The Pr. Commissioner Of Income Tax,Panaji – Goa v. Zuari Maroc Phosphates Ltd.jaikisaan Bhawan, Zuari Nagar,Goa

1 TXA NO.42-2016 IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NO. 42 OF 2016 The Pr. Commissioner of Income Tax,Panaji – Goa.... Appellant Versus Zuari Maroc Phosphates Ltd.Jaikisaan Bhawan, Zuari Nagar,Goa-403726.... Respondent Ms. Amira Razaq, Standing Counsel for the Appellant. Mr. Salil Kapoor along with Ms. Priyanka Kamat, Advocates for theRespondent. Coram:- M. S. SONAK &DAMA SESHADRI NAIDU, JJ. th Reserved on:-7 January 2021 Pronounced on:- 14th January 2021 JUDGMENT (Per M. S. Sonak, J.): Heard Ms. Amira Razaq for the Appellant and Mr. Salil Kapoorwho appears along with Ms. Priyanka Kamat for the Respondent. 2. This Appeal was admitted on 15.11.2016 on the followingsubstantial questions of law:- 2 TXA NO.42-2016 (I) Whether the learned Income Tax Appellate Tribunal (ITAT)is justified in law in allowing the appeal filed by the assesseewhen the twin conditions for invoking the power under Section263 had been fully satisfied, there being failure on the part ofAssessing Officer in not considering the issue of legality ofexpenses/expenditure allowable as deduction or whether therewas at all any business income after investigating the facts ? (II) Whether in facts and circumstances of the case tribunal wasjustified in law, in passing impugned order thereby holding thatorder passed by the Assessing Officer is not erroneous andprejudicial to the interest of the revenue and accordingly wasjustified to quash the order passed under Section 263 of the I.T.Act ? 3.The assessee filed return of income in the Assessment Year 2009-10 declaring a total loss of `1,78,57,950/-. The case was selected forscrutiny under CASS and accordingly, notices were issued to theassessee. The Assessing Officer (AO), vide assessment order dated30.09.2011 added an amount of `2,31,010/- by assessing the same asincome from other sources to the total income of the assessee.However, the AO, accepted that the assessee had incurred totalbusiness income (losses) to the extent of `1,78,57,950/-, which waseventually allowed to be carried forward for the next assessment year. 4. The Commissioner of Income Tax, invoked his revisionaljurisdiction under Section 263 of the Income Tax Act, 1961 (said Act)and by his order dated 06.03.2014 set aside the aforesaid assessmentorder dated 30.09.2011 and directed the AO to pass a fresh order aftergranting the assessee reasonable opportunity of being heard. The 3 TXA NO.42-2016 Commissioner also directed the AO to verify the claim of the assesseein respect of the allowability of the expenditure and carry forward ofthe losses to the extent of `1,78,57,950/- in terms of the law. 5.The assessee appealed to the Income Tax Appellate Tribunal(ITAT) which, by order dated 11.02.2015, set aside theCommissioner's order dated 06.03.2014. Hence the present appeal bythe respondent on the aforesaid substantial questions of law. 3 TXA NO.42-2016 Commissioner also directed the AO to verify the claim of the assesseein respect of the allowability of the expenditure and carry forward ofthe losses to the extent of `1,78,57,950/- in terms of the law. 5.The assessee appealed to the Income Tax Appellate Tribunal(ITAT) which, by order dated 11.02.2015, set aside theCommissioner's order dated 06.03.2014. Hence the present appeal bythe respondent on the aforesaid substantial questions of law. 6. Ms. Razaq, the learned counsel for the respondent submittedthat in this case the twin conditions of the AO's order being erroneousand prejudicial to the interest of the respondent were satisfied andtherefore, there was no legal bar to the invocation of revisionaljurisdiction by the Commissioner. She submits that the record veryclearly disclosed that the assessee had neither carried out any businessduring the relevant assessment year nor had it charged any fees from itssubsidiary for technical or management services allegedly renderedduring the relevant assessment year. She submits that the AO himselfpointed out the error in his order dated 30.09.2011 and theCommissioner, upon independent application of mind was alsosatisfied with the existence of such error. She points out that onaccount of the erroneous view of the AO, the assessee was incorrectlypermitted to carry forward losses of `1,78,57,950/- to the nextassessment year and thereby avoid payment of tax to the extent ofalmost `60,69,917/-. She submits that in this case an audit objection 4 TXA NO.42-2016 was raised and therefore, despite the tax effect being less than `1 Crore,the respondent, was justified in pursuing the present appeal before thisCourt. She relied upon Malabar Industrial Co. Ltd. v.Commissioner of Income Tax, Kerala State – 2000-(243)-ITR-83(SC), Commissioner of Income Tax v. Amitabh Bachchan –(2016) 69 taxmann.com 170 (SC) and Daniel Merchants P. Ltd.