Income Tax Appellate Tribunal - Delhi
Saw Pipes Ltd. vs Additional Commissioner Of Income Tax on 20 April, 2005
Equivalent citations: (2005)94TTJ(DELHI)1036
ORDER
B.R. Jain, A.M.
1. In this appeal the assesses challenges the action of the learned CIT(A)-III, Delhi, in setting aside the order of the AO/Addl. CIT, Range 7, for the asst. yr. 2000-01.
2. The facts of the case are that the assessment of the case was framed by the Addl. CIT, Range 7, vide his order dt. 31st March, 2003, computing the assessable income at Rs. Nil with unabsorbed depreciation Rs. 12,38,53,171 to be carried forward as against the claim of Rs. 16,85,15,018. This order was subjected to appeal on various issues before the learned CIT(A)-10, Delhi, who took decision vide his order dt. 7th Aug., 2003. On 31st Jan., 2004, appellant received a show-cause notice dt. 30th Jan., 2004, from learned CIT, Delhi-Ill. In the said notice the learned CIT expressed as to why the assessment made by the AO be not held as erroneous and prejudicial to the interest of Revenue for the following reasons :
(i) Exemption under Section 10(33) was claimed by you in respect of the dividend income amounting to Rs. 46,87,862 credited in your P&L a/c. This claim was accepted by the AO without any examination and without allocating any expenses against this income in terms of Section 14A of the IT Act although very substantial expenses including finance expenses amounting to Rs. 32.51 crores, personnel expenses amounting to Rs. 9.11 crores and administrative and other expenses amounting to Rs. 32.51 crores where debited to your P&L a/c;
(ii) It is seen from Annex. G of the tax audit report filed with your return that tax, duty or other sum amounting to Rs. 2,57,06,870 debited to your P&L a/c was not paid during the previous year under consideration. Out of this, only Rs. 2,82,638 was disallowed by you in your computation of income under Section 43B whereas the remaining amount of Rs. 2,54,24,232 was not disallowed apparently on the ground that the said sums had been paid to the respective authorities on or before the due date of filing the return of income. However, the first proviso to Section 43B, inter alia, lays down that in order to avoid such disallowance, the evidence of such payment has to be filed by the assessee along with the return. A perusal of your record shows that such evidence was not enclosed by you with the return. It was also not furnished during the assessment proceedings. Therefore, the aforesaid sum of Rs. 2,54,24,232 seems to have been wrongly allowed to you by the AO;
(iii) Sechedule 7 of your balance sheet/P&L a/c lists your closing stock. It is seen that as on 31st March, 2000, you had total closing stock amounting to Rs. 70.56 crores of which finished goods were shown at Rs. 21.80 crores. A further perusal of Annex. M of your tax audit report enclosed with the returns shows that you had a closing stock of SAW pipes weighing 10,105 metric tonnes as on 31st March, 2000. It is also seen from the details of sales furnished by you that during the previous year under consideration, you had sold 40,453 metric tones of SAW pipes for a total consideration of Rs. 12,179.36 lakhs. The average sale price of these pipes comes to Rs. 30,102 per metric tonne. If this value is applied to the closing stock of 10,105 metric tonnes of SAW pipes, the value of SAW pipes alone comes to Rs. 30.41 crores which is much higher than the value of Rs. 21.80 crores of all finished goods shown by you. Even after making discount for your profit margin included in the sale price, the value of finished saw pipes is much higher than shown by you. Similar differences appear in other items of closing stock also. However, the AO has not examined this discrepancy and has accepted your results;
(iv) In your P&L a/c, you had debited Rs. 6,19,12,759 on account of bad debts. The AO accepted this claim merely on the basis of your chartered accountant's certificate and without making proper inquiry or examination. Considering that the quantum involved was very high and that the bad debts were claimed to be on account of receivables from Hindustan Petroleum Corporation Ltd., it was incumbent upon the AO to make independent inquiry from HPCL to verify the genuineness of your claim. However, he failed to do so;
(v) In your P&L a/c, you have claimed finance expenses amounting to Rs. 32.51 crores on borrowed funds, which stood at Rs. 300.85 crores as on 31st March, 2000. It is also seen from your balance sheet and its Sechedule 10 that you had also given loans and advances amounting to Rs. 172.05 crores to various parties including Rs. 68.15 crores to your subsidiary companies and 48.90 crores by way of inter-corporate loans. The AO accepted your claim that the borrowed funds had no nexus with money advanced as loans, without proper examination. In this connection, you may refer to the judgment of the Hon'ble Delhi High Court in the case of CIT v. Motor General Finance Ltd. (2002) 254 ITR 449 (Del), wherein the Court held as follows :
"From the conspectus of the decisions as noticed hereinbefore, there cannot be any doubt whatsoever that the nexus between the amount paid by way of advance to a sister-concern and the fund available at the relevant time in the assessee's hands must be found out from the advances taken by the assessee. The onus to prove that it is entitled to (deduction) in this regard was on the assessee."
Similarly, in their judgment in the case of CIT v. Orissa Cement Ltd. (2002) 258 ITR 365 (Del), the Hon'ble Delhi High Court observed as follows :
"We are not oblivious of the fact that while arriving at such a finding, a nexus between the borrowings from the banks and other financial institutions by the assessee and lending it to its subsidiary companies must be found out..."
Despite the legal position being so clear, the AO failed to examine the aforesaid nexus between the funds borrowed and lent in your case.
(vi) In your P&L a/c, you had claimed Rs. 206.34 lakhs as commission on sales. The AO accepted this claim without obtaining the relevant details and without any examination or verification....
He concluded by stating that "Thus, since the assessment framed by Addl. CIT, Range 7, in your case for the assessment year is erroneous and prejudicial to the interest of the Revenue, I, in exercise of power vested in me by Section 263 of the IT Act, proposes to direct the AO to make the assessment afresh."
3. After considering assessee's reply the CIT held that there is no error in the assessment order with respect to point Nos. (ii) and (iv) of his show-cause notice, however, with respect to point Nos. (i), (iii), (v) and (vi) he held that the order of the AO was erroneous and prejudicial by giving the undermentioned finding in para 37 of his order :
"Having dealt with all the issues mentioned in my show-cause notice, I, in exercise of my powers under Section 263, cancel the assessment order passed by the Addl. CIT, Range 7, except in respect of those issues which have already been considered and decided by the CIT(A), and direct the present Addl. CIT, Range 7, to reframe the assessment after making necessary inquiries and properly examining the issues mentioned in this order. He will also be free to examine any other issues which have not been covered in this order except those issues which have already been considered and decided by the CIT(A)."
4. At the outright, learned Authorised Representative has assailed the order of the learned CIT on such wholesale cancellation of the assessment order by him. The assessment having been completed after detailed scrutiny and several hearings, could only be set aside in respect of specific issues on which the assessment order was found to be erroneous and prejudicial to the interests of Revenue by him. The setting aside of the whole of the assessment was not warranted on the facts of the case and in law. Cancellation of the assessment is called for only if there is something totally or basically wrong in the assessment and is not capable of being remedied by amendment to the assessment order itself. It will be appreciated that out of six issues outlined in the show-cause notice, the learned CIT found the assessment order erroneous only in respect of four of them. The whole of the assessment in the aforesaid circumstances could not be set aside as the assessment was not basically flawed. Reliance has been placed on the decision of the Chandigarh Bench of the Tribunal in the case of SmithKline Beecham Consumer Healthcare Ltd. v. Dy. CIT (1999) 63 TTJ (Chd) 33 : (1999) 68 ITD 163 (Chd), wherein the action of the CIT in setting aside of the whole of the assessment order, merely because the AO failed to compute deduction under Section 80M in accordance with facts and law, was held to be erroneous and the AO was directed only to consider the question of deduction under Section 80M while passing the fresh order.
5. The learned Authorised Representative contends that out of the six issues raised by learned CIT, he is found satisfied with the replies of the assessee in respect of issues at S. Nos. (ii) and (iv) in the show-cause notice as is revealed by para Nos. 22 and 33 of his order. Despite this, the learned CIT chose to set aside those issues also, such an action is beyond the powers conferred under Section 263 of the Act. He further pointed out that in rest of the four issues he has recorded only one dissatisfaction, i.e., failure of AO to look into the matter and thereby made a conclusion that the assessment order is erroneous inasmuch as it is prejudicial to the interest of the Revenue.
6. With reference to the above four points, the learned Authorised Representative invited attention to the provisions of Section 263(1) and argued that the section requires that two conditions should be satisfied in order to entitle a CIT to set aside an order passed by the ITO. The said conditions are : (1) that the order proposed to be revised is erroneous; and (2) that such order has resulted in prejudice to the interests of the Revenue. Reliance was placed on the apex Court decision in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC).
