Income Tax Appellate Tribunal - Pune
Faurecia Interior Systems India Pvt. ... vs Commissioner Of Income-Tax - Iv,, on 5 January, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
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BEFORE MS. SUSHMA CHOWLA, JM AND
SHRI ANIL CHATURVEDI, AM
आयकर अपील सं. / ITA No.1058/PUN/2014
नधा&रण वष& / Assessment Year : 2008-09
Faurecia Interior Systems India .......... अपीलाथ /
Private Limited (Formerly known as
Appellant
Taco Faurecia Design Centre Pvt. Ltd)
Sai Radha Building, 3rd Floor,
RBM Road, Behind Hotel Le Meridien,
Pune - 411 001.
PAN No.AACCT0275F.
बनाम v/s
Commissioner of Income-Tax - IV, .......... यथ /
Pune, Praptikar Sadan, Annexe
Respondent
Building, 60/61, Erandvane,
Karve Road, Pune - 411 004.
अपीलाथ क ओर से / Appellant by : Shri Nikhil Mutha
यथ क ओर से / Respondent by : Shri Rajeev Kumar
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing :14.12.2016 Date of Pronouncement: 05.01.2017
आदे श / ORDER
PER ANIL CHATURVEDI, AM :
This appeal of the assessee is emanating out of the orders of Commissioner of Income Tax (A) - IV, Pune dated 21.03.2014 for the assessment year 2008-09.
2ITA No.1058/PUN/2014
AY.No.2008-09
2. The relevant facts as culled out from the material on record are as under :-
2.1 Assessee is a company stated to be engaged in the business of CAD / CAE services for Automotive Services. Assessee electronically filed its return of income for A.Y. 2008-09 on 29.09.2008 declaring total income of Rs.2,81,340/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) vide order dt.30.12.2011 and the total income was determined at Rs.2,91,51,900/-. Thereafter on perusing the assessment records, ld. CIT inter-alia noticed that assessee had claimed 'Mark to Market' loss and the loss was allowed by AO despite CBDT instruction No.3/2010 dt.23.03.2010 which inter-
alia stated that 'Mark to Market' losses being contingent in nature and is therefore not allowable. Ld. CIT therefore considered the assessment order dt.30.12.2011 framed by the AO u/s 143(3) to be erroneous and prejudicial to the interest of Revenue. He thereafter issued noticed dt.10.01.2014 and called upon the assessee to explain as to why the orders passed u/s 143(3) be not revised by invoking the provisions u/s 263 of the I.T. Act. In response to the notice, assessee inter-alia raised objections against initiation of proceedings and the assumptions of jurisdiction by the ld. CIT u/s 263 of the Act. On the merits of allowability of 'Mark to Market' losses it was inter-alia submitted that the 'Mark to Market' loss of Rs.2.33 crores was recognized in the light of the guidelines issued by Institute of Chartered Accounts of India and during the course of assessment proceedings, AO had accepted the treatment of 'Mark to Market' 3 ITA No.1058/PUN/2014 AY.No.2008-09 loss as allowable loss after application of mind and after proper enquiries and therefore ld. CIT cannot resort to revisionary proceedings. The submissions of the assessee were not found acceptable to ld. CIT as he was inter-alia of the view that in the questionnaire issued by AO u/s 143(2), there was no mention with respect to 'Mark to Market' loss, the submission of the assessee before AO with 'Mark to Market' loss was reproduction of the notes to accounts and there was no discussion on the part of the AO on that issue. He was therefore of the view that AO had failed to note the instruction No.3/2010 issued by CBDT and in view of the same, the assessment order framed u/s 143(3) was erroneous in so far as it was prejudicial to the interest of Revenue. He accordingly set aside the order of AO and directed the AO to pass fresh order after carrying proper enquiries and considering the points made by ld. CIT. Aggrieved by the order of ld. CIT, assessee is now in appeal before us and has raised the following grounds :
"Based on the facts and in the circumstances of the case, Faurecia Interior Systems India Private Limited (hereinafter referred to as 'the Appellant') respectfully craves leave to prefer an appeal under section 253(1 )(c) of the Act against the order dated 21 March 2014 passed by the Commissioner of Income-Tax - IV, Pune (hereinafter referred to as 'the learned CIT') under section 263 of the Act on the following grounds which are independent and without prejudice to each other.
