Fab India Overseas Pvt. Ltd. vs The Commissioner Of Income Tax
2011 Latest Caselaw 2627 Del

*              THE HIGH COURT OF DELHI AT NEW DELHI

+                             ITA No.55/2011

                                               Date of Decision: 16.05.2011


Fab India Overseas Pvt. Ltd.                            ......Appellant
                                    Through:     Mr.    Mr.Rajan   Bhatia,
                                                 Advocate

                                      Versus

The Commissioner of Income Tax                          ...... Respondent

                                    Through:     Mr. N.P. Sahni, Advocate

CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA


1.     Whether Reporters of local papers may be         -     Yes.
       allowed to see the judgment?
2.     To be referred to the Reporter or not ?          -     Yes.
3.     Whether the judgment should be reported          -     Yes
       in the Digest ?


M.L. MEHTA,J (ORAL):

1.     Admit.         The following substantial questions of law arise for
consideration:

               (i)      Whether the ITAT was correct in law and on the facts of
                        the case in upholding the action of the CIT under
                        Section 263 whereby the learned CIT directed
                        reference to Transfer Pricing Officer (TPO) even though
                        the value of international transactions was below 5
                        crores and when the AO had merely followed DBDT's
                        circular No.12/2011 dated 23/8/2001 and instruction
                        No.3 of 2003 dated 20/05/2003 in accepting such
                        transactions without reference to TPO?

               (ii)     Whether the ITAT was correct in law and on facts of the
                        case in upholding the action of the CIT under Section
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                     263 in setting aside the assessment in respect of (A)
                    "commission expenses" (b) "general charges" even
                    though the AO had framed an assessment under
                    Section 143(3) after issue of questionnaire under
                    Section 142(1) and even though full details had been
                    filed by the assessee and material was placed on
                    record?



2.     With the consent of the learned counsel for the parties, we have

heard the matter finally at this stage.


3.     The assessee company is engaged in export and local trading of

various handloom products, including readymade garments. It filed its

return of income on 1st November, 2004 declaring an income of

Rs.5,26,51,170/-. The case of the Assessee was processed under Section

143(1) of the Income Tax Act (for short, "the Act"). Subsequently, the case

was selected for scrutiny and a notice under Section 143(2) of the Act was

issued on 10th October, 2005. The Assessing Officer passed the

assessment order on 29th November 2006 under Section 143(3) of the Act

and    determined    the   taxable    income   at   Rs.5,74,58,752/-.      The

Commissioner of Income Tax took cognizance of the matter under Section

263 of the Act observing the assessment under Section 143(3) of the Act

to be erroneous and prejudicial to the interest of the revenue. Accordingly,

a notice under Section 263 of the Act was issued. Brief reasons assigned in

the show cause notice read as under:


       "From an examination of the income-tax assessment records for
       A.Y. 2004-05 of M/s Fab India Overseas P. Ltd. 14, N Block Market,

I.T.A No.55/2011                                            Page 2 of 10
        Greater Kailash-I, New Delhi-1, it transpires that the assessee
       company has made international transaction with its associates. It
       has not been verified as to whether the transactions have been
       made at the arms length price.

       Brokerage of Rs.11,52,195/- as debited in the Profit & Loss A/c
       (Schedule-15) has been allowed without verification.
       General charges of Rs.11,20,500/- have been claimed in the return
       and allowed without any verification.

       Commission on sales claimed at Rs.16,96,845/- (included in the
       selling and distribution expenses debited at Rs.2,16,173/-) has been
       allowed without any verification.



4.     In response to the above show-cause notice, the assessee filed

written submissions vide letter dated 10th February 2009 before the

Commissioner. With regard to the aforesaid items, as mentioned in notice

under Section 263, he recorded his findings as under:-


       "International   transactions:   Even   though   the   details   of    the
       transaction were furnished by the assessee, it is clear from the
       assessment records that the arms length nature of the payment
       was not examined. The Assessing Officer may, therefore, make a
       reference to the Transfer Pricing Officer and take into account the
       observation of the Transfer Pricing Officer before reframing the
       assessment.

       Brokerage: It is contended that a part of the expenditure has
       already been disallowed under Section 40(a)(i). However, the
       disallowance under Section 40(a)(i) was for non-deduction of tax at
       source. It is not evident from the record if the Assessing Officer
I.T.A No.55/2011                                               Page 3 of 10
        examine the reasonableness of the total brokerage, payment of
       Rs.11,52,195/-. The Assessing Officer is, therefore, directed to
       examine the terms and conditions of the agreement under which
       the brokerage payment has been made.

       General charges: It is argued that the details of general charges
       amounting to Rs.11,20,500/- was submitted vide letter dated
       14.09.2006 to the Assessing Officer. However, it is not clear from
       the record if the Assessing Officer verified the nature and
       allowability of the general charges.
       ....

From the terms of the above contract, it will be seen that the assessee is incurring almost the entire expenses of the Chennai premises of the agent. If all these expenses are added to the amount of commission paid, the rate of the commission would work out to be very substantial and not 5% as mentioned in the agreement.

