M/s. Seshasayee Paper and Boards Ltd. vs The Deputy Commissioner of Income Tax

Chitra Venkataraman, J.—The above Tax Case (Appeals), filed by the assessee as against the order of the Income Tax Appellate Tribunal

relating to the assessment years 1995-96 and 1996-97, were admitted by this Court on the following substantial question of law:

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in confirming the order u/s 263 passed by the Commissioner

of income tax for the Assessment Years 1995-1996 and 1996-1997?

The appellant is a public limited company engaged in the business of producing paper and paper boards and leasing of assets. It is stated that the

assessee had recently developed its leasing activity. There was a search in the business premises of the assessee on 02.07.1996, in which, 14

leased transactions were examined based on the materials recovered at the time of inspection. The leasing transaction of the company was in the

nature of buy and lease back, i.e., the assessee would buy and lease back the plant and machinery installed in the factory or going to be installed in

the factory and in respect of this business assets, the assessee claimed depreciation. On an enquiry made as to the genuineness of these

transactions, except for 5 transactions, the assessee''s business with 9 other companies on buy and lease back transactions were confirmed as

genuine transactions. For the block period covered under the block assessment from 01.04.1986 to 03.07.1996, an order of assessment was

made under Chapter XIV-B of the Income Tax Act on 31.7.1997.

It is a matter of record that the assessee went on appeal as against this order of block assessment before the Income Tax Appellate Tribunal.

Apparently, on account of the difference in the conclusion reached between the Vice President and the Accountant Member, the appeal was

placed before the Third Member Senior Vice President, who concurred with the view of the Vice President that the transactions were all reflected

into books of accounts and that in the absence of any material to show that the assessee had concealed the particulars of income, the question of

making assessment under Chapter XIV-B did not arise.

On the question of fair opportunity not granted to the assessee to question the third parties, who were enquired by the Revenue, the Vice

President as well as the Third Member held that there had been a total violation of principles of natural justice and hence the assessment was liable

to be annulled. Thus, both on merits as well as on the opportunity denied to the assessee, the majority view was that the block assessment made

was not sustainable in law.

The Accountant Member, however, viewed that considering the violation of principles of natural justice, the order of assessment need not be

annulled, but had to be sent back to the Assessing Officer for granting an opportunity and pass orders accordingly. The order of the Third Member

was thus made on 31.1.2002. Admittedly, the Revenue had not preferred any appeal before this Court; consequently, the view taken by the

majority members had become final.

It is seen from the documents placed before this Court that for the assessment year 1995-96, the first assessment order was made on

30.3.1998, wherein the Officer had accepted the income offered by the assessee. Except for certain additions made under certain heads, the

assessment was completed and the income offered under the sale and lease back transactions were assessed under the provisions of the Act. As

far as the assessment year 1996-97 is concerned, the returns filed by the assessee on 28.11.1996 was taken up for scrutiny u/s 143(2) and

ultimately, the assessment order was passed u/s 143(3) on 22.3.1999. The Assessing Officer observed that the leasing transaction already dealt

with in the block assessment was pending before the Income Tax Appellate Tribunal. However, the Assessing Officer completed the assessment

based on the income disclosed for these transactions. In respect of the assessment years 1995-96 and 1996-97, evidently, the assessee preferred

an appeal before the first Appellate Authority on the issues, with which we are not concerned herein.

In exercise of jurisdiction u/s 263 of the Income Tax Act, under notice dated 25.2.2000, the Commissioner of Income Tax proposed to revise

the assessment holding a view that the Assessing Officer had wrongly granted deduction on margin money and hire management fee in respect of

leased transactions, which had been held as sham and bogus on the block assessment made on 31.3.1997. The Commissioner further viewed that

the Assessing Officer had allowed the claim on 100% depreciation in respect of the asset acquired from M/s. Morgan Industries Limited at Rs.

51.00 lakhs without properly appreciating the fact that the lease agreement, hire purchase agreement and supplementary agreement had all been

entered on a single day, i.e., on 28.3.1995, which would indicate that no ownership had passed on. Thus, before satisfying himself on the

genuineness of the transactions regarding the allowability of the claim, the Assessing Officer had granted the relief, which was erroneous and

prejudicial to the interests of the Revenue. Consequently, the assessee was called upon to file its objection on or before 06.03.2000. This notice

was subsequently followed by yet another notice on 12.3.2001 by reason of the change of the Authority. The consequent notice dated 12.3.2001

is almost on identical lines as contained in the notice dated 25.2.2000. The assessee objected to the notice and pointed out that the allegation that

the transactions had been sham and nominal and whether the ownership in the property were passed on or not were all matters pending before the

Appellate Tribunal in the appeal filed as against the block assessment. In the circumstances, the assessee requested the Commissioner to defer

action in this regard.