On the facts and circumstances of the case and in law, the learned CIT has:
Generic ground Ground 1:
Erred in initiating the revision proceedings under section 263 of the Act against the assessment order passed by the Assessing Officer under section 143(3) of the Act and in directing the Assessing Officer to pass fresh order without appreciating the merits of the case.4 ITA No.1058/PUN/2014
AY.No.2008-09 Grounds challenging the validity of revision proceedings Ground 2:
Erred in invoking the revision proceedings under section 263 of the Act without appreciating the fact that the Assessing Officer had already dealt with the issue on merits and hence, the assessment order cannot be regarded as 'erroneous' for the purpose of initiating the proceedings under the said section.
Ground 3:
Erred in initiating the revision proceedings under section 263 of the Act to impute additional disallowance under section 10A(7) r.w.s 80-IA(10) without appreciating that the said matter has been challenged and pending before the Hon'ble Commissioner of Income-tax (Appeals) - III, Pune.
Grounds challenging the merits of the case:
Ground 4:
Erred in directing the Assessing Officer to disallow and consider mark to market (hereinafter referred to as 'MTM') losses incurred on derivative contracts of Rs.2,33,89,522 for the purpose of alleged adjustment under section 10A(7) r.w.s 80-IA(1 0) of the Act.
Ground 5:
Erred in directing the Assessing Officer to make additional adjustment under section 10A(7) of the Act considering MTM losses as a non-deductible tax expense without appreciating the fact that the Appellant has already considered such losses as non-operating in nature while computing the operating profit margin for the purpose of transfer pricing and hence, imputing such additional adjustment leads to a double disallowance.
Without prejudice to the above, should the disallowance under section 10A(7) be sustained, the mark to market losses ought to be considered as an operating cost for the purpose of transfer pricing while computing the operating profit margin.
Ground 6:
Erred in invoking the provisions of section 10A(7) of the Act on the entire amount of profits eligible for deduction under section 10A of the Act without appreciating that if at all adjustment under section 10A(7) is to be invoked, the same ought to be computed only to the extent of the excess profits by applying the difference in the operating margins earned 5 ITA No.1058/PUN/2014 AY.No.2008-09 by the Appellant (after considering MTM as an operating item) and the average operating margins earned by the comparable companies and not by applying such difference on the profits eligible for deduction under section 10A of the Act.
In view of the above grounds and in the facts and circumstances of the case and in law, the Appellant prays your Honours to set aside order under section 263 of the Act and grant relief to the Appellant.
The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide this appeal according to law."
3. At the outset, ld.A.R. submitted that though assessee has raised various grounds but the sole ground which needs adjudication is ground No.2 namely, the challenge to the validity of revisionary proceedings.
4. Before us, Ld AR reiterated the submissions made before ld.CIT and further submitted that the prerequisite conditions specified u/s 263 of the Act were not satisfied and therefore the proceedings u/s 263 initiated by the ld.CIT lacks jurisdiction and is therefore bad in law. He submitted that u/s 263, the ld.CIT can revise an order passed by the AO only on the satisfaction of twin conditions namely (i) the order is erroneous and (ii) it is prejudicial to the interest of Revenue. If one of them is absent i.e. if either the order of the Revenue is erroneous but is not prejudicial to the interest of the Revenue or if it is not erroneous but is prejudicial to the interest of Revenue - recourse cannot be had to Sec.263(1). He further submitted that the error envisaged by Sec.263 is not one which depends on possibility or guesswork but it should be an actual error either of facts or of law. He 6 ITA No.1058/PUN/2014 AY.No.2008-09 further submitted that when two views are possible and the AO has taken one view with which the ld.CIT does not agree, the order of the AO cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the AO is unsustainable in law and for the aforesaid proposition he relied on the decision in the case of Malabar Industrial Co Vs. CIT (2000) 243 ITR 83 (SC).
