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2014 (9) TMI 18
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.... appeal by the appellant-assessee relates to the Assessment Year 2007-08. The appellant-assessee had filed return declaring income of Rs. 1,82,68,953/- under normal provisions and book- profit of Rs. 9,85,25,142/-. Tax was payable on book profits as per Section 115JB of the Income Tax Act, 1961 ("Act", for short). The aforementioned return was taken up for scrutiny and additions of Rs. 1,00,500/- and Rs. 1,17,141/- on substantive basis, and Rs. 10 lacs on protective basis, were made. Income was computed under Section 115JB at Rs. 9,85,25,142/-. 4. Commissioner of Income Tax issued a notice under Section 263 of the Act, dated 4th February, 2011, on two grounds. Firstly, commission of Rs. 69,53,949/- had been paid to the two Managing Directors, but should have been disallowed under Section 36(1)(ii) of the Act. Secondly, the assessee had booked majority of the expenses against the unit carrying out trading operations and thereby had inflated profits of the manufacturing unit exempt under Section 80-IC. Expenses booked for the eligible unit under section 80-IC were only Rs. 12,31,78,274/-, as against expenses of Rs. 37,26,60,316/- booked against trading activities. 5. The appell....
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....the Commissioner of Income Tax referred to the total figure of expenses claimed against the manufacturing unit and the expenses booked against trading activities. In paragraph 5 the Commissioner accepted that during the course of the assessment proceedings, a specific query was raised by the Assessing Officer to justify the expenses claimed unit-wise and the appellant-assessee had filed a letter dated 17th August, 2009 to explain allocation of common expenditure. The appellant-assessee had submitted that common expenses had been divided between the two units as per accepted accountancy principles, which were consistently followed. That appellant-assessee had maintained regular books of accounts for the exempt unit and such books of accounts along with the vouchers were duly produced and verified by the Assessing Officer, who did not point out any defects in the same. In paragraph 6, the Commissioner duly noticed break up of different expenses and apportionment thereof. The Commissioner observed that the segregation of common expenses had been made by-and-large on basis of the manufacturing and trading operations, but he observed that as separate books of accounts for both manufactu....
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.... 70%:30% Majorly on sales 6 Travelling Expenses- Foreign 2,859,164 2,529,078 330,086 88%:12% On Imports 7 Interest on Vehicle Loans etc. 1,075,025 752,518 322,508 70%:30% Majorly on sales 8 Advertiseme nt Exps 188,377 128,364 60,013 70%:30% Majorly on sales 9 Sales Promotion 1,875,257 1259,516 615,741 70%:30% Majorly on Sales 10 Incentive to Staff 705,607 493,925 211,682 70%:35% Majorly on sales 11 Car Hiring Chg. 688,075 456,501 231,574 65%:35% Strictly on Sales 12 Legal & Professional Charges 2,890,732 1,900,002 990,730 65%:35% Strictly on Sales 13 Testing & Inspections 301,444 190,720 110,724 65%:35% Strictly on Sales Total 20,687,588 14,533,502 6154,086 "The aforesaid figures stand reproduced in the order passed by the Commissioner. 9. The Commissioner, instead of commenting upon or giving a final finding whether aforesaid apportionment was acceptable or not, observed that it was possible that there was an attempt to inflate expenses on trading acti....
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....xpenses made related to sale or purchases, if so, to each unit etc. had been kept in mind in accordance with common accounting principles. Details of the apportionment of common expenses were separately enclosed. 11. It is also clear from the order passed by the Commissioner under Section 263 that the issue relating to apportionment of common expenditure was specifically gone into and examined by the Assessing Officer, who was fully satisfied with the apportionment made. Thus, it was not a case of "no" inquiry but specific and pointed enquiries by the Assessing Officer. The said finding and apportionment could have been set aside and negated only with a finding by the Commissioner, that the Assessing Officer was erroneous and wrong. The Commissioner should have examined and gone into the question of apportionment on merits. Mere statement that it was possible that the Assessing Officer was erroneous, is not sufficient and does not meet the requirement stipulated by law. On the said aspect, we would like to reproduce observations of the Delhi High Court in Income Tax Officer Vs. DG Housing Projects Limited, (2012) 343 ITR 329 (Delhi) wherein reference was made to CIT Vs. Sunbeam ....
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....[1993] 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page ". . . From a rending of sub-section (1) of section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is 'erroneous in so far as it is prejudicial to the interests of the Revenue'. It is not an arbitrary or unchartered power, it can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already c....
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.... of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be ,, erroneous" simply because in his order he did not make an elaborate discussion in that regard." 16. Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and....
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....by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT vs. Shree Manjunathesware Packing Products, 231 ITR 53 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous. 18. It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax, (2000) 243 ITR 83 (SC), had observed that the phrase 'prejudicial to the interest of Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such ma....