2003-VIL-198-ITAT-DEL

Equivalent Citation: TTJ 087, 093,

Income Tax Appellate Tribunal DELHI

Date: 06.05.2003

TRIVENI ENGINEERING WORKS LTD.

Vs

DEPUTY COMMISSIONER OF INCOME TAX.

BENCH

Member(s)  : R. K. GUPTA., T. N. CHOPRA.

JUDGMENT

This appeal is filed by the assessee against the order of CIT, Delhi-VII passed under s. 263 of the IT Act, 1961, for asst. yr. 1993-94.

2. During the course of hearing before us, learned counsel for the assessee filed a paper book containing 93 pages including, inter alia, show-cause notice issued by the CIT under s. 263 as well as various details and information submitted before the AO during assessment proceedings having relevance with the point in issue before us. On behalf of assessee-company, Shri Ajay Vohra, learned counsel has been heard. On behalf of the Revenue, Shri Sandeep Chaube, learned Departmental Representative argued the matter and supported the impugned order of the CIT under s. 263.

3. A few facts relevant for the present appeal may be set out at the outset. Assessment in this case was made under s. 143(3) of the IT Act, 1961, on27th March, 1996, on total loss of Rs. 1,35,47,256 as against declared loss of Rs. 1,56,15,920. The CIT-VII,New Delhiissued show-cause notice to the assessee dt.30th May, 1997, pointing out that a sum of Rs. 1,14,90,200 has been paid to M/s Nova Corporation Ltd. as service charges and the same have been allowed by the AO. According to the CIT, the recipient company is not capable of rendering any services for designing and manufacturing of sugar plants and, therefore, service charges have been wrongly allowed. The assessee made written submissions before the CIT vide letters dt.1st July, 1997and21st Feb., 1998, which are placed in the paper book at pp. 2 to 11. The assessee explained before the CIT that service charges have been paid to M/s Nova Corporation Ltd. amounting to Rs. 81.39 lacs and such charges have been paid for procurement of orders for design, manufacture and supply of sugar plant machinery by the assessee. The assessee further stated that payments have been made by account payee cheques and duly confirmed by the party. According to the assessee, the AO has allowed the deduction of commission after making detailed enquiries during the assessment proceedings and on the basis of information and details furnished during assessment proceedings. The assessee further pointed out that assessment for asst. yr. 1993-94 under reference has already been reopened by the AO vide notice under s. 148 served on 11th March, 1997, and, therefore, any further proceedings under s. 263 would result in multiplicity of proceedings for the same assessment year and for that reason, these would be bad in law.

4. The CIT, however, proceeded to pass the impugned order under s. 263 and recorded the following observations and conclusions vide para 4 of the impugned order:

"I have gone through the reply of the assessee. I am not convinced by his argument that the notice under s. 263 is not tenable in this case. On the facts and circumstances, there is no doubt that while taking action under s. 263 of the IT Act, two conditions should be fulfilled, i.e., (i) there should be an error in the assessment order passed by the AO, and (ii) the order should be prejudicial to the interest of the Revenue.Para11 of the assessment order deals with the allowance/disallowance of commission payment. This shows that the AO required the assessee to file the details of the expenses claimed under this head, including the names and addresses of the parties and the amount of commission paid to each one of them alongwith the nature of services rendered to them. The details on file show that although the names and addresses and amount of the parties to whom the commission was paid was furnished, but the AO failed to investigate as to whether in reality any services were rendered by M/s Nova Corporation Ltd. to them in connection with procuring orders for them. Neither the details and information on file nor anything in the assessment order shows that their help in procuring orders does not fulfil the requirement for allowing the expenditure. There has to be a direct linkage between the orders procured and the help rendered by M/s Nova Corporation in procuring these orders. The AO failed to make enquiries and failed to investigate on this issue and thus failed to show that it was as a result of M/s Nova Corporation’s effort that certain orders were given to the assessee. I may once again emphasize that it is not only the nature of services rendered by the party which is important but it is more important to know that it was because of the services rendered by the party that they were able to procure orders to the assessee. Thus, there is a clear cut error and mistake on the part of the assessee to make full enquiries and to make full investigation in this case so as to establish that the commission/service charges paid to M/s Nova Corporation Ltd. had direct linkage with the efforts made by them and the orders procured by them for the assessee, thus, giving it character of the expenditure incurred for the purpose of the business and giving it a character of allowable expenditure."

