Ambuja Cements Limited Vs CIT (ITAT Mumbai)

Section 263(1) of the Act obligates the Commissioner to give the assessee an opportunity of being heard before passing of his order. No doubt the Commissioner is not disentitled to consider a point which is not stated in the notice so issued. However, the obligation to given an opportunity to the assessee of being heard on the point on the basis of which he finds it expedient to treat the assessment order erroneous in so far as it is prejudicial to the interests of the Revenue, is definitely cast on the Commissioner, as opined by the Hon’ble Supreme Court in the case of Amitabh Bachchan (supra). Considering the aforesaid, in our view, in the present case the basis on which the Commissioner has found the assessment order as erroneous in so far as it is prejudicial to the interests of the Revenue, namely, absence of any scientific basis for fixing the percentage to make the provision for slow moving inventories of spares, does not appear to have been put to the assessee, as is emerging from the material before us. Thus, on this point itself, we find the impugned order of the Commissioner to be untenable in the eyes of law.

FULL TEXT OF THE ITAT JUDGMENT

This appeal by the assessee is directed against the order passed by the CIT(LTU) [in short the Commissioner], Mumbai, dated 29.03.2016, holding the assessment order passed by the Assessing Officer u/s. 143(3) of the Act, dated 28.02.2014, as erroneous in so far as it was prejudicial to the interests of the Revenue u/s. 263 of the Income tax Act, 1961(hereinafter referred to as “the Act”)

2. The appellant before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of cement manufacturing, etc. For the assessment year under consideration the return of income filed by it was subject to scrutiny assessment u/s. 143(3) of the Act, dated 28.02.2014, wherein the total income was assessed at ~ 9,94,52,94,305/- under the normal provisions of the Act and the book profit u/s. 115JB of the Act was determined at ~ 19,13,21,89,572/-. Subsequently, the Commissioner invoked his revisionary jurisdiction and issued a notice u/s. 263 of the Act, dated 26.02.2016, proposing that the assessment order, dated 28.02.20 14 (supra), was erroneous in so far as it was prejudicial to the interests of the Revenue, in as much as incorrect allowance of Provision for slow moving inventories of spares amounting to ~ 52.80 cores had led to under assessment of income. In this context, the relevant discussion by the Commissioner shows that his examination of record showed that the assessee had debited in the Profit & loss Account a sum of ~ 52.80 crores as a ‘Provision for slow moving inventory’ and read with note 18 of the Notes forming part of the Accounts, it reflected that such a provision was made for slow moving inventories based on the age of the inventory and it was consequent to a change in policy of recognizing provisions for slow moving inventories of spares. The Commissioner further noticed that this provision was created for the first time and was meant for temporary diminution in the value of spares meant for plant and machinery and, hence, related to capital in nature. Thus, according to the Commissioner, it was an incorrect allowance made in the assessment order dated 28.02.2014 (supra).

3. In reply to the show cause notice, a copy of which has been placed in the paper-book at page 64, the assessee resisted the action of the Commissioner and, inter alia, furnished written submissions dated 14.03.2016, copy of which has been placed in the paper-book at pages 65 to 69. The appellant company resisted the action of the Commissioner both on the point of assumption of jurisdiction as well as on the merits of the issue. In paras 2 to 3.3 of his order, the Commissioner has briefly noted the submissions put-forth by the assessee. However, the Commissioner was not satisfied with the submissions put-forth and held that the requisite conditions prescribed for invoking section 263 of the Act were fulfilled in the present case and he justified the invoking of section 263 of the Act.

4. In so far as the merits of the issue was concerned, the Commissioner directed the Assessing Officer to withdraw the allowance of such provision and his relevant discussion is contained in para 5 of his order, which we would reproduce and refer to it in detail later in this order.

5. In conclusion, the Commissioner held the assessment order, dated 02.2014, to be prejudicial to the interests of the Revenue to the above extent and directed the Assessing Officer to modify the assessment order.

