Rajpal Yadav, Judicial Member:
1. Present appeal is directed at the instance of the assessee against impugned order of ld.Pr.CIT-2, Ahmedabad passed under section 263 of the Income Tax Act, 1961 in the Asstt.Year 2013-14.
2. Though the assessee has taken seven grounds of appeal, but its grievance revolves around a single issue viz. the ld.CIT(A) has erred in taking cognizance under section 263 of the Act and setting aside the assessment order with a direction to make fresh assessment.
3. Brief facts of the case are that the assessee at the relevant time was engaged in the business of manufacturing and trading of agro processing, maize processing, cotton spinning etc. It also operates wind mill, thermal power plants and biogas power plants for power generation for captive purpose. It has filed its return of income on 29.11.2013 declaring total income at Rs.76,03,79,800/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued on 4.9.2014. It was duly served upon the assessee. The ld.AO has passed an assessment order under section 143(3) of the Act on 21.1.2016. He determined taxable income of the assessee at Rs.81,21,02,510/- as against Rs.76,13,79,802/- declared by the assessee. On scrutiny of the records, the ld.Commissioner formed an opinion that the assessment order is erroneous and prejudicial to the interest of Revenue. Hence, action under section 263 of the Act required to be taken against the assessee. He issued show cause notice dated 26.3.2018. Copy of the show cause notice is available at page no.231 of the paper book. It reads as under:
OFFICE OF THE PR.COMMISSIONER OF INCOME-TAX -2, AHMEDABAD 1s' Floor, Navjeevan Trust Building, B/H Gujarat Vidyapith, Ahmedabad- 380 014, Telefax-079-27542603 No.Pr.CIT- 2/ABD/Tech/263/17-18 Date: 26.3.2018
The Principal Officer
Gujarat Ambuja Exports Ltd
Opp. Memnagar Fire Station
Sub: Notice u/s 263 of the I. T. Act 1961 A.Y. 2013-14 ITA No.1049/Ahd/2018 Kindly refer to the assessment order for AY 2013-14-passed on 21.01.2016. On perusal of the case records, I find that the said assessment order is liable to be rectified u/s 263 of the Act for the following reasons:
1) That said assessment order has been framed by the AO without application Of his mind and making due enquiries and verification in respect of the nature and qualities of assets to which depreciation @ 80% was allowed by the AO.
2) On perusal of the records, it is seen that Bio-gas plant, power plant, ETP which have been partly booked in the first half &f the year and partly in the second half. The AO has allowed full depreciation and half depreciation respectively on such assets without verifying if these assets which had been acquired during the first half had
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been actually put to operation without the aid of the assets which were admittedly acquired in the second half ? The AO has allowed the claim of depreciation without application of mind and without making proper enquiries and verification in this regard.
2. In this view of the matter , I am of the considered opinion that the impugned order passed by the AO is erroneous and prejudicial to the interest of revenue as it has been passed without proper application of mind , without making enquiries and I thereby intend to revise the order u/s 263 of IT Act.
3. You are hereby given an opportunity to represent your case. The hearing is fixed on 27.3.2018 at 5.30AM, in the office of the undersigned either personally or through an Authorised Representatives and may also file written submissions, if any on the said date.
(RAJKUMAR LACHHIRAMAKA) Pr. Commissioner of Income Tax-2 Ahmedabad.
4. In response to the above show cause notice, the assessee has filed a detailed reply. Copy of the same is available on pages no.233 to 270 of the paper book. The ld.Commissioner has also taken note of such reply in the impugned order. The ld.Commissioner was not satisfied with the ITA No.1049/Ahd/2018 explanation of the assessee and set aside the assessment order. He observed that deprecation at the rate of 80% has been granted on certain assets i.e. boilers, turbine and bio-gas plant. According to the ld.CIT(A) certain equipments were purchased and installed in the second half of the assessment year. In the absence of such equipments plant could not become operational independently. Hence, the ld.AO did not examine the issue properly whether the plant was operational in the absence of certain parts, which have been installed in the latter half of the year. If not, how it can be construed that the plant was put to use? In the opinion of the Commissioner, the AO failed to conduct inquiry on this aspect, and therefore, his order is erroneous, which deserves to be set aside.
