Income Tax Appellate Tribunal - Mumbai
Casa Builders P.Ltd, Mumbai vs Pr Cit 6, Mumbai on 13 February, 2019
1
ITA 2463/Mum/2015
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "C", MUMBAI
Before Shri C.N. Prasad (JUDICIAL MEMBER)
AND
Shri G Manjunatha (ACCOUNTANT MEMBER)
ITA No. 2463/Mum/2015
(Assessment year : 2010-11)
M/s Casa Builders Pvt Ltd vs Principal CIT-6, Mumbai
K-7, Prathamesh, Veer
Savarkar Marg, Prabhadevi
Mumbai- 400 025
PAN : AADCC1835B
APPELLANT RESPONDEDNT
Appellant by Shri Nishant Thakkar / Hiten Chande
Respondent by Shri Awungshi Gimson
Date of hearing 14-11-2018
Date of pronouncement 13 -02-2019
ORDER
Per G Manjunatha, AM :
This appeal filed by the assessee is directed against the order of Principal CIT-6, Mumbai u/s 263 of the I.T. Act, 1961 and dated 02-03-2015 and it pertains to AY 2010-11. The assessee has raised the following grounds of appeal:-
"Being aggrieved by the order of the learned CIT U/s. 263, the Appellant begs to prefer the present appeal against setting aside of the assessment for A.Y. 2010-11 on the following grounds:
1. Details of Share premium received Rs. 3,55,32,000/- not verified satisfactorily.
2. Investments made by the assessee amounting to Rs. 9,43,97,530/- not verified satisfactorily."2
ITA 2463/Mum/2015
2. The brief facts of the case are that the assessee company is engaged in the business of builder and developer and also investments, has filed its return of income for AY 2010-11 on 20-09-2010 declaring total income at Nil. The assessment was completed u/s 143(3) of the I.T. Act, 1961 determining total loss at Rs.7,66,237 by making certain disallowances. Subsequently, the PCIT-6, Mumbai issued a show cause notice u/s 263 and asked the assessee as to why the assessment order passed u/s 143(3) of the I.T. Act, 1961 dated 22-03-2013 shall not be revised under the provisions of section 263 of the I.T. Act, 1961 for the reasons stated in his show cause notice. In the said show cause notice, the PCIT has questioned two issues, i.e. fresh share capital alongwith share premium raised by the assessee by issue of shares to certain parties and also huge investments made to the tune of Rs.9,43,97,530. According to the PCIT, although the AO has carried out certain enquiries in regard to the issue of share capital to Shri Anil Deshpande family, on perusal of assessment records it was observed that the assessee claims to have received share capital amounting to Rs.3,55,32,000, when the reply filed to show cause notice u/s 142(1) dated 16-08-2012, the assessee stated that it has received share premium of Rs.35,52,000. Thus, there is a difference of Rs. 3,18,80,000. The AO ought to have verified the above difference, but he has simply accepted submission of the assessee which clearly showed that the AO has passed 3 ITA 2463/Mum/2015 assessment order without application of mind which rendered assessment order erroneous insofar as it is prejudicial to the interest of the revenue. Further, the Principal CIT questioned the issue of investments. According to the PCIT, although the assessee has made various investments to the tune of Rs.9,43,97,530, the AO failed to make out independent verification, whatsoever, in respect of any of those parties except merely receiving information u/s 133(6) of the Act, in some cases and filing of receipt, copy of agreement, etc. The AO has treated this as genuine investments without conducting necessary enquiries. Therefore, he opined that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue.
3. In response to show cause notice, the assessee has filed submissions to argue that assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue as the issue of share premium received from Shri Anil Deshpande and others has been thoroughly examined during the course of assessment proceedings where the AO has raised a specific question for which the assessee has filed complete details. Insofar as huge investments appearing in balance-sheet, during assessment proceedings, necessary details had been filed before the AO to explain investments appearing in assets side of the balance-sheet and whatever advances were 4 ITA 2463/Mum/2015 appearing in balance-sheet are normal business advances given to various parties with regard to its real estate business. The assessee further submitted that in real estate business, long investment entails a long gestation period and the returns are not immediate but fact remains that these are subject matter of assessment during original assessment proceedings. Therefore, merely for the reason that the AO has not conducted enquiries as required by the PCIT, the assessment order cannot be termed as erroneous insofar as it is prejudicial to the interest of the revenue.
