Income Tax Appellate Tribunal - Hyderabad
Navabharat Ventures Limited, ... vs Assessee on 10 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
I.T.A. No. 919/Hyd/2010
Assessment year 2005-06
M/s. Navabharat Ventures vs. The CIT-IV
Ltd., Hyderabad Hyderabad
PAN: AAACN7327C
Appellant Respondent
Appellant by: Sri V. Sivakumar
Respondent by: Sri Narahari Biswal
Date of hearing: 10.10.2012
Date of pronouncement: 27.11.2012
ORDER
PER CHANDRA POOJARI, AM:
This appeal by the assessee is directed against the order of the CIT-IV, Hyderabad dated 26.3.2010 for assessment year 2005-06.
2. The first ground in this appeal is with regard to assumption of jurisdiction u/s. 263 of the Income-tax Act, 1961.
3. Brief facts of the case are that while examining the records it came to the notice of the CIT that a sum of Rs. 10,13,07,595 had been claimed as current repairs whereas a portion of the damaged building and plant & machinery were reconstructed. According to the CIT, expenditure on substantial renovation has to be considered as capital expenditure. Further it was noticed from scheduled 17 "other expenses" appended to the annual accounts that an amount of Rs. 19,03,712 represents the expenditure relating to earlier years was debited to profit and loss account. However, this was not added back to the income of the assessee. After giving opportunity of hearing to the assessee, the CIT directed the Assessing Officer to bring the entire 2 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== renovation expenditure of Rs. 15,13,07,595 and also prior period expenses of Rs. 19,03,712 which consists two parts i.e., 1. service tax of Rs. 13,00,348 and 2. Modvat, sales tax, house tax compensation relating to A.Ys. 1996-97, 1993-94, 2000-01, 2004-05 to tax in A.Y. 2005-06. Against these the assessee is in appeal.
4. The learned AR submitted that the assessee has furnished all the information at the time of completion of original assessment u/s. 143(3) of the Act and the assessee has not kept hidden any information from the Assessing Officer. After furnishing entire information at the time of assessment by the assessee to Assessing Officer. he had examined and accepted the expenditure. According to the AR assuming of jurisdiction is bad in law. Accordingly he prayed to annul the order u/s. 263 of the Act.
5. The AR further submitted that the Commissioner of Income Tax erred in holding that the order passed by the Assessing Officer u/s. 143(3) was erroneous and prejudicial to the interest of revenue. The CIT erred in holding that the expenditure incurred towards repairs to damaged plant & machinery and buildings is capital expenditure. The CIT erred in directing the Assessing Officer to bring to tax the amount of Rs. 19,03,712. The CIT ought to have seen that the liability for such expenses arose during the assessment year 2005-06 only.
6. The AR submitted that a major fire accident occurred in the 50,000 MT capacity Ferro Alloy plant, Orissa on 26-11-2004 resulting in substantial damage to a portion of factory building and plant & machinery. Expenditure of Rs. 15,13,07,595 was incurred during the year on repairs to damaged buildings and plant & machinery to bring them back into operation. During the year the assessee received an ad-hoc payment of Rs. 5,00,000 from the insurance company. The said claim received was adjusted against the expenditure of Rs. 15,13,07,595 and the net expenditure of Rs. 10,13,07,595 was debited as loss in fire. The expenditure was incurred to bring back damaged 3 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== buildings and equipment into operating condition and no new assets had come into existence. Hence the expenditure incurred claimed was claimed as revenue expenditure.
7. The AR submitted that during the course of assessment proceedings the Assessing Officer issued a letter dated 12-11-2007 to the assessee calling for information on various issues. At item 7 of the said letter, the Assessing Officer called for full and complete correspondence relating to the insurance and police Department in respect of the loss in fire and extent of damage evaluated by the insurance company for necessary verification. The assessee furnished detailed information before the Assessing Officer who has accepted the claim of the assessee after considering the details and information filed.
8. The AR further submitted that before the Commissioner, the assessee filed preliminary details of the accident vide letter dated 28-11- 2004, details of the equipment and its condition as per preliminary inspection report, details of nature of damage and estimate of fire disaster and also details of the breakup of expenditure on repairs to assets on account of fire accident as also a note on the expenditure incurred. The assessee relied on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Volga Restaurant (253 ITR 405) (Del.). In that case, due to a fire accident, besides business premises, air- conditioning plant installed therein also got damaged. The assessee's claim for allowance of the expenditure as repairs was disallowed by the Assessing Officer. When the matter reached the High Court, it has been held that the real test to be applied is whether, as a result of expenditure claimed as expenditure on repairs, what is really being done is to preserve and maintain an already existing asset and not to bring a new asset into existence or obtain a new or fresh advantage. Applying the said test, the Hon'ble High Court held that the expenditure was revenue expenditure incurred for the purpose of repairing and restoring the damaged AC unit to its original working 4 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== condition. The Commissioner of Income tax brushed aside the facts stating that the said case was on entirely different facts.
