Delhi High Court
Cit vs Hero Auto Ltd on 12 March, 2012
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, R.V. Easwar
$~1
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 12th March, 2012.
+ ITA 146/2012
CIT ..... Appellant
Through Mr. Sanjeev Sabharwal, sr. standing
counsel
versus
HERO AUTO LTD ..... Respondent
Through
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
1. Ld. counsel for the Revenue at the outset states that Annexure
1 to this appeal is the assessment order passed pursuant to the order
under Section 263 of the Income Tax Act, 1961 („Act‟, for short).
He prays for and is granted permission to place on record the original
assessment order dated 26.12.2006. This order was made subject
matter of an order under Section 263 of the Act dated 24th March,
ITA 146/2012 Page 1 of 11
2009 by the Commissioner of Income Tax („CIT‟, for short). By the
impugned order dated 8th July, 2011, the Income Tax Appellate
Tribunal („Tribunal‟, for short) has allowed the appeal of the
respondent-assessee and has quashed the order dated 24.3.2009,
under Section 263 of the Act, passed by the CIT on two aspects :
(1) Claim for warranty; and
(2) Deduction under Section 35 DDA.
With regard to the third aspect i.e. non-recurring items, the
Tribunal has upheld the order passed by the CIT. In this appeal, we
are therefore concerned only with the first two aspects.
2. On the question of warranty claim, it is noticeable that this
issue was raised by the Assessing Officer during the course of
original assessment proceedings and the assessee had written a letter
dated 21.11.2006 giving complete details of the provision for
warranty and had relied upon decision of Delhi High Court in the
case of Commissioner of Income Tax v. Vinitec Corporation. Pvt.
Ltd., (2005) 278 ITR 337. The CIT in the order dated 24.3.2009 has
ITA 146/2012 Page 2 of 11
not disputed the aforesaid factual position and has stated as under:
"i) The assessee‟s claim that warranty issue is covered
by Jurisdictional High Court decision in the case of CUT
Vs Vinitec Corporation is not fully correct. The Hon‟ble
High Court had held that if the provisions is made on
scientific basis then only it is an allowable expenditure."
3. Thereafter, he has referred to the second claim of the
respondent-assessee and has observed that there was lack of enquiry
and this vitiated the assessment order. Reference was made to the
decision of this Court in Gee Vee Enterprises Vs. Addl. CIT & Ors.
(1975) 99 ITR 375 (Del.). There is no discussion in the order of the
CIT as to how and in what manner the enquiry was lacking and what
was the fault and default committed by the Assessing Officer. The
Assessing Officer had examined the said aspect in the original
assessment proceedings and accepted the stand of the assessee.
There is no finding of CIT that the order passed by the Assessing
Officer was erroneous and prejudicial to the interest of the Revenue.
The question of "lack of enquiry" and "inadequate enquiry" has been
explained by this Court in Commissioner of Income Tax v.
ITA 146/2012 Page 3 of 11
Sunbeam Auto Ltd., (2011) 332 ITR 167 (Del.) and it has been
observed as under: -
"We have considered the rival submissions of the
counsel on the other side and have gone through the
records. The first issue that arises for our consideration
is about the exercise of power by the Commissioner of
Income-tax under section 263 of the Income-tax Act. As
noted above, the submission of learned counsel for the
Revenue was that while passing the assessment order,
the Assessing Officer did not consider this aspect
specifically whether the expenditure in question was
revenue or capital expenditure. This argument predicates
on the assessment order, which apparently does not give
any reasons 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 on the issue. There are judgments
galore laying down the principle that the Assessing
Officer in the assessment order is not required to give
detailed reason 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. Learned counsel for the assessee is right in
his submission that 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 of the Act, merely
because he has a different opinion in the matter. It is only
in cases of "lack of inquiry" that such a course of action
ITA 146/2012 Page 4 of 11
would be open. In Gabriel India Ltd. [1993] 203 ITR
108 (Bom), law on this aspect was discussed in the
following manner (page 113) : " . . . From a rending of
sub-section (1) of section 263, it is clear that the power
of suo motu revision can be exercised by the
Commissioner only if, on examination of the records of
any proceedings under this Act, he considers that any
order passed therein by the Income-tax Officer is „
erroneous in so far as it is prejudicial to the interests of
the Revenue‟ . It is not an arbitrary or unchartered
power, it can be exercised only on fulfilment of the
requirements laid down in sub-section (1). The
consideration of the Commissioner as to whether an
order is erroneous in so far as it is prejudicial to the
interests of the Revenue, must be based on materials on
the record of the proceedings called for by him. If there
are no materials on record on the basis of which it can
be said that the Commissioner acting in a reasonable
manner could have come to such a conclusion, the very
initiation of proceedings by him will be illegal and
without jurisdiction. The Commissioner cannot initiate
proceedings with a view to starting fishing and roving
enquiries in matters or orders which are already
concluded. Such action will be against the well-accepted
policy of law that there must be a point of finality in all
legal proceedings, that stale issues should not be
reactivated beyond a particular stage and that lapse of
time must induce repose in and set at rest judicial and
quasi-judicial controversies as it must in other spheres
of human activity. (See Parashuram Pottery Works Co.
