TaxTMI 
TaxTMI 
2002 (9) TMI 256
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....s. 23,54,71,290 which, after being subjected to scrutiny assessment under section 143(3), lead to the income being finally assessed at Rs. 2,39,19,589. However, on 19th October, 1995, learned Commissioner of Income-tax (West Bengal V) issued a show-cause notice to the assessee requiring the assessee to show cause as to why the assessment order under section 143(3) should not be treated as 'erroneous and prejudicial to the interest of revenue' and, accordingly, be made subject matter of revision under section 263 of the Act. In this show-cause notice, the Commissioner pointed out that: "a. The assessee had claimed deduction of amounts of Rs. 14,30,416 and Rs. 15,51,373, on account of technical know-how fees and design and drawing expenses, which have been wrongly allowed by the Assessing Officer as these expenses were in the nature of capital expenses. b. The assessee had advanced an interest-free advance of Rs. 2,26,23,000 to its subsidiary company, even though assessee had 'huge liabilities for interest'. It was also pointed out that the assessee 'did not get any business gains from the subsidiary company, directly or indirectly, by giving the interest free loan'. It was then po....
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....ced reliance on the auditor's note. b. It was submitted by the assessee that the bank accounts from which the advances of Rs. 226.63 lakhs were made were not bank overdraft accounts, but all the receipts and collections were also deposited in those accounts. The assessee thus submitted that advances were thus made from common pools of funds which included collections and realizations from customers, and profits generated by the assessee over the years, as reflected in the General Reserves, are also embedded in the same. In this back drop, assessee placed reliance on Hon'ble jurisdictional High Court's judgment in the case of Woolcombers of India Ltd v. CIT [1982] 134 ITR 219 (Cal.) which was also followed in the case of Reckitt & Colman of India Ltd. v. CIT [1982] 135 ITR 698 (Cal,), Indian Explosives Ltd v. CIT [1984] 147 ITR 392 (Cal.), Alkali & Chemical Corporation of India Ltd. v. CIT [1986] 161 ITR 820 (Cal.) and British Paints (India) Ltd. v. CIT [1991] 190 ITR 196 (Cal.). It was also pointed out that assessee's profits for the relevant financial year was Rs. 518 lakhs. The assessee thus submitted that therefore 'no question can be raised on the payment of any interest on an....
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....he aforesaid order of the learned Commissioner, assessee is in appeal before us. 7. We have heard Shri Rahul Mitra, learned counsel for the assessee, and Shri L.D. Mahalik, learned Departmental Representative, at considerable length. We have also carefully perused the material before us and duly deliberated upon factual matrix of the case, as also the applicable legal position. 8. We find that connotations of expression 'erroneous', in the context of exercise of revisionary powers by the Commissioner under section 263 or, for that purpose, under section 264 of the Act, are much narrower than ordinary connotations of this expression in common parlance. Hon'ble Calcutta High Court, in unreported judgment dated 19th October, 2001 in the matter of CIT v. Subhash Projects & Marketing Ltd [IT Appeal No. 448 of 2000] has observed that "when a possible view has been taken by the Assessing Officer, it cannot be said that the order of the Assessing Officer is erroneous". Their Lordships have further observed that "In exercise of power under section 263, the order of Assessing Officer can be said to be erroneous only when impossible view has been taken" and that "If a possible view has been....
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....15,51,373 which represents payment to one M/s. Stolberger Maschinerfabrik GmbH & Co., a German company towards purchase of drawings and designs which were said to have been required for prodiicing 'Drum Twister Line, complete with all accessories' which the assessee was to supply to M/s. Incab Industries Limited. We may, in this regard, reproduce the following auditor's, relevant portion at pages 39-40 of the paper book, for ready reference: "4.4 According to the past practice, designs and drawings are capitalized under Plant & Machinery. Deviation from the said practice has been made in the case of designs and drawings amounting to Rs. 15,51,373.35 imported during the year from M/s. Stolberger Maschinerfabrik GmbH & Co., West Germany, which have been charged off to revenue as consumption of materials as, in the opinion of the officials of the Unit, these designs were primarily imported to execute a specific order for sales value of Rs. 1.8 crores (approx.) and accordingly they do not visualize receiving any such order in the near future. Other drawings and designs imported during the year have been capitalized........" 10. We also find that the assessee had received an order dat....