5. The assessee raised multi fold of objections before the ld.Commissioner viz. that the assessee is entitled for deduction under section 80IA/80IC. In case depreciation is disallowed, then its eligible profit would increase and it will get higher deduction under section 80IA/80IC. There is no prejudice to the Revenue because this exercise will be revenue neutral. On the one hand, disallowance will be made out the depreciation, on the other hand, deduction under section 80IA/80IC would be granted. Somehow, the ld.Commissioner dealt with the issue in para 3.2, but failed to record any logical finding. The finding recorded by the ld.CIT on this aspect reads as under:
"3.2 The contention of the assessee that that as the twin conditions of invoking the provisions of Section 263 are not satisfied, is without any basis. Whether the reduction in depreciation would decrease the deduction u/s 80IA/80C of the IT Act or not is not relevant in the present context as the said order has been passed without application of mind and/or without making due enquiries and verification which ITA No.1049/Ahd/2018 in term of Explanation 2 appended to Section 263, deems the said order to be erroneous and prejudicial to the interest of Revenue."
6. The assessee further raised an objection on account of certain disallowance made in the computation of eligible profit for the purpose of deduction under section 80IA/80IC. A dispute also travelled before the ld.CIT(A) and disallowance of depreciation had direct link with admissibility of deduction under these sections. Therefore, once the issue relating to computation of deduction under section 80IA/80IC travelled to the CIT(A), the issue of disallowance of depreciation would merge with that issue and no action under section 263 can be taken. According to the ld.Commissioner, these are two different issues and have no inter-connection, hence, no merger had taken place. The assessee also took an objection that action under section 263 has been initiated on an audit objection, but the ld.CIT rejected this contention by observing that error in the assessment was noticed on examination of the record. This is within the statutory power of Pr.Commissioner of Income Tax. In this way, the ld.CIT set aside the assessment order and directed the AO to make a fresh assessment.
7. Before us, the counsel for the assessee reiterated his contentions as were raised before the ld.CIT. In his first fold of contentions, he submitted that no prejudice has been caused to the Revenue in case depreciation is being granted to the assessee, because the moment depreciation is to be disallowed, then eligible profit for grant of deduction under section 80IA/80IC would enhance. The assessee is, thus, entitled for deduction under these sections at 100% of the eligible profit. Thus, the ld.Commissioner has undertaken a futile exercise.
8. In his second fold of contention, he submitted that claim of depreciation is integral part for computation of eligible profit under section 80IA/80IC, and once the dispute relating to computation of deduction under section 80IA/80IC travelled to the ld.CIT(A), then according to the Explanation 1 of clause (c) of section 263, the issue would be merged before the ld.CIT(A) and no independent action required to be taken by the administrative Commissioner. He placed reliance upon the order of the Hon'ble Gujarat High Court in the case of CIT Vs. Nirma Chemicals Works P.Ltd., 309 ITR 67 (Guj). He also placed on record copy of the order passed in SCA No.2818 of 2018 (Guj) in the case of Haryana Paper Distributors P.Ltd.
9. In his next fold of contentions, he submitted, the ld.AO has conducted proper inquiry, and thereafter took one of the possible views, therefore, no action under section 263 ought to be taken. For buttressing his contentions, he took us through copy of show cause notice issued by the AO under section 142(1) of the Act. He specifically drew our attention towards page no.80 of the paper book wherein at serial no.5 of the show cause notice, the ld.AO has called for following information:
"5. Complete details of additions made to fixed assets, including work in progress during the financial year 2012-13 along with the copies of bills/vouchers exceeding Rs. 1 lakh for such additions. Also furnish complete details of all the deletions made to fixed assets and its treatment given in the books of account and whether any capital gain is leviable on such transactions."
10. He contended that the assessee has submitted complete details, and the AO has gone through these details. Therefore, it cannot be said that the AO has not carried out any inquiry.
11. In the last fold of submissions, he contended that revisionary proceedings have been initiated at the instance of audit objection. The ld.Commissioner was not justified in taking action under section 263 on audit objection. For buttressing his contentions, he made reference to large number of decisions including the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs. CIT, 243 ITR 83 (SC). He has also relied upon Hon'ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd., 332 ITR 167 (Del) and CIT Vs. Mehsana District Co- op. Milk Producers Union Ltd., 263 ITR 645 (Guj) and others.
12. On the other hand, the ld.DR submitted that the AO has granted depreciation at the rate of 80% on plant & machinery which were not actually put to use, because in the absence of certain parts, the plant could not function independently. The assessee itself admitted that these parts have been installed in the later part of the year, and then how it could be construed that the plant has functioned for the full year.
