TMI Blog2004 (12) TMI 680X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. Income Tax Act, 1961 s.263 Revision under section 263--ERRONEOUS AND PREJUDICIAL ORDERESOP expenditure Held: Deduction of ESOP expenditure being in accordance with the guidelines of SEBI and not being a contingent liability, the order of AO granting deduction was neither erroneous nor prejudicial to interest of the revenue. Income Tax Act, 1961 s.263 Revision under section 263--POWERS OF CITEnhancement and setting aside of assessment simultaneouslyThe CIT directed enhancement on four issues and in respect of one issue he set aside the assessment for fresh consideration after invoking provisions of section 263. Held: The clear use of the disjunction or after the comma explicitly brings out the legislative intent that it is either one of the acts viz., enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment which can be done, therefore, enhancement and setting aside of assessment simultaneously vitiated the order of CIT entirely. Income Tax Act, 1961 s.263 Revision under section 263--SCOPEAllowability of depreciationAssessee-company acquired an American-firm AOC, and in the process, the assessee came to process valuab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights through the process of becoming the owner of AOC, an American firm. The assessee earned 16.75 crores by way of interest on GDR issue and expenses incurred on GDR issue amounted to ₹ 16.73 crores. The assessee however, claimed only ₹ 4.80 crores under section 35D. Held: This being a case of expansion of an existing undertaking, acceptance of claim for deduction under section 35D by the AO could not be considered as erroneous in law. Further, the assessee having preferred a lesser claim, grant of deduction under section 35D was not prejudicial to interest of revenue. Income Tax Act, 1961 s.263 ORDER N. Vijayakumaran, J.M. 1. This appeal arises from the order of the CIT, Chennai-III, passed under Section 263 of the IT Act, 1961, in respect of the order of assessment dt. 21st April, 2003 for the asst. yr. 2001-02. The appellant filed the return of income on 30th Oct., 2001, declaring a total income of ₹ 39,97,82,760. This return was processed under Section 143(1)(a) and the income returned was accepted. Thereafter, a notice under Section 143(2) was served on the appellant and an assessment was completed on 21st April, 2003 under Section 143(3) determini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of technical know-how and IPR as per the provisions of Section 35AB. (iv) Fourthly, you have swapped your company's share numbering 6,38,236 with the shares numbering 7,86,099 of Albion Orion Company LLC It is seen that your ₹ 10 shares have been swapped at the rate of ₹ 3,058, The AO has neither examined any of the aspects of these transactions nor you have furnished any details, such as due diligence reports, agreement for swapping, agreement for taking over, agreements with the financial agencies who structured the deal, how their transaction was completed, how the final acquisition took place, at what rate you have purchased the shares of the acquired company, balance sheets of the acquired company pre and post- acquisition, etc. Whether these transactions resulted in capital gains or a revenue receipt and what are its implications from taxation point of view have not been examined. This failure to apply mind on an important issue on the part of the AO is erroneous and prejudicial to the interest of Revenue. (v) Fifthly, as per notes to the balance sheet, you have accounted the discounted value of the options granted as employee stock options outstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antime, a survey under Section 133A was carried out on 30th Dec., 2003, in the premises of the assessee and various documents relating to the issues raised in the said show-cause notice were impounded. The assessee, by reply dt. 5th Jan., 2004, submitted that the impugned order of assessment was neither erroneous in law nor prejudicial to the interests of Revenue and so requested to drop the proceedings. 3. By letter dt. 21st Jan., 2004, the assessee was requested to furnish specific information on certain points and was also asked to give reasons as to why the receipts by way of foreign exchange fluctuation should not be treated as revenue receipt. 4. The assessee was heard on this issue by CIT who held that he had validly assumed jurisdiction and further directed the AO to-- (a) tax exchange fluctuation Income of ₹ 16,35,77,977 as revenue receipt and also to examine whether there was a need to rework the claim for deduction under Section 80HHE earlier allowed in the proceedings under Section 143(3), as a result of treating the exchange fluctuation as a revenue receipt; and (b) disallow the claim under Section 35D amounting to ₹ 4,80,72,799; and (c) disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of computing deduction under Section 80HHE does not arise. In support of its submission that the receipt was of a capital nature, the decision of the Madras High Court in EID Parry Ltd v. CIT (1988) 174 ITR 11 (Mad) was cited. In response to this, the CIT by letter dt. 21st Jan., 2004 opined that the decision of the Madras High Court relied on by the assessee, was not in favour of assessee made an altogether new proposal to treat the said receipt as revenue in nature. In this context, the learned counsel for the assessee drew our attention to the additional ground filed by the assessee on 20th Sept., 2004, wherein a ground had been taken that the CIT erred in not confining himself to the basis for the assumption of jurisdiction under Section 263 in his show-cause notice dt. 22nd Dec., 2003 and going beyond the show-cause notice dt. 22nd Dec., 2003, which in law is not permissible. This ground was in addition to and without prejudice to the grounds raised about assumption of jurisdiction under Section 263 by the CIT being invalid. The learned counsel for assessee submitted that the CIT could not go beyond the initial show-cause notice through a letter, which was subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l receipt was one view as against the view of the CIT that it was revenue in nature and this was beyond the scope of revision under Section 263. He relied on the decision of the Hyderabad Bench of the Tribunal reported in Srinivasa Hatcheries (P) Ltd. v. Dy. CIT (2004) 89 TTJ (Hyd) 545 : (2002) 81 ITD 36 (Hyd) to state that if one of two possible views had been followed by the AO, no action under Section 263 can be taken. 