$~4.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL NO. 447/2013
Date of decision: 13th August, 2014
GLOBUS INFOCOM LTD
..... Appellant
Through Mr. S. Krishnan, Advocate.
versus
COMMISSIONER OF INCOME TAX DELHI-IV
..... Respondent
Through Mr. Kamal Sawhney, Sr. Standing
Counsel & Mr. Sanjay Kumar, Jr. Standing
Counsel.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J. (ORAL):
Counsel for the respondent-Revenue has not been able to ascertain
the correctness of the documents filed along with the present appeal. We
are not inclined to grant any further time to the counsel for the respondent-
Revenue as notice in the appeal was issued on 28th October, 2013 and
sufficient time has been granted. Further, a very limited issue arises for
consideration.
2. By order dated 28th July, 2014, the following substantial question of
law was framed:-
"Whether the Income Tax Appellate Tribunal was right
ITA No. 447/2013 Page 1 of 16
in sustaining the order dated 29.2.2012 of the
Commissioner of Income Tax under Section 263 of the
Income Tax Act, 1961?"
3. The present appeal by the appellant-assessee relates to the
Assessment Year 2007-08. The appellant-assessee had filed return
declaring income of Rs.1,82,68,953/- under normal provisions and book-
profit of Rs.9,85,25,142/-. Tax was payable on book profits as per Section
115JB of the Income Tax Act, 1961 ("Act", for short). The
aforementioned return was taken up for scrutiny and additions of
Rs.1,00,500/- and Rs.1,17,141/- on substantive basis, and Rs.10 lacs on
protective basis, were made. Income was computed under Section 115JB
at Rs.9,85,25,142/-.
4. Commissioner of Income Tax issued a notice under Section 263 of
the Act, dated 4th February, 2011, on two grounds. Firstly, commission of
Rs.69,53,949/- had been paid to the two Managing Directors, but should
have been disallowed under Section 36(1)(ii) of the Act. Secondly, the
assessee had booked majority of the expenses against the unit carrying out
trading operations and thereby had inflated profits of the manufacturing
unit exempt under Section 80-IC. Expenses booked for the eligible unit
under section 80-IC were only Rs.12,31,78,274/-, as against expenses of
Rs.37,26,60,316/- booked against trading activities.
5. The appellant-assessee filed a detailed reply, which we will be
subsequently referring and are not reproducing herein to avoid prolixity.
ITA No. 447/2013 Page 2 of 16
6. The Commissioner of Income Tax, in its order dated 29th February,
2012, took note of the reply filed, which was reproduced in detail.
Thereafter, in paragraph 3, he referred to the commission paid to Manish
Dham and Rajive Bakshi of Rs.12,30,459/- and Rs.57,23,490/-,
respectively. He took note of the submissions made by the appellant-
assessee that Manish Dham was neither a shareholder nor a Director or
Managing Director of the company. Further, Rajive Bakshi was
controlling affairs of the manufacturing unit and due to his efforts, the
appellant-assessee had achieved turnover of Rs.20.60 crores in the second
year of its operation. Commission paid was duly approved by the
shareholders of the company and thus Section 36(1)(ii) was not applicable.
Rejecting the said contention, the Commissioner of Income Tax in his
order observed:-
"4. As per Section 36(1)(ii) of IT Act, it has been
provided that the admissible deduction is of any sum
paid to an employee as bonus or commission for services
had not been paid as bonus or commission. This section
has been specifically laid down to ensure that the
companies do not avoid tax by distributing their profit to
their members/shareholders as bonus or commission
instead of dividend. From the submissions of the Ld.
A/R of the assessee company, it is not clear as to
whether the concerned directors of the company were
shareholders/stake holders entitled to profits or dividend
of the company and accordingly, it is not possible to
comment as to whether mischief of section 36(1)(ii) of
IT Act is attracted towards the payment of commission
to such directors. As a result, the assessment made by
the AO accepting such commission payment without
verifying as to whether provisions of section 36(1)(ii)
ITA No. 447/2013 Page 3 of 16
are attracted, is set-aside on this limited issue with a
direction to the AO to verify as to whether the concerned
directors were stake holders/shareholders in the
company, entitled to profits/dividend of the company
and if these facts appear to be correct then the provisions
of Section 36(1)(ii) may be invoked to disallow the
commission payment made to the said directors and the
fresh assessment order u/s143(3) of I.T. Act may be
passed accordingly."