Ltd. v. ITO [1977] 106 ITR 1 (SC) at page 10) . . .
From the aforesaid definitions it is clear that an order
cannot be termed as erroneous unless it is not in
ITA 146/2012 Page 5 of 11
accordance with law. If an Income-tax Officer acting in
accordance with law makes a 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 the
judgment of the Commissioner for that of the Income-
tax Officer, who passed the order unless the decision is
held to be erroneous. Cases may be visualised where
the Income-tax Officer 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 estimate 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 left to the Commissioner he would have
estimated the income at a figure higher than the one
determined by the Income-tax Officer. That would not
vest the Com- missioner with power to re-examine the
accounts and determine the income himself at a higher
figure. It is because the Income-tax Officer has exercised
the quasi-judicial power vested in him in accordance
with law and arrived at a conclusion and such a
conclusion cannot be formed to be erroneous simply
because the Commissioner does not feel satisfied with
the conclusion . . . 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 . . . We may now examine the facts of the
present case in the light of the powers of the
ITA 146/2012 Page 6 of 11
Commissioner set out above. The Income-tax Officer in
this case had made enquiries in regard to the nature of
the expenditure incurred by the assessee. The assessee
had given detailed explanation in that regard by a letter
in writing. All these are part of the record of the case.
Evidently, the claim was allowed by the Income-tax
Officer on being satisfied with the explanation of the
assessee. Such decision of the Income-tax Officer cannot
be held to be „erroneous‟ simply because in his order he
did not make an elaborate discussion in that regard."
After referring to the said, in the case of Income Tax Officer Vs.
DG Housing Projects Ltd. decided on 1st March, 2012 we have recently
observed and held as under :
"16. Thus, in cases of wrong opinion or finding on merits,
the CIT has to come to the conclusion and himself decide
that the order is erroneous, by conducting necessary enquiry,
if required and necessary, before the order under Section 263
is passed. In such cases, the order of the Assessing Officer
will be erroneous because the order passed is not sustainable
in law and the said finding must be recorded. CIT cannot
remand the matter to the Assessing Officer to decide whether
the findings recorded are erroneous. In cases where there is
inadequate enquiry but not lack of enquiry, again the CIT
must give and record a finding that the order/inquiry made is
erroneous. This can happen if an enquiry and verification is
conducted by the CIT and he is able to establish and show
the error or mistake made by the Assessing Officer, making
the order unsustainable in Law. In some cases possibly
though rarely, the CIT can also show and establish that the
facts on record or inferences drawn from facts on record per
ITA 146/2012 Page 7 of 11
se justified and mandated further enquiry or investigation but
the Assessing Officer had erroneously not undertaken the
same. However, the said finding must be clear, unambiguous
and not debatable. The matter cannot be remitted for a fresh
decision to the Assessing Officer to conduct further enquiries
without a finding that the order is erroneous. Finding that the
order is erroneous is a condition or requirement which must
be satisfied for exercise of jurisdiction under Section 263 of
the Act. In such matters, to remand the matter/issue to the
Assessing Officer would imply and mean the CIT has not
examined and decided whether or not the order is erroneous
but has directed the Assessing Officer to decide the
aspect/question.
