9911796707
TMI Blog2023 (4) TMI 375X X X X Extracts X X X X X X X X Extracts X X X X ..... er amount allowable as deduction in schedule BP, details about share premium and ICDS compliance and adjustment. For which, the assessee has filed a detailed note and explained each entry passed in compliance with IND-AS Standards and how such entries have been negated in the statement of total income, which is not affecting taxable income for the impugned assessment year. All issues questioned by the Pr. CIT including the issue of securities premium has been thoroughly examined by the Assessing Officer during assessment proceedings and after being satisfied with explanation furnished by the assessee, the AO has completed the assessment. Therefore, it cannot be said that the Assessing Officer has not verified the issue which he ought to have been verified in light of explanation 2 to section 263 Income has to be computed as per the provisions of the Income Tax Act, 1961 and the ICDS principles. In the books of accounts, an Assessee may be following any other Standard as may be prescribed by the Statute governing the Assessee. ICDS being fundamental in nature, shall be applicable for computing the income under the heads Profits Gains from Business or Profession Income from other sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "1. The learned Principal Commissioner of Income-tax (Pr. CIT) erred in passing an order u/s.263 and directing the Assessing Officer to modify the order dated 31-12-2019 passed u/s 143(3) of Income Tax Act, 1961. Your appellants submit that the order of the Pr. CIT is illegal, bad in law and void and the same ought to be quashed. 1.1.The learned Pr. CIT erred in holding that there was a lack of enquiry under Explanation 2 to section 263 of the Income Tax Act, 1961. 1.2. The learned Pr. CIT failed to appreciate the fact that the order of the AO is not erroneous and is not prejudicial to the interest of the Revenue. Your appellants therefore submit that the order of the Pr. CIT be quashed. 1.3. The learned Pr. CIT failed to appreciate the fact that in respect of all the issues, the learned Assessing Officer has adopted one of the possible views. 1.4. Without prejudice to the above, the learned Pr. CIT erred in remanding the matter for further verification. 2. The learned Pr. CIT erred in directing the learned Assessing Officer to verify the reduction in profit and de-recognition of income by applying ICDS provisions. 2.1.The learned Pr. CIT failed to appreciate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the computation of total income which were credited to profit and loss account. This reduction has been reflected in Sl. No 33 "any other amount allowable as deduction," in the Schedule-BP of Form ITR filed for the assessment year 2017-18. Sr. No. Particulars Amount (Rs.) Amount (Rs.) 1. Income from Guarantee Commission 2,06,18,121 2 Gain on extinguishment of financial liability 171, 16,24,538 3 Unwinding of discount relating to refundable security to refundable security deposit 5,60, 12,015 4 Profit on sale of fixed assets 5,30,455 Sub Total 178,87,85, 129 5 Fair Value Gain on Financial Instruments at FVTPL 16,53,95,001 6 Interest Income on redeemable financial instruments 2,35,25,578 Total 197,77,05,708 4. The appellant company has filed its return of income for the assessment year 2017-18 on 03.11.2017, admitting a total income of Rs. 11,59,05,730/-. The case was selected for scrutiny and the assessment has been completed u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") on 31.12.2019 and determined total income at Rs. 11,96,55,730/- by making additions towards disallowance of royalty paid amounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as per which the issue of claim of any other amount allowable as deduction in Schedule-BP, increase in securities premium and ICDS compliance and adjustment has been specifically called for with necessary evidences. The assessee in response to notice u/s. 143(2) of the Act, has filed all the details including financial statements for the relevant assessment year, copy of tax audit report, statement of total income and also explained various notional entries passed in compliance with adoption of IND-AS. The assessee had also filed detailed reply to 143(2) notice issued by the Assessing Officer and explained notional entries passed in pursuant to IND-AS Accounting Standards with ledger extract of journal entries effecting asset and liabilities of the accounting year. The assessee had also submitted its reply with regard to increase in securities premium in response to specific question no. 6 of Assessing Officer notice and explained that the increase in securities premium is on account of restatement of liability in compliance with IND-AS, however there is no change in number of shares issued during the financial year 2016-17. The Assessing Officer, after considering relevant submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of security premium u/s. 56(2)(viib) of the Act and all other connected issues relating to the above issues. The relevant findings of the PCIT are as under: 10. I have considered the written submissions filed along with certain details enclosed. The arguments and pleas raised during the hearing were also Considered. I have also perused the assessment record. On perusal l of the submissions, the assessee's plea that the allegation in the notice that the company received dividend income of Rs.135.53 crore is wrong and that no dividend was received by the company during A.Y. 2017-18 is acceptable. Regarding difference in business loss, the AO may examine the reconciliation submitted with reference to the records available. 