Cognizant India Pvt. Ltd. (earlier known as T-Systems India Pvt. Ltd), V. COIT - IV, Pune

ITA 1179/PUN/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1007 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 20-10-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 28-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DIVYA BAJPAI
• Assessee Lawyers: P J PARDIWALA
• Keywords: Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Question of law; Corroborative evidences; Capital expenditure
• Section: 43B; 37; 263

Judgement Text

] IQ.KS ] IQ.KS ] IQ.KS ] IQ.KS IQ.KS IQ.KSIQ.KS IQ.KS IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , , ' # BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1179/PN/2013 '% % / ASSESSMENT YEAR : 2006-07 COGNIZANT INDIA PRIVATE LIMITED, (EARLIER KNOWN AS T-SYSTEMS INDIA PRIVATE LIMITED) 165/110, 6 TH FLOOR, MENON ETERNITY BUILDING, ST. MARYS ROAD, CHENNAI 600 018 PAN NO.AACCT0773E . / APPELLANT V/S CIT-IV, PUNE . / RESPONDENT / ASSESSEE BY : SHRI P.J. PARDIWALA / RESPONDENT BY : SMT. DIVYA BAJPAI, CIT / ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE O RDER DATED 25-03-2013 PASSED U/S.263 OF THE I.T. ACT BY THE CIT-IV, PUNE RELATING TO ASSESSMENT YEAR 2006-07. 2. ALTHOUGH A NUMBER OF GROUNDS HAVE BEEN RAISED BY TH E ASSESSEE THEY ALL RELATE TO THE VALIDITY OF PROCEEDINGS U/ S.263 INITIATED BY THE LD.CIT. / DATE OF HEARING :20.10.2015 / DATE OF PRONOUNCEMENT:23.10.2015 2 ITA NO.1179/PN/2013 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY INCORPORATED ON 24-06-2006. IT IS A WHO LLY OWNED SUBSIDIARY OF T-SYSTEMS INTERNATIONAL GMBH. THE STP UNIT OF THE ASSESSEE LOCATED AT PUNE IS PRINCIPALLY ENGAGED IN THE BU SINESS OF DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE AND HAS CO MMENCED ITS COMMERCIAL OPERATIONS ON 30-09-2004. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30-11-2006 SHOWING LOSS OF RS.11,09,00,536/-. 4. THE AO MADE A REFERENCE U/S.92CA(1) OF THE I.T. ACT TO THE TPO FOR DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTIO N REPORTED IN FORM NO.3CEB FILED BY THE ASSESSEE. THE TPO AFTER CO NSIDERING THE VARIOUS SUBMISSIONS MADE BY THE ASSESSEE FORM TIME T O TIME MADE AN UPWARD ADJUSTMENT OF RS.9,84,10,304/- TO THE VALU E OF INTERNATIONAL TRANSACTION RELATING TO PROVISION OF SOFTWARE S ERVICE TO ARRIVE AT THE ALP OF THE INTERNATIONAL TRANSACTION. THE ASSESSEE APPROACHED THE DRP WHO VIDE ORDER DATED 30-09-2010 R EVISED THE ADJUSTMENT TO RS.10,77,00,742/- AS AGAINST RS.9,84,10,304/- PROPOSED BY THE TPO. SUBSEQUENTLY, THE AO VIDE ORDER DATED 25-11- 2010 PASSED THE ORDER U/S.143(3) R.W.S. 144C(13) OF THE I.T . ACT DETERMINING THE TOTAL INCOME AT RS.10,65,91,200/-. 5. SUBSEQUENTLY, THE LD.CIT EXAMINED THE RECORDS AND N OTED THAT THE AO HAS NOT VERIFIED CERTAIN ITEMS OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT WITH REFERENCE TO THE PROVISIONS OF THE I.T. ACT. HE, THEREFORE, WAS OF THE OPINION THAT THE ORDER IS PREJUDICIA L TO THE INTEREST OF REVENUE. ACCORDINGLY, HE ISSUED A NOTICE U/S. 263 OF THE I.T. ACT VIDE NOTICE DATED 24-02-2011 FIXING THE DATE O F HEARING OF THE CASE ON 07-03-2011. THE DETAILS OF THE NOTICE DATED 24-02-2011 R EAD AS UNDER : 3 ITA NO.1179/PN/2013 IT IS SEEN THAT THE DCIT, CIRCLE-7, PUNE HAS PASSED THE ORDER ON 25.11.2010 U/S.143(3) R.W.S.144C(13) OF THE ACT WHERE HE HAS NOT VERIFIED THE VARIOUS ITEMS OF BALANCE SHEET AND P & L ACCOUNT WITH REFERENCE TO THE PROVISIONS OF THE I.T. ACT, THEREFOR E THE ORDER IS PREJUDICIAL TO THE INTEREST OF THE REVENUE. THEREFOR E, THE SAME IS REVISED U/S. 263 OF THE I.T. ACT. THIS IS AN OPPORTUNITY OFFER ED TO YOU TO DEFEND THE CASE BY FILING DOCUMENTARY AND OTHER EVIDENCES. T HE REVISION IS ON THE POINTS MENTIONED BELOW: 1) IN PARA 4, THE DCIT HAS PRODUCED THE CONTENTION OF THE ASSESSEE'S LETTER DATED 19/11/2009. FURTHER WITHOUT DISCUSSING IN DETAIL ABOUT THE DECISION OF THE DRP WHICH IS RUNNING IN TO 111 PAGES T HE A.O. HAS SUMMED UP IN DISCUSSING THE MEAN OF OPERATING MARGIN OF COMPARABLES ADOPTED AT 22.62% AS AGAINST 20.66% DECLARED BY THE A SSESSEE. THUS WHILE ADOPTING THE DECISION OF THE DRP THE A.O. HAS N OT CONSIDERED THE OTHER ISSUES AT ALL. THEREFORE, SUBMIT THE ITEM WISE DET AILS OF P & L ACCOUNT, THE BALANCE SHEET, NOTES TO THE AUDITED ACC OUNTS, EXPLANATORY NOTES, DIRECTOR'S REPORT ETC. ALONG WITH THE DETAILED EXPLANATION AND SUPPORTING EVIDENCES FOR ALL THESE ITEMS OF P & L AND B ALANCE SHEET. 