9. The AR submitted that the expenditure incurred by it was purely to bring back the damaged assets into their previous condition. There is no allegation that the expenditure resulted in increased capacity or endowed the assessee with any new advantage. In this connection, the AR brought to the notice of the Bench a recent decision of the Tribunal, Hyderabad in the case of M/s. Nagarjuna Fertilisers and Chemicals Ltd in ITA No. 645/H/2010 dated 27-05-2011 wherein the Tribunal allowed the assessee's appeal against order passed by the CIT-IV. In the said case, the assessee replaced "bi-metallic stripper" at a cost of Rs. 15.66 crores. The Assessing Officer examined the facts threadbare and allowed the expenditure. In revision proceedings, the CIT-IV, Hyderabad held that the expenditure was capital in nature and directed the Assessing Officer to revise the assessment by disallowing the said expenditure. In appeal, the Tribunal held that the expenditure of Rs. 15.66 crores was revenue expenditure. It also held:
"It is now well settled that when the Assessing Officer adopts one of the courses permissible in law or where two views are possible and the AO has taken one view with which the CIT does not agree, it could not be treated as erroneous order prejudicial to the interest of revenue unless the view taken by the Assessing Officer was unsustainable in law. In this case it cannot be said that the view taken by the AO in scrutiny assessment was perverse or unsustainable in law or was not a possible view".
10. The AR submitted that the expenditure in its case was examined by the AO and he took a view which has judicial support but the same been negated by the CIT by taking an opposite view. The AR submitted that in the light of the facts of its case and the law relating thereto, the order of the CIT is not sustainable. Accordingly, the AR prayed that the order of the CIT may be vacated.
11. The AR submitted with regard to expenditure of Rs. 19,03,712 as follows:
5 I.T.A. No. 919/Hyd/2010M/s. Navabharat Ventures Ltd.
======================== Item 1: Service tax of Rs. 13,00,348 on user of goods transportation services for the period 16.11.1997 to 2.6.1998:
Goods transport operators were brought under the service tax w.e.f. 16-7-1997 by Finance Act, 1997. The user of goods transport services was to pay the service tax. The validity of levy of service tax on the receiver of transport services was challenged in court of law by the users. However, further amendments were carried out in Finance Acts, 2000 and 2003 to levy service tax on the receiver of goods transport services. The assessee and other receivers filed writ petitions in High Court of AP on levy of service tax on amount paid to goods transport operators for the period 16-11-97 to 2-6-98. These writ petitions were dismissed by the High Court of AP by order dated 27-1-2005.
The AR submitted that the assessee received demand notice No. 221/2005 dated 16-3-2005 from the Superintendent of Customs and Central Excise, Bhadrachalam Range, consequent to the court order. The assessee paid service tax of Rs. 13,00,348 on 31-3-2005. The demand crystallised during the year and was allowable. In any case it was paid during the year and is allowable u/s. 43B.
Item 2: Modvat of Rs. 58,436 availed in earlier years, debited to RG-23C Part 11 Particulars Rs. Rs.
Debited in RG-23C, Part-II on 24.11.2004 as per demands dated 15.10.2004 consequent to CESTAT order dt. 24.8.2004
- Columns of Heavy Fabricated structures and bracings 2,97,387
- HR Coils 36,504 3,33891 Less: Credits taken in RG-23C, Part-II as allowed by the Asst. Commissioner, Customs & Central Excise, Warangal on
- Welding electrodes 6 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
========================
- Welding electrodes 18,691
- Glass and HR sheets 56,123
- HR Sheets 2,00,641 2,75,455 Net amount of expenditure 58,436
12. The AR submitted that the assessee company availed MODVAT credit of Rs. 2,97,387 on columns of heavy fabricated structures and bracings on 16-1-1996 and 28-03-1996 and Rs.36,504/- on HR coils on 16-09-1995 which was not accepted by the Central Excise Department.
The assessee company filed appeal before the Commissioner of Central excise and customs(Appeals), Hyderabad. The appeal was dismissed. In further appeal, the CESTAT upheld the order of the Commissioner (Appeals) in its order dated 24-08-2004. Consequently, the assessee received letters dated 15-10-2004 from the Supdt., Central Excise, Bhadrachalam Range demanding payment of Rs. 2,97,387/- and Rs. 36,504/- which the company paid on 24-11-2004 by debiting in RG- 23C.
13. The AR submitted that the assessee availed Modvat credit of Rs. 18,691 on welding electrodes in the quarter Jan-March, 1998. The Asst. Commissioner, Central Excise, Warangal, vide his adjudication order dated 22-03-1999 rejected the said Modvat credit. The assessee reversed the RG-23C credit on 18-10-1999. The assessee appealed before the Commissioner (Appeals) and further before the CESTAT. Consequent to the order dated 24-12-2003 passed by CESTAT, the Asst. Commissioner, Central Excise, Warangal allowed Modvat credit vide his order dated 31-05-2004. The amount of Rs. 18,691 was taken credit in RG-23C, Part-II on 10-07-2004.
