2014-VIL-897-ITAT-MUM

Income Tax Appellate Tribunal MUMBAI

ITA No. 1593/Mum/2013

Date: 27.06.2014

HORIZON INVESTMENT CO LTD

Vs

COMMISSIONER OF INCOME TAX-6

For the Appellant : Shri J P Bairagra
For the Respondent : Shri K C P Patnaik

BENCH

Sanjay Arora And Vivek Varma, JJ.

JUDGMENT

PER : Sanjay Arora

This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-6, Mumbai (‘CIT(A)’ for short) dated 24.01.2013, for the assessment year (A.Y.) 2008-09 passed u/s.263 of the Income Tax Act, 1961 (‘the Act’ hereinafter).

2. The sole issue arising in the instant appeal is the maintainability in law of the invocation of section 263 of the Act by the competent authority in the facts and circumstances of the case. A subsidiary question, where the answer to the foregoing issue is in the affirmative, is whether any modification, if any, to the direction issued by the ld. CIT to the Assessing Officer (A.O.) is required in the facts and circumstances of the case.

3.1 We shall proceed by delineating the law in the matter. The same is trite, and for which we may for reference advert to decision in the case of Malabar Industrial Company Ltd. vs. CIT [2000] 243 ITR 83 (SC), a locus classicus on the subject. The hon’ble apex court therein laid down a four-way test for invocation of a provision. Succinctly put, these are:

    (a) incorrect assumption of facts;

    (b) incorrect application of law;

    (c) without applying the principles of natural justice; and

    (d) without application of mind.

We shall, for the reason that the present case involves the application of section 263 on ground (d) above, dwell on this aspect in some detail. An order, as explained in Malabar Industrial Company Ltd. (supra), is in such a case subject to revision under section 263 not for the reason that some error may be found upon enquiry, but because of nonapplication of mind per se. Decades earlier, the hon’ble Delhi high court, per its landmark decision in Adl. CIT v. Gee Vee Enterprises [1975] 99 ITR 375 (Del) (cited before us by the ld. DR), relying on two celebrated decisions by the apex court [reported at 67 ITR 84 and 88 ITR 323], explained that an assessing authority is both an adjudicator and investigator. That is, he is, besides adjudication, also charged with the responsibility of probing the matter and unearthing facts. As such, where he fails to make proper enquiry, i.e., as warranted by the facts and circumstances of the case, his order is rendered erroneous in-so-far as it is prejudicial to the interest of the Revenue. In its words:

    ‘It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income Tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income Tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income Tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.’

    [emphasis, ours]

This represents the well-settled law, followed by the hon’ble high courts throughout, as in CIT (Addl.) vs. Mukur Corporation [1978] 111 ITR 312 (Guj.); Swarup Vegetable Products vs. CIT [1991] 187 ITR 412 (All); Tarajan Tea Co. (P.) Ltd. vs. CIT [1994] 205 ITR 45 (Gau); CIT vs. Active Traders (P.) Ltd. [1995] 214 ITR 583 (Cal); CIT vs. Mahavar Traders[1996] 220 ITR 167 (MP); Duggal & Co. vs. CIT [1996] 220 ITR 456 (Del); K.A. Ramaswamy Chettiar vs. CIT [1996] 220 ITR 657 (Mad); Mofussil Warehouse & Trading Co. Ltd. vs. CIT [1999] 238 ITR 867 (Mad.); CIT vs. Export House, Amritsar [2002] 256 ITR 603 (P&H); PT. Lashkari Ram vs. CIT [2005] 272 ITR 309 (All.); CIT vs. Deepak Kumar Garg [2008] 299 ITR 435 (MP); CIT vs. Toyota Motor Corpn. [2008] 306 ITR 49 (Del) (affirmed by the apex court, vide its judgment at [2008] 306 ITR 52 (SC)); CIT vs. Arunaben Sumankumar [2003] 259 ITR 386 (Guj); besides by the larger bench of the tribunal in Rajalakshmi Mills Ltd. vs. ITO [2009] 121 ITD 343 (Chen) (SB), signifying the application of the concept in a variety of fact situations.

3.2 A question may arise as to what enquiry is considered enough, for surely one could possibly argue for scope of deeper enquiry in almost every case, and which definitely could not be the legislative or judicial intent, how-so-ever wide the revisionary power under section 263 may be envisaged as. This is often represented by saying that though lack of enquiry would justify revision, inadequate enquiry would not (refer the decision by the hon’ble Delhi high court in CIT vs. Gupta Spinning Mills Pvt. Ltd. (in ITA No. 410/2013 dated 13.09.2013 reported at 2013-TIOL-761-HC-DEL-IT)). At the same time, a superficial enquiry would by itself not qualify to be a proper inquiry, precluding revision. In our view, a resolution to this valid concern or issue lies in bearing in mind two guide posts in the matter, which serve as a check against an arbitrary or mechanical application of section 263 on this ground:

    a) the extent of enquiry, signified variously by the expression/words: ‘absence of enquiry’, ‘lack of enquiry’, ‘inadequate enquiry’, etc., is only the manifestation of the error, i.e., non-application of mind, per se erroneous and prejudicial to the interest of the Revenue, which permeates or characterizes the enquiry, though would need to be shown to exist despite the enquiry to the extent made;

    b) the A.O. has adopted one of the courses permissible in law, which has though resulted in a loss to the Revenue, or where two views are possible and the A.O. has taken one view, which though in view of the ld. CIT is not correct.

