Income Tax Appellate Tribunal - Chennai
Jsw Steel Ltd.,, Salem vs Assessee on 25 September, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER]
I.T.A.No.1404/Mds/2012
Assessment year : 2007-08
M/s JSW Steel Ltd vs he ACIT
(Successor to Southern Iron & Company Circle I(1)
Steel Company Ltd) Coimbatore
Pottaneri - M.Kalapatti Village
Mecheri, Mettur Taluk
Salem 636453
[PAN AAECS 3306 E]
(Appellant) (Respondent)
Appellant by : Shri K. Raghu
Respondent by : Dr. S.Moharana, CIT/DR
Date of Hearing : 25-09-2012
Date of Pronouncement : 28-09-2012
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
This is an appeal filed by the assessee against the order of the CIT-I, Coimbatore, dated 29.3.2012.
2. In this appeal, the assessee has raised the following grounds:
:- 2 -: I.T.A.No.1404/12
"(1) The learned CIT-I has erred in setting aside the order of the AO dated 23.09.2009, without finding the order of the AO as erroneous, in so far as prejudicial to the interest of the revenue, in the facts and circumstances of the case.
(2) The learned CIT, having agreed that pre-operative expenditure are not covered u/s 350, the proposal contained paragraph 2.0 of his notice was not valid, to enable him to assume jurisdiction u/s 263 of the Income Tax Act, 1961, in the facts and the circumstances of the case and in law.
(3) The direction contained while setting aside the assessment, in paragraph 4.1 of the impugned order, in the background stated therein, is vague and not sustainable in the facts and circumstances of the case and law.
(4) For these and other additional grounds of appeal that may be adduced at the time of hearing, the impugned order u/s 263 of the Income Tax Act, 1961 of the Commissioner of Income Tax-I, Coimbatore, dated 29.03.2012, setting aside the assessment, is unsustainable in law and in the facts and the circumstances of the case."
3. The A.R of the assessee submitted that the CIT had no jurisdiction to pass order u/s 263 of the Act as in the instant case, the Assessing Officer had allowed income from trial run of ` 3487.18 lakhs as a deduction from the pre-operative expenditure and capital work-in- progress. He submitted that according to the CIT, as per section 35D of the Act, pre-operative expenditure is to be amortized over a period of five years and accordingly the assessee should have claimed as deduction in five equal instalments after commencement of business. Therefore, the entire trial run income is to be treated as revenue receipt of the year of receipt. The Assessing Officer in the order under consideration has not omitted to assess any income resulting in an :- 3 -: I.T.A.No.1404/12 error which is prejudicial to the interests of the Revenue. He submitted that during the year under consideration, the assessee has not received any capital by way of issue of shares or debentures and incurred expenses in connection therewith, hence, section 35D was not applicable to the pre-operative expenditure. Therefore, the CIT was wrong in issuing notice u/s 263 of the Act by holding that as per section 35D of the Act pre-operative expenditure was to be allowed deduction in five equal instalments and the entire receipts from trial run was taxable. He further submitted that during the course of 263 hearing, when the assessee pointed out this to the CIT, the CIT in para 4.1 of his order has noted that he agreed with the A.R of the assessee that pre-operative expenses which are incurred by the assessee prior to the commencement of its business are not covered by section 35D of the Act. However, he held that such expenses are required to be capitalized in the block of depreciable assets and therefore, the assessee's case merits the verification of the expenses of ` 3487.18 lakhs as per Schedule-6 to the audited Profit & Loss Account and accordingly, directed the Assessing Officer to ascertain the liability or otherwise of the expenditure in computing the assessable income for assessment year 2007-08. He argued that if the trial run receipts are considered to be the income of the assessee then :- 4 -: I.T.A.No.1404/12 the corresponding expenditure incurred to earn the income is required to be deducted. If that is done then there will be no surplus which can be treated to be the income of the assessee during the year under consideration. Hence, it was his submission that the order of the CIT passed u/s 263 of the Act should be cancelled.
4. On the other hand, the CIT/DR supported the order of the CIT observing that the trial run receipts of ` 3487.18 lakhs was not shown by the assessee in the Profit & Loss Account and hence, was not assessed to tax. The same was reduced from pre-operative expenses.
5. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the instant case, original order of assessment u/s 143(3) was passed on 23.9.2009 assessing total income of the assessee at NIL. Thereafter the CIT issued a show cause notice u/s 263 of the Act dated 11.5.2011 and the relevant issue raised by the CIT in the said notice is extracted as under:
"2.1. As per Sec-35D of the Act pre-operative expenditure is to be amortized for five years; and, accordingly, claimed as deductions in five equal installments after commencement of business. Therefore the entire trial-run-income is to be treated as revenue receipt of the year of the receipt. . But the AO, in the 'order under consideration'. has omitted to so assess resulting in an error which is prejudicial to the interests of the Revenue. In view of such, it is proposed to invoke :- 5 -: I.T.A.No.1404/12 provisions of the Sectlon-263 of the Act on the 'order under consideration' to remedy loss to the Revenue."
6. Thus, from the show cause notice, it is observed that the proceedings u/s 263 were initiated as in the opinion of the CIT ` 3487.18 lakhs was the income of the assessee assessable to tax for the year under consideration which was omitted to be assessed in the assessment order. The CIT, after considering the submissions of the assessee on this issue which was to the effect that out of ` 3487.18 lakhs, ` 3204.98 lakhs represents inter-divisional transfer of the assessee's units only in which no assessable income element is embedded and the balance amount of ` 282.22 lakhs which represented sale of power to TNEB has corresponding expenditure of more than that amount i.e 483 lakhs, the CIT ordered u/s 263 as under:
"4. The A.Rs were heard. The foregoing written submissions were duly considered. The assessee's stand is that, the expenditure in question i.e pre-operative expenses are not covered by the provisions of section 35-D of the Act, and, therefore, are allowable wholly in computing the total income, and, therefore, the A.O passing the "order under consideration" had allowed. Accordingly, there is no error within the meaning of Sec. 263 of the Act. "order under consideration".
4.1 I agree with the A.R that, the Pre-operative Expenses is/are the expense(s) which are incurred by an assessee prior to commencement of its business are not covered by Section 35D of the Act. But, such expenses are required to be capitalized with the block of depreciable assets. In view of such, the assessee's case merits the verification of the expenses of ` 3487.18 lakhs (as per the Schedule 6 to the :- 6 -: I.T.A.No.1404/12 audited P&L a/c of the 'Annual General Report: 2006-07) to ascertain its allowability or otherwise in computing the assessable income, for the A.Y: 2007-08. The AO is directed, accordingly.
Thus, 'the order under consideration' [passed u/s 143(3) dated: 23-9-10] is, hereby set-aside with directions to the Assessing Officer to re-do the assessment afresh, with reference to the observations inter alia, as per law and procedure, and after hearing the assessee."
7. We find that the order ultimately has been passed to verify the expenses of ` 3487.18 lakhs to ascertain its liability or otherwise in computing the assessable income for the assessment year 2007-08.
8. Firstly, we find that no show cause notice was issued in respect of expenses of ` 3487.18 lakhs. Further, even it is assumed that income of ` 3487.18 lakhs referred to in show cause notice issued u/s 263 was ordered by the CIT to be verified by the Assessing Officer then also we find that instant order passed u/s 263 is not sustainable as the CIT could not point out any error in the submissions of the assessee in respect thereto. Though the CIT has quoted the submissions of the assessee that no assessable income was established in the receipt of ` 3487.18 lakhs but the CIT has not disputed the said submissions of the assessee. In the above circumstances, the order of the CIT is without jurisdiction inasmuch as no show cause notice was issued in respect of expenses of ` 3487.18 :- 7 -: I.T.A.No.1404/12 lakhs and no error in the submissions of the assessee in respect of receipt of ` 3487.18 lakhs was pointed out by the CIT. We, therefore, cancel the order of the CIT passed u/s 263 of the Act on 29.3.2012 and allow the appeal of the assessee.
9. In the result, the appeal of the assessee is allowed.
Order pronounced on Friday, the 28th of September, 2012, at Chennai.
Sd/- Sd/-
(CHALLA NAGENDRA PRASAD) (N.S.SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 28th September, 2012
RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR