TaxTMI 
TaxTMI 
2005 (4) TMI 264
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....sment made by the AO be not held as erroneous and prejudicial to the interest of Revenue for the following reasons : (i) Exemption under s. 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 s. 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 s. 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 ....
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....es 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 vs. Motor General Finance Ltd. (2002) 173 CTR (Del) 123 : (2002) 254 ITR 449 (Del), wherein the Court held as follows: "From the conspectus of the decisions as noticed herein before, 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 vs. Orissa Cement Ltd. (2002) 177 CTR (Del) 361 : (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 o....
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....sment 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. vs. 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 s. 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 s. 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 be....
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....ts 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. I....
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.... 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 s. 10(33). The CIT in his show-cause notice has held that in view of the provisions of s. 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 s. 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. T....
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.... 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 vs. Sridev Enterprises (1991) 97 CTR (Kar) 80 : (1991) 192 ITR 165 (Kar) (ii) Malwa Cotton Spinning Mills vs. Asstt. CIT (2004) 83 TTJ (Chd)(TM) 72 : (2004) 89 ITD 65 (Chd)(TM) (iii) Meenakshi Synthetics (P) Ltd. vs. 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 vs. CIT (1991) 100 CTR (SC) 267 : (1992) 193 ITR 321 (SC); (ii) CIT vs. Lagan Kala Upvan (2003) 179 CTR (Del) 243 : (2003) 259 ITR 489 (Del); (iii) CIT vs. Neo Poly Pack (P) Ltd. (2000) 245 ITR 492 (Del); (iv) Director of IT vs. Apparel Export Promotion Council (2000) 163 CTR (Del) 131 : (2000) 244 ITR 734 (Del); and (v) Kinetic Honda Motor Ltd. vs. 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,....
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....of s. 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 s. 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 s. 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 s. 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 s. 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 s. 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....
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....eration 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. 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 stoc....
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....f Standard 2 issued by the Central Government pursuant to powers conferred on it under s. 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. 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 un....
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....he CIT(A) : 1. Oil India Ltd. vs. CIT (1982) 27 CTR (Cal) 259 : (1982) 138 ITR 836 (Cal) 2. CIT vs. Salonah Tea Co. Ltd. (1992) 62 Taxman 51 (Cal) 3. Remex Construction vs. ITO & Ors. (1986) 55 CTR (Bom) 423 : (1987) 166 ITR 18 (Bom) 4. CIT vs. Goodricks Group Ltd. (1994) 116 CTR (Cal) 625 5. CIT vs. First LeasingCo.of India Ltd. (1997) 140 CTR (Mad) 218 : (1995) 216 ITR 455 (Mad) 6. P. Das & Co. vs. Dy. CIT (1996) 132 CTR (Gau) 16 : (1996) 217 ITR 29 (Gau) 7. Smt. Sujata Grover vs. Dy. CIT (2002) 74 TTJ (Del) 347 8. Sahara India Mutual Benefit Co. Ltd. vs. Asstt. CIT (2002) 74 TTJ (All) 67 9. ITO vs. Ahmedabad Engg. & Services Co-op. Society Ltd. (1992) 44 TTJ (Ahd) 383 10. Desai Bros. Ltd. vs. 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 vs. Sridev Enterprises (ii) CIT vs. Tin Box Co. (2003) 182 CTR (Del) 171 : (2003) 260 ITR 637 (Del) (iii) Motor & General Finance Ltd. vs....
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....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 de....
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.... Co. Ltd. vs. ITO (1989) 28 ITD 231 (Del) (ix) Shivam Leasing & Finance Ltd. vs. ITO (1993) 63 Taxman 211 (Del)(Mag) (x) Triveni Engg. Works Ltd. vs. Dy. CIT (2004) 87 TTJ (Del) 93 : (2003) 131 Taxman 32 (Del)(Mag) (xi) Sunil Lamba vs. Dy. CIT (xii) Amrik Singh vs. ITO (2003) 127 Taxman 87 (Chd)(Mag) (xiii) Baljees vs. 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 ....
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....itted a paper book raising the contentions supported by precedents as under : "A. Case law supporting CIT's action : Malabar Industrial Co. Ltd. vs. CIT -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 vs. CIT (1968) 67 ITR 84 (SC) Smt. Tara Devi Aggarwal vs. CIT 1973 CTR (SC) 107 : (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. vs. CIT Gee Vee Enterprises vs. Addl. CIT Thalibai F. Jain vs. ITO --AO's failure to make the necessary inquiries makes the order erroneous inasmuch as it is prejudicial to the interests of the Revenue. Tarajan Tea Co. (P) Ltd. vs. CIT (1994) 117 CTR (Gau) 179 : (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 sup....
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....eting features as discussed in the order under s. 263. (iii) Serious discrepancies in stock and quantitative tally : As discussed in the order under s. 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 s. 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 s. 14A for the year under consideration. He clarified that the proviso to s. 14A is applicable on assessment completed before the induction of s. 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 doe....
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....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. "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 s. 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, the reasons for approving the CIT's or....
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....wrong in stating that the Court had approved the proposition that provisions of s. 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 s. 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 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....
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....nue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to s. 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 ofCalcuttain Dawjee Dadabhoy & Co. vs. S.P. Jain & Anr. (1957) 31 ITR 872 (Cal), the High Court of Karnataka in CIT vs. T. Narayana Pai (1975) 98 ITR 422 (Kar), the High Court of Bombay in CIT vs. Gabriel India Ltd. (1993) 114 CTR....
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....passed by the ITO which can be revised under s. 33B. Sec. 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 vs. 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....
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....he interest of the Revenue, the Tribunal was justified in reversing that order." (v) Similarly, the Punjab & Haryana High Court in the case of CIT vs. Kanda Rice Mills 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 s. 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 vs. Rayon Silk Mills (1996) 134 CTR (Guj) 388 : (1996) 221 ITR 155 (Guj) held that : "It is an essential condition for exercise of the power under s. 263 that the CIT must find that the e....
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.... 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 s. 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 s....
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....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. vs. Dy. CIT. We, therefore, do not agree with learned CIT that the AO committed any error in not applying provisions of s. 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 Sch. 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 whe....
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.... 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 s. 263 stands ousted. We may clarify here that the issue before the learned CIT(A) was allowability of interest under s. 36(1)(iii) pertaining to funds used in erection of new unit and the issue raised by the learned CIT in s. 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....
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.... 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 arg....