The CIT must give reasons and basis for his conclusion that the order sought to be revised is erroneous

CASE LAWS DETAILS

DECIDED BY: ITAT MUMBAI C BENCH, MUMBAI, IN THE CASE OF: Crisil Ltd. Vs. Addl. CIT, APPEAL NO: ITA No. 3094/Mum/09, DECIDED ON June 25, 2010

ORDER

Per Pramod Kumar:

1. This is an appeal filed by the assessee and is directed against the order dated 30th March 2009 passed by the learned Commissioner under section 263 of the Income Tax Act, 1961. Grievances raised by the assessee are as follows:

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has legally erred in assuming jurisdiction u/s 263 of the Act and the order passed by him is bad in law, illegal, void and without jurisdiction.

2. Without prejudice to ground (1) above, and on the facts and in the circumstances of the case and in law, the learned CIT(A) has legally erred in setting aside the order passed u/s 143(3) by the A.O. without considering the submissions and details filed by the appellant.

3. Without prejudice to ground (1) and (2) above, and on the facts and in the circumstances of the case and in law, the learned CIT(A) has legally erred in holding that the ACIT has not applied his mind in verifying the claim of deduction u/s 10A of the Act made by the appellant.

4. Without prejudice to grounds (1) and (2) above and on the facts and in the circumstances of the case and in law, the learned CIT(A) has legally erred in rejecting appellant’s contention that reimbursement of expenses cannot be considered to be a part of total turnover of the business.

5. Without prejudice to ground (1), (2) and (4) above, on the facts and in the circumstances of the case and in law, the learned CIT(A) has legally erred in rejecting the plea of the appellant that if any expenses is reduced from the export turnover, such sum should also be reduced from the total turnover of the undertaking for the purpose of computing deduction under section 10A of the Act.

2. Briefly stated, the relevant material facts are as follows. The assessee is mainly engaged in the business of rendering rating, advisory, and research and information services, and the assessee also has a unit registered under the software technology park scheme which is granted approval for “development and export of computer software, information technology and enabled services”. During the course of assessment proceedings, the Assessing Officer took note of the fact that the assessee has entered into an agreement for the data collection services, and to build a similar database as per the specifications of Standard & Poor’s rating services in USA. He also took note of the assessee’s contention that “the assessee gathers Standard & Poor’s rating services data, standardizes, organizes, normalizes, analyzes and re transmits the data in S & P’s transmission format”. The Assessing Officer upheld the claim for deduction under section 10 A in respect of this unit and also observed that “the scope of services include data collection and formatting services of collateralize rating obligation to support rating assignments, surveillance, research and publishing” and that “data elements are specified and it includes any information that is generally or frequently included in the performance reports, calculated from information collected from another source which is required to be processed further as per the specifications and required to be furnished into the standard CSV and XMN files”. As to the nature of work carried out in 10A unit, the Assessing Officer concluded by observing that “as per the agreement, the assessee has to build a single database and to deliver the data into S & P transmission format” which requires “standardizing organizing, normalizing according to the specifications, and re transmitting the data to S& P in S&P’s structure finance surveillance system”. The deduction of Rs 1,42,06,867 was thus allowed after some minor adjustment in the quantum.

3. The matter, however, did not rest there. On 6th March,2009, learned Commissioner issued a notice under section 263, in respect of the above assessment, pointing out to the assessee that “it is seen that you have not made any deduction on account of expenditure incurred in foreign exchange in connection with the new undertaking” even though there was an expenditure on travel amounting to Rs 63,29,556, expenses on professional fees amounting to Rs 44,69,236 and expenses on other matters amounting to Rs 21,99,838. The assessee was required to produce details of export related expenses incurred by the assessee, or received in convertible foreign exchange, in respect of freight, travel, professional fees, telecommunication charges, insurance attributable to the delivery of the articles or things or computer software outside India, expenses, if any, incurred in foreign exchange in providing technical services outside India, onsite development of software outside India, and other matters. The assessee was also called upon to show cause as to why “adjustment in export turnover should not be made, and reworking of deduction admissible under section 10A should not be carried out” and “as to why the assessment made by the Assessing Officer should not be set aside to that extent”. The details of expenses incurred in foreign exchange were duly filed before the Commissioner, but the Commission wanted to peruse `the evidence to show as to which expenses pertained to which unit’. However, when assessee wanted further time to compile the said information, the assessee was declined further time on the ground that `proceedings under section 263 were getting barred by limitation’.

