Income Tax Appellate Tribunal - Jodhpur
Hycron India vs Assistant Commissioner Of Income Tax on 14 July, 2003
Equivalent citations: (2004)82TTJ(JODH)450
ORDER
B.L. Khatri, A.M.
1. This is an appeal by the assessee against the order dt. 12th Feb., 1996, of the CIT, Jodhpur passed under Section 263 of the IT Act, 1961, for the asst. yr. 1993-94.
2. The appellant agitated on the ground that the learned CIT has erred in setting aside the order passed by the AO under Section 143(3) for the asst. yr. 1993-94 and the order passed by the CIT under Section 263 of the Act deserve to be quashed/cancelled.
3. The brief facts of the case are that the assessment for the asst. yr. 1993-94 was made by the AO under Section 143(3) vide order dt. 19th Nov., 1993. On perusal of assessment' record it was found by the CIT that the assessee had received an interest of Rs. 4,85,861 from M/s Wolkem India Ltd. in addition to interest of Rs. 5,61,410 received from deposit of funds with some other firms. According to the assessee, entire amount of interest was exempt because the assessee is 100 per cent export oriented unit whose income is exempt under Section 10B of the IT Act, 1961. While the AO rejected the assessee's claim in regard to the interest amounting to Rs. 5,61,410 and added the same to the assessee's income, he accepted such claim in regard to the amount of Rs. 4,85,881 in respect of interest received from M/s Wolkem India Ltd. According to him the aforesaid amount represented assessee's business income and as such it was exempt under Section 10B of the Act. On the facts and in the circumstances of the case, this view taken by the AO was considered by the learned CIT to be erroneous in as much as it was prejudicial to the interest of Revenue. Accordingly a show cause notice under Section 263 was issued by the CIT to the assessee. In response to this show cause notice the learned authorised representative, inter alia, made the following submissions before the learned CIT.
(i) The appellant-firm required advances against the supply of raw materials from the assessee from time to time and after adjustment of advances against the purchases, the aforesaid company paid interest on its surplus balances. Under these circumstances the amount of interest received by the assessee from M/s Wolkem India Ltd. was the business income.
(ii) The order passed by the AO had already been subjected to the first appeal before the learned CIT(A), Udaipur. He pointed out that though, the learned CIT(A) had rejected assessee's claim regarding the exemption of the other amounts of interest of Rs. 5,61,410, he had specifically made, a mention regarding the exemption allowed by the AO in regard to the amount of Rs. 4,85,861. Therefore, the order passed by the AO cannot be subjected to any revision as the issue in question was a subject-matter of appeal before the CIT(A).
(iii) While allowing exemption to the assessee in regard to the aforesaid amount the AO has applied his mind and merely the possibility of another view of the matter could not justify involving of provisions of Section 263.
(iv) He further argued that even otherwise 25 per cent of assessee's income could be from local sales for the purpose of exemption under Section 10B.
4. The learned CIT considered the argument of the learned counsel. In his opinion, at the outset, it was necessary to deal with the assessee's objection relating to its case being covered by the provisions of Section 263(1)(c) of the IT Act. No doubt while deciding the issue of addition relating to amount of Rs. 5,61,410 by way of interest against the assessee, a reference had been made by the learned CIT(A) to the amount of Rs. 4,85,861 received as interest from M/s Wolkem India Ltd., yet it could not be said that the issue of exemption of this amount had been considered or decided by the learned CIT(A) in his order. Since the AO himself had allowed relief to the assessee at the assessment stage itself in this regard, there was no question of this issue arising for adjudication by the learned CIT(A) so far as the interest received from M/s Wolkem India Ltd. was concerned. Mere casual reference to such interest by him in the appellate order could not be considered as a bar for invoking the provisions of Section 263. Therefore, this contention of the learned authorised representative was rejected by him.
