that once the order passed by the CIT- I, on 19-6-2008 was quashed by the Hon'ble High Court, all objections to the assumption of jurisdiction by the Commissioner, vanished or come to an end and, thereafter, his order could be objected to only on merits. It was contended that this was the true consequence of the order passed by Hon'ble High Court on 11-12-2009 and, therefore, the assessee could not be permitted to take up the point that the second order passed by the Commissioner on 1-4-2010 u/s 263 also suffered from the same flaw i.e. that he did not apply his independent mind and merely acted on the dictates or instructions of the CBDT. (f) To contend this, Revenue had relied on the Hon'ble High Court's observation that since there would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther appeals. 12.1. Hon'ble High Court then referred to its observations vide order dated 11-12-2009 in paras 20 21 and concluded that the observations of Hon'ble High Court could not be understood as placing an embargo on the assessee from raising the plea when the authority considered the matter afresh that that order suffers from the same jurisdictional defect, namely, that it did not show an independent application of mind and was authorized by the dictates of some other authority, observing as under: 20. We have to read and understand this Court's order dated 11.12.2009 as a whole and taking all the observations made therein together in order to appreciate the true scope and tenor of the order. To understand the order as barring the assessee from questioning the order passed by the CIT on 01.04.2010 on the ground that he did not exercise his independent mind but merely proceeded on the lines as dictated by the CBDT would not be proper, for no Court can plausibly lay down the grounds on which an order, which is to be passed, can be challenged by the aggrieved party. At the time when this Court passed the order, the order of the CIT was not in existence. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is evident that assessee is entitled to raise the plea on all points which were raised in the first round of proceedings before Hon'ble High Court on the issue of jurisdiction to pass order u/s 263 viz., firstly the order was passed at the dictates of higher authorities and secondly since order u/s 153A/ 243(3) was passed under the monitoring of CIT, therefore, the order could not be held to be erroneous insofar as it was prejudicial to the interest of revenue. We, therefore, now proceed to examine the various grounds on the issue of jurisdiction of present Commissioner to pass order u/s 263, which has been assailed before us vide ground nos. 1 to 5. 14. As far as ground no. 1 is concerned, it is general in nature and the various issues are covered in other grounds of appeal. 15. Ground no. 2 is in regard to passing of the order by ld. CIT without affording adequate opportunity of being heard. This ground, in our opinion, does not survive, particularly because the impugned order has been passed by new Commissioner after complying with the specific directions of Hon'ble High Court, particularly in regard to providing of opportunity of being heard. In the result, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6-2007 1 18 AL Mehta's letter The said letter states to Prime Minister - for revision of order The said letter states that the assessment was made at the behest CIT/Addl. CIT 3 27-7-07 7 182-185 Letter from CIT to CCIT The CIT states that the case was monitored by the Member (Inv.) CBDT from time-to-time. 4. 6-9-2007 1 42-43 Report of Addl CIT to CIT II The report records that CBDT had monitored the assessment and that the AO had examined all issues/ allegations during assessment. 17.3. The various issues raised in the appraisal report and reiterated by Shri AL Mehta in the various complaints filed from time to time were looked into and scrutinized during the course of assessment as is evident from the following: S.N. Date of Letter Vol. No. Page No. Contents Remarks 1 16-5- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the directions issued vide order sheet dated 6-7-2010, read with the decision of Hon'ble High Court dated 3-8-2012, the Tribunal vide order-sheet entry dated 9-10- 2012 had directed the Income-tax department to allow inspection of the entire records to the assessee which is evident from the order-sheet entry noted above. 17.6. Ld. Counsel in petition has pointed out that the AO allowed the authorized representatives to appear before the office of the AO and CIT on 9th 10th October 2012 for inspection of the aforesaid records including confidential folders relating to assessments u/s 153A and proceedings u/s 263 of the Act. However, very limited inspection of the records was allowed, as is evident from the following: - The records shown to the applicant/authorized representative only contained copies of the return of income filed by the applicant, statutory notices/questionnaires issued by the assessing officer / CIT and replies thereto filed by the applicant, which are already available with the applicant; - Certain pages were found to be missing in the serially-numbered files shown to the representatives of the applicant, which were not shown to the applicant; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 ITR 437, wherein it has been held that record , as defined in clause (b) of the Explanation, is a word of wide amplitude and includes all records relating to any proceeding available at the time of examination by the Commissioner. 17.9. Ld. Counsel referred to Annexure A in its petition dated 15-10-2012 to demonstrate monitoring of assessment by higher authorities S. Date Particulars Refer No. S.No. Date Particulars Refer 1. 12.9.2005 Letter from CBDT to CCIT 9 1 2. 23.9.2005 Letter from CCIT to CIT forwarding aforesaid letter to CBDT 9 2 3. 05.10.2205 Return filed by assessee in response to notice under section 153A 4 10.10.2005 Not known/Required 5. 24.10.2005 Letter from CIT to Addl. CIT enclosing another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. 31-1-2006 Status report, in turn, forwarded by CIT to CCIT 9 22-28 21. 06-02-2006 Questionnaire issued by the assessing officer 22. 08-02-2006 Questionnaire issued by the assessing officer 23. Questionnaire issued by the assessing officer 24. 13-02-2006 Letter from CBDT to CCIT with respect to the status report furnished by A.O. 9 45 25. 27-02-2006 Reply filed by the assessee in response to queries raised during the assessment proceedings 26. 01-03-2006 Questionnaire issued by the assessing officer 27. 06-03-2006 Reply filed by the assessee in response to queries rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41. 19-6-2006 Letter from CCIT to CBDT This letter of the CCIT also refers to an earlier report dated 23-05-2006 9 106-111 42. Office Notes 17.10. The assessee in its reply dated 20-11-2012, contained at pages 65L to 65Z, reiterated the submissions made in its petition dated 15-10- 2012, inter alia, pointed out that in course of inspection before the Hon'ble High Court the assessee was denied the photo copies of the record/ files which were made available to the assessee. Further, only limited/ incomplete record had been shown to the assessee. 18. The Revenue, inter alia, submitted that the record for the purposes of 263 proceedings before the ITAT constituted: (a) All the correspondence between the AO/ CIT and the assessee; (b) Evidence collected and used by the department against the assessee; and (c) File notings, which are meant for communication to the assessee. 18.1. The revenue specifically pointed out that documents, correspondenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idated Photo Finvest Ltd. ACIT 281 ITR 394 (Del.); -CIT Vs. Emery Stone Mfg. Co. 213 ITR 843; -Thermal Systems (Hyd.) P. Ltd. Vs. ACIT 312 ITR (AT) 187. -Malabar Industrial Co. Ltd. 243 ITR 83 (SC); 18.4. As regards the assessee's reliance on the decision in the case of M.D. Overseas Ltd. (supra), ld. Spl counsel pointed out that the said case deals with the recording of satisfaction u/s 132, which is wholly out of context for the present case, because u/s 132 if the reasons are not recorded or information is not on record, it would not be a bona fide satisfaction for the issue of search warrant, because the search warrant is the basis of action. However, u/s 263 satisfaction is recorded in the order of the Commissioner on each of the issues as to why he considers that the order is erroneous and prejudicial to the interests of the revenue, which has been done by ld. Commissioner in the present case. 18.5. As regards reliance, placed by ld. Counsel for the assessee, in the case of P.K. Mishra Vs. ACIT, ld. Spl. counsel pointed out that in the said case the AO persisted with the reopened proceedings despite the fact that the assessee could demonstrate from a v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken on Board. SLP(C) Nos. 7712/2010 8488-8493/2010: Pursuant to the order dated 11th March, 2010, we are directing the petitioner-assessee in these cases to give us a complete break-up/ bifurcation of the worldwide income, allocation of expenses towards learning business and towards software business. In these cases, we want to examine whether there is any loss of revenue suffered by the Department de hors the question of mala fides at this stage. Proceedings to go on but, no recovery shall be made. It is made clear that limitation will not come in the way of the Department. Matters to stand over for three weeks. 18.10. Ld. Spl counsel pointed out that after all these proceedings when such directions were issued by Hon'ble Supreme Court on 12-4-2010, the assessee withdrew the Spl. Leave petitions. Therefore, the directions of Hon'ble High Court have attained finality. 18.11. Ld. Spl. Counsel further pointed out that Hon'ble Delhi High Court in its order dated 11-12-2009 had directed the Commissioner to pass fresh order after giving opportunity. He pointed out that as far as the legal position, as expounded by Hon'ble Delhi High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its order dated 11-12-2009. He further submitted that there were complaints against the AO for having shown undue favour to the assessee. The veracity of the complaint was looked into at different stages and it finally culminated in the issue of a charge-sheet against the AO. In course of hearing, Ld. CIT(DR) filed before us copy of charge-sheet, as additional evidence. However, ld. Counsel for the assessee objected to the same, pointing out that without providing the charge-sheet to assessee and taking his reply on the same, the additional evidence should not be admitted. We find force in the submission of ld. Counsel that this additional evidence should not be admitted, particularly when admittedly administrative correspondence relating to vigilance matters does not form part of record of either of the two proceedings. 18.17. As regards the assessee's contention that assessment order was passed under the monitoring of CIT, ld. Spl. Counsel referred to page 8 of the impugned order, wherein it has been observed as under: The above allegation of the assessee is totally baseless. Sending of routine correspondence and reports by the Assessing Officer to senior authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documents could not be shown to the petitioners as their disclosure will hamper the inquiry pending against the petitioners. He pointed out that in the present case also the disclosure of material will have effect on the vigilance proceedings against the officer. 18.19. Ld. Spl. Counsel referred to the decision in the case of Dr. Pratap Singh Vs. Director of Enforcement 22 Taxman 30 (SC), wherein it has been held that it is not obligatory on the officer to disclose his material on the mere allegation that there were no material before him on which his reason to believe could be grounded - It is for the person making an allegation of prejudice or bias to lead necessary evidence to demonstrate that the action of the statutory authority is prima facie not bona fide. He cannot make an allegation and then call for the other party to make available the evidence on which he can rely to substantiate the allegation. This obligation is all the more burdensome in this case where the Hon'ble High Court has already disposed off all such allegations against the original order by directing a fresh proceeding and a fresh order by a fresh statutory authority. Unless similar allegations c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Status report forwarded by Assessing Officer to CIT 2. 20-11-2005 9 13 Letter by AO to CIT forwarding another status report 3. 13-2-2006 9 45 Letter from CBDT to CCT with respect to the status report furnished by AO CBDT wanted specific report on details of investigations done with respect to specific allegation Nos. 2,3,4,5 and 6 and whether information regarding allegation nos. 13 14 have been sent to the respective AOs - clear instance of monitoring of assessment by CBDT 4 27-4-2006 5.5.2006 9 60-68 Letter from CBDT to CCIT enclosing Shri A.L.Mehta s letter dated 25-3- 2006 addressed to Chairperson CBDT directing that allegations made there be investigated and report with regard to the action taken to be sent to the Board. 5. Undated 11 1-68 Status report dated 15-5-2006 submitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: As is apparent from this report the Department has made a ludicious and watertight case against the assessee by making in depth investigation from all possible angles after referring the cases to TPOs as well as DVOs The letter of the CCITT refers to earlier report dated 23-5-2006 - not on record. 11 24-4-2007 12 32-34 Letter of Shri A.L. Mehta to Member (Inv.), CBDT, asking for a copy of detailed report sent to Member (Inv.), CBDT, by CCIT (Central)/2006- 07/136 dated 26-5- 2006(not shown) on the points of allegation of tax evasion brought out in the appraisal report in the Directorate of Income-tax 20.1. A bare perusal of the above details would show that in none of the letters, CBDT or CCIT has given any direction to the assessing officer to frame the assessment in a particular manner on a particular issue. Taking status report on the basis of information received by CBDT on tax evasion petition cannot be said to be monitoring of assessment by CBDT. U/s 119, CBDT is required to issue instruction to other authorities, as it may deem fit, for the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to keep inform the development to CBDT. 20.2. Ld. CIT, inter alia, has pointed out that the assessee had inspected the records as per the directions of the Hon'ble High Court which is evident from the following observations: 1. Inspection of Records: Issue regarding the inspection of record had already been complied with. The various correspondence, etc. which the assessee has mentioned in its letter, while raising the legal objections, clearly shows that it has not only inspected the requisite records but have also taken copies of the same. The assessee has raised similar objections before the Hon'ble Delhi High Court, during the course of the Writ Petitions. As per the direction of the High Court the records were duly shown to assessee's counsel Shri Ajay Vohra and Ms. Kavita Jha along with other representatives of the assessee and contents thereof were also duly noted by its representatives with the help of stenographer , under the supervision of our Senior Standing Counsel Ms Rashmi Chopra on 1.08.2009 In between the hearing before the Hon'ble High Court and again on 17.08.2009 19.08.2009. Records were also shown/ made available to assessee's co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment records and the records relating to proceeding u/s 263 for the relevant assessment years . 20.5. Therefore, 'all records' as interpreted by the assessee to include inter- departmental correspondence (including CBDT) in respect of assessment proceedings u/s 153A/143(3); and the inter-departmental correspondence (including CBDT) in respect of proceedings u/s 263 of the Act does not come within the ambit of directions given by the Hon'ble High Court. Hon'ble High Court has only referred to assessment records and the records relating to proceedings u/s 263 for the relevant assessment year. It is pertinent to note that neither Tribunal nor Hon'ble High Court referred to above correspondences and confidential records inspite of specific prayer to that effect by assessee. 20.6. Thus all records , as mentioned in the Tribunal's order dated 6-7- 2010, have been clarified by Hon'ble High Court in its order dated 3-8-2012 by observing that Tribunal cannot be faulted in directing to produce the assessment record and the records relating to proceedings u/s 263. 20.7. The observations in the case of Dr. Pratap Singh (supra) and other decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has followed directions of higher authorities. We have examined the compilation filed by department in sealed cover, which is mainly from file nos.1,7,8,9,10,11 and 12. The entire correspondence relates to 2006 and 2007 i.e. prior to the passing of first order of ld. CIT which was set aside by Hon'ble High Court and not thereafter. Therefore, in any case, this correspondence, which is purely administrative in nature, is not relevant for present proceedings. We have gone through various letters and find that mainly the correspondence is between various authorities with reference to various issues on which review was required but finally ld. CIT has passed the order after duly verifying the records before him. No direction had been issued to AO to pass the order in a particular manner. 