7. He further stated that the learned CIT in his order has laid emphasis only on the first condition and according to him an erroneous order empowers him to set aside the case. For such a view entertained by him, reference was made to the following passages in his order :
"Para 3. The assessees attention was also drawn to the settled legal position with regard to Section 263 of the IT Act, namely, that the AO's failure to make the necessary inquires makes an order erroneous and prejudicial to the interests of the Revenue. In this connection, the assessee was informed about a few illustrative decisions, for example, the decisions of the Hon'ble Delhi High Court in the cases of Duggal & Co. v. CIT (1996) 220 ITR 456 (Del) and Gee Vee Enterprises v. Addl. CIT (1975) 99 ITR 375 (Del) and the decision of the Karnataka High Court in the case of Thalibai F. Jain and Ors. v. ITO and Anr. (1975) 101 ITR 1 (Kar).
Para 6. The assessee's contentions have been considered. At the outset, it may be clarified that I am not deciding here the merit of the question whether any disallowance under Section 14A was called for or not.
Para 7. Thus, it was incumbent upon the AO to examine whether any part of the substantial finance cost, personnel cost, administrative cost and other costs was relatable to the investments made by the assessee and, if so, the same should have been determined and accounted for against the income from investments and excluded for the computation of business income. Since the AO failed to do so, his order clearly becomes erroneous inasmuch as it is prejudicial to the interests of the Revenue.
Para 19. Therefore, it is clear that the examination of the issue by the AO was perfunctory and because of his failure to make proper inquiries, as mentioned above, and to apply his mind, the assessment order framed by him is erroneous inasmuch as it is prejudicial to the interests of the Revenue. In support of this conclusion, reliance is placed on the decisions referred earlier in paras 8 and 9 above.
Para 24. The assessee's contentions have been considered. At the outset, I have to reiterate that I am not deciding the question here whether the prima facie undervaluation of the stock of finished goods, as mentioned in my show-cause notice, is factually correct or not. A conclusion regarding that will require detailed examination by the AO. I am only concerned with the question whether the AO applied his mind to the issue, whether in doing so he made any incorrect assumption of facts and, whether his order was erroneous inasmuch as it was prejudicial to the interests of the Revenue.
Para 29. It is clear from the above discussion that though the issue of valuation of closing stock of finished goods had significant Revenue implications, the AO failed to consider the relevant issues during the assessment proceeding and also failed to make the relevant inquiries to reach appropriate conclusions. Thus, the assessment order is based on incorrect assumption of facts and has been passed without application of mind to this important issue. The order is clearly erroneous inasmuch as it is prejudicial to the interests of the Revenue in regard to this issue also. Reliance is placed on the Court decision referred in paras 8 and 9 above.
Para 36. I have considered the assessee's submissions but find them devoid of merit. Firstly, it is not borne out from record that the AO made inquiries regarding the commission paid by the assessee. As stated earlier, even the details of commission paid were not obtained by him. Secondly, even from the details filed before me, it is seen that the commission as a percentage of sales increased from 0.91 per cent in the immediately preceding year to 1.16 per cent in the year under consideration. Therefore, even with regard to this issue, I have no hesitation in holding that the AO failed to make the necessary inquiries before accepting the assessee's claim. Thus, even on this ground, the assessment framed by him is erroneous inasmuch as it is prejudicial to the interests of the Revenue."
8. On the basis of the above, the learned Authorised Representative argued that on all the four issues, the learned CIT attributed AO's failure to make necessary inquiries for coming to the conclusion that the assessment framed by the Addl. CIT was erroneous inasmuch as it is prejudicial to the interest of the Revenue. For assailing this, reference was made to the following judgments :
(i) CIT v. T. Narayana Pai (1975) 98 ITR 422 (Kar);
(ii) J.P. Srivastava & Sons Ltd. v. CIT (1978) 111 ITR 326 (All):
(iii) CIT v. Chawla Trunk House (1983) 139 ITR 182 (P&H);
(iv) CIT v. Goyal Private Family Specific Trust (1988) 171 ITR 698 (P&H);
(v) CIT v. Kanda Rice Mills (1989) 178 ITR 446 (P&H);
(vi) CWT v. Prithviraj & Co. (1993) 199 ITR 424 (Del); and
(vii) CIT v. O.P. Seth (1993) 201 ITR 635 (Del).
9. He, after addressing us at length in several sittings, also filed written arguments. Relevant portion is reproduced as under :
"1. No disallowance made against dividend income: During the year appellant had shown dividend income of Rs. 46,87,862 and claimed exemption of the entire amount under Section 10(33).
The CIT in his show-cause notice has held that in view of the provisions of Section 14(A) the AO should have made appropriate disallowance of expenditure relatable to dividend income from finance cost, administrative cost and personnel cost as shown in the account of the assessee. In his order under Section 263 the CIT has stated that he does not agree with the assessee's contention that the investments have been made from own funds and not from borrowed funds for the reason that during the year under consideration the assessee had made substantial investments in the shares of Jindal Steel & Power. Further, substantial borrowing were made in the asst. yr. 1995-96 when major investments were made and inter-corporate loans increased from Rs. 22.91 crores to Rs. 110.85 crores. Assessee has given guarantee in respect of various companies. Assessee's investment in shares stood at Rs. 67 crores. Therefore, it is unlikely that no expenses would have been incurred on this account. Since the AO has not examined this aspect the order is erroneous and needs to be looked afresh.
Assailing these findings, the Authorised Representative stated that the entire contention of the CIT is erroneous and would be evident from the following facts :
No amount of money has been invested in shares in the year under consideration. The change in the investment in shares, as pointed out by the CIT, in the above companies happened consequent to the scheme of arrangement whereby the erstwhile holding of Jindal Strips was apportioned in the ratio of 60 : 40 into shares of Jindal Strips Ltd. and Jindal Power Ltd. This fact has been given as a note in Sechedule 6 of the balance sheet of the appellant. In fact in the course of assessment the AO also noticed this and inquired into the taxability of such change in the investment in shares and the same was replied to vide appellant's letter No. SPL/FIN/NM/J/2003. The CIT did not consider the following arguments of the appellants :
(a) No expenditure debited in the P&L a/c and claimed deduction by the appellant was incurred in relation to earning dividend income as :
(i) the finance expenditure of Rs. 32.51 crores consisting mainly of interest and was paid to financial institutions/banks on monies borrowed for specific purposes and not for making investment in shares;
(ii) all major loans outstanding as at the end of the relevant previous year (except Rs. 200 lakhs which were availed in financial year 1994-95 for setting up a project at Nasik) had been raised subsequent to investment in the shares held by the assessee and there is no nexus between borrowed funds and investments made in shares;
(iii) no investments were made in the relevant previous year and no major investments were made in the last five years;
(iv) Share capital, free reserves and interest-free funds available with the assessee as at the end of the previous year were Rs. 209.74 crores which are much in excess of investments in shares of Rs. 67.22 crores;
(v) the ICDs which were to the tune of Rs. 110.85 crores as on 31st March, 1995, have been substantially repaid and have come down to Rs. 20.97 lakhs as on 31st March, 2000;
(vi) it has been accepted in the earlier years that investments in shares have been made out of interest-free funds available with the appellant as no interest had been held attributable to such investments. In such circumstances, there can be no disallowance of interest as held in the following cases :
(i) CIT v. Sridev Enterprises (1991) 192 ITR 165 (Kar)
(ii) Malwa Cotton Spinning Mills v. Asstt. CIT (2004) 83 TTJ (Chd)(TM) 72 : (2004) 89 ITD 65 (Chd)(TM)
(iii) Meenakshi Synthetics (P) Ltd. v. CIT (2003) 79 TTJ 423 (Lucknow) : (2003) 84 ITD 563 (Lucknow)
(vii) even otherwise, in the absence of any change in facts, a different view is not warranted. The Courts have in the following cases advocated the rule of consistency :
(i) Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC);
(ii) CIT v. Lagan Kala Upvan (2003) 259 ITR 489 (Del);
(iii) CIT v. Neo Poly Pack (P) Ltd. (2000) 245 ITR 492 (Del);
(iv) Director of IT v. Apparel Export Promotion Council (2000) 244 ITR 734 (Del), and
(v) Kinetic Honda Motor Ltd. v. Jt. CIT (2001) 72 TTJ (Pune) 72 : (2001) 77 ITD 393 (Pune)
(viii) as regards personnel and other expenses which include expenses towards bad debts, insurance, auditor fees, travelling, etc., the same have no co-relation with the earning of dividend income which is passive/dormant income as no effort is required to earn such income;
(ix) it has been held in the following cases that in the absence of any specific expenditure relatable to earning of dividend income, there cannot be any disallowance of notional or proportionate expenses :
(i) CIT v. United Collieries Ltd. (1990) 49 Taxman 227 (Cal);
(ii) CIT v. Enamour Investments Ltd. (1994) 72 Taxman 370 (Cal);
(iii) CIT v. Carolina Investment Ltd. (1996) 87 Taxman 238 (Cal);
(iv) CIT v. Kanoria Investment (P) Ltd.; (1998) 232 ITR 7 (Cal); and
(v) Tata Fertilisers Ltd. v. Dy. CIT (1997) 92 Taxman 423 (Mumbai)(Mag).