13. With the assistance of ld.representatives, we have gone through the record carefully. Section 263 has a direct bearing on the controversy, therefore, it is pertinent to take note of this section. It reads as under:-
"263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
[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 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 authorized 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.
(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.
Explanation.- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded."
Xxxx xxxx xxxx xxx
14. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon'ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263.
(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled.
(ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted.
(iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous.
(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.
(v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law
(vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO.
(vii) The AO exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion.
(viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction.
(ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.
15. Main thrust of arguments at the end of the assessee is that even if the depreciation is being disallowed, then also there is no prejudice to the Revenue, because whole exercise at the end of the Commissioner would revenue neutral. The moment addition on account of disallowance of the deprecation would be made to the income of the assessee, it will be allowed as deduction under section 80IA/80IC. If that be so, then where is the prejudice ? It is settled position that unless twin conditions are fulfilled i.e. erroneous of the impugned order before the ld.Commissioner, as well as prejudice to the Revenue on account of such error are available, action under section 263 is not permissible.
16. The Hon'ble Karnataka High Court in the case of CIT Vs. Shri D.G. Gopala Gowda, 354 ITR 501 (Kar) had an occasion to examine similar aspect, i.e. if after exercise of power u/s.263, no taxable income is unearthed in the hands of the assessee, then, action u/s.263 should not be upheld. The facts in that case are noticed by Hon'ble Court in para-2 which read as under:
"2. The assessee had purchased a site at Rupena Agrahara in the financial year 1995-96 for a consideration of Rs.3,46,520/-. He started construction of the building in April 1999. He agreed to sell the said property under the agreement dated 9-9-2000 in unfinished condition. Under the terms of agreement, the assessee should complete the construction of the building before execution of sale deed with the help of the funds provided by the purchaser. On 22-11- 2000 the assessee executed a sale deed in favour of the purchaser for a consideration of Rs.1,38,00,000/-. The assessee received a sum of Rs.40,00,000/- at the time of agreement. The total cost of construction was Rs.1,04,30,425/-. Thereafter, the assessee purchased another property at Koramangala. The Assessing Officer computed the income from the long term capital gains at Rs.22,17,940/- for the sale of the property. However, the assessee was exempted from paying tax since the fund was utilized fully towards purchase of another property at Koramangala. The Commissioner of Income Tax issued notice under Section 263 of the Act stating that the Assessing Officer was not justified in treating the sale as long term capital gain and according to him, it should have been treated as short term capital gain. The assessee filed his reply to the show cause notice. Thereafter, the Commissioner proceeded to pass the order setting aside the order of assessment on the ground that it is prejudicial to the interest of the revenue. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal went into the factual aspects and took note of the legal position as settled in various judgments of the courts and in fact, calculated both the short term and long term capital gain and then found that the assessee is not liable to pay any tax. Therefore, it recorded the finding that even if the order of the Assessing Authority is erroneous, it is not prejudicial to the interest of the revenue. Therefore, set aside the order of the revisional authority and granted relief to the assessee.
17. The Hon'ble High Court while upholding the order of the ITAT has observed as under:
"Even if it is erroneous, unless the said erroneous order is prejudicial to the interest of the Revenue, the Commissioner could not have exercised the said power. From the admitted material on record, the amount that is ordered to be refunded to the assessee is not the amount, which is lawfully due to the Revenue at all, it was an amount which is Revenue legitimately should have refunded if only the claim had been in the return enclosing the certificates under Section 203. the said amount should have been refunded to the assessee. Because he was handicapped by such certificates not being forwarded to him, consequently not able to make the claim, such a claim was not made. The moment he got possession of those certificates on 12.02.2001, within two years from the date of the end of the assessment year he has put forth the claim. The said amount was not a lawful amount to the Government. It was an amount which should have been refunded to the assessee. Therefore, the condition precedent for exercising the revisional power under Section 263 of the Act is that the order under revision should not only be erroneous, but such erroneous order should result in prejudice to the interest of the revenue. Mere error would not confer jurisdiction to exercise revisional power under Section 263 of the Act. We have gone through the order passed by the revisional authority. It is a very cryptic order. It neither points out an error nor prejudice which has caused to the revenue. After declaring that the order is prejudicial, it refers to the notice being issued to the assessee and the assessee filing reply to the said notice and then review authority feels that it is a matter to be readjudicated by the Assessing Authority and therefore, the