Commissioner Of Income Tax, Chennai v. Savera Industries Limited

IN THE HIGH COURT OF JUDICATURE AT MADRASDated: 11.01.2017 Coram: The Hon'ble Mr.Justice HULUVADI G.RAMESH ANDThe Hon'ble Dr. Justice ANITA SUMANTHTAX CASE APPEAL No.839 of 2016 Commissioner of Income Tax,Chennai .. AppellantVersus Savera Industries Limited,No.146, Dr.Radhakrishnan Salai,Chennai 600 004. .. Respondent Prayer: Tax Case Appeal filed under Section 260A of IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal Madras "C" Bench, dated 11.11.2015 in ITANo.835/mds/2015 against the order of the Principal Commissionerof Income Tax-6, Chennai 34 dated 02.03.2015 in C.No 6119(10)/CIT-6/2014-2015, which was filed against the assessment order ofthe Assistant Commissioner of Income Tax company Circle VI(1)dated 25.04.2012, vide G.R.No/PAN/sa/174/ for theassessment year 2010-2011. For Appellant .. Mr.J. Narayanasamy For Respondent .. Mr.Sandeep Bagmar.R JUDGMENT This Department Tax Case (Appeal) relates to AY 2010-11and raises the following substantial questions of law: ‘Whether on the facts and in the circumstances of thecase the tribunal was right in setting aside therevision order passed by the CIT u/s.263 of the IncomeTax Act. https://hcservices.ecourts.gov.in/hcservices/ Whether on the facts and in the circumstances of thecase the tribunal was right in holding that the CIThad merely set aside the orders of the assessmentwithout any adverse finding about the claims of theassessee without appreciating the fact that the CIThad clearly given adverse findings holding that theassessee's claims were allowed in the assessmentwithout proper verifications about the nature ofexpenditure and without application of mind?’ 2. The facts in issue are as follows: The assessee/respondent is a company that owns and managesa four star hotel. In respect of assessment year 2010-11, anorder of assessment in terms of the Income tax Act 1961 (inshort ‘Act’) was passed under scrutiny on 25[th] April 2012. In thecourse of assessment, various queries were raised by theassessing authority in relation to issues that arose from anexamination of the return of income. A notice under section 143(2) dated 05.09.11 as well as a questionnaire under section 142(1) dated 07.02.12 were issued. Specific queries were raisedwith respect to expenditure incurred on renovation amounting toRs.1,09,81,000/- treated as deferred revenue expenditure andpreliminary and pre-operative expenditure of an amount ofRs.9,48,000/- claimed in the computation of income. The assesseefiled detailed replies on 09.02.12, 27.02.12, 05.03.12 and11.02.12, explaining the claims and filing material in supportof thereof. Account copies were filed setting out the nature anddetails of the expenses, the narration in respect of each itemof expenditure and details of the entities to which paymentswere made. 3. Upon a detailed consideration of all the particularsfiled, the assessing authority accepted the claims and order ofassessment dated 25.04.12 thus came to be passed after dueapplication of mind. 4. While this is so, the Commissioner of Income Tax (inshort ‘CIT’) proposed to exercise jurisdiction under section 263of Income Tax Act, being of the view that the claims ofexpenditure had not been examined by the assessing officer andthe order of assessment was thus erroneous and prejudicial tothe interests of revenue. A notice dated 28.01.15 was issuedcalling upon the assessee to show cause why the expendituresincurred on renovation as well as deferred revenue expenditurenot be disallowed and proposing to set aside the order ofassessment for re-computation of the total income of theassessee. Despite the assessee bringing to the notice of the CITthe details filed before the Assessing Officer in regard to theclaim of expenditures, the proposal was confirmed and the assessment set aside to be re-done after proper verification ofthe claims by order of revision dated 02.03.15. 5. The order of the CIT was assailed before the Income TaxAppellate Tribunal, (in short ‘Tribunal’) which, vide orderdated 11.11.2015, allowed the appeal. The order of revision u/s263 of the Act was set aside, as being bereft of jurisdictionand not satisfying the parameters of the statutory provision.The Department is in appeal against the aforesaid order of theTribunal. 6. We have heard the submissions of Mr.J.Narayanasamyappearing for the Department and Mr.Sandeep Bagmar appearing forthe assessee/respondent and perused the appeal as well as thesupporting documents carefully. 