Income Tax Appellate Tribunal - Bangalore
Ibm India Private Limited , Bangalore vs Assessee on 28 June, 2013
ITA No.598 of 2011 IBM India Pvt Ltd Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
Bangalore Benches "B" Bangalore
Before Shri Gorge George K. Judicial Member and
Shri Jason P. Boaz, Accountant Member
ITA No.598 /Bang/2011
(Assessment year: 2005-06)
IBM India Private Limited, Vs. Commissioner of Income Tax
No.12 Subramanya Arcade, Large Taxpayers Unit, JSS
Bannerghatta Main Road, Towers, 100 Feet Ring Road,
Bangalore 560 093 Banashankar III Stage,
PAN: AAACI 4403 L Bangalore 560 085
(Appellant) (Respondent)
Assessee by: Shri Padam Chand Khincha
Department by: Shri S.K. Ambastha, DR
Date of Hearing: 28/06/2013
Date of Pronouncement: 05/07/2013
ORDER
Per Bench:
This appeal of the assessee company is directed against the order of the Commissioner of Income-tax [LTU], Bangalore, under section 263 of the Act dated 21.3.2011. The relevant assessment year is 2005-06.
2. The assessee company has, in its concise grounds of appeal, raised fifteen grounds. Ground No.1 is being general in nature, it doesn't survive for adjudication. The remaining grounds relate to the following issues, namely:
(1) (Ground Nos. 2 to 6) that the CIT had erred in initiation of revision proceedings u/s 263 of the Act in respect of relief u/s 10A of the Act;
(2) (Ground Nos. 7 to 14) that the CIT had also erred in extending the revision proceedings in respect of deduction claimed on the following heads:
(i) Repairs and maintenance;
(ii) Write off of bad debts;
(iii)CENVAT credit pertaining to exempted goods;Page 1 of 36
ITA No.598 of 2011 IBM India Pvt Ltd Bangalore
(iv)Club membership expenditure;
(v) Doubtful advances written off;
(vi) u/s 40(a)(i) / 40(a)(ia) of the Act; also
(vii) Applicability of the provisions of s. 115JB to the expenses provisions disallowed u/s 40(a)(i)/40(a)(ia) of the Act.
(3) (Ground No.15) that the CIT erred in directing the AO not to allow setting off of brought forward losses.
3. The facts of the issues, in brief, are as under:
3.1. The assessee company is engaged in the business of manufacturing, trading and leasing of computer hardware, maintenance of computer equipment, development of computer software and related services as consultancy in information technology, system integration etc., For the assessment year under consideration, the assessee had furnished its return of income on 26.10.2005, admitting a total income of Rs.115,81,64,033/-. An order u/s 143(3) of the Act was passed on 26.12.2008, determining the taxable income of the assessee at Rs.546,90,33,790/- which comprised of, among others, the additions made by the AO under the following heads, namely:
(i) TP adjustment of Rs.335,96,65,289/-
(ii) Provision for warranty Rs.16,19,27,000/-;
(iii)Software expenses after depreciation Rs.23,34,68,800/-;
(iv) Provision for obsolescence Rs.2,37,59,000/-
(v) Besides, reduction of claim u/s 10-A of the Act to Rs.189,50,46,333/- as against Rs.242.70 crores.
3.2 The assessee filed the appeal against the order passed under section 143(3) before the learned CIT(A)-LTU Bangalore and the said appeal is pending till date.
3.2.1 The assessee also filed an application under section 154 on 30.01.2009 for rectification of certain mistakes before the Assessing Officer. Copy of this application along with enclosures is placed at Page 3 to 41 of paper book 2. A second application under section Page 2 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore 154 dated 15.02.2009 was filed before the Assessing Officer. A reference to this application is made at page 52 of paper book 2. The Assessing Officer passed the order under section 154 on 15.09.2009 rectifying certain mistakes. Copy of this order is placed at page 42 to 45 of paper book 2.
3.2.2 Subsequently the learned CIT (LTU) issued notice under section 263 on 06.01.2010 initiating the proceedings under section 263 of the Act. Copy of this notice is placed at Page 46 to 48 of paper book 2. In the said notice the learned CIT (LTU) proposed to revise the order passed under section 143(3) dated 26.12.2008 for the following reasons:
i) The assessee has wrongly set off brought forward losses to the extent of Rs.37,13,52,075 since losses were not allowed to be carried forward in the assessment orders passed for assessment year 2003-04 and assessment year 2004-05.
ii) The export profit for the purposes of deduction under section 10A has been wrongly computed wherein the above amount of Rs.37,13,52,075 has been deducted.
iii) The deduction claimed under section 10A is to be denied fully in view of not meeting the conditions specified under section 10A as brought out in earlier assessment years and upheld by CIT (A) in his latest order dated 05.10.2009 for assessment year 2002-03.
3.2.3 The assessee filed written submissions before the learned CIT (LTU) in respect of the above show cause notice on 15.02.2010.
Copy of the above submissions is placed at page 49 to 79 of paper book 2. Subsequently the learned CIT called for various information and documents in the course of revision proceedings. The assessee filed the information and documents as directed by the learned CIT on 18.11.2010, 23.11.2010 and 30.11.2010. Copies of these submissions are placed at pages 87 to 211 of the paper book 2.
Page 3 of 36ITA No.598 of 2011 IBM India Pvt Ltd Bangalore Copy of submissions filed on 30.11.2010 and enclosures thereto are also separately placed as box file No.3. The assessee was again directed to file certain additional details and the same was filed on 16.12.2010. Copies of these submissions are placed at page 212 to 219 of paper book 2.
3.2.4 A second notice under section 263 was issued by the learned CIT on 21.12.2010. Copy of this notice is placed at page 220 and 221 of paper book 2. In the said notice, it was proposed by the learned CIT to re-examine and revise the concluded assessment in order to ascertain whether payments made outside India without deducting tax at source under section 195 are liable for disallowance under section 40(a)(ia). It was stated that the revision in respect of the above issue is in addition to issues already under consideration vide notice issued under section 263 on 06.01.2010. The matter was posted for hearing on 04.01.2011.
3.2.5 During the course of hearing on 04.0-1.2011, the learned CIT called for certain documents and these were filed by the assessee vide letter dated 10.01.2011. Copy of this letter and the attachments thereto are placed at page 223 to 240 of the paper book 2. Vide letter dated 12.01.2011 the learned CIT asked the assessee to produce the details of disallowance made by the assessee under section 40(a)(i) and 40(a)(ia) in computation of taxable income. Vide another letter dated 27.01.2011 the learned CIT directed the assessee to produce various details as mentioned in the annexure to above letter and the matter was posted for hearing on 31.01.2011. Copy of letter dated 12.01.2011 and 27.01.2011 are placed at pages 241 to 245 of paper book 2. The assessee filed the details and documents as called for by the learned CIT on 31.01.2011 and 07.02.2011. Copies of covering letter of these submissions are placed at pages 246 to 259 of paper book 2. The entire submissions along with enclosures filed on 31.01.2011 and 07.02.2011 is separately placed in box file No.4 and 5.
Page 4 of 36ITA No.598 of 2011 IBM India Pvt Ltd Bangalore 3.2.6 Third notice under section 263 was issued by the learned CIT on 17.02.2011. Copy of this notice is placed at page 261 to 267 of paper book 2. In the said notice, the assessment order passed under section 143(3) was sought to be revised for the reasons stated in the annexure to said notice. These reasons were as under:
(i) Non maintenance of separate books of accounts for units registered under the STPI Scheme.
(ii) Audit under section 10A having being completed within one day of statutory audit and auditor's examination of evidence not being comprehensive.
(iii) Deduction claimed under section 10A is excess since reconciliation of revenues, expenses of each STPI Units and domestic Units with bank statements has not been submitted.
(iv) Overseas bank account not with proper authorization.
(v) Deduction under section 10A is not available for onsite services provided by the STPI Units.
(vi) Repairs and maintenance claimed as deduction are capital in nature and bad debts, doubtful advances have been incorrectly claimed as deduction.