20.11. It is pertinent to note that assessee is harping more on the complaints being made by Shri A.L. Mehta which is primarily a tax evasion petition and CBDT, in exercise of its administrative functions, is required to take reports from CCIT/CIT on various allegations contained in the tax evasion petition. We do not see any interference being caused by CBDT in discharge of quasi judicial fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lizing the assessment cases of the persons searched at Noida. This action was also challenged before the Hon'ble High Court by way of amendment application. The Hon'ble High Court crystallized the issues before it observing as under: 13. Essentially, the WP and the amendment application, (i) Challenge the search and seizure action; (ii) Question the centralization of assessment case at Noida; and (iii) Seek a direction for conducting the assessment proceeding at Delhi, in case the answer to the aforesaid questions is in negative. 14. The remaining nine companies, the firm, and the nine individuals (out of fifteen) have also filed writ petition raising similar points. These petitions are connected with the present one. 15. The search by the Department, is being challenged on the number of grounds. The main ground of challenge is that there was no relevant information that could lead to reasonable belief to authorize the search. 21.1. The Hon'ble High Court, after detailed discussion of various provisions of law, as well as case laws, concluded that if the assessee is able to make out a prima facie case against the validity of the search, then (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -12-2009 had only set aside the order passed u/s 263 and did not quash the proceedings, therefore, the proceedings initiated vide show cause notice dated 23-7-2007 still survive and the matter is restored to the present Commissioner to be taken up from the stage where the irregularity crept in the order passed by ld. CIT on 19-6-2008. The submission is that primarily on account of not following the principles of natural justice in passing the order, the matter had been set aside by the Hon'ble High Court and, therefore, in the set aside proceedings the ld. CIT could not issue fresh show cause notice dated 5-2-2010 u/s 263 on several new issues in addition to those already included in the notice dated 23-7- 2007 and 15-10-2007 and the issues covered in the original order, in the earlier round of proceedings. 22.2. In sum and substance, the submission of ld. counsel for the assessee Shri Ajay Vohra, is that initiation of proceedings has to be considered with reference to the original show cause notice issued in the first round of proceedings. 23. On the contrary, the submission of ld. Special Counsel Shri G.C. Srivastava is that ld. Commissioner, who was a new incumbent, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of revenue, issues show cause notice to assessee and, thus, provide an opportunity to assessee to give explanation on all the issues raised in the show cause notice. This show cause notice does not per se give jurisdiction to ld. commissioner for passing order u/s 263 which can be passed only after the objections of assessee are duly considered. It is only after considering the explanation/ objection of the assessee if the ld. Commissioner reaches a conclusion that the order passed by ld. Commissioner is erroneous in so far as prejudicial to the interest of revenue, then he proceeds to pass order u/s 263. In the proceedings u/s 147, for proper assumption of jurisdiction assessing officer has to issue notice u/s 148 after recording of reasons and if this notice is found to be issued without jurisdiction, then the notice as such is quashed. (iv) In 263 proceedings, the show cause notice and the order passed by the ld. Commissioner both cannot survive once the order has been set aside. The show cause notice and the order passed by the ld. Commissioner are part and parcel of the same order and, therefore, when the order passed by ld. Commissioner has been set aside, then it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26.2. Ld. Counsel referred to the impugned order and submitted that revisionary jurisdiction has been exercised on the ground that proper inquiries or inquiries, as expected by CIT or necessary inquiries according to the ld. Commissioner, were not conducted. He submitted that ld. CIT did not agree with the manner of inquiries conducted by AO prior to completion of assessment. 26.3. Ld. Counsel submitted that it is well settled law that the issue whether the assessment order was passed after making proper inquiry and due application of mind is to be seen from examination of the entire assessment records and not just the assessment order. He relied on following judicial pronouncements: -Hari Iron Trading co. Vs. CIT 263 ITR 437; -CIT v. Eicher Ltd. 294 ITR 310 (Del.); -CIT Vs. Sunbem Auto 332 ITR 167 (Del.); -CIT v. Anil K Sharma 335 ITR 83 (Del.); -ONGC v. DCIT 104 TTJ 900 (Del.). 26.4. Ld. Counsel submitted that Ld. Commissioner cannot substitute his opinion in place of that of the AO as to the manner and the form in which the inquiries should have been conducted during the course of assessment. 26.5. Ld. Counsel referred to the decision of Jurisdictional Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the AO is erroneous. It was held that the lack of inquiry by itself renders the order to be erroneous and prejudicial to the interests of revenue. However, in cases where the AO conducts inquiry, the CIT has to examine the order of the AO on merits and then form an opinion on merits that the order passed by the AO is erroneous and prejudicial to the interests of revenue. 26.9. It was, inter alia, held that an order is not erroneous, unless the CIT records reasons why it is erroneous. He has to demonstrate that inadequate inquiry led to passing an erroneous order on merits. Thus, it was held that in case of inadequate inquiry, the Commissioner must, after recording reasons, hold that the order is erroneous and unsustainable in law. 26.10. Ld. Counsel submitted that ld. CIT has relied on following decisions to contend that where the AO does not conduct inquiry in the manner as expected that would provide power to the CIT to review the assessment order. -K.A. Ramaswamy Chettiar Anr. V. CIT 220 ITR 657(Mad.); -Addl. CIT v. Mukur Corporation 111 ITR 312 (Guj.); -Shyam Telelink Ltd. V. ITO 99 ITD 576 (Del.). 26.11. Ld. Counsel submitted that in the case of K.A. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quiry level. Ld. Spl. Counsel pointed out that mere entry in books of account without supporting material is not enough and calls for further inquiry. He submitted that mere assertion and claim by assessee is not sufficient and supporting material has to be there to reach the satisfaction about the genuineness of loan. Ld. Spl. Counsel submitted that if level of inquiry is such by which AO could reach the required satisfaction, then it may be a case of inadequate inquiry, but not lack of inquiry. He submitted that there is no authority for the proposition that ld. CIT cannot substitute his opinion in place of AO. 27.3. Ld. Spl. Counsel placed reliance on the decision in the case of Thalibai F. Jain other Vs. ITO 101 ITR 1, wherein it has been held that if order is prejudicial then necessarily erroneous but not vice versa. In this case, the assessee, who had not been assessed previously, filed voluntary return of income for A.Y. 1969-70 to 1973-74, declaring an income of ₹ 31,500/-, stating that it was previous saving inclusive of the gifts given to her at the time of her marriage. She was not assessed to tax previously. Along with the return of income she had filed a let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble High Court upheld the action taken by the ld. Commissioner, inter alia, observing as under: Section 143(1)(a) as substituted by Act 42 of 1970 with effect from April 1, 1971, provides where a return has been made under section 139, the Income tax Officer may, without requiring the presence of the assessee or the production by him of any evidence in support of the return, make an assessment of the total income or loss of the assessee after making such adjustments to the income or loss declared in the return as are required to be made under clause (b) ............... and determine the sum payable by the assessee or refundable to him on the basis of such assessment. It is true that the Income tax Officer need not have been satisfied that the voluntary return submitted by the assessee was correct and complete. He could accept the return of income as submitted by the assessee. But the income must be the income earned by the assessee in the relevant year. The Income tax Officer has no power to assess the income of one person in the hands of another. To that extent at least, he must apply his mind and cannot blindly make the assessment while accepting the voluntary return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner. The Hon'ble High Court did not accept the assessee''s contention. The assessee preferred appeal before the Hon'ble Supreme Court, the Hon'ble Supreme Court upheld the decision of Hon'ble High Court, inter alia, observing as under: In our view, the High Court was right in overruling the contention of the assessee. The order of the Commissioner is a detailed order. There is no doubt that he does mention some facts which were not indicated or communicated to the assessee and which the assessee had had no opportunity of meeting. For instance, in paragraph 9 it is stated : It has been ascertained that the Income tax Officer, D Ward, Howrah, had no jurisdiction over the assessee and hence all the assessments made by him are ab initio null and void. It has also been learnt from local enquiries that the assessee never resided nor carried on any business from 7, Haragenj Road, Salkia, Howrah, and that the assessee's father in law, Shri Sagarmall Saraogi, and his sons have been doing business of foodgrains, besides owning a rice factory and flour grinding machine from 90, Fidder Road, Belgharia, 24 Parganas. He further observed : Moreover, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order was made for each assessment year. As a sample, the Commissioner has reproduced the assessment order for the assessment year 1952-53 in his order. Profit from speculation was shown as ₹ 3,085 and interest ₹ 600, and ₹ 500 was added for want of books of account and evidence. No evidence whatsoever was produced in respect of the money lending business done and interest income shown to have been received by the assessee. No names were given as to the parties to whom the loans were advanced, with amounts and rate of interest and as to when the interest income was received. 27.7. With reference to above decision, ld. Special counsel pointed out that Hon'ble Supreme Court upheld the revisional proceedings because the AO did not carry out that level of inquiry from which he could reach a stage where he was in a position to take proper decision. He submitted that inquiry level had to be weighed by AO. 27.8. Ld. Spl. Counsel Ld. further relied on the decision of Hon'ble Supreme Court in the case of Smt.Tara Devi Agarwal Vs. CIT 88 ITR 323, wherein it was, inter alia, held that where an income had not been earned and is not assessable, merely beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. 27.10. With reference to above case laws, ld. Spl. Counsel has summarized his arguments as under: In the present case before your Honours, it is respectfully submitted that the ratio laid down by the apex court and by the jurisdictional High Court is squarely applicable for the reason that: a) The AO had passed one page stereo type order (for AY 99-00) without looking into any aspect of the matter. We will point out the nature of the so called enquiry allegedly conducted by the AO, while dealing with specific grounds. Suffice it to say at this stage in relation to this ground of appeal that in the given facts of this case, the AO completed the assessment in undue haste, without applying his mind and without conducting any worthwhile enquiry into various issues involving high stakes for the Revenue. No material of any kind was brought on record to reach any kind of satisfaction for the acceptance of the claims put forth before him. This is a case of complete lack of enquiry and the assessee may not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel are distinguishable on the facts and circumstances of the case. We wish to deal with the case laws cited by the Ld. counsel as under: Malabar Industrial Co. Ltd. vs CIT(243 ITR 83-SC-@ Vol IV- 1216-1219 In this case, the Hon'ble Supreme Court observed on pages 128-1219 of PB that there was non-application of mind by the AO. and entry in accounts was filed before the AO. without any supporting material and thus there was lack of enquiry. This case really supports the case of the Revenue. Ganpact Ram Vishnoi (152 Taxman 242 @ Vol IV-1248-1250) The attention is drawn to the observations of Hon'ble High Court on Page 1249 of PB where a finding is recorded that detailed enquiries were completed in this case. The case is, therefore, distinguishable. D.G. Housing projects Ltd. (343 ITR 329-Del @ Vol-IV-1262- 1280) In this case, the Hon'ble High Court of Delhi observed that in the case of inadequate enquiry, CIT must record a finding on merits that the conclusions reached by the AO. are erroneous and prejudicial to the interest of Revenue. However, in the cases of lack of enquiry, it would be open to the CIT to remand the matter back to the AO. for further enquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f enquiry is the error in the order. Besides, the Court clearly records a finding that the assessee had placed all the material before the A.O. CIT vs Sunbeam Auto (332 ITR 167-Delhi High Court @ vol IV: page no. 1228-1237 of assessee's paper book In this case the assessment was made in accordance with law. The assessee followed the same accounting practice which was followed in earlier years. Further, the view taken by the Assessing Officer was one of the possible views. In view of these facts, the Hon'ble Delhi High Court held that the view taken by the Assessing Officer was one of the possible views and the assessment order passed by him could not be held to prejudicial to the interest of revenue. In the present case before your Honours, the Assessing Officer had not applied his mind at all. He had not conducted any enquiry or further enquiry as necessary in the given circumstances. CIT vs Anil K Sharma (335 ITR 83-Delhi High Court @ vol IV: page no. 1238-1240 of assessee's paper book In this case it was found by the Tribunal that complete detail were filed before the Assessing Officer and that he applied his mind to the relevant material and facts, although ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO's query and the AO, without proper verification of replies, accepts the same, then, it cannot be said to be a case of due application of mind. 28.1. Ld. Special counsel has rightly pointed out that the expression, 'inquiry', 'lack of inquiry' and 'inadequate inquiry', have not been defined and, therefore, when the action of the AO would be suggestive of lack of inquiry or inadequate inquiry, will depend upon the facts obtaining in a particular case. What emerges as a broad principle from the various decisions is that where the AO has reached a rational conclusion, based on his inquiries and material on record, the Commissioner should not start the matter afresh in a way as to question the manner of his conducting inquiries. It is not the province of the Commissioner to enter into the merits of evidence; it has only to see whether the requirements of essential inquires and of law have been duly and properly complied with by AO or not. 28.2. It is well settled that before the Commissioner can invoke his powers u/s 263, he has to arrive at a conclusion that the assessment order is erroneous in so far as it was prejudicial to the interests of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute the view which is legal and sustainable. 