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TMI Blog2025 (2) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 263 of the Act, the CIT had to make some observations on the merits of the case moreso because the issue was not examined during the course of the assessment proceedings. The CIT having said so has directed the assessing officer to recompute the book profit afresh by applying the correct provision of law, and after providing an opportunity to the assessee. In our view on a complete reading of the operative paragraphs of order under Section 263, it cannot be said that the observations made by the Commissioner on computation of book profit was definite and conclusive, but he had to make these observations for satisfaction of the twin conditions mentioned in Section 263 for assumption of jurisdiction. If he had not made such observation, then the order under Section 263 would have fallen foul of the mandatory conditions required for exercising jurisdiction under Section 263. Therefore, on a holistic and complete reading of the operative paragraphs, we cannot accept the submission made by the Appellant-Assessee that the observation made by the CIT on computation of book profit is definite and therefore he is entitled to challenge the same on merits before the Tribunal and befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest was changed, whereby interest relating to period from the commencement of production upto 31 December 1986 was decapitalised and charged as an expenditure in the profit and loss account of the year 1987-1988, and the depreciation claim on the said capitalised interest in the earlier year was also written back to the profit and loss account in 1987-1988. 6. On 28 July 1988, the Appellant-Assessee filed its return of income declaring loss. The said return was revised on 7 July 1989 and income under Section 115J of the IT Act was declared at Rs. 49,19,380/-. The said revised return was further revised on 23 April 1990 in which the deduction under Section 32AB of Rs. 80,85,862/- was claimed, but the income under Section 115J remained the same i.e. Rs. 49,19,380/-. The said return was selected for scrutiny assessment. 7. On 28 February 1991, an assessment order under Section 143 (3) of the IT Act was passed by the assessing officer, assessing the income under normal provisions of the IT Act at rupees 'NIL' after making disallowance under Rules 6D, 37(2A), incentive payment, 40A (5), 43B, payment to club, addition on account of mortgage etc. and after setting off unabsorbed losse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this adjustment in this year of amalgamation. The deletion of the prior period interest debited in the books of accounts is not one of the items referred to in the provisions of Section 32AB (3) which defines the profits on business for the purpose of this Section. Since the assessing officer has not taken this aspect into consideration, the assessment made by the assessing officer is erroneous and prejudicial to the interest of revenue on this account. 5. Taking the second point for the purpose of Section 115J the book profits have to be taken into consideration. However, it does not mean that the adjustments made by the assessee in respect of earlier years should be allowed to alter the figures of business profits of this year. If such adjustments has to be allowed for the purpose of Section 115J the assessee will be at liberty to alter the figures of the current year's books by making adjustment entries. It will artificially have the effect of decreasing the book profits of this year with sole intention of avoiding applicability of Section 115J. Such attempt cannot be said to be within the scheme of the provisions of Section 115J. Accordingly the deduction of the book pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, we refrain from commenting on the merits of the issues." 12. Meanwhile, the assessing officer on 31 January 1995 passed an order pursuant to Section 263 order. The said order under Section 143 (3) read with Section 263 of the IT Act was passed after giving an opportunity to the Appellant-Assessee, who made various submissions vide various letters on the issue of computation of deduction allowable under Section 32AB and computation of book profit under Section 115J. After detailed analysis of the submissions made by the Appellant-Assessee and after hearing the Appellant-Assessee on the merits, the assessing officer passed an order under Section 143 (3) read with Section 263, wherein book profit under Section 115J was computed at Rs. 1,44,48,277/- and eligible income under Section 32AB was computed at Rs. 1,14,49,120/- but deduction was restricted to the extent of amount utilised for acquiring the plant and machinery which was Rs. 80,85,862/-. The assessing officer with respect to decapitalisation of interest gave the same treatment in computing deduction under Section 32AB as given in computing book profit under Section 115J and similarly with respect to write back of depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d against the revenue. Submissions of the Respondent :- 16. Per contra, Mr. Suresh Kumar, learned counsel for the Respondent submits that the issue raised in the order under Section 263 was never examined by the assessing officer in the course of the original assessment proceedings. He further submitted that the CIT can exercise jurisdiction under Section 263 of the IT Act only if the order is erroneous and prejudicial to the interest of the revenue. He submits that to satisfy these twin jurisdictional conditions, the CIT after giving an opportunity of hearing to the Appellant, has to form some opinion on merits for coming to a conclusion that the order passed under Section 263 of the IT Act is