4. The Ld.PCIT, after considering relevant submissions of the assessee and also by relying upon various judicial precedents, including the decision of Hon'ble Supreme Court in the case of Malabar Industrial Company Ltd vs CIT 243 ITR 83(SC) held that assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue as the AO failed to carry out required enquiries insofar as share premium received from NRIs and also huge investments appearing in the assets side of the balance-sheet. Although the AO has conducted primary enquiries with regard to the share premium but having regard to the nature of credits found in the form of money received from NRIs, the AO ought to have conducted required enquiries through FT&TR division of CBDT which is competent authority to conduct cross border investments through proper channel. In this case, the AO has simply 5 ITA 2463/Mum/2015 accepted explanation filed by the assessee without carrying out further investigation even though the shares were issued at a huge premium of Rs.600 per share. Similarly, the AO has failed to carry out necessary enquiries with regard to the subscription to preference shares of M/s Nagarkar Developers Pvt Ltd as well as equity investments in Reis Magos Property Developers Pvt Ltd. The AO failed to examine as to what returns were received by the assessee from these investments, atleast, by the date on which assessment order was passed, has not been looked into. Therefore, he opined that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue. Accordingly, he set aside the order passed by the AO and directed the AO to redo the assessment after verifying the facts carefully, in accordance with settled position of law. The relevant portion of the order of PCIT are extracted below:-
"5.2. I am not convinced that any reasonable person would feel after seeing poor cash flow as well as poor returns that there be huge premium of Rs.600/- per share for a company having authorized capital less than Rs.l crore would be justified. The high premium charged was tried to be justified on the basis of "illusory projected discounted cash flow statement" with "rate of return" of 19% per annum. The facts available on record at the time of assessment, clearly indicate that share premium was not justified to the extent of Rs.600/- per share. 5.3. The details of listed company being available in public domain, the A.O. could have considered the P/E prevailing in the industry as well as other financial ratios before he got satisfied with regard with the justification of the premium. 5.4. I therefore, do not agree with the claim of the assessee that assessment order is not prejudicial with the interest of Revenue.
6. As mentioned in para 2.6 of the show cause notice, the A.O. did not make any enquiries with regard to subscription in preference shares of Nagarkar Developers Pvt. Ltd. as well as equity investment in Reis Magos what returns were received by the assessee from these investments, atleast by the date on which assessment order was passed has not been looked into. I therefore, do not accept the claim of 6 ITA 2463/Mum/2015 the assessee A.O. was fully satisfied with independent enquiries about genuineness of the investment and consequently assessment order was not erroneous and prejudicial to the interest of the Revenue.
7. As stated in the show cause notice that the A.O. did not examine the genuineness of source of investment i.e. the creditworthiness of the investors and especially when there was nothing to show that subscriber to the shares were related to the Directors of the assessee and had good financial health. Merely, gathering information about NRI does not ipsofacto show the creditworthiness of the subscriber. There was clear failure on the part of the A.O. to make relevant and meaningful enquiries.