30.1. Ld. Special Counsel referred to the decision of Hon'ble Delhi High Court in the case of CIT Vs. Goetz India and pointed out that new dimensions have been given to 263 jurisprudence and it has been held that CIT can revise if he finds that the view taken by the AO is erroneous and prejudicial to the interests of revenue irrespective of the fact that two views are possible. If erroneous view has been taken, then 263 can be resorted to. 30.2. In the case of CIT Vs. Goetze India (ITA no. 1179/2010) the Hon'ble Delhi High Court in para 10 has observed as under: 10. In the facts of the present case, as we examine the factual position, the Commissioner in her order under Section 263 has recorded specific findings as to why and for what reason she felt that the order passed by the Assessing Officer on two accounts was erroneous and prejudicial to the interest of Revenue. For the reasons set out in the order, which we need not at this stage elaborate as this is a question of merits, we reject the contention of the respondent- assessee and also the findings and reasoning of the tribunal that the Commissioner could not have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsustainable and incorrect. But the said finding must be recorded. This would satisfy the statutory requirement that the order passed and made subject matter of revision was erroneous, subject to the second condition that the order under review should also be prejudicial to the interest of the Revenue. (Emphasis supplied by us). 30.3. Ld. Spl. Counsel further submitted that the ld. Commissioner restored the matter to the AO on the ground that inquiries were not conducted and the claims were accepted on their face value without any inquiry and the supporting material having been placed on record. He submitted that the case needed certain basic inquiries to bring on record the material to reach the conclusion arrived at by the AO. He submitted that it is not a case where the AO has taken one of two possible and legally sustainable views and the Commissioner was seeking to challenge the same. He submitted that in this case the ld. commissioner proceeded on the basis that the view taken by the AO, one way or the other, could not have been reached at all without conducting the preliminary inquiries in the matter. He submitted that in a situation, where AO chooses not to conduct the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l filed by Poonam Rani Singh. Thereafter, the AO in the case of the assessee issued notice u/s 148 of the Act on 29-3-2001. In response to this notice, the assessee on 16-8-2001 filed a return, showing loss of ₹ 1,02,756/-. Vide assessment order dated 28-3-2002, the AO accepted that the assessee had established and proved the source and their capacity to invest ₹ 20 lacs and, accordingly, no addition was made on this count. The return filed by the assessee, showing loss of ₹ 1,02,756/- was accepted. In the assessment order, the AO had also noted as under: Scrutiny of the P L A/c also revealed that during the year share application money was increased by ₹ 47,00,000/-. In order to verify the geniuses of share application money summons u/s 131 of the IT Act was issued to person on random basis and statement was recorded for confirming of these investments made by them towards the assessee company. 32.2. The CIT vide order dated 25-3-2004 u/s 263 directed the AO to conduct further enquiries in respect of share application money of ₹ 47 lacs. He also held that the AO had erred in determining loss after issue of notice u/s 148 of the Act. The ITAT qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout making necessary enquiries on any of the issues having no relation to the incriminating material found during search, still the same could not have been held to be erroneous and prejudicial to the interests of Revenue under section 263 since the said issues being outside the scope of assessment under section 153A of the Act was not required to be looked into by the assessing officer during the course of assessment. The alleged failure to enquire into such issues, which did not and could not form the subject matter of assessment under section 153A of the Act, cannot result in such an order being regarded erroneous and prejudicial to the interest of Revenue. As a necessary corollary, the CIT could not seek to revise the assessment under section 153A of the Act qua issue that cannot be gone into by the assessing officer while framing assessment under that section. In other words, the CIT cannot indirectly seek to do what the assessing officer could not do directly. The Full bench of the Delhi High Court in the case of Kelvinator of India Ltd. 256 ITR 1 observed as under: ... It is well settled principle of law that what cannot be done directly cannot be done indirectl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that on various issues accounts came to the notice of AO for the first time as there was no occasion for assessee to produce the same. He submitted that if assessment has not been made on the basis of books of a/c, any books of account found in course of search will be covered by the phrase 'material found in the course of search'. In this regard ld. Special Counsel referred to para 53 of the decision report, which reads as under: 53. The question now is - what is the scope of assessment or reassessment of total income u/s 153A (1) (b) and the first proviso ? We are of the view that for answering this question, guidance will have to be sought from section 132(1). If any books of account or other documents relevant to the assessment had not been produced in the course of original assessment and found in the course of search in our humble opinion such books of account or ITA Nos. 5018 to 5022 5059/M/2010 other documents have to be taken into account while making assessment or reassessment of total income under the aforesaid provision. Similar position will obtain in a case where undisclosed income or undisclosed property has been found as a consequence of search. In othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 153A. Thus, analysis of various scenarios regarding completed assessments does not fall within the ambit of the question posed to us. 32.3. Ld. Special Counsel further referred to para 58 of the decision which reads as under: 58. Thus, question No.1 before us is answered as under : a) In assessments that are abated, the AO retains the original jurisdiction as well as jurisdiction conferred on him u/s 153A for which assessments shall be made for each of the six assessment years separately ; ITA Nos. 5018 to 5022 5059/M/2010 b) In other cases, in addition to the income that has already been assessed, the assessment u/s 153A will be made on the basis of incriminating material, which in the context of relevant provisions means - (i) books of account, other documents, found in the course of search but not produced in the course of original assessment, and (ii) undisclosed income or property discovered in the course of search. 33.4. Ld. Special Counsel submitted that assessment u/s 143(1) even if treated as completed assessment but that was not on the basis of books of account. He submitted that power u/s 147 has been merged with 153A to avoid multiplicity of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing however, has not been applied by the Tribunal in respect of the addition of ₹ 1,50,000/- made in the assessment year 2003-04 on account of unexplained loan advanced to Mohini Sharma and the addition of ₹ 27,000/- made in the assessment years 2004-05 and 2005-06 presumably because the document embodying the loan was recovered in the course of the search of the assessee‟s premises. 16. We now proceed to discuss the correctness of the conclusion of the Tribunal that the Assessing Officer had wrongly invoked Section 153A of the Act. This Section was introduced into the Act by the Finance Act, 2003 w.e.f. 1.6.2003 along with Sections 153B and 153C. Section 153A provides for assessment in case of search or requisition‟. It runs as follows: 153A. [(1)] Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall- (a) Issue notice to such person requiring him to furnish within such per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 143(1)(a) of the Act, the provisions of Section 153A cannot be invoked. The Assessing Officer has the power under Section 153A to make assessment for all the six years and compute the total income of the assessee, including the undisclosed income, notwithstanding that the assessee filed returns before the date of search which stood processed under Section 143(1)(a). The other reason given by the Tribunal in the same paragraph of its order that no material was found during the search is factually unsustainable since the entire case and arguments before the departmental authorities as well as the Tribunal had proceeded on the basis that the document embodying the transaction with Mohini Sharma was recovered from the assessee. While summarizing the contentions of the assessee in Paragraph 5 of its order, the Tribunal itself has referred to the contention that no document much less incriminating material was found during the search of the assessee‟s premises, except one unsigned undertaking for loan. Again in Paragraph 10 of its order, while dealing with the assessee‟s contention against the addition of ₹ 1,50,000/- being unexplained loan given to Mohini Sharma, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present set of facts. He pointed out that the aforesaid decision was based on the reasoning that no addition could be made on the issue of share application money by AO but no such dispute is involved in the present case. 33.9. As regards the reliance placed by ld. counsel for the assessee in the cases of Rajasthan Shipping Weaving Mills 281 ITR 177 (Raj.); Sumbholi Industries Ltd. 78 ITD 161; Paul John Delicious Cashew Co. 94 ITD 131; Dholadhar Investment (P) Ltd. (ITA 628/Del/2010), ld. Special Counsel submitted that they are of no help as the issue involved in those cases were outside the scope of assessment/ reassessment proceedings. He pointed out that in the present case, the AO had the necessary jurisdiction to complete the assessment u/s 153A after taking into consideration the material including the copies of accounts found during search, e-mails, statements and all other material brought on record as a result of search proceedings. He submitted that the case of the present assessee stands on its own facts and none of the cases referred to by the assessee have any application. Ld. Spl. Counsel in written submissions submitted as under: Search proceedings. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of evidence found in the course of search (Page 1295 of Vol:IV of PB) The only requirement of law is that there should be a nexus, howsoever thin, between the assessment made uls 153A and the material/information gathered during search. The evidence found for one year may have bearing on the other year as well and would thus form material for the year of assessment. A direct one-to-one correlation is neither mandated nor necessary in law. 25. The assumption of jurisdiction uls 153A is triggered by operation of law. The rest is a matter of determination of income based on the material available with the A.O. Section 153A substitutes other powers and functions of A.O., like those available uls 147. If a Profit Loss account is found during search(not hitherto available on record) the A.O. would be duty bound, while exercising his powers and function uls 153A, to determine what taxable income emerges from the same. It would not be open to argue that the income arising from such account should be disregarded merely because the assessment is not abated. The plea may be valid if such Profit Loss account was produced and examined at earlier point of time while making the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son to whom summons/ notice under the provisions of the Act had been or might be issued will not or would not produce books/ documents; or (iii) Any person is in possession of money, bullion, jewellery or any valuable article or thing, which had not been or would not have been disclosed for the purpose of the Act, referred to as undisclosed income. 34.1. Thus, the trigger point of such assessment is search, which, in turn, can be conducted only where the income-tax authority has reason to believe that the assessee is in possession of certain undisclosed assets or documents suggesting earning of undisclosed income by the assessee. The purpose of making assessment u/s 153A of the Act is not to verify the return, as such, but to make assessment primarily on the basis of the material found during the course of search. There cannot be any quarrel with these submissions made by the ld. counsel for the assessee. In this regard we may refer to the decision of Hon'ble Jurisdictional High Court in the case of Chetan Das Laxman Das (supra), in which Hon'ble Jurisdictional High Court observed that though there is no condition in section 153A that addition should be strictly made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rement that assessment order should be prejudicial to the interests of revenue and, therefore, while exercising revisionary jurisdiction u/s 263 of the Act, CIT must pinpoint not only as to how the assessment order was erroneous but also how the prejudice was caused to the revenue as a result of such error. Ld. counsel submitted that in the present case the Commissioner while alleging that AO conducted inadequate inquiries qua various issues held the assessment order to be erroneous, but did not give any finding on merits of any of the issues. He submitted that CIT simply set aside the assessment to be decided afresh, thereby giving a fresh inning to the AO to first conduct inquiry and thereafter make additions/ disallowances, if required. He submitted that this approach of ld. Commissioner is impermissible in law and beyond jurisdiction, as held by Hon'ble Delhi High Court in the case of DG Housing Projects (supra), wherein it has been held that where AO actually conducted inquiry at the time of assessment, the CIT must examine the order of AO on merits and then hold and form an opinion on the merits that the order passed by the AO is erroneous and prejudicial to the interests ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question. 37. Ld. Special Counsel submitted that since the case of the assessee falls in the category of lack of inquiry as opposed to inadequate inquiry, the CIT was not required to give finding on merits of the matter and the approach of setting aside the issue for fresh consideration by AO was valid in law. In this regard he placed reliance on the decision of Hon'be Delhi High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted and there is a complete non- application of mind. There is a complete failure of AO to discharge the statutory function. The ground of appeal is, therefore, not tenable. 37.5. Ld. Special counsel further referred to para 19 of the decision in the case of DG Housing (supra), reproduced below, to submit that the facts in the said case were such where CIT was required to give his decision on merits before branding the assessment order as erroneous and prejudicial to the interest of revenue: 19. In the present case, the findings recorded by the Tribunal are correct as the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that order passed by the Assessing Officer may be erroneous . The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order passed by the Assessing Officer was erroneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent‟s computation figures but he had reservations. The CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores. Considering the facts that the total turnover of the assessee was only ₹ 6.13 crores, it was necessary to obtain the details of the closing stock, but no details were called for from the assessee; b) The assessee has shown insurance claim receivable amounting to ₹ 1.21 crores but no details have been furnished by the assessee. The Assessing Officer has also not made any inquires in respect of this issue, from the insurance company which would be having the details of the claim; c) The assessee has shown M/s Meghna Overseas as a Sundry Debtors to the extent of ₹ 6.99 crores. It appears that export have been made to this firm, but no details are on record, which would details the export sales made. It is pertinent to point out that the requirements of section 80 HHC (4) is as follows: (4) The deduction under sub-section (1) shall not be admission unless the assessee furnishes in the prescribed form, alongwith the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. and as there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted. These additions were not sustained at the appellate stage by the CIT (Appeals), who accepted the plea of the assessee The Director being out of the country and the matter having not been properly attended to at the earlier stage as per the requisition is highly regretted. 8. The point which bears consideration is that the Assessing Officer made no third party enquiries, as a result of which he has passed a very weak order, which ignored the major issues involved, and left the assessee to benefit from its own non-compliance. 13. Thus, according to the Commissioner proper exercise was not done while making the assessment; deeper inquiries were not made; major issues involved were ignored and a weak order was passed. There is not a whisper as to how this order was prejudicial to the interest of the Revenue. 14. That apart, we find that the approach of the Tribunal in discarding the observation of the Commissioner about not making proper inquiries in respect of the said four issues are also justified and without blemish. 