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From the Courts »
 BSES Rajdhani Power Ltd. Vs. Principal Commissioner Of Income Tax, Delhi-2
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BSES Rajdhani Power Ltd. Vs. Principal Commissioner Of Income Tax, Delhi-2
November, 24th 2017
%                                       RESERVED ON: 27.10.2017
                                     PRONOUNCED ON: 08.11.2017

+                         ITA 387/2017
BSES RAJDHANI POWER LTD.                        .....Appellant
                 Through: Mr. Ajay Vohra, Sr. Advocate
                 with Mr. Rohit Jain, Advocate.


                                          ..... Respondents
                  Through: Mr. Zoheb Hossain, Sr. Standing
                  Counsel for Revenue.

1.     The following questions of law arise for consideration:
       (a) Whether on facts and in the circumstances of the case, the
       Tribunal erred in law in not holding that order dated
       31.03.2016 passed under section 263 of the Act was without
       jurisdiction, illegal and bad in law?
       (b) Whether on facts and in the circumstances of the case, the
       Tribunal erred in law in not quashing order passed under
       section 263 of the Act, considering that the assessing officer had
       raised specific queries and applied his mind to the concerned
       issues while framing original assessment?
       (c) Whether on facts and in the circumstances of the case, the
       Tribunal erred in law in not quashing the order passed under
       section 263 of the Act in respect of issues pertaining to alleged

ITA 387/2017                                                     Page 1 of 13
       violation in deduction of tax at source and related party
       transactions, which did not either form part of the show cause
       notice or confronted to the Appellant, instead in setting aside
       the same for de novo adjudication by the CIT?
2.     The appellant/assessee filed its return for assessment year (AY)
2010-11, declaring Nil income, which was subsequently revised on
30.03.2012.The return was selected for scrutiny and the assessing
officer (AO) initiated assessment proceedings and issued notice under
Section 143(2) of the Act. During the course of assessment a special
audit of the assesse's accounts was directed, under Section 142(2A) of
the Act on 05.03.2013. The special auditor's report dated 30.08.2013
provided elaborate comments, inter alia, in connection with the terms
of reference for special audit framed by the AO, concerning the
following issues: (i) reconciliation of fixed assets and depreciation
thereon, (ii) arm's length nature of transactions entered into with
related parties, and (iii) compliance with provisions of Chapter XVII-
B of the Act relating to tax deduction at source and effect of non-
compliance thereof.

3.     The AO, after considering the special auditor's report
completed assessment by an order-dated 29.10.2013, under Section
143(3) of the Act. The total income assessed was 838,38,00,790 after
making, inter alia, disallowance of 66, 27,782 being depreciation on
6,44,81,091 capitalized for re-installing fixed assets. Further, the AO
also disallowed 94,20,842 due to related party transactions, added
38,58,60,000 in respect of arm's length price of transactions with
related party and disallowed 2,58,28,863 under section 40(a)(ia) of

ITA 387/2017                                                  Page 2 of 13
the Act. The assessee appealed against the AO's order; the appeal was
disposed of on 30.05.2014. The CIT (A) decided the issue with respect
to disallowance of depreciation of 66,27,782 on capitalization of
reinstallation costs of fixed assets and disallowance in respect of
transactions with group concerns in favour of the assesse. The CIT
(A), further, granted partial relief to the assessee in respect of
disallowance made under Section 40(a) (ia) of the Act.

4.     A show cause notice under Section 263, on 16.03.2016, was
issued by the Commissioner, alleging that there was variation in cost
of fixed assets, which aspect had not been verified or examined by the
AO while framing assessment under section 143(3) of the Act. In
response to the show-cause notice issued under Section 263 of the Act,
the assessee filed its replies, resisting the move to revise the completed
assessments; the appellant also pointed that since the original order of
the AO had merged with that of the CIT (A), after the disposal of
appeal, the re-appraisal under Section 263 was unwarranted. Later, the
CIT (A) made an order on 31.03.2016 under Section 263, setting aside
the original assessment order framed under section 143(3) of the Act,
holding the same to be erroneous and prejudicial to the interests of the
Revenue and directing the AO to reconsider the following issues:

(i) Depreciation claimed in respect of fixed assets to the extent of
298.93 crores (mentioned in show cause notice) [hereinafter also
referred to as "first issue"];

(ii) Applicability of TDS provisions to certain expenditure claimed by
the assessee. It was urged that this issue was not mentioned in the

ITA 387/2017                                                    Page 3 of 13
show cause notice nor was any opportunity of hearing allowed to the

(iii) Benchmarking of transactions with group companies under
Section 40A (2). It was urged that this issue was not mentioned in the
show cause notice nor was any opportunity of hearing allowed to the

5.     The assessee's appeal to the ITAT was rejected by the
impugned order. The Tribunal held that the assessment was concluded
by the AO without making adequate enquiries with respect to variation
in cost of fixed assets and accordingly, order passed by the
Respondent under Section 263 of the Act was upheld. As regards
issues concerning applicability of TDS provisions on expenditure
claimed by the assessee and benchmarking of transactions with group
concerns, the Tribunal set aside the order of the CIT, holding that no
opportunity was provided to the assessee regarding those issues and
accordingly, directed the Respondent to pass fresh order in respect
thereof after providing reasonable opportunity to the assessee.