11. In regard to the other issues, the assessee's main contention is that these are notional entries passed in accordance with adoption of IND AS standards, which it was mandated to adopt as per MCA regulations and are not taxable as income. It was Contended that as per IND AS, the gain or loss has to be recognized in the P&L Account, and that as per lCDS the assessee has negated these gains and claimed deduction. However, the assessee failed to sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial instruments, interest income on redeemable financial instruments, the assessee has not furnished the supporting documentation as to the manner and basis of valuations and the entries passed. The investments in debentures in Shriprop Builders Pvt. Ltd., Shrivision Homes Pvt. Ltd. And Shriprop Housing Pvt. Ltd. were fair valued as per submission. It is not evident why the debenture investment in Shrivision Builders Pvt. Ltd. was not so fair valued. As per submission, preference share investment in Shriprop Housing Pvt. Ltd. was fair valued. It is not evident why the investment in Bengal Shriram Hitec City Pvt. Ltd. was not so valued. 15. In regard to gain on extinguishment of financial liability and accretion to security premium, the assessee represented that its investor initially had a put- option under which there was liability to pay interest at 8% under certain conditions, and that such agreement was modified, and as a result, the financial instrument was not reclassified, restated, fair measure of liability done and subsequently reversed. It was submitted that under IND AS, they are considered compound financial instruments. The assessee has not furnished the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to the Explanation 2 to sec. 263 which reads as under: Explanation 2. -For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner (a) the order is passed without making inquiries or verification which should have been made: (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. 19. The Hon'ble Calcutta High Court in the case of CIT V. Maithan Investment (56taxmann.com) observed, "when the requisite enquiry was not made, the order is bound to be erroneous and prejudicial to the interest of revenue.... If the relevant enquiry was not made, it may in appropriate cases amount to no enquiry and may also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer which covers all the issues forming part of 263 proceedings. The ld. Counsel for the assessee, referring to paper book page no. 5 which refers to 143(2) notice dated 27.09.2019, where the Assessing Officer has called for specific explanation on the issue of claim of any other amount allowable as deduction in schedule BP, share premium and ICDS compliance and adjustment, submitted that the assessee has filed all details and also explained how entries passed in compliance with adoption of IND-AS standards has been negated in the statement of total income. The Assessing Officer, after considering relevant facts has completed the assessment u/s. 143(3) of the Act and thus, it cannot be said that the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue. 9. The Ld. Counsel for the assessee submitted that, before the ld. PCIT, the assessee has submitted all details including relevant IND-AS provisions and records of the company such as journal entries, ledger account, guarantee agreements, CA certificate etc., and argued that entries passed were purely notional in nature and not liable to tax. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as and when these OCDs and OCPS were redeemed, the gain or loss has been recognized as income. It was further submitted that, part of debentures invested in one of the subsidiary was redeemed on 20.01.2017, on which the company offered capital gains of Rs. 12.30 crores in the financial year relevant to assessment year 2017-18. 10. The Ld. Counsel further submitted, in so far as interest income on redeemable financial instruments, the company had investments in Shriprop Housing Pvt Ltd in the form of preference shares, which are treated as debt under IND-AS and the fair value gain of Rs. 2.35 crores is credited in P&L account. However, fact remains that unless preference shares are redeemed the investor does not get any right to receive gain or loss and thus, it cannot be treated as income. Therefore, the same has been reduced from the total income. The Ld. Counsel for the assessee, had also explained gain on extinguishment of financial liability, is nothing but a reversal of liability credited on the basis of re-working of fair value and thus, same cannot be treated as income which is taxable under the law. However, as per IND-AS provisions all these changes in value of liabilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question no. 1, the CBDT has made it very clear that ICDS is not for maintenance of books of accounts. However, ICDS being fundamental in nature, shall be applicable for computing the income under the heads Profits & Gains from