Rambagh Palace Hotels Pvt Ltd Vs ITO (ITAT Delhi) – In this case ld CIT(A) had adjudicated upon on all the issues. Therefore, the assessment order has merged in the order of CIT(A). Hence, ld. CIT was debarred to assume jurisdiction u/s 263 of the Act. The assessment cannot be treated as erroneous in so far as prejudicial to the interest of revenue merely on the basis of a complaint and that too for the purpose of making roving inquiries.
IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCH “F” DELHI ]
I. T. A. No. 394 (Del) of 2010
Assessment year: 2006- 07.
Rambagh Palace Hotels Pvt. Ltd. Vs. The Income-tax Officer
O R D E R.
PER K. D. RANJAN, AM :
This appeal by the assessee for assessment year 2006-07 is directed against the order under section 263 of the Income-tax Act, 1961 [hereinafter referred to as the Act] passed by the ld. Commissioner of Income-Tax-V, New Delhi.
2. In this case the assessment order under section 143(3) of the Act was made on 19/12/2008. While completing the assessment under section 143(3) the assessing officer made certain additions assessing the taxable income of Rs. 18,68,62,700/- as against declared income of NIL. Subsequently, the ld. CIT on perusal of assessment records noted that the assessing officer had allowed certain expenses without examining the genuineness of expenses in view of the fact that a complaint was received by the assessing officer on 19/11/2008 indicating misappropriation and siphoning of the funds of the company by Maharaj Prithvi Raj and Maharaj Jai Singh. This complaint was made by a close family friend of the Director, namely, Maharaj Dev Raj. In the complaint it was mentioned that the assessee company had booked expenses of Rs.50 crores under the head repair and maintenance of the building which had been siphoned off with the help of a contractor appointed in consultation and for personal benefit of Maharaj Prithvi Raj. Ld CIT, therefore, issued show-cause notice to the assessee requiring the assessee to submit explanation with reference to the complaint received.
3. Ld CIT observed that the AO during the course of the assessment proceedings verified the genuineness of the expenses under the head ‘repairs and maintenance’. The AO specifically asked the assessee to furnish complete details of contractors to whom payment exceeding Rs.50,000/0- was made but the assessee filed details of payment exceeding Rs.5 lakhs only and failed to file the remaining details before the AO. The AO also requested the assessee to produce four parties, namely, Shri Choti Lal, Shri Chander Singh, Shri Sat Narain and M/s. Singh Construction, but these parties were not produced before the AO. Consequently, the AO had concluded in the assessment order that the genuineness of these expenses could not be verified and deserves to be allowed. However, the AO had treated 90 per cent of such expenses to be of enduring advantage to the assessee company and of capital in nature. This action of the AO is contrary to the complaint and the observations of the AO himself that the genuineness of the expenses could not be verified and deserves to be disallowed. In the absence of verification of genuineness of expenses, the whole of expenses to the tune of Rs.6,67,88,797/- should have been disallowed as bogus / non-genuineness expenses.
4. In response to a query raised by the ld. CIT, it was submitted that the ld. CIT (A) has already decided this issue and his findings are recorded on page 9 of the appellate order. It was, therefore, argued that once this issue has been decided by the ld. CIT (A), it is out of the scope of revision under section 263 of the Act. The ld. CIT in view of the decision of the ld. CIT (A) observed that the ld. CIT (A) has only observed that the assessee is a five star luxury palace hotel and the expenditure on repair and maintenance shown at Rs.6.67 crores was in tune with the expenditure of earlier assessment years. The ld. CIT (A) has further noted that the material was produced before the AO to show that the vendors were not fake parties and their bank accounts, ledger accounts, and Income-tax returns established that the parties were genuine and not bogus. From these facts the ld. CIT observed that nowhere the ld. CIT (A) had given the finding that repair and maintenance expenditure was genuine. The vendors being not bogus were one thing and the expenditure shown by the assessee in collaboration with these parties being genuine was another thing. The ld. CIT further noted that the cases decided by the ITAT, High Courts and Hon’ble Supreme Court show that sometimes the genuinely existing parties do indulge in bogus transactions and help the taxpayer in evading the taxes. Therefore, the ld. CIT rejected the contention of the assessee that the issue had been decided by the ld. CIT (A). He further noted that the AO had given a finding that expenditure on repair and maintenance was not genuine and deserves to be disallowed. However, he proceeded to hold that 90 per cent of the expenditure was capital. The AO was required to disallow the expenses of Rs.6,67,88,079/-. Further, the ld. CIT (A) had not given any finding that the expenditure on repairs and maintenance was not genuine. Hence the order of the AO is erroneous and prejudicial to the interest of the Revenue.