(vii) Club membership expenditure claimed as deduction is capital in nature and consequently deduction is not allowable in respect of the said expenditure.
3.2.7 The assessee was also called to produce ledgers, cash book, bank pass book, purchase and sales register, journal register, stock register and fixed assets register in the above notice. The assessee complied with the above notice and submitted the details and documents called for vide submissions dated 18.02.2011 and 25.02.2011. Copy of these submissions and enclosures thereto are placed at pages 268 to 403 of paper book 2. The learned CIT also made various enquiries and called for various documents and details during the course of revisionary proceedings. Assessee complied with the same and furnished the submissions and Page 5 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore documents vide letters dated 01.03.2011, 04.03.2011 and 09.03.2011. Copy of the same is placed at pages 404 to 511 of paper book 2.
3.2.8 The sequence of proceedings before the learned CIT under section 263 is also tabulated at page 1 to 5 of the 'compilation of relevant decisions/material' filed before the Bench by the assessee.
4. The CIT after due consideration of the submissions made by the assessee and also extensively quoting various case laws as recorded in her impugned order under dispute, the CIT had concluded her proceedings u/s 263 of the Act dated 21.3.2011, among others, as under:
"X. Conclusion:
To conclude, the discussions in the fore-going paragraphs show that the original assessment dated 26.12.2008 completed under section 143(3) was concluded without proper enquiries on the issues discussed in this order. Non-conducting of such enquiries render this assessment order erroneous in so far as it is prejudicial to the interest of the revenue within the meaning of section 263 of the Income-tax Act.
Moreover, the findings of the investigations carried out in the assessment for AY 2007-08 also show the need for similar enquiries in the current assessment year also.
Accordingly, following issues are remitted back to the file of the assessing officer for making necessary enquiries in the light of the foregoing paragraphs:
(i) Expenditure on repairs as discussed in Para IX.1;
(ii) Writing off of bad debts as discussed in Para IX.2;
(iii) Deduction claimed in respect of CENVAT credit as discussed in Para IX.3;
(iv) Payments for club membership as discussed in Para IX.4;
(v) Writing off of advances as discussed in Para IX.5;
(vi) Assessee's eligibility to claim deduction under section 10A as discussed in Para IX.6;
(vii) Applicability of section 115JB as discussed in Para IX.8;Page 6 of 36
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(viii) Disallowance under section 40(a) as discussed in Para IX.9 The assessing officer is directed to examine these issues in the light of the discussions in this order in respect of the claims made by the assessee.
Regarding the issue of incorrect set off of non-existing losses of earlier years, discussed in Para IX.7, the assessing officer is directed to withdraw the set off allowed."
5. Aggrieved, the assessee has come up before us with the present appeal. During the course of hearing, the submissions made by the learned A R are summarized as under:
- that revision u/s. 263 of the Act is permitted only if the order passed by the AO is erroneous and prejudicial to the interest of revenue. S. 263 postulates the satisfaction of twin conditions/requirements, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) prejudicial to the interests of revenue. If one of them is absent i.e., if the order of the AO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue, recourse cannot be had to s. 263(1) of the Act. The phrase 'pre-judicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the revenue. When the AO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue. The provision cannot be invoked to correct each and every type of mistake or error committed by the AO;
Relies on the following case laws:
(i) Malabar Industrial Co. Ltd v. CIT - (2000) 243 ITR 83 (SC);
(ii)T.K. International Ltd v. ACIT - (2005) 275 ITR (AT) 101 ITAT (Ctk);
(iii) Jamnadas T Mehta v. ITO (2002) 257 (AT) 90 ITAT (Pune)
- that an order passed u/s 143(3) after consideration of all the details/information cannot be said to be erroneous and prejudicial to the interests of revenue Relies on the following case laws:
(i) CIT v. Abdul Rahman Sait (2008) 306 ITR 142 (Mad);Page 7 of 36
ITA No.598 of 2011 IBM India Pvt Ltd Bangalore
(ii) ALA Firm v. CIT (1991) 189 ITR 285 (SC);
(iii) CIT v. Kelvinator of India Ltd (2010) 320 ITR 561 (SC) S. 263 has no application in respect of 'inadequate inquiry:
- that s. 263 does not visualize a case of substitution of the judgment of the CIT for that of the AO who passed the order unless the decision is held to be erroneous. Cases may be visualized where the AO while making an assessment examine the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The CIT, on perusal of the records, may be of the opinion that the estimate made by the AO was on the lower side and left to the CIT who would have estimated the income at a figure higher than the one determined by the AO. That would not vest the CIT with power to re-examine the accounts and determine the income himself at a higher figure. It is because the AO had exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion; and that such a conclusion cannot be termed to be erroneous because the CIT does not feel satisfied with the conclusion. 'Lack of inquiry' is different from 'inadequate inquiry'. If the AO passes the order after making inquiries, even if the same were inadequate, the CIT had no jurisdiction u/s 263. Only in cases of 'lack of inquiry', the CIT may assume jurisdiction u/s 263;
Relies on the following case laws:
(a) CIT v. Sunbeam Auto Ltd (2009) 227 CTR 0133 (Del):
(b) CIT v. Anil Kumar Sharma (2010) 194 Taxman 0504 (Del);
(c)CIT v. Vikas Polymers (2010) 194 Taxman 0057 (Del);
(d) Hitendra A Nanavati v. CIT (2010) 135 TTH (Ahmedabad) 17;
(e) Hyundai Heavy Industries Co. Ltd v. DIT (Intl. Taxation-II) ITA Nos.2086 & 2087/83 Del/2009 Delhi ITAT decision dated 31.5.2011;
(f) Infosys BPO Ltd v. ACIT (2012) 6 TaxCorp (AT) 27503 (Bang)
- that on perusal of the assessment order, it is evident that the assessment order u/s 143(3) was passed after verification of all details and enquiries and after application of mind by the AO and, thus, it cannot be treated as erroneous and pre- judicial to the interests of revenue. Revision u/s 263 cannot also be made merely because the CIT was not satisfied with the conclusions or findings of the AO;
- that even on merits too, the jurisdictional Tribunal in assessee's own case for the earlier years had held that there is no statutory requirement to maintain separate books of Page 8 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore account for STPI units to claim deduction u/s 10A; and that the Board's Circular No.1 of 2013 affirms that maintenance of separate books of account for STPI Units is not mandatory and, thus, the basis/reasons on which the issuance of notice u/s 263 was incorrect, contrary to law;
- that since the AO having taken a conscious view or opinion while passing the assessment order, the same cannot be disturbed in the garb of proceedings u/s 263 [Source:
Malabar Industrial Co. Ltd v. CIT (2000) 243 ITR 83 (SC)];
- that even assuming that the enquiries made by the AO were insufficient, the 'inadequate enquiry', per se, cannot be the reason for assuming jurisdiction u/s 263; that there is a difference between 'lack of enquiry' and 'inadequate enquiry. It is only 'lack of enquiry' which may attract revision and that the 'inadequate enquiry' by itself cannot result in revision by the CIT u/s 263 [Source: Infosys BPO Ltd v. ACIT [(2012) 6 TxCorp (A.T) 27503];
Relies on the following case laws:
(a) CIT v. D'silva (LF) (1991) 192 ITR 547 (Kar); &
(b) Raylon Silk Mills v. CIT (1996) 221 ITR 155 (Guj);
Validity of issuance of second and third notices u/s 263:
- that in the second show-cause notice u/s 263 dated 21.12.2010, it was proposed to re-examine and revise the order for the reason that the assessee had not made TDS on foreign remittances and, hence, these payments were to be considered for disallowance u/s 40(a)(ia) and yet again in the third notice referred to certain sworn statements recorded from the auditors; and that it would be evident that the CIT made a roving and fishing enquiries under the garb of revision proceedings; and that the issuance of notices u/s 263 of the Act for the second and third times was, therefore, bad in law;
Relies on the following case laws:
(a) Commercial Art Press v. CIT (1978) 115 ITR 876 (All); &
(b) ASSP and Co v. CIT (1988) 172 ITR 274 (Mad)
- that the impugned order u/s 263 of the Act does not demonstrate as to how the order passed u/s 143(3) was erroneous and pre-judicial to the interests of revenue. The CIT had remanded all the issues to the file of the AO for re-
examination whereas the AO, in fact, called for various details, examined them scrupulously before concluding the assessment and, therefore, the assessment order was neither erroneous nor prejudicial to the interests of revenue as attributed by the CIT in her revision proceedings u/s 263 of the Act.
