PCIT Vs Brahma Centre Development Pvt. Ltd. (Delhi High Court)
Revision by CIT Held Invalid Where Interdiction of Assessment Order In Substitution of View Taken By AO Is Not Permissible Under Section 263
To answer this issue, one would have to bear in mind, the following aspects.
i. Was there an enquiry carried out by the AO [and for this purpose, for the moment, we are assuming that Clause (a) and (b) of Explanation 2 appended to Section 263 of the Act would apply to the AYs in issue]?
ii. To what standard should the enquiry carried out by the AO, measure up?
iii. Whether the officer concerned [in this case, PCIT], while exercising powers under Section 263 of the Act, can supplant his views with those of the AO?
iv. Was the view taken by the AO, in the given facts, a possible view?
Having regard to the aforesaid documents, it cannot be said that the enquiry or verification was not carried out by the AO. A perusal of paragraphs 10 to 12 of the impugned orders passed by the Tribunal would show that findings of fact concerning the enquiry made by the AO have been recorded.
The standard to be adopted while dealing with the issue as to whether or not an AO has carried out an enquiry or verification, all that the Court is required to ascertain is as to whether the AO applied his mind.
The fact that the AO has not given reasons in the assessment order is not indicative, always, of whether or not he has applied his mind. Therefore, scrutiny of the record, is necessary and while scrutinising the record the Court has to keep in mind the difference between lack of enquiry and perceived inadequacy in enquiry. Inadequacy in conduct of enquiry cannot be the reason based on which powers under Section 263 of the Act can be invoked to interdict an assessment order. The observations made in this behalf, by the Division Bench of this Court, in Commissioner of Income-tax vs. Sunbeam Auto Ltd., [2010] 189 Taxman 436 (Delhi)/[2011] 332 ITR 167 (Delhi) being apposite, are extracted hereafter10.2. This view was followed by another Division Bench of this Court in Commissioner of Income-tax vs. Anil Kumar Sharma, (2010) 194 taxman 504 (Delhi).
Therefore, the error should be one that is not debatable or a plausible view. Section 263 of the Act invests a power of revision in a superior officer and therefore, by the very nature of the power, does not allow for supplanting or substituting the view of the AO. The appreciation of material placed before the AO is, exclusively within his domain which cannot be interdicted by a superior officer while exercising powers under Section 263 of the Act only on the ground that if he had appraised the said material, he would have come to a different conclusion. [See Parashuram Pottery Works Co. Ltd. v. ITO, [1977] 106 ITR 1 (SC)]
Issue no. (iv):
According to us, the AO, having received a response to his query about the adjustment of interest, in the concerned AYs, against inventory, concluded that, there was a nexus between the receipt of funds from investors located abroad and the real estate project, which upon being invested generated interest.
Thus, it cannot be said that the conclusion arrived by the AO, that such adjustment was permissible in law, was erroneous.
Furthermore, in our view, we need not detain ourselves and examine as to whether Clause (a) and (b) of Explanation 2 appended to Section 263 of the Act could have been applied to the AYs in issue, since on facts, it has been found by the Tribunal that an enquiry was, indeed, conducted by the AO.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. The above-captioned appeals are directed against the common order dated 18.12.2019, passed by the Income Tax Appellate Tribunal [in short “Tribunal”] in ITA Nos. 4341/Del/2019 and 4342/Del/2019, concerning assessment years [in short AYs] 2012-2013 and 2013-2014, respectively.
1.1. The Tribunal, via the impugned order, has in turn set aside two separate but similar orders dated 28.03.2019, passed by the Principal Commissioner of Income Tax [in short “PCIT”] in the exercise of his powers under Section 263 of the Income Tax Act, 1961 [in short “Act”]
1.2. The PCIT has, via his orders dated 28.03.2019, interfered with the assessment orders dated 31.01.2017 and 27.09.2017 passed by the assessing officer [in short “AO”] concerning the respondent/assessee [hereafter referred to as “assessee”] pertaining to AYs 2012-2013 and 2013-2014 respectively. The assessment orders were passed under Section 143(3) read with Section 144C of the Act, although, in the opening sheet of the assessment order concerning AY 2013-2014, there is only a reference to Section 143(3) of the Act. The record also shows that, after the PCIT had passed the order dated 28.03.2019, insofar as AY 2013-2014 is concerned, the AO as directed, passed a fresh order dated 12.11 2019 under Section 143(3) of the Act by conducting “proper enquiries”.