14. The AR submitted that the assessee availed Modvat credit of Rs. 56,123 on glass and HR sheets in November, 1996. The Asst. Commissioner, Central Excise, Warangal, vide his adjudication order dated 27-10-1997 rejected the said Modvat credit. The assessee reversed the RG-23C credit on 15-1-1998. The assessee appealed before the Commissioner (Appeals) and further before the CESTAT.
7 I.T.A. No. 919/Hyd/2010M/s. Navabharat Ventures Ltd.
======================== Consequent to the order dated 4-11-2003 passed by CESTAT, the Asst. Commissioner, Central Excise, Warangal allowed Modvat credit vide his order dated 26-04-2004. The amount of Rs. 56,123/- was taken credit in RG-23C, Part-II on 10-05-2004.
15. The AR submitted that the assessee availed Modvat credit of Rs. 2,00,641/- on HR sheets in February, 1996. The Asst. Commissioner, Central Excise, Warangal, vide his adjudication order dated 24-10-1997 rejected the said Modvat credit. The assessee reversed the RG-23C credit on 15-1-1998. The assessee appealed before the Commissioner (Appeals) and further before the CESTAT. Consequent to the order dated 27-10-2003 passed by CESTAT, the Asst. Commissioner, Central Excise, Warangal allowed Modvat credit vide his order dated 26-04- 2004. The amount of Rs. 2,00,641 was taken credit in RG- 23C, Part-II on 10-05-2004.
16. The AR submitted that since the demands dated 15-10-2004 received on 19-10-2004 on account of orders of CESTAT fell in the Asst. Year 2005-06, the expenditure of Rs. 58,436/- was claimed. The same is allowable Item 3: Sales Tax of Rs. 1,39,530/- on lease rentals on boiler for the month of January, 2000: The assessee company took a bagasse-fired boiler on lease from M/s. Sundaram Finance Ltd on 29-9-97 for a period of 7 years. Towards the end of the lease period the assessee received a letter dated 23-09-04 from the lessor stating that sales tax was exempted on lease rentals up to 31-12-99 and again from 31-1-2000 and thus lease charges were liable to sales tax for the month of January, 2000. Therefore, sales tax of Rs. 1,39,530 was levied by sales tax authorities on lease rentals for the month of January, 2000. The assessee reimbursed the tax paid by the lessor on 09-10-2004 based on the letter received in September, 2004. Since the demand was 8 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== received in the Asst. Year 2005-06, the expenditure that crystallised during the year was claimed as deduction.
Item 4: House tax Rs.2,05,630/- on sugar unit factory buildings at Pugalur: The assessee company was owning sugar factory located at Pugalur which was sold to M/s.EID Parry (India) Ltd, Chennai on 13-11-1992. As per the terms of sale and transfer agreement, any liability arising in respect of all statutory levy and liabilities pertaining to pending cases till the date of transfer are to be borne by the assessee company. The company received a letter dated 24-2-2004 in respect of house tax on sugar unit factory buildings in a sum of Rs. 2,05,630 from the executive officer, Punjai Pugalur Panchayat, Velayuthampalayam, Karur Dist., Tamil Nadu, for the period 1978-79 to 1987-88. The assessee remitted the house tax vide Demand Draft No. 726228 dated 06-11-2004. The demand was booked as it was received in the current year and was also paid in the current year.
Item 5: Compensation of Rs. 1,99,768 paid to legal heirs of deceased worker: The assessee company received a demand dated 22-4-2004 on account of the order passed by High Court of Madras in C.M.A No. 889 of 1995 from the Dy. Commissioner of Labour, Trichy, Tamil Nadu towards compensation to the heirs of a deceased worker who dies on 19-2-1992 in sugar unit, Pugalur, Karur Dist, Tamil Nadu. The assessee paid compensation of Rs. 1,99,768 to the Dy. Commissioner of Labour, Trichy, Tamil Nadu on 15-10-2004. Since the demand was received in the assessment year 2005-06, the expenditure was claimed as allowable.