Page 9 of 36ITA No.598 of 2011 IBM India Pvt Ltd Bangalore 5.1. In conclusion, the learned AR submitted that on the facts and in the circumstances of the case and law applicable, the impugned order passed u/s 263 of the Act was bad in law and liable to be quashed.
6. On the other hand, the learned D R had supported the stand of the CIT in invoking the provisions as well as assumption of jurisdiction under section 263 of the Act. The arguments put-forth by the learned DR are summed up as under:
- that as per computation of income, business income of the assessee was Rs.400.34 crores. The assessee had six STPI/SEZ Units and the cumulative deduction u/s 10A of Rs.242.7 crores claimed in its computation has been allowed by the AO. The assessee had also one STP Unit at Bangalore with expired holiday period (ex-10A Unit). The details of deduction u/s 10A as per the audit reports (Form 56F) dated 21.10.2005 is as under:
Location ETO of Export turnover profit
Company
Bangalore 2 1299.53 1321.46/845.88 169.89 4 locations
On/offshore
New Delhi 4129.03 31.25/845.88 02.94 Offshore
Gurgaon 4129.03 97.36/845.88 11.68 On/offshore
Pune 2 4129.03 149.19/845.88 19.88 On/offshore
Pune 1 4129.03 56.93/845.88 09.16 On/offshore
Kolkatta 4129.03 234.24/845.88 29.11 On/offshore
Total 242.70
Bangalore 1 Non-10A 194.73 18.99
2085,30,15,748 185.11
Domestic 2106,72,86,265 89.12
- that the CIT had issued a show-cause notice u/s 263 of the Act which primarily raised the issue of brought forward losses of Rs.37.13 crores wrongly allowed by the AO and also allowance of deduction u/s 10-A to the assessee etc., With regard to assumption of jurisdiction u/s 263:
- that the AO did not call for any details with regard to the profits certified to be exempt u/s 10A in Form 56F by the CA, submitted by the assessee with regard to verification of accounts of STPI undertakings; and that other than audit report u/s 44AB dated 20.10.2005, certificate dated 21.10.2005 and the written submission dated 19.10.2008, no details were furnished by the assessee and enquiry was carried out by the AO. Those documents were mere financial Page 10 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore statements based on restricted information supplied by the assessee;
Claim of deduction u/s 10A requires the following conditions to be fulfilled:
(a) the under-taking should be newly established unit approved by STPI;
(b) the unit should manufacture or produce articles or develop computer software and export such product or software outside India;
(c) the export proceeds in foreign exchange should be brought into India within six month of the end of the assessment year; &
(d) RBI must approve/extend the time limit for bringing the foreign exchange into India beyond six months.
- that deduction u/s 10A of profits derived from and eligible under-taking, such undertaking or unit has to be treated on standalone basis, as an independent source of income, unrelated to other activities of an assessee;
- that the profits of 10A Units have to be computed before computing the gross total income, it is, therefore, incumbent that the accounts of such units are maintained separately, more so where the assessee may have many 10A units (some being profit making while other loss making), as also substantial domestic sales/business of the same nature. The assessee must demonstrate that the domestic sales/services are not being sourced from the STPI Units (which would have the effect of reducing the 10A deduction), and further that the sale proceeds in foreign exchange is actually arising from the export of software and/or software services from the STPI Unit and not arising from other businesses carried out in India (which would not be eligible for deduction u/s 10A, in any case). Any goods supplied or services rendered in India to a foreign customer or an Indian customer who pays in foreign exchange would not amount to export and profits of such sale/service would not be eligible for deduction u/s 10A. It is, therefore, imperative and incumbent that accounts of each of the undertaking is maintained separately and the exports proceeds could be verifiably related to the manufacture of goods/computer software by the undertaking.
Relies on the following case laws:
(i) CIT v. Himatasingike Seide Ltd. - (2006) 286 ITR 255 (Kar);
(ii) Intellinet 129 TTJ 273 (Chennai SB)(sic) Scientific Atlanta India Technology (P) Ltd v. ACIT - (2010) 129 TTJ (Chennai) (SB) 273;& Page 11 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore
(iii)Arisudana Spinning Mills (2012) 348 ITR 385 (SC)
- That the assessee did not furnish the bank account with Marine Midland Bank (HSBC), USA where amounts were credited, alleged for the software exports by 10A Units before the AO, neither such credits were correlated with the invoices raised by the Units. The FIRCs do not indicate the realization against any invoice raised or in relation to softex forms certified by the STPI authorities. The FIRCs merely indicate that substantial amounts have been transferred from the overseas account of the assessee. They do not have any reference and/or endorsement to softex invoices or forms.
The source, volume and nature of credit in the overseas account has not been explained till date;
- with regard to the issue of separate books of accounts, the assessee's reliance on Board's Circular dated 17.1.2013 is misplaced as the circular clearly mentions that the assessing officer may call for such accounts which are necessary to determine the eligible profits of the undertaking. There could be a situation where the assessee has only one undertaking with small other incomes which could be segregated easily for computing business profits of the undertaking. But where the situation requires separate accounts, it could not be wished away by the assessee. For example, if the undertaking is capital intensive, computation of depreciation for such undertaking would require, separate depreciation chart for the same. A common depreciation chart with block of assets for the assessee as a whole would not give a clear picture of the depreciation amount attributable to the assets of a particular undertaking. Similarly, if the employees working in or out of the undertaking and serving the domestic customers for say maintenance work, the proceeds of which is received in foreign exchange, would affect the eligible profits of the undertaking for deduction. Examination of payroll and work performed by such employees in an IT sector environment is necessary, where the software services and maintenance work for both domestic and foreign customers could be performed through telecom/satellite/internet channels. The work orders received and executed by employees of respective units would determine the nature of business and receipts. The invoices are non-descriptive and not approved by STPI. As these invoices are computer generated and digitally signed which could be changed to 'offshore efforts' or software income. Page 120 of PB II clearly shows that the service contract for server management with GE is in relation to Indian location. Similarly, P 125 of PB II shows the ICA to be in relation to All India IGA server management. The softex forms in BF NO.3 (PB 2) hide the finer details of the real work;
Page 12 of 36ITA No.598 of 2011 IBM India Pvt Ltd Bangalore
- that the compliance to the requirements/conditions for deduction u/s 10A requires verification of relevant facts during each assessment with regard to nature of activities, correct computation of profits of the undertaking and also of the profits eligible for deduction u/s 10A in the light of foreign exchange remittance in relation to such exports. This entails calling for basic documents such as (i) terms of sale or services to be made to the customer to verify the nature of goods or services supplied and the location of such end-user, domestic or foreign; (ii) bill raised for the goods/services and verification of sale proceeds being received in foreign exchange, verified and correlated with entries in the bank accounts and FIRCs issued by the bank;
- that the very fact of non-verification of assets, employees, customers, nature of work and the end beneficiary of the services of such undertaken would render the assessment erroneous. Further, the export of tangible goods in terms of bills raised, and bringing the foreign exchange to India in terms of FIRCs was not examined or verified and, thus, the assessment was erroneous and allowance of exemption u/s 10A prejudicial to the interest of revenue. The various details called for by the CIT itself shows that such details required for assessment before allowing the exemption were neither called for nor submitted by the assessee. The multiplicity of notices issued by the CIT is more on account of non-furnishing of requisite details/accounts e.g., asset register of the undertakings for the purposes of verifying the nature of work, depreciation etc., FIRCs in respect of the bills raised proving the realization of export proceeds within the stipulated period;
- that even during the course of revision proceedings, the assessee had submitted asset register as a whole which does not give unit-wise details of plant and machinery or the depreciation chart;
- that though separate books of accounts are not required to claim deduction u/s 10-A which legally sound also, but, for making an assessment, profits of the undertaking from eligible activities have to be determined, in order to allow deduction and that even if books are not mandatory under law (although it is for STPI regulations), invoices for income and expenses would have to be examined by the AO to determine the nature of receipt, direct expenses, allocation of common / indirect expenses and resultant profits, ascertain the veracity of certificate in Form 56F;
- that the CIT had, during the course of revision proceedings, called for such materials, on the basis of which the P & L account of the undertakings could be assumed/conceived by Page 13 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore the CA to certify in 24 hours, the profits for deduction without any books of accounts and any reference to them;
- that it would be incorrect in the facts and circumstances of the case that the CIT was making fishing or roving enquiries or creating materials.