2) IT IS SEEN THAT OTHER THAN THE TP ADDITION THE A. O. HAS NOT CALLED FOR ANY DETAILS OF TRADING ACCOUNT, P & L ACCOUNT AN D BALANCE SHEET, FOR EXAMPLE AS PER NOTE 5 OF SCHEDULE 13 TO AUDITED ACCOU NTS THE ASSESSEE HAS CRYSTALLIZED THE HUGE DAMAGES OF RS. 5,79,02,756/- BUT NO DETAILS WERE CALLED FOR AND SEEN THE POSSIBILITY OF ADDITIONS ON THIS IMPORTANT ISSUE. THE DAMAGES PAID TO THE PARENT COMPANY OF GERMA NY BELONGS TO EARLIER YEAR AND THERE ARE NO EVIDENCES OR NOTES AS TO HOW THE DAM AGES GOT CRYSTALLIZED DURING THE YEAR, WHERE NO EFFORTS WE RE MADE BY THE DCIT. THEREFORE, THERE IS A NEED TO VERIFY WITH THE HELP OF THE DOCUMENTARY EVIDENCES TO SEE TO WHICH YEAR ACTUALLY T HE EXPENSES BELONG FOR THE PURPOSE OF ADDITION, THERE IS NO CLEA R NOTE ABOUT THE COMPUTATION OF THE SAME. SUBMIT THE DETAILS AND WORKI NG WITH DOCUMENTARY EVIDENCES. 3) AS PER SCHEDULE 13, WHERE SIGNIFICANT ACCOUNTING P OLICIES ARE MENTIONED LIKE IN PARA 2.2 THE COMPANY HAS RECALCULA TED USEFUL LIFE OF COMPUTERS, PERIPHERAL, OFFICE EQUIPMENTS AND INTANGIB LES WITH EFFECT FROM 1/1/2006 WHERE THERE IS A LOSS OF RS. 19,32,848/- . FURTHER AS PER PARA 2.5 OF SCHEDULE 13 TO THE NOTES, AS PER PARA 2.6, I.E. DIFFERENCES, 2.9 PROVISIONS, PARA 6 OF IMPLEMENTING SAP MODULES FOR IT S ACCOUNT AND MIS REPORTING AT THE COST OF 99,38,263/- NEEDS VERIFICATI ON AND JUSTIFICATION FOR CLAIM. AS PER PARA 8 THERE IS DEFERRED TAX LIABIL ITY OF RS. 10,92,888/- WHICH HAS TO BE SEEN THAT WHETHER THE PERIOD WAS AVAIL ABLE FOR COMPLETING TAX HOLIDAY U/S. 10A OF THE ACT. SIMILARL Y THE VERIFICATION IS ALSO REQUIRED IN RESPECT OF PARA 10 TO 14 IN RESPECT OF THE AUDITORS NOTES ANNEXED FORM NO.3 CE REPORT ALONG WITH VERIFICATION OF POINTS FROM 1 TO 6. THEREFORE, SUBMIT THE DETAILS WITH EVIDENCES TO JUST IFY THE CLAIMS. 4) WITHOUT FOLLOWING THE VERIFICATION / INVESTIGATIO N / CROSS VERIFICATION NORMS IN RESPECT OF P & L ACCOUNT AND BALANCE SHEET ITEMS, THE NOTES TO THE AUDIT REPORT AND NOTES TO THE AUDITED ACCOUNTS WH ICH ARE REVEALING VARIOUS POINTS OF ADDITION, THE A.O. HAS PASSED THE ORDE R. THEREFORE, FILE THE DETAILS WITH EVIDENCES FOR CROSS VERIFICATION AND A DDITION. IN VIEW OF THE SAME IT IS DECIDED TO REVISE U/S. 263 OF THE I.T. A CT TO VERIFY THE ITEMS OF P & L ACCOUNT AND BALANCE SHEET ITEMS ALONG WITH VERIFICA TION OF NOTES AND OTHER EXPLANATIONS TO PROTECT THE INTEREST OF REV ENUE. 4 ITA NO.1179/PN/2013 YOUR CASE IS FIXED FOR HEARING ON 07/03/2011 AT 3.30 PM., IN CASE OF FAILURE TO ATTEND THE MATTER WILL BE DECIDED ACCORD INGLY, PLEASE NOTE. 6. HOWEVER, THERE WAS CHANGE OF INCUMBENT AND THE SUBS EQUENT CIT VIDE NOTICE DATED 30-01-2013 AGAIN REQUESTED THE ASSESSEE TO SUBMIT, IF ANY ,AGAINST SUCH NOTICE. THE ASSESSEE STATED THAT THE NOTICE DATED 30-01-2013 DOES NOT SPECIFY ANY PARTICULAR REASON AS TO HOW THE ASSESSMENT PROCEEDINGS COMPLETED BY THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. THE ASSE SSEE ALSO REQUESTED FOR SOME MORE TIME TO PRESENT THEIR CASE. HO WEVER, THE LD.CIT PASSED THE ORDER ON 25-03-2013 HOLDING THAT THE ASSESSEE DID NOT SQUARELY ADDRESSED THE ISSUES RAISED IN THE NOTICE U/S.263 OF THE I.T. ACT WHICH CLEARLY POINTS OUT THAT THE SAID ISSUES RE MAINED UNEXAMINED AND UNVERIFIED BY THE AO. SINCE THE AO HAS F AILED TO MAKE NECESSARY ENQUIRY IN RESPECT OF THE ISSUES HIGHLIGHTE D IN THE NOTICE U/S.263 WHILE MAKING THE ASSESSMENT U/S.143(3) HE HE LD THAT THE ORDER PASSED BY THE AO U/S.143(3) R.W.S. 144C(13) IS E RRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. HE ACCOR DINGLY SET ASIDE THE ORDER AND DIRECTED THE AO TO REFRAME THE SAM E AFTER