15. First comment of the Commissioner was in respect of finished goods in the closing stock. The Commissioner found that these were to the tune of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bt, the Income-Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not materialize . At page 748 and 749, the Supreme Court further observed as under: Even though the assessee company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers, no real income had accrued to the assessee company in respect of those enhanced charges. The Tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made, ITA represented only hypothetical Income, and the amounts in question brought to tax by the Income-Tax Officer did not represent income which had really accrued to the assessee company during the relevant previous year. 17. Coming to the claim under Section 80HHC of the Act, we are again inclined to agree with the Tribunal that it was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in the assessment year 1999-2000 after an order under section 263 of the Act. This order passed was struck down by the Tribunal and that decision had been upheld by the High Court. That the claim for deduction under section 35DDA was made by the assessee for the first time in assessment year 2002-03. One fifth of the amount payable under the voluntary retirement scheme was allowed as a deduction. In this year, the Assessing Officer had followed the earlier assessment orders. The Commissioner observed that note 2 in the audit report did create doubt as to whether expenditure to ES was actually incurred or not. The asessee had clarified that the note was written by the auditor as a precautionary measure for reporting that the amount had been claimed under section 35DDA. The Commissioner in the order did not appreciate and deal with this aspect. He had wrongly interpreted and observed that the claim itself was made a s a precautionary measure. The Tribunal was, therefore, right in setting aside this part of the order. 37.11. In view of above finding of Hon'ble High Court, ld. Special Counsel submitted that this decision is also of no assistance to assessee because here the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. 38.4. In the backdrop of these facts the Hon'ble High Court observed as under: The aforesaid observations have to be understood in the factual back-ground and matrix involved in the said two cases before the Supreme Court. In the said cases, the Assessing Officer had not conducted any enquiry or verification. These cases have to be distinguished from other cases (i) where there is enquiry but the findings are incorrect/ erroneous; and (ii) where there is failure to make proper or full verification or enquiry. 38.5. Thus, it is evident that Hon'ble Delhi High Court in DG Housing Projects Ltd. clearly pointed out that the facts in Gee Vee Enterprise (supra) were entirely different. Thus, the ratio laid down in the case of Gee Vee Enterprise as well as DG Housing Projects L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 the assessee has assailed the action of the ld. Commissioner in alleging that since the AO failed to examine the basis of allocation of expenses between the assessee's EOU and non-EOU units, the order of the AO was erroneous and prejudicial to the interests of the revenue. 41.3. Vide ground no. 11.3 the assessee has assailed the findings of ld. Commissioner in holding that since the assessee had not allocated foreign exchange fluctuation loss of ₹ 2.76 crores to the EOU units and the AO having failed to examine the said issue, the order of the AO in this regard was erroneous and prejudicial to the interests of revenue. 41.4. Vide ground no. 11.4 the assessee has assailed the Commissioner's action u/s 263 without appreciating that the said issue was subject matter of appeal before the Commissioner in the present assessment year as well as assessment year 2001-02. 42. Ld. Commissioner, while examining the claim of the assessee for exemption u/s 10B noticed that (i) The AO in the order passed u/s 143(3) read with sec. 153A of the Act had not examined the exemption claimed by the assessee u/s 10B of the Act. (ii) The AO failed to conduct inquiri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out that the assessee had shown revenue of the EOU at ₹ 15,47,93,925/- and the gross revenue from production at ₹ 5,26,79,28,616/-. No basis had been given in the return of income or during the course of assessment proceedings to substantiate the said revenue income of the export oriented unit. This aspect has not been examined by the AO to find out the genuineness of these incomes. (e) Net loss of ₹ 2,76,56,898/- on account of foreign exchange rate fluctuation was shown as part of sundry expenses. Ld. CIT observed that in the preceding years when there was profit under this head, the same was included as part of revenue from operations. However, during the year under consideration when there was loss, instead of reducing the revenue from operations the expenses were claimed separately under the head sundry expenses. 42.1. The main objection of ld. Commissioner was that since the major part of the said loss was attributable to the export oriented units, eligible for exemption u/s 10B, the said expenses should have been attributed to the said income. However, while computing the profits of export oriented units, eligible for exemption u/s 10B of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es raised by ld. Commissioner qua deduction u/s 10B. Ld. counsel referred to page 35 of ld. Commissioner's order and pointed out that his conclusion is that AO failed to inquire and verify the eligibility and the genuineness of exemption claimed u/s 10B of the I.T. Act. Thus exemption/ deduction u/s 10B was allowed without proper inquiry and application of mind, which rendered the assessment order erroneous and prejudicial to the interest of revenue. 43.5. In this regard ld. counsel referred to page 759 to 764 of the PB, wherein the queries raised by AO vide his questionnaire dated 2-11-2005 is contained, in which he, inter alia, required the assessee to furnish following details: 37. It is noticed that some expenses like bought out package/ products Course excision charges profession charges Bad debts etc., have been allocated exclusively to the taxable units whereas some of the items which have been assigned to non taxable region, have been booked as expense in the taxable unit. You are requested to explain the justification of booking these expenses under the taxable unit or whether some of these expenses can be supported proportionately. 43.6. Ld. couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted undertakings eligible for exemption u/s 10B of the Act. 43.11. Ld. counsel further referred to page 870, wherein the permission under the STP Scheme for the establishment of a new undertaking for development of computer software in respect of 100% export oriented units is contained. 43.12. Ld. counsel with reference to above replies submitted that all are old units and are at different locations. He pointed out that deduction u/s 10B has been allowed in all earlier years. As regards the ld. CIT's objection regarding disparity on allocation of expenses between EOU and non-EOU units, ld. counsel referred to pages 898 and 899, wherein the assessee had furnished a note on allocation of expenses as under: (a) Direct expenses were chargeable to individual business group; (b) Service group (corp) Expenses: Expenses under this category is debited to individual service organisation such FSO/CSO/CMO etc. These expenses are allocated based on the manpower of EOU and NON EOU units. 43.13. Ld. counsel further referred to page 854 wherein the certificate of the Auditor is contained, in which they certified that indirect expenses relating to the EOU had been allocated on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Andhra Pradesh 271 ITR 401 (SC). 43.20. Ld. counsel referred to page 779 to 795 of PB, wherein samples of softex forms are contained. Ld. counsel further referred to pages 798 to 800, wherein the export details with export proof are contained. He, therefore, submitted that assessee had furnished all the details which were necessary for verification of nature of export turn over. He submitted that whole gamut of claim u/s 10B was looked into by the AO. 43.21. Ld. counsel submitted that since issue was examined by AO, it was not a case of no inquiry. 43.22. On the issue of merger, ld. counsel submitted that:- (i) Since the claim u/s 10B made by assessee was subject matter of appeal before ld. CIT(A) for A.Y. 1999-2000 and 2001-02, therefore, the issue of 10B claim got merged with the order of ld. CIT(A) and hence the ld. Commissioner's jurisdiction was ousted. (ii) No material was found in course of search, which threw any shred of doubt on admissibility of 10B deduction, therefore, aO could not go into this issue in 153A proceedings. (iii) Exhaustive and detailed reply given on each allegation raised by ld. Commissioner but ld. Commissioner did nto give any de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her expenses had been allocated between EOU and non EOU units, against which a general reply was filed by the assessee. He submitted that on examination of record it was found by the Commissioner that common expenses had not been allocated on an appropriate basis. He further pointed out that Commissioner also noticed that assessee did not follow any consistent method for allocation of such expenses. He referred to page 21 of the order, wherein the reply of the assessee to the show cause notice is extracted and pointed out that assessee mainly stated that direct expenses were charged to individual business group, service expenses were charged on the basis of revenues of EOU and non-EOU units and other common expenses like rent, electricity etc. were charged on the basis of area occupied, as under:. 1. Direct Expenses chargeable to individual business Group. 2. Service Group (corp) Expenses: Expenses under this category is debited to individual service organization such FSO/CSO/CMO etc. These expenses are allocated based on the Revenue of EOU and non EOU units. 3. Certain expenses like Rent, Electricity water, Repair maintenance etc. that are building related are consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 2- 11-2005, asking explanation with regard to specific expenses, like brought out package , course execution charges , professional charges etc., ld. Special counsel submitted that assessee had given only a general justification for the same. Therefore, ld. Commissioner observed that all such unsubstantiated claims were accepted without any primary verification. Thus, AO failed to discharge his statutory obligation and failed to conduct the basic inquiries. Therefore, it is a case of lack of inquiry and non- application of mind. 44.8. As regards ld. CIT's observations to verification of actual and physical export of software, ld. Special counsel referred to page 759 of PB and pointed out that AO had issued the questionnaire on 2-11-2005 on the basis of assets/ documents found during the search, inter alia, to explain the following: 8. Please give details of all the advances given or taken, during the financial year, together with the name, address and the assessment particulars of all such persons. 9. Please furnish the details of all the loans squared up during the year, together with the name, address and the assessment particulars of all such persons. 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reof. 44.12. Ld. Spl. Counsel referred to page 798 onwards, wherein the details of export made by assessee are contained and pointed out that the assessee claimed to have exported technical reference material to certain parties, the details whereof are contained at pages 798 to 800. He submitted that the AO, without conducting any inquiry into the matter made a nominal disallowance of the claim of export of technical reference material and denied exemption with regard to export of ₹ 25.20 lacs, which represented provision of technical service to M/s Kwet Liso Holdings. He referred to pages 798 to 800 and pointed out that in all there were 12 invoices raised against M/s Kwet Liso Holdings, but AO picked up only six invoices and made the disallowance. He submitted that there is no basis for picking up only six invoices. He further pointed out with reference to the said details that there were in all 14 other parties to whom similar exports were made but no inquiry was conducted, nor any detail obtained to show whether the invoices represented export of technical reference material or provision of technical services. 44.13. Ld. Spl. Counsel pointed out that the disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the above, it was submitted that the aforesaid was a case of 'lack of enquiry', which justified the action of the CIT in exercising revisionary jurisdiction under section 263 and setting aside the aforesaid issue to the file of the assessing officer for fresh examination. 44.15. As regards the plea of ld. counsel for the assessee regarding doctrine of merger, Ld. Spl. Counsel submitted that the said doctrine is confined to issues actually decided in appeal by the CIT(A) and does not travels to issues not reached and adjudicated by the CIT(A). In this regard Ld. Spl. Counsel placed reliance on following decisions: - CIT Vs. Shri Arbuda Mills Ltd. 231 ITR 50 SC; - Ritz Ltd. Vs. Union of India 184 ITR 599 (Bom.). 44.16. Hon'ble Supreme Court in the case of Shri Arbuda Mills Ltd. (supra) has held that powers of Commissioner u/s 263 would extend and would be deemed to have extended to the items which had been considered and decided in appeal filed by the assessee. In this case the assessment was completed u/s 143(3) read with section 144B of the Act on 31-3-1978 for the AY 1975-76, in which the net business loss was computed at ₹ 3,61,086/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact of it that after the amendment in 1989, Explanation (c) means that to the extent matters have not been considered and decided in appeal the Commissioner will always have jurisdiction to revise the order of assessment under section 263 subject to other conditions. The question, however, is if that was so, why did the Legislature not stop at that and went further to say that the insertion of these words though factually in 1989 was with retrospective effect from June 1, 1988, the date on and from which Explanation (c) itself was inserted by the Finance Act, 1988. In my judgment, Explanation (c) requires to be construed harmoniously. The insertion of the words at two places as well as the fact that the insertion is made retrospective from the date on which the Explanation itself was inserted can all be given proper meaning if it is held that these words are to be read in the Explanation right from the date the Explanation itself was inserted. Thus, only in cases where action under section 263 is taken after June 1, 1988, the merger of the assessment order will be treated as confined to the issues actually considered and decided in appeal in terms of Explanation (c). In my judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the issue before the CIT(A) was the allowability of interest on certain deposit. However, in the present case, the issue before CIT(A) was limited as to whether the receipts from Kwetliso Holdings constituted as export of TRM or was in the nature of fee for technical services. Besides, these cases are further distinguishable also for the reason that the CIT holds the order as erroneous for lack of enquiry which would have led the statutory authority to reach the conclusion one way or the other and not for the reason that he has taken one plausible view of the matter, which did not find favour in appeal or otherwise. 44.23. As regards the assessee's plea that since no incriminating material was found in regard to claim made u/s 10B by the assessee in course of search, therefore, the AO's jurisdiction u/s 153A was ousted, ld. Special Counsel referred to supplementary paper book filed on 18-12-2013, containing 144 pages, wherein the following documents are contained: Page no. Description of documents 1-7 Telephone expenses April to March,99 8 Electricity expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59 to 764 of the PB to demonstrate that the notice issued to assessee was based on scrutiny of seized material. 55.28. As regards the assessee's plea that ld. Commissioner has not given any specific finding further and had not considered the replies filed by assessee in course of revisional proceedings, ld. Special Counsel referred to page 6 of CIT's order to demonstrate that Commissioner has pointed out at various places in his order that failure of AO to conduct inquiries had resulted in passing of an erroneous order, causing prejudice to the revenue. He submitted that observations of Commissioner that failure on the part of AO to conduct proper/ necessary inquiries with respect to each issue discussed earlier, constituted a valid finding of the Commissioner for the purpose of setting aside the issue u/s 263 of the Act. The failure to conduct the inquiry itself rendered the order as erroneous. He pointed out that it was not a case, where the AO had taken one plausible view, where the Commissioner would be called upon to demonstrate that the view so taken was erroneous. He submitted that Commissioner did not want to reverse the finding of AO but as necessary inquiries w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's claim u/s 10B. On this count, the first aspect, which has been raised by ld. CIT in his order, is regarding allocation of expenses to non-taxable units. 