Relies on the ruling of the Hon'ble Supreme Court in the case of CIT v. Shree Manjunatheswer Packing Products and Camphor Works (1998) 231 ITR 53 (SC)
- that a lack of enquiry could not be equated with inadequate or insufficient enquiry which has been held to no ground for revision; and that in the present case, the claim of deduction of more than Rs.210 crores warranted detailed and meaningful enquiry as discussed above;
Relies on the ruling of the Hon'ble Rajasthan High Court in the case of M/s. Kandhari & Kandhari (P) Ltd Udaipur v. ITAT
- (ITA 222/2011) (Raj.HC); &
- that there was no bar to revise an assessment on many accounts and for that purpose issuance of more than one show-cause notices. While it may not be permitted to pass more than one revision order u/s 263 for the same assessment order, there could not be any grievance that more than one show-cause notice was issued before passing the order so long as opportunity was given to the assessee and the order was passed within the prescribed time limit.
6.1 In conclusion, the learned DR had distinguished the following case laws on which the learned AR placed strong reliance:
(i) Malabar Industrial Company v. CIT - 243 ITR 83 (SC);
(ii) CIT v. Garbriel India Ltd - 203 ITR 83 (SC);
(iii)Bongaigaon Refinery and Petro Chemicals Ltd - 287 ITR 120;
(iv) B&A Plantation & Industries Ltd - 290 ITR 395 (Gau);
(v) CIT v. Leisure Wear Exports Ltd - 341 ITR 166 (Del);
(vi) CIT v. Hindustan Marketing and Advertising Co. Ltd 341 ITR 180 (Del);
(vii)IBM India (P) Ltd v. DCIT - ITA No.1151/Bang/2009 - AY 2002-03 - ITAT, Bangalore;
6.2 In the following case laws, the learned DR had placed reliance to support his views, namely:
(i) Mukur Corporation (1978) 111 ITR 312 (Guj);
(ii) CIT v. Daga Entradce Pvt. Ltd (2010) 327 ITR 467 (Guj);
(iii)CIT v. English Indian Clays Ltd (2011) 331 ITR 219 (Ker);
(iv) CIT v. Infosys Technologies Ltd (2012) 341 ITR 293 (Kar);Page 14 of 36
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(v) Mysore Sales International Ltd - ITA No.1402/B/2010 dated 30.3.2012 - AY 2006-07 '- ITAT, Bangalore 'A' Bench;
(vi) M/s. Times VPL Ltd - ITA No.587/B/2012 dated 31.1.2012 -
AY 2007-08 - ITAT, 'A' Bench, Bangalore;
(vii) CIT v. Nagesh Knitwears P Ltd & Ors. (2012) 345 ITR 135 (Del); &
(viii) ITO v. DG Housing Projects Ltd (2012) 343 ITR 329 (Del);
7. We have carefully considered the submissions (oral as well as written) of rival parties, perused the relevant materials on records and also voluminous paper books, case laws etc., furnished by either of the parties during the course of hearing proceedings. For the assessment year under consideration, the assessee had furnished its return of income, declaring a total income of Rs.115.81 crores with a deduction of Rs.242.7 crores under section 10A of the Act. As could be seen from the assessment order, the learned AO had concluded the assessment with a prefix that "After going through the details submitted by the assessee and considering the issues discussed below, the assessment is completed as under:"
7.1 While doing so, the AO had made the following adjustments to the income returned by the assessee:
(a) Transfer pricing adjustment;
(b) Disallowance of provision for warranty;
(c) Disallowance of software expenses;
(d) Disallowance of provision for obsolescence; &
(e) Reduction of deduction claimed u/s 10A 7.1.1 Subsequently, on a perusal of the assessment records of the assessee and for the reasons recorded in the show-cause notices [incidentally, there were three notices dated 6.1.2010, 21.12.2010 and yet again on 17.2.2011] u/s 263 of the Act, the learned CIT (LTU) sought to revise the assessment made u/s 143(3) of the Act which was, according to her, concluded by the AO without examining the following issues which rendered the said order erroneous and pre-judicial to the interests of the revenue:
(a) Losses amounting to Rs.37.13 crores has been wrongly allowed as set off in the order;Page 15 of 36
ITA No.598 of 2011 IBM India Pvt Ltd Bangalore
(b) Wrong computation of export profit in computing deduction u/s 10A of the Act; &
(c) Disallowance of entire deduction claimed u/s 10A for the reason that separate books of account have not been maintained in respect of STPI Units.
7.1.2 After taking into account the submissions of the assessee and for the detailed reasons recorded therein in her order u/s 263 of the Act dated 21.3.2011, the CIT remitted back the following issues to the file of the assessing officer for making necessary enquiries:
(a) Expenses on repairs;
(b) Writing off of bad debts;
(c) Deduction claimed in respect of CENVAT credit;
(d) Payments for club membership;
(e) Writing off of advances;
(f) Eligibility to claim deduction u/s 10A of the Act;
(g) Applicability of s. 115JB;
(h) Disallowance u/s 40(a); &
(i) With regard to incorrect set off of non-existing losses of earlier years, the assessing officer was directed to withdraw the set off allowed.
7.2 Aggrieved, the assessee has come up before us with the present appeal. The first and second ground on which the learned CIT assumed jurisdiction to revise the order is that losses amounting to Rs.37,13,52,075 relating to assessment year 2003-04 and assessment year 2004-05 have been wrongly allowed to be set off in computing the business income and export profits in the order passed under section 143(3) for assessment year 2005-06. The CIT observed that as per assessment records relating to assessment year 2003-04 and assessment year 2004-05 there are no losses available for carry forward and hence these losses have been wrongly allowed by the Assessing Officer in the order passed under 143(3) for the year under consideration. The losses were not allowed to be carried forward in assessment year 2003-04 and assessment year 2004-05 for the reason that in the opinion of the Assessing Officer the assessee is not entitled to claim deduction under section 10A and also on the basis of the orders passed under section 143(3) for the Page 16 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore assessment years 2000-01 to 2002-03. On appeal the learned CIT (A) allowed deduction claimed under section 10A for the assessment year 2000-01, 2002-03 and the appeals filed by the Department against the orders of the CIT (A) were dismissed by the Coordinate Bench of the Tribunal. This fact is evident from page 177 of paper book 1 filed by the assessee. Further, for assessment year 2003-04 the learned CIT (A) allowed deduction under section 10A following the orders of the Coordinate Bench in assessee's own case for assessment year 2000-01, 2001-02 and the revenue did not file an appeal against the relief allowed by the learned CIT (A). The above facts were brought to the notice of the learned CIT by the assessee in its submissions dated 15.02.2010 at page 54 of paper book 2. The Supreme Court in CIT vs. Max India Ltd (2007) 295 ITR 282 held that the law prevailing on the date when the Commissioner passed the order under section 263 is relevant to judge the validity of the said order. When the learned CIT initiated the proceedings under section 263 on 6.1.2010 and when the order under section 263 was passed on 21.3.2011 the order passed by the CIT (A) on 30.4.2009 for assessment year 2003-04 and the orders of the Coordinate Bench in assessee's own case for assessment year 2000-01 and assessment year 2001-02 were available on record. However, the learned CIT failed to consider the same. On consideration of the above undisputable facts, it would be evident that the ground on which the losses for assessment year 2003-04 and assessment year 2004-05 were not allowed to be carried forward i.e. denial of deduction under section 10A has been decided in assessee's favour by the Coordinate Bench of Tribunal.