& Anr. v. Income Tax Officer & Anr. - SLP (C) No.23976/2017,in support of her submissions. 7. Mr. Salil Kapoor, the learned counsel for the respondentsubmitted that there was no dispute that the assessee was engaged tocarry business as an investment company and to acquire, hold, orotherwise deal in shares, stocks, debentures, bonds, and othersecurities. Besides, the assessee was also providing technical andstrategic management services to its subsidiary M/s. ParadeepPhosphates Ltd. He, therefore, submits that there was no basis to holdthat the assessee had not undertaken any business during the relevantassessment year. 8.Mr. Kapoor submits that the findings of fact recorded by theAO were in no manner perverse. Similarly, the view taken by the AOwas entirely correct or in any case eminently plausible. He also reliedupon Malabar Industrial Co. Ltd. (supra) and CIT V. Max India Ltd.- (295) ITR 282 (SC) to submit that where two views are possibleand the AO has taken the view favourable to the assessee, the same 5 TXA NO.42-2016 9. Mr. Kapoor submits that since the order of the AO was not atall erroneous, one of the two conditions necessary for the exercise ofrevisional jurisdiction under Section 263 of the said Act was notfulfilled. Further, he submits that every loss of the Revenue as aconsequence of an order of the AO cannot be treated as prejudicial tothe interest of the Revenue particularly where the AO has adopted apermissible and a plausible view. He once again relied upon MalabarIndustrial Co. Ltd. (supra) and Max India Ltd. (supra) in support ofhis submissions. 5 TXA NO.42-2016 9. Mr. Kapoor submits that since the order of the AO was not atall erroneous, one of the two conditions necessary for the exercise ofrevisional jurisdiction under Section 263 of the said Act was notfulfilled. Further, he submits that every loss of the Revenue as aconsequence of an order of the AO cannot be treated as prejudicial tothe interest of the Revenue particularly where the AO has adopted apermissible and a plausible view. He once again relied upon MalabarIndustrial Co. Ltd. (supra) and Max India Ltd. (supra) in support ofhis submissions. 10. Finally, Mr. Kapoor submits that in this case, theCommissioner has not recorded any firm finding that the order of theAO was erroneous but has merely observed that the order of the AOwas “prima facie erroneous”. He submits that until and unless theCommissioner was satisfied that the order of the AO was indeederroneous, there was no question of setting aside the same by invokingthe revisional powers under Section 263 of the said Act. He submitsthat in any case, the Commissioner was duty-bound to himself hold aninquiry to find out whether the losses claimed by the assessee wereindeed incurred by the assessee during the relevant assessment year andthe matter could not have simply being remanded by the AO forreconsideration. He relies on CIT v. Gabriel India Ltd. - 1993- 6 TXA NO.42-2016 (203) ITR 108 (Bom) and PCIT v. Delhi Airport Metro Express P. Ltd. - ITA No.705/2017 in support of this contention. Mr. Kapoorsubmits that for all the aforesaid reasons this appeal is liable to bedismissed. 11. The rival contentions now fall for our determination. 12. The record, in this case, indicates that the assessee claimed tohave earned an amount of `2,31,010/- on account of interest on fixeddeposits and it was the case of the assessee that this was its businessincome. Further, the assessee also claimed business expenses to thetune of `2,84,09,850/- as against the business income of `2,31,010/-for the relevant assessment year. This included the salary paid to thedirectors of the subsidiary company to the extent of `1,34,07,740/-and exchange losses of `1,03,20,890/-. 13. Now the AO in his assessment order dated 30.09.2011 has heldthat there was no nexus between this interest income of `2,31,010/-and the so-called business activities of the assessee. On this basis, theAO directed that this income of `2,31,010/- be treated not as businessincome but as income from other sources, and the expenses claimed onsuch interest income came to be disallowed by invoking the provisionsof Section 57 of the said Act. 14. The assessment order dated 30.09.2011 then refers to the 7 TXA NO.42-2016 explanation offered by the assessee in its order dated 19.08.2011 andthen proceeds to simply state as follows in paragraph 4.2 of its orderdated 30.09.2011:- “4.2 The explanation filed by the assessee has