It is clear therefore that even though some details about the commission were furnished during the assessment proceedings, the Assessing Officer did not examine if the rate and amount of commission was reasonable. There is nothing on record to show if the Assessing Officer has examined whether Gem Photographic India Pvt. Ltd. which is private limited company is covered by the provisions of Section 40A(2)(b) by enquiring if there are any common shareholder or whether the two concerns are associated in any manner as covered by the provisions of that section."

5. The assessee preferred an appeal against the order of the

Commissioner which came to be disposed of by learned Income Tax

Appellate Tribunal vide order dated 25th February 2010 which is impugned

here before us.

6. With regard to the brokerage, the learned Tribunal noted that the

assessee has preferred an appeal before CIT (A) and this could not have

been taken up by the Commissioner while exercising his powers under

Section 263(1) of the Act as per Clause (c) Explanation 1. To this extent,

the order of the Commissioner was modified and the order of the

Commissioner directing the Assessing Officer to investigate this issue in

respect of the brokerage was rescinded. The rest of the order of the

Commissioner whereby directions were given to the Assessing Officer to

conduct an enquiry de novo with regard to remaining items viz

international transactions, commission and general charges was

maintained.

7. With regard to the International Transactions, it transpired that the

Assessee had made international transactions with its associates. The

Commissioner noticed that the same had not been ascertained as to

whether the transactions have been made at the arms length. It was

rightly noted by the Commissioner as also by the Tribunal that there is not

a single whisper in the enquiry conducted by the Assessing Officer

regarding the international transactions made by the Assessee with its

associates and that such transaction was to be verified by making a

reference to TPO. The Assessing Officer was bound to examine prima facie

such transactions. What has been recorded by the Commissioner and the

Tribunal apparently makes the order of the Assessing Officer erroneous

because no such enquiry has been made with regard to the international

transaction.

8. We do not find any infirmity or illegality in the findings of the

Commissioner and also of the Tribunal in this regard. Consequently

Question No.1 is answered against the Assessee and in favour of the

Revenue.

9. With regard to commission and general charges, it is a matter of

fact that the Assessee did supply the required information to the

Assessing Officer in response to the questionnaire. This is also so recorded

by the Commissioner that even in the submissions filed vide letter dated

10th February 2009 in response to the notice under Section 263 of the Act,

it has been stated that the details of commission payment were submitted

by the Assessee vide letter dated 25th August 2006. A copy of the same

was also presented during proceedings under Section 263 of the Act. It

was also submitted that the payment of commission has also been made

in the earlier years and was considered allowable expenditure in the

assessment proceedings. Similarly, with regard to the claim towards

general charges also, it was recorded by the Commissioner that the same

were submitted by the Assessee vide letter dated 14 th September, 2006 to

the Assessing Officer. The reasons given by the Commissioner for de novo

enquiry in this regard was that it was not clear from the record if the

Assessing Officer verified the nature and allowability of the general

charges. It is true that though the Assessing Officer has not given detailed

reasons in this regard, but there is nothing on record to suggest that he

did not make any enquiry or applied his mind with regard to the

submissions made by the Assessee vide its letter dated 14 th September

2006. It is seen that details of general charges given by the Assessee were

submitted as Annexure-H to the Assessing Officer. At the most, it can be

said to be a case of inadequate enquiry. In fact, required information was

given by the Assessee to the Assessing Officer who made the assessment

under Section 143(3). May be that the detailed reasons of the same were

not given by Assessing Officer, but after considering submissions of

Assessee, he assessed the total income at Rs.5,74,58,752/-, as against the

declared income of Rs.5,26,51,170/-. In this regard, reference can be

made to the decision of this Court in CIT v Sunbeam Auto Ltd. [2010] 189

TAXMAN 436 (Delhi) wherein it was held as under:

1. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income Tax under Section 263 of the Income Tax Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the AO did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as Revenue expenditure. However, that by itself would not be indicative

of the fact that the AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO in the assessing order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under Section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabriel India Ltd. (Supra), law on this aspect was discussed in the following manner:

"xxx... From a reading of sub-section (1) of section, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is "erroneous in so far as it is prejudicial to the interests of the Revenue". It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will

be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. (See Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) at page 10).

Xxx

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income- tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.

xxx There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.

xxx We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard ... xxx"

10. In view of aforesaid, it is reiterated that the Assessing Officer called

for certain clarifications through the questionnaire of the Assessee and

that the same were furnished with the required details. This fact is even

taken note of by the Commissioner himself in his order. The only

grievance of the Commissioner was that the Assessing Officer should have

made further enquiries rather than accepting the explanation given by the

Assessee. It cannot be said to be a case of lack of enquiry. We accordingly,

answer Question No.2 in favour of the Assessee and against the Revenue.

11. The appeal stands disposed of in terms of above order.

M.L. MEHTA, J.

MAY 16, 2011                                                    A.K. SIKRI, J.

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