5. The next issue raised in the show cause notice related to the issue that as per complaint the Directors of the company had illegally withdrawn / siphoned off approximately Rs.5 crores under the head travel and conveyance in the years 2003-04 to 2007-08. These expenses were personal expenses of Maharaj Prithvi Raj and Maharaj Jai Singh as these expenses were not related to the business of the company as they were not incurred for procuring business outside India. The AO while dealing with the issue noted that the documents submitted by the assessee for the foreign visit of the Directors were manipulated and the letter submitted by them were of similar font. The assessee company had not produced the pass-ports of the Directors and others who have undertaken the foreign visits. Traveling expenses incurred by the Directors and others are of personal expenses of the Directors. He has further noted that Directors have not submitted business report on their foreign visit. The expenses of foreign tour have not been approved by the Board although the expenses have been incurred every month for their foreign visits. Before execution of the tour of the Directors, it has not been approved by Board of Directors. As per the operational agreement, the Directors of the company have nothing to do with the operation and promotion of the business of the company which is looked after by Indian Hotel Company. Moreover the books of accounts of the assessee company had not been produced. The AO, therefore, came to the conclusion that the expenses were in the nature of personal expenses of the Directors and had nothing to do with the business of the company.
6. In response to the notice issued the assessee submitted that the ld. CIT (A) had already decided this issue and, therefore, provisions of section 263 of the Act will not be applicable. The ld. CIT after going through the relevant paragraphs of the order of the ld. CIT (A) relating to foreign travel expenses observed that ld CIT(A) had given a finding based on ITAT’s decision in assessee’s own case for AY 1997-98 and had allowed the foreign travel expenses. The ld. CIT (A) had not, however, given a finding that the expenditure incurred was genuine. The ld. CIT (Appeals) had not examined anything which would indicate that the expenditure was genuine particularly in view of the finding of the AO that the address and telephone numbers of travel agenta, who were stated to be connected by the Directors abroad could not be verified and the documents submitted by the assessee’ s Directors for foreign visit appeared to be manipulated and the books of accounts and pass-ports of the Directors were not produced for verification. The ld. CIT further observed that the foreign visit of the Directors had not been established. The AO in addition to making the dis allowance on the ground of expenditure being personal in nature of the Directors should have disallowed the expenditure also for the reason that the expenditure was not genuine. The dis allowance made only on the basis that expenditure was personal in nature leaves the assessment order incomplete and thus week. The assessment order, therefore, was erroneous and prejudicial to the interest of Revenue in the sense that dis allowance has not been made on all the reasons for which it was required to be made.
7. As regards the third issue that as per para 2 of the complaint the assessee company had siphoned off Rs.40 crores between year 2002-03 and 2008-09 by illegally withdrawal of money in the guise of additions to the fixed assets. This means that the assessee had not actually acquired fixed assets, but siphoned off by showing bogus purchases / acquisition of fixed assets. From the schedule of depreciation, it was seen that the assessee had shown addition of Rs.50 lakhs between 1st April to 30th September and Rs.1,88,45,697/- between 1st October to 31st March. The AO, however, has failed to make any enquiries into this allegation / aspect. It was submitted by the assessee that the AO by questionnaire dated 21st November, 1988 asked the assessee for various details relating to addition / reduction to block of assets vide its letter dated 8/09/2008. The assessee furnished details regarding description of assets purchased during the year, date of purchase, cost of asset and depreciation on fixed assets purchased during the year. The details furnished were discussed by the assessing officer who did not ask for any further information. It was, therefore, argued that allegation / aspect has been examined and, therefore, the assessment order could not be revised under section 263 of the Act on this issue.
8. The ld. CIT on consideration of these facts noted that the assessing officer had not made any inquiry / investigation into allegation of siphoning of money by illegal withdrawal of money in the form of additions to the fixed assets. The AO was required to thoroughly examine the genuineness of the purchase / acquisition of the assets during the previous year. Since the AO had failed to make inquiry / investigation into the genuineness of the purchase / acquisition of assets during the year the assessment order is erroneous and prejudicial to the interest of the revenue. He accordingly directed the assessing officer to make through enquiry / investigation into purchase / acquisition of assets into illegal siphoning off the money in the complaint.