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. 56.2. Admittedly the AO had sought justification of allocation of various expenses like course execution charges, bad debts, legal and professional charges etc. exclusively to taxable units and not to non-taxable/ EOU units. The assessee had explaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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. 349 ITR 352 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. 56.6. Next aspect is with regard to the acceptance by the AO of revenue of the export oriented unit without calling for any details on this ground. Therefore, ld. CIT concluded that it was a case of lack of inquiry on this primary aspect. Further, as regards the assessee's claim of exported technical reference material (TRM) to certain parties, the AO only called for the details of receipt of US$ 60,000 equivalent to ₹ 25,20,000/- received from M/s Kwetliso Holdings in respect of six invoices only and disallowed the same. The assessee had claimed the export to 15 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to invoices in respect of rest of the parties. We accordingly uphold the order of CIT on this aspect. 56.9. The next aspect is regarding non allocation of foreign exchange fluctuation loss to EOU unit. In this regard we find that assessee in its reply had pointed out that loss of ₹ 2.76 crores did not pertain to EOU units. The assessee had further pointed out that in Schedule 15 of the profit and loss account under the head Revenue from operations it is clearly stated that net gain of ₹ 4,66,35,669/- due to exchange rate fluctuation was included in for the year. Thus, the assessee's claim, both for gain and loss on exchange fluctuation in relation to revenue from operations had already been considered in schedule 15 of the annual accounts. 56.10. Ld. CIT pointed out that since assessee failed to submit the transactions which resulted in foreign exchange fluctuation loss, the assessee's reply could not be accepted, particularly because assessee's foreign exchange transactions were mainly on account of operational exports. Admittedly, the AO had not made any inquiries on this count. Assessee failed to furnish transactions which resulted into loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following: (a) The assessee has not claimed any deduction under section 10B of the Act on the entire int4erest income of ₹ 13,08,53,750. This is clearly evident from the Profit Loss Account of the EOU Units wherein the assessee has merely shown receipts on account of income from operation; (b) Finance charges, including interest paid, aggregating to ₹ 1,74,36,330, which are relatable to the EOU unit has been debited and reduced from the Profit Loss Account of the eligible unit; (c) Even if the entire interest income of ₹ 13,08,53,750 were to be assessed as income from other sources, as against the same being presently assessed as income from business, there would be no effect on the final taxable income of the assessee. 57.3. Ld. CIT, however, did not accept the assessee's contention and observed that AO had only asked about the details of interest income and interest payment but had never asked about netting off of these. He further observed that AO never examined that interest income should have been assessed under the head income from other sources . 58. As regards the assessee's contention that assessee had not claimed any dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l interest expenditure and net interest expenditure of ₹ 3,94,95,436/- was debited to the profit and loss account under the head 'administration and others'. In this regard he referred to page 1062 of PB Vol. III, wherein, schedule, forming part of P L A/c, containing details of administration and other expenses is contained and pointed out that description and disclosure of both, interest received and interest paid was as under: Interest on: Fixed Loans 105,456,846 Other Loans 64,892,340 170,349,186 Less: Interest Received: From Deposits 59,729,499 From Loans 14,700,000 From others 56,424,251 130,853,750 58.2. Ld. counsel pointed out that out of the aforesaid total expenditure of ₹ 17,03,49,186/-, interest expenditure of ₹ 1,57,12,324/- related to term loan borrowed for purchase of assets at E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uiry. As regards the ld. Commissioner's observation that the interest income should have been assessed under the head income from other sources , ld. Counsel pointed out that since interest expenditure relating to EOU unit was allocated to such unit and no part of interest income was credited to that unit, even if the entire interest income were to be assessed as income from other sources as against the same being presently assessed as 'business income', there would have been no effect on the final gross taxable income of the assessee and, therefore, there was no prejudice caused to the revenue from the aforesaid alleged non-examination by the assessing officer. 58.6. Ld. Counsel further submitted that this issue was out the scope of jurisdiction of AO u/s 153A because no incriminating material/ evidence was found during the course of search in respect of this issue. 58.7. He further submitted that ld. Commissioner did not give any specific finding or pin point the error and prejudice from the alleged non- verification, insufficient verification by the AO, which is a sine qua non for invoking revisionary jurisdiction u/s 263 of the Act. 59. Ld. Special Counsel sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Counsel submitted that the accounts of the assessee as also its EOU units were found during search and this gave the necessary nexus for the issue, which was never looked into hereinbefore, to be examined u/s 153A. 60. We have heard rival submissions and perused the material available on record. From the replies filed by assessee and the submissions made on behalf of the revenue it is evident that the assessee had returned the interest income of ₹ 13,08,53,750/- as income from business. The very amount of receipt should have prompted the AO to resort to detailed inquiry on this issue. It is settled law that the order is prejudicial to the interest of revenue if AO does not apply correct position of law to the facts of the case. If the income was assessable under the head Income from other sources , but was returned as Income from business , then it could not be said that even if on ultimate analysis no loss is caused to the revenue, the order is not prejudicial to the interest of revenue. The phrase Prejudicial to the interest of revenue , does not imply only monetary loss, but also includes wrong application of law to the facts of the case. The assessee had netted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t free, the assessing officer had rightly not made any disallowance of interest in the original assessment. 61.4. Brief facts apropos these issues are that assessee had borrowed various loans from financial institutions as noted in ground no. 12, on which interest of ₹ 17,03,49,186/- had been paid and claimed the same to be adjusted against interest income. However, ld. Commissioner observed that assessee had made various investments to the tune of ₹ 57.20 crores and also given various loans and advances etc. on which no interest had been charged. Ld. commissioner referred to the reply filed by the assessee, which has been considered by the Commissioner in ground no. 12 regarding maintenance of common pool of funds and pointed out that the contention of assessee was based on presumption. He pointed out that direct nexus between interest free funds and interest free loans/ advances has to be proved. If the interest free loans/ advances had been given from interest bearing funds, then it is clear that the interest expenses had not been incurred for the purpose of business and, accordingly, not allowable as business expenditure. Thus, AO was required to verify and exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere made/ given in the course of the business, therefore, entire expenditure was allowable u/s 36(1)(iii). In this regard ld. counsel relied on various case laws given in the written submissions. 62.3. He further pointed out that no disallowance was called for u/s 14A, because the investments were made in foreign companies, the dividend wherefrom was not exempt. 62.4. Ld. counsel further submitted that the presumption of interest free funds out of own funds is always in favour of assessee in case of mixed pool of funds. In this regard also ld. counsel relied on various case laws given in the written submissions. He, therefore, submitted that in any view of the matter, since own funds of the assessee far exceeded investments made/ loans advanced, the presumption would be that the same were out of interest free funds available with the assessee. 62.5. Ld. counsel further referred to pages 1052 and 1053 of the PB and submitted that borrowed funds were substantially repaid by the assessee inasmuch as borrowings reduced to ₹ 105.53 crores as at the end of the relevant year from ₹ 151.04 crores as at the beginning of the year. 62.6. Ld. counsel further submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id on various loan account from business were given and at page 973 details of interest received were given. 63.2. Ld. Special counsel further referred to page 1046, wherein the balance-sheet and tax audit report is contained. He pointed out that at page 1055, the details of investments are contained. All these investments were mainly in equity shares of different companies. Thereafter, ld. Spl. Counsel referred to page 1058, wherein the loans and advances including loans to subsidiaries are contained. With reference to all these details, ld. Spl. Counsel submitted that no details regarding common pool etc., were furnished by assessee. 63.3. Ld. Spl. Counsel referred to page 312, wherein assessee's reply to show cause notice is contained, in which the assessee submitted that interest bearing funds were utilized for business purposes and not for making interest free advances and investment was not correct because assessee had mixed pool of funds, comprising of own funds in the form of share capital and reserves and interest bearing funds in the form of loans. He submitted that the assessee's contention was that interest free funds were inextricably mixed up with the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vances were out of interest free funds. The submission advanced by assessee for the first time before ld. CIT was that it was having mixed fund and, therefore, the presumption was that the borrowed interest bearing funds were utilized for business purposes and the advances or loans and investments were to be presumed to have come out from interest free funds available with the assessee. There is no quarrel with this proposition in principle. But the AO was required to bring at least primary facts on record before applying this proposition to the facts of assessee's case. He had to at least consider whether there were sufficient interest free funds available with assessee or not. The AO had merely called for the details of interest received and paid, but did not examine this issue from the legal point of view. Thus, it was completely a case of non-application of mind by AO. 64.1. Ld. special counsel has rightly submitted that on careful examination of material facts, the entire interest may be allowed but for the present we are only to examine whether the primary issue of conducting necessary inquiry was done by AO or not. Had it been a case of inadequate inquiries, ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ably and efficiently leaving the fixed capital untouched and, therefore, it could not be regarded as capital expenditure. The assessee also filed sample copy of AMC agreement. The assessee also referred to the decision of Hon'ble Supreme Court in the case of CIT Vs. Saravana Spinning Mills P. Ltd. 293 ITR 201 (SC), wherein the test for determining, whether the expenditure would constitute current repairs, allowable u/s 31 of the Act, has been laid down. 65.2. Ld. CIT, after considering the assessee's reply, set aside the assessment order on this issue and restored the matter to the file of AO for fresh consideration for the following reasons: (i) No break up of the expenses were called for by the AO during the course of assessment proceedings. (ii) No details of the expenses were filed by the assessee before the AO, which fact is not disputed. (iii) The case laws and other contentions can only be judged after details of expenses debited under the head repairs . (iv) The AO did not verify the genuineness and allowability of these expenses. (v) Capital expenditure, if any, included in the expenses, had to be capitalized while computing the income of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g task of verifying each and every expense has been assigned to the tax auditor who is required to go through the books of account, examine/ audit the expenditure incurred and report the items of disallowance in the report to be furnished u/s 44AB of the Act. He submitted that u/s 263 the CIT cannot direct fresh enquiry into issues on pure conjectures and surmises. Ld. counsel submitted that the direction to the AO to undertake fresh examination, without reaching any prima facie finding as to the incorrectness of the claim of an assessee, is beyond jurisdiction of CIT u/s 263 of the Act. 66.5. Ld. counsel also reiterated his submissions as regards the issue being beyond the scope of jurisdiction of AO u/s 153A. Ld. counsel further submitted that in earlier years this expenditure has been allowed. As regards the proposition that mere no inquiry does not automatically lead to justification of 263 proceedings. Ld. counsel relied on following decisions: (1) DLF Ltd. (PB 1227) - He submitted that in this case it has been held that CIT must pin point the error and prejudice caused to revenue. (2) Gulmohar Finance 170 Taxmann 483 (3) 341 ITR 166 67. Ld. Spl. Counsel submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital 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. 69. Vide ground no. 15 the assessee has assailed the order of ld. CIT in holding that the steep rise in course execution charges incurred by the assesee was accepted by the AO without any verification and inquiry. The grievance of the assessee is that ld. CIT failed to appreciate that the issue was duly examined by the AO during the original assessment proceedings and, therefore, was not amenable to revisionary jurisdiction u/s 263. 69.1. Brief facts, apropos this issue are that during the year under consideration the assessee had claimed course execution charges of ₹ 119,81,32,796/- as against the sum of ₹ 57,59,53,934/-claimed in the immediately preceding year. Thus, the assessee had returned more than 108% increase in the above expenses during the year under consideration. He further noted that in the corresponding revenues, there had not been any such proportionate increase. He pointed out that the AO f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der to AO for fresh consideration. 69.5. Ld. counsel for the assessee reiterated the submissions made before ld. CIT and referred to the query raised vide letter dated 2-11-2005 and 29-12- 2005 noted earlier, which were replied by assessee. 69.6. Ld. counsel further submitted that AO vide notice dated 8-2-2006 contained at page 859 of the PB, specifically required the assessee to explain the reasons behind increase in aforesaid expenditure vis a vis the last year. The said query reads as under: Please give justification for increase in the following expenses in the assessment year 2001-02: Courseware Manuals Bought out package Courseware execution expenses Other equipment hiring Course announcement 69.7. Ld. counsel referred to pages 960 to 962 of the PB, wherein the assessee had submitted its reply, which reads as under: Courseware Execution (Rs. 17647.02): These payments were made to business partners which are directly linked with revenue. The percentage of expenses works out to 30-32% as compared to 22% in the previous year. (F.Yr 1997-98). The percentage is higher due to change in mix business with the franchisees between metro and network centre. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses have been debited in taxable units i.e. domestic units only. Also related revenue is booked in domestic area. 69.13. With reference to above queries and replies, Ld. counsel pointed out that AO had specifically examined the impugned issue during the course of assessment proceedings and the expenditure was allowed after due application of mind and formation of his view on the issue. 