erroneous and prejudicial to the interest of the revenue. After having observed the same, he has remanded the matter to the assessing officer to consider the same afresh by applying correct provision of law and after providing an opportunity to the assessee. He submits that on a holistic reading of paragraphs 4 to 6 of the order under Section 263, it cannot be said that the CIT has given a definite finding on merits. He further submits that in the order giving effect to the Section 263 ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. [Emphasis supplied] 21. The object of conferring revisional power on CIT under Section 263 of the IT Act is that the revenue has no right of appeal to CIT(A) against any order passed by the assessing officer. Therefore, this section is enacted conferring supervisory power on the CIT to be exercised when an order passed by the officer is found to be erroneous and prejudicial to the interest of the revenue. 22. At the outset a query was raised by the Court as to whether there is any material on record to show that the assessing officer in the course of the original assessment proceedings had raised a query on the issues which were the subject matter of proceedings under Section 263, and whether the Appellant-Assessee had filed any response/reply to such query on these issues having been raised by the assessing officer during the course of the original assessment proceedings. We were not shown any such material. Therefore, admittedly the assessing officer had not examined the issue during the course of the original assessment proceedings on the subject matter of Section 263 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63 proceedings, nor was it at any point of time argued before any of the authorities that these issues were examined in the course of the original proceedings. Therefore, in our view, merely because an assessing officer reproduces the computation of book profit made by the assessee at the end of the assessment order, it cannot be said that the assessing officer has examined the issue of computation of book profit under Section 115J of the IT Act. Therefore, the contention raised by the Appellant-Assessee on this issue is rejected. 25. It is important to note that in the reply to show cause notice to notice under Section 263, the Appellant-Assessee had not challenged the jurisdiction of the CIT but made submissions on merits. However in grounds of appeal to the Tribunal, assumption of jurisdiction was challenged. However, on a perusal of the Tribunal's order, submission on jurisdiction appears to be that since on merits issue is covered by the subsequent decision of the Supreme Court in the case of Apollo Tyres (supra) the jurisdiction assumed is bad in law. Although initially Mr. Agarwal sought to contend that due to subsequent decision of the Supreme Court in the case of Apollo T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g officer and, therefore, same is set aside for computation of book profit under Section 115J afresh by applying the correct provisions of law, and after providing an opportunity of hearing to the assessee. 27. The very fact that the Commissioner is required to make an order after affording an opportunity of hearing to the assessee ingrains in the process the requirement of recording reasons for its conclusion, as is necessary for any quasi-judicial order required to be made by a quasi-judicial authority. It cannot be doubted nor has it been questioned that orders under Section 263 bear stamps of quasi-judicial nature and require to be supported by reasons for its conclusion. Necessary consequence is that while passing the order revising an order passed by subordinate officer, the Commissioner must record reasons in support of his conclusion that the order is revised being erroneous and that it would be prejudicial to interests of revenue due to such erroneousness. 28. In our view, the Appellant-Assessee cannot pick up one sentence of the operative order and contend that the Commissioner has given a definite finding on the merits of the case. There has to be a holistic reading of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 260A of the Act, we cannot permit such course of action since we are in appellate jurisdiction and not in equity jurisdiction. 30. Learned counsel for the Appellant relied upon the decision of this Court in the case of Herdillia Chemicals Ltd. (supra) in support of his submission that there is a definite finding of the CIT in his order on the merits of the case and, therefore, the Appellant should be permitted to agitate the issue on merits. In our view, in the case of Herdillia Chemicals Ltd. (supra), the CIT expressly stated that he is withdrawing the reliefs under Section 80J of the Act granted by the ITO and after withdrawing the reliefs, the ITO was directed to determine the reliefs afresh in accordance with law after giving opportunity to the assessee of being heard only for ministerial purpose. In the present case before us, admittedly the issues raised in the revisional proceedings were not examined by the assessing officer during the course of the original assessment proceedings. The Commissioner, therefore, had to make observations on the merits for satisfying the twin conditions of assuming jurisdiction under Section 263 of the Act. Having made so, the CIT note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y opinion does not arise which could be said to have been adopted or taken. The decision in the case of Max India Ltd. (supra) itself states that when the ITO adopted one of the courses permissible in law or where two views are possible and ITO has taken one view and the CIT disagrees with it then, in that scenario, the order cannot be treated as erroneous or prejudicial to the