9. Before us the ld. AR of the assessee submitted that the AO completed assessment on 19/12/2008 after making several additions. The AO had treated the expenditure of Rs.5,40,97,927/- as capital in nature. The ld. CIT (Appeals) deleted the addition of Rs.5,11,54,867/- after duly verification of the details of expenditure, which were supported by complete documents towards repair and maintenance expenditure. When ld CIT(A) had held that out of expenditure of Rs.5,40,97,927/- expenditure to the extent of Rs.29,43,060/- could not be allowed as Revenue expenditure as the expenditure was of the nature of capital expenditure, it cannot be said ld CIT(A) had not examined the nature of the expenditure. As regards traveling expenditure of Rs.85,11,080/- the ld. CIT (A) had noted that the assessee company had incurred an aggregate expenditure of Rs.1,34,55,221/- towards traveling which included expenditure incurred towards inland and foreign traveling of staff, directors etc. He had held that the dis allowance made was untenable and deleted the addition by way of dis allowance of expenditure incurred by the AO of Rs.85,11,050/-. It was also submitted that the ld. CIT (A) has examined the nature of various expenses incurred by the assessee and after being satisfied that the expenditure incurred have genuinely been incurred, held the same to be allowable. The aggregate of additions deleted by the ld. CIT (A) amounted to Rs.7,47,01,275/-. He further submitted that the complaint was received by the AO on 19/11/2008 alleging certain allegations for siphoning off the funds of the company by illegally by way of bogus expenses or acquisition of assets not in existence. The AO had treated 90 per cent of the expenditure capital in nature. There was no material to doubt the genuineness of the expenditure incurred on the basis of the complaint. The ld. CIT while initiating proceedings on the basis of the complaint issued notice in respect of expenditure incurred on travelling on the ground that the expenditure incurred was of personal nature. Another issue relates to depreciation claimed on assets, which has been allowed by the AO without making any inquiries. It has been submitted in compliance to the show cause notice that the assessee had filed replies with same evidence as was filed before the assessing officer. It was also stated that the complaint made against the assessee was frivolous without having any supporting evidences. The AO had considered the complaints and required the assessee to satisfy about the genuineness of the expenditure in respect of each of the head, which was duly complied with by the assessee. It was further submitted that the alleged complaint is neither by a share-holder nor is by a Director. No evidence or material whatsoever has been furnished by the alleged complainant to establish that the assessee company had debited expenditure which was bogus or any moneys were siphoned off. He also submitted that the assessing officer made addition which has been deleted by the ld. CIT (A). This alone shows that the allegations in the complaint were frivolous and the ld. CIT had no material to hold the order to be erroneous being prejudicial to the interest of revenue.
It has further been submitted that assumption of jurisdiction under section 263(1) of the Act is not valid as the ld. CIT (A) had considered and decided the matter which was the subject matter of appeal before him. Therefore, the ld. CIT could not have taken any proceedings under section 263 of the Act. Reliance was placed on the decision of Hon’ble Supreme Court in the case of CIT Vs. Manik Sons 74 ITR 1 and the decision of Hon’ble Delhi High Court in the case of CIT Vs. Edwared Kaventor 123 ITR 200 (Del). Further there was no material whatsoever to allege that the order was erroneous in so far as it was prejudicial to the interest of the revenue and the expenditure incurred was either bogus. There is no basis to allege that no enquiry had been conducted as can be seen from the various replies submitted by the assessee. The ld. CIT has not brought any material to justify the initiation of the proceedings or how he considered the order to be erroneous in so far as prejudicial to the interest of the revenue on the basis on record. He further submitted that setting aside the order by the ld. CIT would tantamount to sitting over the order of the ld. CIT (A) as an appellate authority. Therefore, the order passed by the ld. CIT is not in accordance with the provisions of law.
