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TMI Blog2013 (12) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... n provided in the books - The respondent-assessee had credited the same amount to the depreciation account and also the profit and loss account in the year in question. Disallownace u/s 14A - Held that:- the Assessing Officer had failed to disallow expenditure in respect of exempt income as per the mandate of Section 14A of the Act - Section 14A was introduced by Finance Act, 2001, which was tabled in the Parliament on 28th February, 2001. The said provision was introduced with retrospective effect from 1st April, 1962 - The quantum of deduction should be made on reasonable basis - The the Commissioner had rightly invoked Section 263 of the Act as the order of the Assessing Officer was erroneous and prejudicial to the interest of the Revenue - adjustment of Rs.1.35 crores should not have been allowed under clause (i) to Explanation to Section 115JA and deduction should have been also made towards expenditure to earn dividend income, which did not form part of taxable income under Section 14A of the Act. - Decided in favour of Revenue. - Income Tax Appeal No. 1179/2010, ITA No. 1366/2010, Income Tax Appeal No. 1979/2010, ITA No. 2106/2010 - - - Dated:- 9-12-2013 - Sanjiv Khann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r but the same was rejected on the two issues in question vide order dated 29th November, 2006 read with order dated 23rd June, 2008 under Section 154 of the Act. 5. The respondent-assessee preferred further appeal before the tribunal being ITA No. 409/Del/2007 and also preferred an appeal against the order of Commissioner of Income Tax under Section 263, which was registered as ITA No. 208/Del/2005. The said appeals have been allowed, with the order under section 263 being quashed/set aside. 6. The first question raised is whether the order under Section 263 of the Act is justified and in accordance with law. Section 263 has been elucidated and explained in Commissioner of Income Tax versus Nagesh Knitwears Private Limited, (2012) 345 ITR 135 (Delhi). In the said decision, reference was made to Malabar Industrial Company Limited versus CIT, (2000) 243 ITR 83 (SC) and decisions of Delhi High Court in Nabha Investments Private Limited versus Union of India, (2000) 246 ITR 41 (Delhi) and ITO versus DG Housing Projects Limited, (2012) 343 ITR 329 (Delhi). It has been observed in Nagesh Knitwears Private Limited (Supra):- 10. Revenue does not have any right to appeal to the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate the facts stated in the return when circumstances would make such an inquiry prudent that the word erroneous in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. 7. Reference was also made to decisions of the Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the Assessing Officer had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions were explained in the case of DG Housing Project Limited (supra) in the following words:- These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he has a different opinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open. In Gabriel India Ltd. [1993] 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113): 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 jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Knitwears Private Limited (Supra), when and how power under Section 263 can be exercised where there was no proper or full verification and when the twin pre-conditions are satisfied:- 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 he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d state that the order of the Assessing Officer is erroneous. It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. v. 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 matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue. 10. In the facts of the present case, as we examine the factual po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neous but observes that two views are possible and yet remits the issue for fresh decision by the Assessing Officer. However, it would be incorrect to state as a broad proposition that an order of the Assessing officer cannot be erroneous, if the Assessing Officer has taken one of the two views possible. In such cases the order of the assessing officer is erroneous provided the Commissioner holds and is able to demonstrate that the view taken by the Assessing Officer was not plausible, being legally unsustainable and incorrect. But the said finding must be recorded. This would satisfy the statutory requirement that the order passed and made subject matter of revision was erroneous, subject to the second condition that the order under review should also be prejudicial to the interest of the Revenue. 