The Commissioner Of Income Tax – Ltu, Chennai v. M/S. Chemplast Sanmar Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM: THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMAND THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal Nos.1058 of 2010 & 420 of 2011 The Commissioner of Income Tax – LTU,Chennai.... Appellant in both appealsVs M/s. Chemplast Sanmar Ltd.,9, Cathedral Road,Chennai – 86.... Respondent in both appeals PrayerT.C.A.No.1058 of 2011: Tax Case Appeal filed under Section 260-A of the Income TaxAct, 1961, against the order of Income Tax Appellate TribunalChennai 'A' Bench, dated 07.05.2010 in ITA No.611/Mds/2009 forthe Assessment Year 2004-05, and against the order of the Commissioner of Income Tax,Large Tax Payer Unit, Chennai, dated 09/03/2009 made in PANNo.AAACC3000F, and against the order of the AssistantCommissioner of Income Tax Company Circle I (3), Chennai, dated20.12.2006 made in GI No/PAN No. Assessment Year 2004-05. Tax Case Appeal filed under Section 260-A of the Income TaxAct, 1961, against the order of Income Tax Appellate TribunalChennai 'C' Bench, dated 29.04.2011 in ITA No.89/Mds/2011 forthe Assessment Year 2004-05, and against the Order of the commissioner of Income Tax,(Appeals) Large Tax Payer Unit, Chennai, dated 07/10/2010 madein ITA 32/09-10/LTU(A) and against the order of the AssistantCommissioner of Income Tax, Large Tax Payer Unit, Chennai dated25/11/2009 made in GI No/PA No.AAACC3000F, Assessment Year 2004-05. https://hcservices.ecourts.gov.in/hcservices/ These appeals by the Revenue filed under Section 260-A ofthe Income Tax Act, 1961 (hereinafter referred to as ‘the Act’)are directed against the order dated 07.05.2010 passed by IncomeTax Appellate Tribunal Chennai 'A' Bench (hereinafter referredto as 'Tribunal') in ITA No.611/Mds/2009 for the AssessmentYear 2004-05 and the order dated 29.04.2011 passed by Income TaxAppellate Tribunal Chennai 'C' Bench (hereinafter referred to as'Tribunal') in ITA No.89/Mds/2011 for the Assessment Year 2004-05. 2. There are two tax case appeals, which have been clubbedtogether pertaining to very same assessee for the Assessmentyear 2004-05. TCA.No.1058 of 2010 is taken as the lead case anda decision in this appeal would cover TCA.No.420 of 2011, sincethe Tribunal allowed the assessee's appeal following theimpugned order in TCA.No.1048 of 2010. Therefore, we take upTCA.No.1058 of 2010. 3. TCA.No.1058 of 2010 was admitted on 07.12.2010 on thefollowing substantial question of law:“Whether on the facts and circumstancesof the case, the Tribunal was right insetting aside the order of the Commissionerof Income Tax under Section 263 directing theAssessing Officer to add the provision ofgratuity of Rs.61,71,603/- allowed by himwithout applying his mind to the allowabilityof provision for gratuity under thecomputation of income under the normalprovisions of the Act, on the wrongassumption that the assessee had made no suchclaim, holding that the power under Section263 could not be invoked in the case of adebatable issue?” 4. TCA.No.420 of 2011 was admitted on 11.10.2011 on thefollowing substantial question of law: “Whether on the facts and in thecircumstances, the Income Tax AppellateTribunal was right in quashing the orderpassed by the Assessing Officer underSection 143 read with Section 263? 4. TCA.No.420 of 2011 was admitted on 11.10.2011 on thefollowing substantial question of law: “Whether on the facts and in thecircumstances, the Income Tax AppellateTribunal was right in quashing the orderpassed by the Assessing Officer underSection 143 read with Section 263? 