5. As regards the merits of the case, the learned CIT observed that apart from M/s Wolkem India Ltd., the assessee had derived interest income from a number of concerns as per details given in the order of the AO. Interest income from other parties was evidently derived only due to placement of certain funds by the assessee with the said parties which were considered to be surplus and which resulted into an interest income to it. Admittedly, M/s Wolkem India Ltd. is also a sister-concern of the assessee. There is nothing on record to show that M/s Wolkem India Ltd. had desired deposit of any specific amount of advances prior to its agreeing to supply raw material to its own sister-concern. Even if there is business practice where supplier of certain goods do require advances for future purchase, the transaction of the assessee with its own sister-concern is to be considered on a different footing. In these circumstances in the absence of any material to the contrary, the AO could not be said to be right in taking the view that interest received by the assessee from M/s Wolkem India Ltd. was materially different in nature from the interest in respect to other parties without due inquiries. The learned CIT(A) has confirmed the addition of Rs. 5,61,410 made by the AO in respect of other parties. The CIT relied on the decision of the Hon'ble Rajasthan High Court in the case of Murli Investment Co. v. CIT (1987) 167 ITR 368 (Raj) wherein income derived from surplus funds was not considered to be business income. Therefore, the CIT came to the conclusion that while considering the total taxability in assessee's own case in respect of different items he took an erroneous view without due inquiries regarding the amount of Rs. 4,85,861 received from M/s Wolkem India Ltd.
6. In addition to the arguments already advanced before the learned CIT the learned authorised representative made the following submissions :
The prerequisites to the exercise of jurisdiction by the CIT under Section 263 is that the order of the AO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, viz., (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interest of the Revenue. If any one of them is absent i.e., if the assessment order is erroneous but is not prejudicial to the Revenue, recourse cannot be had to Section 263(1). The provisions cannot be invoked to correct each and every type of mistake or error committed by the AO. An incorrect assumption of the fact or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase 'prejudicial to the interest 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 the order of the AO cannot be treated as prejudicial to the interest of the Revenue. For example, if the AO has adopted one of the courses permissible in law and it resulted in loss of Revenue, or where two views are possible and AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the AO is unsustainable in law. For this preposition, he referred to the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC).
7. The learned counsel further argued that applying the principles laid down in the case of Malabar Industrial Co. Ltd. v. CIT (supra) there is absolutely no prejudice caused to the Revenue inasmuch as the entire income of the unit was exempt under Section 10B. The AO applied his mind and disallowed the entire interest and dividend. However, considering the fact that interest from WIL have been received during the course of business, which was one of the course available in view of various regular judgments and, therefore, has not done anything wrong. It is only a substitution of opinion by the higher superior officer and hence the ratio laid down squarely applies to the facts of the present case.
8. 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 CIT simply because, according to him, order should have been written more elaborately. The section does not visualize a case of substitution of the judgment of the CIT for that of the ITO who passed the order, unless the decision is held to be erroneous. Cases may be visualized where the ITO, while making the assessment examines the accounts, makes inquiries, applies his mind to the facts of the case and determines the income either by accepting the accounts or by making some estimates himself. The CIT, on perusal of the records, may be of the view that the estimate made by the concerned AO was on lower side and left to the CIT he would have estimated the income at a higher figure than the one determined by the ITO. That would not vest the CIT with power to re-examine the accounts and determine the income himself at a higher figure. This 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 erroneous simply because the CIT does not feel satisfied with the conclusion. He referred to the decision of the Bombay High Court in the case of CIT v. Grabriel India Ltd (1993) 203 ITR 108 (Bom).
9. Thus, presently in the case where there is substitution of opinion by the officer, the ratio of above decision also applies on the facts of the present case as in this case also complete inquiries were made.
10. The learned CIT, in his impugned order under Section 263 vide para 4 p. 3 onwards, has alleged at certain places that the AO did not make due inquiries. Before proceeding to show that this is an absolutely incorrect fact, the learned authorised representative submitted that the learned CIT has not at all pointed out as to what type of inquiries were really warranted which the AO was supposed to have made and failed to do so as to make the assessment as erroneous. His allegation only appears for the sake of an allegation to justify an action under Section 263 as he totally failed to point out as to what inquiry was needed and what grave error the learned AO has made by not making a particular and specific inquiry, resulting into an error in the assessment.