8. I am therefore, convinced that the AO has failed to carry out relevant and meaningful enquiries, especially in respect of areas mentioned above. It is settled proposition of law that failure of the AO to carry out relevant and meaningful enquiries as warranted by the facts and circumstances of the case rendered (lie assessment order erroneous and prejudicial to the interest of the revenue. This also emerges from the ratio of the decisions such as Malabar Industrial Co. Ltd. vs CIT 243 ITR 83{SC), CIT vs Max India Ltd. 295 ITR 282(SC), CIT Vs Mangal Castings 303 ITR 23(P&H), CIT v. Kohinoor Tobacco Products(P)Ltd.[1998] 234 ITR 557, CIT v. Mahavar Traders[1996] 220 ITR 167(MP), Duggal & Co.v. CIT[1996] 220 ITR 456, CIT vs MEPCO Industries Ltd 294 ITR 121(Mad.), Meerut Roller Flour Mills Ltd vs CIT[2013] 35 Taxman.com 183<A1L), Bharti Hexacom Ltd v CIT [2013] 33 Taxman.com.210(Delhi-Tr.), CIT v RKBK Fiscal Service(P) Ltd [2013] 32 Taxman.com.l53(Cal.), M.I. Overseas Ltd v DIT (Int.Tax) [2012] 28 Taxman.com, 279 (UttarakHand), Bharat Overseas Bank Ltd v CIT[2012] 26 Taxman.com 330(Chennai), CIT v Harsh J. Punjabi 345 ITR 451(DeU, CIT v Infosys Techn. Ltd 17 Taxman.com 203 & Sripan Land Dev.(P) Ltd v CIT[2011] Taxman.com 429(Mum ITAT) 8.1. Further, it is also another settled proposition of law that when act in a mechanical fashion and accept claim of the assessee without application of mind, this also renders assessment order erroneous and prejudice to the interest of revenue, I rely on the decision of ITAT in Horizon Investment Co. Ltd. vs. CIT in ITA No. 1593/Mum/2013 (A.Y. 2008-09) to hold that assessment order passed without application of mind is erroneous and prejudicial to the interest of revenue. The Hon'ble Tribunal in this case held that -
"2. The sole issue arising in the instant appeal is the maintainability in law of the invocation of section 263 of the Act by the competent authority in the facts and circumstances of the case.......
3.1, We shall proceed by delineating the law in the matter. The same is trite, and for which we may for reference advert to decision in the case ofMalabar Industrial Company Ltd. vs. CIT [2000] 243 ITR 83 (SC), a locus classicus on the subject. The hon'ble apex court therein laid down a four-way test for innovation of a provision. Succinctly put, there are:
(a) incorrect assumption of facts;
(b) incorrect application of law;
(c) without applying the principles of natural justice; and
(d) without application of mind.
We shall, for the reason that the present case involves the application of section 263 on ground (d) above, dwell on this'aspect in some detail. An 7 ITA 2463/Mum/2015 order, as explained in Malabo? Industrial Company Ltd, (supra}, is in such a case subject to revision under section 263 not for the reason that some error may be found upon enquiry, but because of non-application of mind per se. Decades earlier, the Hon'ble Delhi High Court, per its landmark decision in Adl. CIT v. Gee Vee Enterprises [1975] 99 ITR 375 (Del) (cited before us by the Id. DR), relying on two celebrated decisions by the apex court [reported at 67 ITR 84 and 88 ITR 323] f explained that an assessing authority is both an adjudicator and investigator. That is, as warranted by the facts and circumstances of the case, his order is rendered erroneous in-so-far as it is prejudicial to the interest of the Revenue. In its words:
"It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income Tax Officer should .have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income Tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of the return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income Tax Officer to further investigate the fads stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct."
[Emphasis, ours] This represents the well-settled law, followed by the hon'ble high courts throughout, as in CIT (Addl.) vs. Mukur Corporation [1978] 111 ITR 312 (Guj.); Swamp Vegetable Products vs. CIT [1991] 187 IT 412 (All); Tarajan Tea Co. (P) Ltd. vs. CIT [1994] 205 ITR 45 (Gau); CIT vs. Active Traders (P) Ltd. [1995] 214 ITR 583 (Cal); CIT vs. Mahavar Traders [1996] 200 ITR 167 (MP); Duggal & Co. vs. CIT [1996] 220 ITR 453 (Del); K.A. Ramaswamy Chettiar vs. CIT [1996] 220 ITR 657 (Mad.); Mofussil Warehouse & Trading Co. Ltd. vs. CIT [1999] 238 ITR 867 (Mad.); CIT vs. Export House, Amritsar [2002] 256 ITR 603 (P&H); PT. Lashkari Ram vs. CIT [2005] 272 ITR 309 (All); CIT vs. Deepak Kumar Garg [2008] 299 ITR 435 (MP); CIT vs. Toyota Motor Corpn. [2008] 306 ITR 49 (Del.) (affirmed by the apex court, vide its judgment at [2008] 306 ITR 52(SC); C7T vs. Arunaben Sumankumar [2003] 259 ITR 386 (Guj); besides by the larger bench of the tribunal in Rajalakshmi Mills Ltd. vs. ZTO [2009J 121 ITD 343 8 ITA 2463/Mum/2015 (Chen) (SB), signifying the application of the concept in a variety of fact situations.