5. The Assessment for the year under consideration i.e.,2004-05 was completed under Section 143(3) of the Act dated20.12.2006 and the Assessing Officer computed the total incomeunder the normal provisions of the Act at Rs. 8,05,01,900/- andthe book profits under Section 115JB of the Act atRs.20,849,495/-. While computing the book profits under Section115JB of the Act, the Assessing Officer found that the assesseehad made a provision for gratuity to the tune of Rs.61,71,603/-.The Assessing Officer added back the said amount since anyprovision made for an unascertained liability has to be addedback and while doing so, an observation was made that while theprovision for gratuity has been added back to the income fornormal computation, the same has not been added back to the bookprofits under Section 115JB of the Act. 6. The Commissioner of Income Tax Large Taxpayer Unit[hereinafter referred to as (“CIT”)] initiated proceedings underSection 263 of the Act as he was of the view that the assessmentcompleted by the Assessing Officer was erroneous and prejudicialto the interest of Revenue. There are three grounds, which werepointed out by the CIT in the notice issued under Section 263 ofthe Act dated 03.02.2009, of which, we are concerned with onlyone of the issue namely whether the provision for gratuity wasallowable as deduction under Section 40A(7)(b) of the Act. Theassessee was given an opportunity to put forth his submissions,which were promptly done by the assessee and the CIT, by orderdated 09.03.2009, held that the assessment order dated20.12.2006 was erroneous and accordingly, directed the amount tobe added back while computing the book profits under Section115JB of the Act. The assessee filed an appeal before theTribunal, which was allowed by the impugned order primarilyholding that the CIT could not have exercised powers underSection 263 of the Act. 7. Mr.T.Ravikumar, learned Senior Standing Counsel for theappellant/Revenue submitted that the Tribunal erred in notappreciating the fact that the Assessing Officer did not applyhis mind while taking a decision not to add back the provisionfor gratuity. Further, the Assessing Officer misdirected himselfin assailing that the assessee had not claimed the deduction inrespect of provision for gratuity under normal computation.Further, it is contended that the Tribunal erred in settingaside the CIT order passed under Section 263 of the Act on theground that the issue was debatable and without considering the https://hcservices.ecourts.gov.in/hcservices/ fact that the order passed by the Assessing Officer was clearlyerroneous and prejudicial to the interest of Revenue, as therewas no assessment. 8. To support his contentions, learned Senior StandingCounsel for the appellant/Revenue placed reliance on thefollowing decisions:(i)CITVs.SouthIndiaShippingCorporation Ltd. [reported in (1998)233 ITR 0546 (Madras)];(ii)CIT Vs. Seshasayee paper & Boards Ltd.[reported in (2000) 242 ITR 0490(Madras)];(iii)Ashok Leyland Ltd. Vs. CIT [reportedin (2003) 260 ITR 0599 (Madras)]; and (iv)TTK LIG Ltd., Vs. ACIT [reported in(2012) 346 ITR 0452 (Madras)]. 9. Mr.Vijayaraghavan, learned counsel appearing for therespondent/assessee sought to sustain the order passed by theTribunal and submitted that the Tribunal has clearly held thatthe power under Section 263 of the Act could not have beeninvoked by the CIT, as the issue was clearly debatable at therelevant point of time and this has been brought out by theTribunal in a proper manner and the order passed by the Tribunaldoes not call for any interference. 9. Mr.Vijayaraghavan, learned counsel appearing for therespondent/assessee sought to sustain the order passed by theTribunal and submitted that the Tribunal has clearly held thatthe power under Section 263 of the Act could not have beeninvoked by the CIT, as the issue was clearly debatable at therelevant point of time and this has been brought out by theTribunal in a proper manner and the order passed by the Tribunaldoes not call for any interference. 10. We have elaborately heard the learned counsel for theparties and given our anxious consideration to the materialsplaced before us. 11. The power under Section 263 of the Act can be invoked bythe CIT. The power under Section 263 of the Act is a power givenfor revision of orders prejudicial to revenue. The CIT, inexercise of such power, may call for and examine the records ofany proceedings under the Act and if he considers that any orderpassed therein by the Assessing Officer is erroneous insofar asit is prejudicial to the interests of Revenue, he may aftergiving the assessee an opportunity of being heard and aftermaking or causing to be made such inquiry as he deems necessary,pass such order thereon as the circumstances of the casejustify, including an order enhancing or modifying theassessment, or cancelling the assessment and directing a freshassessment. 