5. On the merits of allowability of 'Mark to Market' loss claimed by the assessee and allowed by AO, he submitted that in the notes to accounts the assessee had clearly explained and stated that it was pursuance to the announcement made by the Institute of Chartered Accountants of India regarding accounting for derivatives of options and forward exchange of contracts. The ld.A.R. also submitted that the position in relation to 'Mark to Market' derivatives were disclosed in the financial statements along with the notes, computation of income, return of income and the T.P. Report and all these documents were perused by AO before allowing the claim of the assessee. In support of its contention that assessee during the course of assessment proceedings before AO, had submitted the reply and clarification with respect to 'Mark to Market' loss, he submitted that ld. CIT himself at Page 7 of the order has noted that assessee had submitted it reply vide letter dated 25.11.2011. Ld.A.R. further submitted that 'Mark to Market' loss is allowable deduction u/s 37(1) and for which reliance was placed in the case of Reliance Industries Limited Vs. CIT reported in (2013) 40 Taxmann.com 431 (Mumbai Trib). On the issue of allowability of loss, he also 7 ITA No.1058/PUN/2014 AY.No.2008-09 relied on the decision of Hon'ble Bombay High Court in the case of DIT Vs. Citibank in ITA No.330/2013 order dt.11.03.2015. He further submitted that the Hon'ble Apex Court in the case of CIT Vs. Woodward Governor India Private Limited (2009) 312 ITR 254 (SC) has also held the loss on account of foreign exchange difference as on date of balance sheet is an item of expenditure allowable u/s 37(1) of the Act. Ld.A.R. therefore submitted that when AO has taken a possible view while allowing the claim of deduction and since the Circular 3 of 2010 issued by CBDT was in conflict with the view of High Court, the Revenue Authorities have to ignore such Circular and for this proposition, he relied on the decision of Hon'ble Calcutta High Court in the case of Bhartia Industries Ltd. Vs. CIT reported in (2011) 12 Taxmann.com 409 (Cal). He also placed copy of the aforesaid decision. He further submitted that AO in the assessment order is not required to give detailed reason for items of deduction etc which are allowed by him and it is to be seen from the record as to whether there was an application of mind before allowing the expenditure and for this proposition he relied on decision of Delhi High Court in case of CIT Vs. Sunbeam Auto Ltd (2011) 332 ITR 167 (Delhi). The ld.A.R. therefore after relying on the decisions cited submitted that the order passed by ld. CIT lacks jurisdiction and even on merits it cannot be upheld and therefore be set aside.
6. Ld. D.R. on the other hand supported the order of ld. CIT and further submitted that when AO had allowed the claim without any discussion, the order passed by AO was erroneous and prejudicial to the interest of Revenue and therefore ld. CIT 8 ITA No.1058/PUN/2014 AY.No.2008-09 has rightly invoked provisions of Sec.263. Ld. D.R. further placed reliance on the decisions in the case of UCO Bank Vs. CIT reported in (1999) 237 ITR 889 (SC) dt 13.05.1999 and the decision of Pune Tribunal in the case of M/s. Jagadamba Sahakari Sakhar Karkhana Limited in ITA No.991/PN/2013 dt.06.11.2015. He also placed on record the copy of the aforesaid decisions. He therefore submitted that ld. CIT has rightly invoked the provisions of Sec.263 of the ACT and thus supported the order of ld. CIT.
7. We have heard the rival submissions and perused the material on record. The issue in the present case is about the invoking of provisions of Section 263 by ld.CIT. Section 263(1) of the Act, the powers under which CIT has assumed power for revision reads as under:
"The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the ITO is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment."
8. The reading of the above provisions makes it very clear that the power of suo motu revision u/s 263(1) 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 u/s 263, namely (i) the order is erroneous (ii) by virtue of being 9 ITA No.1058/PUN/2014 AY.No.2008-09 erroneous prejudice has been caused to the interests of the Revenue.
9. Hon'ble Apex Court in the case of Malabar Industrial Co Ltd Vs CIT (2000) 243 ITR 83 (SC) has held that ld.CIT has to be satisfied of twin conditions, namely, (i) the order of the AO 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 ITO 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 Sec.263(1). It was further held that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO; 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 ld.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.
10. In the case of ld.CIT Vs. Gabriel India Ltd (1993) 203 ITR 108 (Bom), the Hon'ble Bombay High Court has held as under:
"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 10 ITA No.1058/PUN/2014 AY.No.2008-09 concerned was on the lower side and, 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 of revision because the second requirement also must be fulfilled."
11. In the present case, it is seen that provisions of Sec.263 has been invoked by ld. CIT for the reason that the 'Mark to Market' loss has been allowed by AO by over-looking the Instruction No.3 of 2010 issued by CBDT. It is ld. CIT's stand that the loss arising from 'Mark to Market' is notional / contingent in nature and accordingly not allowable and that as the Circular has been issued u/s 119 of the I.T. Act, it would be binding on the AO and since AO has not followed the instructions of CBDT, the order of AO is erroneous and prejudicial to the interest of Revenue and therefore can be set aside in revisionary proceedings. Before us, it is assessee's contention that during the course of assessment proceedings assessee had submitted explanation about the allowability of the 'Mark to Market' loss and after considering the same, AO found the stand of assessee acceptable and allowed the claim of the assessee. We find that even ld. CIT in the order passed u/s 263 makes a mention of the note on allowability of 'Mark to Market' loss submitted by assessee before AO but however he is of the view that note is mere reproduction of notes 11 ITA No.1058/PUN/2014 AY.No.2008-09 to accounts. In such a situation it cannot be said to be a case of "no inquiry" by the AO. On the issue of 'Mark to Market' loss, we find that Hon'ble Supreme Court in the case of Woodward Governor India Private Limited (supra) and various other High Courts, including Bombay High Court has held that 'Mark to Market' loss as allowable. In such a situation, the allowability of the 'Mark to Market' loss by the AO cannot be considered to be an impermissible view or contrary to law. On the issue as to whether the AO can ignore the Circular issued u/s 119 while framing the assessment, we find that Hon'ble Calcutta High Court in the case of Bhartia Industries Ltd. Vs. CIT (2011) 12 Taxmann.com 409 (Cal.) has noted as under :
"On a plain reading of the said provision, we have no doubt in our mind that the circular issued by the Board under the aforesaid provision is meant for guiding the officers of the revenue for administrative purpose of enforcing the provisions of the Act. But when an authority under the Act is required to perform quasi-judicial functions, such authorities should be guided by the law of the land as enunciated on the questions involved by various judicial authorities which have binding effect. If an existing circular is in conflict with the law of the land laid down by the High Courts or the Supreme Court, in our view, the Revenue Authorities, while acting quasi-judicially, should ignore such circulars in discharge of their quasi- judicial functions."
12. Considering the totality of the aforesaid facts and relying on the decisions cited hereinabove, we are of the view that provisions u/s 263 cannot be resorted to in the present case. Further the case laws relied upon by ld. D.R. are distinguishable on facts and therefore cannot be applied to the facts in the present case. Before us, Revenue has not placed any material on record to demonstrate that the view taken by the AO was an impermissible view or was contrary to law or was upon erroneous application of 12 ITA No.1058/PUN/2014 AY.No.2008-09 legal proceedings necessitating the exercising of revisionary powers u/s 263. In view of the aforesaid facts we are of the view that ld. CIT was not justified in resorting to revisionary powers u/s 263 of the Act. We therefore set aside the order of ld. CIT passed u/s 263 of the Act. Thus, this ground is allowed.
13. In the result, the appeal of the assessee is allowed.
Order pronounced on the 5th day of January, 2017.
Sd/- Sd/-
(SUSHMA CHOWLA) (ANIL CHATURVEDI)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
पुणे Pune; दनांक Dated : 5th January, 2017.
Yamini आदे श क( ) त*ल+प अ,े+षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The CIT-IV, Pune
4. The Jt. CIT, Range-7, Pune.
5. #वभागीय &त1&न'ध, आयकर अपील य अ'धकरण, "ए" / DR, ITAT, "A" Pune;
6. गाड- फाईल / Guard file आदे शानस ु ार/ BY ORDER,स य// True Copy // //True Copy// व/र0ठ &नजी स'चव / Sr. Private Secretary आयकर अपील य अ'धकरण ,पण ु े / ITAT, Pune