3.2. The question may arise as to what enquiry is considered enough, for surely one could possibly argue for scope of deeper enquiry in almost every case, and which definitely could not be the legislative or judicial intent, howsoever, wide the revisionary power u/s. 263 may be envisaged as. This is often represented by saying that though lack of enquiry would justify revision, inadequate enquiry would not (refer the decision by the Hon'ble Delhi High Court in CIT vs. Gupta Spinning Mills Pvt. Ltd. (in ITA No. 410/2013 dated 13/09/2013 reported at 2013-TIOL-761-HC-DeL-IT)). At the same time, a superficial enquiry would by itself not qualify to be a proper inquiry, precluding revision. In our view, a resolution to this valid concern or issue lies in bearing in mind two guide posts in the matter, which serve as a check against an arbitrary or mechanical application of Section 263 of this ground:
(a) the extent of enquiry, signified variously by the expression/words: "absence of enquiry", "lack of enquiry", "inadequate enquiry", etc., is only the manifestation of the error, i.e. non-application of mind, per se erroneous and prejudicial to the interest of the Revenue, which permeates or characterizes the enquiry, though would need to be shown to exists despite the enquiry to the extent made;
(b) the A.O. has adopted one of the courses permissible in law, which has though resulted in a loss to the Revenue, or where two views are possible and the A.O. has taken one view, which though in view of the Ld, CIT is not correct.
3.3. The matter, thus, becomes primary factual, so that it would, in each case be required to be seen if the A.O. has considered all the materials, or that there has been a proper examination and verification by him, demonstrating application of mind, in adopting a considered view and, thus, eschew the charge of non-application of mind. It is the variation in the fact- situation of different cases, which also explains the divergent result of the decisions by the Hon'ble Courts, i.e. in the wake of well settled law. What, then, is required is an examination of the facts of the case to arrive at the finding of the fact as to an application or otherwise of mind by the assessing authority in the matter, making enquiry as warranted, while framing the assessment."
8.2. Similar view was taken by Allahabad High Court and Madras High Court in CIT vs. Bhagavandas, 272 ITR 267 (AIL); P.T. Laskar Ram vs. CIT, 272 ITR 309 (All.); Ashok Leylands Ltd. vs. CIT, 260 ITR 599 (Mad.), wherein Hon'ble High Court held that action u/s. 263 is valid where the assessment order is passed without application of mind by the A.O. and without conducting proper enquiry.
9. I, therefore, intend to set aside the assessment order passed on 22/03/2013 and direct the A.O. to pass an assessment order afresh (de novo) after verifying the facts carefully in accordance with settled position of law. The A.O. should give reasonable opportunity of hearing to the assessee before passing the fresh assessment order. The Assessing Officer is required to examine the facts and the applicable law on facts discussed above at the time of fresh assessment without being prejudiced by the fact 9 ITA 2463/Mum/2015 that assessment order has been set aside u/s. 263 after taking into account submissions of the assessee."
