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October, 20th 2014

+                  INCOME TAX APPEAL NO. 447/2013

                                         Date of decision: 13th August, 2014
                                                             ..... Appellant
                            Through Mr. S. Krishnan, Advocate.


                                                            ..... Respondent
                            Through Mr. Kamal Sawhney, Sr. Standing
                            Counsel & Mr. Sanjay Kumar, Jr. Standing


        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


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



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
2     Directors   6,462,600       4,253,820       2208780     65%:35%         Strictly
      Remuneratio                                                             on sales
3     Insurance   418,805         336,643         82,162      80%:20%         On
      Exps                                                                    Insuranc
                                                                              e one on
                                                                              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
6     Travelling      2,859,164   2,529,078       330,086     88%:12%         On
      Expenses-                                                               Imports
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
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

        The aforesaid figures stand reproduced in the order passed by the


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
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

             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

ITA No. 447/2013                                                   Page 16 of 16
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