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TMI Blog2002 (9) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of Rs. 23,54,71,290 which, after being subjected to scrutiny assessment under section 143(3), lead to the income being finally assessed at Rs. 2,39,19,589. However, on 19th October, 1995, learned Commissioner of Income-tax (West Bengal V) issued a show-cause notice to the assessee requiring the assessee to show cause as to why the assessment order under section 143(3) should not be treated as 'erroneous and prejudicial to the interest of revenue' and, accordingly, be made subject matter of revision under section 263 of the Act. In this show-cause notice, the Commissioner pointed out that: "a. The assessee had claimed deduction of amounts of Rs. 14,30,416 and Rs. 15,51,373, on account of technical know-how fees and design and drawing expenses, which have been wrongly allowed by the Assessing Officer as these expenses were in the nature of capital expenses. b. The assessee had advanced an interest-free advance of Rs. 2,26,23,000 to its subsidiary company, even though assessee had 'huge liabilities for interest'. It was also pointed out that the assessee 'did not get any business gains from the subsidiary company, directly or indirectly, by giving the interest free loan'. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee also placed reliance on the auditor's note. b. It was submitted by the assessee that the bank accounts from which the advances of Rs. 226.63 lakhs were made were not bank overdraft accounts, but all the receipts and collections were also deposited in those accounts. The assessee thus submitted that advances were thus made from common pools of funds which included collections and realizations from customers, and profits generated by the assessee over the years, as reflected in the General Reserves, are also embedded in the same. In this back drop, assessee placed reliance on Hon'ble jurisdictional High Court's judgment in the case of Woolcombers of India Ltd v. CIT [1982] 134 ITR 219 (Cal.) which was also followed in the case of Reckitt Colman of India Ltd. v. CIT [1982] 135 ITR 698 (Cal,), Indian Explosives Ltd v. CIT [1984] 147 ITR 392 (Cal.), Alkali Chemical Corporation of India Ltd. v. CIT [1986] 161 ITR 820 (Cal.) and British Paints (India) Ltd. v. CIT [1991] 190 ITR 196 (Cal.). It was also pointed out that assessee's profits for the relevant financial year was Rs. 518 lakhs. The assessee thus submitted that therefore 'no question can be raised on the payment of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." 6. Aggrieved by the aforesaid order of the learned Commissioner, assessee is in appeal before us. 7. We have heard Shri Rahul Mitra, learned counsel for the assessee, and Shri L.D. Mahalik, learned Departmental Representative, at considerable length. We have also carefully perused the material before us and duly deliberated upon factual matrix of the case, as also the applicable legal position. 8. We find that connotations of expression 'erroneous', in the context of exercise of revisionary powers by the Commissioner under section 263 or, for that purpose, under section 264 of the Act, are much narrower than ordinary connotations of this expression in common parlance. Hon'ble Calcutta High Court, in unreported judgment dated 19th October, 2001 in the matter of CIT v. Subhash Projects Marketing Ltd [IT Appeal No. 448 of 2000] has observed that "when a possible view has been taken by the Assessing Officer, it cannot be said that the order of the Assessing Officer is erroneous". Their Lordships have further observed that "In exercise of power under section 263, the order of Assessing Officer can be said to be erroneous only when impossible view has been taken" and that "If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly with the amount of Rs. 15,51,373 which represents payment to one M/s. Stolberger Maschinerfabrik GmbH Co., a German company towards purchase of drawings and designs which were said to have been required for prodiicing 'Drum Twister Line, complete with all accessories' which the assessee was to supply to M/s. Incab Industries Limited. We may, in this regard, reproduce the following auditor's, relevant portion at pages 39-40 of the paper book, for ready reference: "4.4 According to the past practice, designs and drawings are capitalized under Plant Machinery. Deviation from the said practice has been made in the case of designs and drawings amounting to Rs. 15,51,373.35 imported during the year from M/s. Stolberger Maschinerfabrik GmbH Co., West Germany, which have been charged off to revenue as consumption of materials as, in the opinion of the officials of the Unit, these designs were primarily imported to execute a specific order for sales value of Rs. 1.8 crores (approx.) and accordingly they do not visualize receiving any such order in the near future. Other drawings and designs imported during the year have been capitalized........" 