6.     Relying on Malabar Industrial Co. Ltd. vs Commissioner of
Income Tax 243 ITR 83 (SC) and Commissioner of Income Tax vs
Max India Ltd 295 ITR 282 (SC) it was contended, by Mr. Ajay
Vohra, learned senior counsel, that having regard to the fact that each
of the issues which were sought to be re-opened, were the subject
matter of scrutiny in the original assessment order, it could not be said
that such an assessment order was prejudicial to the interests of the
revenue and erroneous in law. It was emphasized that the process of

ITA 387/2017                                                   Page 4 of 13
verification of materials, specifically included considering the special
auditor's report. The AO went through the report, and made his
additions in respect of all matters. The assessment was a scrutiny
assessment under Section 143 (3). That order, according to learned
senior counsel, merged with the appellate order of the CIT (A) on

7.     Counsel submitted that the issue relating to depreciation in fact
merged with the decision of the CIT (A). Thus, if there was any
concern with respect to the AO's order, that stood addressed and
became final upon application of mind at the appellate stage.
Particular notice of the court was drawn to the following observations
of the CIT (A):

       "5.5.7. Therefore, I am of the opinion that expenditure incurred
       by the appellant, including inter alia, the installation cost,
       borrowing cost and other charges etc, were relating directly or
       indirectly to the installation of the transformers and are
       therefore, eligible to be included in the actual cost of the
       relevant block of fixed assets and therefore, the AO is hereby
       directed to allow depreciation on the cost of recapitalized

8.     It was submitted that as regards addition of `94,20,842/- under
Section 40A(2)(b) of the Act, the CIT (A) ruled on this issue too.
Counsel relied on the following extract of the CIT (A)'s order:

       "Considering the peculiar facts of the case and material on
       records, I am of the view that the AO has added on an ad hoc
       basis Rs.38.58 crores on account of lack of arms length price in
       appellants transaction with M/s RETL as regard power

ITA 387/2017                                                  Page 5 of 13
       purchase without a valid legal and factual support as all
       purchases and sales of power by the distribution companies
       (Discoms) in Delhi require approval from Delhi Power
       Procurement Group (DPPG), a body constituted vide Delhi
       Transco Limited's order, with the objective of formulating
       procedure to be followed by all discoms in Delhi for sale and
       purchase of power and moreover, the expenditure was factually
       expended for the purpose of business. Therefore, the AO cannot
       it in the armchair of the assessee to determine what part of the
       expenditure is reasonable and allowable (Refer SA Builders
       case Supra). The expenditure on this count are held to be
       allowable, "including the amount disallowed by the AO of Rs.
       38.58 crores."

9.     As regards TDS too, it was argued that the issue had been gone
into; the Commissioner could not legitimately have sought to re-open
such matters, under Section 263 on a re-appreciation of the merits.
Learned counsel relied on the decision of this Court in Commissioner
of Income Tax v Sunbeam Auto Ltd 332 ITR 167 (Del) where it was
observed that:

       "12. We have considered the rival submissions of the counsel
       on the other side and have gone through the records. The first
       issue that arises for our consideration is about the exercise of
       power by the Commissioner of Income-tax under section 263 of
       the Income-tax Act. As noted above, the submission of learned
       counsel for the revenue was that while passing the assessment
       order, the Assessing Officer did not consider this aspect
       specifically whether the expenditure in question was revenue or
       capital expenditure. This argument predicates on the
       assessment order, which apparently does not give any reasons
       while allowing the entire expenditure as revenue expenditure.
       However, that by itself would not be indicative of the fact that

ITA 387/2017                                                 Page 6 of 13
       the Assessing Officer had not applied his mind on the issue.
       There are judgments galore laying down the principle that the
       Assessing Officer in the assessment order is not required to give
       detailed reason 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. Learned counsel for the
       assessee is right in his submission that 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 give occasion to the Commissioner to pass orders
       under section 263 of the Act, merely because he has different
       opinion in the matter. It is only in cases of "lack of inquiry",
       that such a course of action would be open."