been carefullyperused. It may be true that the assessee may have to incurcertain which be relevant to the expenditure may keepcompany in operation. However, those expenditures arerelating to its business activity and the same cannot be claimedout of the income from other sources. As per section 57 of the I.T. Act, only such expenditure which are expended wholly andexclusively for the purpose of earning of such income can beallowed as deduction. The expenses claimed by the assessee outof the interest income are not expended wholly and exclusivelyfor the purpose of earning such income. Therefore, the samecannot be allowed as deduction from the income from othersources.” [Emphasis supplied] “4.2 The explanation filed by the assessee has been carefullyperused. It may be true that the assessee may have to incurcertain which be relevant to the expenditure may keepcompany in operation. However, those expenditures arerelating to its business activity and the same cannot be claimedout of the income from other sources. As per section 57 of the I.T. Act, only such expenditure which are expended wholly andexclusively for the purpose of earning of such income can beallowed as deduction. The expenses claimed by the assessee outof the interest income are not expended wholly and exclusivelyfor the purpose of earning such income. Therefore, the samecannot be allowed as deduction from the income from othersources.” [Emphasis supplied] 15. The above-emboldened portion, is perhaps, the only portion inthe assessment order dated 30.09.2011, which suggests that the AOhas accepted the version of the assessee that during the relevantassessment year, it incurred business expenses to the tune of`2,84,09,850/- and suffered losses to the tune of `1,78,57,950/-.According to us, this is indicative of non-application of mind on thepart of the AO particularly because the record, as was observed by theCommissioner in his order dated 18.02.2014, did indicate that theassessee had not charged any fees whatsoever from M/s. ParadeepPhosphates Ltd. for any alleged technical or management services 8 TXA NO.42-2016 rendered by the assessee to it. The assessee claimed to have earned abusiness income of only `2,31,010/- as against business expenditure of`2,84,09,850/- incurred by it during the relevant assessment year forearning such a paltry income. Besides, this income of `2,31,010/- wasnothing but interest on certain fixed deposits and even the AOrecorded a finding that this income had no nexus whatsoever with thebusiness of the assessee. 16.According to us, it is not sufficient that the AO merely seeks anexplanation from the assessee but further, the AO must apply his mindto such an explanation. If the assessment order dated 30.09.2011 isperused, then, all that transpires is that the AO has generally observedthat it may be true that the assessee may have to incur certainexpenditure which may be relevant to keep the company in operation. 17.As noted earlier, this type of reasoning is indicative of non-application of mind. It is also indicative of the circumstance that theAO has ignored the material on record or failed to inquire into theexplanation furnished by the assessee in its letter dated 19.08.2011.Even going by the restrictive parameters of revisional jurisdiction underSection 263 of the said Act, in the facts of the present case, we feel thatthe twin conditions i.e. about the order of the AO being erroneous andprejudicial to the interest of the Revenue were satisfied and there wasno jurisdictional infirmity in the exercise of revisional jurisdiction bythe Commissioner. 9 TXA NO.42-2016 18.In Malabar Industrial Co. Ltd. (supra), the Hon'ble SupremeCourt has held that though the revisional jurisdiction cannot beexercised to correct each and every type of mistake or error committedby the AO, an incorrect assumption of facts or an incorrect applicationof law will satisfy the requirement of the order being erroneous. In thesame category fall the orders which are made by the AO withoutapplication of mind. The Hon'ble Supreme Court did not accept theview that no revisional jurisdiction could be exercised unless the orderof the AO suffered from some grievous error that might set a bad trendor a pattern for similar assessments. The Hon'ble Supreme Court heldthat such interpretation was too narrow to merit acceptance and theAct schemed to levy and collect tax in accordance with the provisionsof the Act and if due to an erroneous order of the AO, the Revenue islosing tax lawfully payable by a person, then, it will be certainlyprejudicial to the Revenue. 