ITAT
DELHI
NIIT v. Commissioner of Income-tax (Central-II) 60 taxmann.com 313
IT APPEAL
NOS 2057 (DELHI) OF 2010
Order Dated.- MARCH
27, 2015
Ratio
CBDT or CCIT cannot issue any
order, instruction or direction so as to require any income-tax authority to
make a particular assessment or to dispose of a particular case in a particular
manner; revision proceedings cannot be challanged on ground of such direction
by such higher authorities
If a particular issue comes within ambit of complete lack of inquiry then order is to be considered as erroneous as well as prejudicial to interest of revenue but if case is of inadequate inquiry, then Commissioner has to demonstrate that how order was erroneous and prejudicial to interest of revenue
Purpose of making assessment under section 153A is not to verify return, as such, but to make assessment primarily on basis of material found during course of search
Where deduction under section 10B was being claimed and allowed to assessee since several year and Assessing Officer had examined nature of operations carried by assessee in details, Commissioner could not exercise his revisionary powers
If a particular issue comes within ambit of complete lack of inquiry then order is to be considered as erroneous as well as prejudicial to interest of revenue but if case is of inadequate inquiry, then Commissioner has to demonstrate that how order was erroneous and prejudicial to interest of revenue
Purpose of making assessment under section 153A is not to verify return, as such, but to make assessment primarily on basis of material found during course of search
Where deduction under section 10B was being claimed and allowed to assessee since several year and Assessing Officer had examined nature of operations carried by assessee in details, Commissioner could not exercise his revisionary powers
Full
Text
S.V. Mehrotra and C.M. Garg
For
the Appellant: Ajay Vohra, Sr.
Adv. Gaurav Jain , Adv. and Ms. Bhavita Kumar
For
the Respondent: G.C. Srivastava, (Spl. Counsel) and Saurabh Srivastava, CA
ORDER
S.V.
Mehrotra, Accountant Member
This appeal has been filed by the assessee against the order dated 1-4-
2010, passed u/s 263 of the Income-tax Act, 1961, for A.Y. 1999-2000, after the
first order passed u/s 263 by the CIT (Central)-II, New Delhi, dated 19-6-2008
was set aside by Hon'ble High Court vide order dated 11-12-2009 in writ
petition being WP(C) no. 4722/2008 and others.
2. Several events have taken place during
the course of proceedings and, therefore, it is necessary to refer to various
events, leading to the passing of the present impugned order u/s 263.
2.1 The assessee, incorporated under the
Indian Companies Act, 1956, in the relevant assessment year, claimed to be
engaged in the business of imparting computer education and training to clients
in over thirty countries.
2.2 The assessee claimed to be a leading
service provider in information technology training in India and the only
Indian information technology service company outside Europe and U.S. in the 20
global I.T. training institutes.
2.3 It offers complete range of learning
solution, including learning strategy, formulation, custom content development,
technology, and out sourced services amongst the top ten fortune 500 companies.
2.4 The assessee company is ranked no. 16
among global 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 Rs. 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 Rs.
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 Rs.
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 appeal before the
Tribunal against the assessment order dated 1-6-2006 was pending, the ld. CIT
(Central)-III, New Delhi initiated revisionary proceedings u/s 263 by issuing
show cause notice dated 23-7-2007. The assessee filed its reply dated
9-10-2007, in which primarily the assessee contended that the assessment order
was passed by AO after minutely scrutinizing and discussing the detailed and
voluminous written submissions along with necessary evidence filed before him.
2.9 The assessee filed its reply on all
the issues raised in the show cause notice. Thereafter, ld. CIT (Central)-II,
New Delhi again issued a show cause notice dated 15-10-2007 in continuation to
the issues raised in the show cause letter dated 23-7-2007. The assessee vide
its letter dated 10-1-2008 filed its reply in which the assessee primarily
raised following issues:
(i)
The assessments were completed by the assessing officer after due application
of mind, taking into account the voluminous record and evidences filed by the
assessee in that behalf.
(ii)
The assessee believed that the assessments were completed under the monitoring
of the CIT, exercising jurisdiction over the assessing officer.
(iii)
The assessee pointed out that it was further believed that regular reports were
also sent to CBDT through proper channel from time to time on the progress of
the assessments and the decisions/actions proposed to be taken. Thus, the
assessments were completed under the monitoring of CIT/CBDT.
(iv)
It is not open to the successor CIT to seek to revise an assessment completed
under the direction and the monitoring of the predecessor CIT.
(v)
Shri A.L. Mehta was employed with the company as Dy. General Manager up to
December 2001. He resigned from service and at the time of resignation his
certain demands were not accepted. Accordingly, he was disgruntled employee and
started making frivolous allegations against the company to various government
organizations, including Income-tax Department, FERA authorities etc.
(vi)
The Income-tax Department (Inv.), for the first time in 2002, issued show cause
notices u/s 131 of the Act to the assessee, asking information on several
issues. Voluminous and detailed records running over thousand pages were
submitted to the Investigation Department in 2002. Nothing was heard thereafter
from the department for two years.
(vii)
The assessee 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 Rs. 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 contention of the assessee was
that it reliably believed that it was on account of pressure and influence
exerted by A.L. Mehta on Member (Investigation), CBDT that the department had
initiated action u/s 263 of the Act.
(xi)
In sum and substance the assessee's contention was that it was not satisfaction
of CIT but the pressure from higher authorities who directed the CIT to take
remedial action u/s 263 of the Act. The assessee relied on various decisions
wherein it has been held that where authority which is expected to exercise
jurisdiction, abdicated the same to other authority, such action cannot be
legally sustained.
2.10 Ld. CIT(Central)-II, New Delhi vide order
dated 19-6-2008, after considering the assessee's submissions, directed the
assessing officer to frame the assessment afresh, after affording the assessee
of being heard. Ld. CIT while dealing with the various issues raised by
assessee in its reply dated 10-1-2008 refuted each and every objection raised
by assessee and, inter alia, pointed out as under:
(i)
As regards assessee's contention that assessment order was passed under the
monitoring by CIT, it was pointed out that there was no material to indicate
that directions were issued by the then CIT(Central)-III, New Delhi to the
assessing officer to frame the assessment of NIIT in a particular manner. No
formal or informal monitoring was done by the CIT/CBDT. No seized material or
the assessment records were requisitioned by the then CIT/CBDT. There was no
evidence of any monitoring/directions issued by the higher authorities.
(ii)
As regards forwarding of the report to the CBDT of the framing of the
assessment order, the ld. CIT pointed out that in important search &
seizure cases sending of reports to the CBDT is a normal practice. These
reports are in the nature of status report that give the progress of
investigations/assessments made by the assessing officer. By sending these
reports assessing officer does not seek any direction from either the CIT or
the CBDT. Thus, the assessee's contention that the assessment was framed on the
basis of monitoring and directions of the then CIT was unsustainable.
(iii)
Ld. CIT further pointed out that assessing officer had made independent
inquiries during assessment and framed the assessment order. However, on
examination of records by CIT it was found that there were 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 Driveshafts
(India) Ltd. v. CIT[2003] 259 ITR 19/[2002]
125 Taxman 963 (in
context of section 148 of the Act). The assessee had reserved the right to make
submission on merits once ld. CIT had passed interim order disposing of the
legal objections raised. However, ld. CIT, after a lapse of more than 5 months
dismissed the legal objections raised and also disposed of the matter on
merits. Thus, it was submitted that there was complete violation of principles
of natural justice.
(ii)
Assessment completed under the monitoring of CIT, could not be revised u/s 263.
In regard to this ground, the assessee inter
alia, submitted that the ld. CIT was duty bound to bring on record the
correspondence exchanged between various officers of the department to
refute/rebut the objections raised by the assessee that the assessment u/s 153A
was completed under the monitoring of the then CIT.
(iii)
The revision at the direction/dictates of superior authorities : In this regard
the assessee, inter alia, submitted that on account of undue pressure and
influence exerted by Shri A.L. Mehta, the superior authorities within the
Income-tax hierarchy directed the ld. CIT to reopen the concluded assessment by
initiating action u/s 263 of the Act.
(iv)
The assessment order passed after application of mind could not be regarded as
erroneous and prejudicial to the interests of revenue.
(v)
View taken by the assessing officer was one of the possible view in law.
(vi)
No prima facie finding reached by the ld. CIT that
assessment was erroneous and prejudicial to the interest of revenue before
exercising of the revisional jurisdiction u/s 263 of the Act.
2.12 The assessee had, inter alia, prayed that Hon'ble
High Court may be pleased to call for the complete record of the department
including confidential folder to verify for itself the averments made by
assessee in the writ petition.
2.13 The assessee also filed detailed
submissions which are contained at page 104 to 146 of the paper book Vol. I.
2.14 The Hon'ble High Court vide orders
dated 18-8-2008 and 15-7-2009 had directed the Department to produce the
records as were desired by the assessee before the Hon'ble High Court.
Department produced the records, which were examined by assessee's counsel in
the presence of Sr. Standing Counsel and assessee had taken detailed notes with
the assistance of stenographer.
2.15 Hon'ble High Court vide its judgment
dated 11-12-2009 allowed the writ petition, setting aside the order 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.
3.1 The assessee filed SLP before the
Hon'ble Supreme Court and assailed the order of Hon'ble High Court on the
ground that the Hon'ble High Court erred in law in not quashing the order
passed by the CIT u/s 263 and also in not deciding the objections raised by the
assessee that the revision u/s 263 had been initiated on the dictates of the
superior authorities and the original assessment had been completed under the
monitoring of the CIT or the CCIT. The assessee had also, inter alia, taken a
ground that in the prevailing atmosphere generated by the informant Mehta by
reasons of his minatory letters and conduct, it was virtually impossible for the
CIT to exercise independent judgment and unfettered discretion in discharge of
its statutory functions u/s 263 of the Act.
3.2 The Hon'ble Supreme Court had issued
notice on this petition on 12-3-2010. On 22-3-2010 the SLP was heard and after
hearing counsel, the Hon'ble Supreme Court made the following order:
"SLP(C)
Nos. 8488-8493/2010:
By consent,
these SLPs are 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."
3.3 Thereafter, a SLP was again taken up
for hearing on 12-4-2010 and upon hearing the counsel, Hon'ble Supreme Court
made the following order:
"Mr.
Ajay Vohra, learned counsel, submits that recently an order(s) has been passed
by the Commissioner under Section 263 of the Income Tax Act, 1961 remanding the
matter(s) to the Assessing officer on all points, including the issue involved
in these matters. He, accordingly, prays for withdrawal of these Special Leave
Petitions. Permission granted. Special Leave Petitions are dismissed as
withdrawn. It may be noted that we are expressing no opinion on the merits of
the case(s)."
3.4 Thus, finally, the assessee withdrew
its SLP and, therefore, 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
categorically denied inspection of the following records:
(i)
assessment folders containing office notes to the orders;
(ii)
correspondence with CBDT in respect of proceedings u/s 263 and correspondence
with Shri A.L. Mehta.
(iii)
Inter-departmental correspondence in respect of both assessment proceedings and
proceedings u/s 263 of the Act.
5. The assessee pointed out that pursuant
to the directions of the Hon'ble High Court, the department made available for
inspection to the assessee 12 files maintained in the office of the CIT
relating to the proceedings u/s 263 of the Act. The assessee was, however, not
allowed to take copies thereof. The assessee further pointed out that the files
mentioned were also not complete and the following documents/files were not
produced in spite of the direction of the Hon'ble High Court:
(i)
assessment folders containing office notes to the orders;
(ii)
correspondence with CBDT in respect of proceedings u/s 263 and correspondence
with Shri A.L. Mehta.
(iii)
Inter-department correspondence in respect of both assessment proceedings and
proceedings u/s 263 of the Act.
5.1 The assessee pointed out that its
challenge to 263 proceedings before CIT and in the writ petition was on the
ground that the assessment u/s 153A/143(3) was completed under the
monitoring/supervision of the CIT. CBDT. The second objection was that the
initiation of proceedings u/s 263 was on the dictates/at the behest of the
CCIT/CBDT and for both the reasons, the order passed u/s 263 was without
jurisdiction. The assessee pointed out that these objections are to be disposed
of and for deciding the issue, the assessee would require inspection of the
assessment records as well as record relating to proceedings u/s 263 of the
Act, including confidential folders. In the absence of relevant records being
made available for inspection, the assessee would be handicapped in
substantiating the aforesaid legal objections. Accordingly, it was prayed that
inspection of records be allowed to assessee.
5.2 The assessee further submitted 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 on
19-6-2008.
5.3 The assessee relied on the decision of
Hon'ble Supreme Court in the case of GKN
Driveshafts (India) Ltd. (supra),
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 Janki Exports International v. Union
of India[2005] 278 ITR 296/145
Taxman 82, 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 Vodafone International Holdings
B.V. v. Union of India[2009] 179 Taxman 129,
wherein, in the context of sec. 201 of the Act, the apex Court directed the
department to dispose of the preliminary objection raised by the assessee
regarding assumption of jurisdiction before proceedings on merits of the case.
5.6 Thereafter, assessee -
(a)
|
vide letter dated 16-12-2008 gave a reminder for
copies of assessment orders along with office note thereon and inspection of
assessment files;
|
|
(b)
|
vide letter dated 7-6-2007, copies of assessment
orders passed u/s 153A/143(3) for A.Y. 1999-2000 to 2005-06;
|
|
(c)
|
vide letter dated 23-2-2009 inspection of -
|
(i)
|
records for exercising revisional jurisdiction u/s
263;
|
|
(ii)
|
All interdepartmental correspondences (including
with CBDT) in respect of the assessment proceedings u/s 153A;
|
|
(iii)
|
All interdepartmental correspondences (including
with CBDT) in respect of the proceedings u/s 263;
|
|
(iv)
|
All correspondences between Mr. A.L. Mehta and the
Department (including with CBDT).
|
(d)
|
vide letter dated 23-2-2009, inspection of record
in regard to proceedings u/s 153A and 263 for AY 1999-2000 to 2005-06;
|
|
(e)
|
vide letter dated 12-3-2009, inspection of record
in regard to proceedings u/s 153A and 263 for AY 1999-2000 to 2005-06;
|
5.7 Vide letter dated 12-3-2009, addressed
to AO, the assessee pointed out various discrepancies as were noticed on
inspection of files and also pointed out that no inspection was allowed in
respect of various interdepartmental correspondences, both, in respect of
assessment proceedings as well as proceedings u/s 263 of the Act and also
various correspondences between Shri A.L. Mehta and the department. This letter
is contained at pages 212 to 214 of the PB.
5.8 Ld. CIT vide its order dated 11-3-2010
replied the assessee's letter dated 10-3-2010 and gave a point wise reply to
the assessee's objection.
5.9 Thereafter, assessee again filed its
reply to CIT vide letter dated 15-3-2010. In this reply, the assessee
reiterated its submissions, as regards inspection of records, and pointed out
that the results of limited inspection were tabulated by the assessee and
submitted to the Hon'ble High Court, which had been annexed along with
assessee's letter dated 10-3-2010 which clearly vindicated the objections
raised by the assessee.
5.10 The assessee also distinguished the
decision of Hon'ble Calcutta High Court in the case of Sri Sri Kubereswar Mahadeva Thakur v. CIT[1992] 196 ITR 649/[1993]
66 Taxman 154 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-Ã -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 reiterated the
submissions as regards the passing of the assessment order u/s 153A/143(3)
under the monitoring/supervision of CIT/CCIT and in support of this contention
relied on various letters.
6.2 The assessee in its detailed reply in
regard to the submission that proceedings initiated on dictate of CCIT/CBDT
were bad in law relied on various decisions in which this proposition has been
considered.
6.3 The assessee also filed its reply on
merits.
7. Ld. CIT, after considering the
detailed submissions of the assessee passed its order u/s 263 on 1-4-2010.
8. Following are the salient findings of
ld. CIT on the issue of jurisdiction, assailed vide ground nos. 1 to 5 before
us.
8.1 As regards the assessee's plea that
the assessment u/s 153A was completed under the monitoring of the CIT/CCIT/CBDT
and such order could not be regarded as erroneous much less prejudicial to the
interest of revenue, ld. CIT referred to the finding of Hon'ble High Court
while disposing of the writ petition of the assessee in writ petition no.
4722/2008 dated 11-12-2009 (supra), which are reproduced hereunder:
"The
learned ASG, as noted above, has conceded that an opportunity shall be granted
to the petitioner for making its submission on the merits of the case by the
Commissioner and thereafter fresh order would be passed. For this reason also,
once we proceed to set aside the impugned order, the effect would be that the
concerned Commissioner will have to go into this issue afresh for considering
the submission of the petitioner, which would necessarily involve application
of his independent mind. This, coupled with the fact that the Commissioner who
passed the order is no more the concerned officer, i.e. the respondent No. 4 the matter will
have to go to another office discharging the duties in the capacity of
respondent No. 4. In these circumstances, the very basis of the submission that
the impugned order was passed on the dictated lines of CBDT vanishes. As the
same time, we make it clear that the present Commissioner/Respondent No. 4,
while exercising his power under section 263 of the Act, shall look into the
matter with independent mind without being influenced by the observations made
in the impugned order. "(emphasis supplied by us).
. . . . . .
.
"Since
the matter has to be considered afresh by the Commissioner, even this
contention can be raised 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
matter with independent mind without being influenced by the observations made
in the impugned order. We make it clear that in Para 24 where it is stated that
the issue of limitation would not be raised by the petitioners, the same is in
the context of passing of the orders under Section 263 of the Act as well.
"
8.2 As regards the issue regarding
inspection of record to be provided to assessee, ld. CIT pointed out that as
per the directions of the Hon'ble High Court, during the course of writ
petition filed by the assessee's counsel Shri Ajay Vohra and Ms. Kavita Jha,
along with other representative of the assessee and were duly shown the records
and contents thereof were also duly noted by representatives with the help of
stenographer under the supervision of Sr. Standing Counsel Mrs. Rashmi Chopra
on 11-8-2009, in between the hearing before the Hon'ble High Court and again on
17-8-2009 and 19-8-2009 records were also shown/made available to assessee's
counsel during the course of hearing of writ petitions before the Hon'ble Delhi
High Court. Thus, the inspection of records, as directed by the Hon'ble High
court was duly complied with and this fact was taken cognizance by the Hon'ble
Delhi High Court. It is only thereafter that the matter was proceeded for final
hearing. Thus, ld. CIT held that the issue of inspection of records stood
settled.
8.3 As regards the assessee's plea that
the original assessment order was passed by the assessing officer under the
monitoring or the supervision of the then CIT/CBDT and, therefore, the present
CIT could not withdraw such assessment as erroneous and prejudicial to the
interests of revenue, ld. CIT observed that examination of assessment record of
the assessee clearly shows that there was neither any directions nor any
approval of the CIT for passing the assessment order. He pointed out that
sending of routine correspondence and report by the assessing officer to senior
authorities does not in any way means that the assessment has been completed by
him on the directions of the superior authorities. He pointed out that nowhere,
during the assessment proceedings, any approval has been sought by the
assessing officer from the CIT nor the CIT issued any directions to the
assessing officer, stating that the assessment order must be passed by making
any particular addition or disallowance.
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 para 8.1 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 out that the Hon'ble Delhi High Court
has held that the CIT while exercising the powers u/s 263 of the Act, shall
look into the matter afresh with independent mind.
9.1 Ld. CIT pointed out that the new
issues, which had been taken in show cause notice, had been raised after
examination of the assessment record with independent mind.
9.2 Ld. CIT pointed out that show cause
notice had been issued as per the provisions of the IT Act/direction of the
Hon'ble High Court and other judicial pronouncements on the issue.
9.3 Ld. CIT referred to the decision of
Hon'ble Calcutta High Court in the case of Sri
Sri Kubereswar Mahadeva Thakur (supra),
wherein it has been held as under:
"All
issues of fact and law can be considered de novo - When an order is set aside
with a direction to pass a fresh order in accordance with law, the concerned
authority can entertain all issues of fact and law in the course of the
proceedings in which the fresh order would be made, unless there are directions
to decide specific issues only."
9.4 As regards the allegation that the
issues raised in the show cause notice had been subjected to detailed scrutiny
during the course of assessment u/s 153A/143(3), ld. CIT pointed out that reply
on the merits can be submitted which will be considered while passing the
order.
9.5 Ld. CIT further pointed out that the
proceedings u/s 263 cannot be compared with the proceedings u/s 147/158BD and
201 and pointed out that in those proceedings only notice is issued to the
assessee wherein no reasons, what-so-ever, are given for initiation of the same
and, therefore, the reason had to be supplied to assessee so that he can file
objections. However, in the proceedings u/s 263, the show cause notice itself
contains all the preliminary issues, which are not conclusive and the assessee
is at liberty to rebut the same with submissions and supporting evidence.
9.6 Thereafter, ld. CIT has passed order
on other issues also which we shall discuss later.
9.7 Against this order passed u/s 263, the
assessee preferred appeal before us on 4-5-2010 and has assailed the order on
following grounds of appeal:
"1.
That on the facts and circumstances of the case and in law, the order passed by
the Commissioner of Income-tax (CIT), under section 263 of the Income-tax Act,
1961 ('the Act') setting aside the assessment 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 passed under section 263 of the
Act, the Hon'ble High Court, vide order dated 11.12.2009, had dismissed the
aforesaid ground raised by the appellant in the writ petition.
5. That on
the facts and circumstances of the case and in law, the CIT erred in exercising
jurisdiction under section 263 of the Act without appreciating that the
original assessment order under section 143(3)/153A of the Act having been
passed under the monitoring of the Commissioner/Chief Commissioner, such an
assessment was not amenable to revision under section 263 of the Act.
6. That on
the facts and circumstances of the case and in law, the CIT erred in exercising
jurisdiction under section 263 of the Act and setting aside issues which had
been discussed and scrutinized by the assessing officer in detail while framing
the assessment under section 143(3)/153A of the Act.
7. 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 various claims, which
were duly supported by judicial precedents and, therefore, could at best be
said to be debatable ousting jurisdiction under the said section.
8. That on
the facts and circumstances of the case and in law, the CIT erred in exercising
jurisdiction under section 263 in respect of issues which were beyond the
jurisdiction of the assessing officer while framing the original assessment
under section 143(3)/153A of the Act.
9. That on
the facts and circumstances of the case and in law, the CIT erred in setting
aside the various issues without recording any prima facie finding on the
merits of the issues.
10. That on
the facts and circumstances of the case and in law, the CIT exceeded his
jurisdiction in setting aside the assessment order in respect of issues raised
in the notice, dated 05.02.2010, issued under section 263 of the Act, in
contravention of the Hon'ble High Court's order dated 11.12.2009.
11. That on
the facts and circumstances of the case and in law, the CIT erred in setting
aside the claim for exemption under section 10B as erroneous and prejudicial to
the interest of the Revenue on the ground that the same was not examined by the
assessing officer while passing the order under section 143(3)/153A of the Act.
11.1 That
on the facts and circumstances of the case and in law, the CIT erred in holding
that the individual 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
Rs. 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 present assessment year as well as assessment
year 2001-02.
That on the
facts and circumstances of the case and in law, the CIT erred in holding that
the assessing officer while allowing netting off of interesj-ir rcorrre-sad For IT expense in the order passed
under section 143(3)1153A of the Act, having failed to examine nexus between
interest income and expense, the order of the assessing officer was erroneous
and prejudicial to the interest of the Revenue.
12.1 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 under section
143(3)1153A of the Act and, the CIT could not have exercised jurisdiction in
respect thereto.
13. That on
the facts and circumstances of the case and in law, the CIT erred in alleging
that interest free advanceslloans/investments having been made by the appellant
for non-business purpose out of interest bearing funds and the assessing
officer having failed to examine the aforesaid issue, the assessment order in
this regard was erroneous and prejudicial to the interest of the Revenue.
13.1 That
in holding as aforesaid, the CIT failed to appreciate that the appellant having
mixed pool of funds, interest free advances/loans/investments had rightly been
presumed by the assessing officer to have come out from interest free funds
available with the appellant, while not making any disallowance of interest in
the original assessment.
13.2 That
the CIT failed to appreciate that since the appellant maintained common pool of
funds and since the profits of the business exceeded the interest free advances/investments,
the assessing officer had rightly not made any disallowance of interest in the
original assessment.
13.3 That
in holding as aforesaid, the CIT failed to appreciate that in the absence of
one-to-one nexus between the funds borrowed for purpose of business and those
diverted interest free, the assessing officer had rightly not made any
disallowance of interest in the original assessment.
14. That on
the facts and circumstances of the case and in law, the CIT erred in holding
that repair expenses of Rs. 10.15 crores were claimed by the appellant and
allowed by the assessing officer without any verification or enquiry.
14.1 That
on the facts and circumstances 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 jurisdiction under section 263 of the Act.
16. That on
the facts and circumstances of the case and in law, the CIT erred in setting
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 assessing
officer.
16.1 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 jurisdiction under section 263 of the Act.
17. That on
the facts and circumstances of the case and in law, the CIT erred in holding
that the assessing officer failed to verify whether any expenses were incurred
for earning exempt income which were required to be disallowed under ~A of the
Act and, therefore, the order of the assessing officer was erroneous and
prejudicial to the interest of the Revenue.
17.1 That
on the facts and circumstances of the case and in law, the CIT failed to
appreciate that in terms of proviso to section 14A, the assessing officer being
precluded from making any disallowance in this regard, the CIT could not have
exercised jurisdiction under section 263 of the Act in respect of such issue.
18. That on
the facts and circumstances of the case and in law, the CIT erred in alleging
that since the appellant had paid technical services fee to various
non-residents without deduction of tax at source 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.
18.1 That
in holding as aforesaid, the CIT failed to appreciate that the aforesaid issue,
including the issue of deduction of tax at source, having been duly considered
and scrutinized by the assessing officer in the original assessment, the
assessment order could not be termed as erroneous and prejudicial to the
interest of the Revenue.
18.2
Without prejudice, the CIT failed to appreciate that since under the alleged
AMC contracts, the appellant had only received upgrades to sof received any
technical service from the non-resident, the consideration paid was not subject
to tax withholding under section 195 of the Act.
19. That on
the facts and circumstances of the case and in law, the CIT erred in alleging
that since import of 'Net Varsity' from NUT USA was fictitious, the order of
the assessing officer allowing depreciation on the value of Net Varsity, 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 'Net Varsity' 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 under section
143(3)/153A of the Act and, the CIT could not have exercised jurisdiction in
respect thereto.
20. That on
the facts and circumstances of the case and in law, the CIT erred in alleging
that since the appellant had imported obsolete CBTs from NETg (UK) in order to
remit payments in the nature of 'royalty' to NETg and the assessing having
failed to examine the said issue, the assessment order in this regard was
erroneous and prejudicial to the interest of the Revenue.
20.1 That
on the facts and circumstances of the case and in law, CIT failed to appreciate
that the aforesaid issue having duly examined in detail by the assessing
officer in the original assessment, the same was, therefore, not amenable to
revisionary jurisdiction under section 263 of the Act.
20.2 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 aforesaid
issue without appreciating that the CIT CA) for assessment year 2002-03 had
allowed the said issue in favour of the appellant.
21. That on
the facts and circumstances of the case and in law, the CIT erred in alleging
that the assessing officer having allowed deduction under section 35D of the
Act in respect of public issue expenses without verification and enquiry, the
assessment order in this regard was erroneous and prejudicial to the interest of
the Revenue.
22. That on
the facts and circumstances of the case and in law, the CIT erred in setting
aside the issue of loan transactions between the appellant and various banks
and other parties alleging that the said issue was not examined by the assessing
officer.
23. That on
the facts and circumstances of the case and in law, the CIT erred in holding
that credit for taxes paid/deducted abroad was claimed by the appellant and
allowed by the assessing officer without verification and enquiry and, therefore,
the order of the assessing officer in this regard was erroneous and prejudicial
to the interest of the Revenue.
23.1 That
on the facts and circumstances of the case and in law, the CIT failed to
appreciate that all certificates in respect of foreign taxes paid/deducted were
duly furnished before the assessing officer and the assessing Officer satisfied
allowed credit for such taxes while processing the return of income under
section 143(1) of the Act."
10. The 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. DR
is directed to produce all records pertaining to assessment completed u/s
153A/143(3) of the Act for assessment year 99-00 to 05-06 and record pertaining
to initiation and completion proceeding u/s 263 of the Act for the said
assessment years. Hearing adj. to 19/07/10 at the request of the Ld. DR. Both
parties are informed in the open court.
(A/W ITA
no. 2058 to 2063/10).
Sd/-
|
Sd/-
|
(A.K.
Garodia)
|
(C.L.
Sethi)
|
AM
|
JM
|
10.3 The Revenue filed writ petition being
WP no. 4684 of 2010 against the aforementioned two orders passed by the
Tribunal i.e. one staying the assessment proceedings
before the assessing officer; and the other directing the revenue to produce
all the records pertaining to the assessments completed u/s 153A/143(3) and the
record pertaining to the initiation and completion of the proceedings u/s 263
for all the assessment years.
10.4 Vide interim order dated 16-7-2010,
passed by the Hon'ble High Court, the order passed by the Tribunal on 6-7-2010
and all other proceedings pending before the Tribunal, forming subject matter
of ITA nos. 2057 to 2063/Del/2010 for A.Ys. 1999-2000 to 2005-06, were stayed,
which was made absolute on 27-4-2011.
10.5 The writ petition was primarily filed
before the Hon'ble High Court on following grounds:—
(a)
It was not open to the assessee to question the order passed by the CIT on
1-4-2010 on the ground that he had not validly assumed jurisdiction to revise
the assessment orders, particularly when it was not open to the assessee to
take up the contention that the CIT did not independently applied his mind
before taking action u/s 263 and had acted on dictates or instructions of his
superiors i.e. CBDT.
(b)
The stay granted by the Tribunal in the assessment proceedings was barred by
the principle of res-judicta.
It was contended that the challenge to the jurisdiction of the Commissioner, to
revise the assessment orders, was already adjudicated upon by the Hon'ble High
Court in WP(C) no. 4772/2007 dated 11-12-2009 and, thereafter, the assessee
itself had submitted before the Hon'ble Supreme Court that all issues were
remitted back to the assessing officer by the CIT and, therefore, the SLP may
be dismissed as withdrawn.
(c)
The assessee agreed before the Hon'ble High Court that the CIT may look into
the assessment orders on merits, which implied that there was no objection 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 change in the incumbent of the office of the
Commissioner, the very basis of assessee's submissions that the order was
passed by the Commissioner on the dictates of the CBDT vanished.
11. In rebuttal, the assessee's contention
was that operative part of the order of Hon'ble High Court clearly showed that
the assessee was granted liberty to raise all points before the Commissioner
which were canvassed before the Hon'ble High Court and also further points
which the assessee intended to urge at the time of fresh hearing. The assessee
raised strong reliance on the observations of Hon'ble High Court that it had
not authoritatively pronounced all the contentions raised by the assessee
either way and the Commissioner had to deal with such contentions objectively
without being influenced by any observations in the judgment.
11.1 Ld. Counsel for the assessee had
further argued that, in any event, the question of assuming jurisdiction by any
statutory authority and its validity can be set up by the aggrieved party at
any point or at any stage of the proceedings and can even be taken during
collateral proceedings. In support of this contention assessee had relied on
the decision of Hon'ble Gujarat High Court in the case of P.V. Doshi v. CIT[1978] 113 ITR 22.
12. Hon'ble High Court after detailed
discussion of this decision, inter
alia, observed that according to the Hon'ble Gujarat High Court, neither
the question of res-judicata nor the rule of estoppel could be
invoked where the jurisdiction of authority was under challenge. The Hon'ble
High Court further noted that Hon'ble Gujarat High Court held that since
neither consent nor waiver can confer jurisdiction upon the AO where it did not
exist, no importance could be attached to the fact that the assessee, in the
first round of proceedings, expressly gave up the plea against the erroneous
assumption of jurisdiction by the assessing authority. Hon'ble Gujarat High Court
held that:
"finality
or conclusiveness could only arise in respect of orders which are competent
orders with jurisdiction and if the proceedings of reassessment are not validly
initiated at all, the order would be a void order as per the settled legal position
which could never have any finality or conclusiveness. If the original order is
without jurisdiction, it would be only a nullity confirmed in further
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 was yet to be passed.
Neither the petitioner, nor the respondent in the writ proceedings nor even this
Court could have delved into the mind of the CIT and attempt to anticipate the
grounds on which he would rest his order. That apart, there is ample authority
for the proposition, as we have earlier referred to, that neither consent or
waiver can confer jurisdiction upon the authority. Moreover, the rule of
estoppel and the principle of res
judicata have been held to be
inapplicable where the question involved is the competence or the jurisdiction
of an authority or Court over the subject matter. The observations of this
Court can, therefore, only be understood in the context of the order of the CIT
that was before it. It cannot 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. In any event, even if the plea of the
petitioner to the effect that the objection to the jurisdiction of the CIT to
initiate proceedings under Section 263 vanished after the order of this Court,
either by consent or waiver is accepted, since these acts on the part of the
assessee have been held insufficient in law to clothe the CIT with jurisdiction
to pass orders under Section 263, the assessee cannot be estopped from putting
forth that plea before the CIT in the fresh round of proceedings. The assessee
cannot also be prevented from taking up the plea in the appeals filed before the
Tribunal against the orders passed by the CIT on 01.04.2010. Consequently, the
Tribunal cannot be faulted for directing, by its order dated 06.07.2010, the
Revenue to produce the assessment records and the records relating to the
proceedings under Section 263 for the relevant W.P. (C) 4684/2010 Page 16 of 17
assessment years. Unless these records are made available to the Tribunal, it
will not be able to take a view on the assessee's challenge that the CIT did
not exercise his independent mind while initiating proceedings under Section
263.
