9911796707
TMI Blog2017 (6) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... roneous 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 Act in respect of expenses incurred to earn exempt income, Rs. 75,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 notice on the limited issue of allowability of interest may not be proceeded with further. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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 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 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) - 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) (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 borrowings made and which were outstanding as on 31.01.2012. The Assessee had also furnished before the AO full particulars of the investments which the Assessee made in its Group, Associate & Subsidiary Companies to promote its co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Explnation (c ) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore 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 the Act dated 20.09.2016 is with regard to computation of long term capital gain of Rs. 60.05 crores. On this issue the allegation of the CIT in the show cause notice is that the AO did not call for any details or documentary evidence w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 considered revenue expense and deduction therefore was claimed in the computation of income. However, in cases where the lessees acquired long lease of the constructed spaces for period of 99 years against lump sum lease premium, such trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pleting 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 buildings" came into being and got recognized for tax purposes for the first time in AY 2002-03 when first phase of Assessee's project known as "Infinity Think Tank" got completed. In the assessment for the year under consideration as also for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income so derived from commercial exploitation of IT Parks has been assessed by the AOs under the head 'profits & gains of business". Since such business income is earned by the Assessee by use of the "IT Park" owned and developed by the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation 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 AY 2007-08 the matter was taken in appeal. The CIT(A) deleted both the additions made in the assessment order. The CIT(A) in the first instance held that refundable deposit of Rs. 86,74,200/ - represented assessee's liability and could not be ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the plant & machineries and fixtures installed therein have always been allowed on the footing that these assets were "fixed assets" of the Assessee's business. In the audited accounts of the Assessee IT park building as also the plant & machineries installed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 order of the AO was erroneous and prejudicial to the interest of the revenue. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Even on this ground the order u/s.263 of the Act, in so far it concerns, issues other than the issues for which the allegation in the show cause notice was lack of enquiry on the part of the AO before concluding the assessment rendering the order of the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
