TaxTMI 
TaxTMI 
2005 (4) TMI 264
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....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 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 ....
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....from your balance sheet and its Sch. 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 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 o....
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.... 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. 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 ....
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....r 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,....
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....lls (1990) 85 CTR (P&H) 5 : (1989) 178 ITR 446 (P&H); (vi) CWT vs. Prithviraj & Co. (1991) 98 CTR (Del) 216 : (1993) 199 ITR 424 (Del); and (vii) CIT vs. O.P. Seth (1993) 111 CTR (Del) 37 : (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 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 th....
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.... 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 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 (....
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....lier years, by disallowing any amount under s. 14A of the Act. Though s. 263 is not specifically mentioned in the proviso to s. 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 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 neit....
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.... (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. A broad calculation was made by the appellant to explain that ....
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....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. (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 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....
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....pense 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 s. 263(1)(c) of the Act. It has been held by the Courts in the following cases that revision under s. 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. 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 ....
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....n 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. vs. CIT (1983) 35 CTR (Cal) 244 : (1984) 147 ITR 392 (Cal) (ii) Alkali & Chemicals Corp. of India Ltd. vs. CIT (1986) 50 CTR (Cal) 139 : (1986) 161 ITR 820 (Cal) (iii) Woolcombers of India Ltd. vs. CIT (1981) 23 CTR (Cal) 204 : (1982) 134 ITR 219 (Cal) (iv)East India Pharmaceutical Works vs. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 627 (SC) (v) Marinite Polycast Ltd. vs. Asstt. CIT (1995) 53 ITD 345 (Del) (vi) Pramod S. Talwalkar (HUF) vs. Asstt. CIT (2001) 70 TTJ (Pune) 436 : (2000) 75 ITD 492 (Pune) (vii) Dy. CIT vs. Chloride Ind. Ltd. (2001) 70 TTJ (Cal) 407 : (2001) 76 ITD 1 (Cal) (viii) Dy. CIT vs. 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 ca....
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....: (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. (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 vs. Girdhari Lal (2002) 176 CTR (Raj) 92 : (2002) 258 ITR 331 (Raj) (ii) CIT vs. Ratlam Coal Ash Company (iii) Plastic Concern vs. Asstt. CIT (1998) 61 TTJ (Cal) 87 (iv) Ashoke Kumar Parasramka vs. Asstt. CIT (1998) 61 TTJ (Cal) 156 : (1998) 65 ITD 1 (Cal) (v) CIT vs. Hastings Properties (2001) 171 CTR (Cal) 626 : (2002) 119 Taxman 36 (Cal) (vi) Manohar Lal Naresh Kumar vs. Asstt. CIT (1996) 89 Taxman 240 (Asr)(Mag) (vii) Kewal Ram Chauhan vs. ITO (1997) 91 Taxman 167 (Chd)(Mag) (viii) Hindustan Marketing & Advertising Co. Ltd. vs. ITO (1989) 28 ITD 231 (Del) (ix) Shivam Leasing & Finance Ltd. vs. ITO (1993) 63 Taxman 211 (....
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.... of s. 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 s. 263 of the Act. In support of his arguments the learned Departmental Representative has also submitted a paper book raising the contentions supported by p....
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....ceivable (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 s. 10(33) : The assessee had claimed exemption under s. 10(33) in respect of dividend income amounting to Rs. 46.87 lakhs. He accepted the cl....
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....s 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 vs. CIT and Tara Devi Aggarwal vs. CIT 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 in....
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....ney 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 s. 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 s. 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 fi....
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....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. vs. CIT 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, namel....
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....mains 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 vs. CIT, 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 s. 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....
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....gh 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 vs. Kashi Nath & Co. (1987) 64 CTR (All) 177 : (1988) 170 ITR 28 (All) held as under : "The power of the CIT under s. 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 ....
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....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 prejudi....
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....dered 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 s. 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 s. 14A and has made no disallowance. Further, in the precedin....
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....te 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 fil....
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.... 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 va....