17. In this connection the AR relied on the decision of the Tribunal in the case of M/s. Deccan Cements Ltd., in ITA No. 283/H/97 dated 31-5-2002. In this case the assessee debited an amount of Rs. 12,27,759 and also credited an amount Rs. 12,17,080 to the P&L account being 9 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== receipt relating to transactions of earlier year. The said income and expenditure were contractual liabilities and though they pertained to transactions of earlier years, they were brought into account only during this year as they have crystallised during this year. The Assessing Officer selectively accepted the receipt and disallowed the entire expenditure. In appeal the CIT(A) selectively allowed (Rs. 5,33,353) prior period expenditure. The Tribunal took into account the nature of prior period expenditure as per Accounting Standard 5 and held:
"it is not unnatural for large organisations to miss out certain expenses or income either inadvertently or otherwise. Whenever these omissions or errors come to the notice of the assessee-company, they were brought into their account and claimed as expenditure. It was on similar logic that the revenue accepted the income of Rs. 12,17,080 which also pertained to accounting periods prior to the financial year in question. What is not in dispute is that the expenditure in question has been incurred by the company but the only ground on which the C.I.T(A) disallowed these expenses was that it should have been claimed during the previous asst. year i.e., 1992-93 ang not in the assessment year in question in the case of statutory liabilities. We are of the considered opinion that the C.I.T(A) should have allowed this expenditure as it was paid during the year 1993-94 and not 1994-95."
18. The AR further submitted that the assessee having paid the service tax liability during the year under account it is allowable in this year. Similar is the case with the liability to Central excise, sales tax and house tax. As regards the compensation of Rs. 1,99,798/- to the legal heirs of deceased worker, the same crystallised and was also paid during the year under account. The AR submitted that having regard to the facts and the decision of the Hon'ble Appellate Tribunal cited above, the acceptance of these items by the Assessing Officer did not render the assessment order erroneous or prejudicial to the interest of revenue. Accordingly, the AR prayed that the order of CIT may be quashed on this count also.
10 I.T.A. No. 919/Hyd/2010M/s. Navabharat Ventures Ltd.
========================
19. On the other hand, while relying on the order of the CIT, the learned DR submitted that an amount of Rs. 15,13,07,595 was entirely not incurred to maintain or preserve the existing assets. On destruction of property namely factory building, plant and machinery such as transformers, electrodes etc., in the fire, the assessee expended the above expenditure. It was entire reconstruction of the factory, machinery as well as plant and machinery which had been damaged in fire accident. The expenditure resulted in substantial increase and in future benefit from the said investment. She relied on the judgement of Supreme Court in the case of Sarvana Spinning Mills (293 ITR 201) and also submitted that the judgement relied on by the assessee council in the case of CIT vs. Volga Restaurant 253 ITR 405 Delhi is not applicable to the facts of the assessee's case. It was clearly distinguished by the CIT in his order.
20. Regarding the prior period expenditure the DR submitted that prior period expenditure involves an aggregate amount of Rs. 19,03,712. The major component of this happens to be service-tax of Rs. 13,00,348 on user of goods transportation services for the period 16.11.1997 to 2.6.1998 i.e., relating to two assessment years 1998-99 and 1999-2000. The applicable service-tax laws had been effectively amended by the Finance Acts 2000 and 2003 to clinch the matter of levy of service-tax on recipient of goods transport services. In view of this, the assessee's liability can be said to have arisen and accrued from the F.Y. 2003-04 as evidenced by the letter of Superintendent, Customs & Central Excise, Bhadrachalam Range i.e. in O.C. No. 487/2003 dated 27.10.2003 and reminder under O.C. No. 29/ 2004 dated 19.01.2004. In view of this, the liability evidently relates to assessment year 2004- 05, not to the assessment year under consideration. No evidence has been produced for its accounting treatment in the assessment year 2004-05. The Assessing Officer had allowed such claims of the assessee without applying his mind, thereby rendering the assessment not only erroneous but also prejudicial to interest of revenue in the light of the decision of the Hon'ble Apex Court as laid down in the case of Malabar 11 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== Industrial Co. Limited vs. CIT (243 ITR 83)(SC). As regards the other items, i.e., Modvat, sales-tax, house-tax, compensation, they evidently relate to earlier assessment years such as 1996-97, 2000-01, 1993-94, 2004-05, respectively. No evidence has been produced by the assessee regarding the accounting treatment of the said items in the respective assessment year. In view of these facts and circumstances, the Assessing Officer is directed to bring to tax aggregate amount of Rs. 6,03,364 i.e., representing these four items.
21. We have heard both the parties and perused the material on record. We have carefully perused the order passed by the Assessing Officer u/s. 143(3) of the act on 31/12/2007. First we take up the legal issue with reference to the jurisdiction of invoking the provisions of section 263 of the Act by the learned CIT. The scheme of the IT Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to erroneous order of the assessing officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue. As held in the case of Malabar Industries Co. Ltd., Vs. CIT ( 243 ITR 83 (SC), the Commissioner can exercise revision jurisdictional u/s 263 if he is satisfied that the order of the assessing officer sought to be revised is
(i)erroneous; and also (ii) prejudicial to the interests of the revenue. The word 'erroneous' has not been defined in the Income Tax Act. It has been however defined at page 562 in Black's Law Dictionary (seventh Edition) thus;
'erroneous, adj. Involving error, deviating from the law'.