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....the Commissioner and it was submitted that it was because of these peculiar circumstances that the assessee had claimed the deduction for entire amount of Rs. 15,51,373, under section 37(1) and as a part of direct cost of manufacture of machinery supplied to Incab Industries Limited, the Commissioner did not adequately deal with these contentions, and rejected the same by observing that "since these are capital expenditures, they cannot be allowed as a revenue deduction". However, the facts set out in assessee's submissions dated 5th and 20th December, 1995, filed before the learned Commissioner, were not controverted or disputed. 14. We find that on one hand the CIT has not even dealt with any of the submissions of the assessee, and yet he comes to a categorical finding of fact that 'since these are capital expenditures, they cannot be allowed as a revenue deduction'. No reasons have been assigned to CIT's coming to the conclusion that the expenditure in question is in the nature of capital expenditure. Such an approach of the CIT cannot be said to be a judicious exercise of powers under section 263, and, accordingly, unsustainable in law. Although CIT has restored the matter to ....
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...., it will be sometimes difficult to decide whether the payment therefore is capital or revenue expenditure". Suggesting various aspects to be examined for this purpose, it concludes by stating that 'If as a result of this examination, it is found that no asset or advantage of a permanent or enduring character is acquired by the Indian participant, the expenditure should be treated as revenue expenditure and allowed as a deduction." In the light of this guidance, let us look back at uncontroverted facts of the case. It is not in dispute that these drawings and designs were specifically acquired for one time supply of a particular machine to Incab Industries Limited and, as mentioned in the audit notes, unit officials did not visualize receiving any such order in the near future. The assessee's contention that "these drawings and designs were solely required for the purpose of executing aforesaid order of Incab Industries Limited, and, therefore, payment for these drawings and designs, for all practical purposes, constituted a part of cost of executing that order" is not disputed on facts. We have also noted that order for these drawings was placed in the light of, and immediately af....
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....er with a direction to look into the matter afresh "on the basis of facts stated above". 18. As far as this issue is concerned, we find that the issue is covered on merits by Tribunal's order in the case of Dy. CIT v. India Foils Ltd. [IT Appeal Nos. 1353-1354 (Cal.) of 1996 dated 28-3-2001; copy of the order placed before us] which was authored by one of us (learned Judicial Member) and to which both of us were parties. In that order, the Tribunal had, following the judgments of Hon'ble jurisdictional High Court in the cases of Woolcombers of India Ltd., Reckitt & Colman of India Ltd. Indian Explosives Ltd. and British Paints (India) Ltd., held that "only because the account from which cheques was issued is an overdraft account, it cannot be presumed that the investments were made by the assessee out of interest-bearing funds because other various receipts were also deposited in that account". A reference was then also made to the judgment in the case of Alkali & Chemical Corpn. of India Ltd. wherein a view was taken by the Hon'ble jurisdictional High Court that "if the money is deposited by the assessee out of its profits in an overdraft account from which all payments including....
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....curred in earning the dividend and that only 'actual expenditure incurred by an assessee in earning the dividend income can be deducted from gross amount of dividend earned'. It was thus submitted by the assessee that there was no scope of making an estimate and no notional expenditure can be allocated to dividend income. We find that the Commissioner has not controverted these submissions but has made a bland statement that 'it is not acceptable that such huge dividend income was earned without any expenses having been incurred by the assessee'. It is, however, not clear that on what basis the Commissioner has rejected assessee's submissions and factual statements. We may mention that dividend income in inherently in the nature of a dormant income and, therefore, it is not at all necessary that there should always be some direct expenditure involved in earning the same. We may further mention that it is only an expenditure in the nature of direct and specific expenditure incurred in earning the dividend that is to be deducted from gross dividend to arrive at amount deductible under section 80M of the Act. This view also finds support from following observations in Tribunal's decis....