9911796707
TMI Blog2017 (6) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Disallowance of interest u/s 14A - Interest expenses debited in the profit and loss account - Held that:- Disallowance of interest u/s 14A of the Act was the subject matter of the appeal by the assessee before CIT(A) against the order of assessment and the CIT had already decided the said issue prior to the impugned order of CIT and therefore the CIT cannot exercise jurisdiction on an issue which is already merged with the order of CIT(A). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to brokerage and commission namely copy of ledger of revenue expenditure at page 156 of the paper book, details of brokerage and commission paid during the year ended 31.03.2012 at page 157 of the paper book, details 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. Depreciation on unsold building wrongly allowed by the AO - Held that:- Since the initial year of operation of IT Parks, the cost of developing IT Parks has always been disclosed in the books as "Fixed Assets" and is never considered or regarded either by the assessee or by the Department to be part of 'Trading Stock". Since first year of operation i.e. A.Y. 2002-03, the assessee has been claiming and the Department is allowing depreciation on the actual cost / WDV of the “Fixed Assets" comprised in IT Parks, i.e., building, P&M and fixtures. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 76,00,000/- u/s 35 AC of the I.T. Act, 1961 apart from claim of exemption u/s 35(1)(iii) of ₹ 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 ₹ 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 ₹ 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 ₹ 173.40 Crs and ₹ 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 Act in respect of expenses incurred to earn exempt income, ₹ 75,24,000/- only was disallowed. The fact that the Assessee had utilized major part of the long term borrowings and short term borrowing for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 notice on the limited issue of allowability of interest may not be proceeded with further. The assessee has argued vehemently on this issue. But regarding other issues, during assessment proceedings all de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 pointed out that in the show cause notice u/.s 263 of the Act dated 20.09.2016 the CIT had not raised the issue of lack of enquiry on the part of the AO before completing the assessment except on item-4 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T 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) - CIT Vs Leisure War Exports Ltd (341 ITR 166) (Del HC) - C.S.E. Ltd Vs CIT (ITA No. 268/K/15) (ITAT Kol) - Crisil Ltd Vs Addl.CIT (142 TIK 62) (ITAT Mum) 10. The Ld. DR, on the other hand, submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a - 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 ₹ 4,65,000/- and deduction allowable Rs.l,30,62,500/ - and ₹ 8, 13, 750/ - u/ s 35(1)(iii) and u/ s 35(1)(ii) respectively. Debited and deduction allowable ₹ 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 ₹ 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 shown deduction claimed was Nil , it has been explained by the Assessee that it was advised that separate disclosure in Clause-29 of the computation of business income as contained in return form was necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35AC of the Act the assessee has shown a sum of nil. It is also explained by the assessee that the assessee under 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's finding, deleted the interest disallowance made by the AO. Therefore the issue with regard to allowability of the interest paid 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 ₹ 75,24,000/- disallowed by the AO. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ₹ 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examination of commission and brokerage of ₹ 1,16,10,615/- expenses by the AO before completing the assessment. On this aspect the records reveal 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 ₹ 52,40,44,462/ - debited to the Profit Loss A/c. This amount inter-alia included commission and brokerage of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue expenditure at page 156 of the paper book, details of brokerage and commission paid during the year ended 31.03.2012 at page 157 of the paper book, details 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-trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e constructed spaces in these IT parks were leased out by the Assessee on short term basis to numerous lessees who pay monthly lease rent for use of office space. 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 Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sit of ₹ 86,74,200/-. In AO's opinion both the sums totalling ₹ 3,27,69,200 were in the nature of lease premium and therefore he considered it as the consideration received for granting long term lease. The AO further noted that for the purpose of computing depreciation allowance Assessee had reduced lease premium of ₹ 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 ₹ 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 lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's liability. While deciding the Revenue's appeal the ITAT considered the Assessee's transactions with the lessee in its entirety and recorded the following finding. We 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 ₹ 2,49,95,000/- out of opening WDV of ₹ 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment orders from AY 2004-05 and onwards [See Pages 161 to 164 of PB]. As such the CIT's notice proceed on incorrect assumption with regard to the character and nature of the IT Park building 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rroneous, by conducting necessary enquiry before passing the s. 263 order. The CIT is entitled to collect new material to show how the order of the AO is erroneous. The CIT cannot remand the matter to the AO for further enquiries or to decide whether the findings recorded are erroneous without a finding that the order is erroneous and how that is so. A mere remand to the AO implies that the CIT has not decided whether the order is erroneous but has directed the AO to decide the aspect which is not permissible. On facts, as the CIT had doubts about the valuation and sale consideration received, he ought to have examined the said aspect himself and given a finding on the merits on how the consideration was understated. 33. In the following cases, similar proposition has laid down by Hon ble High Courts as well as various Benches of ITAT :- - DIT Vs Jyoti Foundation (357ITR 388) (Bom HC) - CIT Vs Leisure War Exports Ltd (3411TR 166) (Del HC) - C.S.E. Ltd Vs CIT (ITA No. 268/K/15) (ITAT Kol) - Crisil Ltd Vs Addl.CIT (142 TIK 62) (ITAT Mum) 34. We therefore agree with the submission of the learned counsel for the Assessee that when CIT s specific objection ..... X X X X Extracts X X X X X X X X Extracts X X X X
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