8. In the alternative, it was submitted that if the exchange fluctuation receipt was to be treated as income, then the entire share issue expenses amounting to ₹ 16,71,80,907 would be allowable as a deduction relying on the decision of the Jodhpur Bench of the Tribunal reported in Neha Proteins Ltd. v. Asstt. CIT (2004) 83 TTJ (Jd) 236 and of the Supreme Court in CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC) and CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC). He further contended that if the said expense of ₹ 16,71,80,907 is reduced from the exchange fluctuation of ₹ 16,35,77,977, the result would be a loss and total income of the appellant would thus be lesser than what was assessed by the AO under Section 143(3) and that, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on account of rupee devaluation, but in the present appeal the assessee is an Indian company. The learned Departmental Representative had in the written submissions stated that the assessee had not made a share issue abroad but had only issued certificates, Which Were negotiable. The learned Departmental Representative however, in the course of his submissions fairly conceded that the fact was that the assessee had only made a share issue abroad and, therefore, prayed that the written submissions to that extent it refers to the assessee not having made an issue of shares may be treated as withdrawn. 10. The learned Departmental Representative further submitted that the assessee had retained moneys in the form of FDs and current account abroad and had treated them as current assets only which is taken to revenue account correctly as per the accounting principles followed by the assessee. In view of this excluding the same from computation as claimed by the assessee without examination is an error committed by the AO and, therefore, the direction of the CIT in treating it as a revenue receipt is correct on the facts and circumstances of the case, He also submitted that the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to be judged only with reference to the reasons stated therein. Admittedly, in the show-cause notice reproduced by us hereinabove, there is no mention that the increase caused by exchange fluctuation was of a revenue nature and so had to be taxed as income. In this circumstance, the question that arises for our consideration is whether the same can be raised in the form of a-letter. The learned Departmental Representative has submitted that the letter dt. 21st Jan., 2004, should be construed as a second show-cause notice and so the assumption of jurisdiction by the CIT by issue of a letter was proper. Further, the letter was in continuation of the Section 263 proceeding already initiated and not a fresh proceeding as contended by the Departmental Representative. Therefore, we are of the view that the letter dt. 21st Jan., 2004 was not signed by the CIT himself but by some other officer on his behalf which showed that it was only a letter and not a show-cause notice and this mistake is not a curable one as enumerated in Section 292B of IT Act. 14. In this connection, useful reference may be made to the decision of the Hon'ble Karnataka High Court in the case of CIT v. L.F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, one cannot make profit out of himself. In this case, the amount of US dollars raised in the GDR issue remained the same and the increase was due to exchange rate increase and not due to any activity by the assessee. As held by the Supreme Court in the case of CIT v. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC), one cannot profit out of himself, we hold that the exchange fluctuation is not a revenue receipt and the direction of the CIT in this behalf is not justified. 16. There is one more aspect to the case. Even assuming that the view of the CIT that the increase due to exchange fluctuation is revenue is not altogether ruled out, then similarly the view that it is capital in nature is also a plausible view and Section 263 is not the forum to decide such issues. The AO took one view and the CIT took another view and in a Section 263 proceeding, there is no scope for substituting one view for the other as held by the Gujarat High Court in Arvind Jewellers on which SLP was dismissed by the Supreme Court [(2004) 266 ITR (St) 101]. 