2. The reason why the PCIT had interfered with the original assessment orders was on account of a view held by him that interest earned by the assessee against fixed deposits was adjusted, i.e., deducted from the value of the inventory and not credi ed to the Profit and L ss Account [in short “P&L account”]The PCIT noted that the tax auditor, in the report filed in Form 3CD, had observed that interest earned on fixed deposits pertained to “other income” and had not been credited to the P&L account. The interest earned on fixed deposits in AY 2012-2013 was Rs.9,47,04,585/- whereas in AY 2013-2014, the interest earned on fixed deposits was Rs.4,32,9 1,517/-
2.1. Consequently, after the PCIT had issued two separate show cause notices to the assessee concerning the aforementioned AYs dated 20.02.2019 and had received replies against the same, he proceeded to pass two separate orders of even date, i.e., 28.03.2019 concerning AYs 2012-2013 and 2013-2014.
2.2. The PCIT interfered with the orders of assessment on the ground that they had been passed without making any enquiries as to whether the interest earned by the assessee had any nexus with the real estate project, the construction of which was undertaken by the assessee. Thus, according to the PCIT, the assessment orders were “erroneous” insofar as they were prejudicial to the interests of the revenue.
2.3. In the appeals preferred before the Tribunal by the assessee, the view held by the PCIT was reversed. It is in these circumstances that the appellant, i.e., the revenue has approached this Court by way of the instant appeals.
2.4. In support of the appeals, arguments on behalf of the appellant/revenue were advanced by Ms. Vibhooti Malhotra, while submissions on behalf of the assessee were advanced by Ms. Kavita Jha.
2.5. Before we proceed further, we may also note that Ms. Jha had placed before us, the record of the aforementioned cases, as was filed before the Tribunal; a copy of which was served on Ms. Malhotra as well. The arguments were, thus, advanced by counsel for the parties, keeping in perspective the record concerning the above-referred cases, which was made available to the Tribunal.
Submissions on behalf of the appellant/revenue:
The submissions advanced by Ms. Malhotra can be, broadly, paraphrased
as follows.
The impugned order of the Tribunal was perverse insofar as it did not take into account the fact that there was no enquiry or verification carried out by the AO as to whether or not the interest earned by the assessee from fixed deposits was taxable.
The Tribunal had erred in holding that the PCIT had wrongly invoked powers under Section 2631 of the Act. Explanation 2 appended to Section 263 of the Act, which was inserted via Finance Act, 2015 w.e.f. 01.06.2015, was declaratory, and therefore, contrary to what the Tribunal as held, would be applicable retrospectively even for the AYs in issue, i.e., AY 20 12-13 and 20 13-14. In other words, the argument was that Clause (a) and (b) of Explanation 2 appended to Section 263 of the Act, would apply to the aforementioned AYs, although the provision came into effect from 01.06.2015. [See: Judgement dated 01.02.2016, passed by the Income Tax Appellate Tribunal, Mumbai in I.T.A. No. 1994/Mum /20 13 titled Crompton Greaves Limited vs. CIT-6, Mumbai]
iii. The Tribunal failed to appreciate the judgements [referred to hereafter] in which Courts have held that, interest earned from fixed deposits, inter alia, kept as margin money or security for a bank guarantee to avail credit facility for export business, had to be treated as income from other sources and not business income since it did not have any nexus with business.
a) Conventional Fasteners vs. CIT, [2017] 88 com 163 (Uttarakhand)2; the SLP(C.) Nos. 16338/2018 and 12610/2018, filed vis-à-vis this judgement, were dismissed by the Supreme Court, via orders dated 13.07.2018 and 16.05.2018;
b) CIT vs. Jyoti Apparels3, (2008) 166 Taxman 343 (Delhi); and
c) CIT vs. Mereena Creations4, (2010) 189 Taxman 71 (Delhi).
Submissions advanced on behalf of the respondent/assessee:
4. On the other hand, Ms. Jha contended that, firstly, Clause (a) and (b) of Explanation 2 appended to Section 263 of the Act could not have been invoked by the PCIT to interfere with the assessment orders, as said provisions did not have retrospective effect.