7. The power conferred under section 263 of the Act can beexercised by the CIT only upon concurrent satisfaction of thetwin statutory conditions contained in the provision. Thesection states thus: 263. Revision of orders prejudicial to revenue.-(1) The Commissioner may call for and examine therecord of any proceeding under this Act, and if heconsiders that any order passed therein by the As-sessing Officer is erroneous in so far as it isprejudicial to the interests of the revenue, hemay, after giving the assessee an opportunity ofbeing heard and after making or causing to be madesuch inquiry as he deems necessary, pass such or-der thereon as the circumstances of the case jus-tify, including an order enhancing or modifyingthe assessment, or cancelling the assessment anddirecting a fresh assessment. 8. Thus, the order sought to be revised has to be botherroneous as well as prejudicial to the interests of the Revenuefor the exercise of jurisdiction to be valid. 9.In the present case, the revision under section 263 ison the basis that the Assessing Officer ought not to haveaccepted the claims without examining each expense item wisethus committing an error as well as resulting in prejudice beingcaused to the revenue. The assessment order was thus set asidewith a direction to verify the claims item wise again in thelight of the material filed by the assessee. We note that the CIT, in his conclusion, admits to the position that the assesseehad filed details in support of the claims. 10. A perusal of the details brought on record at the timeof assessment indicate that explanations as well as materials tosubstantiate the claim of the assessee were produced before theassessing officer. The claims form part of the return of incomeand are duly reflected in the accompanying financial statements.This has not escaped the attention of the assessing officer whoraises a query calling for explanation as well as substantiationof the claims. The assessee has furnished an explanation asfollows: With reference to the above we submit that wehave been asked to furnish information re-lating to the following:-1. Renovation Expenses - Allowability2. Deferred Revenue Expenditure - Allowability3. Payment details of PF, ESI, VAT and ServiceTax Etc.In connection with is this we submit as fol-lows:- With reference to the above we submit that wehave been asked to furnish information re-lating to the following:-1. Renovation Expenses - Allowability2. Deferred Revenue Expenditure - Allowability3. Payment details of PF, ESI, VAT and ServiceTax Etc.In connection with is this we submit as fol-lows:- 1.Account copy of Renovation Expenses is en-closed. As can be seen from the renovation ex-penses, no new Asset is created. It is onlya renewal and replacement of asset. Allthese expenses are revenue expenditure only. NoNew Asset is included in the above expenditure.It is an allowable expense, since it is for thepurpose of maintaining the standards and up-keep of assets.We also submit that the renovation expenses arecurrent repairs only. Ours is a hotel industryin the category of four star hotel. Unlike oth-er industries we have to maintain and upgradeour assets to meet the standards of the day today competition with others and to retain theclientele. The repairs and maintenance are alsoseparately shown in the profit and loss accountfor the purpose of indication of regular main-tenance. The expenses shown under the head ren-ovation also represents to current repairs tomaintenance of quality of assets. For the pur-pose of business, there is no distinction be-tween the two and the bifurcation was made for the purpose of administrative convenience forbetter control in maintaining the asset. The renovation expenses are exactly the same of'repairs & maintenance which are incurred whol-ly and exclusively for the purpose of maintain-ing the assets for running the business. It isthe legitimate claim in accordance with theprinciples of accountancy and established com-mercial practice. Such expenditure must betaken into account to assess profit and gain inbusiness. It is the well settled law that Renovation ex-penses are to be treated as revenue ex-penditure unless new asset is created. The en-closed court decision clearly establish andsupport our above mentioned claim. The case laws on this subject are:- 1. Commissioner of Income Tax vs Ooty Das-aprakash on 12[th] February 1998. 