19.In Malabar Industrial Co. Ltd. (supra), the Hon'ble SupremeCourt has held that the record made it evident that the assessee hadstopped agricultural operation in November 1982 and the receiptunder consideration did not relate to any agricultural operation.Therefore, the revisional jurisdiction was quite correctly invoked by theCommissioner in the said case. 20.In the present case as well the AO had himself held that theincome of `2,31,010/- had no nexus with the business of the assessee. 10 TXA NO.42-2016 The record did prima facie suggest that during the relevant assessmentyear there was no business undertaken by the assessee though, it hadclaimed business expenses to the tune of `2,84,09,850/- and on whichbasis, sought to carry forward losses to the extent of `1,78,57,950/-.Records very clearly indicated that the assessee had not charged anyfees whatsoever to M/s. Paradeep Phosphates Ltd. for alleged technicalor management services rendered by it during the relevant assessmentyear. Therefore, without a thorough inquiry and merely based on thevague premise that the assessee “may have to incur certain expenseswhich may be relevant to keep the company in operation”, the AO wasnot at all justified in allowing the assessee to carry forward losses to theextent of `1,78,57,950/-. 21.According to us, this is not a case where the Commissioner hasnot concluded that the order of the AO in the aforesaid circumstancewas not erroneous or that it was not prejudicial to the interest of theRevenue. The only reason the Commissioner has used the expression“prima facie” in paragraphs 7 and 10 of the impugned order is that theCommissioner, intended to offer the assessee a reasonable opportunityof being heard by the AO, in the course of a detailed inquiryaccompanied by due application of mind by the AO, in pursuance of aremand order. This is also not a case where the Commissioner failed toundertake inquiry in the course of the exercise of revisionaljurisdiction. It is only in pursuance to such inquiry that theCommissioner recorded a categorical finding that the assessee had not 11 TXA NO.42-2016 even claimed any fees from M/s. Paradeep Phosphates Ltd. in respectof any alleged technical or management services rendered by it. 22.Though, there can be no dispute about the propositions laiddown in the various rulings relied upon by Mr. Kapoor, we feel thatsuch propositions are not attracted to the facts and circumstances ofthe present case. This is not a case of some plausible view but this is acase where the decision was a result of non-application of mind to thematerials on record. In similar circumstances, in the case of AmitabhBachchan (supra), the Hon'ble Supreme Court, after considering thelaw laid down in Malabar Industrial Co. Ltd. (supra) and Max IndiaLtd. (supra), held that revisional jurisdiction was quite correctlyinvoked by the Commissioner. 23. In Gabriel India Ltd. (supra), this Court has held that thedecision of the AO cannot be regarded as erroneous simply because theAO did not make an elaborate discussion in the order. In our case, asnoted earlier, there is no discussion whatsoever, much less anyinadequate discussion. Moreover, in Gabriel India Ltd. (supra), theCommissioner after initiating proceedings for revision, could nothimself say that the allowance of the claim of the Assessee waserroneous and that the expenditure was not revenue expenditure, butan expenditure of capital nature. It is in these circumstances that theexercise of revision jurisdiction was interfered with by this Court. 12 TXA NO.42-201624. The principles in Max India Ltd. (supra) and DesignAutomation Engineers (Supra) are of no assistance to the Assesseebecause this is not a case of interference with a plausible view of theAO based on some different opinion held by the Commissioner. 12 TXA NO.42-201624. The principles in Max India Ltd. (supra) and DesignAutomation Engineers (Supra) are of no assistance to the Assesseebecause this is not a case of interference with a plausible view of theAO based on some different opinion held by the Commissioner. 25. In K.A. Ramaswamy Chettiar and anr. vs. CIT – 220 ITR657 (Mad), it was held that when an officer is expected to makeinquiry of a particular item of income and if he does not make anyinquiry as expected, that would be a ground to interfere with the orderpassed by the officer, since such an order passed by the Officer iserroneous and prejudicial to the interests of the Revenue. 