TMI Blog2020 (3) TMI 627X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of CIT Vs. Sunbeam Auto Ltd. [ 2009 (9) TMI 633 - DELHI HIGH COURT ] drew the thin line of difference between lack of inquiry and inadequate inquiry and held that in the case of inadequate inquiry there cannot be 263 order. Therefore, without prejudice, even it is held that the AO had made inadequate inquiry then also powers under section 263 of the Act cannot be invoked under the facts and circumstances of the case. It is well established that the impugned order passed u/s. 143(3) dated 07.01.2016 was passed after calling for relevant information and after detailed examination of the same. The AO has passed the assessment order after calling for details on the issue and after considering the reply and documents after verification of the same and after due application of mind passed the assessment order, so it cannot be termed as erroneous and prejudicial to the interest of the revenue. So, the Ld. CIT s finding fault with the order of the AO is erroneous as well as prejudicial to the interest of revenue on account of lack of inquiry has to fail. AO has adopted one of the courses permissible in law and even if it has resulted in loss to the revenue, the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Thus, the above action of the Ld. Pr. CIT in setting aside the assessment order passed u/s 143(3) of the Act is bad in law and needs to be quashed. b) That without prejudice to the above ground, the Ld. Pr. CIT(A) also ignore the fact that the interest paid on the OD against FD has not been used in the exempted unit. Hence, no portion of the interest of OD can be apportioned towards the exempted income on which the deduction claimed by the assessee and allowed by A.O. u/s 80IA of the Act. Thus, the above action of the Ld. Pr. CIT in setting aside the assessment order passed u/s 143(3) of the Act is bad in law and needs to be quashed. c) That without prejudice to the ground (1a) (1b), at the stage of assessment proceedings, the matter was explained and necessary documents were submitted before the A.O. All the issues have been examined by the A.O as submitted before the Ld. Pr.CIT with all supporting documents. The A.O. after due enquiry and taken one of the possible view as per law, pass the said order. Hence, the order passed u/s 143(3) cannot be termed as erroneous and prejudicial to the interest of revenue. Thus, the above action of the Ld. Pr. CIT in setti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (Note-21 of Annual Accounts). It was observed from assessment records that the interest on FD (under the head Other income ) was adjusted with interest on Bank Overdraft of Rs. 3,19,81,862/- which appeared to be a pure business expenditure. As per the provision of Income Tax Act, 1961 deduction u/s 801A is available to the assessee company to the extent of business income included in Gross Total Income. If the interest on FD was not adjusted with interest on Bank Overdraft then the total other income of the assessee company would be ₹ 5,62,83,790/- [2,43,01,928 + 3,19,81,862]. And income comprised of profits and gains of business profession income would be ₹ 6,16,66,965/- [11,79,50,755 - 5,62,83,790] and assessee would be eligible for deduction u/s 80IA to the extent of ₹ 6,16,66,965. This issue was not examined at the time of assessment. b) It is observed that as per Form No. 10CCB the total sale of the eligible undertaking (₹ 25,99,00,163/-) comprised of inter-unit sale of power: Sale of power to Sponge Iron Unit : ₹ 6,24,29,806/- Sale of power to Induction Furnace Unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction u/s 80IA. 14. In view of the facts and the legal position stated above, I am of the view that the order passed on an incorrect assumption of facts or incorrect application of law and without making requisite inquiries will satisfy the requirement of the order being erroneous and pre-judicial to the interest of the revenue within the meaning of Section 263 of the Income Tax Act, 1961. 15. I have carefully examined the assessment record and submissions made by the assesssee s A.R. The impugned assessment order dated 07.01.2016 has been passed without making relevant enquiry or verification with respect to the issue discussed in Para-13. Therefore, the reliability, validity and genuineness of claim of the assessee appear to have not been examined by the Assessing Officer as no proper enquiry has been made to gather evidences in this regard. The A.O. has failed to make inquiries which were called for in the circumstances of the case. Having regard to the facts and circumstances of the case, the impugned assessment order for the A.Y. 2013-14 u/s 143(3) of the Income Tax Act, 1961 dated 07.01.2016 is deemed to be erroneous in so far as it is prejudicial to the interests ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and collected cannot be the sole consideration to attract section 263, as prejudicial to the interest of revenue, unless the said method is the only mode legally applicable (Cf. S.S. Muddanna Vs State of Karnataka (1963) 89 STC 90,95 (Karn.) 9. On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the ld PCIT which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. 10. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other material available on record. First of all, we have to see whether the requisite jurisdiction necessary to assume revisional jurisdiction is there existing before the Pr. CIT to exercise his power. For that, we have to examine as to whether in the first place the order of the Assessing Officer found fault by the Principal CIT is erroneous as well as prejudicial to the interest of the Revenue. For that, let us take the guidance of judicial precedence laid down by the Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 37,07,642/- had been shown as other income chargeable to tax. The assessee prepared the financial accounts following the generally accepted accounting principles. And as per generally accepted accounting principles Bank Overdraft facility is utilized for the purpose of working capital of the business and accordingly interest on Bank O/D should be a business expenditure. Therefore, in the instant case interest on Bank O/D should have been adjusted with business income.Gross Total Income of the assessee company before allowing deduction u/s 80IA was assessed at ₹ 11,79,50,755/-. Deduction u/s 80IA allowed to the assessee company was ₹ 7,44,85,923/-. If the interest on FD was not adjusted with interest on Bank Overdraft then the total other income of the assessee company would be ₹ 5,62,83,790/- [2,43,01,928 + 3,19,81,862]. And income comprised of profits and gains of business profession income would be ₹ 6,16,66,965/- [11,79,50,755 - 5,62,83,790] and assessee would be eligible for deduction u/s 80IA to the extent of ₹ 6,16,66,965/- instead of ₹ 7,44,85,923/-. As per ld PCIT, this issue was not examined by