The word 'error' has been defined at the same page in the same dictionary thus:
'error No. 1 : A psychological state that does not conform to Objective reality; a brief that what is false is true or that what is true is false'.
At page 649/650 in P. Ramanatha Aiyer's Law Lexicon Reprint 2002, the word 'error' has been defined to mean-12 I.T.A. No. 919/Hyd/2010
M/s. Navabharat Ventures Ltd.
======================== 'Error: A mistaken judgement or deviation from the truth in matters of fact, and from the law in matters of judgement 'error' is a fault in judgement, or in the process or proceeding to judgement or in the execution upon the same, in a Court of Record; which in the Civil Law is called a Nullityie" (termes de la ley).
Something incorrectly done through ignorance or inadvertence S.99 CPC and S.215 Cr.PC.
'Error, Fault, Error respects the act; fault respect the agent, an error may lay in the judgement, or in the conduct, but a fault lies in the will or intention."
22. At page 650 of the aforesaid Law Lexicon, the scope of Error, Mistake, Blunder, and Hallucination has been explained thus:
"An error is any deviation from the standard or course of right, truth, justice or accuracy, which is not intentional. A mistake is an error committed under a misapprehension of misconception of the nature of a case. An error may be from the absence of knowledge, a mistake is from insufficient or false observation. Blunder is a practical error of a peculiarly gross or awkward kind, committed through glaring ignorance, heedlessness, or awkwardness. An error may be overlooked or atoned for, a mistake may be rectified, but the shame or ridicule which is occasioned by a blunder, who can counteract. Strictly speaking, Hallucination is an illusion of the perception, a phantasm of the imagination. The one comes of disordered vision, the other of discarded imagination. It is extended in medical science to matters of sensation, whether there is no corresponding cause to produce it. In its ordinary use it denotes an unaccountable error in judgement or fact, especially in one remarkable otherwise for accurate information and right decision. It is exceptional error or mistake in those otherwise not likely to be deceived."
23. In order to ascertain whether an order sought to be revised under Section 263 is erroneous, it should be seen whether it suffers from any of the aforesaid forms of error. In our view, an order sought to be revised under Section 263 would be erroneous and fall in the aforesaid category of "errors" if it is, inter alia, based on an incorrect 13 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== assumption of facts or an incorrect application of law or non- application of mind to something which was obvious and required application of mind or based on no or insufficient materials so as to affect the merits of the case and thereby cause prejudice to the interest of the revenue.
24. Section 263 of the Income-tax Act seeks to remove the prejudice caused to the revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo moto proceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The Commissioner will be well within his powers to regard an order as erroneous on the ground that in the circumstances of the case, the Assessing Officer should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an Assessing Officer under the Income-tax Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further enquiry. He must discharge both the roles effectively. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. The scheme of assessment has undergone radical changes in recent years. It deserves to be noted that the present assessment was made under Section 143(3) of the Income-tax Act. In other words, the Assessing Officer was statutorily required to make the assessment under Section 143(3) after scrutiny and not in a summary manner as contemplated by Sub-section (1) of Section 143. Bulk of the returns filed by the assessees across the country is accepted by the Department under Section 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The Assessing Officer is therefore, required to act fairly while accepting or 14 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== rejecting the claim of the assessee in cases of scrutiny assessments. He should be fair not only to the assessee but also to the Public Exchequer. The Assessing Officer has got to protect, on one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him, and on the other hand, he has a duty to protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry. Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the Assessing Officer becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. The Commissioner may consider an order of the Assessing Officer to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case. In taking the aforesaid view, we are supported by the decisions of the Hon'ble Supreme Court in Rampyari Devi Saraogi v. CIT (67 ITR 84) (SC), Smt. Tara Devi Aggarwal v. CIT (88 ITR 323) (SC), and Malabar Industrial Co. Ltd.'s case ( 243 ITR 83) (SC).
25. In Malabar Industrial Co. Ltd. case the Hon'ble Court has held as under:
"There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted.15 I.T.A. No. 919/Hyd/2010
M/s. Navabharat Ventures Ltd.
======================== An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall the orders passed without applying the principles of natural justice or without application of mind.
In our humble view, arbitrariness in decision-making would always need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the Commissioner under Section 263. Arbitrariness in decision-making causing prejudice to either party cannot therefore be allowed to stand and stare at the legal system. It is difficult to countenance such arbitrariness in the actions of the Assessing Officer. It is the duty of the Assessing Officer to adequately protect the interest of both the parties, namely, the assessee as well as the State. If he fails to discharge his duties fairly, his arbitrary actions culminating in erroneous orders can always be corrected either at the instance of the assessee, if the assessee is prejudiced or at the instance of the Commissioner, if the revenue is prejudiced. While making an assessment, the ITO has a varied role to play. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor. In S.N. Mukherjee v. Union of India AIR 1990 SC 1984, it has been observed by the Hon'ble Supreme Court as follows:
"Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes 16 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== chances or arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge."