12.2 The writ filed by the revenue was
dismissed and all the interim orders passed were vacated and Tribunal was
directed to proceed with the hearing of appeals.
13. From the aforementioned discussion, it
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 ground is dismissed.
16. Ground no. 3 is with regard to
inspection of records. We have noted earlier the observations of ld. CIT on
this aspect in para 5 of his order. Ld. CIT observed that as per the directions
of Hon'ble High Court fresh notice was issued and the proceedings u/s 263 were
initiated for giving assessee an opportunity to respond. The fresh order u/s
263 was being passed after considering all the submissions of the assessee. He,
therefore, held that in such circumstances, the relevance of showing old files
containing interdepartmental correspondence, had no relevance.
17. Ld. counsel's submission is that the
order has been passed on the dictates of higher authorities and also under the
monitoring of CIT/CCIT. In this regard the assessee vide letter dated
16-4-2008, 23-2-2009 and 12-3- 2009 requested the AO/CIT for inspection of
assessment records and records relating to proceedings u/s 263 of the Act, more
particularly the 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.
17.1 Ld. counsel submitted that unless the
interdepartmental correspondences (including with CBDT), in respect of
assessment proceedings u/s 153A/143(3) are disclosed to the assessee, he cannot
advance his arguments regarding the monitoring of the assessment by CIT/CCIT.
The submission is that, without examination of all interdepartmental
correspondence, it cannot be decided, whether the assessment was completed
under the monitoring and supervision of higher authorities.
17.2 The submission of ld. Counsel is that
in the following letters it is clearly mentioned that the assessment was
completed under the supervision/guidance of CIT/Additional CIT
S.N.
|
Date
of Letter
|
Vol.
No.
|
Page
No.
|
Contents
|
Remarks
|
1.
|
Undated
|
8
|
1-2
|
Assessment framed under supervision/guidance of
CIT/Addl. CIT
|
|
2.
|
25-6-2007
|
1
|
18
|
AL Mehta's letter to Prime Minister - for revision
of orders
|
The said letter states that the assessment was
made at the behest of 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
|
16-5-2006
|
9
|
58-59
|
Letter from CIT to Addl. CIT regarding points to
be kept in mind while conducting investigation.
|
Shows that assessment being monitored/supervised
by CIT. The AO is further advised by the CIT that in case of variance with
the stand taken in the appraisal report, the AO should properly record the
same in the office note for future reference.
|
Reference to office notes - not shown
|
|||||
2
|
25-6-2007
|
7
|
123-146
|
Report of Addl. CIT to CIT
|
The Addl CIT who was not involved with the
original assessment after independent analysis of the appraisal report, the
assessment records, the allegations of AL Mehta intimates tha tall the points
raised by AL Mehta has been duly considered in the course of assessment and
additions made wherever required. According to the Addl CIT, no action was
required to be initiated u/s 263.Whre addition/disallowance has not been made
in the assessment qua any item mentioned in the appraisal report filed, the
report of the Addl. CIT refers to the page(s) of the office note to the
assessment order giving reasons why such addition/disallowance was not made.
|
3
|
6-9-2007
|
1
|
44-46
|
CIT to CCIT
|
The CIT records that the various issues forming
part of the appraisal report and finding mentioned in the repeated complaints
by Shri AL Mehta were duly examined in the course of the assessment. In case
no addition was made in the assessment qua such issues, reasons have been
duly recorded in the form of office notes.
|
17.4 Ld. Counsel for the assessee referred
to page 35 of PB dated 9-1-2013 wherein the extract of order-sheet dated
9-10-2012 is contained, which is reproduced hereunder:
"9/10/12
Spl. Counsel Mr. G.C. Srivastava agreed to allow inspection of the entire
record to the assessee in the dept. premises. Both parties to compile
convenience compilation of the record. Both parties state that an application
will be made before Hon'ble Delhi High Court for extention of time beyond 3rd
Nov 2012. Adj. to 16th October. Both parties to inform whether Hon'ble High
Court has extended the time limitation or not."
17.5 Ld. Counsel further submitted that in
furtherance 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;
- With
respect to the inspection of the records relating to assessment, certain pages
of the original assessment order, which has to be retained on record, were also
not found in the files shown for inspection. This, it appears, was primarily
done to deny inspection of the office notes available in the files;
With
respect to inspection of files relating to proceedings under section 263 of the
Act, order sheets of the files leading to initiation of proceedings under that
section were not complete and certain pages were found to be missing."
"(a)
interdepartmental correspondences (including with CBDT) in respect of the
assessment proceedings under section 153A/143(3) of the Act;
(b)
inter-departmental correspondences (including with CBDT) in respect of the
proceedings under section 263 of the Act;
(c)
copies of the office notes to the assessment order;"
17.7 Thus, the direction of the Tribunal to
place the entire records was not complied with. Accordingly, the assessee
prayed as under:
''In view
of the aforesaid, it is respectfully submitted that the Department may kindly
be specifically directed to allow the applicant inspection of the entire
records relating to assessment and proceedings under section 263 of the Act,
and more particularly the following:
(a)
inter-departmental correspondences (including with CBDT) in respect of the
assessment proceedings under section 153A/143(3) of the Act;
(b)
inter-departmental correspondences (including the CBDT) in respect of the
proceedings under section 263 of the Act;
(c)
copies of the office notes to the assessment order;
(d)
copies of documents relating to monitoring of the assessment by Higher
Authorities referred to in Annexure A to this application, prepared on the
basis of limited inspection of ten files allowed to the applicant before the
Delhi High Court in the presence of the Standing Counsel for the Revenue;
(e)
copies of documents relating to initiation/completion of revisionary
proceedings under section 263 of the Act referred to in Annexure B to this
application, prepared on the basis of limited inspection of ten files allowed
to the applicant before the Delhi High Court in the presence of the Standing
Counsel for the Revenue;"
17.8 The assessee had also relied on the
decision of Hon'ble Punjab & Haryana High Court in the case of Hari Iron Trading Co. v. CIT[2003] 263 ITR 437/131
Taxman 535, 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. 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
letter dated 10.10.2005
|
9
|
3
|
6.
|
02-11-2005
|
Questionnaire issued by the assessing officer
|
||
7.
|
08-11-2005
|
Status report forwarded by the assessing officer
to CIT
|
9
|
6
|
8.
|
14.11.2005
|
Reply filed by the assessee in response to queries
raised during the assessment proceedings.
|
||
9.
|
Status report, in turn, forwarded by CIT to CCIT
|
9
|
11
and 12
|
|
10.
|
20-11-2005
|
Another status report forwarded by A.O. to CIT
|
9
|
13
|
11.
|
21.11.2005
|
Reply filed by the assessee in response to queries
raised during the assessment proceedings
|
||
12.
|
29-11-2005
|
Reply filed by the assessee in response to queries
raised during the assessment proceedings
|
||
13.
|
30-11-2005
|
|||
14.
|
05-12-2005
|
Reply filed by the assessee in response to queries
raised during the assessment proceedings
|
||
15.
|
12.12.2005
|
Reply filed by the assessee in response to queries
raised during the assessment proceedings
|
||
16.
|
29.12.2005
|
Another questionnaire issued by the assessing
officer.
|
||
17.
|
09-01-2006
|
Reply filed by the assessee in response to queries
raised during the assessment proceedings
|
||
18.
|
10-01-2006
|
|||
19.
|
17-01-2006
|
Reply filed by the assessee in response to queries
raised during the assessment proceedings
|
||
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
raised during the assessment proceedings
|
||
28.
|
17-03-2006
|
Questionnaire issued by the assessing officer
|
||
29.
|
23.03.2006
|
Letter from CBDT forwarded by CCIT to CIT.
|
9
|
46
|
30.
|
24.03.2006
|
Reply filed by the assessee in response to queries
raised during the assessment proceedings
|
||
31.
|
25.03.2006
|
Letter from A.L. Mehta to Chairman, CBDT directing
that allegations made there be investigated and report with regard to the
action taken to be sent to the Board.
|
||
32.
|
30-3-2006
|
Status report, in turn, forwarded by CIT to CCIT
|
9
|
47-52
|
33.
|
27-4-2006 5-5-2006
|
Letter from CBDT to CCIT enclosing letter date d
25-3- 2006 of Shri A.L. Mehta
|
9
|
60-68
|
34.
|
11.5.2006
|
Reply filed by the assessee in response to queries
raised during the assessment proceedings
|
||
35.
|
Undated
|
Status report dated 15-5-2006 submitted by the
assessing officer to CIT dealing with each allegation raised by Shri A.L.
Mehta
|
11
|
1-68
|
36.
|
16-5-2006
|
Letter by Addl. CIT to CIT forwarding
investigation note prepared by the assessing officer on the allegations made
by Shri A.L. Mehta
|
9
|
55-56
|
37.
|
16-5-2006
|
Letter from CIT to Addl. CIT
|
9
|
58-59
|
38.
|
26-5-2006
|
Status report of assessing officer forwarded by
CCIT to CBDT
|
9
|
69-86
|
39.
|
26.5.2006
|
Letter from CCIT to CBDT
|
7
|
109-122
|
40.
|
01-06-2006
|
Assessment order(s) under section 153A
|
||
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, correspondence and file notings, which are not used and not
meant for communication to the assessee for passing the impugned order, cannot
be regarded as part of the record because it is not that all the papers and
documents lying in any folder of the department constitute record for the
purpose of these proceedings. The department relied on following decisions:
- Shanti Sports Club v. Union
of India [2009] 15 SCC 705.
18.2 As regards the assessee's plea that
office notes, appended to the assessment order constitute 'record' for purposes
of proceedings u/s 263, the revenue's reply in para 10 is as under:
"10.
For the sake of argument, it can be stated that the A.O. might have noted
something in file which was never communicated to the assessee, though the
noting may be based on the facts of the case. The A.O. might have remarked that
for the stated reasons mentioned therein, an addition was not called for.
Later, if the AO found patent error in the un-communicated file noting, he
cannot rectify it by resorting to section 154, as this is not part of the
order. This would be so whether he has made the noting before or after passing
the assessment order, but discovered the error after service of the assessment
order on the assessee. This noting cannot constitute any evidence for the
purpose of appellate proceeding. Application of mind has to be demonstrated in
the language of the assessment order itself and not on the basis of the noting
which are not communicated to the assessee. In State of Karnataka v. Ameerjan,
(2007) : I SCC 273 : (2008) 1 SCC (Cri) 130, the Hon'ble Supreme Court has held
that for the application of mind on the part of the sanctioning authority it is
imperative that the order granting sanction must be demonstrative of the fact
that there had been proper application of mind on the part of the sanctioning
authority."
18.3 The revenue also referred to the
following decisions, mentioned in para 11, for the proposition that application
of mind is to be demonstrated through assessment order and if there is no
application of mind by the AO then the assessment order can be termed as
erroneous and prejudicial to the interests of revenue:
18.4 As regards the assessee's reliance on
the decision in the case of M.D.
Overseas Ltd. v. DGIT[2011] 333 ITR 407/198
Taxman 136/10 taxmann.com 30 (All.), 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 v. 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 valid document that
he was not the owner but only a tenant of the property and hence question of
any unexplained investment did not arise. In respect of other investments, he
could file details of loan etc., taken for the construction. It was certainly a
case where the AO did not display a bona fide intent when he refused to close
the proceedings and rejected the objections in an irrational and illogical manner.
However, in the present case, the order passed u/s 263 is well reasoned order
and based on material facts.
18.6 Ld. Special Counsel Shri G.C.
Srivastava submitted that new CIT has passed the order after going into the
issues afresh and after considering the submissions of the assessee.
18.7 Ld. Spl. Counsel further referred to
the SLP filed before the Hon'ble Supreme Court in which assessee had, inter
alia, taken following grounds:
"6.
Because the Hon'ble High Court erred in law in not quashing the order under
section 263 of the Act having noted from perusal of record that the initiation
of revisional proceedings under section 263 were on the dictates of higher ups
in the department, viz.
CCIT/CBDT, who succumbing to the pressure exerted by informant Mehta had
directed/coerced/pressurized the CIT to initiate action.
7. Because
the Hon'ble High Court failed to appreciate that the proceedings under section
263 of the Act had been initiated and the orders under that section had been
passed by the CIT without reaching any independent satisfaction and as directed
by the superior authorities in the income tax hierarchy, to satisfy the
insidious desire of informant Mehta and his determination to cause harm to the
petitioner."
13. Because
the Hon'ble High Court failed to appreciate that the prevailing atmosphere
generated by informant Mehta by reasons of his minatory letters and conduct, it
was virtually impossible for the CIT to exercise independent judgment and
unfettered discretion in discharge of its statutory functions under section 263
of the Act."
18.8 Ld. Spl. Counsel referred to page 181
wherein the order dated 12-3- 2010 is contained and pointed out that Hon'ble
Supreme Court had issued notice to the CBDT and others.
18.9 On 22-3-2010 when the petitions were
listed the Hon'ble Supreme Court passed the order which has been reproduced
earlier
"SLP(C)
Nos. 8488-8493/2010:
By consent,
these SLPs are 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 para
22 itself, there is no quarrel with the same.
18.12 Ld. Spl. Counsel further referred to
pages 128 and 129 wherein additional submissions of Sr. Counsel Shri
Solisorabji, on behalf of the assessee, are contained and pointed out that they
clearly demonstrate the direction by CBDT/CCIT was only for remedial action and
not for doing assessment in a particular manner.
18.13 Ld. Special Counsel referred to para
21 of the decision of Hon'ble High Court dated 11-12-2009, which has been
reproduced earlier and submitted that the aforementioned observations have
attained finality and in view of the observations of Hon'ble Delhi High Court,
the very basis of the submission that the impugned order was passed on the
dictated lines of CBDT, vanished.
18.14 Ld. Spl counsel Shri G.C. Srivastava
pointed out that the allegation of the assessee with regard to the first order
u/s 263 having been passed on the dictates of the superior authority, which the
assessee made before the Hon'ble High Court after inspection of records, was
taken note of by the Hon'ble Court. The Hon'ble High Court believed so and
observed that all these allegations would not survive if the order, which is
passed in consequence of such purported allegations is quashed/set aside with a
direction that a fresh order would be passed by the new officer. Therefore,
after withdrawal of SLP by assessee, the very basis for this ground of appeal
vanished.
18.15 Ld. Spl. Counsel further pointed out
that the contention of the assessee that those very documents and assertions,
as were made against the first order passed u/s 263, still survive cannot be
accepted as the Hon'ble High Court preferred to direct the new CIT to pass a
fresh order with application of independent mind and dispose of assessee's
objection in this regard.
18.16 Ld. Spl counsel pointed out that
assessee has referred to the affidavit of Shri A.L. Mehta in a defamation suit,
asserting that he got the proceedings u/s 263 initiated. In this regard he
pointed out that the statement was from a party, having personal interest in
the case and the said assertion was not backed by any tangible material and was
made with ulterior motive. He pointed out that though the statement was extracted
in the writ petition, filed by the assessee, the Hon'ble High Court preferred
to completely ignore the same in 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 does
not in any way mean that the assessment has been completed by him on the
directions of senior authorities. Nowhere during the assessment proceedings,
any approval has been sought by the A.O. from the CIT, nor has CIT issued any
directions to the A.O. stating that the assessment order must be passed by
making any particular addition or disallowance. None of the letters written by
the CIT/CBDT indicate that there was any dictate therein for the A.O. Hence,
the important issue in the light of assessee's allegation is that whether the
CIT was empowered by the provisions of law, to give any directions and also was
the A.O. required to take any approval before passing the assessment order. For
passing the assessment order under consideration, there was never any such
provision in the law. "
"As
per the provisions of the Act, the higher authorities are not to interfere with
the independence of unfettered discretion which is statutorily conferred upon
the Assessing officer. Hence. If assessee's allegations are to be accepted,
even then it is clear that the said order passed by the A.O. is contrary to the
provisions of law and accordingly the same itself becomes erroneous and
prejudicial to the interest of the revenue. Hon'ble Supreme Court in the case
of CIT v. Green
Word Corporation(2009) 314 ITR 81 (SC) has inter alia held that in the case
where it is found that the assessment has been passed on the dictates of the
commissioner, being fully without jurisdiction, then such assessment would be
treated as nullity and in the said case Hon'ble Apex Court has itself directed
the incumbent Commissioner to reopen the assessment. However, since, in the case
of assessee, Assessment Order has not been passed by the A.O. after obtaining
any directions/approval from any authority, there is no bar or restriction in
initiating the provisions of section 263."
18.18 Ld. Spl. Counsel referred to the
decision in the case of Southern
Herbals Ltd. v. DIT (Inv.) [1994] 207 ITR 55,
wherein the Hon'ble Karnataka High Court has observed that, "the High
Court may examine the files for the limited purpose, but the person against
whom the search warrant was issued, is not entitled to look into the file. He
also relied on the decision of Patna High Court in the case of Ram Swarup Sahu v. CIT[1992] 196 ITR 841,
wherein it has been held that confidential 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 v. Director of
Enforcement [1985] 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 can be shown to exist against
the new CIT as well, the entire contention deserves to be disregarded."
18.20 Ld. Spl. Counsel pointed out that the
Hon'ble High Court in its order dated 3-8-2012 did not give any direction for
producing the confidential record though specific plea was taken before High
Court to this effect.
19. In rejoinder, the assessee in regard
to its plea regarding assessment order being passed under the
monitoring/supervision of the Commissioner, further relied on the decision of
Hon'ble Calcutta High Court in the case of CIT v. Hastings
Properties[2002] 253 ITR 124/[2001]
119 Taxman 36 and as
regards the revenue's contention regarding application of mind by AO in framing
the assessment, to be demonstrated through the assessment order, assessee
relied on the decision, including the decision of ITAT Delhi Ç' Bench in the
case of CIT v. Usha
International Ltd.[2012] 348 ITR 485/210
Taxman 188/25 taxmann.com 200 wherein
it has been held that the fact that there is no finding qua the assessee in the
body of the assessment passed by the AO the same does not lead to the
conclusion that there was no application of mind or formation of opinion qua
such issue by the AO before completing the assessment.
20. We have considered rival submissions
and perused the relevant material available on record. The assessee wants the
department to prove the negative which is not permissible. In the present case,
we find that all the inter-departmental correspondences required by the
assessee, primarily in the nature of administrative actions being taken by the
department, had been shown to assessee and department is claiming
confidentiality on rest of the documents. Further, we find that as per the
directions of Hon'ble High Court, the assessee was shown the correspondence,
from which assessee has prepared a synopsis, the extracts from which, have been
reproduced in the written submissions filed before the Hon'ble High Court,
contained at pages 104 to 146 of the PB-I ( relevant at pages 136 to 140).
Assessee was allowed inspection of 12 files maintained in the office of CIT in
relation to the proceedings u/s 263 of the Act. The same is reproduced:
S.N.
|
Date
of Letter
|
Vol.
No.
|
Page
No.
|
Contents
|
Remarks
|
1.
|
8-11-2005
|
9
|
6
|
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 by AO to
CIT dealing with each allegation raised by Shri A.L. Mehta
|
The report points out that ach allegation raised
by AL Mehta was confronted to the assessee during the course of assessment.
The report also points out that a total addition of Rs. 31.29 crores is being
made in various companies of the same group.
|
6.
|
16-5-2006
|
9
|
55-56
|
Letter by Addl. CIT to CIT forwarding investigatin
note prepared by AO on the allegations made by Shri A.L. Mehta
|
|
7.
|
16-5-2006
|
9
|
58-59
|
Letter from CIT to Addl. CIT regarding points to
be kept in mind while conducting investigation
|
Shows that assessment being monitored/supervised
by CIT. The AO is further advised by the CIT that in case of variance with
the stand taken in the appraisal report, the AO should properly record the
same in the office note for future reference - Reference to office notes not
shown.
|
8.
|
26.5.2006
|
9
|
69-86
|
Status report of AO forwarded by CCIT to CBDT
|
CCIT records that all the allegations levied by
the informant have been investigated in depth and wherever found correct,
additions are being made. The aforesaid clearly shows supervision/monitoring
of the assessment by CCIT.
|
9.
|
26-5-2006
|
7
|
109-122
|
Letter by CCIT to CBDT
|
The CCIT informs the Board that complete
investigation was undertaken in the course of assessment and additions are
being made, wherever necessary. Yet another instance of
supervision/monitoring of assessment by CCIT
|
10.
|
19-6-2006
|
9
|
106-111
|
Letter from CCIT to CBDT regarding monitoring of
NIIT Group of cases by the Board
|
The CCIT states that various allegations of the
informer, the conclusion drawn on such allegations as well as the various
enquiries and investigations done were dealt at length. This report was sent
by the CCIT to the Board ahead of finalization of assessment order by the AO
which shows close day-to-day monitoring of the assessment by the CBDT
|
The CCIT further stats 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 proper
administration of the Act. No order, instruction or direction can be issued so
as to require any income-tax authority to make a particular assessment or to
dispose of a particular case in a particular manner. Ld. counsel has relied on
the decisions in the cases of J.K.
Synthetics Ltd. v.CBDT[1972] 83 ITR 335 (SC);
and Sirpur Paper Mill Ltd. v. CWT[1970] 77 ITR 6 (SC) to submit that while the AO is seized
of an assessment, it is not open to the superior authorities to seek progress
reports from such officer. Ld. counsel submits that submission of progress
reports by the AO is not in discharge of any administrative functions and would
amount to interference with the exercise of jurisdiction by the AO in discharge
of his quasi judicial function. We are not inclined to accept this plea of ld.
counsel because in the two decisions referred by ld. counsel, it is not so
held. The decisions primarily hold that Board cannot give directions or
instructions to Income-tax authorities in exercise of their quasi judicial
function. But there is nothing in the Act or these two decisions to restrain
CBDT to obtain status report from authorities seized of a case. This is purely
in discharge of administrative function of CBDT. While obtaining status report,
the CBDT can also seek information from AO on the various allegations made in
TEP. No doubt the position would be different if CBDT directs the AO to carry
out investigation in a particular manner but obtaining of information from AO
on specific allegations does not amount to interference with his quasi judicial
powers. In exercise of its administrative and vigilance functions, CBDT issues
various letters to various authorities for proper administration of Income-tax
Act, but that cannot be equated with giving directions to the authorities for
doing assessment in a particular manner. No doubt position will be different
when statutory approval is required to the action by an authority. Submissions
of Ld. counsel is that since CBDT/CCIT were issuing letters to CIT qua
investigation of allegations made by Mr. A.L. Mehta and seeking review report
thereof, therefore, the 263 order as well as assessment order was passed on
dictates of higher authorities. We fail to find out any other manner by which
CBDT could deal with TEP. Only authorities seized of the matter could be
required to furnish the requisite information. Authorities have 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 counsel during the course of hearings of writ petitions before the
Hon'ble Delhi High Court. Inspection of records as directed by the Hon'ble High
Court was complied and this fact was taken cognizance of by Hon'ble Delhi High
Court. It is only thereafter that the matter was proceeded for final hearing.
Thus the issue of inspection of records has already been settled during the
course of writ proceedings before the Hon'ble Delhi High Court as discussed
above.
Further,
Hon'ble High Court directions as contained in para 21 of order reads as under:
"For
this reason alone, once we proceed to set aside the impugned order, the effect
would be that the concerned Commissioner will have to go into this issue afresh
for considering the submissions of the petitioner, which would necessarily
involve application of his independent mind. This coupled with the fact that
the Commissioner who passed the order is no more the concerned officer, i.e., the respondent No. 4, the
matter will have to go to another office discharging the duties in the capacity
of respondent No. 4. In these circumstances, the very basis of the submission
that the impugned order was passed on the dictates lines of CBDT
vanishes."
Accordingly,
as per the directions of the Hon'ble High Court fresh notice was issued and the
proceedings under section 263 have been initiated for giving assessee
opportunity to respond. The fresh order u/s 263 is being passed after
considering all the submissions of the assessee and with an independent mind
without being influenced by the observations made in the earlier order. In
these circumstances. the relevance of showing old files containing
interdepartmental correspondence, has no relevance.'
20.3 In various decisions, relied upon by
revenue, the proposition laid down is that unless any evidence/statement is
used against the assessee in assessment proceedings, the same is not required
to be confronted to the assessee because that does not constitute the relevant
material for the purposes of assessment.
20.4 The order sheet noting recorded by the
Tribunal on 6-7-2010 has to be read subject to the final direction of Hon'ble
High Court in its order dated 3- 8-2012, wherein the Hon'ble High Court has
observed that, "Consequently, the Tribunal cannot be faulted in directing
vide its order dated 6-7-2010 the revenue to produce 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 decisions
relied by ld. Special Counsel, noted supra, conclusively lay down the law that
department is not obliged to produce confidential records. We, therefore, are
of the considered opinion that department fully complied with the directions of
Tribunal regarding production of all records.
20.8 All correspondence referred to by
assessee relates to earlier order passed by ld. CIT. In his order dated
1-4-2010 ld. CIT has pointed out that as per direction of the Hon'ble High
Court, fresh notice was issued and the proceedings u/s 263 had been initiated
for giving assessee the opportunity to respond. Fresh order u/s 263 was being
passed after considering all the submissions of the assessee and, therefore,
the relevance of showing old files containing inter departmental
correspondence, in any case, is lost.
20.9 From this it is evident that ld. CIT,
while passing the order, was conscious of the fact that Hon'ble High Court in
its order dated 11-12-2009 had, inter alia, observed in para 20 that "No
doubt, some anxiety is shown by the CBDT in this behalf. However the argument
of the respondents is that the CBDT had wanted the matter to be examined and
never intended that the orders are to be passed in one particular manner
only". Therefore, the assessee's stand that while passing the fresh order
the Commissioner will again be influenced by the alleged correspondence, cannot
be accepted.
20.10 There is no correspondence between
CBDT and CCIT/CIT/AO on record between passing of the order by Hon'ble High
Court on 11-12-2009 and 3-8-2012. Therefore, it cannot be accepted that the
second order passed by ld. CIT suffers from same flaws or infirmities. The
position that emerges now is that assessee has been shown entire correspondence
relating to assessment along with office notes including the entire
correspondence relating to revision but assessee has not been able to show even
a single correspondence from which it could be inferred that there was any
direction by CBDT/CCIT/CIT to AO for completing assessment in any particular
manner. Had there been any direction to AO, it would have definitely been
incorporated in at least office note by the AO. The term 'direction' implies
that Assessing Officer is required to pass order in a particular manner but if
he simply confirms that all aspects have been taken note of that does not imply
that he 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 2007i.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 functions of AO by resorting to
obtaining reports from CCIT/CIT.
21. Ld. counsel for the assessee has filed
before us supplementary submissions and relied on the decision of Hon'ble
Allahabad High Court in the case ofM.D. Overseas Ltd. (supra), wherein it has been
held that where certain information/material/documents going to the root of the
matter, have been directed to be produced by one party, such documents must be
provided to the other party as the other party cannot make submissions without
access to such material. It was held that proceeding with the matter, without
allowing such access, would not only be violative of principles of natural
justice, but not compatible with the principle of jurisprudence. In this case,
the issue was that assessee company carried on the business of precious metals,
namely, gold, silver and platinum. The registered office of the company was
situated at New Delhi, but had 8 branches situated in 7 different cities of the
country and at least one warehouse was situated within the Special Economic
Zone (SEZ), at Noida. A search was conducted by the department on 15-9-2009 and
16-9-2009, not only in the office, branches and warehouse at Noida, but also at
the residence of its directors as well as on some other persons. In all, the
search was conducted in 10 companies, one firm and 15 individuals. According to
the department, the assessee was the flagship company, whereas the firm and the
other companies were connected with it. Two individuals were employees in the
office and rest of them were the directors in the companies or their relatives.
According to the department, the search was conducted on the satisfaction note
of the Director of the Income-tax (Inv.), Kanpur, after getting approval of the
Director General of Income-tax (Inv.), North, Lucknow. The assessee filed an
application on 7-11-2009 before the DGIT (Inv.), Lucknow and the DIT(Inv.),
Lucknow and the DIT(Inv.), Kanpur, requesting them to provide, apart from other
papers, the copy of satisfaction note to the assessee. The assessee pointed out
before the Hon'ble High Court that neither the satisfaction note was provided
nor any order on the application had been intimated to the assessee. The writ
petitions filed by the assessee were admitted. Subsequently, the departmental
authority passed orders, centralizing 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 (subject to privilege u/s 123 or sec. 124 of the Evidence
Act), the assessee is entitled to know the information in possession of the
department or the reasons to believe for authorizing the search, except the
source of the information. Therefore, it is evident that assessee is entitled
to the information, which is relevant to the issue and if the same goes to the
root of the proceeding. The source of information is not required to be
disclosed by revenue authorities.
21.2 In this case the issue was regarding
the recording of satisfaction as per the statutory requirements in search
proceedings and, therefore, assessee had right to ask for the same. But this
proposition cannot be extended to confidential administrative correspondences,
which do not even form part of 'record' under section 263. This correspondence
can be examined by Court to come to proper conclusion but need not be disclosed
to other party. We, therefore, hold that the decision relied by ld. Counsel is
of little assistance in the present context.
21.3 The proceedings cannot be brought to
stand still on account of repeated plea of assessee regarding confidential
records not being provided to assessee which have not been directed even by
Hon'ble High Court to be shown to assessee on which privilege is being claimed
by department, particularly when substantial details have been made available
to assessee.
22. As regards the assessee's contention
that new issues were raised in the show cause notice dated 5-2-2010, ld. CIT,
inter alia, pointed out that Hon'ble High Court while disposing of the writ
petition had completely set aside the order passed by the then Commissioner u/s
263 dated 19-6-2008, the review proceedings u/s 263 had to be redone de novo.
Ld. CIT observed that the assessee was totally wrong in alleging that the order
dated 19-6-2008 had been set aside by the High Court only for a limited
purpose. Nowhere in the writ order there was any limited directions, so as to
assume that the order had only been partially set aside.
22.1 On this count, the first aspect which
needs to be decided is whether the present proceedings are fresh proceedings or
the continuation of earlier proceedings, initiated vide issue of show cause
notice dated 23-7-2007. The contention of ld. Counsel for the assessee is that
since the Hon'ble High Court vide its order dated 11-12-2009 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 was also observed by Hon'ble High Court, has initiated fresh
proceedings and, therefore, all the objections in regard to initiation of
proceedings as per the dictate of higher authority, no more survive.
24. We have heard at length both the
parties on this issue and are of the considered opinion that keeping in view
the observations made by the Hon'ble High Court in the writ petition, filed by
the assessee and writ petition filed by the revenue, it has to be concluded
that the present proceedings are fresh proceedings, initiated by ld.
Commissioner and cannot be held to be continuation of earlier proceedings. The
reasons for the same are as under:
(i) From
the combined reading of both the orders of Hon'ble High Court it is evident
that assessee is entitled to take all the pleas relating to jurisdictional
issue on the ground that the order u/s 263 is being passed on the dictates of
higher authorities and secondly the order u/s 153A/143(3) was passed under the
monitoring of ld. Commissioner. If we accept the contention of the ld. counsel
for the assessee that the show cause notice dated 23-7-2007 survives in spite
of the set aside order of Hon'ble High Court dated 11-12- 2009, then it would
mean that the initiation of proceedings u/s 263 is legal and all the events
occuring prior to the issuance of notice dated 23-7-2007 cannot be examined.
This cannot be the true import of the directions of Hon'ble High Court and it
would also result in an unintended consequence of the argument advanced by ld.
counsel for the assessee viz. that the impugned order passed u/s 263 dated
11-3-2010, still suffers from the same jurisdictional defect as was canvassed
by the assessee in regard to proceedings initiated by issue of show cause
notice dated 23-7-2007.
(ii)
The submission of the ld. counsel for the assessee that Hon'ble High Court has
not quashed the proceedings but has only set aside the order, has to be
considered in the perspective of nature of proceedings u/s 263. The
jurisdiction to pass order u/s 263 starts the moment assessment order is
passed.
(iii)
In the proceedings u/s 263, unlike the notice contemplated u/s 147/148, ld.
Commissioner first examines the assessment records and on reaching a conclusion
from such inspection that the order passed by assessing officer is erroneous to
the extent it is prejudicial to the interests 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 be said that though the order does not survive,
but the show cause notice does survive. This will be contrary to the very
nature of proceedings under section 263.
(v)
Ld. counsel for the assessee has submitted that as per section 263(2), order
could be passed up to 31-3-2009 and the Hon'ble High Court has lifted the
limitation for passing the order only and not for initiation of proceeding. He
submitted that bar of limitation has not been lifted for initiating proceedings
and the order has been set aside to the stage where irregularity occurred.
(vi) We
find that in the order passed by the Hon'ble High Court 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.
24.1 In view of above detailed discussion,
Ground Nos. 3 to 5 are dismissed.
25. In ground no. 6 the assessee has
primarily assailed the order passed u/s 263 on the ground that the 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.
26. Ld. Counsel submitted that at the time
of assessment proceedings u/s 143(3)/153A, the AO raised queries qua all the
issues pointed out by the Commissioner in the impugned order and accepted the
same either wholly or in part after due application of mind.
26.1 Ld. Counsel has referred to brief
synopsis of the inquiries conducted by the AO which we will consider qua
specific grounds raised by the assessee regarding various issues. However,
presently only the legal aspect is being considered.
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. (supra);
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 High Court in the case of Sunbeam
Auto Ltd. (supra),
wherein, while considering the distinction between lack of inquiry and adequate
inquiry, the Hon'ble court held that where the AO has made inquiry prior to the
completion of assessment, the same cannot be set aside u/s 263 on the ground of
inadequate inquiry.