11. This brings us to the question of computation under Section 115JA of the Act and the order passed by the Commissioner on merits directing that Rs.1.53 crores should be added to the book profits on account of transfer from the revaluation reserve. The question is whether the Commissioner was right in holding that the order of the assessing officer on the said aspect was erroneous on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been credited to profit and loss account. Once sub-clause (i) was not applicable, book profits calculated in accordance with the provisions of the Companies Act cannot be disturbed or recalculated in terms of the judgment of the Supreme Court in Apollo Tyres Limited versus Commissioner of Income Tax, (2002) 255 ITR 273 (SC). It was observed that the respondent had claimed depreciation on enhanced value and as per accounting standards, withdrawal from the capital reserve was to be debited to the depreciation account and credited to the profit and loss account. Withdrawals from the reserve were required to be credited to profit and loss account, as at the time of creation of reserve it was not routed through the profit and loss account. Judgment of the tribunal in the case of SRF Limited (supra) was not applicable as it was not in consonance with the law declared by the Supreme Court in Apollo Tyres Limited (supra). 14. Tribunal in the impugned order on merits did not agree with the Commissioner and has observed that clause (i) permits reduction of amount withdrawn from any reserve if such amount was credited to profit and loss account. The proviso, which incorporates an exception, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves by whatever name called; or (c) the amount or amounts set aside to provisions made for meeting liabilities other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by,-- (i) the amount withdrawn from any reserves or provisions if any such amount is credited to the profit and loss account: Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997, but ending before the 1st day of April, 2001 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or (ii) the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of SRF Limited (supra) on the said aspect. In the impugned order in the present case, tribunal followed their decision in the case of SRF Limited. The reasoning given by the Division Bench in the case of SRF Limited, which dealt with Sections 115J and 115JB is as under:- 20. As would be evident on a bare perusal of both section 115JB and Section 115J the explanation defines as to the manner in which book profit for the purposes of levy of MAT is to be calculated. Broadly, in both Sections, book profit means net profit as shown in the profit and loss account which is to be increased and reduced in terms of provisions contained therein. Book profits are required to be calculated bearing in mind the provisions part II and III of Schedule VI of the Companies Act, 1956. 21. Before we proceed further we may notice the relevant distinction in clause (i) of the Explanation appended to Sections 115JB and 115J, respectively. In clause (i) of the explanation in Section 115JB, in the bracketed portion, the following words appear excluding a reserve created before the 1st day of April, 1997, otherwise than by way of a debit to the profit and loss account . There is no such mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which such a reduction is not permissible where reserves are created by an assessee on or after 01.04.1988. Therefore, his contention is, that since, the revaluation reserves were created in 1983 and 1986 the assessee ought to be allowed a reduction of the amounts drawn from the revaluation reserve. In our view at first blush this argument appears to be both plausible and attractive as well. However, a closer scrutiny would show that clause (i) appended to the explanation appearing in Section 115J would get triggered only if amount is withdrawn from reserves or provisions, if such reserve or provision was created by crediting the amount to the profit and loss account. Admittedly, such is not the situation in the instant case. The intention of the legislature in inserting clause (i) appended to the explanation to Section 115J is to counter a situation where credit is made to the profit and loss account in the first instance at the time of creation of the reserve. When such a situation arises the book profit would stand increased and thus consequently, any withdrawal from the revaluation reserve would stand squared off by reducing the amount from the book profit. Since such a situa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the provisions of Section 115JB were applicable, the assessee became entitled to reduce the amount withdrawn from such reserves if such withdrawal iscredited to the profit and loss account. Now, from the above facts, it is clear that neither the said amount of Rs 288,58,19,000 nor Rs 26,11,74,000 had ever gone to increase the book profits in the said year ending march 31, 2000 (being the financial year). Thus, when such amount(s) has not gone to increase the book value at the time of creation of reserve(s), there is no question of reducing the amount transferred from such revaluation reserves to the profit and loss account. Thus, the proviso to clause (i) of the Explanation to section 115JB(2) comes in the way of the claim for reduction made by the assessee. In our view, the reduction under clause (i) to the Explanation could have been availed of only if such revaluation reserve had gone to increase the book profits. (emphasis is ours) 23. Mr Ganesh had tried to take advantage of the fact that in the observations extracted hereinabove there is a reference to the proviso appended to clause (i) of the explanation to Section 115JB. A closer scrutiny of the observations made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profit and loss account ... (emphasis is ours) 26. Therefore, the submission of Mr Ganesh that it is only when the proviso is attracted that the assessee would be disabled from seeking reduction in terms of clause (i) to the explanation appended to Section 115J even though the reserves when created or provision made did not get reflected in the profit and loss account, is a submission, according to us, that cannot be accepted. 