69.14. Ld. counsel further submitted that even if it is considered to be a case of inadequate inquiry, then too ld. CIT was required to give specific finding, pin pointing error and prejudice to the revenue. Ld. counsel pointed out that before ld. CIT, vide reply dated 19-3-2010, contained at page 291 to 294 of PB, it was clearly explained that from AY 1999-2000 onwards the assessee had changed the business model of disbursement of business to licensees towards execution of courses at Satellite Centres (STCs) and network centers (NWCs). It was clarified that increase in course execution charges was mainly due to the reasons, which have been summarized in the chart of issues, as under: (a) From AY 1999-2000 onwards the assessee had changed the business model of disbursement of fees an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eply filed before ld. AO vide submissions dated 6-2-2006, the assessee had submitted the break up of course execution expenses vide Annexure 6, contained at page 948 of the PB. Ld. counsel pointed out that the payments were made to unrelated parties, who joined hands with assessee to run business execution centers. He submitted that reasonableness of the expenditure could not be examined by ld. CIT. Mere increase in expenditure, does not entail disallowance. 69.17. Ld. counsel reiterated his submissions in regard to scope of jurisdiction of AO u/s 153A and submitted that no undisclosed income/ property or any incriminating documents suggesting income escaping assessment qua aforesaid issue was found in the course of search. 70. Ld. Special Counsel in reply referred to page 41 of CIT's order and pointed out that there was 108% increase in course execution charges. Ld. Spl. Counsel referred to page 959 of PB, wherein the AO's query dated 8-2- 2006 is contained and pointed out that said query was with reference to assessment year 2001-02 and not with reference to assessment year 1999- 2000. Hence, there was no query qua increase in the aforesaid expenditure during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twork Centres (NWCs) as well as payments to M/s Sylvan Prometric for online testing of Microsoft certified courses, copywriting, editing translation, certificate writing mean for student etc. 71.2. However, ld. 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 find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escaping assessment. 72.3. Ld. Spl. Counsel placed reliance upon the order of ld. CIT on this issue. 73. We have heard rival submissions and perused the material available on record. This issue relates to allowing of assessee's claim regarding bad debts. Ld. CIT held the order as erroneous and prejudicial to the interest of revenue on the ground that AO failed to examine the satisfaction of the conditions laid down in section 36 of the I.T. Act. 73.1. Ld. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had shown dividend income of ₹ 9,12,000/-, which had been claimed as exempt u/s 10(33). However, no disallowance was made u/s 14A by the AO. Therefore, the assessment order was erroneous and prejudicial to the interests of revenue. 75.1. Ld. counsel referred to page 300 of the PB, wherein the assessee's reply dated 29-3-2010,in this regard, is contained, wherein assessee had, inter alia, submitted that: (a) Ld. CIT did not pin point, which part of the expenditure had been incurred to earn the aforesaid exempt income. A sweeping allegation has been made in the show cause notice that some expenditure must have been incurred to earn the exempt dividend income. (b) In the following cases, it has been held that it is incumbent upon the CIT to record prima facie finding as to how the assessment was erroneous and resulted in prejudice to revenue: - 98 ITR 1 (Kar) - 111 ITR 326 - 199 ITR 424. (c) As per the proviso to Sec. 14A, the AO does not have jurisdiction to pass an order enhancing the assessment of the assessee or reassess the income invoking section 14A of the Act. Therefore, ld. CIT also could not enhance the assessment by invoking the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , section 14A will have its application. He submitted that section 14A is retrospective in operation and the proviso is not taking away or whittling down retrospectivity. Only power u/s 147 and 154 has been taken away from AO and this is the only import of proviso and section 263 cannot be read into it. He submitted that the Circular no. 14 of 2001 ( page 86 of 252 ITR (Stat.) has no application with reference to section 153A. 77. We have heard rival submissions and perused the material available on record. 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. This aspect we have considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding technical support in terms of maintenance, upkeep and other technical problems, was rendered directly by the assessee to the Indian customers at client sites under the 'Annual Maintenance Contracts' entered into between the parties. Under these contracts, the assessee agreed to supply upgrades to Indian customers free of cost and render technical support services. (b) The contracts with Indian customers of assessee were independent of the contracts entered into by the assessee with foreign suppliers for application software/ upgrades. (c) Payment to foreign suppliers by the assessee was made solely for purchase of software updates/ upgrades. (d) The imports of the software upgrades are evidenced by the sales invoices and bills of entry submitted by the assessee during the course of assessment vide letter dated 14.11.2005. (e) In view of above facts, no tax was required to be deducted at source there-from by the assessee. (f) The commercial invoices raised on the assessee by the foreign suppliers were not carrying the words 'Annual Maintenance Contracts' or 'Annual Support Service '. Such contracts were in fact entered into between the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NIIT Delhi) which talks about .... raising of invoice quarterly causing more problem so they will exercise the right to revert back to Annual maintenance billing. There is clear reference of annual maintenance and is not pertaining to early recovery/ settlement of outstanding dues, as claimed by the assessee. iii) Email dt. 09/11/2000 from Mr. Sunanda Singh of ESB department in NIIT Ltd. To Mr. T.S. Thomas which reads as under Kindly have a P.O. generated against our PR # 1006401 as per details below. Vendor: Mechanical Dynamic Inc. USA Amount: USD 3990 Delivery: 30 Nov. 2000 This is an AMC order. Please have the item description as per your convenience. Emphasis supplied The language of this e- mail is itself very clear and self speaking. This e-mail shows that bogus purchase order were raised to remit money for AMC contracts iv) Purchase orders were issued to cover the payments of technical service is evident from the fact that even before receipts of Material! Software upgrades by the NIlT, the NIlT has sold the Material! Software upgrades to Indian Customers. The above evidence on record shows that payment of remittance were made to overseas supplier for annual m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r agreement with different principals for buying their software/ updates and selling in India. 2. The softwares under consideration are sophisticated software for engineering design and simulation. 3. When NIIT re-sells such imported software in the Indian market, we ensure that the existing customers get there incremental updates/upgrades on a regular basis so that they are always using the latest version. For the purpose, we keep purchasing the update/upgrade software on a regular basis from the principal and provide them to our customer in India. 4. All imports are through proper Custom channel and payment through banks after submission Bill of Entry and other documents to the bank. 5. All maintenance contracts are for the softwares supplied by principals and installed at client site by us. After warranty period is over, the customer desires technical support which is provided by us which also includes supplying upgrades. These upgrades are imported from the principals and supplied to the customer. The technical support in terms of maintenance, upkeeps and other technical problems are taken care by us. 6. To provide technical support for maintenance of software su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but it is the payment against import of software. The asessee company has already filed vide letter dated 14-11-2005 relevant documents for imports like copy of invoice, bill of entry etc. NIIT Ltd. Signed Distributor Agreements with different Principals for buying their software/upgrades and selling in India, as per terms and conditions of the agreement on stock and sell basis. b. It is wrong to state that the imported items were actually stuff of small or rather nil value, which could not be sold in India. All upgrades imported by us were against annual contracts signed by NIIT Ltd with Indian clients. These were supplied to the clients against annual maintenance contracts. This was part of the obligations of annual maintenance contract. c. It is true that invoices raised on clients carry the word annual maintenance contract . Providing free-upgrades is part of obligation of contract for which separate invoice is not raised. d. Sample copy of sale invoice is submitted to the department vide our letter dated 27/02/2006 in respect of Assessment year 2001-02. e. The price variation is on account of number of users and therefore cannot be constant or fixed. f. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Group, USA, which was manipulated to give description as Software was enclosed as Annexure ---. A perusal of the documents enclosed as Annexure --- bring out clearly as to how the transaction was manipulated to evade tax; c) A very crucial piece of evidence in the aforesaid matter is the original email dated 17.11.2000 (which was enclosed as Annexure --- from Mr, Rod Duce, Vice President, Business Development (for Asia Pacific region) of the Convergent Group, who was then based in Singapore, which inter-alia stated that The Model Office is not a stand alone piece of software but a step in designing and structuring the relevant functionalities to build our own 'Digital. Utility' solution, whereas the aforesaid agreement dated 22.9.2000 was manipulated by NIIT Limited to give description therein as Model Office Software' and went on to give description therein as Model Office Software and went on to give it a piece of USD 2 Million which was grossly over-stated. d) It is noteworthy to point out that during searches a note written by Shri Rajesh Mathur, Vice President with NIIT GIS Limited was seized wherein he had recommended import for marketing right in South ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) M/s Relativity Technologies, USA (iii) M/s Prosoft Training Inc., USA; (iv) M/s AcAe, USA and M/s Mentor Graphics, Singapore were on account of royalty. i. Covergent Group: M/s Covergent Group Corporation is a USA based company dealing in utilities software; Covergent Model Office Software Energy Network Object Model (ENOM) core. (vide our letter dated 27-2-2006). NIIT Limited imported the above mentioned software to be used to set up the basic infrastructure for the centre of competence of ENOM under Corporate Group. There were two objectives: - To provide a training area for sales and support staff who would be engaged in re-selling the product. - To provide platform for usage and study for technical staff to grasp the functionality of software, so that they have a capability to port the software to another platform. The Software was installed for easy access to the staff members needing the system at that time.(vide assessee company's letter dated 14-11-2005) The allegations made against us are incorrect as the same is evident from the above that the company imported software only and not technical services. The same was imported through normal physical imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. The relevant import documents have already been filed with the department vide letter dated 27.02.2006. The remittance is not towards technical know-how fee, but towards Import of software for resale in India. V) M/s Mentor Graphics The assessee company have-already explained in our letter dated 14.11.2005, the relevant faces (facts) are given below : 1. The company keep purchasing the update/upgrades software on a regular basis from the principal and provide them to their customer in India. 2. All imports are through proper custom channel and payment through banks after submission bill of entry-and other documents to the bank. 3. All maintenance contracts are for the softwares supplied by principals and installed at Clients site by the assessee. After warranty period is over, if the customer desires technical support is provided by the assessee, which includes supplying upgrades. These upgrades are imported from the principals and supplied to the customer. The technical support in terms of maintenance, upkeep and other technical problems are taken care by NIIT Ltd. 4.To provide technical support for maintenance of software supplied to and installed at cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g decisions: Motorola Inc. Vs. DCIT 95 ITD 269 (Del.)(Spl. Bench); CIT Vs. Mitsu P. Ltd, 259 CTR 418 Director of Income Tax Vs. Ericsson AB 343 ITR 470 (Del) 78.16. Ld. Counsel further submitted that as per article 12(4) under India-US Treaty, unless technical services are made available to assessee, the payments made by assessee to foreign suppliers cannot be treated as fee for technical services. He submitted that in the present case, no technical services were made available by foreign suppliers to recipient of service being Indian customers. 78.17. Ld. counsel also referred to India-UK treaty (346 ITR 564); India- Netherland Treaty (346 ITR 469), in support of his contention. 78.18. Ld. counsel further referred to 91 ITD 133 and submitted that the payments were not in the nature of fee for technical services since they were in the nature of repairs. He pointed out that the required technical support/ maintenance upkeep and other technical problems on site of Indian customers were provided by the assessee through its employees/ technical personnel and there was no technical service provided by the foreign/ over- seas suppliers. He pointed out that it is a matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own inference regarding the nature of transaction of purchase of software upgrades which ordinarily stood recorded in the regular books of account. 78.22. Ld. counsel further submitted that assessee had filed detailed reply in regard to show cause notice issued by ld. CIT, but ld. CIT without examining the taxability of the payments made by assessee in the hands of foreign suppliers, set aside the assessment order. He submitted that ld. CIT was required to record finding on merits of the matter. 78.23. Ld. counsel further submitted that the allegation that all the sale invoices carried the words annual maintenance contracts or annual support service is with reference to sale invoice raised by the assessee on Indian customers, which carried the particulars as annual maintenance contracts . He pointed out that ld. CIT, it appears, proceeded on wrong factual premises that the said words appeared in the invoices raised on the asessee by the foreign suppliers. In this regard ld. counsel referred to the notice dated 10-2-2006 contained at page 451, reproduced earlier and the assessee's reply contained at pages 455-456 reproduced earlier. 78.24. As regards the emails ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of upgrades, the Revenue having not issued any notices to the payees or made an attempt to assess the aforesaid income, alleged to be chargeable to tax in India, in payees hands, assessee/ payer cannot be held to be in default for not deducting tax at source u/s 195 of the Act. In this regard he relied on following decisions, wherein it has been held that the payer cannot be treated as assessee in default for not deducting tax at source from the payment made to the payee (including non-resident payee), if no attempt is made to assess income of such payee. - Van Oord ACZ India (P) Ltd. V. CIT 323 ITR 130 (Del.); - Mahindra and Mahindra Ltd. V. DCIT 313 ITR 263 (Mum.)(SB)(AT). 