matter was remanded for fresh consideration. This is not the way, the revisional authority should exercise their power under Section 263 of the Act. The order of revisional authority should indicate the error committed by the Assessing Authority and consequential prejudice caused to the revenue because of the erroneous order. Unless these two conditions exist, the revisional authority does not get jurisdiction to pass any order under Section 263 of the Act. Once these two conditions are set out in the order, then it is open to the revisional authority to consider the case on merits and pass final order or in its view, requires some adjudication or enquiry, the matter can be remanded to Assessing Authority. But such remand should be only after setting out the facts which show erroneous nature of the order and the consequential prejudice to the revenue which confer jurisdiction on the revisional authority. Seen from that angle, in the impugned order though we could make out what is the error committed by the revisional authority, certainly there is no iota of evidence to show how it is prejudicial to the interest of the revenue. On the contrary, in the reply to the notice, the assessee had filed a statement. Even if the assessment is to be made separately for the land on long term basis and to the building on short term basis, the assessee is not liable to pay any tax for the building. The assessee has demonstrated that in no event the order passed by the Assessing Officer is prejudicial to the interest of the revenue. That aspect has not been considered and there is no reference to that aspect in the entire order passed by the revisional authority and by a cryptic order, the matter is remanded to the Assessing Authority. Though the Tribunal was not expected to go into the merits of the case, in order to demonstrate that the order passed by the Assessing Authority even if it is erroneous, is not prejudicial to the interest of the revenue, they have set out computation of capital gains and demonstrated that the order was not prejudicial. Therefore, the order passed by the revisional authority is illegal and rightly it has been set aside. In the light of what we have stated above, the substantial question of law is answered in favour of the assessee and against the revenue."
18. The Hon'ble High Court has held that fulfillment of twin condition is must i.e. assessment order should be erroneous and it should cause a prejudice to the Revenue. If any one condition is lacking, then action u/s 263 would not be justified. In the above case, the assessment order was erroneous because the learned Assessing Officer failed to compute the long term capital gain and short term capital gain separately. But the Tribunal ultimately arrived at a conclusion that even if this exercise is being done, then there will not be any tax liability and therefore, there is no need to set aside the assessment order. The Hon'ble High Court has upheld this finding of the Tribunal.
19. In the light of the above, if we consider the facts and circumstances of the present case, then it would reveal that the assessee is entitled for deduction under section 80IA/80IC. The moment depreciation is being disallowed, it will be added to the total income of the assessee, and accordingly enhanced deduction would be given to the assessee. Therefore, order of the ld.Commissioner is not sustainable on this issue. The assessee has raised specific plea before the ld.Commissioner also, but without recording any logical finding the ld.Commssioner just simply ignored it. He observed that it was not relevant in the present context, whereas, fulfillment of one of the conditions, which was very much relevant.
20. As far other folds of contentions are concerned, we do not see any necessity to devote more energy towards them. No doubt the AO has issued a questionnaire inviting explanation of the assessee with regard to the details of the assets added in the block of assets. But he failed to conduct an inquiry whether the plant was put to use or not installed in the first half for granting of depreciation.
21. As far as contentions of the assessee that proceedings had merged with proceedings pending before the ld.CIT(A) relating to computation of deduction admissible under section 80IA/IC is concerned, we are of the view that both the issues are separate issues. The eligible profit for grant of deduction under section 80IA/80IC could have many components viz. rental income, interest income, scrap sales, job charges whose exclusion or inclusion would lead to a controversy, which might be pending before ld.CIT(A). How, the resolving of that controversy would give an idea to the ld.CIT that the issue of depreciation deserves to be examined and certain depreciation has to be disallowed to the assessee. This is a peripheral issue, not directly linked which could be construed as merged in that proceeding. We do not find any merit in this fold of contentions.
22. Similarly, perusal of the show cause issued under section 263 does not indicate that it was issued on the instructions of audit report. It was issued on application of independent mind upon the record. The auditor could be an informer. Had it been treated as gospel truth and action under section 263 is being taken, then, the assessee would be justified. But where on an information of the auditor or from any other source, the competent authority, applied his independent mind and then taken action under section 263, then such action would not be declared illegal on the ground that it was taken on the auditor's objection. The requirement under the law is that on the information come to the possession of the competent authority ought to be construed by him and mind should be applied independently. It should not be under tutelage of any other authority. Therefore, we reject all other alternative contentions of the assessee. However on non-fulfillment of twin conditions, i.e. no prejudice is being caused to the Revenue on account of grant of deprecation, we allow this ground of appeal and quash the order passed under section 263 of the Income Tax Act, 1961.
23. In the result, appeal of the assessees is allowed.