26. Similar view was earlier taken by the Hon'ble Supreme Court in Siemens Engg. & Mfg. Co. Ltd. v. Union of India AIR 1976 SC 1785. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. The judgments on which reliance was placed by the learned Counsel for the assessee also points to the same direction. They have held that orders, which are subversive of the administration of revenue, must be regarded as erroneous and prejudicial to the interests of the revenue. If the Assessing Officers are allowed to make assessments in an arbitrary manner, as has been done in the case before us, the administration of revenue is bound to suffer. If without discussing the nature of the transaction and materials on record, the Assessing Officer had made certain addition to the income of the assessee, the same would have been considered erroneous by any appellate authority as being violative of the principles of natural justice which require that the authority must indicate the reasons for an adverse order. We find no reason why the same view should not be taken when an order is against 17 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== the interests of the revenue. As a matter of fact such orders are prejudicial to the interests of both the parties, because even the assessee is deprived of the benefit of a positive finding in his favour, though he may have sufficiently established his case.
27. In view of the foregoing, it can safely be said that an order passed by the Assessing Officer becomes erroneous and prejudicial to the interests of the Revenue under Section 263 in the following cases:
(i) The order sought to be revised contains error of reasoning or of law or of fact on the face of it.
(ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
(iii) The order passed by the Assessing Officer is a stereotype order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case.
28. We shall now turn to the facts of the present case to see whether the case before us is covered by the above said principles. A perusal of the assessment order does not show any application of mind by the Assessing Officer on his part. He simply accepted the claim of the assessee. This is a case where the Assessing Officer mechanically accepted what the assessee wanted him to accept without any application of mind or enquiry. The evidence available on record is not enough to hold that the return of the assessee was objectively examined or considered by the Assessing Officer. It is because of such non- consideration of the issues on the part of the Assessing Officer that the return filed by the assessee stood automatically accepted without any proper scrutiny. The assessment order placed before us is clearly erroneous as it was passed without proper examination or enquiry or verification or objective consideration of the claim made by the assessee. The Assessing Officer has completely omitted to examine the 18 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== issues in question from consideration and made the assessment in an arbitrary manner. His order is a completely non-speaking order on these two issues. In our view, it was a fit case for the learned Commissioner to exercise his revisional jurisdiction under section 263 which he rightly exercised by cancelling the assessment order and directing the Assessing Officer to pass a fresh order considering the issues raised by the CIT. In our view, the assessee should have no grievance in the action of learned Commissioner in exercising the jurisdiction u/s. 263 of the IT Act.
29. It was however contended by the learned Counsel that the Assessing Officer had taken a possible view in accepting the return of the assessee with reference to expenditure and hence, the Commissioner was not justified in assuming the revisional jurisdiction under Section 263. We have given our thoughtful consideration to the aforesaid submissions. As already stated earlier, an order becomes erroneous because inquiries, which ought to have been made on the facts of the case, were not made and not because there is anything wrong with the order if all the facts stated or the claims made in the return are assumed to be correct. Thus, it is mere failure on the part of the Assessing Officer to make the necessary inquiries or to examine the claim made by the assessee in accordance with law, which renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing more is required to be established in such a case. One would not know as to what would have happened if the Assessing Officer had made the requisite inquiries or examined the claim of the assessee in accordance with law. He could have accepted the assessee's claim. Equally, he could have also rejected the assessee's claim depending upon the results of his enquiry or examination into the claim of the assessee. Thus, the formation of any view by the Assessing Officer would necessarily depend upon the results of his inquiry and conscious, and not passive, examination into the claim of the assessee. If the Assessing Officer passes an order mechanically without making the requisite inquiries or examining the claim of the assessee in accordance 19 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== with law, such an order will clearly be erroneous in law as it would not be based on objective consideration of the relevant materials. It is therefore, the mere failure on the part of the Assessing Officer in not making the inquiries or not examining the claim of the assessee in accordance with law that per se renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing else is required to be established in such a case to show that the order sought to be revised is erroneous and prejudicial to the interests of the revenue.
30. We are unable to accept the submission of the learned Counsel for two other reasons also. First reason is that the view so taken by the Assessing Officer without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction under Section 263. Second reason is that it is not taking of any view that will take the matter under the scope of Section 263. The view taken by the Assessing Officer should not be a mere view in vacuum but a judicial view. It is well established that the Assessing Officer being a quasi-judicial authority cannot take a view, either against or in favour of the assessee / revenue, without making proper inquiries and without proper examination of the claim made by the assessee in the light of the applicable law. As already stated earlier, we are not able to appreciate on what material was placed before the Assessing Officer at the assessment stage to take such a view. The assessee has also not been able to lead enough evidence to show to us that any inquiry was made by the Assessing Officer in this regard. Therefore mere allegation that the Assessing Officer has taken a view in the matter will not put the matter beyond the purview of Section 263 unless the view so taken by the Assessing Officer is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. The judicial view taken by the Assessing Officer may perhaps place the matter outside the purview of Section 263 unless it is shown that the view so taken by the Assessing Officer contains some apparent error of reasoning or of law or of fact on the face of it.
