Principal Commissioner Ofincome Tax-3, Kolkata v. Damodar Valley Corporation

O-166 ITA/15/2021 IN THE HIGH COURT AT CALCUTTASpecial Jurisdiction (Income Tax)ORIGINAL SIDE PRINCIPAL COMMISSIONER OFINCOME TAX-3, KOLKATA -Versus- DAMODAR VALLEY CORPORATION Appearance:Ms. Smita Das De, Adv....for the appellant. Ms. Udita Saraf, Adv....for the respondent. BEFORE: The Hon’ble JUSTICE T.S. SIVAGNANAM -And- The Hon’ble JUSTICE SUPRATIM BHATTACHARYA Date : 27[th] September, 2022. The Court : This appeal filed by the revenue underSection 260A of the Income Tax Act, 1961 (the ‘Act’ forbrevity) is directed against the order dated 21[st] February,2018 passed by the Income Tax Appellate Tribunal, “B” Bench,Kolkata (the Tribunal) in ITA No.401/Kol/2017 for theassessment year 2012-13. The appeal was admitted on the following substantialquestions of law: “Whether the impugned order of the tribunal dated21[st] December 2018 setting aside the order under Section 263 of the Income Tax Act, 1961 passed by theCommissioner is erroneous in law ?” We have heard Ms. Smita Das De, learned standingcounsel for the appellant/revenue and Ms. Udita Saraf, learnedadvocate appearing for the respondent/assessee. The short question involved in the instant case iswhether the learned Tribunal was right in setting aside theorder passed by the Principal Commissioner of Income Tax-III,Kolkata (PCIT) dated 12[th] January, 2017 passed under Section263 of the Act. The assessee raised several grounds before theTribunal and the first and foremost ground raised before theTribunal was that PCIT was not justified in reviewing theassessment order on the ground of lack of enquiry with regardto the issue of allowability of prior period expenses eventhough in the show cause notice there was no such allegationand it was not a ground on which the PCIT alleged that theassessment order was erroneous on the ground of lack ofenquiry. Further it was contended that the PCIT committederror in setting aside the assessment order on a ground whichis entirely different than the ground on which the assessmentorder was sought to be revised under Section 263 of the Act.That apart, the assessee had also raised other grounds touchingupon the merits of the claim by contending that facts on recordestablish that liability had crystallised during the relevant year, no deduction for the trading liability was admittedlyallowed in the earlier year and the tax rates in the earlieryear and the current year being the same, no prejudice wascaused to the interest of revenue and there is no justificationfor invoking the power under Section 263 of the Act. Thelearned Tribunal having noted that as many as six grounds wereraised by the respondent before the Tribunal, took up forconsideration the ground as to whether the procedure requiredto be adopted while ensuring proceedings under Section 263 ofthe Act was followed or not and also the fact whether theassessee had adequate opportunity to put forth theirsubmission. The assessee contended before the Tribunal thatthey have been established under the Central Act, 1948 andengaged in the business of generation and distribution ofpower. They operate hydro and thermal power stations which areset up in various location in the State of Jharkhand and Stateof West Bengal. For the thermal plants, the principal rawmaterials is coal which the assessee sources from subsidiariesof Coal India Limited which is another public sectorundertaking. For the purpose of sourcing of coal, the assesseeentered into a coal supply agreement with Coal India Limited interms of which the subsidiaries of Coal India Limited supplythe coal to various plants of the respondent/assessee.Further, it was contended that since the Coal India Limited enjoys almost monopoly status in coal mining and supplybusiness in India like any other customer, therespondent/assessee has to make advance payment to subsidiaryof Coal India Limited based on the estimated monthly supply ofcoal. Further, it was submitted that the assessee’s powerplants critically depend on the regular supply of quality coaland the assessee has to make payment to Coal India Limited onadvance basis. Further, at the time when the advances werepaid, individual account of Coal India Limited is debited inthe books maintained at the Kolkata head office. The amount sopaid, appeared in the head office book under the category“advance” and on receipt of the advance, the supply orders arereleased and accordingly the subsidiary of Coal India Limiteddespatches the coal to different plant location of therespondent/assessee. At the relevant time, the subsidiary ofCoal India Limited raised invoices on the respondent/assessee’sconcerned power project and in the books of the respectiveprojects the supply of coal is initially accounted. However,before the bill for the coal supplied is approved and passedfor payment, the said bills go through detailed process forverification and for this purpose numerous checks and balanceshave been put in place by the assessee. The assessee offeredthe following explanation with regard to the claim of the deduction for the assessment year under consideration namely,A.Y. 2012-13. “During FY 2010-11 a joint reconciliation of claims andcounterclaims was arrived at between representative ofBharat Coking Coal Ltd. (BCCL) and the assessee in respectof coal supplies made by BCCL to assessee’s Mejia ThermalPower Plant (MTPP). The joint reconciliation was carried outin the month of December 2010 in meeting attended by therepresentatives of BCCL & DVC. A copy of the JointReconciliation Statement signed and executed in December2010 is enclosed for your ready reference and record. Afterthe joint reconciliation was arrived at the same was sent tothe fuel section of MTPP for final approval and onwardrecommendation to the head office for passing requisiteaccounting entries in the assessee’s books. Inadvertently,however, the senior account executives of the assesseeposted at MTPP were deputed on election duty as the WestBengal Assembly Elections were held in early 2011. Since theconcerned account executive of the