ALLOWING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 7. AGGRIEVED WITH SUCH ORDER OF THE CIT THE ASSESSEE IS IN APPEAL BEFORE US. 8. THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO THE NOT ICE ISSUED BY THE CIT AS WELL AS THE ORDER PASSED U/S.263 AND SUB MITTED THAT THE CITS NOTICE AS WELL AS HIS ORDER IS SILENT AS TO HOW THE ORDER PASSED BY THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INT EREST OF THE REVENUE. REFERRING TO THE LETTER ADDRESSED TO THE CIT ON 27-02-2013, A COPY OF WHICH IS PLACED AT PAPER BOOK PAGE S 128 TO 130, HE SUBMITTED THAT THE ASSESSEE IN THE SAID LETTER HAS CLEARLY 5 ITA NO.1179/PN/2013 MENTIONED THAT THE NOTICE DATED 25-02-2011 WAS NOT SE RVED ON THE ASSESSEE IN THE PAST AND THEREFORE T SYSTEMS LTD. WOULD REQUIRE ADDITIONAL TIME TO REPLY TO THE SPECIFIC POINTS MENTIONED IN THE SAID NOTICE. REFERRING TO CLAUSE (2) OF THE SAID LETTER HE DREW T HE ATTENTION OF THE BENCH TO THE FOLLOWING REPLY GIVEN TO THE CIT : IN THE PRESENT CASE, THE ASSESSEE HAS FILED ALL THE DETAI LS WHICH WERE REQUIRED BY THE AO DURING THE COURSE OF ASSESSMENT PROCE EDINGS INCLUDING PROFIT & LOSS ACCOUNT, BALANCE SHEET, FORM 3CEB, NOTES TO FINANCIAL STATEMENTS ETC AND ALSO THE DETAILS OF VARIOU S EXPENSES AND OTHER CLARIFICATIONS AS SOUGHT FROM TIME TO TIME. ACC ORDINGLY, ALL THE DETAILS WERE AVAILABLE ON RECORD BEFORE THE AO WHEN HE COMPLETED THE ASSESSMENT PROCEEDINGS. ACCORDINGLY, IT IS INCORRECT TO HOLD THAT AO HAS FAILED TO CONDUCT ENQUIRIES INTO THE ACCOUNTS AND THE REBY EXERCISE REVISIONARY PROCEEDINGS UNDER SECTION 263 BY STARTING F ISHING AND ROVING ENQUIRIES INTO THE DETAILS SUBMITTED DURING THE YEAR. 9. REFERRING TO PARA 8 OF THE ORDER OF THE CIT HE SUBMITT ED THAT THE LD.CIT SAYS THAT THE AO HAS FAILED TO MAKE NECESSAR Y ENQUIRY IN RESPECT OF THE ISSUES HIGHLIGHTED IN THE NOTICE U/S.263. HO WEVER, THE LD.CIT DOES NOT SAY WHAT IS THE ERROR IN THE ORDER OF THE AO. REFERRING TO PAGE 1 OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE LETTER ADDRESSED TO THE AO ON 28-04-2008 IN WHICH THE ASSESSEE HAS FURNISHE D THE DETAILS/EXPLANATIONS REGARDING THE STATEMENT OF TOTAL INCO ME, THE TAX AUDIT REPORT IN FORM 3CD AND STATUTORY AUDIT REPORT AN D FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDING 31-03-2006. REFER RING TO PAGE 5 OF THE ORDER THE LD. COUNSEL FOR THE ASSESSEE DR EW THE ATTENTION OF THE BENCH TO CLAUSE 4 OF THE NOTES TO THE RETURN OF INCOME FOR THE FINANCIAL YEAR ENDING 31-03-2006 WHICH READ AS UNDER: DURING THE YEAR. T-SYSTEMS INDIA HAS PROVIDED FOR RS 5 7,902,756 PAYABLE TO THE T-SYSTEMS ENTERPRISE SERVICES GMBH FORME RLY KNOWN AS T-SYSTEMS INTERNATIONAL, GMBH, PARENT COMPANY TOWARDS DAMAGES IN RESPECT OF THE DEFICIENT SERVICES PROVIDED BY IT ON ON E PROJECT. DAMAGES PAID ARE IN THE NATURE OF ORDINARY BUSINESS EXPENDITUR E ON ACCOUNT OF 6 ITA NO.1179/PN/2013 NOT PROVIDING THE SERVICES AS PER THE STANDARDS PRESCRIBE D IN THE CONTRACT DURING THE COURSE OF OPERATIONS OF THE COMPA NY. AS DISCLOSED IN NOTE NO 5 OF THE NOTES TO THE ACCOUNTS, THE CHARGES H AVE BEEN CRYSTALLIZED DURING THE FINANCIAL YEAR ENDED 31 MARCH 2006. THE COMPANY HAS CLAIMED THIS EXPENDITURE AS DEDUCTIBLE REVENUE EXPEND ITURE UNDER SECTION 37 OF THE ACT. 10. REFERRING TO PAGES 11 AND 12 OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE BALANCE SHE ET AND PROFIT AND LOSS ACCOUNT OF THE ASSESSEE COMPANY FOR THE FINANCIAL YEAR ENDING 31-03-2006. REFERRING TO PAGE 17 OF THE PAP ER BOOK THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE B ENCH TO THE SCHEDULE 13 OF THE BALANCE SHEET AND NOTES WHICH ARE TH E ACCOUNTING POLICIES AND NOTES ANNEXED TO AND FORMING PART OF THE BALA NCE SHEET AND THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31-0 3-2007. HE DREW THE ATTENTION OF THE BENCH TO CLAUSE 5 OF SCHEDULE 13 WHICH READS AS UNDER : 5. EXCEPTIONAL ITEM REPRESENTS SERVICES DAMAGES CLAIMED BY T- SYSTEMS INTERNATIONAL, GMBH, PARENT COMPANY TOWARDS DE FICIENT SERVICES PROVIDED BY THE COMPANY ON ONE OF ITS PROJECT S. ALTHOUGH THE SERVICES ON THE PROJECT