20 I.T.A. No. 919/Hyd/2010M/s. Navabharat Ventures Ltd.
========================
31. The learned Counsel has strongly relied upon the following observations made in the case of Malabar Industrial Co. Ltd. (supra) and submitted that the learned Commissioner was not justified in substituting his view for that of the Assessing Officer:
"... Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law."
32. We have carefully gone through the aforesaid observations.
"Adopting" one of the courses permissible in law necessarily requires the Assessing Officer to consciously analyse and evaluate the facts in the light of relevant law and bring them on record. It is only then that he can be said to have "adopted" or chosen one of the courses permissible in law. The Assessing Officer cannot be presumed or attributed to have "adopted" or chosen a course permissible in law when his order does not speak in that behalf. Similarly, "taking" one view where two or more views are possible also necessarily imports the requirement of analysing the facts in the light of applicable law. Therefore, proper examination of facts in the light of relevant law is a necessary concomitant in order to say that the Assessing Officer has adopted a permissible course of law or taken a view where two or more views are possible. It is only after such proper examination and evaluation has been done by the Assessing Officer that he can come to a conclusion as to what are the permissible courses available in law or what are the possible views on the issue before him. In case he comes to the conclusion that more than one view is possible then he has necessarily to choose a view, which is most appropriate on the facts of the case. In order to apply the aforesaid observations to a given case, it 21 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== must therefore first be shown that the Assessing Officer has "adopted" a permissible course of law or, where two views are possible, the Assessing Officer has "taken" one such possible view in the order sought to be revised under Section 263. This requires the Assessing Officer to take a conscious decision; else he would neither be able to "adopt" a course permissible in law nor "take" a view where two or more views are possible. In other words, it is the Assessing Officer who has to adopt a permissible course of law or take a view where two or more views are possible. It is difficult to comprehend as to how the Assessing Officer can be attributed to have "adopted" a permissible course of law or "taken" a view where two or more views are possible when the order passed by him does not speak in that behalf. We cannot assume, in order to provide legitimacy to the assessment order, that the Assessing Officer has adopted a permissible course of law or taken a possible view where his order does not say so. The submissions made by the learned Counsel, if accepted, would require us to form, substitute and read our view in the order of the Assessing Officer when the Assessing Officer himself has not taken a view. It could have been a different position if the Assessing Officer had "adopted" or "taken" a view after analysing the facts and deciding the matter in the light of the applicable law. However, in the case before us, the Assessing Officer has not at all examined as to whether only one view was possible or two or more views were possible and hence, the question of his adopting or choosing one view in preference to the other does not arise. The aforesaid observations of the Hon'ble Supreme Court do not, in our view, help the assessee; and rather they are against the assessee.
33. In the case of Padmasundara Rao v. State of Tamil Nadu (255 ITR 147), the Hon'ble Supreme Court has held that "... There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Harrington v. British Railways Board [1972] 2 WLR 537 (HL).
22 I.T.A. No. 919/Hyd/2010M/s. Navabharat Ventures Ltd.
======================== Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases...." Therefore, the observations of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd's case (supra) on which reliance has been placed by the learned Counsel cannot be read in isolation. The judgment deserves to be read in its entirety to cull out the law laid down by the Hon'ble Supreme Court. If so read, it is quite evident that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue. If the order sought to be revised under Section 263 suffers from any of the aforesaid vices, it cannot be said that the Assessing Officer has "adopted", in such an order, a course permissible in law or "taken" a view where two or more views are possible."
34. It was next contended by the learned Authorised Representative that the Assessing Officer had considered all the relevant aspects of the case carefully while passing the order. According to him, the mere fact that the assessment order passed by the Assessing Officer was short would neither mean failure on his part in not examining the matter carefully nor would render his order erroneous so long as the view taken by him was a possible view. In our view, the aforesaid submission of the assessee must fail for the reasons already explained in the foregoing paras of this order as the order, which is sought to be revised under Section 263 reflects no proper application of mind by the Assessing Officer and thus be amenable to revision under Section 263. In this case before us, the assessment order passed by the Assessing Officer lacks judicial strength to stand. It is not a case where the order is short but is not supported by judicial strength. It is in this view of the matter that we feel that the learned Commissioner has correctly exercised his revisional jurisdiction under Section 263.