17. The learned Departmental Representative supports the order of the CIT on the ground that the decision of the Madras High Court in (1988 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oden structures were installed in the third party premises, i.e., at Government schools. He also drew our attention to Clause No. 7 of the agreement entered into for the provision of computer education, wherein it is stated that the equipments provided by the assessee cannot be taken away by the assessee during/after the contract period. He submitted that the CIT after examining the agreements, had directed 1/5th of the expenditure so claimed to be allowed in the assessment year under review and the balance in equal instalments over the four, subsequent years. This conclusion was arrived at by the CIT since the agreement for providing the education is for a period of 5 years. The learned counsel for the assessee, therefore, submitted that the CIT had concluded that the expenditure was revenue in nature for he could not have otherwise directed the deduction to be allowed over a five year period but could only have directed a claim for depreciation at the rates prescribed. The learned counsel for the assessee also submitted that an expenditure once held as revenue has to be allowed in full unless it were prohibited from being claimed under the Act. The learned counsel for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that the company got an enduring advantage and not a capital asset. In this case, the appellant had spent the amount for providing furniture, etc, on various schools on a lease agreement entered (p. 228 of the paper book of the appellant) and if these are part of the revenue expenditure, the appellant could have written off to the P L a/c as a direct expenditure but treated part of the asset in the fixed asset schedule and claimed 100 per cent depreciation as temporary structure. In the light of the depreciation schedule, the furniture provided in the training institute cannot be considered as temporary structure and, therefore, the claim of 100 per cent depreciation made by the assessee is erroneous in the first instance. Now claiming the same as revenue expenditure is also not correct, as this alternate claim cannot be entertained as the assessee has. shown it as its own assets in the books of account and hence has not written off to the revenue account. The same principle will also apply in distinguishing the judgment of the Rajasthan High Court in CIT, v. Rajasthan Spinning Weaving Mills (supra) relied by the assessee as the appellant has not made any claim under Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses was to provide computer education in the Government schools, for which the necessary infrastructure has to be provided by the appellant. In Clause No. 7 of the agreement dt. 16th Feb., 1999, it is clearly stated that the equipments leased by the contractor under the contract shall not be taken away from the training center during/after the contract period. As per the preamble to the agreement, the assessee had to provide all the necessary infrastructure for imparting computer education in Government Higher Secondary School by providing necessary hardware, software and connected accessories and provision of computer education in these schools. Pursuant thereto the assessee had to make provision for computer education in these schools and these included wooden partitions, furniture and other structures in these schools. The assessee had incurred an expenditure of ₹ 94.81 lakhs in making these provision and claimed the same by way of depreciation as temporary structures. In the Section 263 proceedings, the CIT held that since the contract is for a period of 5 years the entire expenses ought not to be allowed in full by the AO and hence directed 1/5th of the expenditure be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and character of the expenditure, which gives a clue. In this case the expenditure incurred has not resulted in the creation of the asset for the assessee. The structures were not installed in the assessee's premises and were not under the control of the appellant. These structures were to be used by the school children in the public schools and so liable to be damaged extensively. Hence, expenditure incurred in terms of a contract for the purpose of business and not resulting in the creation of any asset or benefit of enduring nature for the appellant cannot even remotely be treated as capital in nature. In view of this factual position, we are of the view that the grant of the said expenditure in its entirety was not erroneous in law on a different ground and also not prejudicial to the interest of Revenue and so the directions of the CIT to allow 1/5th depreciation for a period of 5 years not justified. 27. The third issue relates to the direction given by the CIT to disallow the claim under Section 35D of ₹ 4,80,72,799. The learned counsel for the assessee submitted that the assessee had incurred expenses of the Global Depositary Shares issue amounting to Rs, 16, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the above, that, since the CIT had concluded that the GDS issue is for working capital, then the entire expenses incurred for the same is allowable as revenue expenditure. Hence, he submitted that the direction of the CIT to disallow the claim under Section 35D is erroneous and not valid. 32. In this regard, apart from the various grounds raised before the CIT and the Hon'ble Tribunal in this appeal, the appellant's counsel placed special emphasis of the Jodhpur Bench of the Tribunal in Neha Proteins Ltd. v. Asstt. CIT (supra). In this case, the Tribunal has held that public issue expenses in connection with expansion of an existing business should be allowed as a deduction in full against the interest earned on the share application money. In the assessee's case, it was submitted, the appellant has earned an interest from out of the GDR issue of ₹ 16.75 crores, which was offered as the income of the assessee. Going by the decision of the Jodhpur Bench of the Tribunal, the entire public issue expenses of ₹ 16.73 crores would be allowable as a deduction against the interest income. This would mean that the net of the public issue expenses and interest r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e., 1/5th of ₹ 24,03,63,994 under Section 35D in the order passed by him under Section 143(3), which in the opinion of the CIT, is incorrect and so prejudicial to the interest of Revenue. Section 35D relates to the