TMI Blog2015 (10) TMI 2772X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee are allowed. - ITA No.1179/PN/2013 - - - Dated:- 23-10-2015 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee by : Shri P.J. Pardiwala For The Respondent : Smt. Divya Bajpai, CIT ORDER PER R.K. PANDA, AM : This appeal filed by the assessee is directed against the order dated 25-03-2013 passed u/s.263 of the I.T. Act by the CIT-IV, Pune relating to Assessment Year 2006-07. 2. Although a number of grounds have been raised by the assessee they all relate to the validity of proceedings u/s.263 initiated by the Ld.CIT. 3. Facts of the case, in brief, are that the assessee is a Private Limited Company incorporated on 24-06-2006. It is a wholly owned subsidiary of T-Systems International GmbH. The STP unit of the assessee located at Pune is principally engaged in the business of development and export of computer software and has commenced its commercial operations on 30-09-2004. The assessee filed its return of income on 30-11-2006 showing loss of ₹ 11,09,00,536/-. 4. The AO made a reference u/s.92CA(1) of the I.T. Act to the TPO for determination of the ALP of the international transaction reported in Form No.3CEB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.O. has not called for any details of Trading account, P L Account and Balance Sheet, for example as per note 5 of schedule 13 to audited accounts the assessee has crystallized the huge damages of ₹ 5,79,02,756/- but no details were called for and seen the possibility of additions on this important issue. The damages paid to the parent company of Germany belongs to earlier year and there are no evidences or notes as to how the damages got crystallized during the year, where no efforts were made by the DCIT. Therefore, there is a need to verify with the help of the documentary evidences to see to which year actually the expenses belong for the purpose of addition, there is no clear note about the computation of the same. Submit the details and working with documentary evidences. 3) As per schedule 13, where significant accounting policies are mentioned like in para 2.2 the company has recalculated useful life of computers, peripheral, office equipments and intangibles with effect from 1/1/2006 where there is a loss of ₹ 19,32,848/-. Further as per para 2.5 of schedule 13 to the notes, as per para 2.6, i.e. differences, 2.9 provisions, para 6 of implementing SAP mod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the CIT the assessee is in appeal before us. 8. The Ld. Counsel for the assessee referred to the notice issued by the CIT as well as the order passed u/s.263 and submitted that the CIT s notice as well as his order is silent as to how the order passed by the AO is erroneous and prejudicial to the interest of the revenue. Referring to the letter addressed to the CIT on 27-02-2013, a copy of which is placed at paper book pages 128 to 130, he submitted that the assessee in the said letter has clearly mentioned that the notice dated 25-02-2011 was not served on the assessee in the past and therefore T Systems Ltd. would require additional time to reply to the specific points mentioned in the said notice. Referring to clause (2) of the said letter he drew the attention of the Bench to the following reply given to the CIT : In the present case, the Assessee has filed all the details which were required by the AO during the course of assessment proceedings including profit loss account, balance sheet, Form 3CEB, notes to financial statements etc and also the details of various expenses and other clarifications as sought from time to time. Accordingly, all the details were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account for the year ending 31-03-2007. He drew the attention of the Bench to clause 5 of Schedule 13 which reads as under : 5. Exceptional item represents services damages claimed by TSystems International, GmbH, Parent Company towards deficient services provided by the Company on one of its projects. Although the services on the project have been provided by the Company from the previous year onwards, these damages got crystallized during the year after management accepted the same. 11. Referring to page 35 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to clause 7(b) of the notes forming part of Form 3CEB which reads as under : (b) Reimbursement of damages represents incremental costs incurred by an associated enterprises which was attributable to the Company on account of deficient services provided by the company to one of the primary customers of associate enterprise. The assessee represents that costs were accepted as damages given the future commercial benefit associated with continuing the contract. In view of section 92(3) of the Income Tax Act, 1961, the assessee believes that no economic analysis is required to determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the above definition suggests that while computing the operating profit, one should exclude extraneous and expenses of purely financial nature of an enterprise carrying out normal operations and activities. Now, the operations of the assessee cannot be said to be abnormal looking at the growth of its revenue compared to last year. Moreover, the expenses from EPCOS damages cannot be termed as extraneous and of financial nature. These expenses have incurred purely during the course of the normal operations of the assessee of software development for its failure to meet the standards laid down by its AE. Such expenses without any doubt are operating expenses. Similarly, the expenses pertaining to failure to meet the quality standards have to be part of operating expenses. He accordingly submitted that when the AO after examining the expenses and various details filed passed the order after due application of mind, then how the order of the AO can be held as incorrect is not understood. 15. So far as the second objection of the Ld.CIT that the company has recalculated the useful life of computers, peripherals and office equipments and intangibles w.e.f. 01-01-2006 where there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as related services are performed. In the case of fixed price contracts, revenue is recognized based on the milestone achieved, as specified in the contracts. Revenue is recognized to the extent that is probable that the economic benefit will flow to the company and revenue can be reliably measured. Provision for estimated losses on uncompleted contracts are recorded in the period in which such losses become probable based on the current contract estimates. 2.6 Foreign Currency Transaction : (i) Initial Recognition Foreign currency transactions are recorded in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. (ii) Conversion At the year end, Foreign Currency monetary items are reported using the year end exchange rate. Non-monetary items which are carried in terms of historical cost denominated in a foreign currency are reported using the exchange rate at the date of the transaction. (iii) Exchange Differences All Exchange differences arising on the settlement of monetary items or on restatement of reporting Company s monetary items at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been written more elaborately. The section does not visualize a case of substitution of the judgment of the CIT for that of the AO who passed the order unless the decision is held to be erroneous. 