TaxTMI 
TaxTMI 
2017 (6) TMI 294
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....e view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue for the following reasons :- "1.In Form No. 3 CD of Tax Audit Report (TAR), the Assessee had claimed exemption of Rs. 76,00,000/- u/s 35 AC of the I.T. Act, 1961 apart from claim of exemption u/s 35(1)(iii) of Rs. 1,04,50,000/-. However, there was no mention of claim of exemption u/s 35AC of the Act in point no 29 of "Computation of income from business and profession". Exemption of Rs. 76,00,000/- u/s 35AC of the IT Act has been allowed in assessment but the same has not been claimed in the IT Return, as found from the records. 2. In the Audited Balance Sheet there was huge liability towards long term borrowings and short term borrowings. The Assessee had incurred finance cost of Rs. 22.51 Crores for AY 2012-13 in respect of such borrowings. 3. The Assessee had given short term loans and advances, the closing balances of which as on 31.03.12 and 31.03.11 were Rs. 173.40 Crs and Rs. 58.30 Crs respectively. The Assessee had not charged any interest for such huge advances made to the related parties. However while computing the disallowance u/s.14A of the ....
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....tness or otherwise of the contention of the assesse in the reply dated 11.01.2017 to the show cause notice u/s 263 of the Act, but came to the conclusion that the AO did not make proper enquiries on the various issues set out in the show cause notice issued u/s 263 of the Act. The following were the relevant observations of the CIT :- "In response to the said notice the assessee submitted written reply on 12.01.2017. The assessee has sought to justify its claim. However, he could not disagree that the necessary inquiries which were called for and expedient on the set of facts and circumstances were not carried out by the assessing officer. Nevertheless, the assessee's Ld A/R has made a valid point on the issue of disallowance of interest paid by the Assessee because the Ld. CIT(A) - 1, Kolkata in appeal no.828/CIT(A)-1/C-2(1)/2014-15 order dated 10.03.2016 had detected the interest disallowance made by the AO. Therefore, the issue concerning allowability of interest paid on borrowed funds was considered and decided by the Ld. CIT(A) in his appellate order and as a corollary to it and in terms of Clause (c) of the Explanation to Section 263 of I TAct, 1961 show cause no....
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....er after conducting inquiries and verification which are called for and discussed in this order and as per law and after giving an opportunity of being heard to the assessee." 6. Aggrieved by the order of CIT the assessee has preferred the present appeal before the Tribunal. 7. Before we set out various contentions raised before us it has to be clarified that with reference to the interest cost of Rs. 22.51 crores referred to in item-2 & 3 of the show cause notice u/s 263 of the Act dated 20.09.2016 of CIT, the CIT agreed that the issue with regard to the disallowance of interest u/s.14A of the Act was the subject matter of the appeal by the assessee before CIT(A) and that the CIT(A) had also considered the aforesaid issue and therefore the order of AO to that extent would merge with the order of CIT(A) and therefore jurisdiction u/s 263 of the Act cannot be exercised by CIT in view of clause-C of Explanation to section 263 of the Act. The CIT, however, has still thought it fit to come to the conclusion that the provisions of section 14A of the Act were not fully and properly applied by the AO while concluding the assessment. 8. The ld. Counsel for the assessee firstly poi....
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....egard the ld. Counsel for the assessee placed reliance on the following decisions of the Tribunal a) Damodar Valley Corpn vs CIT 72 taxmann 127 (ITAT Kol) b) Vesuvius India Limited vs CIT 54 SOT 172 (ITAT Kol) c) B.S.Sangwan vs ITO 67 SOT 447 (ITAT Delhi) (c ) That the AO had in fact made proper and due enquiries of all the aspects set out by the CIT in the show cause notice u/s 263 of the Act. In this regard he drew our attention to the various pages of the paper book which would throw light on the fact as proper and due enquiries were made by the AO, to which we will make reference in the latter part of this order. 9. The next submission of the ld. Counsel for the assessee was that when CIT's specific objection in the show cause notice u/s 263 of the Act was met with adequate explanation he ought to have given his own specific finding on those objections and without doing so, the CIT cannot exercise jurisdiction u/s 263 of the Act. In this regard the ld. Counsel for the assesse placed reliance on the following decisions :- - DIT Vs Jyoti Foundation (357ITR 388) (Bom HC) - ITO Vs D.G. Housing Projects Ltd (343 ITR 329) (Bom HC) ....