10. On the other hand, the ld. [CIT] – DR submitted that the AO asked for the books of accounts and relevant material, which was not produced by the assessee. The ld. CIT (A) has given finding based on the decision of the ITAT. The ld. CIT (A) has not given any finding that the expenditure claimed on repairs and maintenance was genuine. Therefore, the order of the AO has not merged with respect to genuineness of the transaction. Similarly, the assessee has not given details of foreign travel expenses. The AO disallowed the expenditure on the ground that the Directors have not filed their Pass-ports. The ld. CIT(DR) further submitted that the AO had not made inquiries from the parties. Therefore, the order passed by the AO without making third party inquiries is erroneous in so far as it is prejudicial to the interest of the Revenue. He placed reliance on the following decisions:-
1. CIT Vs. Pushpa Devi (1987) 164 ITR 639 (Pat.);
2. Gee Vee Enterprises Vs. Addl. CIT (1975) 99 ITR 375 (Del.); &
3. Indian Textiles Vs. CIT (1986) 157 ITR 112 (Mad.)
12. We have heard both the parties and gone through the material available on record. Under section 263 of the Act the ld. Commissioner of Income-tax is empowered to cancel the assessment, if the order passed by the assessing officer is erroneous in so far as it is prejudicial to the interest of Revenue. Hon’ble Supreme Court in the case of Malabar Industrial Corporation has held that in order to exercise of jurisdiction u/s 263 by the Commissioner is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interest of Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interest of Revenue. If one of them is absent – if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue – recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of fact or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principle of natural justice or without application of mind. The phrase “prejudicial to the interest of Revenue” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Assessing Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of revenue. The phrase “Prejudicial to the interests 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, for example , when an Income Tax Officer adopted one of the course permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income Tax Officer has taken one of the view with which the Commissioner does not agree, it cannot be treated an erroneous order prejudicial to the interest of the Revenue unless the view taken by the Assessing Officer is unsustainable in law.
13. In the instant case the AO had treated 90 per cent of repairs and maintenance expenditure of capital in nature. While holding so the assessing officer relied on various decisions in support of his contention that the expenditure incurred on repairs and up-gradation amounted to capital expenditure. The AO issued questionnaire on 23rd November, 2008 specifically asking the assessee to furnish the addresses of the parties to whom the payment exceeding Rs.50,000/- was made during the year under consideration under the head ‘repairs and maintenance of the building’. The assessee submitted the addresses of the parties to whom payment exceeding Rs.5 lakhs was made. The AO had noted that the assessee had not furnished complete details of contractors. The assessing officer also asked the assessee to produce four parties S/Shri Choti Lal, Chandar Singh, Sat Narain and M/s. Singh Construction, but those parties were not produced. The AO on the basis of these facts came to the conclusion that the genuineness of the expenses could not be verified. Thereafter, the AO discussed various case laws to arrive at the conclusion that 90 per cent of the expenditure was of capital in nature. In this case, a complaint was received by the AO on 19/11/2008 and the AO had issued questionnaire to the assessee on 21st November, 2008. Therefore, the AO while examining the case before him had knowledge of the complaint filed against the assessee.
14.1 On appeal the ld. CIT (Appeals) deleted the addition relying on the expenditure incurred by the assessee in earlier years. The expenses incurred in earlier years ranged from Rs.5 crores to Rs.7 crores per year. Since the expenses were incurred in the same range, the disallowance based on vague statement that repair and maintenance expenses incurred during the year had given enduring benefit or a new advantage was contrary to the facts of the case. The ld. CIT (A) further noted that the assessing officer had held that the assessee could not produce the vendors for physical verification and, therefore, subject expenses were bogus. As regards the genuineness of the expenses, the ld. CIT (A) observed as under:-
“ The AO has also held that the appellant could not produce the vendors for physical verification and, therefore, the subject expenses are bogus. On perusal of submissions and record, it is noticed that the appellant had duly produced all material facts to establish that the vendors are not fake parties. The appellant produced copy of their bank account, copy of ledger account and their Income-tax return. All these documents established without any doubt that the parties are genuine and not bogus. So far as physical verification is concerned, as submitted, these parties are independent parties. Therefore, it takes time to make them available for verification by the tax department. The appellant also submitted that such parties could be produced for verification. However, having regard to the documents filed by the appellant, it seems not relevant to physically verify the parties. ”
14.2 From above order of the ld. CIT (A) it is apparent that the ld. CIT (A) has also gone into genuineness of the expenses. Thereafter the ld. CIT (A) examined the matter whether the expenditure was capital in nature or revenue. The ld. CIT (A) identified the expenditure of Rs.29,49,360/- capital in nature and the balance expenditure of Rs.55,11,54,867/- was held to be Revenue in nature.
15. From the above facts it is evident that the ld. CIT (A) has dealt with the genuineness of the expenditure as well as the allow ability of the expenditure claimed by the assessee. Therefore, the order passed by the assessing officer has merged in the order of the ld. CIT (Appeals).
