TaxTMI 
TaxTMI 
2008 (11) TMI 284
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.... in issuing order under s. 263 without recording finding to the effect that the order of the AO is erroneous. 6. That the order of learned CIT under s. 263 is based on the change of opinion and not on the material from which it could be inferred that the order is prejudicial to the interests of the Revenue. 7. That the learned CIT has failed to appreciate that for the exercise of jurisdiction under s. 263, the order should not only be erroneous but also prejudicial to the interests of Revenue and the twin conditions. which do not exist in the present case renders the order passed under s. 263 void." 3. Briefly stated, the facts are that the assessee filed return of income on3rd Nov., 2003declaring income of Rs. 2,97,02,920. The return was processed under s. 143(1) on16th Jan., 2004on the returned income. Subsequently, the case was taken up for scrutiny and notice under s. 143(2) dt.27th April, 2004was served upon the assessee. Assessment was completed under s. 143(3) on16th July, 2004on returned income. It is noted by the AO in the assessment order that gross revenue receipt from M/s Jindal Drilling & Industries Ltd. was Rs. 33,98,93,886 from which an amount of Rs. 4,28,64....
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.... deducted sub-contractor cost of Rs. 428.64 lakhs from this gross contractual revenue of Rs. 3,398.93 lakhs in line with the provisions of art. 7 of DTAA betweenIndiaandItalyand consequently, the company has offered net revenue of Rs. 2,970.29 lakhs and a deemed profit rate of 10 per cent was applied to work out profit of the assessee. It is also pointed out that break-up of sub-contractor cost of Rs. 428.64 lakhs was also submitted to the AO which included contractual payments, professional payment and salary payment. It was also pointed out that it was also brought to the notice of the AO that TDS was properly deducted and annual return of TDS was duly filed and copies of relevant Form Nos. 26C, 26J and 26A were also submitted along with this letter for ready reference. It was also submitted that in asst. yr. 2000-01 also, the assessment order was completed under s. 143(3) on the same basis and it was pointed out that relevant assessment order dt.21st Oct., 2002for asst. yr. 2000-01 is appearing on pp. 15 to 17 of the paper book. It was also submitted that notice under s. 263 issued by learned CIT, Dehradun is appearing on page No. 1 of the paper book and its reply is appearing o....
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....y. CIT (2006) 104 TTJ (Del) 900. 6. Another contention was raised that the view adopted by the AO is a possible view and hence it cannot be said that the assessment order is erroneous. It was submitted that while accepting the claim of the assessee regarding 10 per cent profit of net receipt, the AO has taken guidance from s. 44BB to determine the profit attributable to the PE and hence it is a possible view adopted by the AO and hence the assessment order is not erroneous. In support of this contention, reliance was placed on the following judicial pronouncements: (a) CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266 : (2007) 295 ITR 282 (SC); (b) Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC); (c) CIT vs. Gabriel India Ltd. (1993) 114 CTR (Bom) 81 : (1993) 203 ITR 108 (Bom). 7. One more contention was raised by him that there is no definite finding of CIT that there is any error in the assessment order and hence the order of learned CIT is bad in law and cannot be upheld. In support of this contention, reliance was placed on the judgment of Hon'ble Delhi High Court rendered in the case of CWT vs. Prithvi Raj & Co. (1991) 98 CTR (Del....
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....ossible and the AO had adopted one of those views, it was submitted that the AO has not given her view and she has simply accepted the return of income by accepting the claim of the assessee without making any inquiry and without applying her mind and hence this claim of the learned counsel is not acceptable. Regarding the contention that the order under s. 263 is not in line with notice issued under s. 263, it was submitted that the objection in the notice was regarding assessing the income of the assessee @ 10 per cent of net receipt and in the order of learned CIT also, same issue has been decided by restoring the matter back to the file of the AO and hence the basis of order under s. 263 is not different than the notice issued under s. 263. Regarding the Tribunal decision in the case of Peerless General Finance & Investment Co. Ltd., it was submitted that in that case, in the order passed by learned CIT under s. 263, the CIT has given several grounds or logic which were not disclosed to the assessee during the proceedings under s. 263 and for this reason, it was held by the Tribunal that revision of the assessment order by CIT under s. 263 is not proper. It is submitted that in....