It is a matter of record that in the meantime the assessee had also approached this Court in W.P. No. 18194 of 1996 challenging the notice and

relying on the orders of this Court, the assessee submitted that the block assessment proceedings would not be given effect to until further orders

of the High Court. On 21.3.2001, the assessee also filed written submissions placing its objection. The Commissioner of Income Tax passed the

revision order rejecting the contention of the assessee. The Commissioner pointed out that as regards the payment of margin money, the same was

not claimed as expenditure in the Profit and Loss account and there was no disallowance of the margin money paid in the hire purchase transaction

as originally proposed.

As regards the hire management fee, the Commissioner viewed that the depreciation claimed in respect of the assets involved in the purchase

and lease back transaction was disallowed in the block assessment on account of the transactions found to be bogus or the transfer of assets in

question was found to be invalid. In the circumstances, the Commissioner directed the Assessing Officer to disallow the assessee''s claim in regard

to hire management fee for the assessment years 1995-96 and 1996-97 and modify the assessment.

As regards the depreciation allowed in respect of Mechanical Reactor purchased from and leased back to M/s. Morgan Industries Limited,

New Delhi, the Commissioner viewed that the genuineness of the purchase and lease back transaction had not been gone into by the Assessing

Officer and hence, he directed the Assessing Officer to go through the same and pass assessment order.

As regards the objection taken by the assessee that the block assessment had been made after obtaining Commissioner''s approval and hence,

the question of exercising jurisdiction u/s 263 of the Income Tax Act was not sustainable in law, the Commissioner rejected the said contention

taking the view that the assessment made for the assessment years 1995-96 and 1996-97 alone were the subject matter of revision and not the

block assessment. In this view of the matter, he rejected the assessee''s contention on jurisdiction.

Aggrieved by this, the assessee preferred appeal before the Income Tax Appellate Tribunal contending that when the block assessment itself

was made only after the approval of the Commissioner of Income Tax as required under Chapter XIV-B, the self-same authority could not assume

authority once again even as against the assessment years 1995-96 and 1996-97 on issues which were already subject matter of consideration in

the block assessment. The order of the Commissioner of Income Tax directing the Assessing Officer to go into the genuineness of the transaction

with M/s. Morgan Industries Limited was totally contrary to what was considered in the block assessment and then subject matter of appeal

before the Income Tax Appellate Tribunal. The assessee further pointed out that as on the date of order, the Commissioner was well aware of the

pending appeal and the difference of opinion between the two Members of the Tribunal. In the circumstances, when the alleged items were part of

the block assessment, the Commissioner ought not to have exercised his jurisdiction.

It may be noted now that as far as the appeal as against the block assessment before the Income Tax Appellate Tribunal was concerned, the

order of the Accountant Member was made on 06.09.2000 and the Vice President was during July, 2000. The Third Member Senior Vice

President gave his verdict concurring with the Vice President on 31.1.2002.

In the appeal preferred by the assessee as against the order of the Commissioner of Income Tax u/s 263 of the Income Tax Act, the Tribunal

considered the jurisdiction of the Commissioner of Income Tax u/s 263 of the Income Tax Act and held that the propositions of block assessment

and regular assessment are separate; the genuineness of the purchase and lease back transactions with M/s. Morgan Industries Limited and the

disallowance of hire management fee were not matters referred to and considered by the Tribunal in the block assessment. For the purpose of

exercise of jurisdiction u/s 263, the Commissioner had to satisfy himself that the order of the Assessing Officer was erroneous and prejudicial to

the interests of the Revenue and once the Commissioner was satisfied about the presence of conditions necessary for the exercise of jurisdiction,

the block assessment and regular assessment, being two different concepts, there was no inhibition in the Commissioner exercising his jurisdiction

u/s 263 of the Income Tax Act. There was no overlapping of assessment made under Chapter XIV-B and the regular assessment made u/s 143(3)

of the Income Tax Act. Thus, when the regular assessment procedures were kept intact providing for appeal, revision and other remedies, when

the assessment made by the Assessing officer was erroneous and prejudicial to the interest of the Revenue, the Commissioner was justified in

exercising his jurisdiction u/s 263 of the Income Tax Act. Consequently, there was no wanting of jurisdiction of the Commissioner to pass a

revisional order. Thus holding, the Tribunal rejected the assessee''s appeal. Aggrieved by this, the present appeals have been preferred by the

assessee.