3.3 The matter, thus, becomes primary factual, so that it would, in each case, be required to be seen if the A.O. has considered all the materials, or that there has been a proper examination and verification by him, demonstrating application of mind, in adopting a considered view and, thus, eschew the charge of non-application of mind. It is this variation in the fact-situation of different cases, which also explains the divergent results of the decisions by the hon’ble courts, i.e., in the wake of the well settled law. What, then, is required is an examination of the facts of the case to arrive at a finding of fact as to an application or otherwise of mind by the assessing authority in the matter, making inquiry as warranted, while framing the assessment. In this regard, our first observation is that the ld. CIT has assailed the assessment as framed (on this aspect) on two grounds:

    a) non-consideration of the lease agreement; and

    b) non-requisition and, thus, non-consideration of the relevant details/vouchers.

3.4 We shall proceed to consider the validity of the said finding by the ld.CIT qua these grounds. Clause 6 of the lease agreement reads as:

    ‘6. All the outgoings such as property tax, maintenance charges, etc. will be borne by the party of the First Part.’

The ld. AR would before us contend that what is meant by the said clause is that while all the regular repairs and maintenance expenditure would be borne by the lessor, nonregular repairs, being in the nature of accumulated repairs, required to be incurred after 4-5 years, and which have in fact been incurred, would be to the account of the assesseelessee. We are completely unable to appreciate the assessee’s case in the matter. Firstly, the very fact that no query in this regard was raised by the A.O. and, consequently, no explanation furnished by the assessee, itself proves the Revenue’s case, confirming an absence of proper inquiry, i.e., as warranted under the circumstances and, thus, non, or in any case lack of due, application of mind by the AO. It is the A.O. in the assessment proceedings, and not either the competent authority in the revisionary proceedings or even we in the appellate proceedings, who can substitute the enquiry that should have properly arisen from or ought to have been made by the assessing authority in the normal course of assessment. That is, it is only the latter which is relevant or material. As such, the occasion to explain the scope and meaning of the said clause of the agreement, which without doubt is extremely relevant in-as-much as it determines the scope of the contractual obligation on the assessee in respect of the impugned expenditure, i.e., in-sofar as the charge of non-application of mind by the A.O. is concerned, is before the latter and not subsequently in the review proceedings. That is, the absence of any such explanation proves the Revenue’s case of non-application of mind in matter by the A.O.

3.5 We may at this stage also consider, even though prima facie, the assessee’s explanation. Though in our view it is not necessary to do so, i.e., strictly speaking, given the legal position as delineated hereinabove, so that non-application of mind itself connotes the resulting order as erroneous and prejudicial to the interest of Revenue, liable to revision, we do so as the assessee has relied on case law to the effect that the revision is in such a case, i.e., non-application of mind, subject to it being further shown that a prejudice to the interest of the Revenue has been caused or suffered thus. (refer: CIT vs. Mepco Industries Ltd. [2007] 294 ITR 121 (Mad)).

The same, in the context of the facts of the present case, is self-evident. The deduction of the impugned expenditure, allowed by the A.O, hinges crucially on the fact whether the assessee was under the terms of the lease agreement liable for the same. The explanation furnished to us, and even to the revisionary authority by the assessee, posits on the allowability of the expenditure, even as that is precisely what was required to be examined by the AO; rather, exhibits lack of enquiry by him. In fact, other collateral and pertinent questions arise on the perusal of the said contract, viz. why would the assessee contract to incur non-regular - capital or quasi capital - expenditure (going by the assessee’s explanation), particularly considering that the contract is for a period of two years, expiring with the relevant financial year. The lessee’s are, rather, generally required to maintain the tenanted premises in a state of good (current) repairs, with the view to delivering possession in a condition in which it was taken. Then, the agreement confers a peaceful enjoyment of the property to the assessee for the lease period. As it would seem to us, there would have been a dislocation of the assessee’s operations during the period the property was subject to renovation. We state so as it is claimed that the expenditure was incurred by the lessor in the first instance, and subsequently reimbursed by the assessee. As rightly observed by the ld. AR, on being posed such relevant queries issuing from the perusal of the contract, the same could have been asked by A.O. in the assessment proceedings, and not by us. But then that is precisely the Revenue’s case in the revision proceedings, i.e., that a proper enquiry, to enable a proper and informed view, was not made by the A.O. in the assessment proceedings.

3.6 With regard to the Revenue’s second objection, the same may arise for consideration in the event of the assessee succeeding on the first ground, or even in the alternative. We find the same to the pertinent to the issue at hand, i.e., the allowability of the expenditure under reference. It could be argued that the A.O. could be satisfied with the factum of the incurring of the expenditure per se, so that the genuineness of the expenditure is not in doubt. The question, however, is: how could he be so without even as much as calling for the details, much less examining them for their veracity and nature. The issue as to the nature of the expenditure, explained as non-regular or accumulated repairs, may be relevant from the stand-point of its allowability, including the provision of law under which it is. A finding of a business purpose as well as the provision under which it is allowable must precede and inform the assessment, and on which we observe no enquiry by the A.O.

4. The instant case, in our clear view is therefore a case of lack, nay, absence of enquiry by the A.O., so that the revision jurisdiction in relation the deduction of the said expenditure in assessment stands validly assumed by the competent authority. Further, his direction for fresh adjudication after examining the facts, and upon allowing proper opportunity to the assessee to present its case, is consistent with his finding of the nonapplication of mind, necessitating fresh determination of the matter, so that we do not find anything amiss or otherwise any infirmity therein. We, accordingly, uphold the impugned order as such. We decide accordingly.

5. In the result, the assessee’s appeal is dismissed.

Order pronounced in the open court on June 27, 2014

 

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