7.2.1 The issue as to whether losses of earlier years are allowable as set off is consequential in nature. The assessee itself vide letter dated 15.02.2009 requested the Assessing Officer to rectify the order passed under 143(3) in respect of set off of losses amounting to Rs.37,13,52,075 vide letter dated 15.02.2010 filed by the assessee before the learned CIT, at page 52 of paper book 2, is an evidence to Page 17 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore the above fact. Even the learned CIT has mentioned at page 76 of the order passed under section 263 that the assessee itself has filed the rectification application in respect of the set off of loses and the learned CIT was also aware of the order of the Tribunal in assessee's favour for the earlier year. The assessee voluntarily having filed the rectification application, the Assessing Officer was seized with the said matter and was competent to rectify the same. There was no legal requirement for the Commissioner to exercise supervisory jurisdiction in respect of an issue which is already pending before the Assessing Officer, which is purely consequential in nature and further given the fact that the issue on merits has already been decided in favour of the assessee by the Coordinate Bench for the earlier years. Even otherwise, as and when the consequential orders are passed to give effect to the appellate orders, the issue of carry forward of losses and the quantification thereof would get resolved. As held by the Supreme Court in Malabar Industrial Co Ltd v CIT (2000) 243 ITR 83, the provisions of section 263 cannot be invoked to correct each and every type of mistake or error committe4d by the Assessing Officer. The learned CIT was therefore not legally correct in exercising jurisdiction under section 263 in respect of set off of losses pertaining to assessment year 2003-04 and 2004-05. Consequently the order passed under section 263 is without jurisdiction and bad in law in respect of the first and second ground i.e. set off of losses pertaining to assessment year 2003-04 and 2004-05.
7.3 The third ground based on which the learned CIT proposed to revise the order under section 263 in his first notice is the disallowance or denial of deduction under section 10A in view of not meeting the conditions specified under section 10A as brought out in earlier assessment years and upheld by the CIT (A) in his order dated 5.10.2009 for the assessment year 2002-03. In the said first notice (copy at page 48 of paper book 2) the learned CIT relied on the assessment records right from assessment year 2000-01 wherein Page 18 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore the department has taken a view that the assessee is not entitled for deduction under section 10A on the ground that basic requirements of maintenance of separate books of accounts is not met by the assessee. Consequently as per the opinion of the learned CIT, the exact quantification of unit wise export profits and the conditions laid by STPI authorities have not been satisfied. The learned CIT thereafter relied on the order passed by the learned CIT (A) for assessment year 2002-03 wherein the learned CIT (A) upheld the denial of deduction under section 10A in the case of the assessee for non maintenance of separate books of accounts in relation to STPI Units. The learned CIT therefore concluded at Para 5 of notice under section 263 dated 6.1.2010 that the above aspects which govern the allowability of claim under section 10A have not been considered by the Assessing Officer while passing the order under section 143(3). It is stated that the Assessing Officer has failed to consider vital and fundamental issue i.e. whether in fact assessee was eligible to claim deduction under section 10A at all or not. This is how the learned CIT has tried to demonstrate that the order passed under section 143(3) is erroneous in so far as it is prejudicial to the interests of the revenue.
7.3.1 As explained earlier the Supreme Court in CIT vs. Max India Ltd (2007) 295 ITR 282 held that the law prevailing on the date when the Commissioner passed the order under section 263 is relevant to judge the validity of the said order. In the present case, the first show cause notice under section 263 is dated 6.1.2010 and the order under section 263 was passed on 21.3.2011. When the learned CIT passed the order under section 263 on 21.3.2011, the Coordinate Bench of the Tribunal in assessee's own case for the earlier years i.e. for assessment year 2000-01 vide order dated 31.10.2007 for assessment year 2001-02 vide order dated 29.02.208 for assessment year 2002-03 vide order dated 24.06.2011 had already held that the assessee is entitled to claim deduction under section 10A. The ITAT also held that there is no requirement for Page 19 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore maintenance of separate of books of accounts for STPI Units. This is an undisputable fact which is also placed at page 177 of paper book
1. Thus, there is no basis for the learned CIT to hold that the order passed under section 143(3) is erroneous in so far as it is prejudicial to the interests of the Revenue. Further, this is not a case where the Assessing Officer allowed deduction under section 10A without making enquiries. During the course of the assessment proceedings, the Assessing Officer asked the assessee to submit explanation as to why deduction under section 10A should not be denied for non maintenance of separate of books of accounts for STPI Units and a portion of software development activity being carried out by the sub contractors. The assessee filed written submissions on 24.1.2008 and explained in detail as to why deduction under section 10A should be allowed. Copy of the submissions filed before the Assessing Officer are placed at page 176 to 187 of paper book 1. In the said submission, the assessee explained that the Coordinate Bench of the Tribunal in assessee's own case for the earlier years has allowed deduction under section 10A and submitted the copies of the said orders also. The Assessing Officer was consequently requested not to make any adjustment in respect of relief claimed under section 10A. Not only this, the assessee explained other aspects of deduction under section 10A such as exclusion of foreign currency expenses and communication expenses from export turnover and total turnover. Vide submissions dated 24.12.2008 copy of which is placed at page 227 of paper book 1, the assessee also explained the aspect of allocation of common corporate expenses to STP Units. The Assessing Officer after making enquiries and after considering all the issues, passed the order under section 143(3) on 26.12.2008. The Assessing Officer accepts at page 2 of the order that the assessment is completed after going through the details submitted by the assessee and after considering the issues discussed in the order. The order passed under section 143(3) contains discussion on computation of deduction under section 10A wherein the Assessing Officer concludes that deduction under Page 20 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore section 10A is to be allowed after set off of losses and foreign currency expenses, communication expenses reduced from export turnover should not be reduced from total turnover. In view of the above undisputable facts on record, it cannot be said that the Assessing Officer allowed deduction under section 10A without making enquiries. From the facts on record it is clear that the Assessing Officer after having asked for replies from the assessee, in respect of deduction under section 10A, after going through the submissions and the decisions of the Coordinate Bench of the Tribunal in assessee's own case wherein deduction under section 10A was allowed, followed the said decisions and allowed deduction under section 10A. It is a trite law that orders of the Tribunal are binding on the lower authorities. The order passed under section 143(3) in the instant case which allowed deduction under section 10A by following the orders of the Coordinate Bench of the Tribunal in assessee's own case for the earlier years cannot, by any stretch of imagination, be branded as an order erroneous and prejudicial to the interests of the Revenue as per sec 263. We are fortified in our conclusion by the decision of the Calcutta High Court in Russell Properties Pvt Ltd v. Chowdhury (A), CIT (Addl.) (1977) 109 ITR 229 wherein it was held that an order passed by the ITO following the decision of the Appellate Tribunal cannot be held to be erroneous and such an order cannot be revised under section 263. The Supreme Court in fact relied on the above decision in CIT vs. Max India Ltd (2007) 295 ITR 282. Even otherwise, the Assessing Officer has taken a possible or a permissible view in law having consciously allowed deduction under section 10A after making enquiries and on an application of mind. Consequently, the order passed under section 143(3) cannot be regarded as satisfying the requirements of section 263 going by the ratio of the decision of the Supreme Court in Malabar Industrial Co. Ltd vs. CIT (2000) 243 ITR 83.
7.3.2 In the case of CIT v. Infosys Technologies Ltd (2012) 341 ITR 293 the decision which is relied on by the learned DR the Page 21 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore jurisdictional High Court at Paras 26 to 28 of the order held as under:
"26. We are also not in a position to accept the submission that the materials had been placed before the assessing authority and therefore, there should be a conclusion that the authority has applied his mind to the same and there was no question of the Commissioner interfering by taking a different view etc.
27. Assessing authority performs a quasi judicial function and the reasons for his conclusions and findings should be forthcoming in the assessment order. Though it is urged on behalf of the assessee by its learned counsel that reasons should be spelt out only in a situation where the assessing authority passes an order against the assessee or adverse to the interest of the assessee and no need for the assessing authority to spell out reasons when the order is accepting the claim of the assessee and the learned Counsel submit that this is the legal position on authority, we are afraid that to accept a submission of this nature would be to give a free hand to the assessing authority, just to pass orders without reasoning and to spell out reasons only in a situation where the finding is to be against the assessee or any claim put forth by the assessee is denied.