In the case of Usha Martin Investment Ltd. v. Dy. CIT (2003) 79 TTJ (Cal) 23 : (2003) 86 ITD 261 (Cal), the action of the CIT in directing the AO to ascertain the expenditure incurred in earning dividend and deduct the same from gross dividend earned for the purpose of arriving at the amount deductible under Section 80M of the Act was held to be erroneous as the assessee had categorically stated that no specific expenses had been incurred to earn the dividend and as per the Tribunal there was no scope of making estimate and no notional expenditure could be allocated to the dividend income.
The proposition laid down in the aforesaid decisions would equally apply in the context of Section 14A of the Act.
(b) The dividend income cannot be said to be exempt income since the company distributing dividend has to pay dividend distribution tax on the same and there is only shifting of incidence of tax from the recipient of dividend to the payer of dividend. Reliance is placed on the decision of Tribunal, Bombay Bench : Mafatlal Holdings Ltd. v. Asstt. CIT (refer pp. 158 to 186, at p. 181 and 182 of the paper book).
(c) In terms of the proviso to Section 14A, no action is to be taken to revise, rectify or enhance the assessment for asst. yr. 2001-02 and earlier years, by disallowing any amount under Section 14A of the Act. Though Section 263 is not specifically mentioned in the proviso to Section 14A, the order of the CIT may result in enhancement of assessment on account of disallowance under that section, which is not permissible in law as the matter relates to an assessment year prior to 2002-03. The CIT is seeking to do indirectly what the AO could not directly do. Such an order, circumventing the provisions of Section 14A of the Act, cannot be sustained.
(d) The AO examined the aforesaid issue in appellant's own case for asst. yr. 2001-02 and no disallowance was made under Section 14A in the assessment order for that year after considering the appellant's reply.
(e) In any case non-consideration of interest cost against dividend income cannot be considered by the CIT under Section 263 as the issue of interest was considered by CIT(A) in appeal. The theory of merger has been discussed in detail under the head interest disallowance. Reliance is placed on all those arguments here.
No disallowance under Section 14A is called for in view of the aforesaid and the action of the AO in not making any disallowance under the above section was neither erroneous nor prejudicial to the interest of Revenue.
Claim of deduction under Section 43B The CIT in the show-cause notice required the appellant to explain as to why the assessment order wherein deduction of Rs. 2,54,24,232, being interest paid to the financial institutions, was allowed under Section 43B of the Act in the absence of any evidence having been enclosed with the return regarding the payment of the said amount prior to the due date of filing the return, be not considered as erroneous and prejudicial to the interests of the Revenue.
In response to this the CIT was informed that the dates of payments pertaining to these items have been given in Annex. G of the tax audit report filed with the return of income and no further evidence is required in this connection. CIT's attention was also drawn to Circular No. 601, dt. 4th June, 1991. The CIT was satisfied with the reply and held in para 22 of his order that the AO's order cannot be considered erroneous and prejudicial to the interest of Revenue on this account. However, he still chose to give directions to the AO to make appropriate enquiry with the financial institutions. It was submitted that such directions were not warranted and were beyond the jurisdiction.
Valuation of closing stock The CIT has stated that the closing stock of the finished goods as per Sechedule 7 of the balance sheet is Rs. 21.8 crores (refer p. 148 of paper book) whereas the average sale price of SAW pipes is Rs. 30,102 per MT (see p. 149 of paper book) which when multiplied by the closing stock of SAW pipes at Rs. 10,105 per MT (see p. 127 of the paper book) results in the value of closing stock of Rs. 30.41 crores. It has been stated by the CIT that the AO had not examined the aforesaid discrepancy and had accepted the closing stock of finished goods as shown by the appellant as a result whereof the order of the AO is erroneous and prejudicial to the interests of Revenue (refer paras 23 to 29 of CIT's order).
In response to this the Authorised Representative submitted as under :
(i) The method followed by the appellant for valuation of the closing stock is as per Accounting Standard 2 (AS 2) on 'valuation of inventories' issued by the Institute of Chartered Accountants of India (ICAI).
(ii) Computing the sale price of SAW pipes by dividing the aggregate sales by the quantity of SAW pipes sold during the relevant previous year and valuing the closing stock on that basis would lead to absurd result due to the following :
(a) the assessee produces various grades of SAW pipes having different costs and selling prices;
(b) the pipes remaining unsold at the close of the year; need not be in the ratio of the product mix sold during the year;
(c) in respect of closing stock meant for export, excise duty does not enter the valuation of cost thereof;
(d) the selling, finance and administrative expenses do not form part of the cost for the purpose of valuation of inventory but the same are taken into consideration while determining the sale price.
(iii) The sale price is to be adjusted by the amount of, selling expenses, finance expenses, administrative and other expenses, in addition to the profit margin, since while valuing closing stock of finished goods, the above factors have not been considered by the CIT while seeking to arrive at the closing stock valuation on a rough and ready basis. Also, excise duty has to be excluded from the sale price since 91 per cent of the closing stock of SAW pipes comprises stock meant for export and the exported goods do not include element of excise duty (see p. 94 of paper book).
A broad calculation was made by the appellant to explain that the aforesaid expenses work out to Rs. 14,150 per MT and if the same are excluded from sale price of Rs. 31,102 per MT, the average cost of SAW pipes sold would come to Rs. 15,952 per MT, which when applied for valuing closing stock would result in the closing stock of Rs. 16.11 crores, which compares favourable with the closing stock of Rs. 21.8 crores shown by the appellant. This was subsequently revised/rectified and the closing stock as per revised working was Rs. 21.53 crores which was more or less the same as the closing stock appearing in the audited accounts (see page No. 79 of the paper book).
(iv) The issue of closing stock valuation was also gone into by AO. He noticed that assessee's inventory as at the close of the accounting period was almost double as compared to the immediately preceding year whereas turnover of the assessee has become almost half of what it was in the immediately preceding year. He sought an explanation on this from the assessee. In reply to this assessee has submitted detailed reply giving the break-up of closing inventory as at the end of the relevant year (see page Nos. 6, 13 and 14 of the paper book).
In view of the aforesaid, the action of the AO accepting the closing stock valuation made by the appellant cannot be said to be erroneous and prejudicial to the interest of the Revenue.
(v) Also, even if the assessment order is held to be erroneous in this regard there is no prejudice caused to the Revenue, as the closing stock of one year constitutes the opening stock of the next year. Reliance is further placed on the case law stated earlier for the proposition that the order of the AO should not only be erroneous but also prejudicial to the interests of Revenue and if one of the two conditions is missing, power of suo motu revision under Section 263 of the Act cannot be exercised.
(vi) The CIT has stated that he is not deciding on merit the issue whether any addition to the closing stock of finished goods is to be made. As the CIT has to record a prima facie finding on merits, the revision under Section 263 of the Act was not warranted. The case law stated earlier for the aforesaid proposition are relied upon.
(vii) Reliance is further placed on the case law stated earlier for the proposition that merely because the AO has not recorded any specific finding on an issue in the assessment order and the assessment was completed after considering requisite information and after due verification, the assessment cannot be said to be erroneous and prejudicial to the interest of Revenue.
(viii) The CIT has stated that the appellant changed the method of valuation of inventories (refer note on Sechedule 22 of annual accounts at p. 142 of the paper book).
(ix) It has not been appreciated that the changed method was in accordance with the AS-II issued by the ICAI that had to be mandatorily followed, w.e.f. 1st April, 1999. The appellant has followed the same basis of valuation of inventory in the subsequent years as well. Further, CIT has also ignored the assessee's contention that as per point No. 7 of Part B of Standard 2 issued by the Central Government pursuant to powers conferred on it under Section 145(2), a change in the accounting method made by the assessee in compliance with the statutory compliance is permissible.
(x) It has been held by the Courts that bona fide change in valuation of closing stock which is as per the method recognised by the practising accountants and commercial world is to be accepted [refer CIT v. Carborandum Universal Ltd. (1984) 149 ITR 759 (Mad). Department's SLP against the aforesaid judgment was dismissed by the Supreme Court in (1991) 187 ITR (St) 38].
Claim of bad debt In the show-cause notice, the CIT required the appellant to show-cause as to why claim of bad debt of Rs. 6,19,12,759 allowed by the AO, on the basis of chartered accountant's certificate, without making enquiries and proper examination be not considered to be erroneous and prejudicial to the interests of Revenue.