17. This distinction must be kept in mind by the CIT while
exercising jurisdiction under Section 263 of the Act and in
the absence of the finding that the order is erroneous and
prejudicial to the interest of Revenue, exercise of jurisdiction
under the said section is not sustainable. In most cases of
alleged "inadequate investigation", it will be difficult to hold
that the order of the Assessing Officer, who had conducted
enquiries and had acted as an investigator, is erroneous,
without CIT conducting verification/inquiry. The order of the
Assessing Officer may be or may not be wrong. CIT cannot
direct reconsideration on this ground but only when the order
is erroneous. An order of remit cannot be passed by the CIT
to ask the Assessing Officer to decide whether the order was
erroneous. This is not permissible. An order is not
erroneous, unless the CIT hold and records reasons why it is
erroneous. An order will not become erroneous because on
remit, the Assessing Officer may decide that the order is
erroneous. Therefore CIT must after recording reasons hold
that the order is erroneous. The jurisdictional precondition
stipulated is that the CIT must come to the conclusion that
the order is erroneous and is unsustainable in law. We may
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notice that the material which the CIT can rely includes not
only the record as it stands at the time when the order in
question was passed by the Assessing Officer but also the
record as it stands at the time of examination by the CIT [see
CIT vs. Shree Manjunathesware Packing Products, 231
ITR 53 (SC)]. Nothing bars/prohibits the CIT from collecting
and relying upon new/additional material/evidence to show
and state that the order of the Assessing Officer is
erroneous."
4. We may also observe that the question of warranty claim was
reopened in the assessment year 1999-2000 after an order u/s 263 of
the Act. The order passed under Section 263 of the Act, in the
assessment year 1999-2000, was struck down by the Tribunal and
this decision has been upheld by this Court in ITA No.536/2007
decided on 21st November, 2007.
5. On the second aspect, it is noticed that the claim for deduction
under Section 35DDA was made by the assessee for the first time in
assessment year 2002-03. 1/5th of the amount payable under the
voluntary retirement was allowed as a deduction. In this year, the
Assessing Officer has followed the earlier assessment order. The
CIT in the order dated 24th March, 2009 has observed as under: -
ITA 146/2012 Page 9 of 11
"iii) In respect of issue of deduction u/s 35DDA, the
Note 2 in audit report does create doubt as to whether
expenditure to ESS was actually incurred or not. The
point that still remains is that while in audit report the
allowable amount u/s 35DDA mentioned in Annexure-III
is Rs.17,79,196, in computation of income the deduction
claimed u/s 35DDA is of Rs.1,097,42,824/-. There is
therefore clearly a mismatch which was never looked
into by A.O. similarly issue of ESS was not examined at
all by the Assessing Officer. The lack of inquiry renders
the assessment order erroneous and prejudicial to interest
of revenue as discussed in point (ii) itself."
6. We may note that the assessee had stated before the CIT and
explained the position that an amount of `5,37,14,119/- was incurred
under Section 35DDA in the assessment year 2002-03 and 1/5th
thereof being `1,07,42,824/- was amortised and claimed and allowed
as a deduction. Thereafter, each year 1/5th of the said expenditure i.e.
`1,07,42,824/- had been claimed for the next four assessment years.
No part of it was precautionary and the note in the audit report has
been erroneously read by the CIT. The note in question reads as
under: -
"The expenditure is ESS has been given on
precautionary measure due to Introduction of new
section 35DDA. However, this section has not been
introduced in clause 15 of Form 3CD."
ITA 146/2012 Page 10 of 11
7. The assessee had clarified that the note was written by the
auditor as a precautionary measure for reporting that the amount had
been claimed under Section 35DDA. The CIT in the order did not
appreciate and deal with the said aspect. He has wrongly interpreted
and observed that the claim itself was made as a precautionary
measure. The Tribunal was therefore right in setting aside this part
of the order dated 24th March 2009 passed by CIT under Section 263
of the Act.
The appeal is dismissed. No costs.
SANJIV KHANNA, J.
R.V.EASWAR, J. MARCH 12, 2012 vld ITA 146/2012 Page 11 of 11