26.In Rampyari Devi Sarogi v. CIT – 67 ITR 84 (SC), theHon'ble Supreme Court has held that the Commissioner can regardthe AO's order as erroneous on the ground, that in the circumstancesof the case, the AO should have made further inquiries beforeaccepting the statement made by the Assessee in his return. Besides, theHon'ble Supreme Court, in the facts of the said case, held that theAssessee had not suffered in any way from the failure of theCommissioner to indicate results of inquiries since, the Assessee wouldhave full opportunity of showing the AO whether he has jurisdictionor not, and whether the income assessed in the assessment orderswhich were originally passed was correct or not. 13 TXA NO.42-2016 AO to investigate the facts stated in the return when the circumstancewould make such an inquiry prudent and when the word 'erroneous'in Section 263 includes failure to make an inquiry, the order becomeserroneous when such an inquiry had been made and not because thereis anything wrong with the order if all the facts stated therein areassumed to be correct. Duggal and Co. vs. Commissioner ofIncome Tax – 220 ITR 456 (Delhi); CIT vs. Pushpa Devi – 164.ITR 639 (Pat.) and CIT vs. Pushpa Devi – 173 ITR 445 (Pat.) 28.In Amitabh Bachchan (supra), the assessee had initially claimedadditional expenses of 30% of the gross professional receipts (`3.17Crores). The AO required the assessee to file requisite details. At thatstage, the assessee resisted furnishing details by submitting that suchdetails related to his security and any disclosure might be detrimentalto his security. Then, by letter dated 13.03.2004, the assessee, assertedthat his claim was allowable but since it will not be feasible tosubstantiate the same, such claim may be treated as withdrawn.Thereafter, a show-cause notice was issued to the assessee underSection 69C of the said Act as to why these additional expensesclaimed not to be treated as an unexplained expenditure. Suchwithdrawal was accepted by the AO and the proceedings under Section69C were ordered to be closed. The CIT, in such circumstances,exercised revisional jurisdiction under Section 263 of the said Act butthe High Court, set aside the Commissioner's order on the basis that 14 TXA NO.42-2016 the view taken by the AO was a possible view and revisionaljurisdiction ought not to have been exercised merely because there wasanother possible view of the matter. 14 TXA NO.42-2016 the view taken by the AO was a possible view and revisionaljurisdiction ought not to have been exercised merely because there wasanother possible view of the matter. 29.The Hon'ble Supreme Court set aside the High Court's order byholding that there was nothing wrong in the exercise of revisionalpowers particularly because the CIT felt that the matter needed furtherinvestigation. Such investigation was necessary because initially, theassessee had himself made such a claim but thereafter sought towithdraw the same without any substantiation. The Hon'ble SupremeCourt held that making a claim which would prima facie disclose thatthe expenses in respect of which deduction has been claimed had beenincurred and thereafter abandoning/withdrawing the same gives rise tothe necessity of further inquiry in the interest of the Revenue. Thenotice under Section 69C of the said Act could not have been simplydropped on the ground that the claim has been withdrawn. TheHon'ble Supreme Court then held that the CIT was perfectly justifiedin exercising its revisional jurisdiction and such exercise ought not tohave been interfered with by the High Court. 30.In the present case as well, taking into consideration thereasoning of the CIT, we feel that the ITAT was not justified ininterfering with the CIT's order, since, the twin conditions prescribedunder Section 263 of the said Act were fulfilled. Besides, the CIT, bythe impugned order, had quite fairly, granted the assessee an In the present case as well, taking into consideration the 15 TXA NO.42-2016 opportunity of being heard whilst directing the AO to verify the claimof the assessee in respect of the allowability of the expenditure andcarry forward of the loss of `1,78,57,950/- in accordance with law. Insimilar circumstances the Hon'ble Supreme Court, in the case ofDaniel Merchants P. Ltd. (supra), upheld that order of theCommissioner which had directed the AO to carry a thorough anddetailed inquiry. 31.For all the aforesaid reasons we set aside the ITAT's order dated11.02.2015 and answer the substantial questions of law as framed, infavour of the Revenue and against the assessee. However, we make itclear that the observations in this Judgment and Order need notinfluence the AO in making a fresh order after giving the assessee areasonable opportunity of being heard. The AO will have to decide thematter on its own merits and in accordance with the law. 32.The appeal is allowed in the aforesaid terms. There shall be noorder as to costs. DAMA SESHADRI NAIDU, J. M. S. SONAK, J. ss