6. Against such a decision assessee is in appeal before the Tribunal. At the time of hearing, the learned representative of the assessee has made various submissions, but a pertinent point has been raised, which is based on the ratio of the judgment of Hon’ble Supreme Court in the case of CIT vs. Amitabh Bachchan [384 ITR 200]. It is sought to be emphasized that the basis on which the Commissioner has found the assessment order to be erroneous in his order is quite different from the point raised in the show cause noticed issued u/s. 263 of the Act, and that in fact the error finally established in the impugned order was not put to the assessee at all. On this basis, it has been argued that the order of the Commissioner is untenable in law. In support of his proposition, he has relied upon the following discussion in para 11 of the judgment of Hon’ble Supreme Court in the case of CIT vs. Amitabh Bachchan (supra)

“11. It may be that in a given case and in most cases it is so done a notice proposing the revisional exercise is given to the assessee indicating therein broadly or even specifically the grounds on which the exercise is felt necessary. But there is nothing in the section (section 263) to raise the said notice to the status of a mandatory show-cause notice affecting the initiation of the exercise in the absence thereof or to require the Commissioner of Income-tax to confine himself to the terms of the notice and foreclosing consideration of any other issue or question of fact. This is not the purport of section 263. Of course, there can be no dispute that while the Commissioner of Income-tax is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controvert the same and to explain the circumstances surrounding such facts, as may be considered relevant by the assessee, must be afforded to him by the Commissioner of Income-tax prior to the finalisation of the decision.”

7. In order to appreciate the point sought to be raised by the assessee, we may refer to the relevant contents of the show cause notice dated 26.02.2016, as under:

“2. … verification of records revealed that the assessee had debited a provision of ~ 52.80 crore for slow moving inventories. Vide Schedule P read with notes 18 to the accounts, it is stated that consequent of change in policy of recognizing, provisions for slow moving inventories of spares, based on the age of inventories, the company has made a provision of Rs.52.80 crore for slow moving inventories. This provision was created for the first time having effect on profit for relevant assessment year. Further, the provision is meant for temporary diminution in the value of spares meant for plant and machinery and related to capital in nature. The same was allowed by the Assessing Officer in the order under reference. The incorrect allowance of this provision led to under assessment of income of Rs.52.80 crore, involving tax effect of Rs. 17.95 crore. As a result, the order passed by the A.O., seems to be erroneous in so far as it is prejudicial to the interest of revenue.”

In terms of the aforesaid, what the Commissioner has sought to make out is that the Provision for slow moving inventories of spares is ‘Capital in nature’ and, therefore, it has been incorrectly allowed by the Assessing Officer in the assessment order dated 28.02.2014 (supra). Thus, in the show cause notice, the Commissioner had found the assessment order erroneous in so far as it is prejudicial to the interests of the Revenue for the aforesaid reason.

8. Now, we may touch upon the manner in which the Commissioner has justified the fulfilment of conditions prescribed in section 263 of the Act in his order. Pertinently, and as has also been explained by the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT [243 ITR 83], invoking of section 263 of the Act can be justified only on satisfaction of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. It is trite position of law that even if one of the aforesaid conditions is absent in a given case, then invoking of section 263 of the Act would be untenable in law. In this background, we may now examine the manner in which the Commissioner has dealt with the conditions prescribed u/s. 263 of the Act in his order. The relevant discussion is contained in para 4 & 5 of his order, which reads as under:

“4. I have carefully considered the issue and perused the records. The allegation of the AR that revisiting the inventory for its categorization amounts to taking alternative view, is ill founded. Unlike reopening of assessment u/s 148 beyond 4 years, there is no requirement u/s 263 that the item should not have been in place before the AO in original assessment proceedings. There is no doubt that the provision is wrongly made for inventory and the same is accepted by the AO, resulting in prejudice caused to the Revenue. The conditions for Section 263 are fulfilled and the same is rightly invoked.