5. The Ld.AR for the assessee submitted that the Ld.PCIT was erred in revising the assessment order u/s 263 of the Act, on the issue of share premium of Rs.3,55,32,000 and also on the issue of investments of Rs.9,43,97,530 as both the issues were subject matter of deliberations by the AO during assessment proceedings, where the AO has issued specific questionnaire for which the assessee has filed complete details. The AO, on being satisfied with explanation furnished by the assessee, has completed assessment without making any addition / disallowance towards above two issues questioned by the PCIT which is evident from the fact that the PCIT himself, has in his order, accepted the fact that the AO has verified the issue of share premium received from Shri Anil Deshpande and family. The Ld.AR further submitted that the Ld.PCIT has questioned the issue of share capital received from NRIs. According to the PCIT, though the credit has been received from NRIs, the AO has failed to carry out required enquiries through FT & TR, Ministry of Finance, Government of India, which is the competent authority to look into cross border investments. The Ld.AR further submitted that the PCIT has admitted the fact that the AO has conducted certain enquiries, but, still opined that the enquiries conducted by the AO are inadequate. The findings of the PCIT are based on the submissions made by 10 ITA 2463/Mum/2015 the assessee during assessment proceedings, where there is typographical error in respect of share premium received from four individuals, as per which, the assessee stated to have received share premium of Rs.8,88,800 each, whereas the correct amount is Rs.88,83,000. These facts were brought to the notice of the PCIT at the time of proceedings before him, but the PCIT has ignored all these evidences, mainly for the reason that the said investment is received from NRIs and the source of investment has not been examined during assessment proceedings. The Ld.AR referring to the paper book filed during revisional proceedings, submitted that the assessee has filed complete details of shares issued to NRIs including share certificates and also filed copies of returns filed with ROC alongwith fund received through proper banking channels. The AO has satisfied with the explanation furnished by the assessee, completed assessment without making any further enquiries. Therefore, the same cannot be considered as inadequate enquiry or lack of enquiry. The Ld.AR further submitted that even on merits, the issue of share premium is a settled position of law inasmuch as, merely for charging higher premium, addition cannot be made when three ingredients provided u/s 68 of the Act, i.e. identity, genuineness of transactions and creditworthiness of the parties, are proved. In this case, the assessee has filed enough evidence in order to prove identity and genuineness of transactions alongwith creditworthiness. 11
ITA 2463/Mum/2015 Therefore, merely for the reason that money has been received from NRIs, addition cannot be made. Similarly, the Ld.AR further submitted that the issue of investments appearing in balance-sheet has been thoroughly examined by the AO where the assessee has filed complete details. Therefore, merely for the reason that the issue has not been discussed in the body of the order, the PCIT cannot come to the conclusion that the AO failed to carry out required enquiries. In this regard he relied upon the following judgements:-
1. Sunbeam Auto - 332 ITR 167 (Del)
2. Hotz Industries - 49 taxmann.com 267 (Del)
3. Gabriel India Ltd - 203 ITR 108(Bom)
4. MOIL Ltd - 396 ITR 244 (Bom)
5. JSW Steel - 4062/Mum/2017
6. Steller Investments - 192 ITR 287 (Del) confirmed by Supreme Court in 251 ITR 263
7. Lovely Exports - 216 CTR 195 (SC)
8. Hindustan Inks & Resins - 60 DTR 18 (Guj)
9. Sophia Finance - 205 ITR 98 (Del FB)
10. Jaya Investments - 206 ITR 718 (All)
11. Barkha Synthetics - 283 ITR 377 (Raj)
12. Electro Ploychem-294 ITR 661 (Mad)
13. Shakti Hardware (Elections - 6301/Mum/2014
6. The Ld.DR, on the other hand, strongly supporting the order of the Ld.PCIT submitted that facts gathered during the course of revisional proceedings clearly established the fact that the AO failed to carry out 12 ITA 2463/Mum/2015 necessary enquiries insofar as share premium received from NRIs. The AO has simply accepted explanation furnished by the assessee without carrying out further enquiries to ascertain source of investments made by NRIs. The Ld.DR further submitted that when investment is received from NRIs, the AO ought to have carried out enquiries through FT & TR division of CBDT, Ministry of Finance, Government of India, but the AO failed to refer the matter to FT & TR and also failed to carry out required enquiries, before assessment, which caused prejudice to the interest of the revenue. Similarly, even though various advances have been given to certain parties, the AO failed to gather necessary information in respect of those investments, but simply accepted certain informations filed by the parties, in response to 133(6) notices which caused prejudice to the interest of the revenue. Therefore, the PCIT was right in revising the assessment order passed by the AO and hence, his order should be upheld.
7. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The PCIT revised the assessment order u/s 263 of the Act, on the ground that the AO failed to carry out required enquiries with regard to the issue of share premium and advance appearing in balance-sheet. The PCIT has questioned two issues - (i) share premium received from four NRI investors and (ii) investments appearing in 13 ITA 2463/Mum/2015 balance-sheets. Insofar as share premium received from NRIs, there is no doubt with regard to the fact that the issue was a subject matter of deliberation by the AO during assessment proceedings, where the AO has called for necessary details with regard to the identity, genuineness of transactions and creditworthiness of the parties. The assessee has filed complete details including names and addresses of investors, share certificates and other evidences to prove that the money has been received through proper banking channels and also the parties have confirmed the investments. All these facts were accepted by the Ld.PCIT, but he questioned the issue only for the reason that there is an error in the submissions made by the assessee with regard to the share premium account, as per which the assessee has received share premium amounting to Rs.3,55,32,000 whereas as per the reply filed before the AO, the assessee stated to have received a sum of Rs.35,52,000. The PCIT, taking cue from the above submission, came to the conclusion that though there is a difference of Rs.3,19,80,000, the AO has simply accepted the explanation furnished by the assessee, without any independent application of mind which resulted in loss of revenue.
8. We find that the assessee has filed a reply in response to notice u/s 142(1) where amount received from each of the subscriber to the share capital has been mentioned as Rs.8,88,000 whereas the total of sum has been taken 14 ITA 2463/Mum/2015 as Rs.3,54,32,000 which is matched with the amount shown in the balance- sheet. This fact has been brought to the notice of the PCIT. Therefore, we are of the considered view that merely for the reason that there is a typographical error and also it was explained with necessary materials, the PCIT ought to have taken into account the said explanations before coming to the conclusion that there is a prejudice caused to the interest of the revenue. Further, the issue of share capital whether the same can be added as unexplained income of the assessee merely for the reason that the shares have been issued at a huge premium is no longer res integra. The Hon'ble Supreme Court in the case of CIT vs Lovely Exports 216 CTR 195 (SC) observed that once necessary details have been filed to prove identity, genuineness of transactions and creditworthiness of the parties, then the AO is at liberty to reopen the assessments of those subscribers but the amount received by the assessee cannot be regarded as undisclosed income.
9. Insofar as investments appearing in the balance-sheet, the PCIT observed that although huge investment has been made in various companies' name, AO failed to call for details in order to ascertain whether these investments were in the normal course of business and what returns these investments given to the assessee, but simply accepted the explanation furnished by the assessee at the time of assessment proceedings, which 15 ITA 2463/Mum/2015 caused prejudice to the interest of the revenue. We find that the AO has cast necessary enquiries insofar as investments appearing in the balance-sheet and after being satisfied with the explanation, assesment has been completed. Therefore, the same cannot be considered as non application of mind and also lack of enquiry. We further notice that all these investments were made in the earlier financial year and the same has been carried forward to the year under consideration. Even otherwise, assuming for a moment, the AO has not carried out necessary enquiries, but when these investments are made in the earlier financial year, the same cannot be considered as income for the current year.
10. In this factual background, if we analyse the provisions of section 263, we find that the language used by the legislature in s. 263 is to the effect that the PCIT may interfere in revision, if he considers that the order passed by the ITO is erroneous in so far as it is prejudicial to the interests of the Revenue. It is quite clear that two things must co-exist in order to give jurisdiction to the PCIT to interfere in revision. The order of the ITO in question must not only be erroneous but also the error in the ITO's order must be of such a kind that it can be said that it is prejudicial to the interests of the Revenue. In other words, merely because the AO's order is erroneous, the CIT cannot interfere. Again, merely because the order of the officer is prejudicial to the interests of the Revenue, then again, that is not enough to confer jurisdiction on the CIT to 16 ITA 2463/Mum/2015 interfere in revision. These two elements must co-exist, where the order of the ITO is not erroneous, no action can be taken by the CIT under s. 263. This is because, the first of the two requirements namely, (i) the order is erroneous and (ii) the same is also prejudicial to the interests of the Revenue, is not satisfied. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that 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.