26.6 In this case, ld. CIT exercised powers
u/s 263 on the ground that while passing the assessment order, the AO did not
consider whether the expenditure in question was revenue or capital
expenditure. The Hon'ble High Court observed that the assessment order did not
give any reason in regard to allowing the entire expenditure as revenue
expenditure by AO. However, it was held that it by itself would not be
indicative of the fact that AO had not applied his mind on the issue. It was
held that it is not necessary that AO should give detailed reasons in respect
of each and every item of deduction. One has to see from the record as to
whether there was application of mind before allowing the expenditure in
question as revenue expenditure. It was held to be, at best, a case of
inadequate inquiry and not lack of inquiry. It was held that if there was
inadequate inquiry, that would not by itself give occasion to CIT to pass order
u/s 263.
26.7 Ld. Counsel further referred to the
decision of Hon'ble High Court in the case of Anil
Kumar Sharma (supra),
wherein it was, inter alia, held that once application of mind is discernable
from the record, the proceedings u/s 263 would fall into the ambit of the CIT
opinion. This case was also examined on the touch stone of principle laid down
in the case of Sunbeam Auto
Ltd. (supra) regarding
lack of inquiry vis a vis inadequate inquiry. He also referred
to the decision of Hon'ble Rajasthan High Court in the case of CIT v. Ganpat
Ram Bishnoi[2008] 296 ITR 292/[2006]
152 Taxman 242 (Raj.), wherein it was, inter alia, held that
jurisdiction u/s 263 cannot be invoked for making fresh inquiries or to go into
the process of assessment again and again merely on the basis that more inquiry
ought to have been conducted to find something.
26.8 Ld. Counsel placed strong reliance on
the decision of Jurisdictional High Court in the case of ITO v. D.G.
Housing Projects Ltd.[2012] 343 ITR 329/20
taxmann.com 587/[2013] 212 Taxman 132 (Delhi). In this case it was
held that in case of inadequate inquiry, the Commissioner must examine the
records and give a firm finding on merits that the order 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.
26.11 Ld. Counsel submitted that in the case
of K.A. Ramaswamy Chettiar (supra), no inquiry was
conducted by AO on the issue of purchase of property by the assessee during the
year, though contemporary material was available on record to suggest payment
of 'on money' by the assessee for purchase of property during the year; and in
the case of Mukur Corporation (supra), the assessment order
was set aside by the CIT after coming to the conclusion that no inquiry, qua
the issue in dispute, was conducted by the AO during the course of assessment
proceedings. In the case of Shyam
TelelLink Ltd.(supra), the Tribunal found that there was no material
on record to hold that the issue raised by the CIT was examined by by the AO.
Ld. counsel submitted that these cases fall in the category of lack of inquiry
and not inadequate inquiry.
26.12 Ld. Counsel submitted that in the
office note, AO has given elaborate reasons on various issues and therefore,
the same have to be referred to find out whether there was application of mind
by AO or not.
26.13 Ld. Counsel submitted that Hon'ble
Supreme Court in the case of Malabar
Industrial Co. (supra)
has held that where the AO has taken a possible view, the CIT cannot revise the
assessment merely because the CIT holds another view.
27. Ld. Spl. Counsel submitted that
whether a case falls under lack of inquiry or inadequate inquiry depends upon
facts of each case.
27.1 Ld. Spl. Counsel submitted that the
meaning of inquiry in the present context is that AO should reach that level
where a rational person, under similar circumstances, would be satisfied with
the level of inquiry. He submitted that rational person test has to be applied
to decide whether the inquiries conducted by AO met the said test or not. Ld.
Spl. Counsel submitted that if a rational person in a given circumstance would
come to that conclusion, then only the case would not be covered by lack of
inquiry. He, therefore, submitted that merely because some inquiry is carried
out by AO, would not imply that the case falls under the ambit of inadequate
inquiry and the same may still fall under the category of lack of inquiry.
27.2 He 'gave an example that in case of
cash credit, unless the AO carries on such inquiry so as to reach the
conclusion/satisfaction about genuineness of cash credit, it cannot be said
that the level of inquiry met the test of rational person inquiry 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 v. ITO[1975] 101 ITR 1 (Kar.),
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
Rs. 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 letter to this effect also.
This letter was further supplemented by another letter, in which it was pointed
out that her father, at the time of marriage paid the cash to her.
Subsequently, the money was used to lend privately, from which she earned
interest. The entire cash of Rs. 31,500/- was offered accordingly for taxation.
It was further pointed out that no documentary evidence was available with her
to prove the same. Hon'ble High court noted that while accepting the returns,
spot assessments were made by the ITO, spreading over the income for the
assessment years 1969-70 to 1972-73, as desired by the assessee. Large number
of similar assessments were made to other assesses. Thereafter, it was brought
to the notice of the Commissioner that the income of all these assesses had
been invested in the business of their husbands. In the inquiry made by ld.
Commissioner it was discovered that the assesses, during the relevant period of
assessments, had no business of their own, much less any money lending
business. Ld. CIT initiated proceedings u/s 263 and directed the ITO to re do
the assessments after observing as under:
"Any
Income tax Officer who does his duties diligently would have sat up, on reading
the assessee's letter and seeing the assessee's returns and would have made
elementary enquiries to satisfy himself that there was a business done by the
assessee and there was income earned from it as alleged. That he did not do so
and misdirected himself in accepting the returns under section 143(1) without
the basic necessaries prescribed thereunder is enough to establish prejudice to
revenue. The subsequent enquiries, as already stated, only confirmed what
should have occurred prima facie to any diligent and industrious Income tax
Officer doing his functions without haste and with due deliberation. The result
of these enquiries have no doubt been put in my notice to the assessee, but
they do not form the sole basis for prejudice. Prejudice can be easily deduced
on the facts of her record from the very returns filed by the assessee and the
impossible explanations given in her letter and the fact that the assessments
were completed in great haste without any enquiry being made in a new case and
on the very next day the returns of income were received for the assessment
years 1969-70 to 1972-73."
27.4 In the backdrop of these facts, the
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. Since no such
inquiry was made by the Income tax Officer in all these cases, the assessments
must be held to be prejudicial to the interests of the revenue, and what is
prejudicial to the interests of the revenue must be held to be erroneous though
the converse may not always be true. The Commissioner, in my view, was,
therefore, right in revising the assessments under section 263 of the Act.
The
petitioners have not been prejudiced in any way by not disclosing to them the
nature of the materials collected by the Commissioner behind their back. The
Commissioner has directed the Income tax Officer to make the assessments afresh
according to law after making proper enquiries. The petitioners will have full
opportunity of showing to the Income tax Officer that the assessments earlier
made were correct and the enquiries subsequently made were incorrect."
27.5 With reference to this decision, ld.
Special Counsel submitted that AO was required to make the necessary inquiry to
find out that income was earned in that year and belonged to assessee. This was
essential inquiry, which was not conducted by AO. Thus, AO did not reach the
necessary level of inquiry to acquire the requisite satisfaction. Accordingly,
the revisional proceedings were upheld.
27.6 Ld. Special Counsel further referred
to the decision in the case of Rampyari
Devi Saraogi v. CIT[1968] 67 ITR 84 (SC).
In this case the Ld. Commissioner (West Bengal ) had sent a notice u/s 133B to
the assessee, inter alia, on the ground that inquiries made revealed that
assessee had neither resided nor carried on any business from the address
declared in the returns. Also the Income-tax Officer was not justified in
accepting the initial capital, the gift received and sale of jewellery, the
income from business etc. without any inquiry or evidence what-so-ever. The
show cause notice was challenged by way of writ petition, inter alia, on the
ground that the order passed by the ld. Commissioner was based on notice which
was absolutely ague and did not contain any indication in what respect the
assessment orders were erroneous or prejudicial to the interests of revenue. It
was further pointed out that assessee was not aware as to what inquiries had
been made by the Commissioner and until the copies of such inquiry were made
available, the assessee was not in a position to produce any evidence before
the Commissioner. 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, the name of the assessee is Rampiyari Devi Saraogi,
and as the Income tax Officer, D Ward, Howrah, who has made the assessments,
had only jurisdiction over cases of new assessees, whose names began with the
alphabetical letters from 'S' to 'Z', with a view to camouflage the name and
make it appear to fall within the jurisdiction of the Income tax Officer, the
name has been given in the reverse order by putting the surname first and her
own name after wards, as will be apparent from the returns filed. In the return
of income for the assessment year 1961-62, the assessee has given her
residential address as 90, Feeder Road, Belgharia, Calcutta, while in that for
1962-63, the office address has been given as 90, Feeder Road, Belgharia,
Calcutta. " He then concluded : " It is apparent that with a view to
fall within the jurisdiction of this particular Income tax Officer, i.e., Income tax Officer, D
Ward, Howrah, a fictitious address was given and the order of the names
reversed. Hence, all the assessments made are without jurisdiction ab initio null and void. "We agree with the
High Court that all this material was supporting material and did not
constitute the basic grounds on which the orders under section 33B were passed
by the Commissioner. There was ample material to show that the Income tax
Officer made the assessments in undue hurry. The assessee was a new assessee
and filed voluntary returns in respect of a number of years, i.e., from assessment years
1952-53 to 1960-61. The return for the assessment year 1953-54 is undated. The
returns for the assessment years 1952-53 and 1954-55 to 1957-58 are dated March
21, 1961, and those for the assessment years 1958-59 to 1960-61 are dated April
26, 1961. On March 21, 1961, the assessee made a declaration giving the facts
regarding initial capital, the ornaments and presents received at the time of
marriage, other gifts received from her father in law, etc., which should have
put any Income tax Officer on his guard. But the Income tax Officer without
making any enquiries to satisfy himself passed the assessment order on March
30, 1961, for the assessment years 1952-53 to 1957-58, and on April 26, 1961,
for the assessment years 1958-59 to 1960-61. No bank account or any proper
books of account were maintained by the assessee or produced before the Income
tax Officer. A short stereo typed assessment 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 Rs.
3,085 and interest Rs. 600, and Rs. 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 Aggarwal v. CIT[1973] 88 ITR 323,
wherein it was, inter alia,
held that where an income had not been earned and is not assessable, merely
because the assessee wants it to be assessed in his or in her hands in order to
assist someone else, who would have been assessed to a larger amount, an
assessment so made will be erroneous and prejudicial to the interest of revenue
and the CIT had jurisdiction u/s 33B of the I.T. Act, 1922 (corresponding to
sec. 263 of the I.T. Act), to cancel the assessment and proceedings that may be
initiated under the provisions of the Act against some other assessee, who,
according to the income-tax authorities, would be liable for the income
thereon. Hon'ble Supreme Court also referred to the decision in the case of Rampyari Devi Saraogi (supra) in this regard.
27.9 Ld. Special Counsel further relied on
the decision of Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl.
CIT[1975] 99 ITR 375,
wherein, following the decision of Hon'ble Supreme Court in the case of Smt. Tara Devi Aggarwal (supra), it was held that it is
not necessary for the Commissioner to make further inquiry before cancelling
the assessment order of the ITO. It was held that the Commissioner can regard
the order as erroneous on the ground that in the circumstances of the case the
ITO should have made further inquiries before accepting the statements made by
the assessee in his return. The Hon'ble Delhi High Court further observed as
under:
"The
reason is obvious. The position and function of the Income tax Officer is very
different from that of a civil court. The statements made in a pleading proved
by the minimum amount of evidence may be accepted by a civil court in the
absence of any rebuttal. The civil court is neutral. It simply gives decision
on the basis of the pleading and evidence which comes before it. The Income tax
Officer is not only an adjudicator but also an investigator. He cannot remain passive
in the face of a return which is apparently in order but calls for further
inquiry. It is his duty to ascertain the truth of the facts stated in the
return when the circumstances of the case are such as to provoke an inquiry.
The meaning to be given to the word "erroneous" in section 263
emerges out of this context. It is because it is incumbent on the Income tax
Officer to further investigate the facts stated in the return when
circumstances would make such an inquiry prudent that the word "erroneous"
in section 263 includes the failure to make such an inquiry. The order 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 be allowed to take benefit of certain observations of
Hon'ble Courts drawing distinction between 'lack of enquiry' and 'inadequate
enquiry' as arising in the facts of those cases. Such a distinction can arise
only when the enquiries have been conducted to reach a rational satisfaction
and not a mere pretence of the so called enquiry.
(b)
The CIT raises as many as thirteen items which are in dispute and as per the
assessee, no enquiry was required or further details were required to examine
such issues iri detail. The AO accepted the claims of the assessee only after a
questionnaire and taking the replies on their face value without bringing any
material on record to justify such claims. This was not an enquiry of any kind
and the assessment was made with complete non application of mind. In the case
of Firoj Nadiadwala v. Addl.
CIT[2013] 35 taxmann.com 89
(Mum.),the Hon'ble Mumbai ITAT held as under:
"In
view of the foregoing discussion we hold that the order passed by Aa was
erroneous and prejudicial to the interest of revenue as he accepted the
explanation of assessee that the loans were of general purpose loans without
any examination and application of mind. The interest on borrowings which had
been specifically taken for the production of two films has to be considered as
part of cost of production in view of definition of cost of production given in
the Explanation to Rule 9A. Therefore allowing the interest as deduction even
though the films were not released during the year was erroneous and
prejudicial to the interest of revenue. We therefore. hold that the CIT had
correctly exercised jurisdiction u/s 263 of IT Act. and the order of CIT is
therefore upheld. "
The ratio
of the above judgment is also· squarely applicable to the present case. Since
in the present case also, the A.O. accepted the replies of assessee on their
face value without conducting any enquiry having regard to the circumstances of
the case.'
27.11 ld. Special counsel further submitted
that the case laws relied by the ld. counsel for the assessee are
distinguishable on the facts and circumstances of the case. In this regard, the
ld. CIT(DR) has filed written submissions, which are reproduced hereunder:
"8.
The Ld. counsel for the assessee placed reliance on various case laws. In this
regard, it is respectfully submitted that the case laws cited by the Ld.
counsel 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:
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.
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.
ITO v. Housing
projects Ltd. [2012]
329-Delhi 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 enquiries. It is submitted that in the case before
your Honours, there is lack of enquiry, nay, only a pretence of enquiry. The
case is, therefore, clearly distinguishable.
Hari
Iron Trading Co. v. CIT[2003] 263 ITR 437-P&H-@
vol IV of assessee's paper book on page no. 1204-1209 :
In this
case, the assessee surrendered Rs 10 lakhs for stock. The case of the CIT in
revisionary proceedings uls 263 was that no proper enquiry had been made by the
assessing officer about the surrendered amount. The Hon'ble High court held
that the fact that the assessee had not included the surrendered amount had
been noticed by the assessing officer and was raised by him in the various
notices issued to the assessee. The assessee had explained and produced
necessary evidence that there was no discrepancy either in cash or in the
stock.
(Page No.
1205 of PB filed by the assessee.).
In view of
the above, it is submitted that the facts of the above case are distinguishable
from the present case before your Honours. In the cited case, there was proper
application of mind. The enquiries were conducted by the Assessing Officer. The
necessary evidence was produced as clearly recorded by the Court. However, in
the present case, there was no enquiry conducted by the Assessing Officer.
The Ld.
Counsel relied upon the above case. In this regard, it is submitted that the
above case was with reference to reopening of assessment uls 148 of the Act.
Further, without prejudice, even on merit of the case, the Assessing Officer
sought to tax the waiver of interest in reassessment proceedings U/S 148. It
was held by the court that the assessee had placed all the material before the
assessing officer and where there was a doubt, even that was clarified by the
assessee in its letter.
(Page No.
112 of PB: Vol VI)
The finding
of the above case can not be applied in the present case for the reason that
the finding given was based on different facts and circumstances. It was a case
of section 148 of the Act but in the present case proceedings u/s 263 of the
Act were initiated. Section 263 of the Act nowhere provides or has any relation
with disclosure of facts as provided in the proviso to Section 148 of the Act.
The requirement of section 148 is that material facts are disclosed but uls
263, the point of 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 v Sunbeam
Auto Ltd.[2011] 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 v. Anil
Kumar Sharma[2011] 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 such application of mind was not discernible from the
assessment order.
The finding
of the above case is also not applicable to the present case. This case only upholds
the principle that revisionary proceeding U/S 263 can be initiated only in the
case of "lack of enquiry" and not in the case of "inadequate
enquiry". The Revenue is not disputing the settled legal position. There
is no quarrel on such a proposition. The issue is when would it be a case of
inadequate enquiry and when of no enquiry.
Oil
& Natural Gas Corpn. Ltd. v. Dy. CIT[2006] 104 TTJ 900-Delhi @ Vol IV: 1222-1227 of assessee's
paper book
In this
case, the view taken by AO was one of the plausible views. The finding of this
case is not applicable to the present case. In the present case, there is no
question of any plausible view since he has accepted the claims without
application of mind and the view taken by the AO is not backed by enquiry and
material and, therefore, not legally sustainable.
9. The Ld.
Counsel has referred to a host of other decisions which are also
distinguishable for the reasons stated above. In none of the cited cases, the
claim of the assessee was accepted without enquiring into and placing on record
the primary and basic facts as in the present case. The case before your
Honours is one where the A.O. has not only failed to conduct the minimum level
of enquiries, but the so called enquiry is farce and a only a pretence of
enquiry. It is not open to suggest, in the wake of glaring facts as your
Honours will observe while examining the manner in which various vital issues
have been handled by the A.O. (grounds no. 11 onwards), that it is a case of
adequate or inadequate enquiry and hence the jurisdiction of CIT is ousted. The
judicial precedents have to be seen in the backdrop of factual matrix in which
these are rendered. These cannot have universal application."
28. We have considered the detailed
submissions of both the parties and have perused the record of the case keeping
in view the various authoritative pronouncements in this regard. There cannot
be any quarrel with the legal propositions, as advanced by both the parties. It
has consistently been held that if the AO's conclusion is arrived at after due
application of mind on a particular issue, then the order cannot be said to be
erroneous. 'Due application of mind' implies that if the assessee has merely
responded to 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 the revenue. Then only the powers u/s 263 can be invoked. Therefore, if AO
accepts or rejects any claim of the assessee without due application of mind
and if such failure causes prejudice to revenue, the Commissioner would be well
within his powers u/s 263 to intervene in the matter. An inquiry which is just
farce or mere pretence of inquiry, cannot be said to be an inquiry at all, much
less an inquiry needed to reach the level of satisfaction of the AO on the
given issue. The level of satisfaction would obviously mean that he has
conducted the inquiry in a manner whereby he places on record the material
enough to reach the satisfaction, which a rational person, being informed of
the nuances of tax laws would reach after due appreciation of such material. If
this component is missing, it will always be a case of lack of inquiry and not
inadequate inquiry. We find that ld. Commissioner, while considering this
argument of assessee has observed that the representative of the assessee was
assured that this issue will be considered with independent application of mind
while passing the order u/s 263. Therefore, when specific issues will be
considered, it will be examined whether the AO had reached the level of
satisfaction by carrying out necessary inquiries qua that issue or not. Ground
is disposed of accordingly.
29. In ground no. 7 the assessee has
challenged the exercise of jurisdiction by CIT u/s 263 on the ground that the
various claims, which were duly supported by judicial precedents, could, at
best, be said to be debatable ousting jurisdiction of Commissioner under the
said section. Ld. counsel for the assessee submitted that courts have
unanimously held that where the AO takes a possible view in law, jurisdiction
u/s 263 of the Act is ousted. He relied on following decisions:
- Malabar Industrial Co. Ltd. (supra);
- Sunbeam Auto Ltd. (supra);
- Anil Kumar Sharma (supra);
30. Ld. Spl. Counsel submitted that there
is no quarrel on the settled legal position. He submitted that if AO's order is
not legally sustainable, the CIT has power to substitute 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 v. Goetz
(India) Ltd.[2014] 361 ITR 505/44
taxmann.com 138/225 Taxman 133 (Mag.) 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 Goetze (India) Ltd. (supra) 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 invoked power and jurisdiction under Section
263 of the Act, because the Assessing Officer had taken a probable view, which
may be debatable and not acceptable to the Revenue. When an Assessing Officer
takes a view but the said view is not correct, erroneous as per the findings
recorded by the Commissioner, along with the finding that the order passed by
the Assessing Officer was prejudicial to the interest of the Revenue, then the
order of the Commissioner cannot be set aside on the ground that the two views
were possible or probable. In such cases, the order under Section 263 of the
Act can be set aside if the findings accorded by Commissioner taking the
particular view, whether on facts or in law, is wrong or incorrect or the order
of the Assessing Officer was not prejudicial to the interest of the Revenue.
The first aspect is essentially a question of merits and not a question
relating to whether or not two views were possible. Commissioner can examine
the issue on merits even when the same issue was examined by the assessing
officer. Principles of change of opinion do not apply. If an order of the
assessing officer is held to be erroneous and prejudicial to the interest of
the revenue, it can be revised. The contention of the assessee and the
reasoning of the tribunal in this regard is clearly fallacious as Revenue does
not have any right to appeal against the order of the Assessing Officer. It is
in these circumstances that power of revision has been conferred on the
Commissioner under Section 263 of the Act to correct erroneous orders which are
also prejudicial to the interest of Revenue. Observations of the Supreme Court
in the case of Malabar
Industrial Company Limited (supra)
have to be understood in the context in which they were made. An order will not
be erroneous, if the Commissioner does not decide whether the order of the
assessing officer is erroneous but observes that two views are possible and yet
remits the issue for fresh decision by the Assessing Officer. However, it would
be incorrect to state as a broad proposition that an order of the Assessing
officer cannot be erroneous, if the Assessing Officer has taken one of the two
views possible. In such cases the order of the assessing officer is erroneous
provided the Commissioner holds and is able to demonstrate that the view taken
by the Assessing Officer was not plausible, being legally 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 inquiry and does not
bring any material on record of any kind; in any view of the matter, the plea
of AO having taken one of the possible views, becomes wholly irrelevant.
31. We have considered the submissions of
both the parties. The issues in hand have to be examined in the light of
various decisions relied by both the sides including the decision of Hon'ble
Delhi High Court in the case of Goetz
(India) Ltd. (supra).
The main thrust is on the level of inquiries conducted by AO to arrive at a
particular conclusion. A possible view taken by AO after due appreciation of
evidence on record particularly found during course of search, in present
context, will not render the Assessment Order erroneous and prejudicial to the
interest of revenue merely because another view could be taken which was
beneficial to the interest of revenue. However, the position will be entirely
different if AO merely raises various queries and accepts the assessee's
explanation without proper appreciation of evidence on record. This aspect will
be taken into consideration while deciding the various issues, keeping in view
the arguments of both the sides. This ground is accordingly disposed of.
32. In ground no. 8, the assessee has
challenged the jurisdiction of ld. CIT on the ground that jurisdiction u/s 263,
in respect of issues, which were beyond the jurisdiction of the AO, while
framing the original assessment u/s 143(3)/153A, cannot be exercised. The
submission is that scope of revisionary jurisdiction depends upon the scope of
proceedings/order sought to be revised u/s 263 of the Act. The issues, which
are outside the scope of the particular assessment, would, as a necessary
corollary, be outside the scope of revisionary proceedings undertaken to revise
such assessment. In sum and substance, the plea is that what the AO could not
do directly, the CIT cannot do indirectly.
32.1 The assessee placed reliance on the
decision of Hon'ble Delhi High Court in the case of CIT v. Software
Consultants[2012] 341 ITR 240/21
taxmann.com 155/211 Taxman 210 (Mag.). In this case the AO initiated
proceedings u/s 147 of the Act on the issue of taxability of certain FDRs,
which were found in possession of Poonam Rani Singh, a director of the company.
However, Poonam Rani Singh claimed that the FDRs, in her name, actually
belonged to the Software Consultants i.e. the assessee. This stand was accepted
by CIT(A) in the appeal 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 Rs.
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 Rs.
20 lacs and, accordingly, no addition was made on this count. The return filed
by the assessee, showing loss of Rs. 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 Rs. 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 Rs. 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 quashed the
order u/s 263, inter alia,
on the ground that since no addition could have been made on the issue of share
application money, the assessment order could not be regarded as erroneous.
Affirming the decision of the ITAT, the Hon'ble Delhi High Court held that
since AO could not have made addition on account of share application money,
the assessment order was not erroneous and CIT could not have exercised
jurisdiction u/s 263 of the Act.
32.3 The assessee also placed reliance on
the decision of Hon'ble Rajasthan High Court in the case of Rajasthan Spinning & Weaving
Mills v. Dy. CIT[2006] 281 ITR 177/150
Taxman 205, wherein it has been held that where certain issues are
outside the scope of any assessment/reassessment proceedings, the AO cannot be
said to have committed error in not making adjustments on the said issues in
order to exercise revisionary jurisdiction u/s 263 of the Act.
32.4 Ld. Counsel for the assessee also
placed reliance on the following decisions of the ITAT:
- Dholadhar Investment (P) Ltd. v. CIT [IT Appeal no. 628(Delhi) of 2010].
32.5 Ld. Counsel pointed out that the scope
of section 153A is such that addition/disallowance can only be made on the
basis of incriminating material/document/books of account found during the
course of search. The AO does not have the jurisdiction to verify the total
income and cannot re- agitate issues, which have attained finality during the
original proceedings, since the proceedings u/s 153A are not intended to give
another innings to the AO to make assessment u/s 143(3) of the Act.
32.6 Ld. Counsel placed reliance on the ITA
T Special Bench decision in the case of All
Cargo Global Logistics Ltd. v. Dy. CIT[2012] 137 ITD 26/21
taxmann.com 429 (Mum.). Ld. Counsel has summarized his submission on
this count as under:
"To
summarize, the assessing officer, at the time of assessment under section 153A
of the Act, conducted enquiries and applied mind on all the issues raised in
impugned order. Assuming for the sake of argument, without admitting, that the
assessment was completed without 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 CIT v. Kelvinator
of India Ltd.[2002] 256 ITR 1 observed as under:
"It is
well settled principle of law that what cannot be done directly cannot be done
indirectly. If the Income tax Officer does not possess the power of review, he
cannot be permitted to achieve the said object by taking recourse to initiating
a proceeding of reassessment or by way of rectification of mistake.
The Kerala
High Court in the case of CIT v. Paul
John, Delicious Cashew Co.[2011] 200 Taxman 154 held that the bar which apply to the
assessing officer equally applies t o the CIT, for the purposes of section 263
of the Act.
For the
aforesaid reason too, the impugned order passed by the CIT under section 263 of
the Act is legally unsustainable and calls for being quashed."
33. Ld. Special Counsel submitted that
there is no dispute on preliminary proposition that what AO cannot do, CIT also
cannot do. He submitted that in the present case assessment year involved is
1999-2000 in which original assessment had been completed u/s 143(1). He
submitted that no notice was issued; no assessment order was passed and no
inquiry was made by the AO. He submitted that search took place on 10-11-2004
on which date assessment proceedings were not pending, therefore, did not
abate. He, therefore, submitted that in effect 153A assessment has been made
for the first time. He submitted that u/s 153A, two situation arise in respect
of proceedings which are not pending. Firstly, AO is to reassess the income, if
assessment order had been passed, and, secondly, if not assessed earlier then
to assess for the first time. He contended that assessment u/s 153A takes in
its ambit 147 proceedings also and there is no need to reopen assessment u/s
147. In such situation, the assessment ,whether abated or unabated, AO has
power to make assessment.
33.1 Ld. Special Counsel referred to the
decision of ITAT in the case of All
Cargo Global Logistics Ltd. (supra)
and pointed out that it has been held that in respect of non abated
assessments, the assessment will be made on the basis of books of account or
other documents not produced in the course of original assessment, but found in
the course of search and undisclosed income or undisclosed property discovered
in the course of search. He submitted that admittedly when intimation u/s
143(1) was only issued, no books of account were produced before the AO and,
therefore, on the basis of books of a/c found in the course of search, the
assessment has to be completed. He referred to the order passed by the CIT and
pointed out 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 other words, harmonious
interpretation will produce the following results :-
(a)
In so far as pending assessments are concerned, the jurisdiction to make
original assessment and assessment u/s 153A merge into one and only one
assessment for each assessment year shall be made separately on the basis of
the findings of the search and any other material existing or brought on the
record of the AO, (b) in respect of non-abated assessments, the assessment will
be made on the basis of books of account or other documents not produced in the
course of original assessment but found in the course of search, and
undisclosed income or undisclosed property discovered in the course of
search."
33.2 Ld. Special Counsel specifically
referred to para 57 in the case of All
Cargo Global Logistics Ltd. (supra),
and pointed out that Special Bench specifically noticed that the question which
had been referred to it was in respect of scope of assessment u/s 153A and
whether it encompasses additions not based on incriminating material found in
the course of search. It was observed that the question uses the word incriminating
material which again finds no mention either in section 132(1) or 153A. Thus,
it was observed that analysis of various phrases regarding completed assessment
does not fall within the ambit of the question posed to the Special Bench. He,
therefore, submitted that it was a matter of inquiry whether the entries in the
books of a/c were incriminating or otherwise. He submitted that it depends on
the facts of each case what constitutes incriminating material. The relevant
part of para 57 eads as under:
'57. The
various Ld. Counsels for the intervening parties have listed or stated various
scenarios regarding what constitutes pending assessment and what ITA Nos. 5018
to 5022 & 5059/M/2010 constitutes completed assessment. We find that second
proviso to section 153A uses the words "pending on the date of initiation
of search" and provides that assessment so pending shall abate. The
provision does not use the words "completed assessment". Further, the
question which has been referred to us is in respect of scope of assessment u/s
153A and whether it encompasses additions, not based on incriminating material
found in the course of search. The question uses the words "incriminating
material" which again find no mention either in section 132(1) or 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 proceedings. He submitted that scope
of assessment u/s 153A qua assessment u/s 143(1) issue has not been answered in All Cargo Global Logistics Ltd. (supra). He submitted that on
the basis of the conclusion drawn by the Special Bench of Tribunal, it is clear
that jurisdiction u/s 153A can be assumed in relation to unabated assessment if
books of account/other documents are found in the course of search which were
not produced in the course of original assessment. He submitted that since
proceedings u/s 143(1) are in the nature of summary proceedings for assessment,
undertaken to simply check the arithmetical accuracy of the total income and
tax liability of an assessee and further since no books of account/documents
were produced by the assessee before the AO, as required by law, the scope of
assessment u/s 153A would extend to the issues arising from scrutiny of regular
books of account as well found during the course of search. He submitted that
the expression "not produced before the AO", cannot have restrictive
meaning to suggest "deliberately not produced" but would also include
"not produced by operation of law".
33.5 In support of his contention Ld. Spl.
Counsel further referred to the decision of Hon'ble Delhi High Court in the
case of CIT v. Anil
Kumar Bhatia[2012] 24 taxmann.com 98/211
Taxman 453 and
referred to paras 15,16 and 22 of the order, reproduced below:
"15.
The first question which we have to consider is whether the Tribunal was right
in holding that no addition can be made for agricultural income, gifts received
and unexplained deposits as stated in the chart set out in Para 10 (supra) on
the ground that in respect of these additions, no material was found during the
search carried out under Section 132 and also on the ground that for all the
years under consideration, the returns filed by the assessee before the search
had been processed under Section 143(1)(a) of the Act. Though the Tribunal has
not referred expressly to the provisions of Section 153A of the Act, its
decision in Paragraph 9.6 of the order is based on the premise that the
Assessing Officer had wrongly invoked Section 153A since (a) no material was
found during the search in respect of the agricultural income, gifts received
and unexplained deposits and (b) the returns filed by the assessee prior to the
search had been accepted under Section 143(1)(a) of the Act. The same reasoning
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 period, as may
be specified in the notice, the return of income in respect of each assessment
year falling within six assessment years referred to in clause (b), in
the prescribed form and verified in the prescribed manner and setting forth
such other particulars as may be prescribed and the provisions of this Act
shall, so far as may be, apply accordingly as if such return were a return
required to be furnished under section 139;
(b)
assess or reassess the total income of six assessment years immediately
preceding the assessment year relevant to the previous year in which such
search is conducted or requisition is made:
Provided
that the Assessing Officer shall assess or reassess the total income in respect
of each assessment year falling within such six assessment years. Provided
further that assessment or reassessment, if any, relating to any assessment
year falling within the period of six assessment years referred to in this
[sub-section] pending on the date of initiation of the search under section 132
or making of requisition under section 132A, as the case may be, shall abate.
[(2) If any
proceeding initiated or any order of assessment or reassessment made under
sub-section (1) has been annulled in appeal or any other legal proceeding,
then, notwithstanding anything contained in sub-section(1) or section 153, the
assessment or reassessment relating to any assessment year which has abated
under the second proviso to sub-section (1), shall stand revised with effect
from the date of receipt of the order of such annulment by the Commissioner. Provided
that such revival shall cease to have effect, if such order of annulment is set
aside.] Explanation.- For the removal of doubts, it is hereby declared that-
(i)
save as otherwise provided in this section, section 153B and section 153C, all
other provisions of this Act shall apply to the assessment made under this
section;
(ii)
in an assessment or reassessment made in respect of an assessment year under
this section, the tax shall be chargeable at the rate or rates as applicable to
such assessment year.
. . . . . .
. . . .