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.... 13. It is seen from the paper book filed by the Assessee that tax audit report filed before the AO by the Assessee in Para - 15 specifically states that the amount admissible u/s 35AC was Rs. 76 Lacs. In Para - 15(a) the Auditor has provided the following specific information: "15.(a). debited to the profit and loss account (showing the amount debited and deduction allowable under each section separately); Debited Rs.l,04,50,000/- and Rs. 4,65,000/- and deduction allowable Rs.l,30,62,500/ - and Rs. 8, 13, 750/ - u/ s 35(1)(iii) and u/ s 35(1)(ii) respectively. Debited and deduction allowable Rs. 76,00, 000/ - u/ s 35AC." The amounts for which deduction was permissible u/s 35(1)(iii), u/s 35(I)(ii) & u/s 35AC were all debited to the Profit & Loss A/c for the F.Y. 2011-12. The Net Profit of Rs. 15,04,56, 915/- as per the profit and loss account was the starting point for the purpose of computation of total income and this was arrived at after taking into account the aforesaid sums debited in the Profit & Loss A/c. As far as column No.29 of the form of return of income in respect of claim of deduction u/s.35AC of the Act in which the Assessee had show....
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....r the impression that filling up of claue-29 was necessary only if the amount allowable as deduction u/s 35AC of the Act was more than the sum debited in the profit and loss account that the assessee was required to mention the excess figure in that column and therefore had shown the figure as nil in the return of income. In our opinion, this explanation of the assessee is a plausible explanation and in any even the AO before completing the assessment was fully conscious of the fact that the assessee had made a claim of deduction u/s 35AC and 35(1)(iii) of the Act and therefore it cannot be said that order of the AO was erroneous on this count. The action of CIT in invoking jurisdiction u/s 263 of the Act on this issue is held to be unsustainable. 14. With regard to the issue on interest expenses debited in the profit and loss account of Rs. 22.51 crores, the following transpired in the course of completion of assessment by the AO. In the course of assessment, the assessee had furnished before the AO full particulars of the interest/finance cost incurred during the relevant year. The Assessee had also furnished before the AO full particulars or the short term & long term borrowi....
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....id on borrowings made had merged in the order of the CIT (A) and therefore in terms of Clause (c) of the Explanation to Sec. 263 revision proceedings are not permissible with regard to the issue which was considered and decided by the CIT (A) prior to invocation of Sec. 263 of the Act. 17. The above discussion would show that as far as disallowance of interest expenses u/s.14A of the Act, the AO has applied Rule 8D(2)(ii) of the Act and determined the disallowance u/s.14A of the Act. The disallowance u/s.14A of the Act in terms of other direct expenses contemplated under rule 8D(2)(i) and other expenses contemplated under rule 8D(2)(iii) has neither been considered by the AO nor explained by the Assessee. To this extent there was lack of enquiry on the part of the AO. As we have already seen in the show cause notice u/s.263 of the Act dated 20.9.2016, the CIT was of the view that the disallowance u/s.14A of the Act ought to have been 66% of the interest expenses claimed by the Assessee as against a sum of Rs. 75,24,000/- disallowed by the AO. However in the order passed u/s.14A of the Act when the Assessee pointed out that interest disallowance u/s.14A of the Act was already sub....
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....t a sum of Rs. 75,24,000/- disallowed by the AO. However in the order passed u/s.14A of the Act when the Assessee pointed out that interest disallowance u/s.14A of the Act was already subject matter of appeal filed by the Assessee before CIT(A) and that the order of the AO had merged with the order of the CIT(A) and therefore jurisdiction u/s.263 of the Act cannot be invoked by the AO in view of Explanation (c ) to Sec.263(1) of the Act, the CIT has taken the plea of lack of full enquiry on applicability of Sec.14A of the Act. In this regard it is seen that the show cause notice u/s.263 of the Act issued by the CIT was dated 20.9.2016. The Assessee had filed his reply to the said show cause notice on 12.1.2017 and on the very same date, the CIT had passed the impugned order. It is thus clear that the Assessee was not put on notice that the CIT intends to invoke jurisdiction u/s.263 of the Act on the ground of lack of enquiry by the AO. Therefore exercise of jurisdiction u/s 263 of the Act on the issue of disallowance u/s.14A of the Act cannot be sustained and the impugned order to this extent is quashed. 19. The next issue considered by CIT in the show cause notice u/s 263 of th....
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....eal that in the course of assessment the Assessee was called upon by the AO to furnish extracts from Ledger a/c of all revenue expenses debited in the Profit & Loss e] vide Clause (28) of the Notice u/s 142(1) of the Act. In response the Assessee had provided the Ledger a/ c of revenue expenses amounting to Rs. 52,40,44,462/ - debited to the Profit & Loss A/c. This amount inter-alia included commission and brokerage of Rs. 1,16,l0,615/-. While explaining the income disclosed under the head LTCG the Assessee had explained that it had developed LT. Parks which were also operated & maintained by the Assessee. The spaces contained in the I T Parks were commercially exploited in 2 ways. The developed spaces in the IT Park were leased by the Assessee either on short term basis or on long term basis. Where the Assessee leased the developed spaces on monthly lease basis, the Assessee earned monthly lease rent & service charges for operating & maintaining the I T Park. In such cases, the gross revenue earned credited to the Profit & Loss A/c is assessed under the head 'profits & gains of business'. Brokerage or commission incurred in connection with securing monthly lessees was cons....