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....ras of art. 7 of DTAA. Thereafter, the AO says that the claim of the assessee regarding deduction of expenses of Rs. 428.64 lakhs is acceptable because these expenses are attributable to PE and payments were made after deducting TDS. Thereafter, the AO says that the claim of the assessee has been considered and the same is acceptable. Apart from discussing the issue regarding deduction of direct expenses of Rs. 428.64 lakhs, there is no discussion regarding acceptability of the claim of the assessee that income is to be assessed @ 10 per cent of such net receipt. In the computation of income also, there is no mention regarding the basis on which the assessee claims that the income of the assessee is to be assessed at the rate of 10 per cent. In the two clauses of art. 7 of DTAA reproduced by the AO in the assessment order, it is stated that in determination of the profits of PE, there shall be allowed as deduction expenses which are incurred for the purpose of business of PE. On the basis of these clauses of art. 7 of DTAA, we can understand the decision of the AO regarding allowing of deduction of Rs. 428.64 lakhs but on what basis, he has accepted the claim of the assessee that t....
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....ar unless there is good and sufficient reason to the contrary." 13. From the above paras of art. 7 of DTAA, we find that in determination of profit of PE, deduction has to be allowed of the expenses which are incurred for the purposes of business of the PE including executive and general administrative expenses so incurred whether inIndiaor elsewhere. In view of these paras of art. 7, allowing of deduction of expenses incurred for the purpose of PE is proper but we find no basis to accept the claim of the assessee that income of the PE is only 10 per cent of net receipt after deducting the direct expenses incurred by the assessee on account of contractual payments, professional payment and salary payment. If this is accepted, it amounts to accept that 90 per cent of such net receipt is expenses incurred by the assessee on account of executive and general administrative expenses and that too without any detail thereof. This is not acceptable because we find that as per para 2 of art. 7 of DTAA as reproduced above, it is permissible that if correct profits of PE is incapable of determination or there are exceptional difficulties in doing so, the profit of PE may be estimated on re....
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....ted. Under these facts, this claim of the assessee is not acceptable that the assessment order is after proper application of mind on the basis of material available on record. Hence this objection of the assessee is rejected. 14. Now, we examine the second objection. In this regard, we have to see as to whether the grounds set out by CIT in the notice issued by him under s. 263 and in the order passed by him under s. 263 are same or different. If these are different, whether the order passed by CIT under s. 263 is valid or not. 15. We first deal with the first aspect i.e. whether the grounds set out by the CIT in notice under s. 263 and in the order under s. 263 are same or different. For this purpose, we reproduce the notice under s. 263 of the Act issued by the CIT as appearing on p. 1 of the paper book. "F. No. CIT/DDN/Tech/263/20/2006-07/1860 Office of the CIT, Dehradun. &....
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....ough this letter an opportunity is being afforded to you. You are, therefore, requested to attend this office at 13-A, Subash Road, Dehradun along with your submission/explanation with evidence in support of your claim on 26th March, 2007 at 12,30 p.m. or you may, make your submissions/explanation with evidence to this office before the said date. In case you fail to furnish the above information/details on the date fixed your case will be disposed of as per law. Sd/- (Y.S. Rawat) &....
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....l not apply in a case where the provisions of s. 42 or s. 44D or s. 115A or s. 293A apply for the purposes of computing profits or gains or any other income referred to in those sections. (2) The amounts referred to in sub-s. (1) shall be the following namely: (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of mineral oils in India; and (b) the amount received or deemed to be received inIndiaby or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of mineral oils outsideIndia. 3. Notwithstanding anything contained in sub-s. (1) an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-s. (2) of s. 44AA and gets his accounts audited ....
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.... feel so because it is specifically mentioned in this section that "Notwithstanding anything to the contrary contained in ss. 28 to 41 and ss. 43 and 43A.....", which, as per us, means that deduction on account of expenses is to be allowed to the extent of 90 per cent without referring to ss. 28 to 41 and ss. 43 and 43A. This section is not for estimation of income attributable to PE where only a part of gross receipt is attributable to PE because it cannot be 10 per cent in all cases and it will vary from case to case. This is for estimating net income out of gross receipt attributable to PE, which is by allowing deductions of expenses from gross receipts. If the assessee can show that such expenses are more than 90 per cent, he may do so by complying with the requirements about maintaining of books under s. 44AA and audit under s. 44AB. This shows that as per provisions of s. 44BB, when we deem income @ 10 per cent of gross receipt we in fact, allow deduction for expenses to the extent of 90 per cent of gross receipts. 21. Hence, when learned CIT says that the AO should have applied this rate of 10 per cent to gross receipt and not to net receipts, his objection is for allowin....