79. Ld. Special counsel submitted that payments towards AMC was made to foreign suppliers in the garb of software import. He pointed out that e- mail found during the course of search specifically talked of AMC. He submitted that keeping in view the contents of e-mail, the main issue which should have been examined by AO was whether the payment was for software supplies or for services. He submitted that the e-mails found during the course of search constituted incriminating material. He referred to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties to avoid the tax incidence. The CIT has extracted the relevant portion of the email of Mr.Phillips Dode of Mesa Solutions on page 50 of his order which reads as under: raising of invoice quarterly causing more problem so they will exercise the right to revert back to Annual maintenance billing. The email clearly shows that there was a tacit understanding to remit fee for AMC as consideration for software upgrade. Since the recipient of the payment was facing difficulty in timely receipt of such payments, they threatened to exercise their right to annual maintenance billing which was the true character of these payments. The email clearly showed that the remittance was falsely shown as being for software upgrade. This email formed part of search material. The CIT also referred to, on page 50 of his order, to another email dated 09.11.2000 from Mr. Sunanda Singh of ESB department of the assessee which reads as under: Kindly have a PO generated This is an AMC order. Please have the item description as per your convenience. There can be no more explicit material to demonstrate the real nature of the remittance. The purchase order is generated for any ite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be taken unless a notice is first issued to the payee is really off the mark. Here, the question is whether the AO was correct in accepting the reply of the assessee that it was a remittance for software upgrade without conducting the enquiry with reference to the seized material. The matter has been sent back to the AO for fresh examination. The learned counsel is seeking to raise a legal issue when the basic enquiry with regard to the characterization of payment to overseas entities has not been made on facts and the claim of the assessee accepted as such holding that the overseas entities were not at all chargeable to tax. The decision in the case of Mahindra Mahindra (Supra) relied upon by the learned counsel had been rendered in the context of proceedings U/S 201 and not with regard to disallowance U/S 40(a)(i) of the Act. The same is wholly inapplicable. As regards the case of Van Oord ACZ India er) Ltd. (Supra), the income was held as not chargeable to tax in the case of payee by accepting the return U/S 143(1). No such facts exist in the present case and hence the case is distinguishable and also inapplicable. 80. We have heard rival contentions and perused the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. In the result this ground is dismissed. 81. Vide ground no. 19, the assessee has assailed the findings of ld. CIT in holding that since import of '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. 81.1. In support of its ground, the assessee has further taken a ground that ld. CIT erred in holding that 'Net Varsity' was developed in India and, therefore, the question of importing the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year is separate and AO is required to enquire the issue in subsequent assessment year also. (d) NIIT Ltd. New Delhi developed the software package and computer based courses for their website www.netvarisity.com and these were exported to NIIT(USA) Inc., Atlanta, USA, a wholly owned subsidiary of M/s NIIT Ltd. from their 100% EOU-STP through satellite transmission. This website provided online educational course which enabled students in North America, Europe, Middle East and South East Asia to register online with the 'Net Varsity'. (e) AO failed to consider the e-mail dated 8-2-2000 which apparently indicated that 'Net Varsity' was not an Indian site. (f) AO overlooked the fact that in 1996-97, NIIT USA did not have facility to develop 'Net Varsity'. The 'Net Varsity' website was not available to the students in India during the year under consideration. There was no evidence to show that the software was put to use during the year under consideration and the revenue was realized. He, therefore, concluded as under: a) The 'Net Varsity' was developed in India by CRCS, a partnership venture of NIIT and IIT. When it has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly examined the case records, written and oral submissions of the notices. The allegation against the notices is that they imported goods other than the one for which the remittance of US$ 7,00,000 was made through Indian Overseas Bank in violation of the provisions of section 8(3) read with section 8(4) of FERA, 1973. The notices in their defense denied the allegations that they imported goods other than the goods for which foreign exchange has been remitted abroad...... . In view of above, in respect of remittance of US$ 150000 the item imported is computer software with documentations FACELIFT WEBSITE (description as mentioned in commercial invoice No. INC/CORP/97001 dated 13-6-97) and further as clarified by Indian Overseas Bank that description of goods mentioned is taken from description mentioned in shipping challan is towards analysis, design, development of FACELIFT NIIT WEBSITE prototype version. In view of the clarification given by bank the item described in the shipping challan and commercial invoices are same as Facelift Website and bill of entry no. 55665 is also filed for Facelift Website. In respect of remittances of US$ 275000 each as per invoice no. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices in the aid SCN for reasons recorded hereinabove. 81.7. Ld. counsel submitted that in AY 1998-99 import was accepted u/s 143(3) and depreciation allowed. The asset entered in block in AY 1998-99. He relied on the following decisions for the proposition that if an issue has been accepted in earlier year that cannot result in disallowance in subsequent year. - CIT Vs. Hero Auto Ltd. 343 ITR 342 (Del.) - CIT Vs. Escorts Ltd. 338 ITR 435. (Del.) 81.8. Ld. counsel further referred to page 552 of the PB wherein AO in his query letter dated 2-11-2005 had raised following query: NIITs own website states that Netvarsity was developed at Centgre for Research in Cognitive Systems (CRCS). The website was originally developed by NIIT Delhi and exported to NIIT USA. Two email dated 8-02-2000 and 15-05-2000 have been found from the computers seized from C-125, Okhla Indl. Area, Phase-1, New Delhi which shows that till May, 2000 Netversity was not launched as an Indian site but the website was being run by NIIT USA and in all likelihood the revenues were also been received by NIIT USA. In order to meet the expense which have incurred in USA to set up Netversity and to expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard was made in the allegations levied by Mr. Mehta. 81.14. Ld. counsel further submitted that as far as the issue of user of software is concerned, it has been clearly demonstrated that students had access to this site. Without prejudice to above submissions, ld. counsel further submitted that since this software formed part of block of asset, so no user was necessary. 81.15. Ld. counsel referred to page 610 which is e-mail sent by Shampi Venkatesh, a student, to Ashok Clement T, wherein the message is to make Netvarsity more useful for institution students. Ld. counsel pointed out that this clearly shows that software was in use of students. 81.16. Ld. counsel has rebutted the specific allegation made by ld. CIT as under: A. The software was developed in India by CRCS, a partnership venture of NIIT and IIT, Delhi and, there was no question of import of same from outside India It is emphatically denied that Net Varsity was developed in India and thereafter exported to NIIT, USA. There is no evidence on record to suggest that the aid software was developed in India and thereafter exported to NIIT, USA. The CIT has made bald allegation that same was expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the net at a time where most information over the net was free. In view of numerous factors, such as those briefly mentioned above, the assessee dcided to purchase the Net Varsity software, considering that the maximum number of registered users for Net Varsity were from India and also that it required content modification for its specific needs. In view of the above, it is respectfully submitted, that the purchase of Net Varsity software was a genuine transaction driven by business considerations and was not developed by the assessee and exported to NIIT, USA earlier and thereafter imported again. The aforesaid query was raised by the assessing officer, vide notice dated 2-11-2005 and 10-02-2006, which was replied to by the assessee, vide reply dated 14-11-2005 and 27-02-2006. B. a Net Varsity was not an Indian site and, therefore, assessee was not its owner. In the impugned order, the CIT, on the basis of the contents of email dated 8-2-2000 from Mr. Nicholas George to Ms. Nilanjana Paul, alleged that Net Varsity was not an Indian website and, therefore, the assessee cannot be considered as owner of that website. In this connection, extracts of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration: The CIT, it is submitted, has made a bald allegation, without any evidence being brought on record to suggest that software was not put to use by the assessee during the year under consideration. It is categorically denied that the software was not put to use for purposes of business of the assessee, during the relevant previous year. In this connection, attention is, in fact, invited to email dated 15th May, 2000, seized from the assessee's premises during the course of search and put to notice by the assessing officer to the asessee during the course of assessment proceedings, attached at page nos. 610-611 of the paper book Vol II, pertaining to the query raised by an Indian customer qua use of the aforesaid website. The contents of that mail further supports that the site was used by Indian customers and was, therefore, a website, which was being put to use by the assessee for the purpose of its business. The aforesaid query was raised by the assessing officer, vide notice dated 10-02-2006, which was replied to by the assessee vide reply dated 27-02-2006. 82. Ld. Special counsel referred to ld. CIT's order and pointed out that he had taken not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity in USA. This was a primary enquiry which the AO ought to have conducted before accepting the reply of the assesee on its face value. The allowance of depreciation in earlier years was no longer relevant as the papers found during search clearly indicated that the real facts on the basis of which depreciation was allowed were otherwise. In any case, this aspect of the matter deserved to be looked into and the true import of the seized paper was needed to be enquired, which was not done. 82. A great deal of emphasis was laid on the order of ED by the learned counsel of the assessee. The order appears on page 575 of vol. 11 of the paper book. This order is dated 30.04.2004. The search was conducted on 10.11.2004. The email which forms the basis of enquiry was found long after the order of ED. The order of ED did not have the benefit of incriminating material discover at a later point of time. Further, the only issue before the ED was whether the remittance of USD 7,00,000/- was made for the purpose other than for which it was acquired (Pg.577 of PB). The ED, relied upon the sale invoices, shipment documents and the bankers certificate. It came to conclusion on Pg.588 that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In the result this ground is dismissed. 84. Ground no. 20: Vide ground no. 20 the assessee has assailed the allegation of ld. CIT that since the assessee had imported obsolete CBTs from NETg (UK) in order to remit payments in the nature of 'royalty' to NETg and the AO having failed to examine the said issue, the assessment order in this regard was erroneous and prejudicial to the interest of the Revenue. 84.1. The assessee in support of its aforementioned ground has further taken a ground that ld. CIT failed to appreciate that the aforesaid issue had duly been examined in detail by the AO in the original assessment and, therefore, was not amenable to revisionary jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n absence of any material casting doubt over the nature of the transactions, the assessee's claim had been rightly accepted by AO). Payment to NETg after the agreement was towards the Minimum Purchase Commitment in terms of Distribution Agreement. Invoices relating to import of the same have been produced before the AO during the course of assessment vide letter dated 11/05/2006. AO accepted the contention of the assessee for assessment year 1999-2000 to 2002-03 that the purchase of software from NETg was bonafide transaction and not payment in the nature of royalty. Only the payments made in assessment year 2002-03 were disallowed by the assesseing officer and that too, on the ground that the Distribution agreement had expired. Being aggrieved, the assessee preferred an appeal to the CIT(A) for AY 2002-03 which was disposed off vide order dated 31/0712009, allowing the appeal of the assessee. Agreement of NIIT with NETg was different from the Agreement between APTECH and NETg. 84.4. As regards assessee's contention that it was not required to replicate or reproduce any material but merely acted as a distributor of NETg products, ld. CIT pointed out that ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned consignments. From the perusal of the statement, dtd 9/12/2004, recorded on oath of Sh Rajiv Katyal, Vice President of Marketing in NIIT Ltd., it is observed that he confirmed that NETg was not allowing NIIT to buy new titles. An extract of statement is reproduced below: Q.14 Did Andre Hogan asked you or tell you that NIIT cannot buy new titles. Ans. Andre Hogan was keen that NIIT not go in for the latest titles and NIIT knew that this was immaterial as the titles, it wanted to buy were saleable. Q.15 Can you give me the reason why NETg wanted to avoid selling new titles with the background of your experience with NETg. Ans. I can not guess as it was a business issue ofNETg (sic) The reason why Mr. Katyal had not given specific answer is very obvious from the fact that NETg had appointed a new distributor namely Mls APTECH Ltd. for its products in India and the agreement with NIIT had been discontinued. Therefore, NIIT was not authorized to sale NETg products in India. The import of CBTs amounting to USD 2,07,785 from NETg after expiry of the agreement also again confirms that remitting money to NETg was for some other purposes (royalty payments).It was stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount calculated @ 30% of sales made by NIIT every year called the Target Order Commitment . He also pointed out that NIIT was also authorized to reproduce training resources for distribution. Thus, the payments were made by NIIT to NETg as a proportion of the sales and, therefore, was in the nature of royalty and not purchase price. 84.10. Ld. CIT pointed out that AO had disallowed the amount remitted to NETg in FY 2001-02 of USD 207785, but failed to examine the real motive and purpose for which said amount was remitted. With reference to above observation, ld. CIT pointed out that AO failed to consider this fact and erred in accepting the import as genuine. 84.11. Ld. counsel for the assessee submitted that NETg is a multinational company based in UK, which is engaged in the business of producing, acquiring and marketing training resources in various media including CD ROMs, interactive video instruction, linear video instructors, computer based training (CBT) and related texts, audio material and equipment. He pointed out that this issue is similar to issue relating to royalty/FTS, as considered vide ground no. 18. He pointed out that assessee was appointed as sole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee/ payer could not be held to be in default for not deducting tax u/s 195 f the Act, relying on following decisions: - Van Oord ACZ India (P) Ltd. v. CIT 323 ITR 130 (Del.) - Mahindra and Mahindra Ltd. v. DCIT 313 ITR 263 (Mum)(SB)(AT). 84.17. Ld. counsel further submitted that since ld. CIT(A) had allowed the assessee's appeal in respect of disallowance made by AO in respect of purchases made in AY 2003-04 aggregating to USD 207785, therefore, in view of clause (c) of Explanation to sec. 263(1), ld. CIT's jurisdiction was ousted. He pointed out that after examining the e-mails, referred to by the AO as well as the CIT, there was no finding by either of the authorities that payment towards purchase of CBTs was in the nature of royalty. 84.18. Ld. counsel submitted that assessment order was passed after detailed queries raised by AO and the replies filed by the assessee were considered by AO. He refered to page 667 of the PB, wherein the AO's query letter dated 1-3-2006 is contained, in which AO had confronted the assessee with the documents in the shape of e-mails, invoices etc., which were not seized from the premises during the course of search actio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o release long outstanding monies to NETg ... I suggest you revise your order and include older titles, for instance word 97 not word 2000, NT titles instead of Windows 2000 etc. In addition it would be sensible to reduce the number of titles to say a maximum of 20 and increase the quantity as the over all exercise is not being completed to produce content reusable for resale. Email dated 12.9.2001 (Annexure ---) from Mr. Sudipto Sinha Roy, sr. Vice President, NIIT to Mr. Devanand Tripathi, Sr. Executive, NIIT (in reply to email dated 12.9.2001) with copy to Mr Ajay Wahi, General Manager, NIIT, Mr. Amitava Mitra, vice President NIIT (USA) Inc. Mr. Arvind Thakur, Director, NIIT, wherein it was stated as under: Since we cannot anyway sell these in India, let us close this transaction by taking older titled. Though this way, they are trying to protect their current partner apprehending that we may sell the new titles. Email dated 25-10-2001 (Annexure ---) sent by Mr. Rajeev Katyal, Vice President NIIT with copy to Mr Andre Hogan, Director Sales Operations, NETg(UK) wherein it was inter alia stated as under: My understanding with Andre NETg is that we cannot order those tit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 678. The assessee's reply on all the points are contained from pages 679 to 692. Ld. counsel further pointed out that in course of assessment proceedings vide letter dated 9-1-2006, contained at pages630 of the PB, the assessee had furnished copy of agreement with NETg (UK) highlighting minimum purchase commitment of NIIT along with note on import of material from NETg valuing US$ 2,07,000/-. 