4. On these facts, learned Commissioner observed that “the fact remains that the Assessing Officer has not absolutely applied his mind on the issue nor any enquiry has been made by the Assessing Officer to ascertain the nature of expenses incurred in foreign exchange and the relevance of such expense in enabling delivery of articles or things or computer software outside India or in providing technical services outside India”. Learned Commissioner then referred to Hon’ble Supreme Court’s judgments in the cases of Rampyari Devi Sarogi Vs CIT (67 ITR 84) and Tara Devi Agarwal Vs CIT (88 ITR 323) in support of the proposition that “the assessment made by the Assessing Officer would be erroneous merely on the ground of not making inquiries which were required to be made in the facts and circumstances of the case and the when the Assessing Officer has accepted the claim of the assessee in a stereo typed manner”.

Learned Commissioner also referred to the definition of export turnover under section 10A which inter alia provide for exclusion of “freight, telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India, or expense, if any, incurred in foreign exchange in providing the technical services outside India”. He thus held that the assessment made by the Assessing Officer is “prejudicial to the interest of the revenue because of non exclusion of particulars of such expenses relating to eligible units under section 10A from export turnover has resulted in excessive deduction”. Before parting with the matter, learned Commissioner also dealt with assessee’s argument that reimbursement of expenses incurred on behalf of the foreign buyer does not involve any element of profit and rejected the same on the ground that what is termed as reimbursement is nothing but part of sale proceeds which is liable to be included in total turnover. Learned Commissioner summed up the above analysis by observing as follows:

In view of the above discussions, the assessment being erroneous and prejudicial to the interest of the revenue, is set aside to the extent of expenses incurred in foreign exchange and attributable to units for which Section 10A claim is made, with directions to verify the nature of such expenses and to correlate such expenses with various units and then rework the export turnover and total turnover for computing deduction under section 10A. The Assessing Officer shall afford reasonable opportunity of being heard to the assessee before passing the fresh order.

5. The assessee is aggrieved of the order so passed by the learned Commissioner, and is in appeal before us.

6. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

7. We have noted that the justification for assumption of jurisdiction under section 263 has been that the Assessing Officer did not apply his mind to “ascertain the nature of expenses incurred in foreign exchange and the relevance of such expense in enabling delivery of articles or things or computer software outside India or in providing technical services outside India” and the learned Commissioner has relied upon Hon’ble Supreme Court’s judgments in the cases of Rampyari Devi Sarogi (supra) of Tara Devi Agarwal (supra) for the said purpose.

8. In Tara Devi Agarwal’s case (supra), as noted by the Hon’ble Supreme Court in the order itself, in which “the ITO, while remarking that the source of income of the assessee during the accounting year was income from speculation and interest on investments stated that neither the assessee was able to produce details and vouchers of transactions made during the accounting year nor was there any evidence regarding the interest received by her from various parties on her investments” and yet “notwithstanding these defects, he did not investigate into the various sources”. The situation thus was that there was everything calling for a further enquiry and yet the Assessing Officer’s inertia prevented from probing further.

9. Similar was the position in the case of Rampyari Devi Sarogi (supra), as evident from the following extracts from the order of Hon’ble Supreme Court, :

There was ample material to show that the ITO made the assessments in undue hurry. The assessee was a new assessee and filed voluntary returns in respect of a number of years, i.e., from asst. yrs. 1952-53 to 1960-61. The return for the asst. yr. 1953-54 is undated. The returns for the asst. yrs. 1952-53 and 1954-55 to 1957-58 are date 21st March, 1961, and those for the asst. yrs. 1958-59 to 1960-61 are date 26th April, 1961. On 21st March, 1961, the assessee made a declaration giving the facts regarding initial capital, the ornaments and presents received at the time of marriage, other gifts received from her father-in-law, etc., which should have put any ITO on his guard. But the ITO without making any inquiries to satisfy himself passed the assessment order on 30th March, 1961, for the asst. yrs. 1952-53 to 1957-58, and on 26th April, 1961, for the asst. yrs. 1958-59 to 1960-61. No bank account or any proper books of account were maintained by the assessee or produced before the ITO. A short stereotyped assessment order was made for each assessment year. As a sample, the CIT has reproduced the assessment order for the asst. yr. 1952-53 in his order. Profit from speculation was shown as Rs. 3,085 and interest Rs. 600, and Rs. 500 was added for want of books of account and evidence. No evidence whatsoever was produced in respect of the money lending business done and interest income shown to have been received by the assessee. No names were given as to the parties to whom the loans were advanced, with amounts and rate of interest and as to when the interest income was received.