The CIT further concluded vide para 6 as under:

"On the basis of the facts as described above, I arrive at the conclusion that the AO has failed to make proper enquiries and investigation so far as to prove that whatever orders purposes to have been procured by M/s Nova Corporation were as a result of the efforts made by them. The case is, therefore, set aside and the AO is directed to make detailed enquiries on this issue so as to establish the linkage between the efforts made by M/s Nova Corporation as an allowable expenditure in this case. At this point I...........the case of the assessee before the customers so as to convince them on the fitness of the assessee’s products as far as their technical supremacy and efficiency is concerned. While passing the fresh order, the AO should keep these facts in his mind and should also examine the assessee on this issue."

Aggrieved by the aforesaid order, the assessee has come up in appeal before us.

5. The learned counsel for the assessee assailed the impugned order of the learned CIT mainly on the following grounds:

(1) The payment or commission to Nova Corporation has been allowed by the AO on the basis of detailed information and evidence furnished by the assessee during the course of assessment proceedings in response to notices issued by the AO. Learned counsel in this connection referred to written submissions made by the assessee during the assessment proceedings vide letters dt.17th Dec., 1998, placed at pp. 16 & 17 of the paper book and18th Dec., 1995, placed at pp. 34 to 37 of the paper book. The learned counsel submitted that full details of the commission have been submitted alongwith particulars of debit notes as well as confirmation of the recipients. It was on the basis of detailed scrutiny that the AO disallowed commission to the extent of Rs. 63,72,795 out of total commission payment of Rs. 2,78,05,925.

(2) Leaned counsel submitted that such commission has been paid to M/s Nova Corporation Ltd. earlier known as M/s M.S. Nova Magnetic Ltd. in the preceding assessment years also and the same has been allowed by the Revenue. He stated that for asst. yr. 1991-92, commission payment of Rs. 13,68,680 has been duly allowed by the AO. For asst. yr. 1992-93, commission payment to this party amounted to Rs. 67,93,060 and 20 per cent ad hoc disallowance was made which was deleted by the learned CIT(A).

(3) The learned counsel further invited our attention to pp. 25 to 30 of the paper book wherein memorandum of understanding dt.10th Jan., 1990, arrived at by the assessee with M/s Nova Magnetics Ltd. (now known as M/s Nova Corporation Ltd.) has been placed which contains the terms and conditions for the payment of service charges by the assessee and the particulars of services to be rendered by the commission agent. This memorandum has been followed by supplementary memorandum of understanding of14th Dec., 1990, placed at pp. 31 and 32 of the paper book.

(4) M/s Nova Magnetics Ltd. is an existing assessee and assessed with Company Circular 2(3) and this information was duly furnished during the assessment proceedings before the AO.

(5) The learned counsel invited our attention to p. 33 of the paper book containing the Schs. XIV, XV and XVI of the balance sheet of the Nova Corporation Ltd. for the year ended31st March, 1993. From these schedules, it is evident that service charges amounting to Rs. 2,98,77,570 have been credited to P&L a/c for the asst. yr. 1993-94. This indicates that M/s Nova Magnetics Ltd. is a genuine concern assessed to tax and carrying out substantial activity as a commission agent.

(6) Since the AO had already initiated proceedings under s. 148, the jurisdiction assumed by the CIT under s. 263 on similar issue is bad, in, law and is liable to be quashed.

(7) Learned counsel submitted that merely because the AO has not dealt with the specific issue of payment of commission to M/s Nova Corporation Ltd. in the assessment order would not by itself imply that there was no application of mind to the facts and details submitted during assessment proceedings and CIT cannot assume jurisdiction under s. 263 on this ground. Learned counsel placed reliance on the following decisions:

(i) CIT vs. Ratlam Coal Ash Co. (1987) 65 CTR (MP) 305 : (1987) 171 ITR 141 (MP);

(ii) CIT vs. Shri Govindram Seksariya Charity Trust (1987) 65 CTR (MP) 28 : (1987) 166 ITR 580 (MP);

(iii) CIT vs. Arvind Jewellers (2002) 177 CTR (Guj) 546 : (2003) 259 ITR 502 (Guj);

(iv) Srinivasa Hatcheries (P) Ltd. vs. Dy. CIT (2002) 81 ITD 36 (Hyd);

(v) Sahara India Mutual Benefit Co. Ltd. vs. Asstt. CIT (2002) 74 TTJ (All) 67;

(vi) Nirmal Kumar Sheel Kumar Jain vs. ITO (2000) 71 TTJ (Jab) 494 : (2000) 111 Taxman 185 (Jab)(Mag);

(vii) Indian Hotels Co. Ltd. vs. Dy. CIT (1999) 107 Taxman 205 (Mumbai)(Mag);

(viii) Vidisha Tractors vs. Asstt. CIT (1995) 53 TTJ (Ind) 432.

(8) Learned counsel argued that the CIT cannot substitute his own opinion in place of that of AO and assume jurisdiction under s. 263. Reliance is placed on the following decisions :

(i) CIT vs. Arvind Jwellers

(ii) Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC)

(iii) CIT vs. Gabrial India Ltd. (1993) 114 CTR (Bom) 81 : (1993) 203 ITR 108 (Bom)

(iv) N.A. Mody vs. CIT (1986) 52 CTR (Del) 149 : (1986) 162 ITR 420 (Del)

(v) Modi Xerox Ltd. vs. Dy. CIT (1999) 63 TTJ (Del) 278 : (1998) 67 ITD 252 (Del)

(vi) Ajai Choudhary vs. Dy. CIT (2001) 70 TTJ (Del) 220 : (2000) 74 ITD 350 (Del)

(vii) Srinivasa Hatcheries (P) vs. Dy. CIT

(viii) SRJ. Ltd. vs. Dy. CIT (2002) 74 TTJ (Del) 648

(ix) Jhulelal Land Devl. Corp. vs. Dy. CIT (1996) 56 ITD 345 (Mumbai)

(x) Super Cassettes Industries (P) Ltd. vs. CIT (1992) 41 ITD 530 (Del)

6. Shri Sandeep Chaube, learned Departmental Representative, on the other hand, strongly supported the order of the CIT and argued that the requisite conditions for invocation of provisions of s. 263 are fulfilled in the instant case inasmuch as the AO while making the impugned assessment failed to apply his mind to the issue of deduction of commission payment to M/s Nova Corporation Ltd. According to the learned Departmental Representative, the AO failed to examine the issue as to what services were rendered by the said party and whether payments have been made for the purposes of businesses by the assessee. The learned Departmental Representative pressed into service the decision of Delhi High Court in the case of Gee Vee Enterprises vs. Addl. CIT 1975 CTR (Del) 61 : (1975) 99 ITR 375 (Del) and contended that failure of the AO to make enquiries regarding the genuineness of commission payment to M/s Nova Corporation would fully justify action of the CIT in assuming jurisdiction under s. 263 and restore the issue to the AO for fresh investigation. The learned Departmental Representative argued that under s. 263, the CIT has power to set aside the assessment order and sent the matter for fresh assessment if he is satisfied that further enquiry is necessary and the order of the AO is prejudicial to the interest of the Revenue.

7. We have carefully considered the rival submission and gone through the orders of tax authorities below as well as documents and paper contained in the paper book to which our attention has been invited during the course of hearing. Various judicial authorities cited before us by the learned representatives of both sides have also been carefully perused by us. A bare reading of the provisions of s. 263 makes it clear that the pre-requisite to the exercise of jurisdiction by the CIT under it is that order of the AO is erroneous insofar as it is prejudicial to the interest of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interest of the Revenue. The revisional jurisdiction of the CIT as a supervisory authority is intended to correct the mistakes of fact and law, which may be committed by the AO and which result in causing prejudice to the Revenue. The failure of the AO to make enquiries into facts on record, which are glaring, apparently unusual and starting in the face from the record would clearly make the order of the AO erroneous and prejudicial to the interest of Revenue as held by Delhi High Court in G.V. Enterprises cited by the learned Departmental Representative. The Delhi High Court held that the AO is not only an adjudicator but also an investigator and he cannot remain passive in the face of a return which is apparently in order but calls for further enquiry. However, we may hasten to add that the proposition enunciated as above, cannot be extended to confer unrestricted and unfettered powers on the CIT to set aside or modify an assessment merely on the basis of difference of opinion. The jurisdiction under s. 263 cannot obviously be utilized as an instrument for reopening concluded proceedings on flimsy grounds or on mere subjective notions of the CIT. The CIT is not entitled to assume revisional jurisdiction merely because he is not happy with the quality of the assessment or the drafting of the assessment order. The CIT cannot invoke s. 263 for upsetting a concluded assessment framed by the AO merely because he feels that a particular line of investigation which would have been effective and useful for the Revenue has not been adopted by the AO. The conditions enacted under the provisions of s. 263 are obviously intended to avoid element of pure subjectivity or arbitrariness on the part of the CIT in taking resort to revisional powers under s. 263.

8. Viewed in the aforesaid legal perspective, we are inclined to hold that the impugned order passed by the CIT under s. 263 is bad-in-law and deserves to be quashed. M/s Nova Corporation Ltd. (erstwhile M.S. Nova Magnetics Ltd.) has been paid commission by the assessee right since asst. yr. 1991-92 onwards for procuring orders for the supply of sugar plants by the assessee. For asst. yr. 1991-92, the AO has allowed such commission amounting to Rs. 13,68,680 while making assessment under s. 143(3). Similarly, for asst. yr. 1992-93, such commission amounting to Rs. 67,83,060 has been paid by the assessee and 20 per cent of such commission was disallowed on ad hoc basis by the AO. However, the CIT(A) deleted the disallowance. We have not been informed by the Revenue as to whether the appellate order of the CIT for asst. yr. 1992-93 has been accepted by the Revenue or not. Be that as it may, such commission payment of M.S. Nova Magnetics Ltd. have been allowed in the preceding assessment years. The commission has been paid to Nova Magnetics Ltd. on the basis of a memorandum of understanding arrived at between the assessee and the commission agent, copy of such memorandum has been duly placed before the Revenue authorities. Genuineness of such agreement has not been questioned or doubted by the Revenue at any stage. It is significant to note that for asst. yr. 1993-94, the assessee has filed details of commission payments during assessment proceedings along with debit notes issued by the commission agents. Such debit notes are placed at pp. 23 & 24 of the paper book which indicate that commission payment aggregating to Rs. 81,39,000 have been made on account of procurement of orders from M/s Venus Sugar Ltd., Darya Ganj, New Delhi as well as M/s Rana Sugar Ltd., Sector 17-E, Chandigarh. These debit notes submitted during assessment proceedings are duly confirmed and sent by the commission agent. It is significant to note that apart from commission payments to M/s Nova Magnetics Ltd. assessee has also made payment of commission to M/s Nova Electro Magnetics Ltd. C-122, Mayapuri Indl. Area, Phase-II,New Delhi, which have been allowed by the AO and no further action with regard to such deduction has been included by the CIT under s. 263. M/s Nova Electro Magnetics Ltd. is a sister-concern of Nova Magnetics Ltd. and nature of commission to both the parties is identical being for procurement of orders for supply of plant and machinery. Both the parties are assessed with Company circle 2(3),New Delhias per the details at pp. 38 & 39 of the paper book. Despite facts and features of commission paid, being identical with respect to both the parties, the CIT has opted to assail commission payments with regard to only one party, namely, M/s Nova Magnetics Ltd. We specifically put across to the learned Departmental Representative as to why allowance of commission only in the case of Nova Magnetics (now known as Nova Corporation Ltd.) has been disputed by the CIT under s. 263 whereas similar payment to sister-concern allowed by the AO has been left untouched in the revisional proceedings. The only conclusion which emerges from the facts and circumstances of the case is that the CIT has passed the impugned action under s. 263 on merely subjective grounds and no valid basis whatsoever have been identicated by the CIT for proceedings under s. 263. The AO has made necessary enquiries during assessment proceedings and the information with regard to payment of commission have been duly furnished and considered by the AO while making the assessment. It is not a case where the AO has failed to apply his mind to the facts and circumstances of the case. The assessment has been made after due consideration of facts and evidence brought on record during assessment proceedings. What further enquiries or investigations the AO should have made, have not been indicated by the CIT in the impugned order except making a general observation that linkage between efforts made by Nova Corporation and the orders procured may be established. We feel that facts and evidence brought on record by the AO like the debit notes issued by the commission agent, memorandum of understanding entered into with the commission agent and the confirmation by the commission agent regarding receipt of commission provide justification for deduction of commission as business expenditure. In our opinion, the CIT(A) has assumed jurisdiction without fulfilling the requisite conditions as contained in s. 263. The fact that the AO has already reopened the proceedings under s. 148 has been brushed aside by the CIT while passing the impugned order. Once the AO has already reopened the proceedings on the ground of payment of commission and issued notice to the assessee under s. 148 on10th March, 1997, there is absolutely no justification for the CIT to embark upon proceedings under s. 263 and pass the impugned order on2nd March, 1998. The learned counsel of course informed the Bench that proceedings under s. 148 have subsequently been dropped by the AO. However, at what stage these proceedings have been dropped and whether the same have been dropped after passing of the impugned order by the CIT is not borne out from record. Be that as it may, the impugned order of the CIT is, in our opinion, clearly without jurisdiction since the requisite conditions as contained under s. 263 are not satisfied.

9. For the aforesaid reasons, we cancel the impugned order of the CIT and allow the appeal of the assessee.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.