assessee was on electionduty; necessary recommendations for passing the entries inthe books to give accountings effect to the settlement withBCCL could only be issued in the FY 2011-12. As soon thehead office of the assessee at Kolkata received therecommendation from MTPP giving accounting effect to thesettlement of BCCL was given by passing entries in thefinancial books of DVC. Your goodself will thus note thatthe process of settlement of dispute with BCCL attainedfinality only in FY 2011-12 and accordingly the entries werepassed by the assessee in its books of accounts in FY 2011-12 and therefore the deduction was rightly claimed andallowed in the assessment of AY 2012-13”. The assessee also submitted the following facts tosupport their contention that the power under Section 263 maynot be invoked and the proceedings should be dropped. The assessee also submitted the following facts tosupport their contention that the power under Section 263 maynot be invoked and the proceedings should be dropped. “In case of dues arising from settlement reached by mutualconsent liability of an assessee gets crystallised only whenthe parties arrive at mutually accepted terms and associateprocedures are complied with. In the assessee’s case thedocuments on record will show that such settlement wasarrived at the meeting jointly conducted between BCCL & DVCrepresentatives in December 2010 and thereafter theaccounting effect to the settlement was given in theaccounts for the year ended 31.03.2012. In the facts andcircumstances set out in the foregoing, it shall beappreciated that the liability to pay Rs.39,34,86,241/- hadattained finality only in the relevant FY 2011-12.Accordingly, such sum which was debited in the assessee’sfinancial books under the head “prior period expenditure”had been rightly claimed by the assessee and allowed by theAO as deduction from the profits of the business for therelevant year. It is further material to submit that theamount claimed as deduction in AY 2012-13 pertained tosupply of coal. The consumption of coal is a prerequisitefor carrying on assessee’s business of power generation.Cost of coal supply is always allowed as deduction incomputing assessee’s business income. In the year in whichthe coal was supplied the assessee had not claimed deductionfor its entire cost since the dispute between assessee andBCCL was not resolved and the full liability had notcrystallised. You will thus appreciate that no deduction wasallowed to the assessee even though the coal was suppliedand consumed in the earlier years and therefore to theextent of unsettled amount the company’s income wasassessed. It is therefore submitted that since the assesseewas not allowed deduction for the full value of coal purchased in the year of supply then in the year in whichthe liability was settled and the same should be allowed asdeduction since in the earlier years the assessee was notallowed any deduction for such cost.” Though the assessee submitted such explanation inresponse to the proceeding initiated under Section 263 of theAct, the PCIT without affording an opportunity of hearing tothe assessee on the alleged ground that no enquiry wasconducted by the assessing officer had rejected the contentionsand confirmed the proposal in the show cause notice holdingthat the assessment order was erroneous in so far as it isprejudicial to the interest of revenue. The learned Tribunal considered the contentionsadvanced by the assessee before it and pointed out that thePCIT did not specifically mention any error in the contentionsadvanced by the assessee in reply to the show cause notice andheld that the assessment order was erroneous in so far as it isprejudicial to the interest of revenue solely on the groundthat the assessing officer failed to verify necessary facts.Furthermore, there was no such allegations made in the showcause notice under Section 263 of the Act and, therefore, noopportunity was afforded on the said issue. Thus, the learnedTribunal taking note of the decision of the Hon’ble SupremeCourt in the case of CIT vs. Amitabh Bachchan reported in 384ITR 200 (SC) held that failure to give any opportunity would The learned Tribunal considered the contentionsadvanced by the assessee before it and pointed out that thePCIT did not specifically mention any error in the contentionsadvanced by the assessee in reply to the show cause notice andheld that the assessment order was erroneous in so far as it isprejudicial to the interest of revenue solely on the groundthat the assessing officer failed to verify necessary facts.Furthermore, there was no such allegations made in the showcause notice under Section 263 of the Act and, therefore, noopportunity was afforded on the said issue. Thus, the learnedTribunal taking note of the decision of the Hon’ble SupremeCourt in the case of CIT vs. Amitabh Bachchan reported in 384ITR 200 (SC) held that failure to give any opportunity would render the revisional order under Section 263 of the Actlegally fragile not on the ground of lack of jurisdiction buton the ground of violation of principles of natural justice.Thus, we are of the considered view that the learnedTribunal rightly went into the matter and held in favour of theassessee. Furthermore, we note that in terms of Section 263 ofthe Act, the PCIT is empowered to invoke the power if, in hisopinion, the assessment order is erroneous in so far as it isprejudicial to the interest of revenue. However, before doingso he is required to give the assessee an opportunity of beingheard and after making enquiry or causing to be made suchenquiry as he deems necessary, pass an order under the saidprovision. The learned Tribunal has found that opportunitywas not granted to the assessee. That apart no enquiry wasconducted by the PCIT before passing the order.Thus, the learned Tribunal was fully justified ininterfering with the order passed by the PCIT. In the result,the appeal filed by the revenue (ITA/15/2021) is dismissed andthe substantial question of law is answered against therevenue. (T.S. SIVAGNANAM, J.) (SUPRATIM BHATTACHARYA, J.)