(emphasis supplied)
7. On the second issue, the Commissioner of Income Tax referred to
the total figure of expenses claimed against the manufacturing unit and the
expenses booked against trading activities. In paragraph 5 the
Commissioner accepted that during the course of the assessment
proceedings, a specific query was raised by the Assessing Officer to justify
the expenses claimed unit-wise and the appellant-assessee had filed a letter
dated 17th August, 2009 to explain allocation of common expenditure. The
appellant-assessee had submitted that common expenses had been divided
between the two units as per accepted accountancy principles, which were
consistently followed. That appellant-assessee had maintained regular
books of accounts for the exempt unit and such books of accounts along
with the vouchers were duly produced and verified by the Assessing
Officer, who did not point out any defects in the same. In paragraph 6, the
Commissioner duly noticed break up of different expenses and
apportionment thereof. The Commissioner observed that the segregation
of common expenses had been made by-and-large on basis of the
ITA No. 447/2013 Page 4 of 16
manufacturing and trading operations, but he observed that as separate
books of accounts for both manufacturing and trading units were
maintained, then what was the need for segregating the common expenses
between the trading and manufacturing operations? Reasoning and
grounds given by the Commissioner on the second aspect read as under:-
"...t is quite possible that there may have been attempt to
inflate the expenses for trading activity in order to show
less profit from such activity eligible to tax. On the
other hand, since the profit from manufacturing activity
is exempt from tax u/s 80-IC of IT Act, the assessee
company may have made an attempt to reduce the actual
expenses on manufacturing activity in order to pass the
same to trading activity for tax evasion. Therefore, the
assessment order passed by the AO by accepting the
claim of expenses under manufacturing and trading
activity as indicated by the assessee is erroneous and
consequently, prejudicial to the interest of revenue and
accordingly such assessment order is set-aside on this
limited issue with a direction to the AO to cause
sufficient inquiries in order to ascertain the actual
expenses relatable to the manufacturing and trading
activity separately and allow the claim of such expenses
after due verification."
8. The appellant-assessee was maintaining separate books of accounts
for the manufacturing unit receipts and expenditure which was exempt
under Section 80-IC; and the trading activities. However, there were
certain common expenses, which were to be segregated. Common
expenses were/are not unusual, abnormal or unique in such cases. In order
to carry out the said segregation, the appellant-assessee had made
apportionment and the ratio thereof was indicated and informed to the
ITA No. 447/2013 Page 5 of 16
Assessing Officer. The details of the said apportionments are reproduced
below:-
"
S. Particulars Total Apportione Apportioned Apportionme Basis
Expenses d to to nt Ratio
No During Trading manufacturin
the Year activities g activities
.
1 Freight & 169,360 101,616 67,744 60%:40% Majorly
Cartage on sales
Outward
2 Directors 6,462,600 4,253,820 2208780 65%:35% Strictly
Remuneratio on sales
n
3 Insurance 418,805 336,643 82,162 80%:20% On
Exps Insuranc
e one on
Import
of goods
4 Printing & 2,265,717 1,586,002 679,715 70%:30% Majorly
Stationery on sales
5 Travelling 787,425 544,799 242,626 70%:30% Majorly
Exps on sales
Director
6 Travelling 2,859,164 2,529,078 330,086 88%:12% On
Expenses- Imports
Foreign
7 Interest on 1,075,025 752,518 322,508 70%:30% Majorly
Vehicle on sales
Loans etc.
8 Advertiseme 188,377 128,364 60,013 70%:30% Majorly
nt Exps on sales
9 Sales 1,875,257 1259,516 615,741 70%:30% Majorly
Promotion on sales
10 Incentive to 705,607 493,925 211,682 70%:30% Majorly
Staff on sales
11 Car Hiring 688,075 456,501 231,574 65%:35% Strictly
Chg. on sales
12 Legal & 2,890,732 1,900,002 990,730 65%:35% Strictly
Professional on sales
Charges
13 Testing & 301,444 190,720 110,724 65%:35% Strictly
Inspections on sales
ITA No. 447/2013 Page 6 of 16
Total 20,687,58 14,533,502 6154,086
8
"
The aforesaid figures stand reproduced in the order passed by the
Commissioner.