22. In the
light of our discussion, we find it difficult to uphold the view of the
Tribunal expressed in Para 9.6 of its order that since the returns of income
filed by the assessee for all the six years under consideration before the
search took place were processed under Section 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 Rs. 1,50,000/- being unexplained loan given to Mohini Sharma,
the Tribunal has stated that it has analyzed "the subject document
carefully, recovered from search" suggesting that the document was
recovered during the search from the assessee. The Tribunal has even proceeded
to delete the addition of Rs. 1,50,000/- as well as the notional interest on
merits, holding that the document was unsigned, that Mohini Sharma was not
examined by the income tax authorities and there was no corroboration of the
unsigned document. If it is not in dispute that the document was found in the
course of the search of the assessee, then Section 153A is triggered. Once the
Section is triggered, it appears mandatory for the Assessing Officer to issue
notices under Section 153A calling upon the assessee to file returns for the
six assessment years prior to the year in which the search took place. There
are contradictions in the order of the Tribunal. We are unable to appreciate
how the Tribunal can say in Para 9.6 that no material was found during the
search and at the same time in Paragraph 10 deal with the merits of the
additions based on the document recovered during the search which allegedly
contain the loan transaction with Mohini Sharma. Therefore, both the reasons
given by the Tribunal for holding that the assessments made under Section 153A
were bad in law do not commend themselves to us. The result is that the first
substantial question of law is answered in the negative, in favour of the
Revenue and against the assessee."
33.6 With reference to this decision, Ld.
Spl. Counsel submitted that the only requirement is that nexus/relevance with
material has to be there but not necessarily specific material found in the
course of search.
33.7 Accordingly, ld. Spcial counsel
submitted that in order to make assessment u/s 153A, existence of seized
material is sufficient and it is not necessary that such seized material must
show actual earning of undisclosed income, to be brought to tax in the completed
assessment. He submitted that on inquiry or investigation of books of account,
if it is found that certain income has not been declared by assessee in return,
then the same can be subjected to addition.
33.8 In regard to the reliance placed by
assessee on the decision of Hon'ble High Court in the case of CIT v. Software
Consultants (supra),
ld. Special Counsel submitted that the said decision is not applicable to the
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 (supra); Sumbholi Industries Ltd.(supra); Paul John Delicious Cashew Co. (supra); Dholadhar Investment (P) Ltd. (supra), 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 case of the present assessee stands on its own facts and none
of the cases referred to by the assessee have any application.
23. Revenue
has placed before the Hon'ble Bench, sample copies of papers found and seized
material during search operations. These are contained in Revenue's
supplementary paper book filed during the course of hearing and contain broadly
the followings:
I.
|
Copies of accounts for the relevant year.
|
|
II.
|
Emails.
|
|
III.
|
Statements recorded during search operations
|
|
IV.
|
Copies of certain documents.
|
|
V.
|
Copies of documents relating to other years but
having a bearing on the year under consideration as well.
|
All such
material has been found during search. It is, therefore, wholly incorrect to
suggest that the assessment is framed without having nexus with the material
found during search. If a certain material is found during search, its
incriminating nature can be ascertained only when the material is examined to
find out whether it has any bearing on the income already assessed or not. If
the material so found, on examination, leads to the inference that the income
originally assessed whether u/s 143(3) or 143(1) needs to be re-determined, the
material would be incriminating and jurisdiction of the A.a. can not be
challenged on the reasoning that the material is not prima facie incriminating.
The word "incriminating" has neither been used in the statute nor and
has been defined in the judicial precedents. It has to have its common sense
meaning in the given context which would only mean whether the material, on
examination, leads to redetermination of the income already assessed.
To
illustrate, if regular books of accounts have not been produced and the
assessment has been completed uls 143(1) and during search the books are found
and seized and further on its examination it is found that certain
purchases/expenses are bogus/inflated, would it be open to argue that the A.a.
has no jurisdiction u/s 153A because the accounts are maintained in the regular
course or books are not prima facie duplicate. It would be a complete travesty
of justice to suggest that the material is not prima facie incriminating and
hence jurisdiction uls 153A is ousted.
24. In the
cases of Chetan Das Lachman
Das (supra), the
jurisdictional High Court has taken the view that "there is no condition
that the additions should be strictly made on 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 regular
assessment.
The revenue
placed reliance on the decision of Delhi High Court in the case of SSP Aviation Ltd. v. Dy.
CIT[2012] 346 ITR 177.
In that case the High Court had examined the validity of assumption of
jurisdiction under section 153C of the Act. The High Court held that for the
purposes of assuming jurisdiction under section 153C, the only requirement is
recording of satisfaction by the Assessing Officer having jurisdiction over the
searched person that the valuable articles or books of accounts or documents
seized during search belong to a third person. It was held that there is no
requirement in section 153C (1) that the Assessing Officer should also be
satisfied, that such valuable articles or books of accounts or documents
belonging to other person, conclusively reflect earning of undisclosed income
by such third person. Accordingly, it was contended that the existence of
seized material is sufficient for the purposes of assuming jurisdiction and
making assessment under section 153A and there is no impediment to complete the
assessment on the basis of such material.
27. On the
basis of the above, it is submitted that since in the case of the assessee
there was incriminating material in the form of accounts not hitherto produced
before A.O., emails/statements of various persons and such material was
sufficient to assume jurisdiction for the purposes of making assessment under
section 153A."
34. We have considered the rival
submissions and perused the record of the case. Section 153A lays down the
procedure for assessment as a consequence of search. As per this section, where
a search has been initiated u/s 132 or requisition is made u/s 132A of the Act,
the AO shall assess or reassess the total income of six assessment years
immediately preceding the assessment year relevant to the previous year in
which such search was conducted or requisition was made. Ld. Spl. Counsel has
rightly pointed out that in terms of section 132 of the Act, search can be
conducted only on satisfaction of certain pre-requisite conditions prescribed
under that section. He has pointed out that search can be conducted on a person
only if the prescribed income-tax authority has reason to believe that -
(i)
|
Any person, to whom, summons/notice was issued
under the provisions of the Act to produce books/documents, has failed to
produce the same; or
|
|
(ii)
|
Any person 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 on the basis of
evidence found in the course of search or other post-search material or
information available with the AO which can be related to the evidence found,
but that does not mean that assessment u/s 153A can be arbitrary or made
without any relevance or nexus with the seized material.
34.2 Ld. counsel has also relied on the
decision of Special Bench of the Tribunal in the case of All Cargo Global Logistics Ltd. (supra), wherein it was held
that in case of non-abated assessment, the same is to be restricted to
-(a)undisclosed income/property found during the course of search; and (b)
income on the basis of books of account or other documents, which was not
produced in the regular assessment and are found in the course of search. It
was held that in case of abated assessments, the assessment u/s 153A of the Act
would merge into one and, thus, only one assessment is to be made.
34.3 Ld. Special Counsel's contention that
since the original assessment had been completed u/s 143(1), the restrictive
meaning cannot be ascribed to the expression "not produced before the
AO" and will include 'not produced by operation of law' deserves to be
accepted. However, 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 v. Paul
John, Delicious Cashew Co.[2011] 12 taxmann.com
131/200 Taxman 154(Mag.).
34.4 In view of above discussion, this
ground is rejected.
35. Vide ground no. 9, the assessee has
assailed the order passed u/s 263 on the ground that ld. Commissioner erred in
setting aside the various issues without recording any prima facie finding on
the merits of the issue.
36. Ld. counsel submitted that ld. CIT
failed to record that assessment order was prima
facie erroneous. He submitted
that it is the mandatory requirement 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 ITO v. D.G.
Housing Projects Ltd. [2012] 343 ITR 329/20
taxmann.com 587/212 Taxman 132 (Mag.), 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 of Revenue. Ld. counsel relied on following case laws on this issue:
- CIT v. Leisure
Wear Exports Ltd.[2012] 341 ITR 166/[2011]
11 taxmann.com 54/202 Taxman 130 (Mag.) (Delhi);
- CIT v. Hindustan
Marketing & Advertising Co. Ltd.[2012] 341 ITR 180/[2011]
196 Taxman 368/8 taxmann.com 128 (Delhi);
- Mahindra British Telecom Ltd. v. Dy.
CIT [IT Appeal No. 3099
(Mum.) of 2009, dated 20-3-2009]
36.1 Ld. counsel pointed out that in
response to the notice issued by the CIT u/s 263 of the Act, the assessee,
apart from raising legal objection to the assumption of jurisdiction under the
said section, had submitted detailed replies on merits. He pointed out that in
the order passed u/s 263, the CIT did not deal with the submissions of the
assessee on merits and had merely set aside the same to the file of AO for de
novo adjudication. He submitted that ld. CIT failed to demonstrate how the
assessment framed by the AO after due verification and inquiry, was erroneous
and prejudicial to the interests of revenue. Ld. counsel in this regard
referred to para 15 of the decision in the case of D.G. Housing Projects Ltd. (supra) and pointed out that
the Hon'ble Delhi High Court after considering the decision in the case of Sunbeam Ltd. (supra), held as under:
"16.
Thus, in cases of wrong opinion or finding on merits, the CIT has to come to
the conclusion and himself decide that the order is erroneous, by conducting
necessary enquiry, if required and necessary, before the order under Section
263 is passed. In such cases, the order of the Assessing Officer will be
erroneous because the order passed is not sustainable in law and the said
finding must be recorded. CIT cannot remand the matter to the Assessing Officer
to decide whether the findings recorded are erroneous. In cases where there is
inadequate enquiry but not lack of enquiry, again the CIT must give and record
a finding that the order/inquiry made is erroneous. This can happen if an
enquiry and verification is conducted by the CIT and he is able to establish
and show the error or mistake made by the Assessing Officer, making the order
unsustainable in Law. In some cases possibly though rarely, the CIT can also
show and establish 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 the case of Gee Vee Enterprise (supra), wherein it has been
held that it is not necessary for the Commissioner to make fresh inquiries
before cancelling the order of assessment. He submitted that it is only where
AO has conducted the neessary inquiry; brought the necessary material and
evidence on record; formed an opinion on the given issue based on such evidence
that the proposition sought to be advanced by the assessee would apply.
37.1 Ld. Special counsel reiterated the
submissions made earlier in regard to the level of inquiry which is expected
from the AO, which we have noted in extenso earlier. He submitted that in case
where the assessment has been completed without making any worthwhile inquiry
and without placing on record the material to form an opinion one way or the
other, it is wholly an untenable proposition to suggest that CIT must record a
finding that the opinion so framed by the AO, was erroneous.
37.2 He submitted that in a case of
non-application of mind by the AO, the finding is always erroneous as it
displays non-application of mind and failure to conduct the enquiries and
collect the primary details. If in a given case the AO accepts the returned
income without looking into any material, it cannot be said that he has formed
an opinion. Forming of opinion is a judicial or quasi judicial process while
discharging statutory functions. He submitted that opinions are not formed in
vacuum. In a judicial process, it has to be based on material evidence. It is
not the subjective opinion of an individual but the rational view of an
authority duly empowered to form the opinion under law.
37.3 Ld. Special counsel submitted that the
present case is not one where the AO has chosen to adopt one of two possible
views. In that event, it would have been correct to suggest that the CIT must
give his finding on how the view taken by the AO was erroneous. It is only in
the case of wrong or untenable opinion and finding that the CIT has to record a
finding as to how the opinion of the AO was erroneous.
37.4 Ld. Special counsel further submitted
that the cases cited by the assessee are not applicable to the present case as
in all those cases reasonable and detailed inquires were conducted and a quasi
judicial view was formed based on material on record. However, in the present
case, even the primary enquiries have not been conducted 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 D.G.
Housing Projects Ltd. (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 CIT in the order
has recorded that the consideration receivable was examined by the Assessing
Officer but was not properly examined and therefore the assessment order is
"erroneous". The said finding will be correct, if the CIT had
examined and verified the said transaction himself and given a finding on
merits. As held above, a distinction must be drawn in the cases where the
Assessing Officer does not conduct an enquiry; as lack of enquiry by itself
renders the order being erroneous and prejudicial to the interest of the
Revenue and cases where the Assessing Officer conducts enquiry but finding
recorded is erroneous and which is also prejudicial to the interest of the
Revenue. In latter cases, the CIT has to examine the order of the Assessing
Officer on merits or the decision taken by the Assessing Officer on merits and
then hold and form an opinion on merits that the order passed by the Assessing
Officer is erroneous and prejudicial to the interest of the Revenue. In the
second set of cases, CIT cannot direct the Assessing Officer to conduct further
enquiry to verify and find out whether the order passed is erroneous or not.'
37.6 Ld. Spl. Counsel referred to the
decision in the case of Leisure
Wear Exports Ltd. (supra),
relied upon by the ld. counsel for the assessee to point out that the facts in
the said case were different. In that case one of the issues on which the CIT
exercised his revisionary powers u/s 263 of the Act pertained to the claim of
deduction by the assessee u/s 80HHC of the act. The assessee had claimed
deduction under this provision amounting to Rs. 32,25,486/-. However, despite
various opportunities given by AO, the assessee did not furnish the
particulars/documents and took a plea that it had lost the books of a/c. The
required information was not given. Then AO disallowed the entire claim of
deduction u/s 80HHC of the Act. The CIT in his order passed u/s 263 of the Act
opined that non-supply of the information was deliberate non-compliance on the
part of the assessee and, therefore, the assessment should have been completed
u/s 144 of the Act and not u/s 143(3) of the Act. Then Commissioner also
recorded in his order that the AO had not raised inquires on the following
issues:
(a)
As per the papers on record, the assessee has claimed that there are finished
goods in the closing stock to the tune of Rs. 5.28 crores. Considering the
facts that the total turnover of the assessee was only Rs. 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 Rs. 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
Rs. 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 such a large balance
outstanding, and in view of the fact that no certificate u/s 80 HHC has been
filed from which it could be deduced that such huge exports have been made, it
was incumbent on the Assessing Officer to make enquiries from the Directorate
of Foreign Trade, but no such enquiries have been made.
(d)
The assessee has shown income at Rs. 1.61 crores as exchange variation and this
has been export/sales of crores. It is pertinent to note that in the immediate
previous year no such gain was shown. Therefore, this is a point which needed
examination by the AO."
37.7 In the back drop of these facts the
Hon'ble High Court observed as under:
'12.
Keeping in mind the aforesaid principles, we proceed to discuss the issue at
hand. It was argued by the learned counsel for the assessee that in the entire
order passed by the Commissioner under Section 263 of the Act it is not
mentioned as to how the order was erroneous and prejudicial to the interest of
the Revenue. After scrutinising the said order minutely we are inclined to
agree with the aforesaid argument of the learned counsel. In the entire order
emphasis laid by the Commissioner is that in respect of four issues mentioned
by him, no queries were raised by the AO. On this premise, though it is
observed that there was no application of mind on the part of the AO and the AO
has not recorded any reasons to justify the omission to consider the said
facts, the Commissioner does not take the said order to its logical conclusion
which was the prime duty of the Commissioner in order to justify exercise of
power under Section 263 of the Act. There is not even a whisper that the order
is erroneous. Even if we infer that non-consideration of the issues pointed out
by the Commissioner would amount to an erroneous order, it is not stated as to
how this order is prejudicial to the interest of the Revenue. The penultimate
paragraphs of the orders, at best, contain the observations that the AO was satisfied
with making flimsy additions which were deleted by the CIT(A). This is stated
in the following terms:-
"7. In
the instant case, the Assessing Officer was satisfied with making a flimsy
addition disallowing the claim of Rs. 17,38,106/- debited under the head,
"selling and distributing expenses", and after further holding that
the deduction under section 80HHC of Rs. 32,25,486/- was unwarranted. 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 Rs. 5.28 crores.
According to the Commissioner, when the total turnover of the assessee was Rs.
6.13 crores, the AO should have satisfied himself by calling for more details
as to how there was closing stock of such a magnitude of Rs. 5.28 crores. Thus,
the Commissioner has not doubted the statement of finished goods in the closing
stock furnished by the assessee. He has only remarked that there should have
been a deeper probe by calling for more details. This is neither here nor
there, when we keep in view the ingredients of Section 263 of the Act.
16. In so
far as the insurance claim is concerned, the Commissioner observed that the
assessee had shown receivable on this account to the tune of Rs. 1.21 crores
but no details had been furnished. The AO had also not made any inquiries. In
the detailed discussion on this aspect the Tribunal has observed that insurance
clam was lodged for the goods lost in transit. The assessee at that time had
merely filed a claim with the insurance company. This claim had not been
approved as the insurance company had neither accepted the same nor given any
assurance for making payment.
Therefore,
no income had "accrued" which could be taxed. The Tribunal rightly
held that ordinarily the income is said to have accrued to a person when he
acquires the right to income and this should be enforceable right, though
actual quantification or receipt may follow in due course. The mere claim to
income without any enforceable right cannot be regarded as an accrued income
for the purpose of Income-Tax Act. The Tribunal referred to the following
judgments in support:-
"Income-tax
is levied on income whether the accounts are maintained on mercantile system or
on cash basis. If income does not result at all, there cannot be levy of tax.
Even if an entry of hypothetical income is made in the books of accounts, where
the income does not result at all as there is neither accrual nor receipt of
income, no tax can be levied. Even in mercantile system of accountancy an
assessee could forge the whole or part of a debt, which was irrecoverable, and
the same could not be added to the income of the assessee". Hon'ble
Supreme Court in the case of Godhra
Electricity Co. Ltd. v. CIT (SC) 225 ITR 706, held that
"income-tax is a levy on income. No doubt, 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 totally uncalled for on the part of the Commissioner
to say that the AO did not make requisite inquiries because of the simple
reason that the AO had, in fact, declined and rejected this claim of the
assessee. If the AO himself disallowed the deduction claimed by the assessee on
this account under Section 80 HHC of the Act, we fail to understand what
further inquiries were needed by the AO.'
37.8 Ld. Special counsel submitted that
since entire claim u/s 80HHC had, in any case, been disallowed so no fruitful
purpose of inquiry was there. As regards other issues, Ld. Special counsel
submitted that the facts were entirely different and after consideration of the
facts and the observations of CIT, Hon'ble High Court held that the exercise of
power u/s 263 was not called for. He submitted that this decision has no
application to the present set of facts.
37.9 Ld. Special counsel further referred
to the decision in the case of Hindustan
Marketing & Advertising Co. Ltd. (supra)
and pointed out that the issue was that the assessment order was held to be
erroneous and prejudicial to the interests of revenue because ITO had not made
adequate and detailed investigation/inquiry in respect of major area of the of
the company's operation and source of income; the ITO had acted in a hurry and
did not examine carefully assessee's receipts and payments pertaining to the
advertising work done by the company.
37.10 Ld. Special counsel referred to para
13 of the decision and pointed out that in this case the AO had made various
inquiries which have been noted in the assessment order and, therefore, the
second principle laid down in the case of D.G.
Housing Projects Ltd. (supra)
would apply. As regards the decision in the case of Hero Auto Ltd. (supra), the order passed u/s
263 was cancelled for the following reasons:
"Held,
dismissing the appeal, (i) that there was no discussion in the order of the
Commissioner as to how and in what manner the enquiry was lacking and what was
the fault and default committed by the Assessing Officer. The Assessing Officer
had examined this aspect in the original assessment proceedings and accepted
the stand of the assessee. There was no finding of the Commissioner that the
order passed by the Assessing Officer was erroneous and prejudicial to the
interests of the Revenue. The question of warranty claim was reopened 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 assessee 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 facts were entirely different. In
earlier year disallowance was deleted by the Tribunal and this aspect was not
taken note of by the CIT who merely proceeded on the basis of observations in
the audit report.
38. We have considered the submissions of
both the parties and have perused the record of the case.
38.1 Ld. CIT while passing the order u/s
263 has considered the assessee's reply in detail and gave his finding on
various issues, inter alia, observing as under:
"However,
keeping in view he principle of natural justice, the reply of the assessee,
filed during the course of this proceeding, on each and every issue was
considered and records vis-Ã -vis replies filed at the time of
assessment proceedings were also examined and accordingly finding is being
given, with reference to each issue separately. Issues were also discussed in
detail with the A.Rs of the assessee. For this purpose sufficient opportunities
were also granted to the assessee to file the details, as requested, which is
clear from the calendar of events. It is only after the receipt of all the
details, to the satisfaction of the assessee, that this order is being passed.
Now the
merit of issues raised under the proceedings u/s 263 of the Act are considered.
On the following issues reply of the assessee is examined and is found be
untenable."
38.2 Therefore, without examining the
detail, the findings of ld. CIT qua various issues, it cannot be concluded that
ld. CIT's order is not sustainable in law. The order needs to be examined in
the backdrop of principles laid down in various cases. It cannot be out rightly
concluded that ld. CIT has set aside the issue without examining the merits of
assessee's claim.
38.3 The Hon'ble Delhi High Court, while
deciding the issue in the case of D.G.
Housing Projects Ltd. (supra)
has referred to the decision in the case ofGee Vee Enterprise (supra) and has observed that
the Hon'ble Delhi High court has referred to the two judgments of Hon'ble
Supreme Court in the case of Rampyari
Devi Sarogi (supra)
and Smt. Tara Devi Aggarwal (supra), wherein it had been
held that where the AO had accepted a particular contention/issue, without any
inquiry or evidence, whatsoever, the order was erroneous and prejudicial to the
interests of revenue. After referring to these two decisions Hon'ble Delhi High
Court observed as under:
"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 D.G. Housing
Projects Ltd. (supra)
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 (supra) as
well as D.G. Housing Projects
Ltd. (supra), have to
be taken into consideration depending upon the facts obtaining in a particular
case while deciding various issues. The broad principle that emerges from
various decisions is that if AO has merely accepted the assessee's explanation
on various issues without proper inquiry then the same would come within the
ambit of 'lack of enquiry' and not 'inadequate inquiry' . If a particular issue
comes within the ambit of complete lack of inquiry then the order is to be
considered as erroneous as well as prejudicial to the interests of revenue but
if the case is of inadequate inquiry, then ld. CIT has to demonstrate that how
the order was erroneous and prejudicial to the interests of revenue. This
aspect we will take into consideration while deciding various issues on merits.
In the result, this ground is disposed of accordingly.
39. Vide ground no. 10 the assessee has
assailed the order passed by the ld. CIT for assessment year 1999-2000 on the
ground that ld. Commissioner exceeded his jurisdiction in setting aside the
assessment order in respect of issues raised in the notice dated 5-2-2010
issued u/s 263 of the Act in contravention of the Hon'ble High Court's order
dated 11-12-2009.
39.1 This issue we have examined earlier,
wherein we have held that the ld. CIT was required to pass fresh order in view
of Hon'ble High Court's decision and it has been held that the present
proceedings being fresh proceedings undertaken by ld. Commissioner, he did not
exceed his jurisdiction in raising various issues vide show cause notice dated
5-2-2010 issued u/s 263. This ground is accordingly dismissed.
40. Now we will consider the various
grounds raised by the assessee in regard to various issues:
41. Vide ground no. 11 the assessee has
assailed the findings of ld. CIT in setting aside the claim for exemption u/s
10B as erroneous and prejudicial to the interests of the revenue on the ground
that the same was not examined by the AO while passing the order u/s
143(3)/153A of the Act.
41.1 Vide ground no. 11.1 the assessee has assailed
the findings of ld. CIT in holding that the individual units of the assessee,
deduction in respect of which was claimed u/s 10B of the Act, were not separate
industrial undertakings but mere extension of already existing business of the
assessee.
41.2 Vide ground no. 11.2 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 Rs. 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 inquiries on this issue.
|
|
(iii)
|
The details furnished by the assessee had been
accepted by the AO on the face value without any verification and application
of mind. He pointed out that assessee was show caused vide notice dated
5-2-2010 in regard to various discrepancies which was as under:
|
|
(iv)(a)
|
Section 10B talks of profit of an industrial
undertaking. All the different units were engaged in similar business
activities i.e. information technology, services and
solutions and, therefore, all the units were basically expansion of existing
business and could not be treated as separate industrial undertaking to
qualify for exemption under the said section. In this regard ld. CIT referred
to the decision of Hon'ble Delhi High Court in the case of CIT v. Mohaan
Foods Ltd.[2009] 177 Taxman 274,
wherein it has been held that the true test of industrial undertaking is not,
whether new industrial undertaking connotes expansion of existing business of
assessee, but whether it is of the same new and identifiable undertaking
separate and distinct from existing business. Ld. Commissioner pointed out
that the AO failed to examine whether the different industrial units as
claimed, actually existed independently or the same were only expansion of
the existing business.
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(b)
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No separate books of account were maintained for
each unit eligible for exemption u/s 10B of the Act. He pointed out that
common books of account of the entire business units were maintained and only
at the end of the period, for the purpose of computing deduction/exemption
under the Act, the expenses were allocated to said units to prove from
branches. This issue was not at all examined by AO.
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(c)
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Ld. Commissioner observed that though assessee was
maintaining books of account but for the purpose of computing the profits of
eligible units as covered under the provisions of section 10B of the Act, the
expenses had not been distributed in appropriate manner. He pointed out that
the AO never examined as to what was the basis on which expenses had been
distributed. In this regard he further pointed out this aspect is clear from
the fact that from the net profit rate of EOU eligible units u/s 10B of the Act
was far in excess of those units, which were not eligible for exemption.
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(d)
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No inquiry was conducted to substantiate the
revenue/export turn over of such EOUs as disclosed by the assessee. He
pointed out that the assessee had shown revenue of the EOU at Rs.
15,47,93,925/- and the gross revenue from production at Rs. 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.
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(e)
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Net loss of Rs. 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.
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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 Act, only Rs.
3701/- was shown as misc. expenses.
42.2 One more issue was also raised in
course of passing the order u/s 263 on the ground that the assessee had
received Rs. 5,28,74,000/- on account of export of technical reference material
on which exemption u/s 10B was claimed. However, the AO only disallowed Rs.
25,20,000/- qua six invoices raised on Kwetliso Holdings Ltd., without
verifying the genuineness of other issues.
42.3 In response to various queries raised
by ld. Commissioner in the show cause notice, the assessee filed detailed
reply.
43. Ld. counsel for the assessee Shri Ajay
Vohra referred to the detailed reply filed by assessee on 30-3-2010 contained
at pages 346 to 370 of PB-I and specifically referred to page 353 wherein the
assessee's reply in regard to grant of deduction u/s 10B is contained.
43.1 Ld. counsel submitted that addition
made by AO by denying deduction u/s 10B was deleted by ld. CIT(A) and,
therefore, in view of explanation (c) to section 263, the CIT's jurisdiction
was ousted. He referred to explanation (c) to Section 263, which reads as
under:
"(c)
where any order referred to in the sub-section and passed by the Assessing
Officer had been the subject matter of any appeal filed on or before or after
the 1st day of June, 1988, the powers of the Commissioner under this
sub-section shall extend and shall be deemed always to have extended to such
matters as had not been considered and decided in such appeal."
43.2 With reference to above explanation,
ld. counsel pointed out that the meaning of the word 'matter' has to be
considered.
43.3 Ld. counsel referred to the decision
of Hon'ble Supreme Court in the case of Jute
Corporation of India v. CIT[1991] 187 ITR 688 [1990]
53 Taxman 85 to submit
that the appellate authority is vested with all the plenary powers which the
subordinate authority may have in the matter. He, therefore, submitted that
once ld. CIT(A) has determined any of the aspects relating to sec. 10B, then
the jurisdiction of ld. Commissioner is ousted with reference to the same. He
submitted that the ld. Commissioner cannot assume jurisdiction qua a particular
facet or aspect of sec. 10B. He submitted that the entire matter of claim u/s
10B was considered by the ld. Commissioner (A).
43.4 Without prejudice to his submission,
ld. counsel advanced his further arguments on various issues 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. counsel referred to pages 765,
769, 770, 771 of the PB, wherein the assessee's replies are contained, in which
assessee had furnished the details in this regard. He further referred to
questionnaire dated 29-12-2005, wherein AO had required to furnish the
following details:
"7.
Please provide year-wise expenses shown under the following heads:
a. Bought out products
b. Course Execution Expenses
c. Course Announcement Expenses
d. Bad Debts
e. Professional Expenses
**
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**
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**"
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9. It is
claimed that export of software is physical export of article or thing. Please
explain with evidence how the software is physically exported. Further confirm
that all exports of software tantamount to transfer of all ownership and
property rights without recourse to recall of resumption of titles."
43.7 Ld. counsel further referred to pages
774, 775, 778 to 794, wherein the replies filed by assessee on various issues
raised by AO are contained.
43.8 Ld. counsel further referred to page
795 wherein the questionnaire dated 10-1-2006 is contained, wherein AO had, inter alia, raised following
query:
"(3)
In support of export of software by you please provide year- wise details of
exports made along with reference of softex forms issued by STP authorities
with sample copies thereof."
43.8.1 The reply to AO are contained at page
796 vide letter dated 17-1-2006.
43.9 Ld. counsel further referred to page
857 wherein the questionnaire dated 17-3-2006 is contained, in which AO had
required the assessee to furnish following details:
"3.
Necessary approvals and compliances to be eligible for exemption/deduction u/s
10B of the Income tax Act."
43.10 The assessee's reply is contained at
page 858, in which assessee had submitted the following details:
"(1)
The assessee is eligible for exemption u/s 10B of the Act. In this connection
we have already filed relevant documents and information in support of
assessee's claim u/s 10B of the Act. Further to that we are filing the
following documents and details as under:-
A. Approval
by the Board appointed by the Central Government
B. Note of
EOU and method of allocation of expenses
C. The
assessee has filed Form no. 56G duly certified by Chartered Accountants,
enclosed along with return of income.
D. The
assessee ahs filed along with return of income audited profit & loss
Account of 100% Export oriented 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 an
appropriate basis.
43.14 Ld. counsel submitted that nothing has
been found in course of search and ld. CIT is only resorting to reappraisal of
facts.
43.15 Ld. counsel referred to pages 801 to
803 of PB, wherein the reply filed by assessee dated 6-2-2006 is contained to
submit that assessee had replied the AO's query regarding impact on allocation
of expenses between EOU and non-EOU on account of turn over with business
partners; and further regarding 5 heads of expenditures not debited in EOU
accounts. He submitted that after considering all these details, which were
before AO, he denied assessee's claim to the extent of Rs. 25.20 lacs.
43.16 Ld. counsel referred to page 900 of
PB, wherein the CIT(A)'s order dated 27-9-2006 is contained. He pointed out
that ld. CIT(A), after detailed consideration of facts allowed the assessee's
appeal.
43.17 Ld. counsel further referred to page
909 of PB, wherein the CIT(A)'s order dated 27-9-2006 for AY 2001-02 is
contained, wherein the issue regarding allocation of expenses between EOU and
non EOU units was considered and it was held that the allocation made by the
assessee of common expenses between EOU and non EOU could not be disturbed. In
sum and substance, he, therefore, submitted that AO had duly examined the issue
of allocation of expenses.
43.18 As regards the ld. Commissioner's
objection that nature of export was not examined by AO, ld. counsel referred to
page 773 and 774 of the PB and pointed out that AO had required the assessee to
explain with evidence, how the software was physically exported. It was further
required by the AO that assessee should confirm that all exports of software
tantamount to transfer of all ownership and property rights without recourse to
recall or resumption of titles.
43.19 He referred to page 774 and pointed
out that assessee had submitted a note on export of software, which is
contained at page 778 of PB. The assessee had filed samples of softex forms
issued by STP authority, confirming export of software. It was further pointed
out that export of software tantamount to transfer of all ownership including
intellectual property rights without recourse to recall or resumption of
rights. In this regard the assessee had also relied on the decision of Hon'ble
supreme court in the case of Tata
Consultancy Services v. State of Andhra Pradesh[2004] 271 ITR 401/141
Taxman 132.
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 not give any decision on merit. He failed
to examine the assessee's reply.
(iv)
Claim u/s 10B allowed in all preceding years and, therefore, it would not be
denied in AY 1999-2000. In this regard ld. counsel has relied on the decision
in the case of Hero Auto Ltd. (supra); and CIT v. Escorts
Ltd.[2011] 338 ITR 435/198
Taxman 324/9 taxmann.com 222 (Delhi).
(v)
Claim made by assessee and allowed by AO, after examination and therefore AO
had taken one plausible view in law. Therefore, ld. Commissioner could not substitute
his views on this issue.
44. Ld. Spl. Counsel submitted that
essentially ld. Commissioner has raised four issues on account of which the
claim u/s 10B has to be considered by AO. He submitted that on following
issues, AO failed to conduct inquiries and accepted the assessee's reply on its
face value, without any verification and application of mind. Therefore, the
order of AO was erroneous and prejudicial to the interests of revenue:
(i)
Eligibility of the unit for the claim of deduction, in regard to which it was
incumbent upon the AO to place preliminary details on record to demonstrate
that t he unit continues to fulfill the conditions for the eligibility.
(ii)
Allocation of expenses between EOU and non EOU.
(iii)
Non verification of revenues of EOU.
(iv)
Loss on foreign exchange fluctuation not allocated to EOU.
44.1 He submitted that issue with regard to
deduction u/s 10B has two broad categories
(a)
Eligibility of the unit for the claim of deduction u/s 10B;
(b)
Quantum of deduction u/s 10B.
44.2 Ld. Special Counsel fairly submitted
that:
(a)
The claim of eligibility will need in depth examination in the initial year and
in subsequent years, only fulfillment of conditions based on changes in facts,
if any, will need to be examined;
(b)
The determination of income, which would be entitled for deduction will need to
be examined each year with reference to the nature of receipts and claim of
expenses.
44.3 As far as eligibility of claim of
deduction 10B for such units are concerned, Ld. Special Counsel relied on the
order of the Commissioner. He fairly pointed out that these units came up in
1994-95 and no new units were established during the year. As regards the
quantification of deduction u/s 10B is concerned, Ld. Special Counsel pointed
out that in course of assessment proceedings the AO only raised general queries
to the effect, whether 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 considered as common in nature. These expenses are not
directly charged to business group/service groups. Whereas expenses are
allocated to respective groups/service group/EOU factories based on the area
occupied."
44.4 Ld. Special Counsel further pointed
out that, on the other hand, in the reply scanned on page 21 of the order, it
was stated that service expenses had been allocated on the basis of manpower.
Thus, there was no consistency in the stand of the assessee in regard to the
allocation of expenses.