grant of an allowance by way of amortisation of preliminary expenses at 20 per cent per year for 5 years in connection with the extension of an undertaking or in connection with the setting up of a new industrial unit. In the opinion of the CIT the sum of USD 100 million raised through GDS issue was neither for extension of the industrial undertaking nor in connection with the setting up of the new industrial unit. Hence, in his view, the assessee is not entitled to the deduction. Further, the entire money was utilized for becoming a partner in a firm in USA known as Albion Orion Company LLC and so Section 35D could have no application. In the view of the CIT, becoming a partner in a firm and then becoming a proprietor of a firm does not amount to extension of industrial undertaking nor does it result in the setting up of new industrial unit The assessee's submissions have been that software development has been recognised as an industry and so the expansion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment order impugned could not be considered as erroneous in law. Software is recognized as industry and development of software can take different shapes depending upon time and circumstances. In this case the admitted position is that the assessee came to possess valuable IPR through the acquisition of AOC. It is further to be noticed that the assessee had earned ₹ 16.75 crores by way of interest out of GDR issue and the expenses incurred in GDR issue amounted to ₹ 16.73 crores. In our view the decision of the Jodhpur Bench of Tribunal rendered in Neha Proteins Ltd (supra) squarely applies to the facts of the case. In such an event, the assessee was entitled to claim ₹ 16.73 crores as deduction whereas the assessee preferred to claim a deduction of only ₹ 4.80 crores under Section 35D on the ground that there had been extension of their undertaking and that 1/5 of the expenses incurred in this behalf was to be allowed as deduction. In our view, as the Jodhpur decision is applicable to the facts of the case and the assessee in the original assessment has preferred a lesser claim and hence the grant of deduction under Section 35D was not prejudicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erecting its plant, the interest incurred before the commencement of production on such borrowed money is to be capitalized and added to the cost of fixed assets which have been created as a result of such expenditure. The Supreme Court further observed that the rule of accountancy should be adopted to determine the actual cost in the absence of any statutory definition or indication to the contrary. He further submitted that the same view was expressed by the Court in this same decision with regard to the expenditure by way of freight, warehouse charges, or insurance paid to bring the asset to the present location and condition. The assessee's counsel drew our attention to the decision of the Supreme Court in CIT v. U.P. State Industrial Development Corporation (1997) 225 ITR 703 (SC). In this case, he submitted that, the issue that was before the Supreme Court was with regard to the treatment of underwriting commission vis-a-vis the sum paid by the underwriter to the company for purchase of shares, which were unsubscribed The Supreme Court, he submitted, had held that it would be proper for the assessee to take the net investment, that is the purchase price as reduced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same will be an allowable business deduction, based on the accounting principle in this regard. Without prejudice to the above, it is submitted by the assessee's counsel that the assessee had the option of paying monies to its employees as compensation for services rendered which could have been used by the employees for acquiring the shares in the assessee's company in which case the moneys paid would have been allowed as a business expenditure. He went on to submit that the mere fact that a different route was chosen whereby the shares were issued directly to compensate the employees for services rendered will not make an otherwise allowable expenditure one in the capital field or one that is notional and fictitious. 37. The learned Departmental Representative submitted that the CIT has given a detailed reasoning for disallowing these amounts in his order as the expenditure is contingent and also notional in nature. He further submitted that the SEBI guidelines nowhere stated that the employee compensation expense is to be taken to the P L a/c. He further stated these amounts are to be written off against the share premium account and therefore, the claim of notiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed was as per SEBI guidelines, the order of assessment granting the said claim was, in our opinion, not erroneous and also it was not prejudicial in the interest of Revenue and, therefore, the direction of the CIT to disallow the amount of ₹ 66.82 lakhs is unjustified. 41. The fifth issue relates to the claim for depreciation in respect of IPRs. The learned counsel for the appellant submitted that the assessee acquired IPR, which is indisputable. The specific details of the IPR are as follows: Description of IPR Value in US$ (million) Beacon service line 8.763 Enterprise service line 3.651 CD It service line 1.460 E-Solution service line 14.790 SCM service line 7.536 CRM ERP service line 9.403 ASP service line 5.778 51.381 Equivalent to ₹ 238,32,06,340 Clear Stream UK Fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jan., 2004 and all documents and records relating to the issues raised in the show-cause notice were impounded. He drew our attention to the operating agreement, which was impounded by the Department on 30th Dec., 2003. He also pointed put that this agreement clearly refers to the capital account and capital contributions as also to the allocation and distribution of gains and losses, which also clearly shows that before the date on which the appellant-company became a 100 per cent owner of AOC, AOC was a partnership firm. Hence, he submitted that the acquisition of the IPR and the claim of depreciation thereon are valid. 