11. The learned Departmental Representative, on the other hand, relied on the order of the learned CIT.
12. We have considered the rival submissions. The AO found that the assessee had claimed exemption under Section 10B for dividend income of Rs. 17,62,500 and interest income of Rs. 10,47,271, the details of which are as under :
B.
1. Interest on bank FDRs 20,794.50
2.
Interest on IT refund for asst. yr. 1992-93 6,175.00
3. M/s Pesticides India 1,48,767.00
4. M/s R.K. Agencies 1,500,00
5. M/s Chemicals India 6,957.00
6. M/s S. Chemores (P) Ltd.
3,76,758.00
7. Foreign Currency Intt.
459.00 5,61,410.00
8. M/s Wolkem India Ltd.
4,85,861.00 10,47,271.50 B. Dividend 17,62,500.00 At p. 2 of the order, the learned AO observed that the main basis on which the interest or dividend income can be treated as income from the industrial undertaking would be whether such interest/dividend income has been received during the normal course of business of such undertaking or not. The investment etc., therefore, cannot be treated as income of the industrial undertaking. On examination of details of interest and copies of the accounts of the parties concerned revealed that the assessee was having regular business dealing of purchases from M/s Wolkem India Ltd. which took advances from the assessee on sales made by it to the assessee and, therefore, only this income could be considered as income from industrial undertaking as the same had arisen during the course of regular business and, therefore, the sum of Rs. 4,85,861 was to be treated as income of the hundred per cent export-oriented unit and thus exempt under Section 10B of the Act. The AO had also considered various case laws relied upon by the learned authorised representative.
13. The learned CIT has observed in his order that the AO had not applied his mind to the facts and circumstances of the case and he has not made due inquiries. From the perusal of p, 2 of the order of the AO as mentioned above, it is evident that the AO had made due enquiry and had considered the case laws also relied upon by the learned authorised representative and thereafter he held that the interest income of Rs. 4,85,861 received from M/s Wolkem India Ltd. would be treated as income from industrial undertaking which was exempt under Section 10B of the Act. The learned authorised representative has rightly placed reliance on the judgment of Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd. (supra). It was held in this case that when an AO, after going through the material on record produced by the assessee, made some additions it could not be said that he had not applied his mind. Reliance can also be placed on the judgment of CIT v. Girdhari Lal (2002) 258 ITR 331 (Raj).
14. From the above facts, it is evident that the AO has applied his mind to the facts of the case and had treated the interest income of Rs. 4,85,861 received from M/s Wolkem India Ltd. as business income. Therefore, we do not agree with the view of the learned CIT that the AO had not made due inquiries and had not applied his mind to the facts of the case. The learned CIT had also relied upon the judgment of the Hon'ble Rajasthan High Court in the case of Murli Investment Co. v. CIT (supra) wherein income derived from surplus fund was not considered as business income. It is evident from the fact of the case that in the case of Murli Investment Co. v. CIT (supra) surplus funds had been deposited with the third party. Therefore, that was not considered as business income whereas, as is evident from p. 2 of the order of the AO and the submission of the learned authorised representative that the assessee is having regular business dealings of purchases from M/s Wolkem India Ltd, which takes advances from the assessee on sales made by it to the assessee and, therefore, only this interest income could be considered as income from industrial undertaking as the same has arisen during the course of regular business and, therefore, the sum of Rs. 4,85,861 would be treated as income of the 100 per cent export-oriented unit. The learned authorised representative during the course of hearing had rightly placed reliance on the case of CIT v. Paramount Premises (P) Ltd (1991) 190 ITR 259 (Bom) wherein it was held that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. Therefore, the interest income earned from M/s Wolkem India Ltd. was rightly held to be income from business by the AO. Thus twin conditions for exercise of jurisdiction under Section 263, i.e., (i) the order of the AO is erroneous; and (ii) that it is prejudicial to the interest of the Revenue are not satisfied. Therefore, order passed by the learned CIT under Section 263(1) of the Act. is hereby quashed.
15. In the result, the appeal is allowed.