HAVE BEEN PROVIDED BY THE COM PANY FROM THE PREVIOUS YEAR ONWARDS, THESE DAMAGES GOT CRYSTALLIZED DURING THE YEAR AFTER MANAGEMENT ACCEPTED THE SAME. 11. REFERRING TO PAGE 35 OF THE PAPER BOOK THE LD. COUN SEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO CLAUSE 7(B ) OF THE NOTES FORMING PART OF FORM 3CEB WHICH READS AS UNDER : (B) REIMBURSEMENT OF DAMAGES REPRESENTS INCREMENTAL CO STS INCURRED BY AN ASSOCIATED ENTERPRISES WHICH WAS ATTRIBUTABLE TO T HE COMPANY ON ACCOUNT OF DEFICIENT SERVICES PROVIDED BY THE COMPAN Y TO ONE OF THE PRIMARY CUSTOMERS OF ASSOCIATE ENTERPRISE. THE ASSESSEE REP RESENTS THAT COSTS WERE ACCEPTED AS DAMAGES GIVEN THE FUTURE COMMERC IAL BENEFIT ASSOCIATED WITH CONTINUING THE CONTRACT. IN VIEW OF SECTION 92(3) OF THE INCOME TAX ACT, 1961, THE ASSESSEE BELIEVES THAT NO ECON OMIC ANALYSIS IS REQUIRED TO DETERMINE THE APPROPRIATENESS OF THESE AMO UNTS SINCE THESE AMOUNTS ARE MERELY IN THE NATURE OF REIMBURSEMENTS (W ITHOUT MARK- UP). THE AMOUNTS REFLECTED IN THE BOOKS HAVE THEREFO RE BEEN DETERMINED BY THE ASSESSEE AT ARMS LENGTH. 7 ITA NO.1179/PN/2013 12. REFERRING TO PAGE 38 OF THE PAPER BOOK HE DREW THE ATTENTION OF THE BENCH TO THE LETTER ADDRESSED TO THE AO ON 12-11 -2009 WHEREIN THE ASSESSEE HAS GIVEN THE DETAILS OF UNSECURED LOANS, DE TAILS OF ADDITION TO FIXED ASSETS, DETAILS OF SUNDRY DEBTORS, DETAILS OF LOANS AND ADVANCES, DETAILS OF SUNDRY CREDITORS AND OTHER LIABILIT IES, DETAILS OF EXPENSES AS PER SCHEDULE 10 AND 11 OF THE AUDITED FINA NCIALS, DETAILS OF EXCEPTIONAL ITEMS AS PER NOTE 5 OF SCHEDULE 13 O F THE AUDITED FINANCIALS, DETAILS OF REIMBURSEMENT OF EXPENSES AS PE R NOTE 7 OF SCHEDULE 13, DETAILS OF TDS, EXPENSES/PAYMENTS NOT DE DUCTIBLE U/S.40A, DETAILS OF STATUTORY PAYMENTS COVERED U/S.43B A ND THE DETAILS OF PROFIT EARNED AND LOSS INCURRED DUE TO FOREIGN EX CHANGE FLUCTUATION. REFERRING TO PAGE 44 OF THE PAPER BOOK HE D REW THE ATTENTION OF THE BENCH TO THE DETAILS OF EXCEPTIONAL ITEMS AS PER NOTE OF SCHEDULE 13 OF THE AUDITED FINANCIALS JUSTIFYING THE DAMAG ES PAID AS ORDINARY BUSINESS EXPENDITURE. 13. REFERRING TO PAGE 46 OF THE PAPER BOOK HE DREW THE ATTENTION OF THE BENCH TO THE GROUND OF OBJECTION BEFORE THE DRP WH ICH READS AS UNDER : 8.1 GROUND OF OBJECTION : THE LD. TPO AND THE LD. ASSESSING OFFICER HAVE ERRED O N FACTS AND IN CIRCUMSTANCES OF THE CASE BY REJECTING THE CONTENTION OF THE APPELLANT THAT THE DAMAGES INCURRED BY THE APPELLANT RELATING TO THE EPCOS PROJECT ARE NOT IN THE NATURE OF AN OPERATING EXPENSE AND HE NCE SHOULD NOT BE INCLUDED IN THE CALCULATION OF OPERATING PROFIT. 14. REFERRING TO PAGE 102 OF THE APPEAL MEMO HE DREW TH E ATTENTION OF THE BENCH TO THE FOLLOWING FINDING GIVEN BY THE DRP : THE ASSESSEE HAS CONTENDED TO EXCLUDE THE EXPENSES PERTA INING TO EPCOS DAMAGES AS ACCORDING TO THE ASSESSEE AN ITEM OF EXP ENSE PERTAINING TO THE START-UP PHASE CANNOT BE CATEGORIZE D AS AN ITEM OF OPERATING NATURE. THE CONTENTION OF THE ASSESSEE, IF I T HAS TO BE BELIEVED, THEN ALL THE EXPENSES OF A COMPANY IN ITS START-UP PHASE WOULD HAVE TO BE EXCLUDED AND THUS THERE WOULD BE NO EXPENSES PERTAINI NG TO THE 8 ITA NO.1179/PN/2013 TURNOVER OF THAT COMPANY RESULTING IN OPERATING MARG IN OF INFINITY' SUCH AN INTERPRETATION IS FAR-STRETCHED AND NOT ACCEPTABL E. A CAREFUL READING OF THE ABOVE DEFINITION SUGGESTS THAT WHILE COMPUTING THE OPERATING PROFIT, ONE SHOULD EXCLUDE EXTRANEOUS AND EXPENSES OF PURELY FINANCIAL NATURE OF AN ENTERPRISE CARRYING OUT NORMAL OPERATI ONS AND ACTIVITIES. NOW, THE OPERATIONS OF THE ASSESSEE CANNOT BE SAID TO BE ABNORMAL LOOKING AT THE GROWTH OF ITS REVENUE COMPARED TO LAST YEAR. MOREOVER, THE EXPENSES FROM EPCOS DAMAGES CANNOT BE TERMED AS EXT RANEOUS AND OF FINANCIAL NATURE. THESE EXPENSES HAVE INCURRED PUR ELY DURING THE COURSE OF THE NORMAL OPERATIONS OF THE ASSESSEE OF SOFTWA RE DEVELOPMENT FOR ITS FAILURE TO MEET THE STANDARDS LAID DOWN BY ITS AE. SUCH EXPENSES WITHOUT ANY DOUBT ARE OPERATING EXPENSE S. SIMILARLY, THE EXPENSES PERTAINING TO FAILURE TO MEET THE QUALITY STA NDARDS HAVE TO BE PART OF OPERATING EXPENSES. HE ACCORDINGLY SUBMITTED THAT WHEN THE AO AFTER EXAMININ G THE EXPENSES AND VARIOUS DETAILS FILED PASSED THE ORDER AFTER DUE APPLICATION OF MIND, THEN HOW THE ORDER OF THE AO CAN BE H ELD AS INCORRECT IS NOT UNDERSTOOD. 