21. Referring to the decision of the Hon ble Punjab Haryana High Court in the case of CIT Vs. Kanda Rice Mills reported in 178 ITR 446 he submitted that for exercise of revisional jurisdiction by the CIT, he has to come to a firm a decision that the order of the AO was erroneous and was prejudicial to the interest of the revenue. In absence of any decision about the erroneous nature of the order the Tribunal was justified in setting aside the order of the CIT u/s.263 of the I.T. Act. 22. Referring to the decision of the Hon ble Madras High Court in the case of CIT Vs. Sakti Charities reported in 244 ITR 226 he submitted that the Hon ble High Court in the said decision has held that revisional power is not meant to correct every error of fact. A revisional power could not be exercised for purpose of directing the AO to hold another investigation. In absence of any indication as to how the order of the AO was erroneous or prejudicial to the interest of the revenue the Tribunal wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntangibles w.e.f. 01- 01-2006 where there is a loss of ₹ 19,32,848/-. Similarly, the cost incurred of ₹ 99,38,263/- were not verified by the AO. Further, the AO has not examined the assessee s claim of deferred tax liability of ₹ 10,92,888/-. In view of the above, the Ld.CIT invoking the provisions of section 263 of the I.T. Act set aside the order passed u/s.143(3) r.w.s.144C(13) of the I.T. Act. 26. It is the submission of the Ld. Counsel for the assessee that all the details as called for by the AO during the course of assessment proceedings were provided. After verifying the same, the AO on due application of mind has passed the order. The order of the Ld.CIT is silent as to how the order passed by the AO is erroneous and prejudicial to the interest of the Revenue. Therefore, the order passed u/s.263 by the CIT lacks jurisdiction and has to be set aside. 27. From the various details furnished by the Ld. Counsel for the assessee, we find the assessee vide letter dated 28-04-2008 addressed to the AO has filed the details of statement of income, tax audit report in Form 3CD and statutory audit report and financial statements for the financial year ended 31- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystallized during the year. 30. As regards the objection of the Ld.CIT that the AO has not verified the assessee s claim out of the deferred tax liability of ₹ 10,92,888/- is concerned we find the assessee in clause 8 of schedule 13 to the notes annexed to and forming part of the balance sheet and profit and loss account has given the following details (page 18 of the paper book) : 8. The components of the Deferred Tax (net) : Particulars Deferred Tax Asset/(Liability) as on 01-04-2005) Current Year (Charge)/Credit Deferred Tax Assete/(Liability) As at 31-03-2006 Difference in depreciation and other differences in block of fixed assets as per tax books and financial books (280,504) 1,373,392 1,092,888 Total (280,504) 1,373,392 1,092,888 31. Further, we find merit in the submission of the Ld. Counsel for the assessee that the amount of ₹ 10,92,888/- is a balance sheet item and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter again. We do not want to express any opinion on this question, since our jurisdiction is confined only to answering the question referred to us. The question referred to us is answered in the affirmative. There will be no order as to costs. 33. We find the Hon ble Bombay High Court in the case of Gabriel India Ltd. (Supra) has held that CIT cannot revise an order merely because he disagrees with the conclusion arrived at by the AO. The Hon ble High Court in the said order has observed as under (Short Notes) : The power of suo motu revision under sub-section (1) of section 263 of the Income-tax Act, 1961, is in the nature of supervisory jurisdiction and can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise the power of revision under this sub-section, viz., (i) the order should be erroneous; and (ii) by virtue of the order being erroneous prejudice must have been caused to the interests of the Revenue. An order cannot be termed as erroneous unless it is not in accordance with law. If an lncometax Officer acting in accordance with law makes certain assessment, the same cannot be branded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. All these were part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. This decision of the income-tax Officer could not be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous ant! that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-examine the matter. That was not permissible. The Tribunal was justified in setting aside the order passed by the Commissioner of Incometax under section 263 (see p. 117A-c). 34. We find the Hon ble Punjab Haryana High Court in the case of Kanda Rice Mills (Supra) has observed as under : A reading of the entire or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer was not right in not considering the effect of the donation of the distributorship business in favour of the assessee. However, the Commissioner of Income tax has not examined the question further that, even assuming that such a material was placed before the Income tax Officer, the position regarding the grant of exemption of the assessee's income would be different, had the Income tax Officer noticed that there was a donation of the distributorship business. It is not disputed by learned counsel for the Revenue that the business of distributorship was an asset in the assessee's business and it was held under a trust. The Income tax Officer had found that the income from such distributorship business was applied for charitable purposes only. The Commissioner has nowhere recorded how the final conclusion of the Income tax Officer would vary, had the Income tax Officer taken into consideration the position that the business of distributorship was donated in favour of the assessee. Learned counsel for the Revenue relied upon the decision of this court in the case of K. A. Ramaswamy Chettiar v. CIT [1996] 220 ITR 657, wherein this court held that if the Income tax Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is erroneous and prejudicial to the interests of the Revenue. We are of the view that the Commissioner would have no jurisdiction to revise an order of assessment, if the final conclusion arrived at by the Income tax Officer could not be different even after considering the particular fact which the Commissioner has directed the Income tax Officer to consider. Further, the power of revision is not meant to be exercised for the purpose of directing the Income tax Officer to hold another investigation when the order of the Assessing Officer was not found to be erroneous. The Commissioner of Income tax in the instant case, in our opinion, has merely set aside the order of the Income tax Officer directing the officer to hold further investigation without recording any finding that the order passed by the Income tax Officer was in any way erroneous or prejudicial to the interests of the Revenue. We hold that the Tribunal was quite justified in holding that the order did not call for any interference in the revision done by the Commissioner of Income tax. Accordingly, we answer the question of law referred to us in the affirmative and against the Revenue. The assessee will be entit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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