11. The phrase 'prejudicial 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 AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO 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 unless the view taken by the ITO is unsustainable in law . An order of assessment passed by the ITO without making necessary enquiries on certain important points connected with the assessment would be erroneous and prejudicial to the interests of the Revenue When the ITO is 17 ITA 2463/Mum/2015 expected to make an enquiry of a particular item of income and he does not make an enquiry as expected, that would be a ground for the CIT to interfere with the order passed by the ITO since such an order passed by the ITO is erroneous and prejudicial to the interests of Revenue. Where the ITO had made enquiries in regard to the nature of the credit received by the assessee who had given detailed explanation in that regard by a letter in writing and all these are part of the record of the case and the claim was allowed by the ITO on being satisfied with the explanation of the assessee such decision of the ITO cannot be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard.
12. Coming to the case laws relied upon by the assessee. The assessee has relied upon the decision of Hon'ble Bombay High Court in the case of CIT vs Gabriel India Ltd (supra). We find that the Hon'ble Bombay High Court in the said judgement observed that in order to exercise jurisdiction u/s 263, the Commissioner must have material to prima facie come to the conclusion that the order of ITO is erroneous as also prejudicial to the interest of the revenue. The relevant observations of the Court are as under:-
"The power of suo motu revision under sub-s. (1) of s. 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where ITO while making an assessment examines 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 estimates himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and, 18 ITA 2463/Mum/2015 left to the Commissioner, he would have estimated the income at a higher figure than the one determined by the ITO. That would not vest the Commissioner with power to re- examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, the order is erroneous, is absent. Similarly if an order is erroneous but not prejudicial to the interest of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be subject-matter c revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully eligible 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. There must be material available on record called for by the Commissioner to satisfy him, prima facie, that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on records to satisfy it in that regard. If the action of the authority is challenged before the Court, it would be open to the Courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Any other view in the matter will amount to giving unbridled and arbitrary power to revising authority to initiate proceedinqs for revision in every case and start re- examination and fresh enquiries in matters which have already been concluded under the law. It is quasi-judicial power hedqed with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly it is an administrative act, but on examination, "to consider", or in other words, to form an opinion that the particular order is erroneous in so far as it is prejudicial to the interest of the Revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of reexamination and reconsideration of an order of assessment, which has already been concluded and controversy about which has been set at rest, is again set in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from records called for by the Commissioner.--Parashuram Pottery Works Co. Ltd, vs. [TO 1977 CTR (SC) 32 : (1977) 106 ITR 1 (SC), Sirpur Paper Mills Ltd, vs. ITQ 1977 CTR (AP) 138 : (1978) 114 ITR 404 (AP), Dawjee Dadabhov & Co. vs. S.P. Jain & Anr. (1957) 31 ITR 872 (Cal) and Russell Properties 1M. Ltd, vs. A. Chowdhury, Addl. CIT (1977) 109 ITR 229 (Cal) relied on ."
13. The assesse also relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs Sunbeam Auto Ltd (supra). The Hon'ble Delhi High Court in the said judgment held that if the AO while making assessment has made an inadequate enquiry, that would not, by itself, give rise to Commissioner to pass 19 ITA 2463/Mum/2015 order u/s 263, merely because he has different opinion in matter. It is only in case of lack of enquiry that such a course of action would be open. The relevant observations of the Hon'ble Court are as under:-
"The submission of the revenue was that while passing the assessment order, the Assessing Officer did not consider the aspect specifically whether the expenditure in question was revenue or capital expenditure. That argument predicated on the assessment order, which apparently did not give any reason while allowing the entire expenditure as revenue expenditure. However, that, by itself, would not be indicative of the fact that the Assessing Officer had not applied his mind to the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reasons in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. One has to keep in mind the distinction between 'lack of inquiry' and 'inadequate inquiry'. If there was any inquiry, even inadequate, that would not, by itself, give occasion to the Commissioner to pass orders under section 263 merely because he has different opinion in the matter. It is only in cases of 'lack of inquiry' that such a course of action would be open. [Para 12] In the instant case, the Assessing