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....llowability of deduction of expenses to compute taxable income of the assessee and hence this objection is not valid that ground in the notice under s. 263 and in order under s. 263 are different. 23. Regarding the second aspect i.e. if the grounds in notice under s. 263 and in the order under s. 263 are different, the order under s. 263 is valid or not, we find that this question is now of academic interest in the present case because we have noted above that the grounds in the notice under s. 263 and in the order under s. 263 is one and the same i.e. regarding allowability of expenses while computing income of the assessee. Hence we do not deal with this aspect of the matter in the present case and hence the judgments cited by learned counsel in this regard are also not being discussed. 24. Now we deal with the third objection of the learned Authorised Representative of the assessee. This objection is regarding the rule of consistency. It is the claim of the assessee that since asst. yr. 1998-99, the same method is adopted by the assessee which is accepted by the Department also and hence in view of rule of consistency, the assessment order cannot be said to be erroneous an....
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....e have seen that there is no provision in art. 7 of DTAA to estimate the income of the assessee to the extent of 10 per cent of net contractual receipt. Although the basis adopted by the assessee since asst. yr. 1998-99 was accepted by the Department in earlier years but since this method of computation of income is not in accordance with law, the same cannot be permitted on the basis of rule of consistency. In our humble opinion, when there are two permissible methods as per law and one of these two methods was followed by the Department in earlier years, then in the subsequent year, the Department cannot turn around and adopt the other method but when the method adopted in the earlier years is not in accordance with law, it cannot be said that by following the rule of consistency, the same method should be adopted in spite of coming to knowledge that this method is not in accordance with law. We, therefore, feel that this objection of the assessee is also not valid. Regarding the Tribunal decision in case of Oil & Natural Gas Corporation Ltd., we find that this judgment is not applicable in the present case because facts are different. In that case, a clear finding is given by th....
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....has resulted into loss of revenue, it is prejudicial to the interest of Revenue also. This was so held by Hon'ble apex Court also in the case of Malabar Industrial Co. Ltd. In the present case, learned CIT has given a concrete finding that the AO has not brought anything on record to properly estimate the expenses attributable to the executive and general administrative expenses as per para 3 of art. 7 and hence the assessment order passed by the AO is without proper application of mind. Under these facts, we feel that this objection of the learned Authorised Representative of the assessee is also not valid because learned CIT has given a definite finding that the assessment order is erroneous because it is without proper application of mind by the AO. 26. Regarding this objection, learned Authorised Representative of the assessee has placed reliance on the judgment of Hon'ble Delhi High Court rendered in the case of CWT vs. Prithvi Raj & Co. We find that this judgment is not applicable in the present case because the facts are different. In that case, the CIT has placed reliance upon the valuation of another valuer who had valued the land at Rs. 200 per sq. mtr. as against the ....
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....see on account of executive and general administrative expenses on reasonable basis which cannot be 90 per cent of net receipt. In view of this, this judgment is also of no help to the assessee in the present case. Since we have noted that learned CIT has given a concrete finding that the assessment order was erroneous because it was without proper application of mind, this objection of the assessee is also not valid. 28. One more objection was raised that the view adopted by the AO is a possible view and hence it cannot be said that the assessment order is erroneous. In support of this contention that the view adopted by the AO is a possible view, it was submitted that while accepting the claim of the assessee regarding 10 per cent profit of net receipt, the AO has taken guidance from s. 44BB to determine the profit attributable to the PE and hence it is a possible view adopted by the AO. Reliance was placed by learned Authorised Representative on three judgments as noted by us in para No. 6 above. Before going to judgments, we examine the claim of the learned Authorised Representative of the assessee that the view adopted by the AO is a possible view. In this regard, we find t....