In this regard it was submitted by the Authorised Representative that the said sum of money was due from a public sector company, M/s Hindustan Petroleum Corporation Ltd. Due to a dispute the said amount was withheld by them and never paid. In this connection during the course of assessment the appellant submitted a chartered accountant's certificate certifying that the said sum of money was shown as income in the preceding years and in the year under consideration has been duly written off in the books of account. The CIT has expressed his satisfaction over the reply of the appellant and in para 33 of his order has held that the assessment order is not erroneous and prejudicial to Revenue on this account. But, still, he chose to hold that AO may make necessary enquiries from HPCL. The Authorised Representative vehemently protested to such decision of the CIT and stated them to be unwarranted and beyond jurisdiction.
Disallowance of interest on borrowed funds The CIT in his show-cause notice has stated that assessee has claimed finance expenses amounting to Rs. 32.51 crores on borrowed funds. It has advanced a sum of Rs. 68.15 crores to its subsidiary companies and 48.90 crores by way of inter-corporate loans to other corporate bodies. The AO had allowed the entire claim of interest by accepting appellant's contention that the borrowed funds have no nexus with money advanced as loans without proper examination despite clear-cut legal pronouncements against assessee. The Authorised Representative submitted as under :
(i) As the AO had raised the issue of interest charged by the appellant on the loans given to subsidiary companies and had asked the appellant to state whether the same was more than or equal to the rate of interest paid by the appellant, it cannot be said that the AO had not applied his mind or made proper enquiries in respect of the above issue. No disallowance was made by the AO as the AO was satisfied with the appellant's reply that the average rate of interest on monies borrowed was more or less the same as charged on loans given and that in any case the borrowed funds had no nexus with monies advanced as loans.
The AO, however, disallowed substantial part of the interest expense by considering the same as capital expenditure in view of utilisation of borrowed funds for putting up new unit. The appellant's appeal against the aforesaid disallowance was allowed by CIT(A). The aforesaid issue of allowability of interest expense having been considered by the AO and also by the CIT(A), the revisionary powers of CIT in respect of the aforesaid issue were ousted having regard to the provisions of Section 263(1)(c) of the Act.
It has been held by the Courts in the following cases that revision under Section 263 of the Act is not warranted even where only a facet of a claim has been examined by the CIT(A) :
1. Oil India Ltd. v. CIT (1982) 138 ITR 836 (Cal)
2. CIT v. Salonah Tea Co. Ltd. (1992) 62 Taxman 51 (Cal)
3. Remex Construction v. ITO and Ors. (1987) 166 ITR 18 (Bom)
4. CIT v. Goodricks Group Ltd.
5. CIT v. First Leasing Co. of India Ltd. (1995) 216 ITR 455 (Mad)
6. P. Das & Co. v. Dy. CIT (1996) 217 ITR 29 (Gau)
7. Smt. Sujata Grover v. Dy. CIT (2002) 74 TTJ (Del) 347
8. Sahara India Mutual Benefit Co. Ltd. v. Asstt. CIT (2002) 74 TTJ (All) 67
9. ITO v. Ahmedabad Engg. & Services Co-op. Society Ltd. (1992) 44 TTJ (Ahd) 383
10. Desai Bros. Ltd. v. Dy. CIT (1998) 61 TTJ (Pune) 527 : (1998) 66 ITD 203 (Pune)
(ii) It has not been appreciated that :
(a) since all the loans were advanced in the past and no disallowance had been made in the past, no disallowance could be made in the relevant previous year. Reference is made to the following decisions in this regard :
(i) CIT v. Sridev Enterprises (supra)
(ii) CIT v. Tin Box Co. (2003) 260 ITR 637 (Del)
(iii) Motor & General Finance Ltd. v. Dy. CIT (supra)
(iv) Meenakshi Synthetics v. Asstt. CIT (supra)
(v) GR Agencies v. ITO (2003) 79 TTJ (Lucknow) 416
(vi) Malwa Cotton Spinning Mills (supra)
(vii) Usha Martin Industries Ltd. v. Dy. CIT (2003) 79 TTJ (Cal) 23 : (2003) 86 ITD 261 (Cal). (In the context of Section 263 of the Act).
(b) the assessee had substantial interest-free funds, share capital and reserves, and the aforesaid loans could be presumed to have been lent therefrom [refer : CIT v. Hotel Savera (1999) 239 ITR 795 (Mad), Motor & General Finance Ltd. v. Dy. CIT (supra)]
(c) the CIT has not established any nexus between borrowed funds and funds advanced to sister-concerns, which was necessary in order to make any disallowance. [Refer : ITO v. Universal Industries Trade Corporation (1995) 83 Taxman 350 (Mag)]. To the same effect are the following decisions of the Tribunal:
(i) Motor & General Finance Ltd. v. Dy. CIT (supra)
(ii) Shahibag Enterprises (P) Ltd. v. ITO (1994) 49 TTJ (Ahd) 554
(iii) Beta Napthol (P) Ltd. v. Dy. CIT (1994) 50 TTJ (Ind) 375
(iv) Pragati Construction Co. v. Dy. CIT (1997) 93 Taxman 86 (Del)(Mag)
(v) Devisahai Banwari Lal v. ITO (1997) 94 Taxman 232 (Del) (Mag)
(vi) ITO v. Universal Ind. Trading Corporation (1995) 83 Taxman 350 (Bom)(Mag)
(vii) Meenakshi Synthetics (P) Ltd. v. Asstt. CIT (supra)
(viii) Malwa Cotton Spinning Mills (supra)
(ix) Usha Martin Industries Ltd. v. Dy. CIT (supra)
(x) Motor & General Finance Ltd. v. Dy. CIT (supra) The decision of Delhi High Court in the case of CIT v. Motor General Finance Ltd. (2002) 254 ITR 449 (Del), relied upon by the CIT has been set aside by the Supreme Court in Motor General Finance v. CIT (2004) 267 ITR 381 (SC).
(d) it has been held in the following cases that in case of mixed funds the option is with the assessee to appropriate the funds and expenditure in a manner most favourable to the assessee :
(i) India Explosives Ltd. v. CIT (1984) 147 ITR 392 (Cal)
(ii) Alkali & Chemicals Corporation of India Ltd. v. CIT (1986) 161 ITR 820 (Cal)
(iii) Woolcombers of India Ltd. v. CIT (1982) 134 ITR 219 (Cal)
(iv) East India Pharmaceutical Works v. CIT (1997) 224 ITR 627 (SC)
(v) Marinite Polycast Ltd. v. Asstt. CIT (1995) 53 ITD 345 (Del)
(vi) Pramod S. Talwalkar (HUF) v. Asstt. CIT (2001) 70 TTJ (Pune) 436 : (2000) 75 ITD 492 (Pune)
(vii) Dy. CIT v. Chloride Ind. Ltd. (2001) 70 TTJ (Cal) 407 : (2001) 76 ITD 1 (Cal)
(viii) Dy. CIT v. Amrit Banaspati Co. Ltd. in ITA No. 5442/Del/1994.
(e) the appellant has paid interest on borrowed funds ranging between 13 to 17.86 per cent whereas it has earned interest on monies advanced in the range of 13.2 to 19 per cent. The appellant has on an average charged interest @ 16 per cent, except in the case of two companies where the interest has been charged @ 13.2 per cent and 15 per cent, which is commensurate with the average rate of lending.
(f) out of the total amount advanced, i.e., Rs. 117.05 crores, interest has not been charged only in respect of Rs. 6.10 crores lent to Jindal Seamless Ltd. due to poor financial position of that company.
(iii) The fact that the financial position of Hexa Securities is bad and the interest accrued by the appellant from that company during the relevant previous year may not be recovered are mere conjectures on part of the CIT and not relevant to determine whether the assessment order was erroneous or prejudicial to the. interest of the Revenue.
(iv) The fact of the appellant having earned meager dividend income from investment in shares is also not relevant and no adverse inference can be drawn from the aforesaid observations of the CIT.
(v) The decisions of the Delhi High Court in the cases of Duggal & Co. v. CIT (supra), Gee Vee Enterprises v. Addl. CIT (supra) and Karnataka High Court in Thalibhai F. Jain v. ITO (supra) referred to by the CIT in the above regard are distinguishable on facts.
(vi) It had been held in the following cases that merely because the AO has not dealt with certain issues or recorded specific finding in the assessment order, it cannot be held that there is no application of mind by the AO to the facts and details before him :
(i) CIT v. Ratlam Coal Ash Company (1988) 171 ITR 141 (MP)
(ii) CIT v. Shri Govindram Seksariya Chanty Trust (1987) 166 ITR 580(MP)
(iii) CIT v. Arvind Jewellers (2003) 124 Taxman 615 (Guj)
(iv) Srinivasa Hatcheries (P) Ltd. v. Dy. CIT (2002) 81 ITD 36 (Hyd)
(v) Sahara India Mutual Benefit Co. Ltd. v. Asstt. CIT (2002; 74 TTJ (All) 67
(vi) Nirmal Kumar Sheel Kumar Jain v. ITO (2000) 71 TTJ (Jab) 494 : (2002) 111 Taxman 185 (Jab)(Mag)
(vii) Indian Hotels Co. Ltd. v. Dy. CIT (2000) 68 TTJ (Mumbai) 706 : (1999) 107 Taxman 205 (Mumbai)(Mag)
(viii) Vidisha Tractors v. Asstt. CIT (1995) 53 TTJ (Ind) 432
(ix) Sunil Lamba v. Dy. CIT (2004) 83 TTJ (Del) 174 : (2003) 131 Taxman 35 (Del)(Mag)
(x) CIT v. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del)(FB).