Business or Profession & Income from other sources. Further, to the answer to question no. 5, CBDT clarified very clearly that ICDS shall apply for computation of taxable income under the head Profits & Gains from Business or Profession irrespective of the Accounting Standards adopted by the companies ie., either Accounting Standards or Ind-AS. 13. In this regard, he relied upon plethora of judicial precedents including the decision of Hon'ble Supreme Court in the case of Godhra Electricity Company Ltd CIT [1997] 225 ITR 746. The relevant case laws cited by the Counsel for the assessee are as under: Sl. No Party Name Citation 1 Godhra Electricity Company Limited 1997 (4) TMI 4 - Supreme Court 2 Bokaro Steel Limited 1998 (12) TMI 4 - Supreme Court 3 Excel Industries Ltd 2013 (10) TMI 324 - Supreme Court 4 Southern Technologies Ltd [2010] 187 Taxman 346 (SC) 5 Shreeji Prints Pvt Ltd 2020 (2) TMI 1021- Gujarat High Court 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd vs CIT [2000] 243 ITR 83, that if Assessing Officer has not carried out required enquires he ought to have been carried out, then it can be said that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. 15. The Ld. DR further submitted that, the assessee has classified the share capital as loan in the earlier financial years and converted into capital. Since, capital has been classified as loan in earlier years, when it has been transferred to capital account it has to be examined in light of fair valuation of shares. The assessee did not furnished any details including so called shareholder agreement dated 14.07.2014 to the Assessing Officer. The Assessing Officer also not called for any specific details about premium charged on issue of shares in light of fair value of equity shares and analyzed the issue in light of provisions of section 56(2)(viib) of the Act. Similarly, the assessee has recognized guarantee commission in the books of account, but reduced from the total income in the statement of computation of total income by stating that it is a notional entry. But, fact remains that the assessee has provided guarantee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in books of accounts in compliance with IND-AS standards are notional entries and also negated these entries in the statement of total income by adding and reducing from the total income, but could not explain how such entries can be excluded while computing income as per relevant ICDS guidelines. He further observed that, once assessee has adopted IND-AS standards it would not be left to its option to reverse its entries while computing the total income. Such reversal ought to be followed as per IND-AS guidelines or ICDS guidelines. However, the assessee has not placed any record or reference to such guidelines which enabled to seek negation of the entries. Although, the Assessing Officer seems to have called for certain details in respect of gain on extinguishment of liability and other issues during assessment proceedings, but fail to carry out required enquiries he ought to have been carried out in light of explanation 2 to section 263 of the Act, which rendered the assessment order erroneous and prejudicial to the interest of the revenue. 17. The provisions of section 263 of the Act, deals with powers of the Pr. CIT to revise the assessment order, in case the PCIT satisfi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law. An order of assessment passed by the ITO without making necessary enquiries on certain important points connected with the assessment would be erroneous and prejudicial to the interests of the Revenue; when the ITO is expected to make an enquiry of a particular item of income and he does not make an enquiry as expected, that would be a ground for the CIT to interfere with the order passed by the ITO, since such an order passed by the ITO is erroneous and prejudicial to the interests of Revenue. Where the ITO had made enquiries in regard to various issues and the assessee who had given detailed explanation in that regard by a letter in writing and all these are part of the record of the case and the claim was allowed by the ITO on being satisfied with the explanation of the assessee, such decision of the ITO cannot be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emorandum. The above details furnished are self explanatory and even a mere reading of the same will give the apparent meaning of the entries and that they are notional in nature. From the above, it is very clear that all issues questioned by the Pr. CIT including the issue of securities premium has been thoroughly examined by the Assessing Officer during assessment proceedings and after being satisfied with explanation furnished by the assessee, the AO has completed the assessment. Therefore, it cannot be said that the Assessing Officer has not verified the issue which he ought to have been verified in light of explanation 2 to section 263 of the Act. At this stage, it is relevant to refer to the observation of Hon'ble Delhi High Court in the case of CIT vs Usha International Limited [2012] 348 ITR 485 (Delhi), where it has been clearly held that the Assessing Officer can examine the claim or subject matter even without raising a written query. There can be cases, where an aspect and question is too apparent or obvious to hold that the Assessing Officer