10. We also find that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he conclusion that the expenditure in question is in the nature of capital expenditure. Such an approach of the CIT cannot be said to be a judicious exercise of powers under section 263, and, accordingly, unsustainable in law. Although CIT has restored the matter to the Assessing Officer but then he has given a finding of fact that the expenditure in question is a capital expenditure. On these facts, even if an opportunity of hearing is given to the assessee, before the Assessing Officer, such an opportunity cannot be a meaningful opportunity so far as determination of question about nature of expenditure is concerned. 15. This also takes us to the question whether, on the peculiar facts of this case, it was at all a possible view that the aforesaid amount of Rs. 15,51,373 was deductible under section 37(l) of the Act. Section 37(l), it may be mentioned, states that "Any expenditure, not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses, laid out or expended wholly or exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head 'profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Limited, and, therefore, payment for these drawings and designs, for all practical purposes, constituted a part of cost of executing that order" is not disputed on facts. We have also noted that order for these drawings was placed in the light of, and immediately after, the order for related machine received by the assessee from Incab Industries Limited. We have also noted that the foreign company was all along involved in assessee's discussions with the Incab Industries Limited and, as evident from specifications set out by Incab Industries Ltd. itself, proximate reason for purchase of these drawings and designs was execution of Incab's order. On these facts, it is not at all an unreasonable view to come to the conclusion that the expenditure was incurred for "running the business and with a view to produce profits" and, therefore, deductible as a revenue expenditure. Since the drawings and designs were required for this specific purpose and were good only for that purpose, a view can indeed be taken that it did not result in acquiring "an asset or advantage of a permanent or enduring character". 16. In view of these discussion, we are of the considered opinion that the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also made to the judgment in the case of Alkali Chemical Corpn. of India Ltd. wherein a view was taken by the Hon'ble jurisdictional High Court that "if the money is deposited by the assessee out of its profits in an overdraft account from which all payments including that of income tax are made, the fact that the said account had a continued debit balance would make no difference to the presumption that the income-tax had, in fact, been paid out of the profits and not out of the borrowings". In the present case also it is not in dispute that the bank accounts from which the advances of Rs. 226.63 lakhs were made were not bank overdraft accounts, but all the receipts and collections were also deposited in those accounts. The assessee's submission that 'advances were thus made from common pools of funds which included collections and realizations from customers, and profits generated by the assessee over the years, as reflected in the General Reserves, are also embedded in the same', also remains uncontroverted. It was also not in dispute that assessee's profits for the relevant financial year was Rs. 518 lakhs. On these facts, and in the light of the Tribunal's decision, which f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure in the nature of direct and specific expenditure incurred in earning the dividend that is to be deducted from gross dividend to arrive at amount deductible under section 80M of the Act. This view also finds support from following observations in Tribunal's decision in the case of Shaw Wallace Co. Ltd. v. Dy. CIT [2002] 80 ITD 156 (Cal.) which was authored by one of us (Accountant Member) and to which both of us were parties: "Having considered the rival submissions and deliberated upon the judicial precedents on the issue before us, we are of the considered view that the deduction of expenditure incurred in earning dividend income, merely on notional or estimate basis and for the purpose of computing admissible deduction under section 80M is not sustainable in law. In case an expenditure is really incurred in earning the dividend income, such an expenditure should undoubtedly be deducted from gross dividends to arrive at the allowable deduction under section 80M. However, in the case before us the deduction for expenditure has been made on purely estimate basis. We are of the considered view that such an allocation of expenditure, as made by the AO in this case, is d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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