interest of the revenue. In the instant case before us, since the issue of computation of book profit was never examined by the assessing officer on any count, the issue of taking a view by the assessing officer or adopting anything and consequently the CIT disagreeing also does not arise and, therefore, the observations made in the case of Max India Ltd. (supra) would not apply to the facts of the present case. 32. The decision of Max India Ltd. (supra) follows decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 wherein exercise of jurisdiction under Section 263 of the IT Act was upheld since the ITO failed to apply his mind to the case and it is in that context the Supreme Court further observed, by way of example, that when an ITO adopted one of the courses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xamined the issue in the course of the assessment proceedings. The argument of the assessee was that in view of conflicting decision with respect to deduction under Section 80HHC and by placing reliance on the decision of the Supreme Court in the case of Max India Ltd. (supra) was that the jurisdiction was wrongly assumed. The Coordinate Bench reconciled and explained the decision in the case Malabar Industries Co. Ltd. (supra) and Max India Ltd. (supra) and has observed as under : 10. The law on exercise of jurisdiction under Section 263 of the Act is settled by the decision of the Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 wherein it has recorded that power of revision under Section 263 of the Act can be exercised only on satisfaction of twin conditions namely the order of the Assessing Officer must be erroneous, and also prejudicial to the interest of the revenue. The Court further observed that where a claim made by the assessee is allowed by the Assessing Officer without having made any enquiry, then the order of the Assessing Officer to the extent it allowed such a claim is erroneous in law. The Apex Court also recorded the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which comes for our consideration is, did the Assessing Officer consider and examine the claim of the respondent before allowing a claim for deduction under Section 80 HHC of the Act. The respondent-assessee seeks to draw inference from the statement of case that there was an inquiry made before allowing the claim of deduction under Section 80 HHC of the Act at Rs.92.81 lakhs. This inference is not justified. Mere using the word "allowed" does not mean examination and enquiry before allowing deduction under Section 90 HHC of the Act. The words "due verification" would include within its ambit not only inadequate inquiry/verification but also no enquiry/verification. However, in case the respondent-assessee was of the view that the claim has been examined by the Assessing Officer before allowing it, then respondent-assessee ought to have the statement of case modified/amended so as to bring the aforesaid facts on record, as held by the Apex Court in the case of Calcutta Agency Ltd. (supra). This not being done and now to draw far fetched inference cannot be accepted. It is now settled in view of Malabar Industries (supra) that non-enquiry before allowing the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act by the Commissioner of Income Tax to be bad in law as the view of the Assessing Officer was in line with the decision of the Tribunal in Mysore Exports Ltd. (supra). It is relevant to note that on the date when the Commissioner of Income Tax exercised his powers under Section 263 of the Act on 31.03.1995, the decision of the Tribunal in Mysore Exports Ltd. (supra) was not available before him as it was rendered on 19.05.1995. 16. Therefore, we are of the view that the Assessing Officer cannot abdicate his responsibility of examining the claim for deduction before allowing it. Absence of examination of the claim made by the assessee while passing an assessment order and allowing the claim made, would render the order of the Assessing Officer erroneous and coupled with the fact that in this case it is admitting prejudicial to the interest of the revenue, exercise of the revisional jurisdiction under Section 263 of the Act by the Commissioner of Income Tax proper and valid. 35. In our view, this decision of the Coordinate bench supports the reasoning given by us in rejecting the submissions of the Appellant-Assessee. 36. We may also point out that in the written submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al are dated 2 May 1994. Secondly, in the order giving effect to the Section 263 proceedings, eligible profit computed under Section 32AB has been revised but since the said profit was more than the amount utilised in the plant and machinery, the deduction was restricted to the amount utilised for acquiring the plant and machinery. The calculation of eligible profit differed in the original assessment order and order giving effect to the Section 263 order. Therefore, to justify acceptance of revisional jurisdiction when it comes to Section 32AB deduction, but at the same time on similar grounds to challenge the jurisdiction when it comes to computation of book profit under Section 115J, in our view, would be self-contradictory insofar as assumption of jurisdiction is concerned. Even before us, the Appellant has not raised any grievance on assumption of jurisdiction under Section 32AB by the CIT. If that be so, then, on very same ground the Appellant-Assessee cannot raise any grievance with respect to assumption of jurisdiction qua computation of book profit is concerned. 39. The learned counsel for the Appellant-Assessee further submitted that in the revisional order, CIT has not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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