did not examine a particular subject matter, claim etc. The stand and stance of the assessee and the Assessing Officer in such ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires interference from the PCIT u/s. 263 of the Act. As we have already stated in earlier part of this order, the assessee has passed various entries in compliance with IND-AS standards to give effect to liabilities and asset as on the date of application of said standards. The assessee has adopted IND-AS standards for the first time in the financial year 2016-17 relevant to the assessment year under appeal. As per IND-AS, it passed certain notional fair valuation entries in the books in order to restate the balance sheet as on 01.04.2015 & 31.03.2016. These entries were passed during the financial year 2016-17 only. Some of these entries were routed through P&L account by way of debited and credit. However, for the purpose of income tax these entries were negated in the computation of total income as per the provisions of ICDS. The assessee has added back amount debit to P&L account and reduced amount credited to P&L account. The PCIT, conveniently ignored amount debited to P&L account and added back in the statement of total income, but questioned amount credited into the P&L account and reduced in the statement of total income. The said reduction from the total income has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of IND-AS 39. But, the same has been reduced from the total income in the statement of total income, because the entry passed in the books of account is only a notional entry but not actual accrual of income, because the assessee has recognized gain or loss in respect of these investments in subsidiaries as and when the debentures and preference shares are redeemed in terms of agreement. It is pertinent to note that part of OCD which the company had invested in Shrivision Homes Pvt Ltd was partially redeemed on 20.01.2017 and assessee has derived capital gain amounting to Rs. 12.30 crores for the assessment year 2017-18 and the same has been offered to tax. Therefore, we are of the considered view that, when the assessee has offered gain or loss arising out of financial instruments in the year in which such investments are redeemed, then the question of taxation of notional gain accounted in the books of the assessee in terms of certain accounting standards does not give raise to any income which can be taxed when the entries has been passed in the books. Therefore, on this issue also there is no error in the order of the Assessing Officer. 23. In so far as interest inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, equity shares amounting to Rs. 8516.29 millions (including securities premium of Rs. 7650.25 millions) have been accounted for as 'non-current borrowings' as on the transition date i.e., on 01.04.2015. During the financial year ended 31.03.2017, the shareholders have entered into a new agreement where these preferential rights with a guaranteed return have been removed. Consequent to the above, the liability option of the instrument has been derecognized and equity instrument including security premium has been recorded at the fair value as on 31.03.2017. The difference between the fair value of the equity and carrying amount of the liability aggregating to Rs. 171.16 crores has been treated as gain on extinguishment of financial liability and credited to P&L account. From the above, it is very clear that, the entry passed in the books of the accounts is only a notional entry for accounting gain in connection with equity instrument in terms of IND-AS standards. Therefore, it cannot be said that there is a commercial value and it requires receipt of any amount. Further, the liability was not claimed as expenditure while computing the total income. Since, gain on extinguis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Assessing Officer after considering relevant facts has taken a possible view and hence, jurisdiction assumed by the PCIT on this issue also fails. 26. In so far as difference in business loss available for set off, we find that the total losses brought forward from assessment year 2016-17 was at Rs. 34,27,71,352/- including unobserved depreciation of Rs. 2,67,93,481/-. The reconciliation of carried forwards loss and its adjustment and also the balance of loss available as at 31.03.2016 along with supporting evidences has been furnished to the Assessing Officer. From the above, it is clear that there is no difference in brought forward losses of earlier years as considered by the ld. PCIT. The Assessing Officer after considering relevant facts has rightly accepted the claim of the assessee and thus, it cannot be said that there is an error in the order of the Assessing Officer, which can be interfered by the PCIT. 27. It is settled principle of law that income has to be computed as per the provisions of the Income Tax Act, 1961 and the ICDS principles. In the books of accounts, an Assessee may be following any other Standard as may be prescribed by the Statute governing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e system where entries are made on accrual basis i.e. accrual of the right to receive payment and the accrual of the liability to disburse or pay. In commissioner of Income tax Bombay city-I v. Messrs. Shoorji Vallabhdas and co.