(vii) The CIT has alleged that the appellant has not filed copies of accounts of inter-corporate loans which is not correct. The same were filed by the appellant before the AO and the CIT (refer pp. 16 to 24 of the paper book).
(viii) It has been held in the following cases that where the assessment was completed after considering all requisite information filed by the assessee and assessment was made after due verification, the same cannot be said to be erroneous :
(i) CIT v. Girdhari Lal (2002) 258 ITR 331 (Raj)
(ii) CIT v. Ratlam Coal Ash Company (supra)
(iii) Plastic Concern v. Asstt. CIT (1998) 61 TTJ (Cal) 87
(iv) Ashoke Kumar Parasramka v. Asstt. CIT (1998) 61 TTJ (Cal) 156 : (1998) 65 ITD 1 (Cal)
(v) CIT v. Hastings Properties (2002) 119 Taxman 36 (Cal)
(vi) Manohar Lal Naresh Kumar v. Asstt. CIT (1996) 89 Taxman 240 (Asr)(Mag)
(vii) Kewal Ram Chauhan v. ITO (1997) 91 Taxman 167 (Chd)(Mag)
(viii) Hindustan Marketing & Advertising Co. Ltd. v. ITO (1989) 28 ITD 231 (Del)
(ix) Shivam Leasing & Finance Ltd. v. ITO (1993) 63 Taxman 211 (Del)(Mag)
(x) Triveni Engg. Works Ltd. v. Dy. CIT (2004) 87 TTJ (Del) 93 : (2003) 131 Taxman 32 (Del)(Mag)
(xi) Sunil Lamba v. Dy. CIT (supra)
(xii) Amrik Singh v. ITO (2003) 127 Taxman 87 (Chd)(Mag)
(xiii) Baljees v. Asstt. CIT (2004) 85 TTJ (Chd) 543 : (2003) 127 Taxman 150 (Chd)(Mag)
(ix) The main thrust of the CIT's objection is that AO had failed to examine the nexus between borrowed funds and money, and for this he relied on case law as mentioned supra in his show-cause notice. This contention is totally erroneous as interest was charged on money advanced by way of loan, therefore, no question arose for establishing such nexus.
Commission payment of Rs. 206.34 lakhs The CIT's objection on this issue was that the AO has allowed the said expenditure without making any inquiries from the appellant in this regard.
The Authorised Representative submitted that this contention of the CIT is not correct inasmuch as the details of parties to whom commission was paid abroad were given with reasons as to why TDS was not deducted. The amount of commission paid was as per past practice and was comparable with the preceding year's payment and did not call for any detailed investigation. Therefore, there was no error on the part of the AO in accepting such claim of the assessee. He further pointed out that it is not necessary for the AO to specifically record his satisfaction for acceptance of each and every claim of the assessee in the assessment order and neither it is possible. In this regard he drew our attention to the Full Bench decision of Hon'ble Delhi High Court in CIT v. Kelvinator of India Ltd. (supra), where the High Court stated as under :
"We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded, an analysis of the materials on the record by itself may justify the AO to initiate a proceeding under Section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of Section 143. When a regular order of assessment is passed in terms of the said Sub-section (3) of Section 143, a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of Clause (e) of Section 114 of the Indian Evidence Act, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong."
The learned Authorised Representative further stated that the CIT was, therefore, unjustified in restoring this aspect of the matter back to the AO.
10. On the other hand, the learned CIT (Departmental Representative) vehemently supporting the order of the learned CIT stated that the decision taken by him needs to be upheld as the AO did not conduct proper enquiries as pointed out in detail by the learned CIT in his order dt. 23rd March, 2004. He further stated that if proper inquiries are not conducted then the order becomes erroneous and the CIT is well within his right to set aside the same invoking his powers under Section 263 of the Act. In support of his arguments the learned Departmental Representative has also submitted a paper book raising the contentions supported by precedents as under:
"A. Case law supporting CIT's action :
Malabar Industrial Co. Ltd. v. CIT (supra)
--An order passed without application of mind or an order based on incorrect appreciation of facts is erroneous inasmuch as it is prejudicial to the interests of the Revenue.
Rampyari Devi Saraogi v. CIT (1968) 67 ITR 84 (SC) Smt. Tara Devi Aggarwal v. CIT (1973) 88 ITR 323 (SC)
--AO's failure to make the inquiries which were called for in the circumstances of the case is erroneous inasmuch as it is prejudicial to the interests of the Revenue.
Duggal & Co. v. CIT (supra) Gee Vee Enterprises v. Addl. CIT (supra) Thalibai F. Jain v. ITO (supra)
--AO's failure to make the necessary inquiries makes the order erroneous inasmuch as it is prejudicial to the interests of the Revenue.
Taiajan Tea Co. (P) Ltd. v. CIT (1994) 205 ITR 45 (Gau)
--A decision taken without considering the relevant aspects of a particular point would certainly be erroneous and such a decision in favour of the assessee without such consideration would be prejudicial to the interests of the Revenue.
B. Facts supporting CIT's action :
The AO made incorrect assumption of facts. He also failed to (i) apply his mind and (ii) make necessary inquiries that he was required to do, as discussed in the order under Section 263, and particularly on the following points :
(i) Assessee's claim of finance cost :
The assessee claimed substantial finance cost. The gross finance cost was Rs. 51.42 crores, however, after setting off interest of Rs. 18.90 crores receivable by the assessee, the net finance cost of Rs. 32.51 crores was debited to its P&L a/c. Primarily due to this, substantial operating profit during the year was converted to net loss.
The AO only made perfunctory examination of this claim and failed to make proper inquiries despite the following disquieting feature :
(a) The assessee had given huge advances (Rs. 172 crores as on 31st March, 2000) to its subsidiary and other group companies. It had also made substantial investment (Rs. 67 crores) in the shares of these companies. It was necessary to inquire whether any borrowed funds were advanced/invested in these companies.
(b) A major portion of the interest receivable (Rs. 12.94 crores, on Rs. 68.15 crores advanced to it) was shown from Hexa Securities & Finance Company Ltd., a subsidiary, which had huge accumulated losses. Chances of actually receiving any money from this company were bleak. In similar situations, the assessee had stopped showing any interest income from another group company, namely, Jindal Seamless Tubes Ltd. It was necessary to inquire whether any borrowed funds were advanced to Hexa Securities.
(c) It was also necessary to inquire whether or not accounting for interest income in respect of money advanced to Jindal Seamless Tubes Ltd., (Rs. 610.13 lakhs) was correct.
(d) The assessee had claimed Rs. 14.45 crores as bank and finance charges. No examination whatsoever was done in regard to the correctness of this claim. Even the details of these charges were not obtained.
(e) Though average interest rate on borrowings was 17 per cent, money was advanced to group companies at 13 and 15 per cent.
(ii) Assessee's claim of exemption under Section 10(33) :
The assessee had claimed exemption under Section 10(33) in respect of dividend income amounting to Rs. 46.87 lakhs. He accepted the claim without any examination, without even obtaining the details of these dividends, despite several disquieting features as discussed in the order under Section 263.
(iii) Serious discrepancies in stock and quantitative tally :
As discussed in the order under Section 263, the AO made no inquiry whatsoever into what prima facie appeared to be serious discrepancies in the assessee's quantitative tally and valuation of closing stock. He also failed to take notice of adverse notes in the note on accounts as mentioned in the assessment order.
(iv) Assessee's claim of payment of commission As mentioned in the order under Section 263, the AO made no inquiry into the assessee's claim of commission payment despite disquieting features. He did not even obtain details of commission paid."
He further stated that :
(a) There is no bar of the applicability of Section 14A for the year under consideration. He clarified that the proviso to Section 14A is applicable on assessment completed before the induction of Section 14A into the Act and did not apply to assessment completed after the induction of the said section in the Act,
(b) In respect of the issue of allowance of interest claim, the learned CIT/Departmental Representative stated that doctrine of merger as contended by the learned Authorised Representative does not apply as the issue before CIT(A) with respect to interest was different than the issue of interest considered by the learned CIT in Section 263 proceedings
(c) He also countered Authorised Representative's argument that to invoke the provisions of Section 263 two conditions are mandatory, i.e., (i) the order should be erroneous and (ii) should also be prejudicial to the Revenue. He stated that once there is no inquiry by the AO the order becomes erroneous and the provisions of Section 263 are attracted. For this proposition he relied on the apex Court decision in Malabar Industrial Co. Ltd. v. CIT (supra) and other decisions as submitted by him in the paper book.