A reading of the order of the Tribunal shows that it considered the effect of the orders passed in the quantum assessment and the block

assessment and held that once the block assessment was quashed, there was no undisclosed income for the purpose of computation of block

assessment. The Tribunal further pointed out to the findings of the earlier order of the Tribunal that the block assessment could not be proceeded

as there was no undisclosed income as defined u/s 158B(b) of the Income Tax Act. The Tribunal, evidently, had not gone into the view of the

earlier order of the Tribunal touching on the aspects of the genuineness of the transaction, but apparently, it restricted its decision only on the

jurisdiction and nothing beyond.

Learned counsel appearing for the assessee submitted that when the subject matter of block assessment and the revision were one and the

same; that the Commissioner having granted his approval to the order passed under Chapter XIV-B, the self-same authority cannot assume

jurisdiction for the purpose of Section 263 to revise the order of assessment. She further pointed out that the very basis of the 263 proceedings

was the finding in the block assessment. When the alleged finding of bogus nature of the transaction was set aside by the Tribunal in the appeal

preferred by the assessee, there was nothing on record for the Commissioner to proceed further in this matter, in any event, when the proceedings

are already pending before the Tribunal as to the claim of the Revenue on the undisclosed income by questioning the genuineness of the transaction

on the depreciation claim, it was not open to the Commissioner to pass orders assuming jurisdiction on the self-same matter and in any event, he

ought not to have proceeded further before the issues got settled before the Tribunal in the appeal filed as against the block assessment. With the

Department accepting the order of the Tribunal on the block assessment and the findings thus having been attained finality, the Tribunal committed

a serious error in ignoring these findings and in upholding the jurisdiction of the Commissioner.

Countering the claim of the assessee, learned standing counsel appearing for the assessee supported the view of the Tribunal as to the

availability of jurisdiction u/s 263 of the Income Tax Act to revise the order, particularly when the transaction with M/s. Morgan Industries Limited

were found to be just a finance transaction; when the assessee was granted an unsustainable relief under law by ignoring the true state of affairs,

rightly the Commissioner assumed jurisdiction to set aside the order and hence, no exception could be taken to the order passed by the Tribunal.

Heard learned counsel appearing for the assessee and the learned standing counsel appearing for the Revenue and perused the materials

placed on record.

As pointed out in the preceding paragraph, admittedly, when the revisional authority assumed jurisdiction and issued notice on 25.2.2000, the

block assessment had already been made on 31.7.1997 covering the period 1.4.1986 to 3.7.1996. The second notice issued on 12.3.2001 on the

change of the Commissioner is on the very same line as was given on 25.2.2000. The notice dated 25.2.2000 issued by the Commissioner reads

as follows:

On a perusal of the assessment orders made u/s 143(3) for the assessment years 95-96 and 96-97, it is seen that the Assessing Officer has

allowed the claim of deduction of margin money and hire management fee vide details below:--

Sl. No. Item Asst. Year 95-96 Asst. Year 96-97

Margin money 1,82,52,486 90,38,000

Hire management fee 5,66,11,431 1,71,14,791

7,48,63,917 2,61,52,791

I find that the action of the Assessing Officer in allowing the claim is wrong in as much as this expenditure relates to lease back transactions which

have been held to be sham and bogus in the block assessment made on 31.3.1997. It is also further noticed that the Assessing Officer has allowed

the claim of 100% depreciation in respect of the asset acquired from M/s. Morgan Industries Ltd. for Rs. 51 lakhs, without properly appreciating

the fact that the lease agreement and hire purchase agreement, supplementary agreement have all been entered on a single day i.e. On 28.3.95

which would indicate that no ownership has passed on. He has also failed to verify and satisfy the genuineness of the transactions and other

conditions regarding the allowability of the claim.

In the circumstances, I am of the opinion that the assessment made u/s 143(3) for the Assessment Years 95-96 and 96-97 are erroneous and

prejudicial to the interest of the revenue.

Therefore, under the powers vested in me u/s 263 of the income tax Act, I propose to pass such orders thereon as the circumstances of the

case justify, including an order enhancing or modifying the assessment order cancelling the assessment and directing a fresh assessment.

You are requested to state your objections, if any, for the above proposals on or before 6.3.2000 in writing. If you desire to be heard in person

in this connection, you may be present on 6.3.2000 at 11 A.M. at my office in person or through an authorised representative.

Thus, the very basis of Section 263 order was the block assessment proceedings holding that the transactions with M/s. Morgan Industries

Limited were bogus; consequently, the Commissioner though it fit to exercise his jurisdiction on the deduction granted on margin money and hire

management fee. It was alleged in the notice that the Assessing Officer had not gone into the question on allowability of the deduction claim. The

Commissioner also pointed out to the depreciation granted therein in respect of the assets, which was the subject matter of the transaction with

M/s. Morgan Industries Limited.