12. Section 263 of the Act contemplates under whatcircumstances the Commissioner can invoke such power. The lawlaid down in the decisions are to the effect that for theCommissioner to be satisfied that the power under Section 263 ofthe Act has to be invoked. He has to be satisfied that the order https://hcservices.ecourts.gov.in/hcservices/ passed by the Assessing Officer was erroneous in so far as it isprejudicial to the interests of the Revenue. The Courts whileinterpreting the provision held that every erroneous order willnot be prejudicial to the interests of the Revenue. Likewise,every order passed by the Assessing Officer, which isprejudicial to the interests of Revenue may not be erroneous.Thus the settled legal position is that the law laid down inSection 263 of the Act is to be simultaneously and conjointlysatisfied. 13. In the instant case, the CIT held that the assessee isnot entitled for deduction under Section 40A(7)(b) of the Act inthe light of Section 43B of the Act, which states that nodeduction is permissible without a provision is made butdeduction is permissible only when actual payment is effective.We are not called upon to decide the effect of Section 40A(7)(b)of the Act visa-vis Section 43B of the Act as to whether boththe provisions are conflict with each other as we are requiredonly to decide as to whether this was a fit case that the CITcould have been invoked the power under Section 263 of the Act.To decide this issue, we may straightaway refer to the findingrecorded by the Tribunal in paragraph of 1 of its order. In thesaid paragraph, the Tribunal has noted the submission of theassessee and the documents filed by the assessee in the form ofpaper book. In the said paper book in page No.9, there is anaudit report wherein, the auditor has recorded as follows:“2..........He further drew our attentionto page 6 of the paper book, which was a copy ofthe audit report under Section 44AB, wherein initem No.17(i), the auditor had specificallymentioned that there was no amount which was noteligible under Section 40A(7). He further drewour attention to page 8, which was the part ofthe audit report showing the details in respectof the sum referred to clause (b) of Section43B, wherein in the note in item No.3, it hasbeen specifically mentioned that based on thedecision in the case of CIT Vs. CommonwealthTrust (I) Limited (269 ITR 290) the provisionfor contribution to gratuity fund is consideredby the assessee as an allowable expenditure.” 14. From the above clarification made by the Auditor in theaudit report, it is seen that the assessee has specificallymentioned about the decision in the case of Commonwealth Trustand stated that the provision for contribution to gratuity fundis considered by the assessee as an allowable expenditure. 15. The argument put forth by Mr.T.Ravikumar, learned SeniorStanding Counsel for the appellant/Revenue is that the Tribunalin paragraph 5 of the impugned order, has held that theprovision is not an approved fund of the LIC. 16. In our considered view, if such interpretation isaccepted, it would amount to misreading the order of theTribunal. What the Tribunal has recorded is that the payment hasnot been effected to the approved gratuity fund, but onlyprovision has been made by the asssessee. This would be thecorrect manner of reading the order passed by the Tribunal, moreparticularly, the observations made by the Tribunal in paragraph5 of the order. 17. It is submitted by the learned counsel for therespondent/assessee that the decision in Commonwealth TrustPrivate Ltd continues to hold the field and if the said decisionhad been relied on by the assessee while filing the returns andmaking a claim for deduction on the provision made, if the CITis of the view that the said decision would not apply forreasons stated by it, this is undoubtedly a debatable issue. TheCIT placed reliance on the decision of the High Court ofCalcutta in the case of CIT Vs. Sree Kamakhya Tea Co. (P) Ltd.