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Judgment
S.Ravindra Bhat, J
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 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?
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.
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 Rs. 838,38,00,790 after making, inter alia, disallowance of Rs. 66, 27,782 being depreciation on Rs. 6,44,81,091
capitalized for re-installing fixed assets. Further, the AO also disallowed Rs. 94,20,842 due to related party transactions, added Rs. 38,58,60,000 in
respect of arm’s length price of transactions with related party and disallowed Rs. 2,58,28,863 under section 40(a)(ia) of 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 Rs. 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.
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 Rs. 298.93 crores (mentioned in show cause notice) [hereinafter also referred to as
“first issueâ€];
(ii) Applicability of TDS provisions to certain expenditure claimed by the assessee. It was urged that this issue was not mentioned in the show cause
notice nor was any opportunity of hearing allowed to the assessee.
(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 assessee.
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.
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 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 30.05.2014.
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 assets.â€
It was submitted that as regards addition of Rs. 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 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.â€
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 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.â€
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.
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 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.
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 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.â€
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 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.â€
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.
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.
Countering the assessee’s arguments, it is submitted that the lack of opportunity at the revisional stage under Section 263 does not 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.
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 Rs. 298.93 crores
as depreciation and the consideration of only a part of it ( Rs. 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.
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 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 notice.â€
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 the AO. Accordingly, the CIT, in exercise of his power under Section 263 will proceed to consider the
assessee’s submissions only on those two aspects, before making his order.
All questions framed are, therefore, answered in the negative, against the assessee.
For the above reasons there is no merit in the appeal; it is accordingly dismissed. No costs.