4.1. Secondly, even if one were to assume for a moment that Clause (a) and (b) of Explanation 2 appended to Section 263 of the Act could be applied to the assessee‟s case concerning AYs 2012-2013 and 2013-14, a close perusal of the assessment orders and the record, which was examined by the Tribunal, would show that the AO had made enquiries with regard to interest earned on fixed deposits by the assessee, and it was only after he was satisfied, that it had nexus with the real estate business undertaken by the assessee, that the adjustment/ deduction made by the assessee [qua the interest earned on fixed deposits against the inventory maintained] was left undisturbed.
4.2. Thirdly, since a finding of fact has been returned in this regard, by the Tribunal, no substantial question of law arises for consideration by this Court, and therefore, the appeals should be dismissed at the very threshold.
Analysis and reasons:
5. Having heard counsel for the parties, and perused the record, it is important to bear in mind that the result of the appeal veers around the issue: as to whether the interest earned by the assessee against fixed deposits had any nexus with the real estate project undertaken by it?
5.1. To answer this issue, one would have to bear in mind, the following aspects.
i. Was there an enquiry carried out by the AO [and for this purpose, for the moment, we are assuming that Clause (a) and (b) of Explanation 2 appended to Section 263 of the Act would apply to the AYs in issue]?
ii. To what standard should the enquiry carried out by the AO, measure up?
iii. Whether the officer concerned [in this case, PCIT], while exercising powers under Section 263 of the Act, can supplant his views with those of the AO?
iv. Was the view taken by the AO, in the given facts, a possible view?
Issue no. (i):
6. It is not in dispute that the assessee was engaged, inter alia, in the business of promotion, construction and development of commercial projects. It is also not in dispute that the assessee had undertaken construction/development of a project allotted to it by the Haryana State Industrial and Infrastructure Development Corporation[in short “HSIIDC”].
7. To satisfy ourselves, we perused the record and inter alia discovered the following.
7.1. On 11.08.2016, chartered accountants of the assessee, i.e., BSR and Co. LLP filed their response to certain queries raised by the AO at a hearing held before him on 09.08.2016 concerning AY 2013-2014. One of the queries raised concerned the exclusion of interest received on fixed deposits from the category/head “income from other sources”. The relevant extract from the said communication is set forth hereafter.
“We refer to the captioned subject. In this regard, further to our earlier submission filed and discussion with your office on 09th August 2016, the Company submits the following information/details: –
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3. Why interest on FDR is not included in Income from other sources;
During the subject year, the Company was engaged in the business of promotion, construction and development of commercial project on the project land allotted by the Haryana State Industrial and Infrastructure Development Limited (HSIIDC). Consequent to the arrangement with HSIIDC, the Company was required to make payment in instalments to HSIIDC towards acquisition of land. In this regard, the Company raised funds from outside India through Compulsory Convertible Debentures (CCDs) to fulfil its payment obligation towards HSSIIDC. Such amount was kept as fixed deposit in bank account of the Company.
It is further submitted that since the interest earned by the Company on fixed deposits has intrinsic and inseggregable nexus with the project being undertaken therefore, the interest earned by the Company has been adjusted against the project expenditure.
Without prejudice to the above, in case your office intends to assess the interest on fixed deposit as income from other sources, a corresponding deduction towards interest on CCDs may be allowed.
Sd/-”
7.2. Likewise, in response to a notice dated 14.09.2017, issued by the AO, under Section 154 and 155 of the Act, in respect of AY 2012-2013, a reply was submitted by the assessee on 12.10.2017. In the notice dated 14.09.2017, inter alia, it was brought to the attention of the assessee that audit scrutiny had, amongst others, raised objections regarding the interest earned on fixed deposits, in AY 2012-2013, which was not credited to the P&L Account and had been deducted from the value of inventory.