45. He further submitted that the CIT has erroneously set aside the matter relating to the claim for depreciation on IPR without appreciating that the IPR is owned and used by the appellant, therefore, entitling them to the claim therefor. 46. He also submitted that the CIT failed to appreciate that the transactions were not premeditated but were only transactions done in the best interest of the business of the assessee. He further submitted that the CIT failed to appreciate that the materials impounded under Section 133A do not constitute part of the recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to furnish to the CIT during the enquiry and as there was no other option, the matter was restored to the AO for fresh consideration. He further submitted that ground 42-45 are to be rejected as restoring to the AO is an accepted principle and stated that unless the facts are examined at the AO's, level the decision cannot be taken by the higher authority and, therefore, the power of set aside are not given not only to CIT but also to higher judicial authorities like ITAT, etc. He also submitted that the argument of the assessee that the higher authority should have taken a decision without restoring the matter to be examined afresh is absurd, when the complete details were not even available with the assessee. He thus submitted that in the light of appellant's own submission complete details were not available and the issue requires examination and the CIT is correct in restoring the issue to the AO. 49. The learned counsel for the assessee submitted that all the available details were submitted to the CIT and the only details that were not submitted were details which were not in the possession of the assessee and which related to the documents of the partnership f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT has to show that the order passed by the AO suffered from an error which caused prejudice to the Revenue. It is significant that even after conducting a survey and admittedly impounding documents and going into great detail, a senior officer of the rank of a CIT has not been able to state as to how the order impugned by him was erroneous and prejudicial to the interests of the Revenue enabling him to invoke his jurisdiction under Section 263. A proceeding under Section 263 has a very limited scope and can be invoked only under special circumstance and not for the purpose of launching a roving enquiry. Error in assessment resulting in prejudicial to Revenue has to be demonstrated while invoking Section 263, which is conspicuous by its absence in the order passed by the CIT under Section 263. 51. The admitted position is that the US entity AOC had became 100 per cent owned by the appellant and had became a branch of the appellant The balance sheet prepared clearly indicates that the cost of acquiring the said firm was nothing but investment in the IPRs owned by the said firm. The admitted position is mat in this process the assessee came to possess valuable IPRs belonging t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT can pass such orders thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment . The learned counsel for the appellant points out that there is comma after the words 'enhancing or modifying the assessment' and also the use of the word 'or' which is a disjunction thereafter, which means that it would either be possible to enhance or modify the assessment or cancel the assessment and direct a fresh assessment. He submits that it would not be possible to do both these acts under Section 263. He also submits that the power of the CIT to pass such order as the circumstances of the case justify cannot be taken to mean that both these acts can be done through one order passed under Section 263 for such an interpretation would render the latter part of the sub-section otiose. 53. The learned Departmental Representative submitted that the validity of the invocation of the powers under Section 263 was considered by the CIT and has given detailed reasoning in his order. He drew our attention to ground No. 10 on the claim of deduction under Section 35 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reasons stated in the notice dt. 22nd Dec., 2003. As stated, the CIT has summed up his directions at p. 13 of his order in which on 4 issues he has directed the AO to disallow certain items of expenses/allowances and in respect of the depreciation on the IPRs he has set aside the assessment for fresh consideration. We consider the point whether in an order under Section 263 passed by him, the CIT can direct an enhancement on certain issues and set aside just an issue, to be important and so a brief reference needs to be made in respect of this submission. This is because in the order under Section 263, the CIT does not set aside the assessment but sets aside an issue. The moot point is how an issue can be set aside without setting aside the assessment. This is not a case where an assessment is set aside by the CIT with a direction to disallow certain items and examine certain items. On the other hand, the CIT directs the AO to disallow certain specific items resulting in enhancing the assessment. In respect of one issue he directs the AO to investigate after setting aside that issue. In our opinion, on the face of it, an issue can be set aside only when the assessment is itself s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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