15. SO FAR AS THE SECOND OBJECTION OF THE LD.CIT THAT THE COMPANY HAS RECALCULATED THE USEFUL LIFE OF COMPUTERS, PERIPHERALS AN D OFFICE EQUIPMENTS AND INTANGIBLES W.E.F. 01-01-2006 WHERE THERE IS A LOSS OF RS.19,32,048/- IS CONCERNED THE LD. COUNSEL FOR THE ASS ESSEE REFERRING TO PAGE 14 OF THE PAPER BOOK DREW THE ATTENT ION OF THE BENCH TO CLAUSE 2.2 OF SCHEDULE 13 WHICH READS AS UNDER : THE COMPANY HAS DURING THE YEAR RE-CALCULATED THE U SEFUL LIFE IN RESPECT OF COMPUTERS AND PERIPHERALS, OFFICE EQUIPMENT AND IN TANGIBLES INCLUDING REMAINING USEFUL LIFE OF EXISTING COMPUTER S AND PERIPHERALS, OFFICE EQUIPMENTS AND INTANGIBLES W.E.F. JANUARY 1, 2006. CONSEQUENTLY, SUCH ASSETS ARE DEPRECIATED OVER THE REVISED USEFUL LIFE AS PER TABLE GIVEN BELOW. AS A RESULT, THE CHARGE BY WAY OF DEPRECIATIO N FOR THE YEAR IS HIGHER BY RS.1,932,848/- AND LOSS BEFORE TAXATION IS HIGHER BY THIS AMOUNT. DESCRIPTION OLD RATE REVISED RATE COMPUTERS AND PERIPHERALS (EXCEPT VIDEO CONFERENCING EQUIPMENTS) 16.31% 33.33% OFFICE EQUIPMENTS 4.75% 12.25% VIDEO CONFERENCING EQUIPMENTS 16.21% 20% INTANGIBLES 16.21% 33.33% 9 ITA NO.1179/PN/2013 16. REFERRING TO PAGE 12 OF THE PAPER BOOK HE SUBMITTED THAT THE ASSESSEE HAS CLAIMED DEPRECIATION OF RS.59,79,695/-. COMING TO THE COMPUTATION STATEMENT AT PAGE 3 OF THE PAPER BOOK HE SUBMITTED THAT THE ASSESSEE, IN THE COMPUTATION OF INCOME, HAS ADDE D BACK THE DEPRECIATION AS PER BOOKS OF ACCOUNT SHOWN AT RS.59,79,69 5/- AND CLAIMED DEPRECIATION AS PER PROVISIONS OF THE I.T. ACT AT RS.1,47,71,626/-. HE SUBMITTED THAT THE CIT IS NOT DISPUTIN G THE DEPRECIATION CLAIMED AS PER THE I.T. ACT. AT RS.1,47,71,626/ -. THEREFORE, WHEN THE ASSESSEE HAS ADDED BACK THE DEPRE CIATION CLAIMED IN THE PROFIT AND LOSS ACCOUNT AT RS.59,79,695/- HOW THE ORDER IS ERRONEOUS IS NOT UNDERSTOOD. 17. SO FAR AS THE OTHER OBJECTION OF THE CIT REGARDING REVENUE RECOGNITION AND FOREIGN TRANSACTIONS ARE CONCERNED THE L D. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO CLA USES 2.5 AND 2.6 OF SCHEDULE 13 (PAGE 15 OF PAPER BOOK) WHICH READS AS UNDER : 2.5 REVENUE RECOGNITION : REVENUE FROM SOFTWARE DEVELOPMENT AND RELATED SERVIC ES COMPRISES INCOME FROM TIME AND MATERIAL AND FIXED PRICE CONT RACTS. REVENUE WITH RESPECT TO TIME AND MATERIAL CONTRACTS IS RECOGNIZED A S RELATED SERVICES ARE PERFORMED. IN THE CASE OF FIXED PRICE CONTRACTS, REVENUE IS RECOGNIZED BASED ON THE MILESTONE ACHIEVED, AS SPECIFIE D IN THE CONTRACTS. REVENUE IS RECOGNIZED TO THE EXTENT THAT IS PROBABLE THAT THE ECONOMIC BENEFIT WILL FLOW TO THE COMPANY AND REVENUE CAN BE RELIABLY MEASURED. PROVISION FOR ESTIMATED LOSSES ON UNCOMPLETED CONTRACTS A RE RECORDED IN THE PERIOD IN WHICH SUCH LOSSES BECOME PROBABLE BASED ON THE CURRENT CONTRACT ESTIMATES. 2.6 FOREIGN CURRENCY TRANSACTION : (I) INITIAL RECOGNITION FOREIGN CURRENCY TRANSACTIONS ARE RECORDED IN THE REP ORTING CURRENCY, BY APPLYING TO THE FOREIGN CURRENCY AMOUN T THE EXCHANGE RATE BETWEEN THE REPORTING CURRENCY AND TH E FOREIGN CURRENCY AT THE DATE OF THE TRANSACTION. 10 ITA NO.1179/PN/2013 (II) CONVERSION AT THE YEAR END, FOREIGN CURRENCY MONETARY ITEMS ARE REPORTED USING THE YEAR END EXCHANGE RATE. NON-MONETARY ITEMS WHICH ARE CARRIED IN TERMS OF HISTORICAL COST DENOMINATED IN A FOREIGN CURRENCY ARE REPORTED USING THE EXCHANGE RATE AT THE DATE OF THE TRANSACTION. (III) EXCHANGE DIFFERENCES ALL EXCHANGE DIFFERENCES ARISING ON THE SETTLEMENT OF MONETARY ITEMS OR ON RESTATEMENT OF REPORTING COMPANYS MONETAR Y ITEMS AT RATES, DIFFERENT FROM THOSE AT WHICH THEY WERE IN ITIALLY RECORDED DURING THE YEAR, OR REPORTED IN PREVIOUS F INANCIAL STATEMENTS, ARE RECOGNIZED AS INCOME OR AS EXPENSES IN T HE YEAR IN WHICH THEY ARISE, EXCEPT EXCHANGE DIFFERENCES ON T RANSACTIONS RELATING TO FIXED ASSETS ACQUIRED FROM A COUNTRY OUTSI DE INDIA, WHICH ARE ADJUSTED IN THE COST CORRESPONDING ASSETS. 