7.3. The relevant part of the notice dated 14.09.20 17 is extracted hereafter.
“1. The assessment of M/s Brahma Centre Development Pvt. Ltd. for the assessment year 2012-2013 completed after scrutiny u/s 143(3)/144 in January 2017 determining at an income of Rs. 9,47,04,585/-. Audit scrutiny revealed some Audit objection[s] in the assessment discussed as below: –
a) Audit Scrutiny revealed that during the year the assessee has earned the interest of Rs. 9,47,04,585/- on FDRs‟; however instead of crediting the same to the Profit & Loss Account, this interest has been deducted by the assessee from the value of inventories (Schedule 15) as shown in the balance sheet. Audit scrutiny further revealed that as per point 13(d) of the 3CD Report the tax auditor as has also certified that an amount of Rs. 9,47,04,585/- pertaining to other income has not been credited to the profit & Loss Account. Being the nature of other income, it should have been credited to P&L A/c. the department had not taxed the amount of Rs. 9,47,04,585/- as interest income of FDRs‟. The mistake resulted in under assessment of income of Rs.9,47,04,585/- involving short levy of tax effect of Rs. 4,85,48,507/- including interest.
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2. In view of the above, a rectification order is required to be passed to rectify the above mentioned mistake. Hence in this respect if you wish to be heard, you are requested to appear in person or through an authorised representative in my office on 25.09.2017 at 11:30 PM alternatively you may send a written reply so as to reach me on or before the date mentioned above. Failing, it will be presumed that you have nothing to say and action will be taken as per IT Act.
Yours faithfully
Sd/-
(Girish Parihar)
Astt. Commissioner of Income Tax
Circle 5(1), New Delhi’
7.4. The relevant part of the response dated 12.10.2017 is extracted hereafter.
“This is in connection with the subject matter. Further to the submission already placed on record by the Company, we submit the following.
1. Audit Scrutiny revealed that during the year the assessee has earned the interest of Rs. 9,47,04,585/- on FDRs’; however instead of crediting the same to the Profit & Loss Account, this interest has been deducted by the assessee from the value of inventories (Schedule 15) as shown in the balance sheet. Audit scrutiny further revealed that as per point 13(d) of the 3CD Report the tax auditor as has also certified that an amount of Rs. 9,47,04,585/- pertaining to other income has not been credited to the profit & Loss Account. Being the nature of other income, it should have been credited to P&L A/c. the department had not taxed the amount of Rs. 9,47,04,585/- as interest income of FDRs’. The mistake resulted in under assessment of income of Rs. 9,47,04,585/- involving short levy of tax effect of Rs. 4,85,48,507/- including interest.
At the outset, we would like to state that the above cannot be said to be mistake apparent from record within the Act. In this regard the Company places reliance on the decision of Supreme court in the case of CIT v. Hero Cycles Private Limited 94 Taxmann 271 wherein it was held that rectification under section 154 can only be made when glaring mistake of fact or law has been committed by the officer passing the order and it becomes apparent from the record. Rectification is not possible if the question is debatable. Moreover, the point which is not examined on fact or in law cannot be dealt with as mistake apparent on the record.
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The Company would further like to submit that the Company was engaged in the business of promotion, construction and development of commercial project land allotted by the Haryana State Industrial and Infrastructure Development Limited (HSIIDC). Consequent to the arrangement wit HSIIDC, the Company was required to make payment in instalments to HSIIDC towards acquisition of land. In this regard, the Company raised funds from non-resident shareholders/investors outside India through Compulsory Convertible Debentures (CCDs) to fulfil its payment obligation towards HSIIDC.
It is further submitted that since the interest earned by the Company on fixed deposits has intrinsic and inseggregable nexus with the real estate project being undertaken, the interest earned by the Company was been adjusted against the project expenditure. This treatment is in accordance with applicable accounting policies and standards and numerous favourable judicial precedents on this issue.
Yours faithfully,
For Brahma Center Development Pvt. Ltd.
Sd/-
Authorised Signatory”
Notice dated 15.11.2014 issued to the assessee under Section 143(2) of the Act concerning AY 2012-2013:
8. Via this notice, the assessee was inter alia asked to reconcile the information given in its Annual Income Return [in short “AIR”]. The response to this notice was given on 25.11.2014. The relevant parts of the notice and the response are extracted hereafter.
Extract from notice dated 15.11.2014:
“In continuation of the pending assessment proceedings in your case, you are hereby accorded Last and Final Opportunity to file the following information/detail which are given as under.