84.20. Ld. counsel further referred to page 1158.45 of PB-4 and pointed out that during the course of assessment proceedings vide letter dated 9-1-2006, the assessee had submitted copy of a/c of M/s K.K. Lubricants Pvt. Ltd. as on 31-12-2005 regarding sale amounting to ₹ 7.88 crores and payment received thereof. He submitted that the adverse inference drawn by the ld. CIT on the basis of subsequent agreement entered into by NETg with APTECH is completely misconceived because APTEC and assessee are two different entities and the nature of interest entered into by NETg with the two parties is different and at variance both in terms of scope of agreement as well as business consideration. 84.21. Ld. counsel submitted that AO had conducted detailed inquiries and thereafter took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket? g. Clarify the Clause 5A (Targeted order Commitment) mentioned in the document titled :Distribution Agreement dated 31-12-1994 between NETg and NIIT Ltd. h. Clarify the clause 7A B mentioned in the document titled Distribution Agreement dated 31-12-1994 between NETg and NIIT Ltd. The Clause 7A B reads as follows: 7.A. NIIT shall order any Training Resources for which it has distribution rights hereunder either in master copy format (where available) or customer copy format. 7B. NIIT may reproduce Training Resources for distribution under this Agreement, except in cases where NETg's agreement with an authority or producer, or other legal restrictions preclude such reproduction. i. Provide the details of number of copies and price at which these CBTs were imported (Annexure 31). 84.24. Assessee's answer to the aforementioned query, vide letter dated 27- 2-2006, contained at page 658 is as under: Regarding TDS on remittances to NETg. In respect of the above, the assessee company would like to submit as under: NETg is a multinational company based in UK. The company was engaged in the business of producing, acquiring marketing, training ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sale invoices is submitted to the department vide letter dated . 27.2.2006 in respect of assessment year 200 I -02. f. No, the assessee company have not replicated/copied the CBTs purchased from NETg and sold to customers in the domestic market. The assessee company have purchased the CBTs from NETg and sold them as stock and sell items. g . The first part of the SA(Targeted Order Commitment) of the Distributor Agreement, is a safeguard built-in by the supplier NETg to ensure that: i. their products are not pirated and sold in the market ii. they get adequate orders from the distributors based on the '. potential of' the market. NETg had appointed NIIT as the sole distributor of their products in India. As per this arrangement, when products are bought from NETg, NIIT can set their own sale price in the market. However, this clause clarifies that NIIT can generate their revenue of Rs.I 00 in the market only, if they have purchased products worth ₹ 30 from NETg. This means that the Targeted Order Commitment from NIIT will be 30% of NIlT billings (as shown in the example above) or Minimum Order Commitment shall be as per Clause 4(B) of the Agreement w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commitment as per the Distributorship Agreement entered between NIIT Limited and NETg. A copy of the Agreement has already been filed with the department vide letter dated 09-01-2006. Therefore, the remittances effected to NETg is towards minimum purchase commitment and not royalty. In addition DDIT have summoned some f the executives of the assessee company for statement. They have recorded the statements which are reproduced below. In the statements recorded in the department from Mr. Rajeev Katyal, Mr. Ajay Wahi, Mr P. Rajendran, it is very clearly mentioned that remittances effected to NETg was towards minimum purchase commitment and not royalty as alleged in your letter. Further, the imports were meant for the purpose of re-sell/ use in the Indian market. The relevant answers of the above officers recorded by the department is reproduced below. Rajeev Kayal: Q: Was NIIT payment any royalty to NETg? A: To the best of my knowledge, we were paying for the material and not royalty. Ajay Wahi: Q: Whether it was for the minimum purchase commitment or something else. A: To the best of my knowledge, this was minimum purchase commitment. P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 11-5-2006 submitted the details of purchases made from M/s NETg and import of NETg products from NIIT UK during assessment year along with sample copy of invoices as contained at pages 694 to 702 of the PB. 84.27. In view of above queries raised by AO and replies filed by assessee, ld. counsel submitted that it was only after extensive examination and due application of mind that the AO accepted the nature of business arrangement and came to the conclusion that payments made to NETg were not in the nature of royalty and to disallow purchases of CBTs for amount aggregating to USD 2,07,785/- on the ground that there was no rational for purchase of the same after the expiry of agreement with NETg. 84.28. Ld. counsel further submitted that the AO, after considering exactly the same issues, as were raised in the impugned order and replies filed by the assessee from the conclusion in the office notes for the assessment year 2002-03, that the assessee had merely entered into a sale and purchase transaction of CBTs and no payment in the nature of royalty was made under the agreement with NETg warranting deduction of tax at source. He referred to the said office note, relevant port ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose for which amount was remitted to NETg. He submitted that the evidence on record like e-mails exchanged between key functionary of NIIT and NETg showed that bogus orders were raised and that there was no corresponding sale orders for the payment made in US$. It further suggested that the real motive and purpose of remittance was to make payment of royalty and not to pay for import of an outdated computer base training product (CBTs). AO had failed to consider this aspect and erred in accepting the import as genuine. 85.1. Ld. Spl. Counsel referred to page 748 of PB and pointed out that the ground raised before ld. CIT(A) was as under: Ground no. 3 relates to the disallowance of purchase (CBT products) amounting to ₹ 97,36,496/- imported by the appellant from M/s NETG on the ground that the appellant made the purchases after the expiry of the agreement with the distributor. 85.2. He submitted that basis of disallowance was disputed before ld. CIT(A). The decision of ld. CIT(A), contained at page 757 of the PB, rests on two counts, firstly, that the purchases were duly accounted for and expenses were made for business purpose. He referred to para 11.3 of CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de in case of royalty payment and the place of payment also had to be taken into consideration for determining the correct tax liabilities. 85.6 Ld. Spl. Counsel submitted that whether the software was replicated or not had to be inquired. He submitted that AO did not carry out the necessary inquiries in order to reach the stage where he could arrive at a proper conclusion. Thus, it was a case of lack of inquiry and the necessary facts which could determine the true nature of payments 85.7. Ld. Spl. Counsel referred to pages 667 onwards, wherein show cause notice dated 1-3-2006 is contained and pointed out that the e-mails were referred to in the show cause notice to demonstrate that the payment was towards royalty in the garb of merit of software. He pointed out that from the e-mails it is evident that the amount was due to NETg even before the shipment was made. 85.8. Ld. Spl. Counsel referred to page 679 onwards wherein the reply of the assessee is contained, in which assessee sought to explain the e-mails. Ld. Spl. Counsel pointed out that AO did not make any discussion of e- mails and accepted the assessee's plea without proper verification regarding import of so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ehta of NIIT reproduced on the same page reads as under: NIIT has to pay USD 1,83,0001- as royalty to NETg 94. Further emails on page 669 of PB 11 indicate that these imports from NETg were of obsolete and unsaleable materials. These orders were sent and imports made to cover the payment for royalty which NIIT was to pay to NETg. In their internal correspondence, NIIT clearly states that the amount of royalty is payable. The email of Andre Hogan clearly brings out the entire purpose of these shipments and also suggests way to reduce the cost of such bogus sales (and shipments). These documents bring out very clearly that remittance for royalty was being made in the garb of price for imports in order to avoid the taxability of non-resident in India and the payment of withholding tax. These emails may have dates relevant to AY 2002-2003 but throw light on the nature of the transaction and characterization of payment. The transaction may be in one or more years but if the nature of the transaction is the same, the characterization of payment (or income) will not vary. 95. The AO has not brought any material on record and made no enquiries with reference to the material gath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt aspect, i.e. royalty paid to Netg in the garb of purchase of software. In other words, CIT(Appeals) only examined whether the purchase of software could be made after the expiry of agreement, but did not examine the character of payment, i.e. whether it was royalty or a payment for purchase. Therefore, it is urged that doctrine of merger is not applicable to the aforesaid issue. 86. We have heard rival submissions and perused the relevant material available on record. The primary reason for exercising revisionary jurisdiction by ld. CIT was on the ground that AO failed to examine the real motive and purpose for which amount was remitted to NETg. The assessee's claim for making payments towards import of CBT's came within shadow of doubt in view of e-mails exchanged between responsible employees of NIIT, found in course of search, which suggested that the payment was made towards royalty in the garb of purchases of CBT's. The statements recorded of various employees also pointed to this aspect. It cannot be denied that true character of payment to NETg had wide revenue implications. Therefore, it was incumbent upon AO to record specific findings with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds 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. 86.1. 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. As regards the issue raised with reference to doctrine of merger, we have already considered this aspect while deciding ground no. 11 and, therefore, we refrain from making any further comments on this issue. 86.2. In view of above, we concur with the finding of ld. CIT in restoring the matter to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the order was erroneous and prejudicial to the interest of the Revenue. Impugned issue beyond the scope of jurisdiction of assessing officer In this regard, it is submitted, that the claim of deduction under section 35D of t he Act having been accepted in the assessment year 1993-94, it was beyond the power of the assessing officer to examine the claim in the succeeding year(s)/ impugned year, without disturbing/ disallowing the same in the initial year. Reliance, in this regard, is placed on the following decisions, wherein the context of admissibility of deduction u/s 80HH/80- I of the Act, the Courts have held that the Revenue could not seek to withhold the benefit under the said section in the later year(s) without disturbing the initial year. - CIT v. Kopran Chemicals Co. Ltd. 112 ITR 893 (Bom.); - Saurashtra Cement Chemical Industries Ltd. v. CIT 123 ITR 669 (Guj.); - DCIT v. Gujarat Narmada Valley Fertilizers Co. Ltd. 215 Taxman 72 (Guj.); - L.G. Balakrishnan Bros. Ltd. v. CIT 151 ITR 270(Mad.); - CIT v. Nippon Electronics (India)(P) Ltd. 181 ITR 518 (Kar.) - CIT v. Paul Brothers 216 ITR 548 (Bom) - Direct Information (P) Ltd. v. ITO 2011 TIOL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether any interest has been paid on the same and if he has the allowability of the same as business expenditure. Further, AO failed to verify facts whether the provisions of section 269SS and 269T were attracted or not. 91.2. Ld. counsel referred to page 1073 of the PB, wherein the tax audit report is contained and referred to Annexure 8 contained from pages 1088 to 1093 of the PB to demonstrate that the auditors had given complete details along with address of the parties from whom the amount of loan or deposit of ₹ 20,000/- or more was accepted during the year. 91.3. Ld. counsel referred to page 1011, wherein the AO had, inter alia, raised following query on this issue ) 7. Please also submit the details of the OD limit, if any, with any bank, with requisite details. 8. Please indicate all the loans taken or given by you during the year. Please state the name(s) and address of the persons from/ to whom such loans were taken/given. Please also indicate the mode of such receipts/ giving such loans. You are also requested to indicate the assessment particulars of such persons. 10.Please furnish the details of all the loans squared up during the year, together with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel submitted that ld. CIT ignored the above replies and without appreciating the facts and circumstances of the case, alleged that there was variance in the list of parties/ details furnished in the tax audit report and that furnished before the AO in the course of assessment proceedings. Therefore, the AO failed to explain - (1) genuineness of the transaction and identity and creditworthiness of the parties; (2) Purpose of accepting these loans and whether any interest has been paid on the same; and (3) whether loans were taken and repaid in accordance with the provisions of section 269SS/T of the Act. 92. Ld. Special Counsel referred to page 59 of ld. CIT's order and pointed out that his main objection was with reference to residuary loans. He submitted that AO was required to make the inquiries as contemplated u/s 68 of the I.T. Act and since he failed to do so, it was a case of complete lack of inquiry. His submissions as contained in written submissions are as under: 109. With respect the deposits received from franchises / distributors, it is submitted that no details were furnished by the assessee in the course of assessment proceedings and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 20,000/- or more were taken or accepted during the year under consideration. His objection is that though the assessee had furnished details of loans taken from business and group companies but these details were not furnished. He further pointed out that in none of the cases PAN had been mentioned. Therefore, it is clear that AO failed to verify the necessary details in regard to the genuineness of the transactions, identity and creditworthiness of the parties. He further pointed out that AO did not verify whether in this case the provisions of Sections 269SS and 269T of the Act were attracted or not. The assessee's claim was that the loans taken were from business partners/ franchises from whom no interest bearing loans were taken. 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 192,881 SGD 50,149 INR 1,222,133 1,222,133 UK Interest USD 160,952 USD 32,190 INR 1,323,688 1,323,688 USA Interest USD 145,602 USD 21,840 INR 855,969 INR 855,969 Total INR 4,781,828 Merely because wrong section was inadvertently mentioned in the return of income, cannot, by itself be the basis to deny legitimate claim of the assessee. Reference in this regard can also be made to the recent decision of the Indore Bench of the Tribunal in the case of Paramjeet Singh Chhabra: TS-293- ITAT-2013: @Vol. VII: 270-276], wherein it was held that wrong mention of section by the assessee in the return of income cannot be a ground to deny legitimate claim of the assessee. 94.2. Ld. counsel further reiterated his submissions in regard to the scope of jurisdiction of AO u/s 153A, scope, expanded by CIT in the second round and no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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