11. In rejoinder, the learned Authorised Representative pointed out that reliance placed by learned Departmental Representative on the decision in the case of Malabar Industrial Co. Ltd. v. CIT (supra) for the proposition that non-application of mind makes an order erroneous and prejudicial, is misplaced. The apex Court has very categorically stated that the order should be both erroneous and prejudicial. In this case the assessee has considered receipt in modification of terms of contract of sale of estate of rubber plantation as agricultural income. There was no material before the AO to accept assessee's said claim, therefore, the order was erroneous. Further, in the very last sentence of the judgment it has been held that the said receipt is taxable as income from other sources. Therefore, both the conditions were present, i.e., incorrect assumption of facts and loss of revenue by treating the taxable income as exempt.
11.1 Further, learned Authorised Representative pointed out that reliance placed on the two apex Court decisions in Rampyari Devi Saraogi v. CIT (supra) and Tara Devi Aggarwal v. CIT (supra) is also not well founded. From the facts of these cases it is very clear that on the very face the acceptance of assessee's return was erroneous. In both the cases AO who passed the assessment orders never had the jurisdiction over the assessee. Further, on enquiry, it was revealed that the assessee never stayed at the addresses as disclosed in the return and they were the addresses from where the business activities of their husbands and in-laws were conducted. The initial capital was accepted without verification, which was supposed to have come from gifts and sale of jewellery received during marriage. In one of the cases the assessment order was passed on the same day when the return was filed. The money so built up was invested in husband's business so as to justify investment of undisclosed money in their business. Had that amount been taxed in their hands the same would have been taxed at a higher amount, therefore, prejudice was caused due to loss of revenue and the twin conditions were applicable. The same will be apparent from the undermentioned passage of the apex Court decision in Tara Devi Aggarwal's case (supra).
"Even where an income has not been earned and is not assessable, merely because the assessee wants it to be assessed in his or her hands in order to assist someone else who would have been assessed to a larger amount, an assessment so made can certainly be erroneous and prejudicial to the interests of the Revenue. If so--and we think it is so--the CIT under Section 33B has ample jurisdiction to cancel the assessment and may initiate proceedings for assessment under the provisions of the Act against some other assessee who according to the IT authorities is liable for the income thereof."
11.2 It was also pointed out that in Rampyari Devi Saraogi's case (supra), the reasons for approving the CIT's order under Section 263 have not been given as the Court followed its unreported judgment in Kalawati Devi Harlalka v. CIT and the only issue which the Court considered was whether the assessee was given proper opportunity by the CIT before setting aside the assessment.
11.3 In Gee Vee Enterprises (supra), the Court dismissed the writ petition of the appellant in limine by holding that the writ petition is not maintainable in lieu of the availability of alternative remedy and it did not go into the merits of the case. Therefore, the abstract from the judgment relied by the learned CIT has been quoted out of context.
11.4 In Thalibai F. Jain v. ITO (1975) 101 ITR 1 (Kar), twelve writ petitions were filed before the Hon'ble High Court challenging the set aside of assessment orders by the CIT in exercise of his powers under Section 263. All these cases pertain to ladies who have invested money in the business of their husbands. They all have shown accumulation of amount by doing money-lending business out of money received at the time of marriages as gift. In all these cases assessments were made on the same day on which the returns were filed. The contention of the CIT was that no enquiry has been conducted by the AO about the receipt of initial capital as donation; neither the names of the persons are available to whom the money has been lent. The exercise has been done to support the use of funds in their husband's business. The counsel admitted that the order is prejudicial, as assessee wants to be taxed by declaring income belonging to somebody else. However, his contention was that the order is not erroneous since the AO had the power to accept returns under Section 143(1). Therefore, he could make an assessment without conducting an enquiry. Since the assessments were made legally they cannot be called erroneous. Consequently, there was the absence of second condition and, as such, the power under Section 263 cannot be exercised. In such circumstances, the Court held that the AO has to assess income in a particular assessment year, only for that year. Since the assessee has filed the return of past years also on the same day by spreading that income, it was incumbent on the AO to atleast find out whether the incomes are of those years or not. To this extent, the orders are erroneous and satisfy the second condition. The learned Departmental Representative was wrong in stating that the Court had approved the proposition that provisions of Section 263 can be invoked merely on account of non-application of mind. He fails to appreciate that the counsel of the appellant himself had admitted in this case that the assessment order was prejudicial. In fact, this decision supports the contention of the appellant that twin conditions are required to be satisfied before invoking the provisions of Section 263, viz., (1) that the assessment order should be erroneous, and (2) the same should be prejudicial to the Revenue.
11.5 In Duggal & Co.'s case (supra) assessee has borrowed money @ 9 to 12 per cent and advanced money to a sister-concern @ 4 per cent. ITO allowed the entire expenditure of interests. It was not the case of the assessee that the money has been lent for business purposes or out of own funds. In such circumstances, AO was required to make enquiries before allowing the assessees claim of interest expenditure.
11.6 Regarding facts he stated that the contentions being raised in the submissions of the learned Departmental Representative are the same as mentioned in the order of learned CIT and the appellant has already addressed in his arguments. However, he pointed out that the learned Departmental Representative is totally wrong in stating that serious discrepancies were noticed in the valuation and quantitative tally of stock. The learned CIT in his order has nowhere stated that there was discrepancy in quantitative tally of stock. In valuation also the objection of learned CIT was that the AO did not make proper enquiries on which written reply of the appellant has also been placed on record.
12. We have heard the parties with reference to material and precedents on record. The powers of CIT for revision of the order of an AO are contained in Section 263 of the IT Act, 1961, which is reproduced as under :
"263. Revision of orders prejudicial to Revenue.--(1) The CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar 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.
Explanation--..."
13. From the perusal of the above provision it is very clear that before a CIT can exercise his right to enhance, modify or cancel the assessment and direct fresh assessment, he has to satisfy the undermentioned twin conditions :
(1) That the order of assessment is erroneous and (2) It is be prejudicial to the interest of the Revenue.
If one of these conditions is absent, then revision cannot be done. This position becomes amply clear by the following passage of the apex Court as propounded in the case of Malabar Industrial Co. Ltd. v. CIT (supra) cited at Bar and also referred by learned CIT in his order :
"A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the CIT suo motu under it is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The 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 Section 263(1) of the Act."
14. The apex Court in the aforesaid judgments has also clarified that erroneous would mean :
"There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category falls orders passed without applying the principles of natural justice or without application of mind."
It also clarified that prejudicial to the interest of Revenue would mean :
"The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain and Anr. (1957) 31 ITR 872 (Cal), the High Court of Karnataka in CIT v. T. Narayana Pai (1975) 98 ITR 422 (Kar), the High Court of Bombay in CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) and the High Court of Gujarat in CIT v. Smt. Minalben S. Parikh (1995) 215 ITR 81 (Guj) treated loss of tax as prejudicial to the interests of the Revenue."
15. In the light of the above settled legal position the learned CIT cannot be said to be justified in holding that if the necessary enquiries were not done by AO the order becomes erroneous and automatically it shall also be prejudicial to the interest of the Revenue. Due to this fallacy in his argument he does not appear to have gone into the merits of the assessee's claim so as to find out whether any prejudice in fact has been caused to the Revenue or not by lack of enquiry on the part of the AO. The relevant paras of the order of learned CIT on each of the issue where he has held that he is not supposed to look into the merits of the claim are referred in para 7 hereinbefore. If no loss of revenue is caused and the result remains the same even after conduct of proper enquiry, no purpose would be served to order such reinvestigation. Our this view finds support from the following decisions :
(i) In the case of J.P. Srivastava & Sons v. CIT (supra), the Allahabad High Court held as under :
"Now, reverting to the merits of the case, we find that the only ground upon which the action was taken by the CIT under Section 33B was that the ITO did not apply his mind to the claim of the assessee as contained in Part D of the return. The CIT himself did not apply his mind to the merits of the claim. In fact, the CIT has specifically refrained from going into the merits. In para 7 of his order, he has observed :
'I consider that it will be in the fitness of things if the ITO's order dt. 7th March, 1964, is cancelled because no attention was paid to the item mentioned in Part D of the return dt. 23rd Sept., 1960. The question of considering the merits does not arise at this stage, since the ITO has not applied his mind and come to any conclusion, one way or the other.' We are of opinion that the approach of the CIT is erroneous. The failure of the ITO to deal with the claim of the assessee in the assessment order may be an error, but an erroneous order by itself is not enough to give jurisdiction to the CIT to revise it under Section 33B. It must further be shown that the order was prejudicial to the interests of the Revenue. It is not each and every order passed by the ITO which can be revised under Section 33B.