35. In our opinion, the Assessing Officer has been entrusted the role of an investigator, prosecutor as well as adjudicator under the scheme of the Income-tax Act. If he commits an error while discharging the aforesaid roles and consequently passes an erroneous order causing 23 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== prejudice either to the assessee or to the State Exchequer or to both, the order so passed by him is liable to be corrected. As mentioned earlier, the assessee can have the prejudice caused to him corrected by filing an appeal; as also by filing a revision application under Section 264. But the State Exchequer has no right of appeal against the orders of the Assessing Officer. Section 263 has therefore been enacted to empower the Commissioner to correct an erroneous order-passed by the Assessing Officer which he considers to be prejudicial to the interest of the revenue. The Commissioner has also been empowered to invoke his revisional jurisdiction under Section 264 at the instance of the assessee also. The line of difference between Sections 263 and 264 is that while the former can be invoked to remove the prejudice caused to the State the later can be invoked to remove the prejudice caused to the assessee. The provisions of Section 263 would lose significance if they were to be interpreted in a manner that prevented the Commissioner from revising the erroneous order passed by the Assessing Officer, which was prejudicial to the interest of the revenue. In fact, such a course would be counter productive as it would have the effect of promoting arbitrariness in the decisions of the Assessing Officers and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the revenue, are allowed to stand, the consequences would be disastrous in that the honest tax payers would be required to pay more than others to compensate for the loss caused by such erroneous orders. For this reason also, we are of the view that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind or without making requisite inquiries will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue within the meaning of Section
263.
36. Adverting to the facts of the present case, there is no enquiry by the Assessing Officer whatsoever on the issue in dispute. He just accepted the claim of the assessee with regard to current repairs and 24 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== other expenses in the assessment year under consideration. Being so, the CIT assumed jurisdiction u/s. 263 of the Act. The argument of the assessee's counsel is that there are decisions in favour of the assessee. Therefore, the view adopted by the Assessing Officer is one of the possible views. The general law on the question of revisional jurisdiction is that an order passed by the Assessing Officer cannot be held to be erroneous, if the Assessing Officer has followed one of the possible views on the subject. But this principle by and large applies to questions of fact. When it comes to question of law, the law laid down by the Supreme Court has to be invariably followed. It is a settled law that when a court declares the law on a subject, the declaration goes back to the date of enactment of that particular law as to state that the law from the date of its enactment itself was in the manner decided by the court subsequently. Therefore, the pronounced order of the Supreme Court dates back to the date of enactment and, therefore, the superimposition made by the judicial pronouncement the assessment order has become erroneous. It is not only erroneous, but also prejudicial to the interest of revenue inasmuch as the error has contributed in granting excessive relief to the assessee. The argument of the assessee's counsel that it is a debatable issue is rejected as there was no discussion of whatsoever by the Assessing Officer in the impugned assessment order without an iota of discussion on the issue of whatsoever as such the CIT exercised his powers u/s. 263 of the Act to revise the order of the Assessing Officer which was in conformity with the order of the Supreme Court and invoking the provisions of section 263 is justified.
37. In the present case, there is no enquiry by the Assessing Officer on the impugned issue. He has accepted the claim of the assessee which is not correct as seen from the facts of the case. The replacement of building and plant and machinery on destruction of the same by fire accident it cannot be considered as current repairs or revenue expenditure and the replacement resulted in bringing into existence of a new asset which brings enduring benefit to the assessee. The assessee 25 I.T.A. No. 919/Hyd/2010 M/s. Navabharat Ventures Ltd.
======================== has sought to treat the said expenditure differently for the purpose of computing the profit and for the purpose of payment of Income Tax that the expenditure which resulted in bringing new asset into existence with enduring benefit cannot be treated for deduction u/s. 31 or 37 of the act. In our opinion, this is a capital expenditure and cannot be allowed as deduction. For this purpose we place reliance on the judgement of Supreme Court in the case of CIT vs. Sri Mangayarkarasi Rasi Mills Pvt. Ltd. (315 ITR 114). We also rely on the judgement of jurisdictional of High Court in the case of CIT vs. Sarvaraya Textiles (332 ITR 553) wherein it was held that expenditure incurred by the assessee in replacement of fixed assets did not amount to current repairs. Accordingly on merit also this issue is decided against the assessee.
38. Regarding the second issue that is prior period expenses, as demonstrated by the CIT in his order in para 4.2 and para 4.2.1, there is no doubt that this expenditure is prior period expenditure and not relating to the assessment year under consideration. The assessee being following mercantile system of accounting cannot claim this expenditure for the assessment year under consideration. Accordingly this ground is also decided against the assessee.
39. In the result, assessee appeal is dismissed.
Order pronounced in the open court on 27th November, 2012.
Sd/- Sd/- (ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, dated 27th November, 2012 tprao Copy forwarded to:
1. M/s. Navabharat Ventures Ltd., 6-3-1109/1, Raj Bhavan Road, Somajiguda, Hyderabad-500 482.
2. The CIT-IV, Hyderabad.
3. The DCIT, Circle-16(1), Hyderabad.
4. The Addl. CIT, Range-16, Hyderabad.
5. The DR - A Bench, ITAT, Hyderabad