44.5 Ld. Special Counsel further submitted
that AO failed to look into this primary aspect of the matter. He failed to
examine the basis of allocation. These details were never obtained or examined
by AO. He pointed out that AO failed to obtain the details of total expenses
under each head and how it had been allocated to the EOU units. The AO
proceeded to accept the reply of the assessee without bothering to obtain at
least elementary details of the total expenses, allocable expenses and the
allocation key in the year under appeal.
44.6 He submitted that since AO failed to
carry out the basic inquiries and details were not placed on record, therefore,
it comes within the ambit of lock of inquiry and complete non-application of
mind. AO had simply made a pretence of inquiry. Further he referred to page 29
of the ld. CIT's order and pointed out that the ld. CIT has scanned the audited
accounts of the eligible unit on the said page. In this, the auditors have only
preferred to state that the indirect expenses to the EOU had been allocated on
appropriate basis. He submitted that it is anybody's guess what that
appropriate basis was. He pointed out that such a certificate from the auditors
should have immediately alerted the AO for going into the primary and basic details
instead of accepting the claim on its face value.
44.7 Ld. Special Counsel further submitted
that even before the Tribunal also the assessee has not been able to point out
what appropriate basis of allocation of expenses was. He submitted that merely
on the basis of routine/general letters/replies, it cannot be said that the AO
had conducted inquiry so as to reach the satisfaction that the expenses were
wholly and exclusively incurred and correctly claimed in respect of 10B units.
As regards the ld. counsel's submission with reference to the common
questionnaire dated 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. Please
furnish the details of interest paid/received, if any, during the financial
year, together with the name address and the assessment particulars of all such
persons.
15. Please
furnish the details of the bad debts claimed, if any, during each of the
assessment year covered u/s 153A.
37. It is
noticed that some expenses like "brought 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 apportioned proportionately.'
44.9 Ld. Spl. Counsel referred to following
Questionnaire dated 29-12-2005 :—
"9. It
is claimed that export of software is physical export of article or thing.
Please explain with evidence how the software is physically exported. Further
confirm that all exports of software tantamount to transfer of all ownership
and property rights without recourse to recall of resumption of titles."
44.10 Ld. Special counsel submitted that out
of the gross revenue of Rs. 5,26,79,28,616/-, the revenues of EOU amounted to
Rs. 1,54,79,36,325/-. He submitted that for the amount of revenue, neither the
assessee filed nor the AO called for any details to arrive at the figure shown
in the return. Thus, there was certainly lack of inquiry on this preliminary
aspect. Ld. Spl. Counsel referred to page 774 and 778 of the PB, wherein the
assessee's reply is contained to buttress his submission that no details were
filed by assessee. Ld. Special counsel referred to page 779 and pointed out
that softex forms were primarily exchange control declaration regarding export
of software and AO accepted these forms without verifying whether the same
formed part of export turn over or not. He submitted that AO has not looked
into this part other than STP forms.
44.11 Ld. Spl. Counsel further referred to
page 795 of the PB, wherein questionnaire dated 10-1-2006 is contained, in
which the AO has required the assessee to furnish the details in support of
export of software the following details:
(a)
Source of details of export made;
(b)
Softex forms issued by STP authorities with samples, copies thereof.
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 Rs. 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
disallowance of paltry sum of Rs. 25.20 lacs without bringing on record to show
how other receipts qualify for deduction or how these stood on a different
footing than the one which he chose to disallow, clearly demonstrates that AO
only pretended to apply his mind. He further pointed out that CIT(A) deleted
the addition of Rs. 25.20 lacs, so made by AO on the preliminary ground that he
himself accepted the claims of other 14 parties. Thus, Ld. Spl. Counsel
submitted that AO neither made the inquiry nor came to a correct conclusion
with regard to the eligibility of such receipts for the deduction u/s 10B of
the Act.
44.14 In response to assessee's submission
that revenues of EOUs or non EOUs were supported by Softex issued by STPI and
export of ERN to certain parties in respect of which disallowance was made by
the AO was deleted by ld. CIT(A), Ld. Spl. Counsel submitted as under:
"Counter
submissions of Revenue
It is
submitted that in the course of assessment proceedings, the Assessing Officer
only took details of export of Softex Forms issued by STPI, but the AO did not
verify whether software was actually exported or the payments were in reality
received in relation to transactions not amounting to export of software.
In this
connection, reliance was placed on the assessment order passed u/s 153A of the
Act for the relevant assessment year, wherein the AO had disallowed deduction
u/s 10B claimed with respect to six invoices raised on Kwetliso Holding on the
ground that the same were receipts of technical knowhow fee and not in relation
to actual export of Software (TRM).
Revenue
would like to submit that the AO failed to conduct the basic and primary
enquiry with regard to nature of the so called export revenue. The glaring
example is with regard to the export made to 15 parties indicated by CIT in his
revisionary order. There was absolutely no material placed on record to
indicate that these represented export of TRM and not fee for technical
services more so when the AO chose to take the contrary view I respect of 6
invoices (identically placed) of Kwetliso Holdings. This leaves no room for any
doubt that the AO made the pretence of enquiry and made some petty adhoc
disallowances only to be deleted in appeal. The order of the CIT examines the
issue in sufficient details and the lack of enquiry is writ large on the face
of the matter.
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:
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 Rs. 3,61,086/- and the income under the head "capital
gains" at Rs. 38,874/-. The ITO had made certain additions and
disallowances while computing the loss and income as above and had also
accepted, inter alia, the following three items:
(i)
|
Deduction of a sum of Rs. 23,82,621/- by way of
provision for security;
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|
(ii)
|
Depreciation of Rs. 4,21,000/- which was paid by
the assessee to United Textile Industries as consideration for transfer of
installed property of Rs. 17,480/- and 400 looms of old Manek Chowk Mills.
|
|
(iii)
|
Loss on account of difference in exchange rate
which was referable to the purchase of machinery etc. as revenue expenditure.
|
44.17 In the appeals filed by the assessee,
the items in respect of which the decision was in its favour, were not the
subject matter of the appeals. In respect of above three items the CIT
exercised his power u/s 263. Main contention of the assessee was that since the
order of the ITO was subject matter of appeal before ld. CIT(A), therefore, the
said order merged with the order of ld. CIT(A), ousting the jurisdiction of ld.
Commissioner. This plea was rejected by Hon'ble Supreme Court and it was held
that in view of Explanation (c) to section 263, the Commissioner
had power u/s 263 in respect of the impugned three items.
44.18 The Hon'ble Bombay High Court in the
case of Ritz Ltd. (supra), while considering the
scope of explanation (c) to section 263, observed that the legal position as
laid down in CIT v. Muncherji
& Co.[1987] 167 ITR 671/32
Taxman 551 (Bom.) and CIT v. Smt.
A.S. Narendrakumari[1988] 176 ITR 515/41
Taxman 226 (Bom.) is
that once an order of assessment is subject matter of appeal, the whole of it
merges in that of the appellate order, nothing survives. The Hon'ble Bombay
High Court, inter alia, observed as under:
'The
Explanation was then evidently prospective with effect from June 1, 1988. In the
present case, the appeals having been not only filed but also disposed of
before that date, this Explanation would have no effect whatsoever. Coming then
to the amendment of the Explanation in 1989 with retrospective effect from June
1, 1988, it is seen that on the face of it there is some contradiction. The
insertion of the words "filed on or before or after the 1st day of June,
1988" and "and shall be deemed always to have extended" at two
places in the Explanation may support the Department's contention on the 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 judgment, the construction placed herein is based on
sound logic, namely, irrespective of the language in which the amending
provisions are couched, the amendment cannot be retrospective with effect from
a date earlier to the date on which the provision sought to be amended itself
was brought on the statute book.'
44.19 In view of these decisions, ld.
Special Counsel submitted that in the present case since the issue under
consideration before the Commissioner (A) was only disallowance of claim of
deduction with respect to 6 invoices raised on M/s Kwet Liso Holdings, therefore,
to that extent only the issue merged with the order of CIT(A) and all other
issues including remaining invoices of the similar kind, allocation of expenses
and verification of physical export of software to other parties was open for
revision by the CIT u/s 263.
44.20 Ld. Special Counsel submitted that the
word "matter", used in clause (c) of the Explanation includes only
such matter as are agitated before the CIT(A) or which CIT(A) examines or
considers suo motu in exercise of his plenary powers. It is not open to urge
that if an appeal is filed and decided by appellate authority, the entire issue
in its broad spectrum is ousted from the purview of consideration by the
Commissioner.
44.21 In regard to reliance placed by
assessee in the case of Smt. Sujata
Grover v. Dy. CIT[2002] 74 TTJ 347 (Delhi),
Ld. ld. Special Counsel submitted as under:
"The
case relied upon by the Ld. Counsel for the assessee are clearly distinguishable
on facts in the case of Smt.
Sujata Grover v. Dy. CIT[2002] 74 TTJ 347 (Delhi) the expression "any other
receipts of similar nature" as appearing in Explanation (baa) to Section
80HHC was considered and decided by CIT(Appeals) in respect of foreign exchange
fluctuation. CIT sought to exclude 90% of such fluctuation. It was in this back
drop that the exercise of powers by CIT was found as being not justified. In
the present case, there is complete lack of enquiry with regard to receipts
from various parties on primary facts as to whether these constituted export of
TRM or constituted consideration for technical fee. The decision is not at all
applicable."
44.22 As regards the reliance placed on the
decision in the case of Sahara
India Mutual Benefit Co. Ltd. v. Asstt. CIT[2002] 74 TTJ 67 (All),
ld. Special Counsel submitted that the said decision is also distinguishable on
facts. In this case 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 as on 31-03-99
|
9.
|
Service group expenses April 98 to Mar 99
|
10
|
Expenses for stride April 98 to Mar 99
|
11
|
EOU Calcutta expenses April 98 to Mar 99
|
12
|
EOU Mumbai expenses April 98 to Mar 99
|
13-14
|
EOU P&L account April 98 to Mar 99
|
15
|
EOU P&L account April 97 to Mar 98
|
16
|
Service group expenses
|
18
|
EOU Calcutta expenses
|
19
|
EOU Bombay expenses
|
20-30
|
Direct expenses EOU & P&L A/c
|
31-32
|
EOU P&L A/c
|
33-37
|
Fixed assets charts & depreciation
|
38-45
|
Salary April 98 to Mar 99
|
46-47
|
EOU expenses April 98 to Mar 99
|
48-71
|
List of employees & salary paid
|
72-111
|
EOU Calcutta expenses
|
112-119
|
EOU Bombay expenses
|
120-129
|
Office expenses
|
130-136
|
Stride expenses
|
137-143
|
Questionnaire issued by Investigation Wing (WETg)
|
144
|
Ann. A-63 regarding email by Phillips M Dodds.
|
44.24 He, therefore, submitted that the AO
was well within his powers to examine the claim u/s 10B in the proceedings
taken u/s 153A, since the documents found had nexus with the claim of deduction
u/s 10B. He submitted that some nexus is necessary but no direct nexus is
necessary for assuming jurisdiction u/s 153A. He submitted that the plea
advanced by ld. counsel is factually incorrect and legally not sound.
44.25 to 55.26 Ld. Special Counsel reiterated his
submissions made earlier in this regard vide ground no. 9 and pointed out that
the assessment in the year was completed u/s 143(1) without reference to any
books of account or other documents. Therefore, the books of a/c found in
course of search, inter alia, constitute material seized in the course of
search.
55.27 Ld. Special Counsel referred to pages
759 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 were not done by AO, therefore, the order was
erroneous and prejudicial to the interests of revenue.
55.29 Ld. Spl. Counsel submitted that deletion
of disallowance in subsequent year cannot be a ground to canvass the
proposition that inquiries were made this year also and no disallowance is
called for at all. Each year, nature of expenses and quantum of deduction may
be different. This fact cannot remain constant for all the years and has to be
examined for each year.
55.30 As regards the plea of ld. counsel for
the assessee that foreign exchange loss did not pertain to export of EOU unit
and, therefore, the question of location of EOU unit does not arise at all, ld.
Spl. Counsel submitted that details were furnished before the ld. Commissioner
and were not before the AO, as no inquiry was made by the AO. Therefore, on
account of failure to carry out necessary inquiry, the assessment order was erroneous
as well as prejudicial to the interests of Revenue.
56. We have considered the submissions of
the parties and perused the record of the case. As far as assessee's challenge
to findings of ld. CIT in regard to setting aside the issue of eligibility of
claim for exemption u/s 10B is concerned, admittedly the deduction u/s 10B was
being claimed and allowed to assessee since AY 1994-95. In response to the AO's
notice dated 17-3-2006, the assessee had furnished vide letter dated 24-3-2006
all the approvals received from STPI authorities of relevant states, where the
EOU unit was established along with note on various business units including
EOU units, the nature of operations carried out by them. Ld. Counsel has
rightly relied on the decision of Tribunal dated 30-5-2014 in the case of HCL Technologies Ltd. v. Asstt.
CIT [IT Appeal No. 5623
(Delhi) of 2010] wherein it had been held that it is beyond the power of the AO
to examine whether the undertakings were formed in the earlier years by
splitting up or reconstruction of existing business. Therefore, this could not
be held to be a case where AO had not applied his mind to the assessee's claim
regarding eligibility u/s 10B and, therefore, this, in our opinion, does not
come within the revisionary powers of ld. CIT. Therefore, we hold that, as
regards the eligibility of claim u/s 10B, the revisional proceedings taken were
not in accordance with law.
56.1 The second limb of this issue is
regarding determination of assessee'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.
56.2-4 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 explained the allocation of
expenses. It is evident from the reply that assessee only explained the
methodology followed for allocation of expenses vide reply dated 24th March 2006 but did not give any
details of the expenses incurred by it under various heads and its distribution
amongst respective units. With reference to details furnished regarding
bifurcation of the expenses ld. CIT has clearly demonstrated that as regards
allocation of service group expenses there was no consistent basis viz. revenue
of units/manpower of units. Assessee did not furnish details of actual
manpower/area of units. It cannot be disputed that without bringing all these primary/basic
details on record, the AO could not take any rational decision. Therefore, this
issue comes within the ambit of lack of inquiry and not inadequate inquiry. The
plea of assessee that auditors had examined the issue of allocation of expenses
is also not acceptable because auditors only stated that indirect expenses had
been allocated on appropriate basis. The AO was required to inquire as to what
was the alleged appropriate basis and whether the same in principle, was
followed or not. Thus, 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 submission
that if a particular aspect permeates through all the assessment years within
the block period then, if, in one year the issue has been examined by ld.
CIT(A), then doctrine of merger will not apply to other assessment years.
However, ld. CIT has clearly demonstrated that the issue of allocation of
expenses was not examined in assessment year 2001-02. In view of above
discussion, we concur with the finding of ld. CIT on this issue.
56.5 The next objection of ld. CIT was that
the assessee was not maintaining separate books of account for each eligible
undertaking. The assessee's submission was that the accounts were maintained
through FAMS/SAP software, which contained separate code for each head of
expenditure and for each of the units of the assessee. 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 Rs.
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 parties but
the AO chose to examine only 6 invoices out of 12 invoices raised on Kwetliso
Holdings. The AO did not make any inquiry to show how other receipts qualified
for deduction or how those stood on a different footing than the one which he
choose to disallow clearly demonstrated a complete lack of inquiry on behalf of
the AO.
56.7 Ld. Special Counsel has rightly
pointed out that ld. CIT(A) deleted the addition of Rs. 25.20 lacs on the
preliminary ground that AO himself accepted the claim of other 14 parties. The
assessee had merely submitted softec forms issued by STPI in support of its
contention. If the AO accepts the details furnished by assessee without proper
inquiry as to the basic aspects involved in a particular case, then it is a
case of lack of inquiry. The assessee's reply that from some licensees assessee
was charging technical know how fees, was a relevant fact, which should have
prompted the AO to examine in detail all the invoices raised by assessee in
respect of export of TRM. The AO did not point out as to from which licensees
the assessee had received technical know-how fee particularly, when he was of
the opinion that assessee was camoflouging the technical know-how fee with
alleged export of TRM. The AO did not refer to any material on record for his
conclusions either way. The AO was required to verify whether software was
actually exported or the payments were in realty in regard to transaction not
amounting to export of software. The AO failed to conduct the basic and
preliminary inquiry with regard to nature of the so called export revenue. The
AO had disallowed the claim of Rs. 25.20 lacs on the ground that the amount
received from Kwetliso Holdings was in lieu of technical know how fees as
opposed to export of technical reference material Softec. These findings were
reversed by ld. CIT(A). The AO was required to bring the primary facts on
record in respect of all the invoices and not bringing the said details on
record resulted into error creeping into the assessment order, which caused
prejudice also to the revenue.
56.8 We do not find much substance in the
submission of ld. counsel for the assessee that it is a case of merger with
CIT(A)'s finding because CIT(A) deleted the disallowance made by AO. The same
finding will be relevant 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.
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 Rs. 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 Rs. 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 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.
In the result this ground is
partly allowed.
57. Vide ground no. 12, the assessee has
assailed the findings of ld. CIT in holding that the AO while allowing netting
off of interest income and expenses in the order passed u/s 143(3)/153A, failed
to appreciate that this issue had already been examined and scrutinized in
detail during the original assessment proceedings u/s 143(3)/153A of the Act.
57.1 Brief facts, apropos this issue, are
that the Commissioner noticed that during the year under consideration the
assessee had received following interest income:
Interest received from deposits
|
Rs. 5,97,29,499/-
|
|
Interest received from loans
|
Rs. 1,47,00,000/-
|
|
Interest received from others
|
Rs. 5,64,24,251/-
|
|
Total
|
Rs. 13,08,53,750/-
|
57.2 He noticed that in the return of
income, assessee had not shown this income under the head "income from
other sources", but had reduced it from interest paid on loans amounting
to Rs. 17,03,49,186/- and had charged the difference amount of Rs. 3,94,95,436/-
to P&L A/c. In the reply filed before ld. commissioner vide letter dated
30-3-2010, the assessee had submitted that during the course of assessment
proceedings the AO vide questionnaire dated 2-11-2005 directed the assessee to
furnish details of interest paid and interest received. In response thereof,
the assessee, vide letter dated 14-11-2005 furnished complete details of
interest income and interest paid. It was further submitted that it could not
be held that the AO did not examine the details of interest income and interest
expenses. The assessee further stated that by netting off of interest income
against interest payment, no prejudice was caused to the revenue, as is evident
from the following:
(a)
The assessee has not claimed any deduction under section 10B of the Act on the
entire interest income of Rs. 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 Rs. 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 Rs. 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 deduction under section 10B of the Act on the
entire interest income of Rs. 13,08,53,750/-, ld. Commissioner pointed out that
assessee was talking about interest income but no where it had taken the impact
of interest expenses on the taxable income of the EOU as well as non-EOU units.
He pointed out that if the assessee had charged the actual interest expenditure
to the respective unit, the profit of those units would have been reduced
accordingly. He submitted that interest income can only be adjusted against the
interest payment only if there was direct nexus between the two. He pointed out
that since the assessee was not in the business of finance, direct nexus
between the two amounts could not be assumed and that aspect had to be examined
by the AO. Interest income was also to be assessed under the income
"income from other sources" and the interest expenditure, if incurred
for the purpose of "business" was to be adjusted against business
profits, as the ld. commissioner's main objection was that, had the assessee
shown interest expenditure against business profits, the profits would have
been reduced to the same extent. Accordingly, the exemption u/s 10B would also
have been reduced. Ld. CIT has further amplified his finding with reference to
illustration. He, therefore, concluded that since the AO had not inquired into
the actual interest expenditure, which was attributable to various business
units, therefore, it was clear that the AO had not examined the issue while
passing order u/s 143(3)/153A and allowed the entire claim of interest paid to
be adjusted against interest income, without making necessary
inquiry/verification. Further, in view of various judicial pronouncements, the
interest income was to be taxed under the head income from other sources and
this aspect was also not examined by the AO.
58.1 Ld. counsel submitted that interest
income being not related to business of EOU, was not credited to the P&L
A/c of EOU unit and consequently no deduction u/s 10B of the act was claimed on
the aforesaid amount. Ld. counsel further submitted that Ld. Commissioner
wrongly proceeded on the premise that no allocation of interest was made to EOU
units. On the contrary, exact interest was debited to respective units. He
clarified that in the consolidated account of the assessee company as a whole,
the interest income was netted against the total interest expenditure and net
interest expenditure of Rs. 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 Rs. 17,03,49,186/-, interest expenditure of
Rs. 1,57,12,324/- related to term loan borrowed for purchase of assets at EOU
units, which was debited in the profit and loss account of the EOU units under
the head "finance charges", aggregating to Rs. 1,74,36,330/-. In this
regard ld. counsel referred to page 855 of the PB, wherein the P&L A/c.,
relating to export oriented unit envisaged u/s 10A/10B of the I.T. Act is
contained, to demonstrate that finance charges aggregating to Rs. 1,74,36,330/-
had been debited in the said account, comprising of interest amounting to Rs.
1,57,12,324/- and bank charges of Rs. 17,24,006/-. Therefore, although in the
consolidated account, the total interest expenditure was netted against
interest income, however, in the separate audited accounts of EOU, prepared for
the purposes of determining profits eligible for deduction u/s 10B of the Act,
interest expenditure on borrowed funds relatable to such unit, was separately
debited and reduced from profit of the EOU units, for purposes of computing
deduction under that section.
58.3 Ld. counsel submitted that since the
assessment order was neither erroneous, nor prejudicial to the interests of
revenue, jurisdiction u/s 263 was ousted. He pointed out that allegation of the
Commissioner that the AO did not examine the aforesaid issue, is incorrect.
Complete disclosure had been made by assessee and in course of assessment
proceedings, the AO vide notice dated 2-11-2005, contained at page 963 to 968
of the PB, required the assessee to furnish following details:
"Please
furnish the details of interest paid/received, if any, during the financial
year, together with the name, address and the assessment particulars of all such
persons."
58.4 In response, the assessee had given
the complete details and break up of interest income and interest paid vide
letter dated 14-11-2005, contained at pages 969 to 973 of the PB.
58.5 He further pointed out that while
considering the issue of computation of deduction u/s 10B of the Act, the
details were duly examined by AO. Ld. counsel further submitted that ld.
Commissioner has observed that AO had allowed assessee's claim of netting off
of interest expenditure with interest income, without making necessary
inquiry/verification, which clearly goes to show that it is not at all the case
of Ld. commissioner that the AO did not make any inquiry. Therefore, he
submitted, at best it could be a case of inadequate inquiry and not lack of
inquiry. 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 submitted that AO
did not at all look into the question, whether netting off of interest payment
against receipt of interest was justified and whether income from interest was
rightly taxable as "income from other sources". He submitted that AO
taxed the income under wrong head. He pointed out that interest expenditure
should have been examined to find out as to how much was relatable to EOU and
how much to non-EOU. He referred to page 963 of the PB, wherein the notice
dated 2-11- 2005 is contained and referred to inquiry raised by AO, which have
been reproduced earlier. He pointed out that assessee in its reply, contained
at page 971 onwards, pointed out that working capital loan was borrowed for
various business. Therefore, it was necessary that AO should have inquired as
to for which particular unit, the working capital loan was borrowed. He
referred to page 972 of the PB, where the facility availed from various banks
for specific purpose are contained and pointed out that the loan was taken for
housing purposes, corporate loans, car finance, term loan and short term loan
and, therefore, how expenditure was allocated, was necessarily required to be
inquired into by AO. He submitted that in the absence of inquiry, it is clear
that AO could not reach the required satisfaction to conclude that no further
amount was allocable to EOU units.
59.1 As regards the submission of ld.
counsel that the issue being revenue neutral, could not be made the basis for
action u/s 263, Ld. Special Counsel submitted that this submission is devoid of
substance for the reason that the AO did not bother at all to look into what
part of the borrowings was utilized for EOU for which deduction u/s 10B was
being claimed. The only detail that the AO called for and placed on record, was
the list of lenders and broad nature of the loan. The details contained nothing
to suggest that these loans were or were not utilized for EOUs. There were
working capital loans in the list filed by the assessee. How much of such
working capital loan was utilized by eligible units and how much by the
non-eligible units. These are primary details and if the AO prefers for some
inexplicable reasons to not even look into these, it is case of complete
non-application of mind and lack of enquiry.
59.2 As regards the submission of ld.
counsel that the issue was out of the scope of section 153A, Ld. Special
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 Rs. 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 this interest income against the interest
expenditure of Rs. 17,03,49,186/-. This claim of netting off of interest made
by assessee was accepted by the AO without examining the primary details
regarding nexus of interest received against interest paid. Interest
expenditure incurred for the purpose of business could be adjusted against
business profits and not against income from other sources and, therefore, the
AO was required to examine this aspect. Further, when assessee was claiming
exemption u/s 10B in respect of certain EOUs, it was incumbent upon AO to carry
out basic inquiry as to against which business unit expenses were to be
allocated. Ld. Counsel has demonstrated that interest relating to EOU was
debited in the particular unit. But the fact remains whether AO enquired into
this aspect to find out the correctness of claim or not. There is nothing on
record to suggest that this issue at all was examined by AO. The lack of
necessary inquiries being made by AO resulted in passing of an erroneous order,
which was prejudicial to the interest of revenue. We accordingly, sustain the
findings of ld. CIT on this count. In the result this ground is dismissed.
61. Vide ground no. 13, the assessee has
assailed the findings of ld. commissioner alleging that interest free
advances/loans/investments having been made by the assessee for non-business
purpose out of interest bearing funds and the AO having failed to examine the
aforesaid issue, the assessment order was erroneous and prejudicial to the
interests of Revenue.
61.1 The assessee's plea was that ld.
Commissioner failed to appreciate that the assessee having mixed pool of funds,
interest free advances/loans/investments AO had rightly presumed that interest
free advances/loans/investments had come out from interest free funds available
with the assessee while not making any disallowance of interest in the original
assessment.
61.2 The ld. Commissioner failed to
appreciate that since the assessee maintained common pool of funds and since the
profits of the business exceeded the interest free advances/investments, the AO
had rightly not made any disallowance of interest in the original assessment.
61.3 Further, sub ground is that ld.
Commissioner failed to appreciate that in the absence of one-to-one nexus
between the funds borrowed for purpose of business and those diverted interest
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 Rs. 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
Rs. 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 examine this nexus in
course of assessment proceedings, which the AO failed to do. He further pointed
out that assessee also failed to prove that some borrowing were exclusively
utilized for the purposes of business and not for granting interest free
loans/advances, even in its reply filed in response to show cause notice. Ld.
Commissioner concluded that since utilization of funds was neither for earning
interest income nor for the purpose of business, the interest expenditure
attributable to the same was neither allowable to be adjusted against interest
income nor allowable for earning business profits. Since AO failed to disallow
the interest expenditure, therefore, the assessment order was erroneous and
prejudicial to the interests of revenue. He, accordingly, restored the matter
to the file of AO for fresh consideration.
62. Ld. counsel referred to the reply
filed before ld. Commissioner at page 312 of the PB and pointed out that it was
submitted therein that assessee had given certain advances for the purpose of
business, like advance to suppliers, advances to employees, security deposits
etc. The assessee had also given certain interest bearing loans. He submitted
that assessee had not given any interest free loan including loans to
subsidiary companies as alleged by the Commissioner. He pointed out that
assessee had made investment to the tune of Rs. 57.20 crores during relevant
previous year in shares of various subsidiary companies. Ld. counsel reiterated
that the AO vide notice dated 2-11-2005 had called for all the details of,
inter alia, interest paid, which were furnished to him vide reply dated
14-11-2005, noted earlier. These details included the amount of interest earned
on loans given by the assessee company including interest earned from
subsidiaries and, therefore, there was no scope for any doubt that no interest
free loan was given by the assessee company.
62.1 Ld. counsel pointed out that details
of investment was given in Schedule 6 of the audited financial statements,
contained at page 1055 of the PB, from which it is clear that assessee had,
with a view to hold controlling interest made investment in shares of
foreign/overseas subsidiary companies, which were engaged in the similar
business of imparting education/ITES in those countries.
62.2 Ld. counsel pointed out that since the
entire investments/loans and advances were 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 Rs. 105.53 crores as
at the end of the relevant year from Rs. 151.04 crores as at the beginning of
the year.
62.6 Ld. counsel further submitted that as
regards the investment/loans and advances made in the earlier years, the same
having been accepted to have been made from interest free funds inasmuch as no
portion of interest expenditure was disallowed in any earlier year, no portion
of interest expenditure, relatable to opening investments/loans and advances
could have been disallowed during the relevant year. In this regard also, ld.
counsel has relied on various case laws.
62.7 Ld. counsel submitted that impugned
issue is out of the scope of jurisdiction of AO u/s 153A and further ld.
Commissioner did not give any specific finding/pin point the error in the
assessment order and prejudice caused to revenue. Further, ld. counsel submitted
that in the second round, ld. commissioner has extended the scope.
62.8 Ld. counsel submitted that this issue
has been raised by ld. Commissioner for the first time in its notice dated
5-2-2010. The Hon'ble High Court had set aside the order to cure the
irregularity and, therefore, ld. Commissioner could not raise this issue by
issuing fresh show cause notice as the limitation stood expired. He submitted
that the scope of original proceedings could not be enlarged in the course of
set aside proceedings.
63. Ld. Special counsel referred to pages
38 and 39 of Commissioner's order where the ld. Commissioner has considered
this issue. He referred to page 963 of the PB, wherein the show cause notice
issued by AO is contained and pointed out that at sl. No. 10, the AO only
required the assessee to furnish the details of interest paid/received, if any,
during the financial year together with the name, address and the assessment
particulars of all such persons. Apart from this query, no other query was raised.
"10.
Please furnish the details of interest paid/received if any, during the
financial year, together with the name, address and the assessment particulars
of all such persons."
63.1 Ld. Spl. counsel further referred to
page 969, wherein the reply of assessee dated 14-11-2005 is contained to
demonstrate that only a general reply was filed by assessee. He further
referred to page 970, wherein the reference is in regard to sl. No. 10,
regarding interest paid and interest received, the details whereof are contained
at page 971. With reference to details of interest paid at page 971, ld Spl.
Counsel submitted that only details of interest paid 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 interest bearing funds. Under such
circumstances, relying on the decision in the case of Indian Explosives Ltd. v. CIT[1984] 147 ITR 392/[1983]
15 Taxman 232 (Cal.) and Marntie Polycast Ltd. v. Asstt.
CIT[1995] 53 ITD 345 (Delhi),
assessee's contention was that interest free funds or loans and advances should
be presumed to have come out from interest free funds available with the
assessee while interest bearing funds were utilized for business purposes.
63.4 Ld. Spl. Counsel submitted that for
this proposition no details regarding common pool and interest bearing funds
were filed by assessee. No material was put before ld. Commissioner to
establish nexus. He submitted that the most critical issue is whether the AO
conducted the preliminary enquiries to find out whether such expenses were
allowable. He submitted that all the arguments of the assessee, like investment
in overseas subsidiaries, common pool of funds, no advance having been made
free of interest etc., were made for the first time before the CIT. The AO did
nothing beyond calling for sketchy details of interest received and paid. The
issue was not examined at all. It was a complete non-application of mind. He
submitted that preliminary issue is whether the necessary inquiries were done
or not.
63.5. Ld. Spl. Counsel submitted that if
some factual contentions are made before the CIT for the first time, it is not
necessary for the CIT to conduct the enquiries only at his end. He would be
fully justified to restore the matter to AO for fresh consideration. As regards
the submission of ld. counsel that the issue having not been raised in the
original order of the Commissioner u/s 263, he referred to the detailed
submissions made in response to ground no. 10. As regards the issue raised by
ld. counsel of this issue being beyond the scope of section 153A, Ld. Spl.
Counsel submitted that the accounts were found during search and, therefore,
the matter fell within the scope of section 153A.
64. We have heard rival submissions and
perused the material available on record. Looking to the amount involved in
respect of payment of interest on borrowed funds, aggregating to Rs.
17,03,49,186/-, the AO was required to at least bring on record the primary
facts whether the funds were used for business purpose or for advancing
interest free loans. The AO did not carry out any inquiry so as to come to the
conclusion that the interest free advances 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 was required to record a finding on the issues
raised before him, but since it was a case of complete lack of inquiry,
therefore, ld. CIT was not required to conduct the inquiries at his end and,
thus, was fully justified in restoring the matter to AO for fresh
consideration.
64.2 Ld. counsel for the assessee has
relied on the decision of Hon'ble Delhi High Court in the case of CIT v. DLF
Ltd.[2013] 350 ITR 555/214
Taxman 91/31 taxmann.com 158 to
contend that in case of debatable issue, even if issue was not specifically
examined by the AO, such issue cannot be set aside by the CIT by invoking
revisionary powers u/s 263 of the Act. However, before treating the issue a
legally debatable one, at least primary facts have to be brought on record.
64.3 In our opinion, the present issue is
to be examined with reference to the decision of Hon'ble Delhi High Court in
the case of GeeVee Electronics(supra),
as it is a case of complete lack of inquiry. We, accordingly, sustain the
findings of ld. CIT on this count. In the result this ground is dismissed.
65. Vide ground no. 14, the assessee has
assailed the ld. Commissioner's findings in holding that repair expenses of Rs.
10.15 crores were claimed by the assessee and allowed by the AO without any
verification or enquiry. The assessee has further assailed the action of ld.
CIT in setting aside the assessment order without considering that the impugned
expenses were in the nature of routine maintenance and repair expenses,
deduction whereof were allowable u/s 31/37 of the Act.