[reported in (199 ITR 714)]. In fact the said decision, was alsoconsidered in Commonwealth Trust Private Ltd. 18. The learned Senior Standing Counsel for theappellant/Revenue placed reliance on the decision of High Courtof Kerala in the case of CIT Vs. Popular Vehicles & ServicesLtd. [reported in (2010) 33 DTR 140]. The said decision does notrelated to interpretation of Section 40A(7)(b) of the Act, butpertains to as to whether what would be the relevant date foreffecting payment to approve gratuity whether it would be thelast date of filing return or the date prescribed under relevantstatute. Therefore, the decision in the case of Popular Vehiclescannot be applied to the facts of the case. 19. In the case of South India Shipping Corporation Ltd.,the Court upheld the order of the CIT under Section 263 of theAct on the ground that there was no proper inquiry done by theAssessing Officer, which is not the case of the Revenue in thepresent appeal before us and therefore, the said decision cannotbe applied to the facts of the present case. 20. In the case of Seshasayee Paper & Boards Ltd., the Courtconfirmed the order passed by the CIT invoking the power underSection 263 of the Act, as it was found that the records did notshow that the ITO had considered the points on which therevision was made. In the appeals on hand, there is no such https://hcservices.ecourts.gov.in/hcservices/ allegation made by the Revenue and therefore, the decisioncannot be applied to the facts of the present case. Equally, thedecision in the case of Ashok Leyland Ltd., and TTK LIG Ltd.,also cannot be applied to the facts of the present case, as inboth decisions, the Court, on facts, found lack of properinquiry by the Assessing Officer. 20. In the case of Seshasayee Paper & Boards Ltd., the Courtconfirmed the order passed by the CIT invoking the power underSection 263 of the Act, as it was found that the records did notshow that the ITO had considered the points on which therevision was made. In the appeals on hand, there is no such https://hcservices.ecourts.gov.in/hcservices/ allegation made by the Revenue and therefore, the decisioncannot be applied to the facts of the present case. Equally, thedecision in the case of Ashok Leyland Ltd., and TTK LIG Ltd.,also cannot be applied to the facts of the present case, as inboth decisions, the Court, on facts, found lack of properinquiry by the Assessing Officer. 21. As pointed out by us earlier, the assessee while statingthat the provision for contribution to gratuity fund wasconsidered by them as an allowable expenditure, specificallyplaced reliance on the decision in the case of CommonwealthTrust. Apart from that, before the Tribunal the assessee placedthe decision of the High Court of the Delhi in the case of CITVs. Bechtel India (P) Ltd. [reported in (2008) 2 DTR 145] andthe decision of the Jaipur Tribunal. Thus, as rightly held bythe Tribunal, there were conflicting views. The question as towhether the provision for contribution to gratuity fund is anallowable expenditure under Section 40A(7)(b) of the Act was adebatable issue at the relevant point of time and therefore,when two views are possible, that too, what the assessee reliedon the decision of High Court of Kerala, though not ajurisdictional Court, the assessment could not have been statedto be erroneous and prejudicial to the interests of revenue.Therefore, the Tribunal rightly allowed the assessee's appealand set aside the order passed by the CIT dated 09.03.2009. 22. In the result, the appeals are dismissed and thesubstantial questions of law are answered against the Revenue.No costs. Sd/- Assistant Registrar(CCC) //True Copy// Sub Assistant Registrar mp To 1.The Commissioner of Income Tax (Appeals), LTU, Chennai. Chennai. 2.The Income Tax Appellate Tribunal, 'A' Bench, Chennai. 'A' Bench, Chennai. 3.The Income Tax Appellate Tribunal, 'C' Bench, Chennai. 'C' Bench, Chennai. 4.The Assistant Commissioner of Income Tax (L.T.U), Chennai. 5.The Assistant Commissioner of Income Tax, Company Circle I (3), Chennai. Company Circle I (3), Chennai. +1cc to Mr.T.Ravi kumar, Advocate Sr.69598 +1cc to M/s.Subbaraya Aiyar, Advocate Sr.69841 TCA. Nos.1058 of 2010 & 420 of 2011br[co]srg 15/10/2019