18. REFERRING TO PARA 3 OF THE NOTICE ISSUED U/S.263 OF TH E I.T. ACT THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS NOT UNDERSTOOD AS TO WHAT ASPECTS NEED FURTHER VERIFICATION. REFERRING TO THE DEFERRED TAX LIABILITY OF RS.10,92,888/-, AT PAGE 18 OF THE PA PER BOOK HE SUBMITTED THAT THE SAID AMOUNT IS A BALANCE SHEET ITE M AND THE ASSESSEE HAS NOT CLAIMED ANY DEDUCTION OF THE SAME. S O FAR AS THE VERIFICATION OF PARA 10 TO 14 OF THE AUDIT REPORT ANNEXED TO FORM 3CE IS CONCERNED HE SUBMITTED THAT THE TPO HAS ALREADY GON E WITH ALL THE ASPECTS. HE ACCORDINGLY SUBMITTED THAT WHEN EVERY AS PECT HAS BEEN DULY EXPLAINED IT IS NOT UNDERSTOOD AS TO HOW THE ORDER OF THE AO IS ERRONEOUS. 19. REFERRING TO THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. R.K. METAL WORKS REPORTED IN 112 ITR 445 HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS HELD THAT IN PASSING AN ORDER OF REVISION U/S.263 OF THE I.T. ACT IT IS NECESSARY FOR THE CIT TO STATE IN WHAT MANNER HE CO NSIDERED THAT THE ORDER OF THE AO WAS ERRONEOUS AND PREJUDICIAL TO TH E INTEREST OF THE REVENUE AND WHAT THE BASIS WAS FOR SUCH A CONCLUSION. IF THERE IS 11 ITA NO.1179/PN/2013 NO INDICATION IN THE ORDER AS TO THE BASIS ON WHICH THE C IT CAME TO THE PRIMA-FACIE CONCLUSION THAT THE CAPITAL BORROWED BY TH E FIRM WAS UTILIZED FOR PURPOSES OTHER THAN THAT OF THE FIRMS BUSINES S THE HONBLE HIGH COURT HELD THAT THE TRIBUNAL WAS RIGHT IN LAW IN SETTING ASIDE THE ORDER PASSED BY THE CIT U/S.263. 20. REFERRING TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GABRIEL INDIA LTD. REPORTED IN 203 I TR 108 HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS HELD THAT THE CIT CANNOT REVISE AN ORDER MERELY BECAUSE H E DISAGREES WITH THE CONCLUSION ARRIVED AT BY THE AO. HE SUBMITTED THAT THE HONBLE HIGH COURT FURTHER HELD THAT IF THE OFFICER ACTING IN ACCORDA NCE WITH LAW MAKES CERTAIN ASSESSMENT, THE SAME CANNOT BE BRAND ED AS ERRONEOUS BY THE CIT SIMPLY BECAUSE ACCORDING TO HIM, T HE ORDER SHOULD HAVE BEEN WRITTEN MORE ELABORATELY. THE SECTION DOES NOT VISUALIZE A CASE OF SUBSTITUTION OF THE JUDGMENT OF THE CIT FOR THAT OF THE AO WHO PASSED THE ORDER UNLESS THE DECISION IS HELD TO BE ERRONEOUS. 21. REFERRING TO THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. KANDA RICE MILLS REPORTED IN 1 78 ITR 446 HE SUBMITTED THAT FOR EXERCISE OF REVISIONAL JURISDICTIO N BY THE CIT, HE HAS TO COME TO A FIRM A DECISION THAT THE ORDER OF THE AO WAS ERRONEOUS AND WAS PREJUDICIAL TO THE INTEREST OF THE REV ENUE. IN ABSENCE OF ANY DECISION ABOUT THE ERRONEOUS NATURE OF THE ORDER THE TRIBUNAL WAS JUSTIFIED IN SETTING ASIDE THE ORDER OF THE CIT U/S.263 OF THE I.T. ACT. 22. REFERRING TO THE DECISION OF THE HONBLE MADRAS HIGH C OURT IN THE CASE OF CIT VS. SAKTI CHARITIES REPORTED IN 244 ITR 2 26 HE 12 ITA NO.1179/PN/2013 SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS HELD THAT REVISIONAL POWER IS NOT MEANT TO CORRECT EVERY ERR OR OF FACT. A REVISIONAL POWER COULD NOT BE EXERCISED FOR PURPOSE OF DIRE CTING THE AO TO HOLD ANOTHER INVESTIGATION. IN ABSENCE OF ANY INDIC ATION AS TO HOW THE ORDER OF THE AO WAS ERRONEOUS OR PREJUDICIAL TO THE INTEREST OF THE REVENUE THE TRIBUNAL WAS JUSTIFIED IN SETTING ASIDE T HE ORDER U/S.263 OF THE I.T. ACT. 23. HE ALSO RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EICHER LTD. REPORTED IN 294 ITR 31 0 AND THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE O F SSI LTD. VS. DCIT REPORTED IN 85 TTJ 1043. HE ACCORDINGLY SUBM ITTED THAT THE ORDER OF THE CIT DOES NOT SPELL OUT CLEARLY AS TO HOW AND ON WHAT BASIS THE ORDER OF THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. SINCE THE ASSESSEE HAS SUBMITTED ALL THE DETAILS AS ASKED FOR BY THE AO AND THE AO AFTER VERIFYING ALL THESE DETAILS HAS PASSED THE ORDER, THEREFORE, THE CIT WAS NOT JUSTIFIED IN SETTING ASIDE THE ORDER U/S.263 OF THE I.T. ACT. 24. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND HEAVILY RELIED ON THE ORDER OF THE CIT. SHE SUBMITTED THAT THE AO HAS NOT DONE ANY ENQUIRY AND HAS ACCEPTED THE SUBMISSION O F THE ASSESSEE. SINCE THERE WAS NO PROPER ENQUIRY MADE BY T HE AO WHILE PASSING THE ORDER, THE ORDER HAS BECOME BOTH ERRONEOU S AS WELL AS PREJUDICIAL TO THE INTEREST OF THE REVENUE. THEREFORE, THE LD.CIT IS FULLY JUSTIFIED IN SETTING ASIDE THE ORDER U/S.263 OF THE I.T. ACT. 25. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND LD.CIT AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED T HE VARIOUS 13 ITA NO.1179/PN/2013 DECISIONS CITED BEFORE US. WE FIND THE ASSESSEE IN THE INST ANT CASE FILED ITS RETURN OF INCOME ON 30-11-2006 SHOWING TOTAL LOSS OF RS.11,09,536/-. AFTER THE ORDER PASSED BY THE DRP, THE AO COMPLETED THE ASSESSMENT DETERMINING THE TOTAL INCOME AT RS.10,65,91,200/- BY MAKING AN ADJUSTMENT OF RS.10,77,00,742 /- TO THE ALP OF THE INTERNATIONAL TRANSACTION. WE FIND THE L D.CIT INVOKED JURISDICTION U/S.263 OF THE I.T. ACT ON THE GROUND THAT WHILE ADOPTING THE DECISION OF THE DRP THE AO HAS NOT CONSIDER ED THE OTHER ISSUES AT ALL. HE DID NOT EXAMINE THE ITEMS CONTAINE D IN THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET. ALTHOUGH THE ASSESSEE HAS CRYSTALLIZED HUGE DAMAGES OF RS.5,79,02,758/- NO DETAILS WERE CALLED FOR BY THE AO. THE DAMAGES PAID TO THE PARENT C OMPANY OF GERMANY BELONGED TO EARLIER YEAR AND NO EFFORTS WERE MAD E BY THE AO TO EXAMINE AS TO HOW THE DAMAGES GOT CRYSTALLIZED DU RING THE YEAR. FURTHER, THE COMPANY HAS RECALCULATED USEFUL LIFE OF COMPUTERS, PERIPHERALS, OFFICE EQUIPMENTS AND INTANGIBLES W.E.F. 0 1- 01-2006 WHERE THERE IS A LOSS OF RS.19,32,848/-. SIMILARLY, THE COST INCURRED OF RS.99,38,263/- WERE NOT VERIFIED BY THE AO. FUR THER, THE AO HAS NOT EXAMINED THE ASSESSEES CLAIM OF DEFERRED TA X LIABILITY OF RS.10,92,888/-. IN VIEW OF THE ABOVE, THE LD.CIT INVOKING T HE PROVISIONS OF SECTION 263 OF THE I.T. ACT SET ASIDE THE OR DER PASSED U/S.143(3) R.W.S.144C(13) OF THE I.T. ACT. 26. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSES SEE THAT ALL THE DETAILS AS CALLED FOR BY THE AO DURING THE COURSE O F ASSESSMENT PROCEEDINGS WERE PROVIDED. AFTER VERIFYING TH E SAME, THE AO ON DUE APPLICATION OF MIND HAS PASSED THE ORDER. THE ORDER OF THE LD.CIT IS SILENT AS TO HOW THE ORDER PASSED BY THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE . THEREFORE, 14 ITA NO.1179/PN/2013 THE ORDER PASSED U/S.263 BY THE CIT LACKS JURISDICTION A ND HAS TO BE SET ASIDE. 27. FROM THE VARIOUS DETAILS FURNISHED BY THE LD. COUNSEL FO R THE ASSESSEE, WE FIND THE ASSESSEE VIDE LETTER DATED 28-04-2 008 ADDRESSED TO THE AO HAS FILED THE DETAILS OF STATEMENT OF INCOME, TAX AUDIT REPORT IN FORM 3CD AND STATUTORY AUDIT REPORT AN D FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31-03-2006. FUR THER, VIDE LETTER DATED 12-11-2009 ADDRESSED TO THE AO, A COPY O F WHICH IS PLACED AT PAGE 37 OF THE PAPER BOOK, WE FIND THE ASSES SEE HAS GIVEN THE DETAILS OF UNSECURED LOANS, DETAILS OF ADDITION TO FIXED ASSETS, DETAILS OF SUNDRY DEBTORS, DETAILS OF LOANS AND ADVANCES, DE TAILS OF SUNDRY CREDITORS AND OTHER LIABILITIES, DETAILS OF EXPENSE AS PER SCHEDULE 10 OF THE AUDITED FINANCIALS, DETAILS OF EXPENSES AS PER SCHEDULE 11 OF AUDITED FINANCIALS, DETAILS OF EXCEPTIONAL ITEM AS PER NOTE 5 OF SCHEDULE 13 OF AUDITED FINANCIALS, DETAILS OF REIMBURS EMENT OF EXPENSES AS PER NOTE 7 OF SCHEDULE 13 OF THE AUDITED FINANCIALS, DETAILS OF TDS AND ITS DEPOSIT, EXPENSES/PAYMENTS NOT DED UCTIBLE U/S.40A OF THE ACT, DETAILS OF PROFITS EARNED/LOSS INCURRED D UE TO FOREIGN EXCHANGE FLUCTUATIONS AND NATURE OF PROVISIONS MADE IN THIS REGARD, DETAILS OF STATUTORY PAYMENTS COVERED BY SECTION 43B OF THE I.T. ACT ETC. 28. FURTHER, FROM THE COMPUTATION OF TOTAL INCOME, WE FIND ALTHOUGH DEPRECIATION AS PER BOOKS OF ACCOUNT HAS BEEN CLAIMED AT RS.59,77,695/- THE ASSESSEE HAS ADDED THE SAME TO THE COMPUTATION OF INCOME AND DEDUCTED DEPRECIATION OF RS.1,47,71,626/- UNDE R THE PROVISIONS OF THE I.T. ACT. THE LD.CIT DOES NOT DISPUTE THE ALLOWABILITY OF DEPRECIATION AS PER THE I.T. ACT OF RS.1,47,71,62 6/-. 