Section 33B contemplates a notice to the assessee. In response to the notice the assessee may show to the CIT that the order sought to be revised is not prejudicial to the interests of the Revenue. In that event, the CIT would have no jurisdiction to take any further action. He would be competent to take action only if he rejects the plea of the assessee. It thus becomes necessary for the CIT to examine the merits of the objection raised by the assessee. He cannot delegate that power to the ITO by setting aside the assessment order and directing him to make a fresh assessment after taking into consideration the objection of the assessee.
(ii) In the case of CIT v. R.K. Metal Works (1978) 112 ITR 445 (P&H), the Punjab & Haryana High Court has held as under :
"A perusal of the order of the CIT clearly shows that the criticism of the Tribunal is well founded. There is no indication in the order of the CIT as to the basis on which he came to the prima facie conclusion that the capital borrowed by the firm was utilised for purposes other than that of the firm's business. When the assessee filed a detailed written statement before him, the CIT did not deal with any of the points raised in the statement. He thought that the best course in the circumstances was to remand the matter to the ITO for consideration of the points raised in the assessee's written statement. That certainly was not the proper course to be adopted by him. It was necessary for the CIT to state in what manner he considered that the order of the ITO was erroneous and prejudicial to the interests of the Revenue and what the basis was for such a conclusion. After indicating his reasons for such a conclusion, it would certainly have been open to him to remand the matter to the ITO for such other investigation or enquiry as might be necessary. But, that was not the course which the CIT pursued. The Tribunal was, therefore, justified in setting aside the order of the CIT."
(iii) Similarly, in the case of CIT v. Chawla Trunk House (supra), the Punjab & Haryana High Court held as under :
"We agree that the ITO's order of assessment was erroneous by reason of the aforesaid omission, but it was necessary for the learned CIT to give a finding that the assessment order was prejudicial to the interests of the Revenue. In the instant case, no such finding is available in the impugned order nor was the learned Departmental Representative able to point out any material on record to show that the total income-tax to be assessed in the instant case should have been at a figure higher than the one at which the ITO completed the assessment. In this view of the matter, we hold that the ITO's order is not shown to be prejudicial to the interests of the Revenue."
(iv) On similar lines the Allahabad High Court in the case of CIT v. Kashi Nath & Co. (1988) 170 ITR 28 (All) held as under :
"The power of the CIT under Section 263 is quasi-judicial in character. He must give reasons in support of his conclusion that the assessment order is erroneous insofar as it is prejudicial to the interests of the Revenue. If he does not give reasons, the order would be vitiated. This was the view taken by this Court in the cases of J.P. Srivastava & Sons Ltd. v. CIT (supra) and CIT v. Late Sunder Lal Through Bankey Behari Lal (1974) 96 ITR 310 (All).
In the instant case, since the CIT has not applied his mind to the relevant material on record and has not given reasons for his conclusions that the assessment order was prejudicial to the interest of the Revenue, the Tribunal was justified in reversing that order."
(v) Similarly, the Punjab & Haryana High Court in the case of CIT v. Kanda Rice Mills (supra) held as under :
"A reading of the entire order of the CIT clearly goes to show that he did not furnish his opinion or consider the cited cases or the argument raised and merely observed that these were the points which deserved consideration and after setting aside the order of the ITO, issued a direction for making assessment afresh. This is not permissible under the provisions contained in Section 263 of the Act. The CIT had to come to a firm decision that the order of the ITO was erroneous and was prejudicial to the interests of the Revenue. Since no decision about the erroneous nature of the order was firmly taken, the Tribunal was right in vacating the order. Accordingly, we answer the question in favour of the assessee, that is in the affirmative, with no order as to costs."
(vi) The Gujarat High Court in the case of CIT v. Rayon Silk Mills (1996) 221 ITR 155 (Guj) held that :
"It is an essential condition for exercise of the power under Section 263 that the CIT must find that the error which is found in the order of the ITO is prejudicial to the interests of the Revenue. The prejudice which has been held to be contrary to the interests of the Revenue is stated to be the only one, namely, in not holding enquiry into the goodwill account by the ITO and not on any other grounds. The conclusion of the CIT that the order is prejudicial to the interests of the Revenue is not a matter of subjective satisfaction of the CIT. That is to be founded on the objective material after assessing the contentions raised by the assessee on opportunity of hearing being afforded to him before passing the order.
Therefore, in our opinion, the conclusion of the Tribunal in affirming the decision of the CIT that the order of the ITO for the asst. yr. 1974-75 was erroneous for want of making enquiry, and is otherwise prejudicial to the interests of the Revenue is not well founded in law."
16. In the light of principles set out in the aforesaid judgments, it will be wrong to say that merely because proper enquiry was not conducted, the assessment would become prejudicial also. It was incumbent upon the learned CIT to; have shown as to how the order was prejudicial to the interests of Revenue. The appellant has furnished a detailed reply to the show-cause notice by making reference to the facts of the case. Despite that, learned CIT did not deal with any of the points raised in the assessee's written statement. He is rather found emphatically stating that I am not deciding the merit of the question whether any disallowance was called for or not, or that I am only concerned with the question whether the AO applied his mind to the issue. The conclusion of the learned CIT that the order is prejudicial to the interests of Revenue is not a matter of subjective satisfaction of the CIT. He, therefore, ought to have found out this on the basis of objective material after assessing the contentions raised by the appellant in his reply to the show-cause notice. He, however, did not do this but reached a conclusion that the order was prejudicial with a view that the present AO shall undertake that exercise after the assessment has been set aside for his consideration. Such a view is not well founded in law and accordingly action taken by the learned CIT is liable to be set aside.
17. On merit on the first issue of disallowance on dividend received invoking provisions of Section 14A, the learned CIT had issued a show-cause notice on the contention that no disallowance has been made out of dividend income keeping in view the provision of Section 14A of the Act. The learned CIT has mentioned that there has been a significant change in the composition of investment in shares of appellant during the year inasmuch as shares of Jindal Steel & Power were acquired for Rs. 5.44 crores and shares of Jindal Strips Ltd. were reduced from 8,71,793 shares to 5,23,076 shares. This finding of the learned CIT, when compared with the schedule of investment given in the balance sheet itself, shows that these shares have increased and decreased due to business reorganisation and not due to any purchase and sale of shares. We further find that instead of giving specific finding of investment of borrowed funds in shares, the learned CIT has digressed the issue by going into the assessment records of asst. yr. 1995-96 and quoted from appellant's reply that substantial amount of investment was made in asst. yr. 1995-96 out of borrowed funds when ICD increased during that year from Rs. 22.91 crores to Rs. 110.85 crores. Nothing turns against appellant on this finding of CIT. It only strengthens appellant's explanation before him that no major investment has been made in last five years. The learned CIT does not say that the assessee utilised whole of borrowings of Rs. 110.85 crores made in asst. yr. 1995-96 towards making investment in shares in that year, though the appellant maintains that it used such borrowings for other business purposes also and investment to the extent of Rs. 67.22 crores was utilised out of such borrowed funds. Substantial portion of such borrowings stood repaid in the preceding years out of internal accruals of the appellant-company and nothing was brought on record by the learned CIT that the investment in shares outstanding in the year under consideration was represented by way of such unpaid outside liability on which interest was payable. Under such circumstances, what remains relevant to be considered is whether the appellant made any investment out of borrowed funds in. the year under consideration which would call for disallowance by operation of provisions of Section 14A of the Act. The appellant's case is that all its present borrowings are for earmarked purposes and none of them was for investment in shares. Further, all the present borrowings had been made after the investments were made. No major investment has been made in last five years. While dealing with this issue, the learned CIT has also dealt with the aspect of advancing loans to subsidiary and other companies, which he has alleged that the AO has not examined. We fail to understand how advancing of loans to subsidiary and other companies have any bearing on the question of deduction of interest from the dividend income. If at all this issue is relevant it will be relevant in the context of allowability of interest expenditure and not in the context of attribution of interest cost to earning of dividend. It is also pertinent to note that in the immediately succeeding year, i.e., in asst. yr. 2001-02, AO has specifically looked into the applicability of Section 14A and has made no disallowance. Further, in the preceding years also there has been no disallowance of interest against dividend income. Applying the rule of consistency, no disallowance was called for unless there has been material change in the facts. The CIT in his order has not brought out any change in the facts and thus on this plea also no disallowance was called for. We also agree with the plea of the learned Authorised Representative that dividend is a dormant income and no efforts or expenses are required to earn the same. This view is also supported by the decision of Calcutta Bench of the Tribunal in the case of Usha Martin Investment Ltd. v. Dy. CIT (supra). We, therefore, do not agree with learned CIT that the AO committed any error in not applying provisions of Section 14A in the present case.