65.1 Ld. CIT has observed that while
examining the assessment records it was noticed that the assessee had claimed
Rs. 10,14,53,772/- as repair expenses (plant & machinery 4,66,38,719,
building Rs. 48,48,463/- and others Rs. 4,99,66,590). The assessee in reply to
show cause notice submitted that the expenses were essentially routine
expenses, comprising of annual maintenance charges of office equipments,
gensets, ACs, computers etc. The expenditure was incurred on spare part
replacement of computers and peripherals and office equipments etc. It was
further contended that no new capital asset was being purchased and further
such expenditure did not relate to any enduring benefit in the capital field.
The contention of assessee was that even some expenditure was of capital nature
that merely facilitate the carrying on of the business more profitably 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 v. Saravana
Spg. Mills (P.) Ltd.[2007] 293 ITR 201/163
Taxman 201, 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 assessee.
|
|
(vi)
|
The claims have been accepted by the AO without
verification, inquiry or application of mind.
|
65.3 Therefore, such allowance of expenses
was erroneous and prejudicial to the interests of revenue.
66. Ld. counsel submitted that the
impugned expenditure were incurred in the normal course of business on account
of repair and maintenance of plant and machienry, building etc., which was only
2.33% higher than the expenditure of Rs. 9,91,43,663/- incurred in the
immediately preceding year. He submitted that the ld. CIT has only referred to
the total expenditure incurred by assessee without having regard to macro
perspective of the entire issue. He submitted that under such circumstances
following judgments are relevant:
Sarvana
Spg. Mills (P.) Ltd. (supra)
and CIT v. Ramaraju
Surgical Cotton Mills[2007] 294 ITR 328/[2008]
166 Taxman 356 (SC).
66.1 He submitted that AO, taking into
consideration the expenditure being within normal range, keeping in view the
size of business, did not ask for details. This cannot be the only basis for
263.
66.2 Ld. counsel referred to page 1062 of
the PB, wherein the schedules annexed to and forming part of P&L A/c are
contained, wherein details of repairs and maintenance are contained and pointed
out that the main reason for increase in expenditure over the previous year was
that under the head "building repairs" as against the sum of Rs. 3300
incurred in previous year the assessee had incurred Rs. 48,48,463/- in the
current assessment year. He referred to pages 309 to 312 and referred to the
reply filed by assessee to the show cause notice, wherein it was pointed out that
this was towards routine maintenance of building.
66.3 Ld. counsel further submitted that in
the show cause notice ld. CIT had not pointed out any expenditure, which was
capital in nature and had made the observations solely on presumption. He
referred to page 321 of PB, wherein the agreement for comprehensive AMC with
HCL is contained and in pursuance to this agreement the payments were made.
66.4 Ld. counsel submitted that ld. CIT did
not comment with reference to reply filed. Ld. counsel further referred to page
1071, wherein the comments of tax auditors are contained, wherein they
specifically stated that no expenditure of capital nature had been debited to
P&L A/c. He submitted that the onerous and time consuming 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. (supra) (PB 1227) - He
submitted that in this case it has been held that CIT must pin point the error
and prejudice caused to revenue.
(3) Leisure were Exports Ltd. (supra)
67. Ld. Spl. Counsel submitted that
admittedly no details were called for examination by AO in respect of
expenditure which was more than Rs. 10 crores. He submitted that AO did not
examine whether any capital expenditure was included in the impugned amount or
not.
67.1 Ld. Spl. Counsel submitted that apart
from tax audit report, AO had no other details and he did not call for even
copy of account. Explanation was given for the first time before ld. CIT and
agreement was also filed for the first time.
67.2 Ld. Spl. Counsel submitted that
primary details have to be first brought on record then only mind can be
applied. He submitted that it was the case of complete lack of inquiry and non
application of mind by the AO and, therefore, ld. CIT rightly exercised his
revisionary jurisdiction. He submitted that the report of the auditor leads to
no inference on the allowability or otherwise of the expenditure. As regards
the various case laws, relied upon by ld. counsel, Ld. Spl. Counsel submitted
that those are distinguishable on facts. He pointed out that in a case of no
inquiry, it is true that the same does not lead to ipso facto inference that
the order was erroneous, but the acceptance of the claim of expenditure without
looking into it at all to the basic details, does lead to an inference of an
error.
68. We have heard rival submissions and
perused the material available on record. The assessee had claimed Rs.
10,14,53,772/- as repairs expense (plant & machinery Rs. 4,66,38,719/0;
building Rs. 48,48,463/-; and others Rs. 4,99,66,590/-). Admittedly with
respect to this issue no queries were raised by AO and no details were filed by
the assessee before the AO. Ld. CIT has further recorded a finding that this
fact was also verified from the assessment record.
68.1 Ld. CIT has rightly pointed out that
the assessee's plea that the expenditure was allowable as current repairs in
view of the decision of Hon'ble Supreme Court in the case of Sarvana Spinning Mills (P.) Ltd. (supra) and also as per the AMC
agreement, but this could be done only if genuineness and allowability of the
expense was examined by the AO.
68.2 Ld. counsel for the assessee in his
submissions has submitted that ld. CIT did not give any finding/pin point any
expenditure or gave reasons as to why and on what basis particulars of the
repairs expenses were to be considered as capital 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 Rs. 119,81,32,796/- as against the sum of Rs.
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 failed to
examine the reasons behind such steep increase while passing order u/s 153A and
allowed the expenditure as claimed by the assessee without any verification. He
referred to the reply filed by the assessee wherein it was pointed out by the
assessee that query regarding course execution expenses was raised by the AO
vide his letter dated 2-11-2005 and 29-12-2005 and it was replied by the
assessee vide letter dated 9-1-2006 that course execution charges comprised
mainly payment to licensees towards execution of courses at Satellite Centers
(STCs) and Network Centers (NWCs) as well as payment to M/s Sylvan Prometric
for online testing of Microsoft certified courses, copywriting, editing
translation, certificate writing mean for student etc.
69.2 Ld. CIT pointed out that in the
questionnaire dated 2-11-2005 the AO had not raised any specific question on
this issue. In the questionnaire dated 29-12-2005, following query was raised:
"Please
provide year wise expenses shown under the following heads:
(a)
Bought out products
(b)
Course Execution Expenses
(c)
Course Announcement Expenses
(d)
Bad Debts
(e)
Professional Expenses"
69.3 With reference to above query, ld. CIT
pointed out that AO had not enquired about the reasons for steep rise in the
course execution expenses. He further referred to the reply dated 9-1-2006,
filed before the AO which is as under:
"Course
Execution expenses basically consists of:
Payment to
Business Partners (Licensees) towards their share of fees for the courses
executed by them in Metro centres, network centers and also in the Government
as well as private schools.
Payment of
Royalty/Technical fees to the overseas Principals for using their contents,
technical evaluation support for students for domestic business.
Payments
made for domestic GNIIT students for online learning.
Professional
expenses like copy writing, editing translations, certificate writing meant for
students etc.
The above
expenses are incurred in relation to domestic division Educational Business in
India. Therefore, all expenses have been debited in domestic division only.
Also related revenue is looked in domestic division."
69.4 Ld. CIT pointed out that it is clear
that this issue was never examined by the AO and neither any verification of
the expenses was ever done and, therefore, he set aside the assessment order 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."
69.8 With reference to above reply, Ld.
counsel submitted that the assessee's explanation for increase in the expenses
was on account of change in the business model of payment to business partners.
69.9 Ld. counsel referred to page 930 of
the PB and pointed out that AO had specifically raised the query in its letter
dated 2-11-2005 as to why some expenses like "bought out
package/products" " course execution charges" "Professional
charges" "Bad debts" etc. had been allocated exclusively to the
taxable units, whereas some of the items, which had to be assigned to non
taxable units, had been booked as expenses in the taxable unit. The AO required
the assessee to explain the justification of booking these expenses under the
taxable unit or whether some of these expenses could be apportioned
proportionately.
69.10 Ld. counsel referred to page 934 of
the PB, wherein assessee's reply is contained in which it was clarified that
out of the expenses referred to in the query, following expenses exclusively
pertained to domestic business (taxable units) and not to EOU. These were -
- Bought
out packages/products
- Course
Execution Charges
- Course
Announcement Expenses; and
- Bad Debts
(domestic).
69.11 It was further clarified that as far
as professional charges were concerned, they were debited to both domestic
(taxable) and EOU (non-taxable) units in the respective years.
69.12 Thereafter, assessee had clarified the
nature of these expenses and referred to course execution charges. It was
submitted as under:
"Course
Execution Charges:
Course
Execution expenses basically consists of payment to domestic education Business
Partners as per details given below:
- Payment
to Business Partners (Licensees) towards their share of fees for the courses
executed by them in Metro centers, network centers and also in the Government
as well as private schools.
- Payment
of Royalty/Technical fees to the for using their contents, technical evaluation
support for students for domestic business.
- Payment
made for domestic GNIT students for online learning
- AMC for
assets installed in School-both Government and Private schools.
-
Professional expenses like copy writing, editing translations, certificate
writing meant for students etc
The above
expenses are incurred in relation to Education Business in India. Therefore,
all 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 and licensees towards execution of courses at Satellite
Centres (STCs) and Network Centres (NWCs). Under the new model, the assessee
started collecting the entire fees from the students and in turn disbursed the
licensee's share in fee to the licensee as course execution expenses at NWCs.
Earlier, the assessee used to show only its own share in the student fees as
income in its books. This change in treatment had standardized the method of
recognizing income in the assessee's books in line with the treatment of
receipts connected with courses offered at STCs.
As a result
of this change in treatment of receipts, the course execution expenses as well
as connected revenues of NWCs stood correspondingly enhanced in the books of
assessee. Thus, the expenses as well as revenues in the profit and loss account
of the assessee were increased by the same amount.
It is
pertinent to note that the licensee's share in the fee in case of NWCs
constitutes around 80% of the total fee collected from students. There is no
additional debit to the profit and loss account on account of the change. It
will however, be appreciated that the net revenue to the assessee, even after
the change, remained the same.
(b)
The assessee started a new Microsoft online testing facility from AY 1999-2000
in respect of which certain expenses were incurred, for the first time, towards
payment to M/s Sylvan Prometric for providing online testing examination
facility for the same.
(c)
Another reason for increase in the course execution changes was the growing
popularity of certain products of the assessee which entail higher course
execution expenditure as compared to other products of the assessee. Thus, an
alteration in the sales-mix of the assessee also contributed towards increase
in course execution expenses."
69.15 With reference to above reply, Ld.
counsel pointed out that ld. Commissioner, without dealing with the aforesaid
contentions of the assessee, set aside the issue of steep rise in course
execution charges back to the file of the AO erroneously, holding that
necessary enquiries had not been conducted by the AO. He submitted that simply
because query was not raised by the AO in the manner desired by the CIT, could
not, be a valid ground to hold the assessment order as erroneous.
69.16 Ld. counsel referred to page 946 of
the PB and pointed out that in the reply 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 year under consideration. Accordingly, the reply of the
assessee contained at page 962 of the PB was made with reference to
justification in increase in the aforesaid expenditure for AY 2001-02 and not for
the year under consideration. He further submitted that AO sought for only
general details.
70.1 As regards the contention of ld.
counsel that ld. CIT did not examine the assessee's reply to pin point the loss
to revenue, ld. Spl. Counsel submitted that the explanation furnished by
assessee needed verification with regard to its content and veracity.
70.2 Ld. Special Counsel in reply to the
submissions made by Ld. counsel for the assessee with reference to impugned
issue beyond the scope of jurisdiction of AO u/s 153A, submitted that the
relevant accounts containing such expenses were found in the course of search
operations.
70.3 In sum and substance Ld. Special
Counsel submitted that it was a case of lack of inquiry and, therefore, action
of the CIT in setting aside the aforesaid issue by exercising revisionary
jurisdiction u/s 263 of the Act, was valid.
70.4 With reference to the reply filed by
assessee, Ld. Special Counsel submitted that the AO had not raised any query
about the purported expenses from AY 1999-2000, so benefit of reply for AY
2001-02 could not be taken. Ld. Special Counsel further pointed out that
assessee in its reply had submitted that it had resorted to a new model, which
were not examined by AO.
70.5 Ld. Special Counsel submitted that
block assessment does not mean that explanation for one particular assessment
year applies to all assessment years. He submitted that basic details were not
available to demonstrate increase.
71. We have heard rival submissions and
perused the material available on record. The assessee had claimed course
execution charges of Rs. 119,81,32,796/- as against the sum of Rs.
57,59,53,934/- claimed in the immediately preceding year. Thus, there was increase
of 108% in this expenditure during the year under consideration.
71.1 Ld. CIT has observed that the query
regarding course execution charges was raised by the AO in his letter dated
2-11-2005 and 29-12-2005 and it was replied by the assessee vide letter dated
9-1-2006 wherein it was stated that course execution charges comprised mainly
of payment to licensees towards execution of courses at Satellite Centres (STC)
and Network 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 finding of ld. CIT on this issue. In the result, this
ground is allowed.
72. Ground no. 16: Vide ground no. 16, the
assessee has assailed the finding of ld. CIT in 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.
72.1 Ld. CIT in his order at pages 42 &
43 pointed out that AO failed to examine the satisfaction of the conditions
laid down in the provisions of section 36. He pointed out that assessee had
written off Rs. 14,95,100/- as bad debts, which was basically a deposit. He
pointed out that this was not a trade debt but was an advance. The AO allowed
the above amount as well as other sum debited under the head "bad
debts" without examining their genuineness and allowability. The assessee
sought to alter its claim of deduction on account of non-recovery of security
deposited as "business expenditure" being loss incidental to business
u/s 28 read with section 37(1) of the Act as opposed to claim the same as bad
debt. Ld. CIT pointed out that this contention of the assessee was acceptable.
However, neither during the assessment proceedings nor before him assessee furnished
any details for the balance bad debts claimed. Thus, out of the total bad debts
written off of Rs. 1,43,44,418/-, ld. CIT accepted the assessee's contention
qua Rs. 14,95,100/- but for the balance he set aside the assessment order to
the file of AO for fresh consideration.
72.2 Ld. counsel for the assessee submitted
that during the course of assessment proceedings u/s 153A/143(3), vide notice
dated 2-11-2005, the AO required the assessee to furnish details of bad debts
claimed during the year which was replied to by the assessee vide letter dated
21-11-2005, 5-12- 2005 and 12-12-2005 along with details of bad debts. He
submitted that ld. CIT failed to pin point any error in the assessment order
and the ensuing prejudice caused to the revenue from the alleged
non-verification of claim of bad debts by the AO. He submitted that post
1-4-1989 the only requirement u/s 36(1)(vii) read with sec. 36(2) is that the
bad debt should be written off and no further condition has been laid down. Ld.
counsel reiterated his submissions with reference to scope of assessment u/s
153A and, inter alia, pointed out that no incriminating document was found,
suggesting income 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 to the
interest of revenue. We, accordingly, are not inclined to accept the finding of
ld. CIT on this issue. Ground is allowed.
74. Vide ground no. 17, the assessee has
assailed the action of ld. CIT in holding that the AO failed to verify whether
any expenses were incurred for earning exempt income, which were required to be
disallowed u/s 14A of the Act and, therefore, the order of the AO was erroneous
and prejudicial to the interests of revenue. The assessee's main contention is
that ld. CIT failed to appreciate that in terms of proviso to section 14A, the
AO is precluded from making any disallowance. Therefore, the ld. CIT could not
have exercised jurisdiction u/s 263 of the Act in respect of this issue.
74.1 Ld. CIT noticed that AO while passing
the assessment order did not make any disallowance u/s 14A in respect of
dividend income claimed exempt u/s 10(33) of the I.T. act. The assessee, in
response to show cause notice issued by ld. CIT on this issue, relied upon the
decision of Cochin Bench of the Tribunal in the case of Paul John Delicious Cashew's case (supra) in support of the
contention that AO has no power to reopen or to change or to increase or
decrease the liability of the assessee on the basis of section 14A, inserted by
Finance Act, 2002. Ld. CIT has in detail considered the assessee's submissions
on legal issues raised before him and pointed out that Board's Circular,
referred by the Tribunal in the aforementioned decision, corrigendum was issued,
which was reported in 254 ITR (Stat.) 279 and has reproduced the contents of
said corrigendum in his order. In this corrigendum it was again clarified that
where the assessment proceedings had become final before 1-4-2001 the
assessment should not be reopened u/s 147 of the Act to disallow expenditure
relatable to the exempt income by applying provisions of section 14A. Ld. CIT
pointed out that since in the present case proceedings were finalized by the AO
on 1-6-2006, therefore, the Board's Circular was not applicable in the instant
case. Thereafter, ld. CIT also referred to proviso to section 14A, inserted by
the Finance Act, 2002 w.e.f. 11-5-2001 and pointed out that in the said proviso
also only sections 147 and 154 were mentioned.
75. Ld. counsel referred to page 190 of
the PB, wherein the show cause notice is contained, in which ld. CIT had
pointed out that assessee had shown dividend income of Rs. 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:
- J.P. Srivastava & Sons (Kanpur)
Ltd. (supra)
- Prithvi Raj & Co. (supra).
(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 provisions of sections 14A.
(d)
Kochin Bench of the ITAT in the case of Paul
John Delicious Cashew (supra)
has held that the order of CIT u/s 263, making disallowance u/s 14A of the Act
was invalid. He further pointed out that this decision has been approved by
Hon'ble Kerala High Court reported as 200 Taxman 154.
75.2 The submission as regards the scope of
assessment u/s 153A was reiterated. The assessee's contention was that u/s m
153A of the Act, assessment cannot be completed on mere reappraisal of
information/documents readily available with the AO but has to be based on
material found in the search.
75.3 Ld. counsel further referred to page
1055 wherein the schedule - annexure to balance-sheet in regard to investment
is contained to point out that all the investments are in group companies,
which is from earlier years. Fresh investment has been made in foreign
subsidiaries, the income from which is not exempt. Therefore, in any view of
the matter, no expenditure was allocable to the earning of exempt income.
75.4 Ld. counsel further placed reliance on
the decision of Hon'ble Delhi High Court in the case of DLF Ltd. (supra), wherein it was held
that considering that the issue of disallowance u/s 14A is debatable and no
disallowance under that section by the AO being a possible sustainable action,
the assessment order could not be set aside on the said issue by the CIT, while
exercising jurisdiction u/s 263 of the Act, notwithstanding that the issue was
not specifically examined by the AO.
76. Ld. Special counsel submitted that
since no query qua applicability of section 14A was raised by the AO during the
course of assessment proceedings, it was a case of lack of enquiry, which
justified the action of the CIT in exercising revisionary jurisdiction u/s 263
of the Act. He referred to page 45-46 of CIT's order, wherein extensive
discussion has been made by ld. CIT on this issue and pointed out that the CIT
was not directing disallowance. He pointed out that there was no bar on
disallowbility of expenses u/s 14A. With reference to the submissions made on
the basis of proviso to section 14A, ld. Spl. Counsel pointed out that AO was
not exercising his power to reopen assessment u/s 147. He submitted that
assessment was being reopened on account of statutory provision and the
assessment being pending before AO, 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 considered in detail while dealing with legal ground in this
regard. As far as decision in the case of Paul
John, Delicious Cashew Co. (supra)
is concerned, the same was not rendered with reference to section 153
assessments and, therefore, is not applicable to present set of facts. Even
otherwise, ld. CIT has elaborately considered as to why the said decision is
not applicable. We concur with his findings noted earlier. We, therefore,
uphold the order of ld. CIT on this count.
78. Vide ground no. 18, the assessee has
assailed the finding of ld. CIT in holding that since the assessee had paid
technical service fee to various non-residents without deduction of tax at
source and the AO having failed to examine the said issue, the order of the AO
in this regard was erroneous and prejudicial to the interest of the Revenue.
78.1 The connecting ground taken in this
regard is that ld. CIT failed to appreciate that this issue including the issue
of deduction of tax at source had duly been considered and scrutinized by the
AO in the original assessment.
78.2 Further connecting ground taken in
this regard is that ld. CIT failed to appreciate that since under the alleged
AMC contracts, the assessee had only received upgrades to software and had not
received any technical service from the non-resident, the consideration paid
was not subject to tax withholding u/s 195 of the Act.
78.3 Ld. CIT noticed from the perusal of
appraisal report that apart from import of software, assessee had to effect
remittance towards "Annual Support/Maintenance Charges" (SMC) to M/s
Ansys Inc. USA, M/s Mechanical Dynamics USA, M/s Mentor Graphics Pvt. Ltd.,
Singapore, M/s Kokums Corporate Sweden etc. Ld. CIT was of the opinion that
payments made were on account of technical support service rendered to Indian
customers in the form of annual maintenance charges. The assessee in its reply
dated 15-3-2010 pointed out that foreign suppliers only supplied the software
and their upgrades from time to time. No services were rendered by the foreign
concerns in connection with these contracts. It was further pointed out that no
technical services were rendered by the foreign suppliers to Indian customers.
The assessee's submissions have been reproduced from pages 47 to 49 of ld.
CIT's order, in which assessee primarily made following submissions:
(a)
Technical/maintenance services, including 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 assessee and
the Indian customers and the foreign suppliers were not a party to these
contracts.
(g)
Under these contracts with the Indian customers, there was obligation of
assessee to supply software upgrades, as well as render technical
maintenance/support services through its technical personnel, to the Indian
customers.
(h)
The supply of software upgrades was incidental and free of cost to the main
activity of providing technical services to customers through the assessee's
technical personnel subject to the terms and conditions agreed to by the
parties.
(i)
The contracts between the assessee and the Indian customers did not cast any
doubt regarding the nature of supply contracts between the assessee and the
foreign suppliers, as the subject matter of the two contracts was different,
both in scope and focus.
(j)
Thereafter assessee answered various queries raised by ld. CIT with reference
to various E-mails and dates of raising of purchase orders.
78.4 Ld. CIT after considering the
assessee's submissions observed that softwares were supplied to customers in
India and the maintenance of software was being done free of cost by overseas
seller for initial few months. Thereafter, the Indian buyer had to pay for
technical support service rendered to Indian customers in the form of annual
maintenance charge. He observed that remittance of annual support
fee/maintenance charges to the overseas suppliers was subject to withholding
tax @ 20%. However, AO erred in accepting the contention that amount was paid
for import of Software upgrades only, without any reason specified/verification
of the related documents by him to reach to this conclusion. He further
observed that A.O. neither cross verified the facts from the concerned persons,
nor recorded their statements, before arriving at any conclusion. He pointed
out that A.O. did not consider the fact that there were evidences on record
which showed that payments were actually made for technical service rendered to
customers in India but it was shown as if payment were made for importing
software upgrades by raising bogus purchase order. For his conclusion ld. CIT
referred to following aspects:-
"(i)
All the sale invoice carries the words "Annual Maintenance Contract"
or annual support service.
(ii)
The email written by Mr. Phillips Dode of Mesa Solution dt. 21/09/04 to Rajesh
Mathur (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 maintenance charge/Technical services and purchase order of
imports were fictitious and bogus. By accepting the purchases order as genuine
the A.O. erred and passed an assessment order which is prejudicial to the
interest of revenue. The payments made for Annual Maintenance Contract
(AMC)/rendering of technical services was taxable in India in the hand of
overseas suppliers. Therefore it was statutory obligation on the assessee part
to deduct the tax at source u/s 195 of the I.T. Act, before making/crediting
payment to overseas suppliers. As the assessee has failed to deduct tax at
source the entire payment is disallowable u/s 40 (a) of I.T. Act."
78.5 Ld. CIT, accordingly, held that the
assessment order was erroneous as no proper inquires were made and prejudicial
to the interests of revenue.
78.6 Ld. counsel for the assessee referred
to show cause notice dated 5-2-2010 contained at page 189 of PB 1 and referred
to pages 190 and 191, wherein ld. CIT had raised the query in regard to annual
maintenance charges/technical services fee paid outside India. Ld. counsel
referred to pages 271 to 274 of PB 1, wherein assessee had given a detailed
reply to the various issues raised by ld. CIT.
78.7 Ld. counsel referred to AO's notice
dated 2-11-2005, contained at pages 432 to 435, being point no. 33, reproduced
hereunder :
"33.
Please explain why the tax has not been collected against payment received by
you as a distributor. You were acting as a distributor of various foreign
company. The maintenance of software was being done free of cost for initial
few months. Thereafter, the Indian buyer had to pay for any support service to
the overseas seller. These payments, which were otherwise subject to tax, were
made through import of software. The imported items were actually stuff of
small or nil value items, you are required to explain how the payment collected
by you as distributor has been appropriated."
78.8 Ld. counsel further referred to pages
437 to 445 of PB2 and pointed out that in regard to point no. 33, assessee had
filed its reply on 14-11-2005 vide Annexure 20 to the said reply, which is
reproduced hereunder:
"Regarding
Point no. 33 for not deducting tax at source on the payments made to Foreign
Principals for import of software and support services. In this connection we
submit our reply as under:
1. That we
signed distributor 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 supplied to and installed
at clients site we have technical team with us.
7. We have
our own team of technical persons who provide Annual Maintenance services to
the client at their sites. There is no technical service provided by the
foreign principals.
8. As we
have imported upgrade which are of small value, there is no question of
deducting tax at source as the payments are towards physical import of upgrade
and not towards technical services.
9. We are
enclosing some of the imported documents which are imported for upgrade of
software e.g. commercial invoice and Bill of entry."
78.9 Ld. counsel further referred to reply
dated 6-2-2006, filed before AO, in which the details of payments towards AMC
upgrade purchases were filed vide Annexure 8, contained at page 449 of PB2.
78.10 Thereafter, Ld. counsel referred to
page 451, wherein the AO's query vide letter dated 10-2-2006 is contained. The
AO required the assessee to furnish information/document in regard to following
queries:
"A.
Regarding Annual Maintenance Contracts on Imported Software:
a. Please clarify why tax was not
deducted at source on royalty/service payments, which was otherwise subject to
deduction of tax at source?
b. Is it correct to state that the
imported items were actually of small or nil value, which could not be sold in
India?
c. Is it true that all the sale invoices
carry the words Annual Maintenance Contract (AMC) or Annual Support Contract
(ASC)? Please clarify.
Please
provide sample copy of sale invoice of AMC.
d. If the payment to overseas suppliers
is only for upgrades, the price should remain the same. However, why is the
price different, even though the purchase order is for the same item number?
e. How did the sale invoices were raised
on some customers in India, even before the receipt of materials from overseas
suppliers?
f. Please clarify on the email written by
Mr Philip Dode of Mesa Solutions dated 21-9-2004."
78.11 Ld. counsel referred to the reply
filed by assessee on this issue vide its reply dated 27-2-2006 which is
contained at pages 455 to 456 and the same is reproduced hereunder:
"A.
Regarding Annual Maintenance Contracts on Imported Software:
In respect
of above, the assessee company would like to submit as follows:
a. It is wrong to state that payment made
to overseas principals is for royalty/technical services, 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 the case of government and semi
government clients, to release payment in advance the clients need advance
invoice to enable them to sign contract and release the payment. This is the
general practice of the trade. This practice is also followed in some of the
private sector parties.
g. Email dated 21st Sept 2004 written by
Mr Philip Dode of Mesa Solutiaons to Mr Rajesh C Mathur talks of setting
outstanding dues and request for early settlement of dues.
The
assessee company would like to clarify that TDS is not applicable on payment
for import of software and their upgrades. Because it is not technical
services. These software/upgrades are standard products and not customized
which the assessee company have imported and sold in the domestic market as
stock and sell items.
The
assessee company would further clarify that the assessee company have not
copied any of the software/upgrade. But have imported and sold them as stock
and sell items."
78.12 Thereafter, Ld. counsel referred to
the questionnaire of AO dated 1-3- 2006 contained at pages 464 to 475 of the
PB, wherein the AO had inter alia raised following queries:
"Remittance
to the following parties were on account of technical services and were
therefore subject to withholding tax in India but the technical services
provided by these parties were described as 'software' which enabled NIIT to
evade taxes, which, were otherwise applicable on the remittances pertaining to
technical services. (i) M/s. Convergent Group Corporation, USA; (stated as
Conversion group in your aforesaid query); (ii) M/s Relativity Technologies,
USA (iii) M/s. Prosoft Training Corn Inc. USA; (iv) M/s ACAE, USA; and M/s.
Mentor Graphics Singapore were on account of royalty)'.
(i)
Remittance of USD 2 Million (0 M/s. Convergent Group Corporation USA
(a)
Tax was evaded by NIIT Limited on remittance of USD 2 Million (Rs. 9.6 Crores
appr.) effected to M/s. Convergent Group Corporation USA under the Technical
Services Contract finalized for NIIT Gls Limited. Remittance of this amount
would have attracted incidence of withholding tax @ 30%. To evade a tax of Rs.
2.76 Crores (appr.) remittance of USD 2 Million was effected by NIIT Limited to
M/s. Convergent Group, USA through manipulated import consignment of software
through satellite;
(b)
Copy of the agreement dated 22.9.2000 with M/s. Convergent 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 Asia, whereas the fact is Ms
Convegent Group, USA did not extend marketing right for South Asia to NIIT
Limited since they had their office in Singapore. You are .requested to produce
any evidence regarding usage made of the software, as it was not a stand alone
piece of software, as per the statement of Convergent's Vice President in the
aforesaid email, and territory of South Asia having been developed with the use
of this so called software described a "Model Office' allegedly downloaded
by them.
(ii)
Remittance of USD 750,0001- to M/s Relativity Technologies, USA
Tax was
evaded by NUT Limited on remittance of USD 750,0001- towards equity of
Relativity Technologies, USA as the remittance reduced the taxable profits of
NIIT's domestic operation, and in support of which copies of documents are also
enclosed;
(a)
Please establish that with the direct use of Software allegedly imported from
Relativity, they were able to earn additional revenue;
(iii)
Remittance of USD 90.000/- 10 M/s Prosoft Training Com. USA;
Tax was
evaded by NIIT Limited on remittance of USD 90,000/- towards technical services
which were fraudulently described as 'Software' Although, M/s Prosoft Training
Corn, USA provided technical services for NIIT's educational & training
centres, the contract was worded to describe as it as "Software Instructional
material'
It is for
NIIT Limited to establish that the aforesaid transactions were at arm's length
and represented genuine import of software.
Your ninth
query is "Please provide the material to prove that were mate (made) at
payment at inflated prices of 20% release of payment where no supply was made
and any evidence to prove that the directors have purchased farm house or
properties out of black money so generated."
78.13 Ld. counsel further referred to pages
545 to 547 of PB2, wherein the assessee's reply is contained, which is
reproduced hereunder:
"Topic-8:
Remittance to the below parties were on account of technical services and were
therefore subject to withholding tax in India, but the technical services
provided by these parties were described as 'software' which enabled NIIT to
evade taxes, which were otherwise applicable on the remittances pertaining to
technical services (i) M/s Covergent Group Corporation, USA; (stated as
Convergent Group in your aforesaid query); (ii) 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 import through customs.
List of
Relevant import documents have already been submitted vide letter dated
14-11-2005;
(a)
Copy of Agreements
(b)
Copy of purchase Order & Requisition
(c)
Copy of invoice
(d)
Copy of Download Certificate.
(e)
Copy of letter of Intimation to Customs
(f)
Chartered Accountant's Certificate
(g)
Copy of letter from RBI, approving deferment of payment.
Further, it
has already been submitted that the company has generated revenue of USD 2.20
million using this software as tool. (vide letter dated 14-11-2005).
ii. Relativity Technologies, Inc:
Relativity Technologies Inc. USA is a company in USA providing Software Solutions
in the area of e-Transformation to modernize and transform existing legacy
applications into net enabling technologies'.
The
assessee has imported "Rescueware 5X Internet Software" vide invoice
No. 129901 dated 31.12.1990 for US$ 7,50,000
In support
of the above, the assessee company have submitted copies of the relevant import
documents vide letter dated 14.11.2005:
The
remittance is not towards technical know-how fee, but towards import of
software.
iii. M/s Proseft Training, Inc:
As mentioned
above, the assessee company can not comment on the e-mails referred.
However,
the assessee company would like to submit as under:
M/s Prosoft
Training Com. Inc was a leader in the US market for Internet & e-commerce
related training and also had global certification program for internet
technologies, called the CIW program (Certified Internet Web Master).
NIIT Ltd. .
imported 14 different courses of the above educational software (Instructional
Material) for the purposes of launch of various courses, based on the above
after creation of additional Instructional Research and content development
(vide assessee's-letter dated 14.11.2005) The same was imported through customs
and banking channels. The assessee company have a ready filed relevant import documents
Vide letter dated 27.02.2006.
Further, it
has also been submitted that the company has generated revenue of Rs 4 Crores.
Vide letter dt 14.11.2005.
The
remittance is not towards technical know-how tee, but towards import of
software
iv. AcAe Inc., USA:
American
Computer Aided Engineering Company based in USA give support service for Mentor
Graphics Products. NIIT Limited has imported the products for sale in 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 clients site .
5. NIIT
Ltd. Have their own team of technical persons who provide Annual Maintenance
services to the client at their sites. There is no technical service provided
by the foreign principals.
6. NIIT
Ltd. have imported upgrades, which are of small value; there is no question of
deducting tax at source as the payments are towards physical import of upgrade
and not towards technical services:
7. The
assessee company have enclosed some of the imported documents, which are
imported for upgrade of software. ( vide letter dt 14.11.2005) :
- Copy of
invoice - Annexure 33(i)
- Copy of
Bi11 of Entry - Annexure 33(ii)
The
remittance, therefore, is not towards technical know-how fee, but towards
import of software."
78.14 With reference to above detailed query
raised by AO and replies filed by assessee, ld. counsel submitted that it is
clear that ld. CIT was seeking to thrust/substitute his opinion on the AO,
arrived by him after making proper inquiries and due application of mind. He
submitted that the observations of ld. CIT that the AO accepted the aforesaid
claim of the assessee, without making proper inquiries with respect to the
aforesaid issue during the course of assessment proceedings, is, in effect,
factually incorrect and contrary to the documents available on record.