10.    Counsel argued that the order of the CIT under Section 263
could not be upheld under any circumstance and the ITAT, in refusing
to set it aside, compounded the error. It was particularly stressed that
the issues in addition to the one relating to depreciation were not part
of the show cause notice and could not have been made the subject
matter of revision; furthermore, no opportunity of hearing was granted
by the Commissioner.

11. Mr. Vohra submitted that each of the three points on which
revisional jurisdiction was exercised, had been inquired into during the
original assessment; the appellate order had dealt with those aspects.
Consequently, it could not be held that such a view was erroneous,
even if another view was possible. It was argued that courts have held
that once relevant details/ documents are available on record
pertaining to original assessment, and if on the basis of material

ITA 387/2017                                                  Page 7 of 13
available on record, a view could be formed by the assessing officer, it
may not even be necessary for the AO to conduct detailed enquiry; in
such circumstances, it cannot be presumed that the assessing officer
had not examined the claims of the assessee. He cited Commissioner
of Income Tax v DLF Ltd 350 ITR 555 (Del.); Commissioner of
Income Tax v. International Travel House Ltd. 344 ITR 554 (Del.)
Commissioner of Income Tax v. Leisurewear Exports 341 ITR 166
(Del.) Commissioner of Income Tax v. Hero Auto Ltd. 343 ITR 342
(Del.) and Commissioner of Income Tax v. Vikas Polymers 341 ITR
537 (Del). It was argued that this would be the position for all three
questions framed.

12.    The revenue defends its position and urges this court not to
interfere with the findings of the ITAT. According to its counsel, Mr.
Zoheb Hossain, the provision of second explanation to Section 263 (1)
empowers Commissioners to issue notices in precisely the kind of
cases as the present one. The said provision reads as follows:

       "Explanation. - For the removal of doubts, it is hereby declared
       that, for the purposes of this sub-section, -

       (a) an order passed on or before or after the 1st day of June,
       1988 by the Assessing Officer shall include -

       (i) an order of assessment made by the Assistant Commissioner
       or Deputy Commissioner or the Income-tax Officer on the basis
       of the directions issued by the Joint Commissioner under
       section 144A;

       (ii) an order made by the Joint Commissioner in exercise of the
       powers or in the performance of the functions of an Assessing

ITA 387/2017                                                     Page 8 of 13
       Officer conferred on, or assigned to, him under the orders or
       directions issued by the Board or by the Chief Commissioner or
       Director General or Commissioner authorised by the Board in
       this behalf under section 120;

        (b) "record" shall include and shall be deemed always to have
       included] all records relating to any proceeding under this Act
       available at the time of examination by the Commissioner;

       (c) where any order referred to in this sub-section and passed
       by the Assessing Officer had been the subject matter of any
       appeal filed on or before or after the 1st day of June, 1988], the
       powers of the Commissioner under this sub-section shall extend
       and shall be deemed always to have extended] to such matters
       as had not been considered and decided in such appeal."

The revenue relied on Commissioner Of Income Tax vs Ratilal
Bacharilal & Sons (2006) 282 ITR 457; Commissioner of Income Tax
v Aruba Mills 1998 (231) ITR 50 (SC) where the position was
clarified as follows:

       "The consequence of the said amendment made with
       retrospective effect is that the powers under Section 263 of the
       CIT shall extend and shall be deemed always to have extended
       to such matters as had not been considered and decided in an
       appeal. Accordingly, even in respect of the aforesaid three
       items, the powers of the CIT under Section 263 shall extend and
       shall be deemed always to have extended to them because the
       same had not been considered and decided in the appeal filed
       by the assessee."

In Ratilal (supra) following Aruba (supra), the Bombay High Court
ruled as follows:

       "20. The consequence of the aforesaid Clause (c) introduced

ITA 387/2017                                                   Page 9 of 13
       with retrospective effect, is that the powers under Section 263 of
       the CIT shall extend and shall be deemed always to have
       extended to such matters as had not been considered and
       decided in the order passed in appeal on or before or after 1st
       June, 1988. The very fact that Expln. (c) was given retrospective
       effect by using the words "on or before or after" itself denotes
       that the intention of legislature is to embrace all orders whether
       passed on or after or before 1st June, 1988. The use of the
       phrase "on or before or after" is no doubt little uncommon. The
       phrase "on or before" denotes immediately at or at any time
       before. The phrase "on or before or after" to our mind means
       either immediately at or in the past or future. It means at any
       time during the continuance of the Act, if it is to be understood
       in the context of the legislation."