Officer had called for explanation on items in question from the assessee and the assessee had furnished his explanation. Said fact was even taken note of by the Commissioner himself in his order. [Para 13] That clearly showed that the Assessing Officer had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyes and tools was to be treated as revenue expenditure or not. It appeared that since the Assessing Officer was satisfied with the assessee's explanation, he accepted the same. [Para 14] Even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquiries rather than accepting the assessee's explanation. Therefore, it could not be said that it was a case of'lack of inquiry'. [Para 15] The instant case was not a case where the Commissioner had concluded that the opinion of the Assessing Officer was clearly erroneous and not warranted on the facts before him, viz., the expenditure incurred was not the revenue expenditure, but should have been treated as capital expenditure. Even the Commissioner in his order passed under section 263 was not clear as to whether the expenditure could be treated as capital expenditure or it was revenue in nature. No doubt, in certain cases it may not be possible to come to a definite finding and, therefore, it is not necessary that in all cases the Commissioner is bound to express final view, but the least that was expected was to record a finding that order sought to be revised was erroneous and prejudicial to the interest of the revenue. No basis for that was disclosed. In sum and substance, accounting practice of the assessee was questioned. However, that basis of the order vanished in thin air when it was 20 ITA 2463/Mum/2015 found that very accounting practice followed for a number of years had the approval of the income-tax authorities. Interestingly, even for future assessment years, the very same accounting practice was accepted. [Para 16] It was in that context, the question that assumed importance was as to whether powers could be exercised under section 263 when two views were possible. [Para 17] The matter could be looked from another angel. What was the material/ information available with the Assessing Officer on the basis of which he allowed the expenditure as revenue? It was disclosed to the Assessing Officer that the assessee was a manufacturer of car parts. In the manufacturing process, dyes were fitted in machines by which the car parts were manufactured. Those dyes were, thus, the components of the machines. Those dyes needed constant replacement, as their life was not more than a year. The assessee had also explained that since those parts were manufactured for the automobile industry, which had to work accurately at high speed for a longer period, replacement of those parts at short intervals became imperative to retain accuracy. Because of those reasons, those tools and dyes had a very short span of life and could produce maximum one lakh permissible shorts. Thereafter, they had to be replaced. With the replacement of such tools and dyes which were the components of a machine, no new assets came into existence, nor was their benefit of an enduring nature. It neither enhanced the life of existing machines of which these tools and dyes were only parts, nor had their production capacity increased. In CIT v. Mysore Spun Concrete Pipe (P.) Ltd.] 1992] 194 ITR 159/60 Taxman 170 (Kar.). the High Court held that the replacement of moulds was not in the nature of replacement of a capital machinery but in the nature of replacement of apart of the machinery which, in turn, was in the nature of maintenance of machinery installed in the factory. Such an expenditure was treated as revenue expenditure. With this position in law, it was clear that view taken by the Assessing Officer was one of the possible views and ,therefore, the assessment order passed by him could not be held to be prejudicial to the revenue. Such an order, thus, had rightly been set aside by the Tribunal. [Para 18] In the instant case, the purpose of replacing the dyes was to maintain the existing assets, viz., machines and not to bring a new asset. Moreover, case at hand was one of 'repairs of machinery'. The case proceeded on the controversy right from the order of the Assessing Officer till the Tribunal as to whether the expenditure was revenue or capital in nature. [Para 19] Likewise, whether the Commissioner should have recorded definite finding or not, may not be very relevant factor in the instant case where on the facts it was found that the opinion of the Assessing Officer in treating the expenditure as revenue expenditure was plausible and, thus, there was no material before the Commissioner to vary that opinion and ask for fresh inquiry. [Para 20] Thus, the conclusion would be that the order of the Tribunal did not call for any interference, as the question of law had rightly been decided. [Para 21]"
14. In this view of the matter and respectfully following the ratios of case laws discussed hereinabove, we are of the considered view that the 21 ITA 2463/Mum/2015 assessment passed by the AO is neither erroneous nor prejudicial to the interest of the revenue. Hence, we set aside the order passed by the PCIT and restore the assessment order passed by the AO u/s 143(3) of the Act.
18. In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on -02-2019.
Sd/- sd/-
(C.N. Prasad) (G Manjunatha)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dt : 13th February, 2019
Pk/-
Copy to :
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
/True copy/ By order
Asstt. Registrar, ITAT, Mumbai