78.15 Ld. counsel submitted that the
assessee is a distributor of applications softwares in India for various
foreign concerns, referred to earlier. Subsequently, the assessee also
purchased upgrades/updates of such applications softwares as and when purchased
from the foreign suppliers, which were supplied by the assessee to the Indian
customers in pursuance of obligation undertaken by the assessee under the
annual maintenance contract, entered into with such Indian concerns. He pointed
out that foreign suppliers only supplied the application software and their
upgrades from time to time and received payment in connection therewith. Those
services were rendered by the foreign concerns either to the assessee or to
Indian Customers of the assessee. Ld. counsel further clarified that the
assessee did not make copies of the aforesaid software updates/upgrades but had
imported and sold them as stock and sale items. He submitted that assessee had
only right to use license software and, therefore, it was not royalty. In this
regard ld. counsel relied on following decisions:
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 Lufthansa Cargo India (P.) Ltd. v. Dy.
CIT[2004] 91 ITD 133/140
Taxman 1 (Mag.) (Delhi) 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 of record
that no employee from foreign distributors at any point of time travelled India
for the purpose of rendering the aforesaid alleged service, nor there was any
allegation in the impugned order u/s 263 of the Act. The fact that there was
actual physical control of upgrade/update of software, was clearly intended
from the purchase order placed by the assessee; invoices raised by the foreign
suppliers and bill of entry for home consumption executed at the customers,
which were furnished before the AO during the course of assessment proceedings.
78.19 Ld. counsel submitted that the tenor
of the impugned order passed by the CIT makes it patently clear that the CIT is
merely seeking to thrust/substitute his opinion in place of the AO, as is
evident from the following extracts from the impugned order:
"However
in the assessment order, the assessing officer (AO) erred in accepting the
contention that amount was paid for import of Software upgrades only, without
any reason specified/verification of the related documents 1 by him to reach to
this conclusion."
78.20 Ld. counsel further referred to office
notes to the assessment order, contained at pages 9 to 12 of vol. 8 of PB,
which were provided to assessee as per the direction of Tribunal to submit that
after considering exactly the same issues, as raised in the impugned order and
replies filed by the assessee for AY 1999-2000, the AO formed a firm conclusion
that assessee had physically imported upgrades of software as part of
obligation under AMC contracts, which were not subject to withholding tax, as
is evident from the following observations:
"Conclusion:-
Based on
the facts and circumstances of case and submissions made by assessee along with
their replies on the seized material, I agree with assessee that as the
upgrades imported physically are part of the Annual Maintenance contracts with
client. Hence it is physical import and is not subject to withholding
tax."
78.21 Ld. counsel further reiterated his
submissions as regards the scope of assessment proceedings u/s 153A and pointed
out that no undisclosed income, property or incriminating documents suggesting
income escaping assessment qua this issue was found in the course of search.
The AO and the CIT only sought to construe the contents of the said email found
during the course of search in a particular manner to draw their 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 assessee 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 found during the
course of search written by Mr. Phillips Dode of Mesa (Manager- foreign
supplier) dated 21-9-2004 to Mr. Rajesh Mathur (NIIT Delhi), in order to
appreciate the import of impugned e-mail. Ld. counsel referred to pages 1158.72
vol. IV of the PB, wherein the impugned e-mail is contained and pointed out
that the said e- mail was for realization of pending dues and in that context
Mr. Phillips suggested that they may have to recall back the AM billing.
78.25 Ld. counsel further referred to page
1158.71 vol. IV, wherein e-mail sent by Sunanda Singh to Mr. T.S. Thomas is
contained, wherein it was written as under:
"Kindly
have a PO generated against our PR# 10006401 as per details below:
Vendor:
MECHANICAL DYNAMICS INC, USA.
Amount: USD
3990
Delivery:
30-NOV-2000
This is an
AMC order. Please have the item description as per your convenience."
78.26 Mr. Sunanda Singh was employee of NIIT
and he had written to Mr. T.S. Thomas, who had been employed by the NIIT in its
purchase department and this e-mail was in relation to raising of purchase
order on foreign supplier in relation to software to be supplied to Indian
customers pursuant to obligation under the annual maintenance contract. He
submitted that this email in no way leads to the conclusion that the purchase
order was raised in guise of annual maintenance service.
78.27 In regard to the allegation that
purchase orders were issued to cover the payments of technical service on the
basis of the fact that even before receipt of material/software updates by the
NIIT, NIIT had sold the material/software upgrades to Indian customers, ld.
counsel pointed out that it was clarified that in case of certain government
and semi government clients, in order to release advance payment, the said
clients need invoice in advance, which is the general practice in this trade.
It was for this reason that in certain cases date of invoice of supply of
material to clients preceded the date of receipt of material/software from the
foreign supplier.
78.28 Without prejudice to the
aforementioned arguments and submissions, ld. counsel submitted that even
otherwise assuming, without admitting that assessee was liable to deduct tax at
source from the payments towards purchase 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.
- Mahindra and Mahindra Ltd. v. Dy.
CIT [2009] 313 ITR (AT) 263
(Mum.)(SB).
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 the replies of assessee contained at page 455 and pointed out
that no reply to that part of e-mail where it says that it will revert back to
annual maintenance billing, was given.
79.1 Ld. Spl. Counsel further submitted
that the most crucial document in the form of distributor agreement had not
been brought on record by assessee before the AO and the AO also did not call
for the same. He pointed out that assessee did not question the correctness of
e-mail in any of its reply. He pointed out that ld. CIT was not thrusting his
opinion on AO or substituting the opinion of AO but his findings were based on
the evidence found during the course of search. In reply to ld. counsel's
submissions with reference to office note, ld. Spl. Counsel pointed out that it
only refers to queries raised and replies obtained but no inquiry was raised on
e-mails. He pointed out that replies did not explain the piece of evidence
gathered during the course of search. He submitted that reply had simply been
accepted and it is not a case of inadequate inquiry but lack of inquiry. He
pointed out that it is wholly non-commercial that one would purchase the
software and would give free of cost to its customers. The entire exercise is
towards make belief story He pointed out that in case of digital products, no
need for physical visit to customers required and the services are rendered
through computer/internets. Written submissions made by ld. Special Counsel are
reproduced hereunder:
"Counter
Arguments of the Revenue before the Hon'ble Bench in this regard '
68. The
Revenue relied upon e-mails, (appearing on pages 1158.71 and 1158.72 of the
paper book (Vol-IV)), found in the course of search and urged that the said e-
mails led to the inference that payments were made/invoices were raised in respect
of annual maintenance contracts and not for supply of software. The email
written by Mr. Phillips Dode of Mesa Solution dt. 21/09/2004 to Rajesh Mathur
(NIIT Delhi) clearly indicates that the payments were for the AMC charges and
not for the software. It is written in the email that the supplier will revert
back to Annual Maintenance Billing if the problem is not resolved. It clearly
shows that the payments were for AMC and not for supply of upgrades of
software. The fee for technical services was paid as price for imports by way
of an internal arrangement between the parties 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 item of convenience to make remittance
for AMC payments.
The CIT
also noted on the same page of his order that all the sale invoices carry the
words "Annual Maintenance Contract" or annual support service.
Despite
such glaring and self speaking documents being on record as a result of search,
the A.O. accepted the reply of the assessee on its face value to the effect
that payment to overseas parties was made for software upgrades.
69. It was
urged that in the course of assessment proceedings, although query was raised
by the Assessing Officer with respect to the said e-mails, yet no enquiry was
made in this regard and the reply filed by the assessee was accepted by the
Assessing Officer without verification and application of mind. As regards the
Office Notes to the assessment order, recorded by the Assessing Officer on the
aforesaid issue, it is submitted that the same also demonstrates mere
acceptance of the reply of the assessee and reproduction of the same but does
not reflect any examination/application of mind by the Assessing Officer. There
is nothing in the office note giving any justification as to why the material
found during search was not being taken note of or why the same was being
disregarded. The A.O. was too eager to accept the reply of the assessee on its
face value disregarding vital material on record and without conducting any
enquiry in the matter'.
70. It is
also submitted that the distribution agreement or contract with customer was
not on record nor requisitioned by the Assessing Officer during the course of
assessment proceedings, which would have demonstrated the exact nature of
payment made to the foreign parties and corresponding obligation to deduct tax
at source by the assessee.
71. In view
of the above, it is submitted that no relevant verification/inquiry was conducted
by the Assessing Officer and, therefore, it was a case of complete lack of
inquiry, which justified the action of the CIT in assuming revisionary
jurisdiction under section 263 of the Act.
72. The
contention of the assessee that the issue was beyond the scope of Section 153A
is ridiculous as these emails etc. relied upon by the CIT form part of search
material. If these were not incriminating material, what else could the
incriminating material?
73. The
argument of the learned counsel for the assessee that no action for
non-deduction of tax 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 relevant material available on record. We have earlier considered
in detail the submissions of ld. counsel for the assessee, wherein he has
submitted that AO had raised specific queries on this issue and the assessee
had filed sample import documents, copy of invoices, details of payment etc. The
AO, after detailed inquiry on this issue, concluded that the payments were made
for import of software. In the office note the AO specifically has given his
conclusion on this point, which we have considered earlier. It is true that if
import documents were available then normally the same cannot be doubted but
where during course of search such documents are found which show that the
actual state of affair may be different, then AO is required to go deep into
the issue to find out the real state of affair. Under such circumstances, he is
not supposed to simply accept the documents at its face value. He cannot
abrogate his findings as an investigator. Therefore, the fact remains, whether
the AO correctly appreciated the evidence found during course of search
proceedings or not. The moot point for consideration is whether AO carried out
necessary enquiries necessitated in the facts and circumstances of the case. If
we closely examine the queries raised by AO on different dates, we find that
queries were raised on 2-11-2005, 10-2-2006 and then on 1-3- 2006, which were
replied by assessee. In its query letter the AO specifically stated that
assessee was acting as distributor but the distributorship agreement was not
brought on record by assessee. It is pertinent to note that in letter dated
1-3-2006, the AO had referred to various documents leading to conclusion that
the payments were towards AMC. In regard to payment to M/s Conversant Group
Corporation, the AO had referred to agreement dated 22-9-2000, 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 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 from
NIIT, USA did not arise.
81.2 The assessee has further taken ground
that ld. CIT erred in alleging that the said software having not been put to
use during the year under consideration, the order of the AO allowing
depreciation thereon, was erroneous and prejudicial to the interest of revenue.
In this regard the assessee in its ground has pointed out that ld. CIT failed
to appreciate that aforesaid software viz. 'Net Varsity' had already been put
to use from FY 1997-98 and formed part of the block of assets thereafter. The
assessee has also taken a ground that ld. CIT failed to appreciate that the
aforesaid issue having already been examined and scrutinized in detail during
the original assessment proceedings u/s 143(3)/153A of the Act, the CIT could
not have exercised jurisdiction in respect thereto.
81.3 Brief facts apropos this issue are
that ld. CIT noticed from the assessment records that AO accepted the
contention that the software titled 'Net Varsity' was imported by M/s NIIT
Delhi from NIIT USA in June 1997 and as such related to the period not covered
u/s 153A of the I.T. Act. He further noticed that AO allowed depreciation on
the WDV amount of the software overlooking various evidences on record which
showed that 'Net Varsity' was indeed developed in India by Centre for Research
in Cognitive Systems (CRCS), which is partnership venture between NIIT/assessee
and IIT, Delhi. He further pointed out that even the website of NIIT, Delhi
displayed the fact that 'Net Varsity' is an example of research and development
work of CRCS that has developed into a business for NIIT.
81.4 Ld. CIT referred to the reply filed by
assessee in response to his show cause notice and pointed out following
aspects:
(a)
|
The assessee only defended its claim theoretically
without substantiating the same by the furnishing any documentary evidence in
support the same.
|
|
(b)
|
The assessee made no attempt, what-so-ever, to
rebut the observation that 'Net Varsity' was developed in India as a
partnership venture of NIIT and IIT Delhi.
|
|
(c)
|
He did not accept the assessee's contention that
since during the course of assessment proceedings for AY 1998-99, this issue
was already considered by AO, therefore, it was not open to the department to
deny its claim of depreciation. In this regard he pointed out that each
assessment 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 developed in India the question of importing it from
M/s NIIT USA does not arise.
(b)
The 'Net Varsity' was not an Indian site and, therefore, NIIT Delhi does not
own it.
(c)
The software was not put to use during the year under consideration."
81.5 Ld. counsel submitted that ld. CIT
erred in doubting the import of aforesaid software and its use for the purposes
of business of the assessee for the following reasons:
"The
aforesaid software was imported by the assessee from outside India after
following proper import procedures which is substantiated through the following
documents available on record:
Copy of
purchase orders raised by the assessee on NIIT, USA;
Copy of
invoice raised by NIIT, USA on the assessee;
Copy of
Airway bill;
Copy of
bill of entry submitted with the Customs Authorities substantiating physical
import of software through the customs channel.
The
aforesaid purchase and payment made there against in foreign currency was duly
verified and accepted under FERA by Special Director of Enforcement,
Enforcement Directorate, Government of India, vide order dated 30-4-2004 [refer
pages 575-588 of the paper book]. On perusal of the said order, it will kindly be
noticed that the ED specifically examined/investigated the issue/allegation of
remittance of US $ 7 lacs against import of goods other than Software titled
"Net Varsity". After extensive examination of the matter, the ED
agreed with the contention of the assessee that remittance was made against
actual import of the Software titled 'Net Varsity'
The
aforesaid documents were filed before the assessing officer during the
assessment proceedings and forms part of the records, since the aforesaid issue
was extensively examined by the assessing officer (as discussed infra). The
aforesaid contemporaneous evidences available on record, in our respectful
submission, clearly establish/prove, without any doubt whatsoever, that the
software was actually imported by the assessee from outside India."
81.6 Ld. counsel submitted that ld CIT has
not referred to Enforcement Directorate's (ED) finding and took a contrary
view. He submitted that the ED order is dated 30-4-2004 and CIT's order is
dated 1-4-2010. The order of ED is available at page 575 of the PB. The
relevant portion is reproduced below:
"Discussion
and findings:
I have
carefully 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. INC/CORP/97003 dated
30-6-97 and no. INC/CORP/97002 dated 28-6-97 items shown by bank are computer
software with documentation NETVARSITY and bill of entries no. 560846 and no.
564343 are filed for software with documentation (Unix Productivity Tools) and
software with documentation ('Net Varsity') and the said description of the
items are duly reflected in the invoices nos. INC/CORP/97002 and
INC/CORP/97003.
In this
case remitting bank is Indian overseas, Nehru Place, New Delhi. The said bank
has certified that remittance of US$ 150000 on 24-7-97 was for import of
computer software with documentation face lift website' (description as
mentioned in commercial invoice no. INC/CORP/97001/dated 13.6.97), remittances
of US$ 275000 each was for import of 'computer software with documentation NET
VARSITY' as per invoice no. INC/CORP/97002 dated 28.6.97 and invoice no.
INC/CORP/97003 dated 30.6.97. The bill of entry no. 556667 (invoice no.
INC/CORP/97001/dated 13.6.97), was filed by the notice company before the
customs authority was for the same item as per invoice i.e. software with
documentation facelift website'). Similarly the bill of entry no. 560846
(Invoice no. INC/CORP/97002/dated 28.6.97), was field before the customs authority
was for software with documentation (unix productivity tools') and the said
item is mention4ed below in the invoice under computer software with
documentation Netvarsity'. Similarly, the bill entry no. 564343 (Invoice no.
INC/CORP/97003/dated 30.6.97), was filed before the customs authority for the
same item as per invoice i.e. 'software with documentation (Netvarsity'). The
bill of entries filed before the customs authority showed that customs
authority have examined the goods as per invoices referred above and cleared
the same. The remitting bank has send the remittances for import on the basis
of above documents referred hereinabove presented to them by the notice
company. In view of above factual position, I do not have any evidence to
support the allegation in the SCN that imported goods were other than the one
for which remittances were sent abroad. On the other hand available and cited
evidences proves that the notice has only imported the goods for which
remittances were released by the bank. I pass order as under.
ORDER
I drop the
proceedings initiated against the notices 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.
- Escorts Ltd. (supra)
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 the operation
there, the management appears to have decided to remit funds as payment for
imports of software from NIIT USA. A sum of US $ 7,50,000 was remitted to NIIT
USA in June 1997. Apart from the depreciation on the capitalized cost of
software to be disallowed, the transaction with a related party needs
evaluation of market price of the software on the date of purchase. Your are
required to explain the above."
81.9 Ld. counsel submitted that this query
was duly replied by assessee which is evident from pages 556 to 572, 573 to 574
and 588,wherein all the facts relating to installation and inquiries being
conducted in this regard were brought to the notice of AO. Ld. counsel further
referred to pages 592 to 593, wherein again AO vide his query letter dated
10-2-2006 had raised following issues:
"Regarding
TDS on remittance of USD 7,50,000 to NIIT(USA) in June 1997 -Netvarsity.
Is it true
that NIIT has developed and exported computer software package to NIIT(USA)
Inc.,?
Is it
correct to state that NIIT imported computer software from NIIT(USA) Inc., to
fund Netvarsity expenses?
Is it
evident from the emails seized that Netvarsity is not hosted from the India
Site. Please clarify."
81.10 The assessee's reply dated 27-2-2006
is contained at pages 597 to 600 wherein in detail the assessee had clarified
all the aspects raised in the notice and had also empathetically denied the
allegation that assessee had exported computer software package to NIIT(USA)
Inc., He also referred to pages 604 to 607 of the PB, wherein the utilities of
this software was discussed.
81.11 Ld. counsel referred to office note of
AO for AY 1999-2000 contained at pages 12 to 14 of PB 8, in which AO, inter
alia, has taken into consideration the various invoices raised by NIIT(USA) and
the proceedings initiated by FERA/FEMA authority and thereafter concluded that
since the allegations related to the period not covered u/s 153A of the IT Act,
hence no action was being taken.
81.12 Ld. counsel further pointed out that
AO specifically observed as under:
"The
Assessment order has been passed after submitting a detailed report on the
points of allegation by the CCIT(Central), New Delhi to the Member (Inv.), CBDT
vide letter No. CCIT(Central)/2006-07/136 dated 26-05-2006."
81.13 He, therefore, submitted that AO had
duly examined this aspect as specific allegation 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 exported to NIIT, USA earlier simply on the basis of display at website of
the assessee that Net Varsity was developed by CRCS, a joint venture between
NIIT & IIT, Delhi.
The
background behind development of the aforesaid software is as under:
During the
Third President Club conference held in May, 1996, a team under the leadership
of Mr. CN Madhususan, President, NIIT, USA was formed and charged with the
responsibility of conceptualizing and popularizing 'Net Varsity' on internet.
Dr. Sugata Mitra, Head of CRCS was entrusted with the job of providing
advice/guidance in setting up the Net Varsity portal.
It is
further submitted that Net Varsity software was in fact developed wholly
outside India by NIIT, USA and the said company was the owner of the same.
It is also
denied that CRCS was a partnership venture between the assessee and IIT, Delhi,
as alleged in the impugned order. CRCS was a research department, which was a
part and parcel of the assessee.
The
background to the development of Net Varsity is that this project was set up in
order to galvanize NIIT's education business to embrace the internet
revolution. At that time the internet infrastructure in India was at its
nascent stage and provision of high standard internet hosting services with
necessary band width was not a viable option in India. These factors coupled
with other considerations, such as proposed use of Net Varsity to penetrate US
and European economies led to the decision that the project was to be
developed, controlled and carried out in USA by NIIT, USA. Accordingly, the
project was headed under the direction of President of NIIT, USA in 1995-96 and
the first version of Net Varsity went live in July of 1996 on the Worldwide Web
while it was owned and managed by NIIT, USA.
As time
elapsed after the launch of Net Varsity site, it began to emerge that the
content of the site had to be stylized according to local requirements of
students who were using the site for effective usage as a learning tool. It was
felt that the site alone was not enough to sustain learning over the web. The
assessee also wanted to add/modify the contents of the site in connection with
its specific requirements which were not in line with the vision envisaged by
NIIT, USA for its outside markets. To add to this, there was a threat that
outside market users would not pay for education over 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 said email, attached at page 608 of paper book Vol
II, is reproduced hereunder for ready reference.
"On
this "Net Varsity" home page, can you please remove the reference to
Rs. 6,000 which comes in bright red? Apart from the fact that "Net
Varsity" is not an Indian site (and to anyone else a Rupee price doesn't
make sense). It is disastruous if the preferential price that we offer in India
(i.e. the lowest possible price) is advertised so prominently on the home page.
Most of NIIT does not display prices on web sites and brochures (with the
exception of eNIIT, which displays US prices - the highest in the world; so any
customer in any other Geo is happy to find that a lower price applies to their
Geo, unlike here)."
In this
regard, it is respectfully submitted, as under:
At the
outset, it is submitted, that the aforesaid website was purchased by the
assessee in June 1997, which is supported through various
documents/contemporaneous evidences (supra) for which payments were also
remitted by the assessee to NIIT, USA. The ownership of the assessee cannot be
doubted simply on the basis of adverse inference drawn from the aforesaid
email.
The email,
it is submitted, merely instructs to change the pricing for the products
offered as "Net Varsity" to be done in non-rupee terms and not to
disclose the lower prices offered by the assessee in India, to
customers/business in outside markets.
While the
site continued to be hosted in USA, owing to the fact that India did not have a
similar level of hosting infrastructure, the ownership was transferred to the
assessee.
It is
respectfully reiterated that the said transaction was also reviewed by the FERA
authorities, who after being satisfied by the genuineness of the transaction
had passed an order dated 30-4-2004 in favour of the assessee.
In this
connection, the assessee has also attached copy of various press releases in
the year 1998 disclosing launch of various educational courses by assessee on
the website "Net Varsity" which conclusively establish that the same
was an Indian site owned and operated by the assessee (refer pages 603-608 of
paper book Vol II).
The
aforesaid query was specifically raised by the assessing officer, vide notice
dated 10-02-2006, which was replied to by the assessee, vide reply dated
27-02-2006.
C. The software was not put to use
during the year under consideration:
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 assessee 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 note of various points to come to
the conclusion that this software was not imported by assessee but developed in
India itself. He referred to the office note of AO, referred to earlier, and
pointed out that in the said office note the AO simply concluded that since the
import of the software was not covered in the block period, therefore, this
issue was outside the scope of assessment proceedings u/s 153A.
82.1 Ld. Spl. Counsel pointed out that AO
over looked the fact that assessee had claimed depreciation during the year.
Therefore, he was required to look into the details. Ld. Spl. Counsel further
referred to the order of Enforcement Directorate and pointed out that ED did
not consider the issue regarding genuineness of import as claimed by the
assessee. He further pointed out that ld. CIT has considered the issue of
allowing depreciation qua the ownership of software.
82.2 The Counter Arguments of the Revenue
before the Bench in this regard are as under:
"80.
The Revenue submits that the Assessing Officer accepted the assessee's reply as
such without verification of material on record and without application of
mind. The moot question before the AO was whether the assessee became the owner
of the software titled 'Net Varsity' in 1997 by acquiring it from NIIT, USA,
its overseas subsidiary for USD 7,00,000/- and consequently whether the
assessee was entitled to depreciation on the same during the year under
consideration. It is not in dispute that the so called purchase was made in
1997 and depreciation was allowed in the earlier years. However, the issue
became open as a result of material found during search, particularly the email
dated 08.02.2000 from Mr. Nicholas George to Ms. Niranjana Paul. This email
appearing on page number 608 vol. VII clearly stated that 'Net Varsity' is not
an Indian site. If the program had been purchased in 1997, the email could not
have stated that the site is not Indian. The CIT also pointed out in his order
that the 'Net Varsity was developed in India by Center for Research in
Cognitive System (CRS) which is a partnership venture of NIIT and IIT Delhi.
This appears clearly on the web site of NIIT Delhi as observed by the CIT.
81. When
the email as found during search was on record, it was incumbent upon the AO to
enquire as to whether "Net Varsity" was owned by NIIT India or its
overseas entity in USA. This was a primary enquiry which the AO ought to have
conducted before accepting the reply of the assessee 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
there was no evidence to support the allegation that the remittance was for
goods other than those for which remittance was made. The ED was not concerned
whether the ownership of asset 'Net Varsity' was with the assessee or not but
this is a precondition for the allowance of depreciation U/S 32 of the Act.
83. In view
of the above, it was urged that no relevant verification/enquiry was conducted
by the Assessing Officer and, therefore, it was a case of lack of inquiry,
which justified the action of the CIT in assuming revisionary jurisdiction
under section 263 of the Act."
83. We have heard rival submissions and
perused the material available on record. The first aspect to be considered in
this regard is whether AO was legally justified in concluding that since the
software was allegedly imported in June 1997, the issue of allowing
depreciation in 1999-2000 was beyond the ambit of 153A proceedings. In our
opinion, the view taken by AO is not legally sustainable. Allowability of
depreciation had to be considered from two perspectives - firstly, whether the
asset is owned by assessee and secondly whether it was put to use or not for
business purpose. Normally if in one year depreciation has been allowed on an
asset then, unless the asset is removed from block of asset, depreciation
cannot be denied. However, when in course of search certain documents are found
which show some contrary state of affair, then it is incumbent upon AO to
examine those facts to arrive at proper conclusion. Else the whole purpose of
passing the assessment order under section 153A would frustrate. There is no
law which prohibits AO to examine the evidence found in course of search and
disallow depreciation in subsequent year, if the same is not legally allowable.
83.1 In the present case, as noted earlier,
AO raised specific queries vide letters dated 2-11-2005, 10-2-2006 and after
examining the replies filed by assessee concluded that assessee's claim was
allowable. He was required to give findings with proper reasoning with
reference to queries raised by him mainly on the basis of appraisal report
prepared by Investigation Wing. The AO was required to record a finding how the
allegation of 'Net Varsity' software being developed in India, on the basis of
details found at web site of NIIT were met by assessee and whether the same was
duly rebutted assessee 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
jurisdiction u/s 263. It is further submitted that ld. CIT erred in exercising
jurisdiction u/s 263 in respect of this issue without appreciating that the
CIT(A) for AY 2002-03 had allowed the said issue in favour of the assessee.
84.2 Brief facts apropos this issue are
that in the show cause notice dated 5-2-2010, ld. CIT pointed out that there
were evidences on record which suggested that in FY 2001-02 the import of CBTs
from NETg (UK) were not genuine commercial transactions. Obsolete, out dated
and non saleable CBTs were imported in India after expiry of agreemen between
NIIT and NETg in order to remit money to NETg for payment of royalty.
84.3 Ld. CIT referred to following
evidences on record:
'- There
are e-mail exchanges between key functionaries of NIIT and NETg, which shows
that bogus purchase orders were raised in FY 2001-02 for remitting moneys for
payment of royalty amounting to USD 182500.
- The
statement, dtd 9/12/2004, recorded on oath of Sh. Rajiv Katyal, Vice President
of Marketing in NIIT Ltd.
The above
evidences shows that fictitious purchase orders were raised and non-saleable
and obsolete CBT's were imported in India for remitting money of USD 182500.
Though the AO has disallowed the amount remitted to NETg in FY 2001-02 of USD
207785, but failed to re-examine the real motive and purpose for which said
amount was remitted. However, evidences on record suggest that the real motive
of remittance was to make payment of "Royalty". This position is also
reinforced from the fact that after the expiry of contract with NIIT, M/s NeTg
entered into a more or less similar agreement though worded differently with
M/s APTECH, Mumbai, wherein M/s APTECH had to make payment of royalty to NETg
for the right to market and distribute interactive training products in India.
NETg was receiving royalty ranging from 20% to 50% of the sales made by
APTECH.'
Before ld. CIT, the assessee had
raised following contentions:
"The
payment made to NETg in respect of CBTs pertain only to physical import of CBTs
and therefore, was not in nature of royalty.
Assessee
was not required to replicate or reproduced any material but merely acted as a
distributor of NETg product.
E-mail
relied on by the department pertains to assessment year 2001-02 and no adverse
inference may drawn from such e-mails with respect to assessment year under
consideration.
In 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 assessing 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 assessee had not
furnished corresponding sales invoices neither during the course of its search
proceedings (though specifically asked to do so), nor filed before the AO
during the course of assessment proceedings. He pointed out that assessee
itself admitted that part of CBTs were put to self use. As regards the contention
of the assessee that the email relied upon by the department pertained to AY
2001-02, ld. CIT pointed out that mentioning of emails of subsequent year was
for ascertaining the true nature of the payment.
84.5 As regards the contention that this issue
was examined by AO during the course of assessment proceedings, as it had, vide
letter dated 11-5-2006, filed all related documents before the AO, ld. CIT
pointed out that assessee filed only a chart showing purchases made from NETg
Ltd. and no detailed submission was made. Further assessee's contention was not
found acceptable on the basis of examination of seized material/statements of
the senior officers of the assessee company recorded during the course of
search proceedings.
84.6 Ld. CIT further pointed out that NIIT
had been developing and exporting course or computer based training products
CBTs. The development of the course ware was being done at the 100% EOU of
NIIT. NIIT was also importing CBTs from NETg. Ld. CIT referred to the record
for FY 2001-02 and pointed out that the import of CBTs from NETg were not
genuine commercial transactions and were made merely to remit monies to NETg
for royalty payment. In this regard he has referred to various evidences as
under.
'Obsolete,
outdated and non-saleable CBT's were imported in India even after the expiry of
agreement between NIIT & NETg.
There are
e-mail exchanges between key functionaries of NIIT and NETg, which shows that
bogus purchase orders were raised in F.Y. 2001-02 for remitting moneys for
payment of royalty amounting to USD 182500 (copies of the said e-rnails have
already been provided to the assessee on 13111/2007, by the then DCIT, C.C.-8,
New Delhi). It is pertinent to mention here that NETg had appointed APTECH Ltd
as its new distributor in India. The "NETg channel agreement" with
Aptech is dated 01/04/200 I i.e. prior to the date on which the Purchase Orders
were released by NIIT. Thus proving the point that NIIT was not authorized to
sell the CBTs in India at the time when it imported the above mentioned
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 stated by-the authorities ofNIIT (Sh. Ajay Wahi and
Sh. Katyal) in their statements that the purpose of their import was to fulfill
a minimum purchase commitment with NETg. However, they could 'not explain if
the import commitment was only for USD 1,82,500 then why was the eventual
import for USD 2,07,785? and further if NETg discontinued its relationship with
NIIT then why did it insist on a minimum purchase commitment.
For the
payment made in 2001 for alleged import of CBTs, inspite of the fact that huge
stock was already lying and there were no corresponding sale orders, it was
submitted ~ the assessee during the course of post search proceedings and also
before the undersigned, that the same was done in order to comply with Minimum
Order commitment, which is devoid of any truth. It is seen that as per Term 4
of the agreement minimum order commitment was not applicable after Dec' 1999.'
84.7 Ld. CIT further pointed out that
assessee's claim was that the CBTs amounting to Rs. 7,88,34,352/- were sold to
K.K. Lubricants Pvt. Ltd. However, physical stock of these CBTs was not found
at the premises of K.K. Lubricants Pvt. Ltd. during the search. The director
Shri K.K. Mittal of K.K. Lubricants Pvt. Ltd. also failed to explain as to
where the stock had been kept and also the purpose for which he had purchased
such old obsolete stock.
84.8 Ld. CIT further disputed the
genuineness of this transaction observing that NIIT continued to release of
import purchase order from NETg in spite of their carrying a stock of NETg
courseware CDs amounting to approximately Rs. 3.37 crores in February 2001,
which proved that the real intention for making payments to NETg was different
though the same was classified as import of CBTs.
84.9 Ld. CIT further referred to the new
distributor agreement with APTECH for NETg products dated 1-4-2001 and pointed
out that APTECH was paying royalty to NETg for the right to market and
distribute interactive training products in India. This royalty was ranging
from 20% to 50% of the sales made by APTECH. Ld. CIT pointed out that a
comparison of the agreement between NETg and NIIT viz-a-viz agreement between
M/s NETg and APTECH showed that they were differently worded but the effect was
same. He pointed out that under the agreement NIIT had to pay a minimum each
year called "minimum order commitment" and excess of 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 distributor by NETg for distribution of its products viz.
CBTs/training programmes in India vide agreement dated 31-12-1994. In
accordance with the agreement, the assessee was required to purchase products
from NETg for further sale in India. This agreement expired in the previous
year relevant to AY 2002-03.
84.12 Ld. counsel pointed out that in
pursuance to this agreement, right from its commencement, the assessee made
payments for purchase/import of CBTs, which were always accepted and allowed as
business deduction in the completed assessments for the earlier years. He
pointed out that assessee also purchased CBTs for amounts aggregating to USD
207785 from NETg after expiry of the agreement in AY 2002-03. This was
disallowed by AO on the ground that the same was made after the expiry of the
agreement with NETg. However, from AY 1999-2000 onwards up to AY 2001-02, AO
after detailed examination/verification of the replies and explanations
furnished by the assessee accepted the business arrangement of import of CBTs
by assessee from NETg. He pointed that in AY 2002-03 ld. CIT(A) deleted the
disallowance on the ground that purchases were made by the assessee as part of
minimum purchase obligation undertaken in the agreement.
84.13 Ld. counsel submitted that on
consideration of some e-mails which were found in the course of search and
confronted to the assessee during the course of assessment proceedings, ld. CIT
held that the assessment order was erroneous and prejudicial to the interest of
the Revenue.
84.14 Ld. counsel submitted that the
assessee only ordered CBT's in customer copy format from NETg, which were ready
to be delivered to the ultimate customer. Therefore, NIIT was not required to
replicate or reproduce any material.