It was argued that the previous decision of this Court in Commissioner
Of Income Tax vs Printers House(1998) 233 ITR 666 was in accord
with the law declared in Aruba (supra), holding that those issues that
were not the subject matter of appeal were capable of revision.

13.    As far as the question of dealing with issues that were not the
subject matter of show cause notice is concerned, counsel points out
that the previous judgments of this Court and several other High Court
has now been overruled in Commissioner of Income tax v Amitabh
Bacchan 2016 SCC Online SC 484. In that judgment, the Supreme
Court held that the failure to issue notice on any particular issue does
not vitiate the exercise of power under Section 263, as long as the
assessee is heard and given opportunity.

14.    Countering the assessee's arguments, it is submitted that the
lack of opportunity at the revisional stage under Section 263 does not

ITA 387/2017                                                  Page 10 of 13
vitiate the entire order, or the proceedings; rather it is a curable defect.
It was submitted that in the present case, however, even that situation
did not arise.

15.    As far as the first aspect with respect to exercise of power under
Section 263 is concerned, the issue stands concluded, in the light of
the amendment with effect from 1989, by insertion of Explanation (c)
to Section 263 (1). The non-consideration of the larger claim for
298.93 crores as depreciation and the consideration of only a part of
it (644,81,091) by the assessing officer, who did not go into the issue
with respect to the whole amount, was an error, that could be corrected
under Section 263. Aruba (supra) is decisive, in that the provision of
Section 263 (1) Explanation (c) was introduced to cater to precisely
this kind of mischief.

16.    On the aspect of show cause notice, i.e., the second and third
questions framed, the court is of the opinion that the ruling in Amitabh
Bachhan (supra) is decisive; it upholds the power of the
Commissioner to consider all aspects which were the subject matter of
the AO's order, if in his opinion, they are erroneous, despite the
assessee's appeal on that or some other aspect. The Court held that:

        "Reverting to the specific provisions of Section 263 of the Act
       what has to be seen is that a satisfaction that an order passed
       by the Authority under the Act is erroneous and prejudicial to
       the interest of the Revenue is the basic pre-condition for
       exercise of jurisdiction under Section 263 of the Act. Both are
       twin conditions that have to be conjointly present. Once such
       satisfaction is reached, jurisdiction to exercise the power would
       be available subject to observance of the principles of natural

ITA 387/2017                                                     Page 11 of 13
       justice which is implicit in the requirement cast by the Section
       to give the assessee an opportunity of being heard.

       It is in the context of the above position that this Court has
       repeatedly held that unlike the power of reopening an
       assessment under Section 147 of the Act, the power of revision
       under Section 263 is not contingent on the giving of a notice to
       show cause. In fact, Section 263 has been understood not to
       require any specific show cause notice to be served on the
       assessee. Rather, what is required under the said provision is
       an opportunity of hearing to the assessee. The two requirements
       are different; the first would comprehend a prior notice
       detailing the specific grounds on which revision of the
       assessment order is tentatively being proposed.

       Such a notice is not required. What is contemplated by Section
       263, is an opportunity of hearing to be afforded to the assessee.
       Failure to give such an opportunity would render the revisional
       order legally fragile not on the ground of lack of jurisdiction
       but on the ground of violation of principles of natural justice.
       Reference in this regard may be illustratively made to the
       decisions of this Court in Gita Devi Aggarwal vs. Commissioner
       of Income Tax, West Bengal and others[1] and in The C.I.T.,
       West Bengal, II, Calcutta vs. M/s Electro House[2]. Paragraph
       4 of the decision in The C.I.T., West Bengal, II, Calcutta vs. M/s
       Electro House (supra) being illumination of the issue indicated
       above may be usefully reproduced hereunder: "This section
       unlike Section 34 does not prescribe any notice to be given. It
       only requires the Commissioner to give an opportunity to the
       assessee of being heard. The section does not speak of any

17.    This Court is of the opinion that the revisional order, to the
extent that it did not provide any pre-decisional opportunity to address
the issues it dealt with, could not be sustained; the ITAT has granted
relief of a limited nature on that score. However, we do not agree that
those issues were incapable of consideration as they were gone into by

ITA 387/2017                                                  Page 12 of 13
the AO. Accordingly, the CIT, in exercise of his power under Section
263 will proceed to consider the assessee's submissions only o n those
two aspects, before making his order.

18.    All questions framed are, therefore, answered in the negative,
against the assessee.

19.    For the above reasons there is no merit in the appeal; it is
accordingly dismissed. No costs.

                                             S. RAVINDRA BHAT

                                           SANJEEV SACHDEVA
NOVEMBER 08, 2017

ITA 387/2017                                                Page 13 of 13
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