16. As regards dis allowance of foreign travel / tour expenses of Rs.85, 11,050/-, the ld. CIT (A) noted that RBI has issued authorization to the assessee for purchase of foreign exchange for Directors foreign visit. As such, the traveling expenses could not be treated as personal expenses of the Directors. Further, it was also submitted that the AO had passed order under fringe benefit tax wherein the entire traveling expenses have been treated as eligible for FBT. FBT liability has been paid by the assessee on the entire traveling expenses. Reliance was placed on CBDT Circular No. 8 / 2005 dated 29th August, 2005 clarifying that the employer is not liable to pay FBT on personal expenses. Therefore, it was submitted that the AO had considered the expenses as revenue expenses incurred for wholly and exclusively for the purpose of business. The assessee also submitted copies of Pass-ports and Visa of Directors on sample basis evidencing the foreign travel undertaken by the directors of the company. The assessee also invited the attention to the documentary evidences furnished by it during the course of assessment proceedings which were furnished on sample basis and which consists of mails from foreign travel agents evidencing meeting with them. The ld. CIT (Appeals) on the basis of the above submissions, held that foreign travel expenses were incurred wholly and exclusively for the purpose of the business. The ld. CIT (A) relied on the decision of the ITAT for assessment year 1997-98.
17. From the above facts it is evident that the ld. CIT (A) has gone through the details. The assessing officer had considered the foreign travel expenses liable to FBT and the assessee had paid the tax thereon. If the expenditure was in nature of personal expenses of the Directors, there was no reason to charge FBT on such expenditure. The ld. CIT (A) has gone through the VISA and Pass-ports of the Directors on test-check basis and has found that the expenditure was incurred for the purpose of business. Therefore, the order of the assessing officer has merged in the order of the ld. CIT (A).
18. As regards the third issue that the Directors have siphoned off money of Rs.50 crores in assessment year 2002-03 to 2008-09 by illegal withdrawals of money by way of addition to the fixed assets, the assessment cannot be held to be erroneous merely on hear-say or failure to make inquiries into the allegations contained in complaint that too for the purposes of making the roving inquiries. The expenditure incurred by the assessee on fixed assets has been found to be genuine by the AO, which has been also upheld by the ld. CIT (Appeals). Therefore, the AO had considered the issue in relation to the renovation and maintenance expenses and foreign traveling expenses. Merely because a complaint has been filed, the assessment cannot be treated as erroneous and prejudicial to interests of revenue on the grounds that the assessing officer had passed such order without making proper inquiries.
19. Clause (c) of the Explanation to section 263 talks about the merger of order with the order of higher authority and reads as under:
“(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.”
Hon’ble Supreme Court in CIT v. Shri Arbuda Mills Ltd.  231 ITR 50 (SC) has held that the consequence of the amendment made in section 263 with retrospective effect from 1-6-1988 is that the powers under section 263 of the Commissioner shall extend and shall be deemed to have always extended to such matters as had not been considered and decided in an appeal. Thus in order to treat an adjudication of a lower authority as having merged in the order of the higher or superior authority, it must be established that the higher or superior authority in proceeding properly brought before it had considered the grounds upon which the decision of the lower authority was based and had either upheld or disapproved it. The doctrine of merger will operate only qua matters considered by appellate authority. The doctrine of merger can only operate on matters which are the subject-matter of decision by the first appellate authority. It cannot have any application to matters which were not taken on appeal either by the assessee or which have not been considered by the first appellate authority. Hon’ble Karnataka High Court in the case of Dy. CIT v. Varma Industrial Ltd. He has no jurisdiction to revise orders of the appellate authorities where the orders of the assessing authority had merged with the orders of the Commissioner (Appeals). The Commissioner cannot invoke the revisionary jurisdiction under section 263 of the Act.
20. In the case before us as discussed above the ld CIT(A) had adjudicated upon on all the issues. Therefore, the assessment order has merged in the order of CIT(A). Hence, ld. CIT was debarred to assume jurisdiction u/s 263 of the Act. The assessment cannot be treated as erroneous in so far as prejudicial to the interest of revenue merely on the basis of a complaint and that too for the purpose of making roving inquiries. We, therefore, set aside the order of ld. CIT and restore the order of assessing office.
21. In the result, the appeal filed by the assessee is allowed.
The order pronounced in the open court on: 11th March, 2011.