AO at the time of scrutiny as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est could be allowed if the assessee is able to prove the nexus between the interest expenditure and interest income and remanded the matter to the file of the AO. The Tribunal also remanded the issue of netting of the rent to the AO with the direction to find out whether the assessee has paid the rent on the same flats against which rent has been received from the staff and if such rent was paid then such rent is to be reduced from the rental income for the purpose of exclusion of business income for computing the deduction under s. 80HHC. Against the order of the Tribunal, the Revenue filed an appeal before the High Court and the High Court has directed that on remand the AO will decide the issue in accordance with the judgment of the High Court in CIT vs. Asian Star Co. Ltd. (2010) 231 CTR (Bom) 1 : (2010) 37 DTR (Bom) 209 : (2010) 326 ITR 56 (Bom) in which it has been held that while determining the profits of the business as defined in Expln. (baa) to s. 80HHC, ninety per cent of the gross receipts towards interest and not ninety per cent of the net receipts towards interest on fixed deposits in banks received by the assessee would be excluded for the purpose of working out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndum, that gross interest and gross rent have to be deducted under Expln. (baa) to s. 80HHC to avoid a distorted figure of export profits. 7. Learned counsel for the Revenue, on the other hand, relied on the reasons given by the Bombay High Court in CIT vs. Asian Star Co. Ltd. (supra) and submitted that the Bombay High Court has rightly held that ninety per cent of the gross amount received towards interest and rent have to be excluded from the profits and gains of business for computing the profits of the business as defined in Expln. (baa) to s. 80HHC of the Act. He also relied on the Memorandum to the Finance (No. 2) Bill, 1991 in support of his submission that ninety per cent of the gross interest and gross rent has to be deducted from the profits of the assessee under Expln. (baa). 8. Before we deal with the contentions of learned counsel for the parties, we may extract Expln. (baa) to s. 80HHC of the Act : Explanation.-For the purposes of this section,- (baa) 'profits of the business' means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by- (1) ninety per cent of any sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntum of receipts cannot be reduced under cl. (1) of Expln. (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in cl. (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining profits of the business of the assessee under Expln. (baa) to s. 80HHC. 11. For this interpretation of Expln. (baa) to s. 80HHC of the Act, we rely on the judgment of the Constitution Bench of this Court in Distributors (Baroda) (P) Ltd. vs. Union of India Ors. (supra). Sec. 80M of the Act provided for deduction in respect of certain intercorporate dividends and it provided in sub- s. (1) of s. 80M that where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such income by way of dividends an amount equal to a certain percentage of the income mentioned in this section. The Constitution Bench held that the Court mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in the present case has followed the judgment of the Delhi High Court. On appeal being filed by the Revenue against the order of the Tribunal, the High Court has set aside the order of the Tribunal and directed the AO to dispose of the issue in accordance with the judgment of the Bombay High Court in CIT vs. Asian Star Co. Ltd. (supra). We must, thus, examine whether reasons given by the High Court in its judgment in CIT vs. Asian Star Co. Ltd. (supra) were correct in law. 14. On a perusal of the judgment of the High Court in CIT vs. Asian Star Co. Ltd. (supra), we find that the reason which weighed with the High Court for taking a different view, is that rent, commission, interest and brokerage do not possess any nexus with export turnover and, therefore, the inclusion of such items in the profits of the business would result in a distortion of the figure of export profits. The High Court has relied on a decision of this Court in CIT vs. K. Ravindranathan Nair (2007) 213 CTR (SC) 227 : (2007) 295 ITR 228 (SC) in which the issue raised before this Court was entirely different from the issue raised in this case. In that case, the assessee owned a factory in which he processed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orandum when the language of Expln. (baa) to s. 80HHC was clear that only ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits computed under the head profits and gains of business of an assessee could be deducted under cl. (1) of Expln. (baa) and not ninety per cent of the quantum of any of the aforesaid receipts which are allowed as expenses and therefore not included in the profits of business of the assessee. 16. In the result, we allow the appeal and set aside the impugned order of the High Court and remand the matter to the AO to work out the deductions from rent and interest in accordance with this judgment. No costs. Therefore, the AO has taken one of the plausible view of netting up of interest expenses with interest income in view of the Supreme Court judgment in the case of ACG Associated Capsules (P) Ltd(supra), therefore, under these circumstances the order passed by the AO u/s 143(3) is not erroneous. 12. We note that the AO after making proper enquiry and proper application of mind framed the assessment u/s 143(3) of the Act, therefore the order of the AO ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACG Associated Capsules (P) Ltd(supra).Therefore, under these circumstances it cannot be said that the order of the AO is erroneous. 13.We note that when there is an application of mind and a decision has been taken by the A.O., the assessment order cannot be said to be erroneous unless the same is potentially wrong or unlawful. For that we rely on the judgment of the Hon ble Supreme Court in the case of M/s. Malabar Industrial Co. Ltd. Vs CIT (2000) 243 ITR 83 (SC)(supra). Further, we note that the Hon'ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd. (227 CTR 133) drew the thin line of difference between lack of inquiry and inadequate inquiry and held that in the case of inadequate inquiry there cannot be 263 order. Therefore, without prejudice, even it is held that the AO had made inadequate inquiry then also powers under section 263 of the Act cannot be invoked under the facts and circumstances of the case. This position is further supported by the following judicial pronouncements; CITVs. Anil Kumar Sharma, 335 ITR 83 (Del HC); Ramakant Singh Vs. CIT 140 TTJ 41 (Patna ITAT); Vodafone Essar South Ltd. vs CIT 141 TTJ 84 (Del ITAT); CIT Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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