84.15 Ld. counsel relied on following
decisions for the proposition that software purchased and sold under a
distribution arrangement without obtaining all the rights in relation to the
copyright, which remained with the licensor, payment made there against was not
in the nature of royalty.
- Ericsson AB (supra);
84.16 Without prejudice to this argument,
ld. counsel submitted that the revenue has not issued any notice to the payees
or made attempt to assess this income, alleged to be chargeable to tax in India
in payees hands and, therefore, assessee/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. (supra)
- Mahindra and Mahindra Ltd. (supra).
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 referred 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 action on
10-11-2004. In the notice the assessee had, inter alia, observed that with
reference to the remittance to NIITg(UK), the AO referred to emails and pointed
out that the payments were on account of royalty and imports were not meant for
resale/use. The queries of AO are reproduced hereunder:
'Remittance
to NIITg (UK)
Evidence in
support of the fact that the remittance to NETg(UK) were on account of royalty
is in the form of e-mails is annexed.
These
e-mails clearly establish that import of copies of older/outdated CBTs effected
by NIIT from NETg(UK) merely for making remittances to NETg(UK) towards royalty
and imports were not meant for re-sell/use.
E-mail
dated 06-02-2001 sent by Mr. Rajeev Katiyal to Amita Mitra, Vice President,
NIIT(USA)Inc. & Mr. Ajay Wahi (General Manager, NITT with copy marked to
Mr. Arvind Thakur Director NIIT and Mr. SS Roy Sr. Vice President, NIIT where
it was, inter alia, stated as under:
"I
told him the only way we can send money from India is getting course in the
quantities mentioned in the PO.
His stance
was that they cannot send courses as we will stock & resell them even
though our agreement is over.
My reply
was that we already hold stock worth close to 750 KUSD (read USD 750000/-) and
if he send some more worth USD 180 K (read 180000/-) it can't add to our
ability to sell.
He has now
agreed to process our PO provided we revise it to include only those course
titles which are already here in our inventory. . . . That by itself is not bad
since we hold quite a few of the latest versions of their courses in the
inventory and we can order more of those. So the action to be taken by us is to
first send a list of our inventory of courses to Andre and to follow it up with
a revised PO to him. K Rajendran should fax to Andre our inventory, which
contains only the following - the list of their course titles held by in our
sock. Then we can send the PO. He process and payment is released."
Email dated
28-02-2001 (Annexure . . . . . . of Mr. P. Rajendaran, sr. Executive with NIIT
Limited to Mr AL Mehta, Dy. General Manager, NIIT, wherein he stated as under:
"NIIT
has to pay USD 1,83,000 as royalty to NETg. . .
Email dated
11-9-2001 (Annexure -) from Mr. Andre Hogan, Director Sales Operations,
NETg(UK) to Mr. Devand of NIIT Delhi, wherein it was inter alia stated as
under:
The purpose
of the shipment is to enable NIIT to 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 titles that are not
in our stock and are new titles produced by NETg. If titles are already in
stock, we can order against those item. These items are not going to be sold by
NIIT as we have taken their products off our sales list …. Therefore if titles
already exists in stock we can order them. We have no intention of reselling
these."
The above
email messages clearly establish how the remittances were effected through the
import route to square off the outstanding to NETg towards royalty and NIIT
continued release of import purchase orders on NETg in spite of their carrying
a stock of NETG's CBTs amounting to approx. Rs. 3.37 crores as in February 2001
(please refer email dated 6-2- 2001 of Mr. Rajeev Katyal, Vice President, NIIT)
since NIIT was prohibited by NETg during subsequent course of their agreement
to sell the stock in India as NETg had appointed M/s Aptech as their sole
distributor for their courseware CBTs in India.
Import of
CBTs was of outdated/old titles, which were already in stock with NIIT, which
goes to establish that the methodology of import was adopted to remit amounts
towards royalty and these were not genuine transactions of import for resale.
It is seen
that the import prices at which CBTs were imported by Aptech from NETg were
much less than the prices at which CBTs were imported by NIIT from NETg;
Stock
statement obtained from NIIT by the Department further confirmed that a huge
inventory of NETg CBTs were being carried by NIIT, which further goes to prove
that the imports effected were only for the purposes of making payments for
$207735 to NETg towards royalty and not for genuine imports of CBTs and their
resale in India NETg after having appointed Aptech as their sole selling
distributor in India had prohibited NIIT to sell NETg's CBTs in India however
NIIT continued imports of copies of CBTs in India for the purposes of making
payments of royalty to NETg;
The
transactions were not at arm's length as required under section 92C of the
Income Tax Act. Imports of CBTs affected through NIITs 100% owned subsidiary
company in UK & directly from NETg were manipulated. The price paid in the
International transaction was not determined in accordance with sub sections
(1) and (2) of section 92.'
84.19 The AO has elaborated all the points
raised above in his query letter, which is contained at pages 667 to 678. The
assessee's reply on all the points are contained from pages 679 to 692. Ld.
counsel further pointed out that in course of assessment proceedings vide
letter dated 9-1-2006, contained at pages630 of the PB, the assessee had
furnished copy of agreement with NETg (UK) highlighting minimum purchase commitment
of NIIT along with note on import of material from NETg valuing US$ 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
Rs. 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 one view by accepting that
payment towards purchase of CBTs was not royalty. In this regard ld. counsel
referred to following queries and respective answers furnished by assessee:
(a)
Query no. 24 raised by AO vide letter no. 2-11-2005 available at page 620 of
the PB, reproduced below:
"24.
As per details obtained from the seized laptop of Sh. V.K. Thadani, you have
imported CBTs (Computer Based Trainign Products) valuing US$ 207785 vide three
different purchase orders from NETg. You are requested to file the complete
details of income from the sale/use of above CBTs."
84.22 Assessee's answer to the
aforementioned query, vide letter dated 14- 11-2005, contained at page 626 is
as under:
"3.
Provide details of obtained from laptop of Mr. V.K. Thadani, which is lying
seized with you s per point 24 of your questionnaire."
(b)
Query no. 9 raised by AO vide letter no. 29-12-2005 available at page 628 of
the PB, as reproduced below:
It is
claimed that export of software is physical export of article or thing. Please
explain with evidence how the software is physically exported. Further confirm
that all exports of software tantamount to transfer of all ownership and
property rights without recourse to recall or resumption of titles"
84.23 Assessee's answer to the
aforementioned query, vide letter dated 9-1- 2006, contained at page 630 is as
under:
"Copy
of agreement with Netg UK highlighting minimum purchase commitment of NIIT
alongwith note on import of material from Netg valuing US$ 2,07,000/- Refer
Annexure III.
(c)
Enquiry no. E regarding TDS on remittances to NeTg, raised by AO vide letter
no. 10-2-2006 available at page 654 of the PB, reproduced below:
E.
Regarding TDS on remittances -
a. Please give a brief of your business
association with NETg, UK
b. Is it correct that the CBTs imported
from NETg have been shown in the non-EOU and the same CBTs were exported to
NETg from the 100% EOUs?
c. Is it correct that the import of CBTs
for USD 2,07,785 was done after expiry of the agreement?
d. Furnish evidence detailing eventual
sale/utilization of the CBTs imported for USD 2,07,785. Have you sold part of
the CBTs to M/s K.K. Lubricants
e. Please provide us copies of invoices
raised on domestic customers for sale of CBTs.
f. Have you replicated/copied the CBTs
purchased from NETg and sold in the domestic market?
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 resources in various media
including CD- ROMs, Interactive Video Instructions, Linear Video Instructions,
CBTs and related texts, audio material and equipments.
The
business relationship between NIIT & NETg was for a long period as
distributor of CBT products of NETg. The ame is evident from the agreement with
NETg which has already been filed with the department on 9-1-2006.
At a latter
stage in 1996, NIIT started software development work for NETg for 'Work on
Hire' basis. Under this new relationship, on the basis of requirement/specific
instructions of the client, NIIT Ltd. developed learning software and contents
on assigned topics with rigorous project and quality control by the client.
These were pieces of Learning Software, called Learning Objects. Once these
softwares were sent to NETg USA, they added their proprietary computer program,
audio files, recorded in their studio, graphics/multi-media, clips where needed
and integrate/recompile al these together to release the final functional CBT
products, which is their intellectual property.
b. It is true that imports of CBTs from
NETg was debited to non-EOU. This is evident from the matching sales as against
the same purchases made in non-EOU. However, it is not correct that the
assessee company have exported the same CBTs to NETg from their 100% EOU.
The G-Ts
developed by NIIT Limited for NETg were shown as exports In the 100% EOU (STP
Units). This is as per the arrangement with NETg on 'Work on Hire' basis. It is
further submitted that the EOU Profitability Statements are correct and the
same have also been certified by Mls Price Waterhouse. Both the above
arrangements are independent and separate from-each other, as explained above
in point (a).
c. It is true that the import of CBTS for
USD 2,07,78S was done after expiry of the agreement, but the import was to be
made as part of "minimum purchase commitment" as per Agreement. The
import was routed thru normal custom channel and all relevant import documents
have been filed with the department (refer our letters . dated 14/l11200S and
09/112006)
d. Summary detailing eventual
sale/utilization of the imported products have already been provided on
14.11.200S. The assessee company have sold part of the CBTs to M/s K K
Lubricants. Further, the assessee company have offered the margin of profit for
tax purpose.
e. Copy 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. 100 in the market only, if they have purchased products
worth Rs.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 whichever is higher.
h. The clarifications of 7 A & B of
the Distributor Agreement are as follows:
7A. Any
distributor can order either in a master copy format or in customer copy
format. In case master copy format is ordered, the distributor has to reproduce
the material and package it and sell it.
7B. In our
case, NIIT always ordered in the customer copy format only which could be
delivered immediately to the customer. Because of this, the issue of
reproduction as per 7B did not arise.
Annexure-31
is not applicable for the assessment year 1999- 2000.
In view of
the reasons stated above, the assessee company would like to submit that TDS is
not applicable on the remittances effected to NETg, because it is not royalty
payment but physical import of CBTs items, which were purchased and sold as
"stock and sell" items. These CBTs are standard products and not
customized. Relevant copies of import documents have already been filed with
the department vide our letter dated 14.11.2005. .
The
assessee company would also like to submit that they have not copied any of the
CBT items imported from NETg, but have purchased and sold them in the domestic
market as stock and sell items."
84.25 The assessee further vide letter dated
6-3-2006 submitted as under:
"Topic-1:
Remittance to NETg (UK)
The reply
to the query is as under:
Background:
NETg is a
multinational company based in UK. The company as engaged in the business of
producing, acquiring & marketing, training resources in various media
including CD- ROM, Interactive Instructions, Linear Instructions, CBTs and
related texts, audio materials and equipments.
The
business association between NIIT Ltd. & NETg was for a long period as
distributor of CBT products of NETg. Under the arrangement, the assessee
company are improting CBTs for selling them in the Indian market. Later on,
NIIT started software development work for NETg in its EOUs under 'work on
Hire' basis. Under this arrangement, once the assessee company develop the
software, they cannot retain and use the products at their end, because they do
not have the copyright to use them (vide our letter dated 27-2-2006).
Referring
to remittance towards import of CBTs from NETg, the assessee company had
already explained vide our letter dated 09-01-2006, wherein it is stated that
the remittance is towards Minimum purchase 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
Rajendran:
Q. I am
showing you certain email extracs of some of your existing/erstwhile employees
email messages either amongst themselves or with foreign principals exchanged
during the period Feb Mar 2001 which talks about business links between NIIT
& NETg group of companies. It talks about outstanding liability of royalty
payment, talks about adjustment required to be made in purchase orders and also
outstanding liability of payments by NIIT to NETg group UK. Kindly go thru
these email extracts and explain the discrepancy in your statement.
A: To the
best of my knowledge since we were importing CBT related software from NETg,
UK, there was no question of adjusting any royalty with NETg,UK.
I. As
mentioned above, the assessee company cannot comment on the emails referred in
your letter vide point 1(1 to 4)
II. It is
not correct to state that the CBTs imported were outdated/obsolete. To the
contrary, the assessee company have sold these CBTs and also used them
internally at their Education Centres (vide assessee's letter dated
14-11-2005).
III.
Regarding comparison of import prices of the CBTs of NIIT with Aptech vide your
letter clause-III, the assessee company cannot compare the price with them. As
you know, the technology is changing very fast. The pricing will vary from time
to time with the change in technology.
IV.
Regarding remittance of USD 207,735 to NETg towards as alleged in your clause
IV, it is true that the assessee company had made the remittance after expiry
of the Agreement because it was the minimum commitment which NETg had reminded
the assessee for which the assessee company had made remittance. For this
remittance also, the assessee company had imported CBTs through custom and
copies of relevant import documents have been submitted to the department.
Therefore, the import was genuine and for resale in the Indian market. The
details of uses already provided vide letter dt. 4-11-2005.
V.
Regarding Section 92C of the Act as pointed out in clause V of your letter,
this is not applicable as this is not a related party transaction (Associate
Enterprise). This business has been agreed upon between two independent
parties. The price of the imported materials is not manipulated. The imports
were at arm's length. Section 92C of the Act is not, therefore, applicable in
this case."
84.26 The assessee vide letter dated
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 portion of which reads as under:
"Since
the assessee has purchased the CBT's for sale in India, as trading items for
which details have been submitted by the assessee. It is clear that this is a
simple transaction of outright sale & purchase and the Royalty Clause is
not attracted at all. However, the import of CBTs worth US$ 2,07,785/- is
disallowed because these CBTs were purchased after the expiry of the agreement
with the supplier."
84.29 Ld. counsel further submitted that the
issue regarding purchase of software under a distribution agreement is not in
the nature of royalty has been upheld by various decisions of Courts, including
the Jurisdictional High Court in the case of Ericsson
AB (supra) and Nokia Networks, OY (supra). He, therefore,
submitted that since the order passed by the AO was in accordance with the
decisions of various High Courts, therefore, the same could not be held to be
erroneous in view of the decision in the case of CIT v. G.M.
Mittal Stainless Steel (P) Ltd.[2003] 263 ITR 255/130
Taxman 67 (SC).
84.30 Ld. counsel further pointed out that
in view of the decision of ld. CIT(A) for AY 2002-03, in any case, the
assessment order for the block period, could not be revised on this issue. He
pointed out that assessment proceedings for AY 1999-2000 to 2004-05 (block
assessment of 6 years as per Section 153A of the ct), were completed
altogether. He pointed out that it is the case of the ld. CIT in the impugned
order that facts in all the assessment years are same and, therefore, emails
relating to transactions conducted in the assessment year 2002-03 are relevant
for determining the true nature of transaction. Ld. counsel reiterated his
submissions as regards the impugned issue beyond the scope of jurisdiction of
the AO u/s 153A. He pointed out that the nature of payment towards purchase of
software was royalty or not is a legal issue and did not emanate from any
document, suggesting that payments towards imports of CBTs was in the nature of
royalty. He, therefore, submitted that it was beyond the scope of powers u/s
153A of the AO, as no incriminating material was found.
84.31 Ld. counsel further submitted that
assessee had filed detailed reply before ld. CIT but he did not pin point the
error in the assessment order.
85. Ld. Special Counsel submitted that ld.
CIT in its order noted that the AO had failed to examine the real motive and
purpose 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 Rs.
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(A)'s order, which reads as under:
"11.3.
I have gone through the documents so produced before me and from the perusal of
the same it is found that the purchase are accompanied with the necessary
import documents and have duly been consumed by the appellant. Further the
purchase so made have been duly accounted for and the payment for the same have
been made through banking channels therefore it is also not a case from the
assessing officer that the purchase are not genuine.
From the
facts it is clear that the purchases have been made wholly and exclusively for
the purpose of business and out of the commercial expediency, in view of the
totally of the circumstances and taking a support from the decision of Supreme
Court in the case of S.A.
Builders Ltd. v.CIT 289 ITR 26, the addition made by the
AO deserves to be deleted."
85.3 Ld. Special counsel submitted that CIT
is on a different issue altogether. In this regard he referred to page 53 of
the CIT's order, wherein the ld. CIT's finding in this regard is contained and
pointed out that the main plank of ld. CIT's order for holding the assessment
order as erroneous and prejudicial to the interests of revenue was that payment
of royalty was made in the garb of purchases/import of software. He submitted
that language of agreement will not change the true character of receipt.
85.4 Ld. Spl. Counsel submitted that in the
agreement, contained at page 634 of PB, the mode of calculation of purchase
price is provided which is not normal in the case of purchases but only in the
case of royalty. This has nothing to do with the assessment yea 2002-03 where
the main issue before the ld. CIT(A) was regarding commercial expediency and
not the character of payment. Therefore, this issue was required to be examined
in the year as well as the years thereafter. He pointed out that no finding has
been given by ld. CIT(A) regarding character of payment - whether royalty or
business transaction, solely because of non-examination of the issue by AO. He
submitted that while drafting the agreement, phraseology may be used but the
substance of the agreement has to be considered.
85.5 Ld. Spl. Counsel further submitted
that no stock was found of this soft-ware during the course of search at K.K.
Lubricants. He submitted that this issue had tremendous implications on revenue
because TDS had to be made 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 software though the payment was towards
royalty. He pointed out that the reply filed by the assessee, threw no reply on
issues raised in the show cause notice. The AO did not comment upon material
found during search.
85.9 Ld. Spl. Counsel referred to the
office note and pointed out that at pages 38 to 41 of the PB, there is no
discussion as to why AO accepted this as simple transaction of outright sale
and purchase holding that royalty clause was not attracted at all. He pointed
out that from these observations, it is clear that AO accepted the assessee's
reply without proper inquiry. He submitted that application of mind has to be
clear from the order itself.
85.10 As regards the assessee's plea that in
view of the findings of ld. CIT(A) for AY 2002-03, this issue got merged with
the order of ld. CIT(A), ld. Spl. Counsel submitted that ld. CIT was deciding
different issue. He pointed out that though AO took this issue in show cause
notice but left it unconcluded. The written submissions filed by Spl. Counsel
are reproduced hereunder:
"92.
The Revenue referred to various queries and replies filed in the course of
assessment, and submitted that the Assessing Officer accepted assessee's reply
as such without proper application of mind. It was urged that whether the
assessee had the right to use the software leading to the characterization of
payments made to Netg as Royalty or was a mere distributor of the same was a
matter of fact, which needed to be investigated by the Assessing Officer to
determine whether any tax was required to be deducted at source by the
assessee.
93. During
search operations, certain material in the form of emails and the statement of
responsible employees was gathered. Kind attention is invited to email
extracted on ~ 668, Vol. 11 of PB. This email from Mr. Andre Hogan, Director,
Sales Operations, NETg UK to Mr. Devanand of NIIT Delhi reads as under:
The purpose
of the shipment is to enable NIIT to release long outstanding monies to NETg. I
suggest you to revise your orders and include older titles, for instance word
97, not word 2000. . . . . . In addition, it would be sensible to reduce the
number of titles to say a maximum of 20 and increase the quantity as the
overall exercise is not being completed to produce content reusable for sale .
. . . "
The email dated 28.02.2001 from
P. Rajendran of NIIT to Mr. AL Mehta 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 unsalable 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 gathered during search before accepting the bald and
unsubstantiated reply of the assessee that the payment to NETg represented
consideration of import of goods.
96. The CIT
has also pointed out that during the relevant period, another entity APTECH was
appointed by NETg for similar rights in India and APTECH was paying royalty to
NETg. It is a strange suggestion that one so called distributor pays royalty
and the other does not or the one has the right to replicate and the other does
not. The AO could not have put blinkers on such vital issues and accepted the
claim without any enquiry whatsoever.
97. The CIT
also points out that Investigation Wing of the Department carried out search at
the premises of M/s KK Lubricants to whom CBTs imported from NETg were supposed
to have been sold by the assessee but found no such stock of CBTs as claimed to
have been sold. The AO turns a blind eye to all such vital material.
98. The
reliance of the learned counsel for the assessee on decisions to the effect
that no tax would be deductible as the payment for the purchase of software
does not amount to royalty are of no consequence as the lapse on the part of
the AO to make relevant enquiry to place material facts on record can not be
made good by citing decisions to say that the amount was not taxable. In all such
decisions, the courts have held that the element of royalty is missing. In the
present case, the email shows that the amount of royalty is payable. The legal
argument can only be raised in the background of facts. The case laws can not
change the factual matrix of a given case.
99. As
regards the contention of the assessee that the issue is beyond the scope of
section 153A, it is submitted that the issue arose as a result of search
material and hence was well within the scope of Section 153A.
100. In
view of the above, it is urged that it is a complete case of lack of inquiry,
which justified the action of the CIT in assuming revisionary jurisdiction
under section 263 of the Act.
101. As
regards the other objection of the assessee that the aforesaid issue merged
with the order of CIT(Appeals) in the assessment year 2002-03, the Revenue
urged that the issue before CIT(Appeals) in that year was limited to issue of
purchase of products after the expiry of agreement (pages 748/757 - Vo1.2) and
did not deal with the issue raised by the CIT on a different 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 the e-mails and
statements keeping in view the reply filed by assessee. Merely accepting the
reply without proper reasoning cannot be countenanced. The AO performs quasi
judicial functions and, therefore, has to comply with the basic canons of
judicial process. Further, the AO should have become more investigative when
his queries regarding sales of CBT's were not suitably replied by assessee,
inasmuch as no stock of CBT's was found with K.K. Lubricant to whom alleged
sales aggregating to Rs. 7.98 crores were made. No satisfactory explanation was
given by Director K.K. Mittal. Then a further aspect of date of PO being
subsequent to the date of agreement between NETg and APTECH, which under almost
similar terms of agreement was paying royalty to NETg, should have prompted the
AO to specifically deal with these queries. At this juncture assessee was not
entitled to sell CBT's imported from NETg. Obviously AO should have recorded
his findings on nature of payment made. Further, the statements of Shri Rajiv
Tayal VP of Marketing in NIIT Ltd. confirmed that NETg was not allowing NIIT to
buy new titles. If this was the state of affair, the AO was required to record
a finding as to how PO's were raised and why payments made. Then a further
aspect on which AO should have recorded his findings emnated from statement of
Shri Ajai Wahi and Shri Katyal. As per their statement the payment was made
towards minimum purchase commitment of USD 182500. But actual payment was for
USD 207785 and further if NETg discontinued its relationship with NIIT then why
did it insist on a minimum purchase commitment. The assessee did not give any
proper explanation for huge stock lying of Rs. 3.37 crore in Feb. 2001 and,
still assessee imported. Further, when terms of payment were in proportion to
sales, AO should have recorded specific findings for accepting assessee's
explanation. The e-mails suggested that the real motive and purpose of
remittance was to make payment of royalty and not to pay for the import of an
outdated computer based training product (CBTs). The AO erred in accepting the
import as genuine. During search operations certain e-mails were found and the
statement of employees was gathered. The detailed scrutiny of these e-mails was
necessary to find out the true import of the e- mails as to whether the payment
made was towards royalty or towards 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 the file of AO as it falls within
the ambit of lack of inquiry. This ground is dismissed.
87. Vide ground no. 21, the assessee has
assailed CIT's action in alleging that the 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.
88. Ld. counsel referred to show cause
notice dated 5-2-2010 issued by ld. Commissioner contained at page 193 of PB,
and pointed out that ld. Commissioner referred to the claim of Rs. 12,01,249/-
made by the assessee in regard to write off of share issue expenses u/s 35D. He
submitted that ld. CIT pointed out that since the expenditure had been
expenditure after the commencement of the business, the same can be allowed if
the conditions laid down in the provisions of section 35D are fulfilled.
However, the AO allowed the claim without verifying its admissibility.
89. Ld. Counsel referred to page 295 of
PB, wherein the assessee's reply dated 23-3-2010 is contained, in which
assessee had given detailed reply to the issue raised by ld. CIT, which has
been summarized as under:
"During
financial year 1992-93, relevant to the assessment year 1993-94, the assessee
had come out with an Initial Public Offer (IPO) of 36,07,500 equity shares of
Rs. 50/- per share. The assessee incurred expenditure of Rs. 1,20,12,490 as
share issue expenses and claimed deduction in respect of the said expenses
under section 35D of the Act, amortized over a period of 10 years, covering the
impugned assessment year.
The
aforesaid claim of the assessee has been allowed as deduction u/s 35D of the
Act from assessment year 1993-94 and onwards. The apparent facts relating to
the aforesaid claim being made in the return of income were fully and truly
disclosed by the assessee in the following manner:
- Schedule
14 of audited accounts relating to Miscellaneous Expenditure/Share Issue
Expenses written off.
- Schedule
19 of audited accounts relating to Administration and other expenses,
containing write off of share issue expense;
- In para
15 read with annexure 3 of the Tax Audit Report, claim of deduction under
section 35D was duly certified by the auditor.
In the
impugned order, the CIT alleged that the assessing officer did not verify the
aforesaid claim of the assessee and, therefore, 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.
- L.G. Balakrishnan & Bros. Ltd. v. CIT [1981] 151 ITR 270(Mad.);
- Direct Information (P) Ltd. v. ITO 2011 TIOL 664 HC MUM IT (Bom)
- CIT v. Western
Outdoor Interactive (P) Ltd. 2012
TIOL 625 (Bom)
The Delhi
High Court in the recent decision of Rio Tinto India P. Ltd. (2013) 212 Taxman 139 @ 1609 -1620 Vol. V] held that it is
unfair on the part of Revenue to contend that assessee must establish date of
commencement of business in each successive year. It was held that such issue attained
finality when the assessing officer framed assessment for first year and the
aid issue, once settled, cannot be reopened every year."
89.1 Ld. Spl. Counsel relied on the order
of CIT on this ground
90. We have heard rival submissions and
perused the material available on record. We find 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. In the result, this ground is allowed.
91. Vide ground no. 22 the assessee has
assailed ld. CIT's action in setting aside the issue of loan transactions
between the assessee and various business and other parties, alleging that the
said issue was not examined by the AO.
91.1 Ld. counsel submitted that ld. CIT in
the show cause notice dated 5-2- 2010 pointed out that assessee had shown
unsquared loans received as well as unpaid. Many of loans received were squared
up within the year itself. He pointed out that AO failed to examine the
genuineness of these transactions and the identity and creditworthiness of the
parties. The main contention was that as per the clause 24(a) of the audit
report the auditor was required to furnish the PAN of the said parties being
available with the assessee. However, in none of the cases the PAN had been
mentioned. AO also failed to examine the purpose of accepting these loans and
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 Rs. 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
the name, address and the assessment particulars of all such persons."
91.4 He referred to assessee's reply to the
above query contained at page 1017 along with annexure to the assessee's reply
contained at page 1018 to 1023, wherein all the details were furnished by
assessee. He submitted that after considering the assessee's reply the AO
accepted the assessee's claim. He submitted that it is the judgment of AO as to
how to proceed with assessment.
91.5 Ld. counsel referred to ld. CIT's
finding and pointed out that ld. CIT did not point out any error in the replies
filed by assessee and, therefore, there could not be any blanket set aside. He
submitted that loans were coming from earlier years and, therefore, ld. CIT
should have given specific instances on refund of loan in cash to attract
section 269T. He submitted that this issue has been raised for the first time
in show cause notice.
91.6 Ld. counsel referred to assessee's
reply contained at page 308 and 309 of PB in which it was, inter alia, pointed
out that loans were taken from reputed banks like ICICI, AXIS, HDFC Bank, Bank
of America and Kotak Mahindra. Separate chart of details of loan given during
the year was also furnished before the AO, including the address and PAN of the
parties to whom such loans were given.
91.7 Ld. counsel also referred to
assessee's reply dated 30-3-2010, contained at page 345, wherein it was
submitted as under:
"Fresh
loan Transaction:
The
assessee had, vide letter dated 29-03-2010, filed reply to the show-cause
notice dated 5-02-2010 in respect of the aforesaid issue. However, during the
course of hearing on 30- 03-2010 your honour had required the assessee to
explain, with reference to Annexure 8 of the Tax Audit Report, the nature of
loans/deposits taken from various parties (apart from the parties whose details
were filed in the letter dated 29-03-10) during the year which were
repaid/squared off during the same year itself.
In this
regard, it is respectfully submitted that the aforesaid parties like JAV VEE
YES Computer, Almora Infotech etc. are all business partners/franchisees of the
assessee from whom refundable/adjustable security deposits were taken. The
addresses of the aforesaid parties are already part of the tax audit report and
were scrutinized by the assessing officer therefrom."
91.8 Ld. counsel 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, therefore, no enquiry qua applicability of sections
269 SS/T to such deposits was conducted by the Assessing Officer. It is,
therefore, urged that it was a case of lack of inquiry, which justified the
action of the CIT in assuming revisionary jurisdiction under section 263 of the
Act. As regards the claim of the assessee that the relevant year was not the
first year of accepting deposits from business partners/franchisees, it is
submitted that the principle of resjudicata is not applicable in the Income tax
proceedings more so when the depositors and the amounts vary in each year. The
assessee filed details of borrowings from banks and financial institutions but
did not furnish details of smaller transactions from individual persons/entities.
The AO should have brought the necessary material on record after conducting
relevant enquiries.
110. The
issue is not beyond the scope of Section 153A of the Act since accounts for the
year were found during the search operation.
111. It is
also submitted that CIT had not exceeded his jurisdiction since it was a fresh
proceedings not barred by limitation. In this regard, the Revenue has made a
detailed submissions under Ground no. 10."
93. We have considered the submissions of
both the parties and have perused the record of the case. As far as preliminary
issue raised by ld. Counsel for the assessee, regarding scope of show cause
notice being expanded by the CIT in the second round of proceeding in
consequent to set aside order passed by the Hon'ble High Court, is concerned,
we do not find any merit in the said submission, because we have already held
that ld. CIT had taken up fresh proceeding in consequence to the orders passed
by the Hon'ble High Court. Accordingly, this objection raised by the ld. Counsel
is rejected.
93.1 As regards the issue raised by ld. CIT
in regard to accepting of all the loan transactions by AO without any
verification is concerned, we find from the foregoing submissions of assessee
that queries were raised by the AO, which have been reproduced earlier. A bare
perusal of the inquiries raised by the AO makes it clear that AO had raised
specific queries on this issue. However, ld. CIT has pointed out that no
details were furnished with regard to Annexure 8 with reference to clause 24(a)
of form 3CD report, wherein there was a long list of persons from whom loans
and deposits of Rs. 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 by the AO. We,
accordingly, confirm the order of ld. CIT on this issue for the detailed
reasons given by the ld. CIT in his order. In the result, this ground is
dismissed.
94. Vide ground no. 23, the assessee has
assailed the action of ld. CIT in holding that credit for taxes paid/deducted
abroad was claimed by the assessee and allowed by the AO without verification
and enquiry and, therefore, the order of AO in this regard was erroneous and
prejudicial to the interest of the Revenue.
94.1 Further additional ground in respect
of above ground is that ld. CIT failed to appreciate that all certificates in
respect of foreign taxes paid/deducted were duly furnished before the AO and
the AO after being satisfied allowed credit for such taxes while processing the
return of income u/s 143(1) of the Act.
95. Ld. counsel pointed out that during
the relevant previous year the assessee had paid tax amounting to Rs. 1781828
in foreign jurisdictions as per the applicable laws of the said countries.
While computing the tax payable by the assessee under the Act, the assessee had
availed credit for such taxes paid abroad in terms of section 90 of the Act
read with the relevant DTAA. However, in the return of income the assessee had
inadvertently mentioned the section under which the claim was made as section
91 instead of section 90, while processing the return of income u/s 143(1).
95.1 The assessee submitted as under:
"In
this regard it is submitted that the aforesaid claim was verified at the time
of processing the return of income under section 143(1) and after being
satisfied with the genuineness of claim, credit was allowed for the taxes paid
abroad in terms of section 90 of the Act.
A statement
of such income earned/received and taxes paid abroad is provided as under:
Country
|
Nature of Income
|
Gross income
|
Actual tax Deducted
|
Actual tax Deducted
in INR
|
Relief claimed
|
|
USA
|
Dividend
|
USD 120,000
|
USD 18,000
|
INR 761,400
|
INR 761,400
|
|
USA
|
Interest
|
USD 97,500
|
USD 14,625
|
INR 618,638
|
INR 618,638
|
|
Singapore
|
Dividend
|
SGD 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."
95.2 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 specific finding/pin pointing of
error and prejudice by the CIT.
96. Ld. Spl. Counsel has submitted as
under:
"It is
urged that the AO did not conduct any enquiry qua verification of claim of
credit of taxes made by the assessee u/s 91 of the Act. Therefore, it was a
case of lack of inquiry, which justified the action of the CIT in assuming
revisionary jurisdiction u/s 263 of the Act.
It is also
submitted that CIT had not exceeded his jurisdiction since it was fresh
proceedings, not barred by limitation. In this regard, the revenue has made a
detailed submissions under ground no. 10."
97. We have considered the submissions of
both the parties and have perused the record of the case. As far as preliminary
issue raised by ld. Counsel for the assessee, regarding scope being expanded by
the CIT in the second round of proceeding consequent to set aside order passed
by the Hon'ble High Court, is concerned, we do not find any merit in the said
submission, because we have already held that ld. CIT had taken up fresh
proceeding in consequence to the orders passed by the Hon'ble High Court.
Accordingly, this objection raised by the ld. Counsel is rejected.
97.1 The assessee had claimed credit of Rs.
47,81,828/- in respect of tax paid in foreign jurisdiction as per the
applicable laws of the said countries. The AO had not verified this claim and
allowed relief to assessee and, therefore, ld. CIT rightly held that assessment
order was erroneous and prejudicial to the interest of revenue, in the absence
of proper verification. We, accordingly, uphold the finding of ld. CIT on this
issue.
98. In the result, assessee's appeal is
partly allowed.
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