2002 (9) TMI 256 - AT - Income Tax

Revision u/s263 over technical fee deductions, alleged interest-free fund diversion, and s.80M dividend expenses-order quashed

The dominant issue was whether the CIT validly assumed revisionary jurisdiction under s.263 on three grounds. On deduction of technical fees/drawings, the ... Revision Of Orders prejudicial to interest of revenue - deduction for payment of technical fees and drawings and designs - assuming jurisdiction under section 263 - dividend income - deductible under section 80M - expression 'erroneous' - HELD THAT:- No reasons have been assigned to CIT's coming to the conclusion that the expenditure in question is in the nature of capital expenditure. Such an approach of the CIT cannot be said to be a judicious exercise of powers under section 263, and, accordingly, unsustainable in law. Although CIT has restored the matter to the Assessing Officer but then he has given a finding of fact that the expenditure in question is a capital expenditure. On these facts, even if an opportunity of hearing is given to the assessee, before the Assessing Officer, such an opportunity cannot be a meaningful opportunity so far as determination of question about nature of expenditure is concerned. The view taken by the Assessing Officer was a reasonable view and, therefore, the Commissioner was denuded of his powers to revise the order on this issue. As we give this finding, we make it clear that, in the present context, we are not even concerned whether such a view of the Assessing Officer was indeed correct on merits or not, but our consideration is confined to whether a reasonable person, on the given facts, could have taken this view or not. Our conclusion is that such a view was indeed a possible and reasonable view. In our considered view, learned Commissioner did not have the jurisdiction to invoke his powers under section 263 to revise Assessing Officer's order on this aspect also. In any event, the Commissioner's conclusion that 'the fact of borrowing (interest bearing) and advancing interest-free loan makes it a colourable transaction' is devoid of any basis or material on record. It is thus clear that there was no material before the Commissioner to suggest that the view taken by the Assessing Officer was not a reasonable view. Learned Commissioner's directions on this issue also are not legally sustainable. Coming to third and last ground of Commissioner's exercise of powers under section 263, we find that the learned Commissioner has observed that 'it is not acceptable that such huge dividend income was earned without any expenses having been incurred by the assessee' and its in this background that the Assessing Officer is directed to ascertain the expenditure incurred in earning the dividend and deduct the same from gross dividend earned, for the purpose of arriving at amount deductible under section 80M of the Act. We have noticed that the assessee has categorically stated that no specific expenses have been incurred in earning the dividend and that only 'actual expenditure incurred by an assessee in earning the dividend income can be deducted from gross amount of dividend earned'. It was thus submitted by the assessee that there was no scope of making an estimate and no notional expenditure can be allocated to dividend income. We find that the Commissioner has not controverted these submissions but has made a bland statement that 'it is not acceptable that such huge dividend income was earned without any expenses having been incurred by the assessee'. It is, however, not clear that on what basis the Commissioner has rejected assessee's submissions and factual statements. We may mention that dividend income in inherently in the nature of a dormant income and, therefore, it is not at all necessary that there should always be some direct expenditure involved in earning the same. We may further mention that it is only an expenditure in the nature of direct and specific expenditure incurred in earning the dividend that is to be deducted from gross dividend to arrive at amount deductible under section 80M of the Act. Thus, we see no infirmity in the order of the Assessing Officer and find that the learned Commissioner indeed erred in seeking to revise the order of the Assessing Officer on this point also. There was no material before the Commissioner to suggest that the view taken by the Assessing Officer was not a reasonable view. Therefore, the view taken by the Assessing Officer, on all the three issues which are subject matter of learned Commissioner's revision, was a reasonable view having regard to the uncontroverted facts of the case and the applicable legal position. Therefore, in considered view, the impugned order passed by the Commissioner is unsustainable in law. Accordingly, we hereby set aside the impugned order dated 19th January, 1996 passed by the learned Commissioner. In the result, appeal is allowed. Issues Involved:1. Jurisdiction under section 263 of the Income-tax Act, 1961.2. Deduction of technical know-how fees and design and drawing expenses.3. Interest-free advance to subsidiary company.4. Deduction under section 80M for dividend income.Summary:1. Jurisdiction under section 263 of the Income-tax Act, 1961:The assessee's appeal was directed against the CIT's order dated 19th January 1996, passed u/s 263 of the Income-tax Act, 1961. The primary grievance was that the CIT erred in assuming jurisdiction u/s 263, and that the order sought to be revised was neither erroneous in law nor on facts.2. Deduction of technical know-how fees and design and drawing expenses:The CIT pointed out that the assessee had claimed deductions of Rs. 14,30,416 and Rs. 15,51,373 for technical know-how fees and design and drawing expenses, respectively, which were wrongly allowed as these were capital expenses. The assessee contended that the technical fees were added back in the computation of income and only deduction u/s 35AB was claimed. For the design and drawing expenses, the assessee argued that these were for a specific order and should be considered as part of the cost of executing that order. The Tribunal found that the CIT did not adequately address these contentions and concluded that the view taken by the Assessing Officer was reasonable and within the scope of a possible view.3. Interest-free advance to subsidiary company:The CIT noted that the assessee had advanced an interest-free loan of Rs. 2,26,23,000 to its subsidiary despite having huge liabilities for interest. The CIT suggested that an amount of Rs. 18,45,901 should have been disallowed. The assessee argued that the advances were made from common pools of funds, including collections and profits, and cited several High Court judgments to support their case. The Tribunal found that the view taken by the Assessing Officer was reasonable and that the CIT's conclusion of a 'colourable transaction' was devoid of any basis or material on record.4. Deduction under section 80M for dividend income:The CIT observed that it was not acceptable that such a huge dividend income was earned without any expenses and directed the Assessing Officer to ascertain the expenditure incurred in earning the dividend. The assessee maintained that no specific expenses were incurred in earning the dividend and that only actual expenditure could be deducted. The Tribunal supported this view, stating that notional or estimated expenses could not be allocated to dividend income for the purpose of deduction u/s 80M.Conclusion:The Tribunal concluded that the view taken by the Assessing Officer on all three issues was reasonable and that the CIT's order u/s 263 was unsustainable in law. The appeal was allowed, and the CIT's order was set aside.