28. We are of the clear opinion that there cannot be any dichotomy of this nature as every conclusion and finding by the assessing authority should be supported by reasons, however, brief it may be, and a in a situation where it is only a question of computation in accordance with relevant articles of a double taxation avoidance agreements and that should be clearly indicated in the order of the assessing authority, whether or not the assessee had given particulars or details of it. It is the duty of the assessing authority to do that and if the assessing authority had failed in that, more so in extending a tax relief to the assessee, the order definitely constitutes an order not merely erroneous but also prejudicial to the interest of the Revenue and therefore, while the Commissioner was justified in exercising the jurisdiction. 263 of the Act, the Tribunal was definitely not justified in interfering with this order of the Commissioner in its appellate jurisdiction".
7.3.3 In the above decision the Hon'ble jurisdictional High Court held that if the reasons for the conclusion and findings of the Page 22 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore Assessing Officer are not forthcoming in the order, the order can be regarded as erroneous in so far as it is prejudicial to the interests of Revenue. As a corollary, if the Assessing Officer calls for the details, examines the same and the order of the Assessing Officer contains the reasons for his conclusions and findings, the said order cannot be regarded as erroneous in so far as it is prejudicial to the interests of Revenue. In the present case, the allowability of deduction under section 10A and its computation were examined by the Assessing Officer in the course of assessment proceedings. The Assessing Officer has recorded reasons in support of her conclusions and findings on the aspect of deduction under section 10A. The order under section 143(3) has been passed after an application of mind as admitted by the Assessing Officer that he has considered all the details following the decisions of the Coordinate Bench in assessee's own case for the earlier years. On similar facts and circumstances, the Coordinate Bench in Infosys BPO Ltd v ACIT (2012) 54 SOT 168 (Bangalore) after considering the decision of the Hon'ble jurisdictional High Court in CIT v Infosys Technologies Ltd (2012) 341 ITR 293 held as under:
"In the above discussion, the Hon'ble jurisdictional High Court has held that if the reasons for the conclusion and findings of the Assessing Officer are not forthcoming in the order, the order can be regarded as erroneous in so far as it is prejudicial to the interests of the Revenue. Consequently, if the order of the Assessing Officer contains the reasons for his conclusions and findings, the said order cannot be regarded as erroneous in so far as it is prejudicial to the interests of Revenue. In the instant case, the allowability of deduction under section 10A and its computation were examined by the Assessing Officer in the course of the assessment proceedings and he has recorded reasons for such conclusions and findings in the assessment order and therefore we are of the view that the learned CIT had no jurisdiction to interfere with the order passed by the Assessing Officer under section 143(3) of the Act".
7.3.4 In the above decision the Coordinate Bench also considered the decision of the Supreme Court in ALA Firm vs. CIT (1991) 189 Page 23 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore ITR 285 (SC), CIT vs. Kelvinator of India Ltd (2010) 320 ITR 561 (SC), CIT vs. Kelvinator of India Ltd (2002) 256 ITR 1 (Del-FB) and CIT vs. Eicher Ltd (2007) 294 ITR 310 (Del) and held that (a) the Assessing Officer can be said to have passed the order of assessment under section 143(3) after application of mind and on verification of all the details and information furnished during assessment proceedings; (b) when a regular assessment is passed under section 143(3), a presumption can be raised that such an order is passed after verification of details filed and on application of mind and merely because the issues accepted by the Assessing Officer do not find place in the assessment order, this cannot be a ground to treat the order as erroneous and prejudicial to the interests of Revenue.
7.3.5 The disagreement of the learned CIT with the view taken by the Assessing Officer cannot by itself clothe him with jurisdiction under section 263 to revise the assessment order. The assessment made by the Assessing Officer in the present case having been passed after an application of mind and consideration of the materials, documents and evidences produced, the conclusions drawn by him in the order passed under section 143(3) cannot be branded as erroneous only because the Commissioner chooses not to agree with him. Even otherwise, it is not a case of a 'lack of enquiry' by the Assessing Officer in respect of computation and allowability of deduction under section 10A. The Delhi High Court in Cit vs. Sunbeam Auto Ltd (2009) 227 CTR 133, CIT v. Anil Kumar Sharma (2010) 194 TAXMAN 504, CIT vs. Vikas Polymers (2010) 194 TAXMAN 57, CIT vs. Hindustan Marketing & Advertising Co. Ltd (2011) 196 TAXMAN 368 has consistently held that the Commissioner cannot revise the order passed under section 143(3) for 'inadequate enquiry'.
7.4 In view of the above, the action of the learned CIT in issuing notice under section 263 dated 6.1.2010 and in passing the order under the said section on account of denial of deduction under Page 24 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore section 10A is bad in law and is quashed. Since the first notice issued under section 263 dated 6.1.2010 and the order passed under section 263 in this connection are bad in law, the second and subsequent notices issued under section 263 and the proceedings thereto also become bad in law since jurisdiction in the first notice was not correctly assumed by the learned CIT. Nevertheless, we have considered and deciding upon the validity of second and subsequent notices and the proceedings thereto in view of arguments put forth by both the parties.
7.5 The second show cause notice under section 263 was issued by the learned CIT on 21.12.2010. The learned CIT proposed to re- examine and revise the order vide the said notice for the reason that the assessee has not made TDS on foreign remittances and hence these payments are to be considered for disallowance under section 40(a)(ia). The show cause notice was not clear as to which foreign remittances were liable for TDS. It was stated in the show cause notice that foreign remittances were liable for TDS under section 40(a)(ia). Section 40(a)(ia) deals with disallowance of payments made to residents and not non residents. The show cause notice wanted to reexamine the aspect of disallowance. The details of disallowance called for by the learned CIT pertained to disallowance made by the assessee voluntarily under section 40(a)(i) and section 40(a)(ia) while filing the return of income. These details were disclosed in form No.3CD, return of income and statement of total income. The Assessing Officer also accepted the disallowances made by the assessee in the order passed under section 143(3) for the year under consideration. When the learned CIT issued second notice under section 263 on 21.12.2010, the details of disallowances under section 40(a)(i) and 40(a)(ia) voluntarily made by the assessee were already on record. It is not a case where the Assessing Officer has deleted or reversed the disallowances made by the assessee, while passing the order under section 143(3). Vide letter dated 12.1.2011 (Page 241 of paper book 2), a letter issued subsequent to the second Page 25 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore notice, the learned CIT directed the assessee to produce the details as per the order sheet note made on 11.1.2011 and the details of disallowances made by the assessee under section 40(a)(i) and 40(a)(ia) in computing the taxable income. In other words, the learned CIT proposed to make enquiries regarding disallowance under section 40(a)(i)/40(a)(ia) after the issue of notice under section
263. This shows that at the time of issue of second show cause notice under section 263 dated 12.01.2011 there was no material on record for the learned CIT to conclude that the order passed under section 143(3) is erroneous in so far as it is prejudicial to the interests of the revenue. The subsequent letter asking for details of disallowances made by the assessee demonstrates that there was no material on record for issue of second show cause notice. The learned CIT first issued notice under section 263 when there was no material on record to conclude that the order was erroneous and prejudicial to the interests of revenue and then started making enquiries. This is impermissible under the scheme of section 263 under which the Commissioner is required to demonstrate that the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue on the basis of examination of record which is already available before him. In view of the same, the second show cause notice issued under section 263 on 21.12.2010 and the order passed under section 263 is bad in law and is quashed.
7.5.1 After the issue of second show cause notice dated 21.12.2010 and letter dated 12.01.2011, the learned CIT called for voluminous details on various issues during the course of revisionary proceedings. For instance, vide letter dated 27.01.2011 (page 242 of paper book 2) the learned CIT directed the assessee to produce details in respect of 43 items as per annexure to the said letter. (Page 243 to 245 of paper book 2) the assessee was directed to produce additional details in respect of 15 items and the same were Page 26 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore submitted by the assessee vide letter dated 7.2.2011 (page 255 to 259 of the paper book).