10. In both the judicial precedents relied upon by the learned Commissioner, facts and circumstances did warrant further inquiry but the Assessing Officer did not conduct the same. There can be no quarrel with the proposition that when an Assessing Officer remains passive on the facts which call for further enquiry, such an inertia on the part of the Assessing Officer does vitiate the assessment order and renders it erroneous and prejudicial to the interests of the revenue, but then it does not mean that the Assessing Officer’s not putting everything stated in the income test return to the rigorous tests of investigation, no matter how desirable it must be from the point of view of a circumspect revenue officer, can render the assessment order erroneous or prejudicial to the interest of the revenue. The test must lie in whether the facts stated in the return and the document would provoke doubt in a reasonable mind and whether a reasonable person must have examined the matter further.

The question then arises whether not examining the foreign exchange expenses, from the point of view of their relevance in delivery of software outside India, would lead to the order being erroneous and prejudicial to the interest of the revenue. The claim of the assessee has been that the reimbursements have been made on actual basis, without any involvement of profit element, and even the Commissioner has not disputed the same. The Commissioner’s grievance has been that even f there is a reimbursement element, without involvement of profit, still adjustments have to be made to the export turnover. In view of the undisputed reimbursement aspect, it is not really necessary to doubt that even other foreign exchange expenses must involve some expenses in connection with delivery of software. It is also important to note that the nature of services are not such that there has to essentially expenses on site or in delivery, as the services are being rendered in the Indian unit and the output is being merely transmitted to the S & P’s facility in USA. All these facts are not such that they call for, provoke or reasonably trigger further inquiry. Carrying out further probe into the nature of expenses, no matter how desirable, is not an essential corollary to the facts presented to the Assessing Officer. Learned Commissioner’s reliance on Hon’ble Supreme Court’s judgment in the case of Tara Devi Agarwal (supra) and Rampyari Devi Sarogi (supra) is of no avail. The only other issue raised by the Commissioner is that perhaps some of the expenses related to delivery of software have not been reduced from the amount of total turnover. This kind of tentative suspicions lurking in the mind of a CIT cannot be said to reasons good enough to exercise revision powers. As held by the Hon’ble Bombay High Court in the case of CIT vs. Gabrial India Ltd. 203 ITR 108 (Bom) in the garb of exercising powers under s. 263 “CIT cannot initiate proceedings with a view to start fishing and roving enquiries in matters or orders which are already concluded” and that “an order cannot be termed as erroneous unless it is not in accordance with the law”. As held by the Hon’ble Punjab & Haryana High Court, in the case of CIT vs. R.K. Metal Works (1978) 112 ITR 445 (P&H), the CIT must give reasons and basis for his conclusion that the order sought to be revised is erroneous. There is no finding whatsoever as to how is it erroneous in law. As for the learned Departmental Representative’s suggestion that no harm is caused to the assessee because the matter is only being restored to the file for fresh adjudication in accordance with the law, we can do no better than to quote from Hon’ble Bombay High Court’s observation, in this very case, to the effect that, “Such action (of exercising revision powers) will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, stale issues should not be re-activated beyond a particular stage and the lapse of time must induce, repose in, and set at rest judicial and quasi judicial controversies as it must in other spheres of activity”. The power of revision, therefore, cannot be made in a routine and mechanical manner. In any event, we have noted that a coordinate bench of the Tribunal, in the case of Siemens Information Systems Ltd Vs Addl CIT (2010 TIOL ITAT MUM), has, on materially identical facts and by following Special Bench decision in the case of ITO Vs Sak Soft Limited (121 TTJ 865) , has quashed the revision proceedings. Keeping in view all these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to uphold the grievance of the assessee and quash the impugned revision order as devoid of jurisdiction. The assessee gets the relief accordingly.

11. In the result, the appeal is allowed. Pronounced in the open court today on 25th day of June, 2010.