Learned counsel appearing for the assessee placed before us a copy of the block assessment order covering the period 1.4.1986 to

03.7.1996 dated 31.7.1997. A perusal of the said order shows that the transactions concerned therein were related to buy and lease back

transactions and the lessesses were Ponni Sugars & Chemicals Ltd., Morgan Industries Ltd., Prakash Industries Ltd., Otoklin Plants &

Equipments Ltd. The transactions made with these concerns were held as falling under the category of finance lease. The block assessment order

referred to the fact that the lessee company were in need of money and they raised money through these transactions for their use. Apart from this,

there were transactions with Sivananda Steels Ltd., Regency Ceramics Ltd., Namaste Exports Ltd., Terry Gold (India) Ltd., Goldwon Textiles

Ltd., Coduras Exports Ltd., and Restile Ceramics Ltd., which were held to be not genuine transaction.

The sum and substance of the block assessment was while questioning the genuineness of the transactions, the order on block assessment also

considered the claim of the assessee on 100% depreciation. Thus, when the assessee came on appeal before the Tribunal as against the block

assessment, the Vice President pointed out that in the block assessment, 14 sale and lease back transactions were considered. The learned Vice

President viewed that in a sale and lease back, there were entries recording of sale and lease rentals, which represented income. The entries for

depreciation did not represent income; it was only a derivative entry. Hence, the Vice President agreed with the submission of the assessee that the

depreciation was not income. On the aspect of the availability of materials in the regular books of accounts, the Vice President pointed out that

there was no denial of fact that the assessee in the returns filed for the assessment years 1995-96 and 1996-97 had reflected all the 14

transactions. Thus, the undisputed fact was that there were entries in the books of accounts which were audited, signed and forwarded to the

Board of Directors disclosing the 14 transactions.

On the question as to whether the amounts which were already there in the books of accounts were treated as undisclosed income, the

Tribunal pointed out that the mere fact that some parties had denied transaction could not lead to the existence of undisclosed income, particularly

when the transaction details had been furnished to the Department or found by them in the course of search. The Department had found detailed

correspondence which supported the transaction. The Department had also accepted that all the transactions were going through banking channels.

The Tribunal further pointed out that though the parties had denied the transactions, they had declared the commission received from the

transactions as their income from undisclosed sources and they had also admitted to the signing of the documents. In the background of the

materials thus available, the Tribunal held that the Department, in the course of search, found all those documents, which were reflected in the

books of accounts and on cumulative appraisal of facts, it was difficult to hold that the transactions had not been disclosed to the Department. Thus

the question of treating this as undisclosed income for the purpose of block assessment did not arise. There was no concealment or fraud or other

characteristics, which would lead to the assessment under the block assessment procedure. In the absence of any undisclosed income, there was

complete lack of jurisdiction for the Department to proceed under Chapter XIV-B in the form of Block assessment. Taking such a view the

learned Vice President also went into the question of enquiry made and the assessment made based on that without giving the assessee an

opportunity of cross examination and on analysis of facts, the learned Vice President came to the conclusion that the assessment was totally

uncalled for and there was no need at all for setting aside the order to remit it back to the Officer for fresh enquiry granting the assessee an

opportunity. On the facts found that there was no concealment and hence, the entire assessment was annulled.

The learned Accountant Member, however, went into the question on the violation of principles of natural justice alone in not granting an

opportunity to the assessee to cross examine the third parties, who denied the transactions. Learned Accountant Member viewed that it was a

procedural remedy and for that, block assessment need not be quashed and the assessee could be granted adequate opportunity to cross examine

the witnesses. In the circumstances, the assessment was set aside and the matter was sent back to the Assessing Officer for granting adequate

opportunity to the assessee.

Considering the difference of opinion between the learned Vice President and the learned Accountant Member, the appeal was placed before

the third Member Senior Vice President.

A reading of the order of the learned Senior Vice President reveals that he concurred with the views of the Vice President that the seized

materials did not disclose any concealed income, as the transactions were very much available in the books of accounts of the assessee. He further

pointed out that the crux of the allegation, namely, the transactions were only in form but not in substance was not considered necessary because

the only issue was whether the transactions could have resulted in undisclosed income. He further pointed out that the learned Vice President had

touched upon the documents seized and on the facts found in the books of accounts, learned Vice President held that except to make allegation on

the depreciation claim as false and not allowable under the provisions of the Act, there was no evidence to suggest that the entries were false or the

assessee had falsified the accounts.