19. Learned counsel appearing for the respondent-assessee tried to distinguish the said judgment on two grounds. It was submitted that book profits computed in the case of SRF Limited filed under Section 115J showed loss of Rs.10.50 crores, but the Assessing Officer had calculated the book profits at a positive figure of Rs.2.15 crores. Thus, substantial addition was made to the book profits. Secondly, the Assessing Officer had observed that transfer from the valuation reserve was essentially an equalisation device meant to ensure that the depreciation continued in the books at the original cost, prior to such valuation and that the accounts presented a true and correct picture of net profits. The amount withdrawn from the valuation reserve was, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance Act, 1987 with effect from 1st April, 1988 with insertion of Section 115J. The said Section became applicable with effect from 1st April, 1989 and was applicable till 1st April, 1991. Clause (i) of the Explanation and the proviso thereto, which was introduced by Finance Act, 1989 with retrospective effect from 1st April, 1988 were as under: i) the amount withdrawn from reserves (other than the reserves specified in section 80HHD) or provisions, if any such amount is credited to the profit and loss account: Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or 22. Reading of the proviso to Section 115J elucidates that reference to the date 1st April, 1988 is not with reference to the date on which reserve or provision was created but with refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to Section 115JA, as the case may be; or 24. In view of the aforesaid discussion, it is crystal clear that under proviso to clause (i) of the Explanation to Section 115JA reserve or provision made may relate to any period and not during the period between 1st April, 1997 and 31st March, 2001. These two dates are relevant as Section 115JA is applicable during this period. Clause (i) operates when an amount is withdrawn from provision made or reserve created but as per the proviso adjustment can be made only when at the time of creation of reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance of expenditure under Section 14A to be Rs.183.63 lacs. 29. It is accepted and admitted that the Assessing Officer had not applied Section 14A and no deduction under the said Section was made. In respect of the present assessment year, i.e., Assessment Year 2000-01, the contention of the respondent-assessee is that in view of the proviso to Section 14A, the said provision could not have been invoked in a revision. It is not possible to accept the said contention. Section 14A was introduced by Finance Act, 2001, which was tabled in the Parliament on 28th February, 2001. The said provision was introduced with retrospective effect from 1st April, 1962 and reads as under:- 14-A. Expenditure incurred in relation to income not includible in total income.-For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the Assessee in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under Section 147or pass an order enhancing the assessment or reducing a refund already made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income Tax, (2012) 347 ITR 272 (Delhi) and other cases. 33. In view of the aforesaid position, the substantial question of law is decided in favour of the Revenue and it is held that the Commissioner had rightly invoked Section 263 of the Act as the order of the Assessing Officer was erroneous and prejudicial to the interest of the Revenue to the extent that adjustment of Rs.1.35 crores should not have been allowed under clause (i) to Explanation to Section 115JA and deduction should have been also made towards expenditure to earn dividend income, which did not form part of taxable income under Section 14A of the Act. However, on the question of quantum of deduction to be made under Section 14A, the matter is remanded to the tribunal. ITA Nos. 2106/2010 and 1979/2010 34. These appeals by the Revenue relates to Assessment Year 2001-02. The respondent-assessee, as noticed above, namely, Federal-Mogul Goetze (India) Limited, had filed return of income on 31st October, 2001 declaring nil income after setting for brought forward losses and depreciation. Tax payable under Section 115JB was also computed at nil . The return was taken up for scrutiny assessment and asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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