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....of legal fees paid for the year ended 31.03.2012 at page 158 of the paper book. In the light of the evidence filed as above it cannot be said that there is any failure on the part of the AO to make adequate and proper enquiries before completing the assessment on the aforesaid issue. Exercise of jurisdiction on this issue is therefore held to be not sustainable and the order u/s.263 of the Act to this extent is quashed. 22. The last issue set out in the show cause notice u/s 263 of the Act is with regard to depreciation on unsold building wrongly allowed by the AO. On this aspect the following aspects are noticed from perusal of the record. We have already seen that the Assessee is in the business of developing IT park and either selling the space so developed or giving it on lease with all amenities for operating a software development business. The "IT Park buildings" constructed and developed by the Assessee is always held and accordingly disclosed in the Assessee's books as "Fixed Assets" and not as "stock-in-trade" as alleged in the show cause notice. 23. It is also seen from the Assessee's assessment records for AYs 2002-03 and onwards the block of "IT Park building....
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....e. Besides paying monthly lease rent, service charges are also paid by all the occupants for use of the facilities as also for operation and maintenance of the IT Park. The lease rent, maintenance/ service charges recovered from the lessees and occupants are assessed in our assessment under the head "business". The IT Parks developed and constructed by the Assessee not only contain civil structure of the building but substantial costs are incurred by the Assessee on installation and commissioning of sophisticated plants, equipments and electrical apparatus etc so as to make the buildings fit for carrying on specialized Information Technology based businesses and enterprises. The costs incurred by the Assessee on development and construction of IT Parks were always capitalized in the Assessee's books arid shown in the audited annual accounts as and by way of "Fixed Assets" and not as "Current Assets" or "stock-in-trade" as alleged in show cause notice dated 20.9.2016 u/s.263 of the Act. By using these fixed assets the Assessee regularly earns Income in the form of lease rent and service charges. Since commencement of operations of the IT Parks in AY 2002-03 and onwards the incom....
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....ion received for granting long term lease. The AO further noted that for the purpose of computing depreciation allowance Assessee had reduced lease premium of Rs. 2,40,95,000/ - from the opening WDV of the building block and on the reduced WDV depreciation was claimed. In AO's opinion however the assessee should have offered "short term capital gain" on grant of long term lease of 6972 sq.ft of office space after deducting proportionate WDV of the office space. The AO computed the prorate WDV of the building attributable to 6972 sq.ft. at Re.l, 77,42,577 / -. Deducting such prorata WDV of the building block from the gross lump sum premium of Rs. 3,27,69,200 / - (24095000 + 8674200) the AO assessed Rs.l,50,26,623/- as Assessee's "short term capital gain". Even though the AO assessed pro rata income on transfer of long term lease of 6972 sq.ft. of constructed space under the head capital gain he did not out rightly reject Assessee's depreciation claim for the remaining/unsold IT Park space leased on short term basis to other lessees on the ground that the IT Park building was Assessee's trading stock and not a depreciable asset. 27. Against the assessment order for the....
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.... agree with the Ld. A/ R that if the D/ Rs contention is accepted in that case the WDV attributable to the portions sub-leased by the assessee will be affected but CIT(A) has directed the AO to reduce the sale proceeds of Rs. 2,49,95,000/- out of opening WDV of Rs. 32,60, 17,820/- which was brought forward from earlier years. It is a fact that the department has not disputed the said part of order of CIT(A). It is not in dispute that space constructed by the assessee in the said towers has been considered as block of assets in respect of which depreciation has been allowed to assessee in the past assessment years". 29. Thus in AY 2007-08 the CIT(A) and the ITAT concurrently considered the nature and character of the IT Park building and held the same depreciable asset on which depreciation was allowed. The orders of the and ITAT for the AY 2007-08 became final. 30. The IT Park buildings in respect of which depreciation was claimed and allowed in the order for AYs 2012-13 were brought forward from earlier years. In the regular assessments u/s 143(3) passed for all the earlier years depreciation allowance u/s 32 on actual cost/WDV of the block of the IT Park building as also on....
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....ding which he erroneously considered to be "Trading Stock". The CIT therefore could not proceed u/s 263 by assuming incorrect facts which are not borne out from records. It is also noticed that on same incorrect assumption of facts, the CIT for AYs 2007-08 & 20. 11 had similarly revised the assessment orders u/s 263 which was cancelled by the ITAT by its order dated 9.6.2015 in ITA No. 413 & 414/Kol/2015 for AY 2007-08 & 2010- 11.[See Pages 282 to 288 of PB]. No revision or reassessment proceedings have been taken for any other years. In the light of the aforesaid facts and circumstances of the case, it cannot be said that the claim of depreciation was made on trading stock by the Assessee. Therefore exercise of jurisdiction u/s 263 of the Act on this issue cannot be sustained and the impugned order to this extent is quashed. 32. In respect of other items set out in the show cause notice u/s 263 of the Act where there was no allegation that there was failure on the part of the AO to make and proper enquiries before completing the assessment, the CIT in the impugned order has held that the order of the AO on those items were also liable to be set aside on that ground holding that....