9. The Commissioner, instead of commenting upon or giving a final
finding whether aforesaid apportionment was acceptable or not, observed
that it was possible that there was an attempt to inflate expenses on trading
activity and an attempt might have been made to reduce actual expenses of
the exempt unit. The use of the word "possible" would indicate that there
was no finding and adjudication by the Commissioner and his observations
were based on mere suspicion and certainly uncertain. Yet, the
Commissioner proceeded further and figmented that this would mean that
the Assessing Officer had passed an erroneous order and consequently it
was prejudicial to the interest of the Revenue. Direction was issued to the
Assessing Officer to carry out fresh inquiries to do the exercise once again
and decipher whether the actual expenses relatable to the manufacturing
and trading activities were correctly separated. Thus the Commissioner was
unsure; whether or not the bifurcation were right or wrong. This does not
show and establish that the finding of the assessing officer was erroneous.
10. The appellant-assessee has placed on record a letter dated 12th
August, 2011, which was filed before the Commissioner in response to the
notice under Section 263 of the Act. In the said reply, reference was made
ITA No. 447/2013 Page 7 of 16
to several decisions of the Supreme Court as well as this Court on the
scope of Section 263 and it was highlighted that the Assessing Officer had
carried out due verification and scrutiny and was satisfied that the
bifurcation/apportionment was justified and correct. Under Section 263,
fresh adjudication by the Assessing Officer cannot be directed, unless for
cogent and good reasons a clear cut and specific finding was made that the
assessment made by the Assessing Officer on the said aspect on merits was
erroneous and was prejudicial to the interest of the Revenue. The
appellant-assessee in the aforesaid reply had also referred to their letter
dated 17th August, 2009, filed before the Assessing Officer giving the basis
for allocation of common expenditure. Reference was also made to the
decision of the Delhi High Court in CIT Vs. ARJ Security Printers, (2003)
264 ITR 276 (Delhi). Copy of the letter dated 2nd July, 2009 written by the
appellant-assessee to the Assessing Officer has been placed on record. By
letter dated 17th August, 2009, the appellant assessee had stated before the
Assessing Officer that there were two separate and independent units, and
that the common expenditure identified had not been booked directly and
had been apportioned at the end of the year. Aspects whether expenses
made related to sale or purchases, if so, to each unit etc. had been kept in
mind in accordance with common accounting principles. Details of the
apportionment of common expenses were separately enclosed.
ITA No. 447/2013 Page 8 of 16
11. It is also clear from the order passed by the Commissioner under
Section 263 that the issue relating to apportionment of common
expenditure was specifically gone into and examined by the Assessing
Officer, who was fully satisfied with the apportionment made. Thus, it was
not a case of "no" inquiry but specific and pointed enquiries by the
Assessing Officer. The said finding and apportionment could have been
set aside and negated only with a finding by the Commissioner, that the
Assessing Officer was erroneous and wrong. The Commissioner should
have examined and gone into the question of apportionment on merits.
Mere statement that it was possible that the Assessing Officer was
erroneous, is not sufficient and does not meet the requirement stipulated by
law. On the said aspect, we would like to reproduce observations of the
Delhi High Court in Income Tax Officer Vs. DG Housing Projects
Limited, (2012) 343 ITR 329 (Delhi) wherein reference was made to CIT
Vs. Sunbeam Auto Limited, (2011) 332 ITR 167, and it has been held:-
"14. The aforesaid observations have to be understood
in the factual background and matrix involved in the
said two cases before the Supreme Court. In the said
cases, the Assessing Officer had not conducted any
enquiry or examined evidence whatsoever. There was
total absence of enquiry or verification. These cases
have to be distinguished from other cases (i) where there
is enquiry but the findings are incorrect/erroneous; and
(ii) where there is failure to make proper or full
verification or enquiry.