2. CIT v. Delhi Cloth & General Mills Co.Ltd. (1981) 131 ITR 641 (Delhi)Ltd. (1981) 131 ITR 641 (Delhi) 3. CIT v. Hede Consultancy (P) Ltd (2002) 258ITR 380 (Bom)ITR 380 (Bom) 4. C.R. Corera and Brotheres v Commissionerof Income-taxof Income-tax 5. Jagadisan and Srinivasan JJ 6. Senapathy Synams Insulations (P) Ltd v.CIT (2001 248 ITR.656 (Kar).CIT (2001 248 ITR.656 (Kar). 2. Deferred Revenue Expenditure:- This head ofaccount represents the renovation/leaserentals expenses, while preparing the Prof-it & Loss a/c under Companies Act we have beenfollowing, a consistent method of ac-counting under which 1/3[rd] of renovation expens-es are written off to Profit & Loss a/c everyyear and 2/3[rd] is carried forwarded to nextyears, which is transferred to deferred revenueexpenditure to be debited to Profit and Lossa/c in the next 2 years. While for Income TaxPurposes we have been claiming 100% of ex-penses as Revenue Expenditure. This method ofaccounting and claim of expenses has been con-tinuously followed for all these years, whichhas been accepted in our Income Tax Assess-ments. 11. Further, in response to query no:24 in questionnairedated 05.03.12, the assessee has also produced books of accountsbefore the officer. The query as well as the response areextracted below: Point.No.24. Produce the books of accounts, includ-ing stock book and bank book verification. Alsoplease produce the pass book/bank statements issuedby the bankers. Please produce vouchers towards ex-penses claimed for verification. Books of accounts produced herewith for your refer-ence. 11. Further, in response to query no:24 in questionnairedated 05.03.12, the assessee has also produced books of accountsbefore the officer. The query as well as the response areextracted below: Point.No.24. Produce the books of accounts, includ-ing stock book and bank book verification. Alsoplease produce the pass book/bank statements issuedby the bankers. Please produce vouchers towards ex-penses claimed for verification. Books of accounts produced herewith for your refer-ence. 12. The power under section 263 is a precise power that hasto be exercised by the Commissioner only in appropriate caseswhere an error arises in the order of assessment that causesprejudice to the revenue. In the present case, the assessingofficer, having noticed the claims, calls for material insupport thereof. The decision to allow the claims is made afterdue verification by the officer and is a plausible view in law.In exercising power of revision u/s 263, the CIT essentiallyseeks to substitute his own conclusions upon the view taken bythe assessing officer at the time of assessment. This isimpermissible in the context of section 263. The Supreme Court,in the case of Malabar Industrial Co Ltd vs CIT (243 ITR 83) hassettled the position that if the assessing officer has taken aview at the time of assessment based on materials, the CITcannot seek to revise the view taken merely because he disagreeswith it. This does not constitute an ‘error’ for the purposes ofsection 263. " The phrase "prejudicial to the interests ofthe Revenue" has to be read in conjunction with anerroneous order passed by the Assessing Officer.Every loss of Revenue as a consequence of an orderof the Assessing Officer cannot be treated asprejudicial to the interests of the Revenue. Forexample, when an Income-Tax Officer adopted one ofthe courses permissible in law and it has resultedin loss of Revenue; or where two views are possibleand the Income-Tax Officer has taken one view withwhich the Commissioner does not agree, it cannot betreated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken bythe Income-Tax Officer is unsustainable in law." 14. The allowability of the claims of expenditure have beenestablished by the assessee both on facts as well as by relianceupon various decisions of courts. Where two views are possiblein relation to a matter, and the assessing officer has adoptedone such view, the CIT cannot, by exercise of power u/s 263impose the other view upon the assessing officer. 15. The Substantial Questions of law stand answered infavour of the assessee and against the Revenue. The Tax Case(appeal) is dismissed. No costs. s/d- Assistant Registrar(CS-III) True Copy Sub-Assistant Registrarmsr/slTo1. The Registrar Income Tax Appellate Tribunal Madras C Bench Rajaji Bhavan, Chennai.2. The Principal Commissioner of Income Tax 6 121, M.G. Road, Nungambakkam, chennai 34.3. The Assistant Commissioner of Income Tax Company Circle VI(1) Aayakar Bhavan New Block(7[th] Floor) 121, Nungambakkam, Chennai 34.+1 Cc to Ms.J.Narayanaswamy, Advocate sr 2729.+1 CC to Ms. Sandeep Bagmal, Advocate sr 3305. MP(CO) sp(03/10/2017) TAX CASE APPEAL No.839 of 2016