(supra) it has been laid down :- "Income tax is a levy on income no doubt the Income Tax act takes into account two points of time all which the liability to tax is attracted viz the accrual of the income or its receipt; but the substance of the matter is the income. if income does not result at all there cannot be a tax even though in book keeping an entry is made about a hypothetical income which does not materialise."[P. 148] This principle is applicable whether the accounts are maintained on case system or under the mercantile system. If the accounts are maintained under the mercantile system what has to be seen is whether income can be said to have really accrued to the assessee-company. in H.M. Kashiparekh & co. ltd. v. commissioner of Income Tax (1960) 39 ITR 706 the Bombay High court had said :- "Even so, (the failure to produce account losses we shall proceed on the footing that the assesse - company having followed the mercanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rroneous. 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 se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 30. The assessee has also relied upon the decision of ITAT Mumbai Benches in the case of Dena Bank vs PCIT [2020] 1 TMI 1035-ITAT Mumbai. The tribunal, after considering relevant facts and also by following various judicial precedence held as under: "The order of the ITO in question must not only be erroneous but also the error in the ITO order must be of such a kind that it can be said of it that it is prejudicial to the interests of the Revenue. In other words, merely because the officer's order is erroneous, the PCIT cannot interfere. Again, merely because the order of the officer is prejudicial to the interests of the Revenue, then again, that is not enough to confer jurisdiction on the PCIT to interfere in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risdiction u/s.263 of the Act, is completely erroneous on account of wrong assumption of applicability of 5th proviso to section 32(1) of the Income Tax Act, 1961, to the facts of the present case, assessment order passed by the Assessing Officer needs no revision, as there is no error committed by the Assessing Officer in claim of depreciation on purchase of goodwill. It is well settled principle of law by decisions of various Courts, including decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co.Vs. CIT 243 ITR 83 (SC), where it has been clearly held that the PCIT cannot assume jurisdiction to revise assessment order, unless the PCIT satisfies that assessment order passed by the Assessing Officer is erroneous, insofar as it is prejudicial to the interests of the Revenue. In this case, on the issue of depreciation on goodwill, the Assessing Officer has taken one possible view with which the PCIT does not agree, however, it cannot be treated as erroneous & prejudicial to the interests of the Revenue, unless view taken by the Assessing Officer is erroneous and unsustainable in law. This legal principle is also laid down by the Hon'ble Supreme Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith law. Further, the PCIT has also not observed anything about creditors appear in books of accounts to direct the AO to bring said creditors within the provisions of Sec.68 of the Act. If you go through the order of the PCIT u/s.263 of the Act, dated 18.03.2022, it is very cryptic and brief. The PCIT has simply by relying upon the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) held that failure on the part of the AO to apply his mind during the course of assessment proceedings, is sufficient ground for invoking sec.263 of the Act, and the order in such case is erroneous in so far as it is prejudicial to the interest of the Revenue. In our considered view, the PCIT is grossly erred in setting aside the assessment order with one-line cryptic observation that the AO has not applied his mind on four issues without bringing on record, how the Revenue is prejudiced from those issues. Further, in the show cause notice also the PCIT has failed to give any plausible reasons 'as to how' the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. From the above, it is clear that the PCIT has simp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 263. • Hon'ble Delhi High Court in the case of Commissioner of Income-tax v. Sunbeam Auto Ltd [2010] 189 Taxman 436 (Delhi) where in it was held that "The submission of the revenue was that while passing the assessment order, the Assessing Officer did not consider the aspect specifically whether the expenditure in question was revenue or capital expenditure. That argument predicated on the assessment order, which apparently did not give any reason while allowing the entire expenditure as revenue expenditure. However, that, by itself, would not be indicative of the fact that the Assessing Officer had not applied his mind to the issue. There are judgments galore laying dawn the principle that the Assessing Officer in the assessment order is not required to give detailed reasons in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. One has to keep in mind the distinction between 'lack of inquiry' and 'inadequate inquiry'. If there was any inquiry, even inadequate, that would not, by itself, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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