15. In the case of Commissioner of Income Tax vs.
Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del), Delhi
ITA No. 447/2013 Page 9 of 16
High Court was considering the aspect, when there is no
proper or full verification, and it was held as under:-
"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
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 a
different opinion in the matter. It is only in
cases of "lack of inquiry" that such a course of
action would be open. In Gabriel India Ltd.
[1993] 203 ITR 108 (Bom), law on this aspect
was discussed in the following manner (page
113):
ITA No. 447/2013 Page 10 of 16
" . . . From a rending of sub-section (1)
of section 263, it is clear that the power
of suo motu revision can be exercised
by the Commissioner only if, on
examination of the records of any
proceedings under this Act, he
considers that any order passed therein
by the Income-tax Officer is ,,erroneous
in so far as it is prejudicial to the
interests of the Revenue . It is not an
arbitrary or unchartered power, it can be
exercised only on fulfilment of the
requirements laid down in sub-section
(1). The consideration of the
Commissioner as to whether an order is
erroneous in so far as it is prejudicial to
the interests of the Revenue, must be
based on materials on the record of the
proceedings called for by him. If there
are no materials on record on the basis
of which it can be said that the
Commissioner acting in a reasonable
manner could have come to such a
conclusion, the very initiation of
proceedings by him will be illegal and
without jurisdiction. The Commissioner
cannot initiate proceedings with a view
to starting fishing and roving enquiries
in matters or orders which are already
concluded. Such action will be against
the well-accepted policy of law that
there must be a point of finality in all
legal proceedings, that stale issues
should not be reactivated beyond a
particular stage and that lapse of time
must induce repose in and set at rest
judicial and quasi-judicial controversies
as it must in other spheres of human
activity. (See Parashuram Pottery
Works Co. Ltd. v. ITO [1977] 106 ITR
1 (SC) at page 10) . . . From the
aforesaid definitions it is clear that an
ITA No. 447/2013 Page 11 of 16
order cannot be termed as erroneous
unless it is not in accordance with law.
If an Income-tax Officer acting in
accordance with law makes a certain
assessment, the same cannot be branded
as erroneous by the Commissioner
simply because, according to him, the
order should have been written more
elaborately. This section does not
visualise a case of substitution of the
judgment of the Commissioner for that
of the Income-tax Officer, who passed
the order unless the decision is held to
be erroneous. Cases may be visualised
where the Income-tax Officer while
making an assessment examines the
accounts, makes enquiries, applies his
mind to the facts and circumstances of
the case and determines the income
either by accepting the accounts or by
making some estimate himself. The
Commissioner, on perusal of the
records, may be of the opinion that the
estimate made by the officer concerned
was on the lower side and left to the
Commissioner he would have estimated
the income at a figure higher than the
one determined by the Income-tax
Officer. That would not vest the
Commissioner with power to re-
examine the accounts and determine the
income himself at a higher figure. It is
because the Income-tax Officer has
exercised the quasi-judicial power
vested in him in accordance with law
and arrived at a conclusion and such a
conclusion cannot be formed to be
erroneous simply because the
Commissioner does not feel satisfied
with the conclusion . . . There must be
some prima facie material on record to
show that tax which was lawfully
exigible has not been imposed or that by
ITA No. 447/2013 Page 12 of 16
the application of the relevant statute on
an incorrect or incomplete interpretation
a lesser tax than what was just has been
imposed . . . We may now examine the
facts of the present case in the light of
the powers of the Commissioner set out
above. The Income-tax Officer in this
case had made enquiries in regard to the
nature of the expenditure incurred by
the assessee. The assessee had given
detailed explanation in that regard by a
letter in writing. All these are part of the
record of the case. Evidently, the claim
was allowed by the Income-tax Officer
on being satisfied with the explanation
of the assessee. Such decision of the
Income-tax Officer cannot be held to be
,, erroneous simply because in his
order he did not make an elaborate
discussion in that regard."
16. Thus, in cases of wrong opinion or finding on
merits, the CIT has to come to the conclusion and
himself decide that the order is erroneous, by conducting
necessary enquiry, if required and necessary, before the
order under Section 263 is passed. In such cases, the
order of the Assessing Officer will be erroneous because
the order passed is not sustainable in law and the said
finding must be recorded. CIT cannot remand the matter
to the Assessing Officer to decide whether the findings
recorded are erroneous. 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
ITA No. 447/2013 Page 13 of 16
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 Assessing Officer to
decide the aspect/question.