18. Second issue relates to disallowance of interest expenditure. The learned CIT has alleged that the appellant has advanced huge sum of money to its subsidiary and other corporates, body and has claimed huge amount of interest expenditure of Rs. 32.51 crores. AO was required to examine this aspect in detail which he has failed to do.
18.1 From the perusal of Sechedule 20 of the balance sheet pertaining to finance expenses placed at p. 138 of the paper book, i.e., paper book as well as p. 87 of the paper book, it would be apparent that the total finance expenses are of Rs. 51.41 crores and a sum of Rs. 18.90 crores pertaining to interest received has been reduced from the same, and a net finance expenses of Rs. 32.51 crores has been claimed as an expense. It is thus not a case where funds have been advanced interest-free. The appellant have filed details of the borrowings in the paper book showing that the same have been borrowed @ 13 to 17.86 per cent whereas money has been lent @ 16 per cent and the main lending is to subsidiary company, Hexa Securities & Finance Co. Ltd., of Rs. 68.15 crores @ 19 per cent interest; besides this the money had also been lent to Padmini Holdings Pvt. Ltd. @ 15 per cent and Jindal Equipment & Leasing Ltd. @ 13.2 per cent.
18.2 The learned CIT has further alleged that the appellant has advanced a sum of Rs. 68.15 crores to M/s Hexa Securities Ltd., a subsidiary company, and has also invested a sum of Rs. 25 crores in its share capital. More than Rs. 100 crores have been advanced to this company and it is doubtful whether the said amount would be realisable. We are not able to appreciate how in the opinion of learned CIT a bad financial investment of funds, if made, can be a relevant factor in determination of assessable income of an assessee during a particular year. The settled principle of law is that a business has to be run as per the decision made by the assessee and not as per whims and fancies of the Revenue authorities. Further, we are not able to understand how learned CIT can object to appellant's act of declaration of interest income of Rs. 12.94 crores on money advanced to M/s Hexa Securities. Declaration of certain income can by no stretch of imagination be prejudicial to the interest of Revenue unless the same does not belong to him. At the same breath he has objected to non-accounting of interest on loans advanced for Rs. 6.10 crores to M/s Jindal Seamless Tubes Ltd. due to their poor financial health. We also do not agree with the learned CIT that AO has not examined the details and rate of interest on loans and advances made to subsidiary and other corporate bodies. The learned CIT in para 12 of his order has narrated that the AO vide letter dt. 14th Jan., 2003, did call for the relevant informations from the appellant and the same were duly filed. We also find considerable weight in appellant's argument that all the secured loans are earmarked (as per the details filed at p. 83 of paper book) and cannot be utilised for investment or making loans. In any case appellant had interest-free and own funds of Rs. 209.74 crores which would take care of investment in shares of Rs. 67.22 crores and interest-free lending of funds at lower rate.
18.3 There is another aspect on this issue. From a perusal of para 20 of the order of learned CIT, it "will be clear that out of a claim of interest expenses AO has disallowed a sum of Rs. 3.20 crores pertaining to loans used in installation of new unit. This disallowance has been deleted by the learned CIT(A)-X, New Delhi, vide her order dt. 7th Aug., 2003, which is placed at pp. 32 to 41 of the paper book. Since issue of allowability of interest has been examined by the learned CIT(A), the CIT's jurisdiction to examine that issue or any other aspect related to that issue under Section 263 stands ousted. We may clarify here that the issue before the learned CIT(A) was allowability of interest under Section 36(1)(iii) pertaining to funds used in erection of new unit and the issue raised by the learned CIT in Section 263 proceedings was interest attributable to investment of funds in shares and disallowability of interest to the extent of advancement of loans to subsidiaries and other companies at lower or nil rate. However, as per the theory of merger, once an issue has been considered by learned CIT(A), all aspects of that issue would be deemed to have merged with it and no aspect related to that issue can be considered by the learned CIT in proceedings under Section 263. This has been amply clarified in the judgments of Oil India Ltd.. v. CIT (supra), Remex Construction v. First ITO and Ors. (supra), CIT v. First Leasing Co. of India Ltd. (supra) and P. Das & Co. v. Dy. CIT (supra). The learned CIT, therefore, had no jurisdiction to direct a revision on the issue of disallowance of interest claimed and allowed as an expenditure to the appellant or in holding that the order of the AO was erroneous on this issue.
19. Next issue relates to disallowance under Section 43B of the Act. In Annex. G to the tax audit report filed along with return of income, the tax auditor has given details of amount outstanding as at close of the financial year and has also certified their dates of payment. This annexure is placed at p. 93 of the paper book. The major amount is towards interest to financial institution and balance is towards bonus and professional tax. We find that once the tax auditor has certified the payments, no further evidence was needed in this respect. It is also pointed out that CBDT has accepted this position in its Circular No. 601, dt: 4th June, 1991. We also find that the learned CIT in his order vide para 22 has himself very clearly expressed that the order cannot be said to be erroneous and prejudicial on this ground. He still went on to hold that AO may call for certificates of payment from financial institutions. This was unnecessary and, as such, order of AO could not be revised.
20. As regards the issue of bad debts also, the learned CIT in para 33 of his order has expressed his satisfaction that the appellant's claim of bad debts of Rs. 6.19 crores is correct and the assessment order cannot be called erroneous and prejudicial on this account but still in para 34 of his order he went on to hold that AO may make proper enquiries in this regard also. Again, this part of the CIT order is beyond jurisdiction and, as such, the order of AO could not be revised.
21. On the issue of valuation of stock, the learned CIT picked up the figure of total quantity of saw pipes sold from the balance sheet of the appellant and divided the same by the total sale amount of saw pipes, and worked out sale value of Rs. 30102 per metric tonne. He then multiplied this rate with the closing stock quantity of saw pipes 10,105 MT and held that the value of closing stock comes to Rs. 30.41 crores as against Rs. 21.80 crores shown by the appellant in his accounts. He, therefore, inferred that prima facie there appears to be a discrepancy in the value of closing stock, which AO needed to have enquired. We do not concur with this approach of the learned CIT. An order to be erroneous and prejudicial has to be found out on the basis of some material and cannot be based merely on the guesswork, as has been done by the learned CIT. The closing stock valued on the basis of cost and sale price, has no relevance with it. The appellant had explained the difference to the CIT on account of the fact that this year 91 per cent of its stock comprises of goods meant for export whereas 80 per cent of the sales during the year was in the domestic market. The prices in domestic market are higher than the export price because the export sales do not have an element of excise duty. Further, the stock comprises of various grades, therefore, by dividing the total quantity sold with sale value, no price of pipes can be worked out, nor any conclusion can be drawn from such average sale value. However, the learned CIT refused to consider the appellant's argument on the plea that he is not considering the merits of the case. By such an approach, saying that there was an error in valuation of closing stock shall not be correct nor justified. The CIT has further pointed out that during the year appellant has changed his method of valuation of stock. Inasmuch as for determination of cost, the appellant has not considered selling expenses, finance expenses and administration and other expenses. Furthermore, the change has been disclosed in Point No. 8 of Sechedule 22 of balance sheet and there is noting glaring about it. Such a change was made in compliance with the provisions of Accounting Standard 2 (made effective from 1st April, 1999) on valuation of inventory, which prescribes that the above item should not be considered while determining cost for the purpose of valuation of inventories. Section 311(3)(C) of the Companies Act makes it mandatory for every company to follow accounting standards as prescribed by the ICAI. Such a change was not voluntary but was in compliance with a statutory provision. In fact, such a change is also consistent with the provisions of Section 145 of the Act. Sub-section 3 of Section 145 of the IT Act makes it mandatory for all the assessee's to follow the accounting standards as notified by the Central Government. Vide Notification No. SO 69 (E), dt. 25th Jan., 1996, the Central Government has prescribed two standards and in point No. 9 of Standard 2, it has been specified that a change in accounting policy is permissible if it is required by a statute. Therefore, such a change was permissible and no prejudice was caused to the Revenue by following such change. Consequently, we do not agree with the learned CIT's contention that by not looking to this aspect the assessment order is erroneous and prejudicial to the Revenue. 22. On the last issue of payment for commission, the learned CIT has set aside the assessment order by holding that AO has not done any enquiry. However, Authorised Representative has pointed out that it was enquired by the AO during the assessment proceedings and he even obtained a written explanation on non-deduction of TDS on commission payment to non-resident parties which is decisive on allowability thereof in terms of provisions of Section 40 of the Act. There was nothing unusual about commission payment. We, therefore, do not find that the AO did not make any enquiry on allowability of deduction for commission payment. Furthermore, the learned CIT did not state as to what prejudice has been caused to Revenue by allowing the deduction of assessee's claim. Without doing so, the decision taken by the learned AO cannot be termed as erroneous and prejudicial to the interest of Revenue so as to revise the same.
23. Having considered the factual as well as the legal position, we do not find any justification in the action of learned CIT to revise the order passed by the AO.
24. As a result, appeal of the assessee stands allowed.