7.6 The learned CIT further issued a third notice under section 263 on 17.02.2011 (page 261 of the paper book 2) in order to revise the assessment for the reasons mentioned in the annexure to the said notice. (pages 262 to 267 of paper book 2). The annexure to the said notice referred to some sworn statements recorded from the auditors subsequent to issue of notice under section 263. The annexure also required the assessee to furnish various details and documents. The details and documents directed to be produced by the assessee were filed vide letters dated 1.3.2011, 4.3.2011 and 9.3.2011 (page 404, 441 and 470 respectively of paper book 2).
7.6.1 Further, the learned CIT also relied on various events occurring after the issue of notice under section 263. The first notice under section 263 was issued on 6.1.2010. However, the learned CIT has relied on various materials subsequent to notice issued under section 263. For instance, the learned CIT has relied on the order passed under section 143(3) dated 15.02.2011 for assessment year 2007-08 (page 7, 48 and 560 of CIT order), tax auditors statement dated 22.12.2010 (page 6 and 63 of CIT order), DRP's order dated 8.9.2010 (Page 13 of 263 order) and letter to ITO (TDS) dated 7.2.2011 (page 7 of CIT order).
7.6.2 On a consideration of the above facts, it is clear that the learned CIT assumed the role of an Assessing Officer in the revisionary proceedings under section 263. The learned CIT went on to make enquiries and investigation not only in respect of the issues raised in the show cause notice issued under section 263 but also in respect of various other issues like allowability of deduction in respect of repairs and maintenance, bad debts, adjustments under section 115JB, deduction in respect of write off of advances, Cenvat Credit etc. The learned CIT called for various new records, Page 27 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore documents, information and examined the same for the purpose of coming to the impugned conclusion that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of Revenue.
7.6.3 The question for our consideration is whether, in the contest and setting of section 263 the Commissioner can make suo moto enquiries by calling for and examining new records which were not available before for the purpose of determining whether the order passed is erroneous and prejudicial to the interests of Revenue?.
7.6.4 The Guahati High Court in Bongaigaon Refinery and Petrochemicals Ltd v UOI (206) 287 ITR 120 held that the Commissioner cannot make roving probe into the facts to pick out errors for sustaining his interference in the course of revisionary proceedings. It was held that the Commissioner cannot supplant the roles of other authorities under the Act and he is not a substitute for other statutorily prescribed authorities under the Act. The High Court came to the above conclusion after noticing that section 263 permits the Commissioner to initiate an enquiry as he may deem necessary. The relevant observations of the High Court are reproduced hereunder:
"Entertainment of a view different from the one adopted by the Assessing Officer, if plausible would not clothe the Commissioner with the power to interfere therewith under the said provision of the Act. Differently put, an error within the jurisdiction of the Assessing Officer on an evaluation of the materials available would not be exposed to interference in exercise of suo motu revisional powers under section 263 of the Act. The provision though permits the Commissioner to initiate an enquiry as he may deem necessary does not authorize a roving probe into the facts with the disposition to pick out errors to sustain the eventual interference. This assumes great significance in the context of the statutory framework of the act outlining the jurisdictional contours of different authorities to adjudicate the issues as legislatively stipulated. The Commissioner in exercise of his revisional Page 28 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore powers cannot arrogate to himself a status to surrogate the other authorities and supplant their roles under the Act. The Commissioner is not a substitute for the other statutorily prescribed for a with codified functions dischargeable in terms of the prescribed procedure in the situations comprehended thereby. The Commissioner therefore has to be rigorously held to the limits of his suo motu revisional jurisdictional lest any transgression of statutorily ordained prerogatives of other authorities under the Act result from an unbridled exercise of such power. The Act envisages a compartmentalization in the functioning of the authorities prescribed who have a dwell within the legally stipulated parameters so much so that it would be impermissible to overreach the legislatively mandated frontiers. Any other approach would be antithetical to the scheme and alignment of the Act".
7.6.5 The Guahati High Court further held that section 263 neither contemplate nor approve substitution of the views of the Assessing Officer in the matter of computation of profits and gains for the purpose of quantifying the deduction to which an assessee is entitled, by indulging in a fact finding enquiry on the basis of additional materials, provided the assessment sought to be interfered with embodies a plausible view recognizable in law.
7.6.6 The Delhi High Court in CIT v Leisure Wear Exports Ltd (2012) 341 ITR 166 held that the power of revision is not meant to be exercised for the purpose of directing the Assessing Officer to hold another investigation without describing as to how the order of the Assessing Officer is erroneous.
7.6.7 The Bombay High Court in Cit v. Gabriel India Ltd (1993) 203 ITR 108 held that the Commissioner cannot make further enquiry without demonstrating that the earlier finding of the Assessing Officer is erroneous and prejudicial to the interests of revenue. Relevant extracts from the decision are as under:
"Further inquiry and/or fresh determination can be directed by the Commissioner only after coming tot eh Page 29 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore conclusion that the earlier finding of the Income Tax Officer was erroneous and prejudicial to the interests of the Revenue. Without doing so, he does not get the power to set aside the assessment".
7.6.8 The Karnataka High Court in the case of CIT v D'Silva (LF) (1991) 192 ITR 547 referring to decision of the Gujarat High Court in Cit vs. Harikishan Jethalal Patrl (1987) 168 ITR 472 held that the Revenue cannot make 'fishing inquiries' and claim opportunity for a 'shot in the dark' without there being any foundational facts on record. The relevant extracts from the decision of the Gujarat High Court quoted by the Karnataka High Court were as under:
"It is obvious from the demand made before the Appellate Tribunal that the Revenue desires to examine the genuineness of the firm and the transaction on fresh facts, not the existing facts, for the existing facts do not even remotely create any doubt regarding the genuineness of the firm and/or the transaction. The question then is, whether, in these circumstances, it would be permissible to grant a second innings to the Revenue to introduce new facts for the purpose of deciding the genuineness of the firm and/or the transaction. The material on record at present does not create any doubt regarding the genuineness of the firm and/or the transaction. What the Revenue desires is an opportunity for a shot in the dark without there being any foundational facts on record. A mere fishing inquiry is contemplated on remand in the hope of digging out material which would throw a doubt on the genuineness of the firm and/or the transaction. If the demand is acceded to, it would mean that all cases concluded by the decision of the Supreme Court in Sunil Siddharthbhai (1983) 156 ITR 509 would be reopened in the mere hope that the Revenue may be able to fish out material casting a doubt on the genuineness of the firm and/or the transaction. Hundred of cases which stand finally settled by the above decision of the Supreme Court and in which no foundational facts exist for doubting the genuineness of the firm and/or the transaction would, on remand, be reopened to enable the Revenue to make a fishing inquiry. The result would be that hundreds of assessee's would be unnecessarily vexed and put to avoidable hardship".Page 30 of 36
ITA No.598 of 2011 IBM India Pvt Ltd Bangalore 7.6.9 The Calcutta High Court in CIT v. Pradeep Kumat Todi (2010) 325 ITR 96 (Cal) held that section 263 is not meant for a roving enquiry. The Gujarat High Court in the case of Raylon Silk Mills vs. CIT (1996) 221 ITR 155 held that the powers under section 263 are not conferred on the CIT to direct making an enquiry on mere suspicion to disturb a completed assessment.
7.6.10 As recently as on 21st February, 2013, the Hon'ble Andhra Pradesh High Court had an occasion to review the revisionary power of the CIT u/s 263 of the Act in the case of Spectra Shares and Scrips Pvt Limited v. CIT reported in (2013) 354 ITR 35 (AP). After analyzing the issue in depth and also extensively referring to various case laws, the Hon'ble Court has observed as under:
"31. (on page 58) From the above decisions, the following principles as to exercise of jurisdiction by the Commissioner under section 263 of the Act can be culled out:
(a) The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the assessing officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it's not erroneous but it is prejudicial to the Revenue-
recourse cannot be had to section 263(1) of the Act.
(b) 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.
(c) To invoke the suo motu revisional powers to reopen a concluded assessment under section 263, the Commissioner must give reasons; that a bare reiteration by him that the order of the Income-tax Officer is erroneous is so far as it is prejudicial to the Page 31 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore interests of the Revenue, will not suffice; that the reasons must be such as to show that the enhancement or modification of the assessment or cancellation of the assessment or directions issued for afresh assessment were called for, and must irresistibly lead to the conclusion that the order of the Income-tax Officer was not only erroneous but was prejudicial to the interests of the Revenue. Thus, while the Income-tax Officer is not called upon to write an elaborate judgment giving detailed reasons in respect of each and every disallowance, deduction, etc., it is incumbent upon the Commissioner not to exercise his suo motu revisional powers unless supported by adequate reasons for doing so; that if a query is raised during the course of the scrutiny by the assessing officer, which was answered to the satisfaction of the assessing officer, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the assessing officer called for interference and revision.
(d) The Commissioner cannot initiate proceedings with a view to start fishing and roving inquiries in matters or orders which are already concluded; that the Department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions which they present as to what should be the interference or proper inference either of the facts disclosed or the weight of the circumstance; that if this is permitted, litigation would have no end except when legal ingenuity is exhausted.
(e) Whether there was application of mind before allowing the expenditure in question has to be seen; that if there was an enquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 merely because he has a different opinion in the matter; that it is only in cases of lack of inquiry that such a course of action would be open; that an assessment order made by the Income-tax Officer cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately; there must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed.
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(f) The power of the Commissioner under section 263(1) is not limited only to the material which was available before the assessing officer and, in order to protect the interests of the Revenue, the Commissioner is entitled to examine any other records which are available at the time of examination by him and to take into consideration even those events which arose subsequent to the order of assessment."
7.7 The judgment of the Apex Court in CIT v. Shree Manjunatheswara Packing Products and Camphor Works (1998) 231 ITR 53 (SC) which was strongly relied on by the learned DR does not help the case of the Revenue. In the above decision, the question before the Supreme Court was whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the word "record" used in s.263 (1) of the Act would not mean the record as it stands at the time of examination by the CIT, but it means the record as it stands at the time the order in question was passed by the Income Tax Officer?. The Supreme Court was not concerned with the question as to whether the term 'record' would include new records which were not available at the time of examination by the Commissioner but which were called for by the Commissioner for the purpose of making enquiries. In the last paragraph of the decision, the Supreme Court held that it was open to the CIT to make into consideration all the records available at the time of examination by him and thus to consider the valuation report submitted by the Departmental Valuation Cell subsequent to the passing of the assessment order and, so the order passed by him was legal. In the present case, the learned CIT as stated earlier, in the course of [proceedings u/s 263 called for and examining various new records and documents which were not available at the time of examination by him, for the purpose of making enquiries. For instance, in the second show cause notice u/s 263 dated 21.12.2010, the learned CIT proposed to reexamine and revise the order on the aspect of disallowance u/s 40(a)(ia). Vide letter dated 12.01.2011 (Page 241 of paper book 2) the learned Page 33 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore CIT directed the assessee to produce the details as per the order sheet note made on 11.01.2011 and the details of disallowances made by the assessee u/s 40(a)(i) and 40(a)ia) in computing the taxable income. The learned CIT called for voluminous details on various issues during the course of revisionary proceedings. As per order u/s 263 itself, 18 such opportunities were afforded (page 15 of CIT's order). For instance, vide letter dated 27.01.2011 (Page 242 of paper book 2) the learned CIT directed the assessee to produce details in respect of 43 items as per annexure to the said letter (Page 243 to 245 of paper book 2). The assessee was directed to produce details in respect of 15 items and the same were submitted by the assessee vide letter dated 7.2.2011 (Page 255 to 259 of the paper book). The learned CIT issued a third notice u/s 263 on 17.2.2011 (Page 261 of paper book 2) in order to revise the assessment for the reasons mentioned in the annexure to said notice (Page 262 to 267 of paper book 2). The annexure to said notice referred to some sworn statements recorded from the auditors subsequent to issue of notice u/s 263. The annexure also required the assessee to furnish various details and documents. Voluminous details and documents directed to be produced by the assessee were filed vide letters dated 1.3.2011, 4.3.2011 and 9.3.2011 (Page 404, 441 and 470 respectively of paper book 2). The learned CIT also relied on various events occurring after the issue of notice u/s 263. The first notice u/s 263 was issued on 6.1.2010. However, the learned CIT has relied on various material subsequent to notice issued u/s 263. For instance the learned CIT relied on the order passed u/s 143(3) for assessment year 2007-08 (Page 7, 48 and 50 of CIT order), tax auditors statement dated 22.12.2010 (Page 6 and 63 of CIT order), DRP's order dated 8.9.2010 (Page 13 of CIT order) and letter to Income Tax Officer (TDS) dated 7.2.2011 (Page 7 of CIT order). It is thus clear that the learned CIT called for various new records, documents, information, which were not available at the time of his examination and examined the same for the purpose of coming to the impugned conclusion that the order passed by the Page 34 of 36 ITA No.598 of 2011 IBM India Pvt Ltd Bangalore Assessing Officer is erroneous and prejudicial to the interests of the Revenue. Thus, the order passed by the learned CIT is therefore, not in accordance with the provisions of section 263.
7.8 In an overall consideration of the facts and circumstances of the issue as deliberated upon in the fore-going paragraphs and also in conformity with the various judicial pronouncements referred supra, we are of the considered view that the learned CIT was not justified in invoking the provisions of s. 263 of the Act. The above view is arrived at for the following reasons, namely:
(i) Every loss of revenue as a consequence of an order of the assessing officer cannot be treated as prejudicial to the interests of revenue;
(ii) Where the assessing officer had exercised the quasi-
judicial powers vested in her in accordance with the law and arrived at a conclusion; such a conclusion cannot be construed to be erroneous, just because the Commissioner does not feel satisfied with such a conclusion;
(iii) when an assessment order u/s 143(3) of the Act is passed, a presumption has to be made that such an order has been passed after due application of mind;
(iv) As ruled by the Hon'ble Delhi High Court in the case of CIT v. Kelvinator of India Limited reported in 256 ITR 7 once a regular assessment order is framed in terms of section 143(3) of the Act, a presumption can be had that such an order was passed on application of mind. The above ruling of the Hon'ble Court has the sanctity of the Hon'ble Supreme Court in the case of CIT v. Kelvinator of India Limited [(2010) 320 ITR 561 (SC)].
(v) When the assessing officer had completed the assessment after considering all the requisite particulars furnished by the assessee, the said order of the assessing officer cannot be a subject matter of revision u/s 263 of the Act on the ground that no proper enquiries were made by the assessing officer.
(vi) As held by the Hon'ble Calcutta High Court in the case of CIT v. Pradeep Kumar Todi reported in 325 ITR 96 the CIT had attempted to make a roving enquiry on the assessment concluded by the assessing officer u/s 143(3) of the Act which is not permissible under the law.
Page 35 of 36ITA No.598 of 2011 IBM India Pvt Ltd Bangalore 7.8.1 In essence, the order passed by the learned CIT (A) u/s 263 of the Act doesn't withstand the testimony of law and, accordingly, the order passed u/s 143(3) of the Act by the assessing officer is in order and the same is, accordingly sustained. It is ordered accordingly.
7.8.2 We have since taken a view that the initiation of revision proceedings u/s 263 of the Act by the CIT was not in conformity with the provisions of the Act and, accordingly, upheld the assessment order passed u/s 143(3) of the Act; the other grounds raised by the assessee have become superfluous.
8. In the result, the assessee's appeal is allowed.
Order pronounced in the open court on 5th July, 2013 Sd/- Sd/-
(Jason P. Boaz) (George George K)
Accountant Member Judicial Member
Bangalore dated 5th July, 2013.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, ITAT, Bangalore
By Order
Senior Private Secretary
Income Tax Appellate Tribunal,
Bangalore Benches, Bangalore
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