17. This distinction must be kept in mind by the CIT
while exercising jurisdiction under Section 263 of the
Act and in the absence of the finding that the order is
erroneous and prejudicial to the interest of Revenue,
exercise of jurisdiction under the said section is not
sustainable. In most cases of alleged "inadequate
investigation", it will be difficult to hold that the order
of the Assessing Officer, who had conducted enquiries
and had acted as an investigator, is erroneous, without
CIT conducting verification/inquiry. The order of the
Assessing Officer may be or may not be wrong. CIT
cannot direct reconsideration on this ground but only
when the order is erroneous. An order of remit cannot be
passed by the CIT to ask the Assessing Officer to decide
whether the order was erroneous. This is not
permissible. An order is not erroneous, unless the CIT
hold and records reasons why it is erroneous. An order
will not become erroneous because on remit, the
Assessing Officer may decide that the order is
erroneous. Therefore CIT must after recording reasons
hold that the order is erroneous. The jurisdictional
precondition stipulated is that the CIT must come to the
conclusion that the order is erroneous and is
unsustainable in law. We may notice that the material
which the CIT can rely includes not only the record as it
stands at the time when the order in question was passed
by the Assessing Officer but also the record as it stands
at the time of examination by the CIT [see CIT vs.
Shree Manjunathesware Packing Products, 231 ITR
53 (SC)]. Nothing bars/prohibits the CIT from collecting
and relying upon new/additional material/evidence to
ITA No. 447/2013 Page 14 of 16
show and state that the order of the Assessing Officer is
erroneous.
18. It is in this context that the Supreme Court in
Malabar Industrial Co. Ltd. vs. Commissioner of
Income Tax, (2000) 243 ITR 83 (SC), had observed that
the phrase ,,prejudicial to the interest of Revenue has to
be read in conjunction with an erroneous order passed
by the Assessing Officer. Every loss of Revenue as a
consequence of an order of the Assessing Officer cannot
be treated as prejudicial to the interest of Revenue.
Thus, when the Assessing Officer had adopted one of
the courses permissible and available to him, and this
has resulted in loss to Revenue; or two views were
possible and 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."
12. Income Tax Appellate Tribunal, in the impugned order dated 26th
April, 2013, did record and has reproduced the relevant portions of the
notice under Section 143(2) wherein details of the commission paid to
related parties, etc. were mentioned. However, it did not notice the
letters/ replies dated 22nd June, 2009, 2nd July, 2009; and, 17th August,
2009, filed before the Assessing Officer and has observed that the
appellant-assessee was unable to furnish the details enclosed with the reply
or to show that the questions in this regard were asked by the Assessing
Officer. Accordingly, the decision of the Supreme Court in the case of
Malabar Industrial Company Limited Vs. Commissioner of Income Tax,
ITA No. 447/2013 Page 15 of 16
(2000) 243 ITR 83 would not help the appellant-assessee. This finding is
completely incorrect as this was not even the case of the Commissioner in
the order passed and which was made the subject matter of challenge
before the Tribunal.
13. On the question of disallowance under Section 36(1)(ii), the Tribunal
has not recorded or given any finding. The arguments raised by the
appellant-assessee on the said aspects have not been considered.
14. In view of the aforesaid position, we do not think that the order of
the Tribunal upholding the order of Commissioner of Income Tax , passed
under Section 263, can be sustained. However, as the Tribunal has not
considered the factual matrix or the various documents on record and has
not examined the scope of Section 36(1)(ii), we feel that it will be proper
and appropriate if the Tribunal re-examines and re-hears the appeal on
merits once again. Order of remand is passed.
15. The question of law is accordingly answered in favour of the
appellant-assessee and against the respondent-Revenue but with an order of
remand. The appeal is disposed of. No costs.
SANJIV KHANNA, J.
V. KAMESWAR RAO, J.
AUGUST 13, 2014
VKR
ITA No. 447/2013 Page 16 of 16
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