In the background of the findings thus reached, the learned Senior Vice President held that he concurred with the Vice President on the facts

found that when the transactions were already there in the books of accounts, there was no such thing as undisclosed income for the purpose of

bringing under Chapter XIV-B of the Income Tax Act. Thus, if any item of income could not fall within the meaning of ""undisclosed income"", it

could not be aggregated at all. He further viewed that the question whether the assessee would be entitled to depreciation or not was a matter to

be considered in the regular assessment and if the Assessing officer had granted the relief, it is always open to the Assessing Officer to touch the

assessment under Sections 147 and 148 of the Income Tax Act. The block assessment procedure was strictly based on the income which was

found to have been suppressed or not to have been disclosed and to come to that conclusion, the Revenue must have materials seized at the time

of search proceedings. In that view of the matter, the Third Member agreed with the learned Vice President.

Thus, the sum and substance of the proceedings in the appeal arising out of the block assessment was that the transactions were held to be

genuine and were reflected in the books of accounts, in which event, the question of granting depreciation or a deduction, which is available to an

assessee, could not be denied at all. It is no doubt true that on any matter which was not subject matter of block assessment, it is always open to

the Commissioner to exercise his Authority u/s 263 of the Income Tax Act to revise the assessment if the same is erroneous or prejudicial to the

interests of the Revenue, unlike in the case considered by this Court in an unreported decision in the case of R. Srinivasan V. The Assistant/Deputy

Commissioner of Income Tax, Central Circle I, Coimbatore in T.C.(A) No. 354 of 2006 dated 11.9.2012, where the block assessment itself was

subjected to revisional proceedings u/s 263 of the Income Tax Act, the present case is whether the Commissioner of Income Tax has jurisdiction

to exercise his revisional powers as regards the regular assessment made. Strictly speaking, there is no wanting of any jurisdiction if there are merits

in exercise of such an authority. However, as far as the facts in the case on hand is concerned, as is evident from the notice of revision, the basis

disclosed in the notice is the block assessment proceedings, wherein, lease and buy back transactions were found to be bogus. Consequently, the

Commissioner viewed that the assessee was not entitled to deduction on margin money and hire management fee, apart from the grant of 100%

depreciation.

The Revenue does not deny the fact that the block assessment was a subject matter of appeal before the Tribunal and the majority view had

become final. Even though the Revenue made strenuous argument that the depreciation was not the subject matter, we fail to understand such a line

of argument, since the order of the Tribunal as well as the block assessment order clearly point out that the claim on depreciation was also

considered on account of doubt on the genuineness of the transactions. We may also point out herein that the assessee in its reply specifically

pointed out that the claim on depreciation in respect of 13 transactions were disallowed leaving out M/s. Morgan Industries Limited. Thus, the

Department had consciously allowed the claim of the assessee on depreciation in respect of M/s. Morgan Industries Limited. Paragraph No. 12.1

of the assessee''s reply dated 10.3.2000 clearly pointed out to this fact, which is not disputed so far by the Revenue. The margin money and hire

management fee related to hire purchase transaction entered into by the company were during the assessment years 1995-96 and 1996-97. With

the claim of the Revenue on the genuineness of the transaction itself negatived by the Tribunal in the first round of litigation in the appeal filed before

the Tribunal, it is no longer now open to the Revenue to cling on to the block assessment order to contend that the proceedings would nevertheless

be justifiable under the provisions of Section 263 of the Income Tax Act based on the genuineness of the transactions.

In the background of the facts found by the Tribunal that the transactions were reflected in the books of accounts and they were all genuine

transactions and that the order of the Tribunal on the block assessment appeal having become final, the sole reliance on the findings in the block

assessment thus not being available to the Revenue, on merits, we have no hesitation in holding that the Tribunal had committed serious error in not

considering the facts in a proper perspective. It is rather ironical that the Tribunal ignored the findings of its own order in the block assessment

appeal, which clearly points out to the genuineness of the transactions and the disclosure of the transactions in the books of accounts and

consequently on the sustainability of the claim on the depreciation, which was also the subject matter of consideration in the block assessment.

Having regard to the above, we hold that there is no material at all for the Commissioner of Income Tax to exercise his jurisdiction u/s 263 of

the Income Tax Act to deny the assessee on the deduction as well as on the depreciation claim considered by the Assessing Officer in the

assessment relating to the assessment years 1995-96 and 1996-97. In the light of the above, the order of the Tribunal stands set aside and both

the Tax Case (Appeals) are allowed. No costs.