15 ITA NO.1179/PN/2013 THEREFORE, WHEN THE ASSESSEE ITSELF HAS ADDED BACK THE D EPRECIATION AS PER BOOKS OF ACCOUNTS AT RS.59,79,695/- IN THE COMPUT ATION OF TOTAL INCOME, HOW THE SAME IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE IS NOT UNDERSTOOD. 29. SO FAR AS THE ISSUE RELATING TO DAMAGES OF RS.5,79,02,756 /- IS CONCERNED THE ASSESSEE IN ITS NOTES TO RETURN OF INCOME FOR THE FINANCIAL YEAR ENDED 31-03-2006 AT CLAUSE 4 OF THE NOTES HAS GIVEN SUFFICIENT DETAILS AND EXPLANATION WHICH HAS ALREADY BEEN REPRODUCED AT PARA 9 OF THIS ORDER. SIMILARLY, BEFORE THE DRP ALSO THE ASSESSEE HAS RAISED IN ITS GROUND OF OBJECTION NO.8 R EGARDING REJECTION OF ITS CONTENTION THAT THE DAMAGES INCURRED BY IT RELATING TO EPCOS PROJECT ARE NOT IN THE NATURE OF OPERATING EXPEN SES AND HENCE SHOULD NOT BE INCLUDED IN THE CALCULATION OF OPERATING PROFIT. THEREFORE, WHEN SUFFICIENT DETAILS WERE THERE BEFORE THE AO AS WELL AS BEFORE THE DRP ON THIS ISSUE, IT CANNOT BE SAID THAT THE AO HAS NOT CALLED FOR THE DETAILS AND NO EFFORTS WERE MADE BY THE AO TO EXAMINE AS TO HOW THE DAMAGES GOT CRYSTALLIZED DURING THE YEAR. 30. AS REGARDS THE OBJECTION OF THE LD.CIT THAT THE AO H AS NOT VERIFIED THE ASSESSEES CLAIM OUT OF THE DEFERRED TAX LIABILITY OF RS.10,92,888/- IS CONCERNED WE FIND THE ASSESSEE IN CLAUSE 8 OF SCHEDULE 13 TO THE NOTES ANNEXED TO AND FORMING PART O F THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT HAS GIVEN THE FOLLOWING D ETAILS (PAGE 18 OF THE PAPER BOOK) : 8. THE COMPONENTS OF THE DEFERRED TAX (NET) : 16 ITA NO.1179/PN/2013 (AMOUNT IN RUPEES) PARTICULARS DEFERRED TAX ASSET/(LIABILITY) AS ON 01-04-2005) CURRENT YEAR (CHARGE)/CREDIT DEFERRED TAX ASSETE/(LIABILITY) AS AT 31-03-2006 DIFFERENCE IN DEPRECIATION AND OTHER DIFFERENCES IN BLOCK OF FIXED ASSETS AS PER TAX BOOKS AND FINANCIAL BOOKS (280,504) 1,373,392 1,092,888 TOTAL (280,504) 1,373,392 1,092,888 31. FURTHER, WE FIND MERIT IN THE SUBMISSION OF THE LD. COUN SEL FOR THE ASSESSEE THAT THE AMOUNT OF RS.10,92,888/- IS A B ALANCE SHEET ITEM AND THE CURRENT YEAR CHARGE OF RS.13,73,392/- HAS NOT BEEN CLAIMED AS DEDUCTION COULD NOT BE CONTROVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. UNDER THESE CIRCUMSTANCES MERELY BECAUSE THE AO HAS NOT PASSED AN ELABORATE ORDER EXP LAINING EACH AND EVERY ITEM, THE SAME IN OUR OPINION, CANNOT BE A GROU ND TO SET ASIDE BY INVOKING THE PROVISIONS OF SECTION 263 OF THE I.T. ACT. 32. WE FIND THE HONBLE PUNJAB & HARYANA HIGH COURT IN TH E CASE OF R.K. METAL WORKS (SUPRA) HAS HELD THAT IN PASSING AN ORDE R OF REVISION U/S.263 OF THE I.T. ACT, 1961 IT IS NECESSARY FOR T HE CIT TO STATE IN WHAT MANNER HE CONSIDERED THAT THE ORDER OF T HE AO WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE AND WHAT THE BASIS WAS FOR SUCH A CONCLUSION. THE RELEVANT OBSERV ATION OF THE HONBLE HIGH COURT AT PAGE 447 READ AS UNDER : A PERUSAL OF THE ORDER OF THE COMMISSIONER OF INCOME TAX CLEARLY SHOWS THAT THE CRITICISM OF THE TRIBUNAL IS WELL FOUNDED. THERE IS NO INDICATION IN THE ORDER OF THE COMMISSIONER AS TO THE BASIS ON WHIC H HE CAME TO THE PRIMA FACIE CONCLUSION THAT THE CAPITAL BORROWED BY THE FIRM WAS UTILISED FOR PURPOSES OTHER THAN THAT OF THE FIRM'S BUSINESS. WHE N THE ASSESSEE FILED A DETAILED WRITTEN STATEMENT BEFORE HIM, THE C OMMISSIONER DID NOT DEAL WITH ANY OF THE POINTS RAISED IN THE STATEMENT. H E THOUGHT THAT THE BEST COURSE IN THE CIRCUMSTANCES WAS TO REMAND THE MATTE R TO THE INCOME TAX OFFICER FOR CONSIDERATION OF THE POINTS RA ISED IN THE ASSESSEE'S WRITTEN STATEMENT. THAT CERTAINLY WAS NOT THE PROPER COURSE TO BE ADOPTED BY HIM. IT WAS NECESSARY FOR THE COMMISSIONER TO STATE IN WHAT 17 ITA NO.1179/PN/2013 MANNER HE CONSIDERED THAT THE ORDER OF THE INCOME TA X OFFICER WAS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVE NUE AND WHAT THE BASIS WAS FOR SUCH A CONCLUSION. AFTER INDICATING HIS REA SONS FOR SUCH A CONCLUSION, IT WOULD CERTAINLY HAVE BEEN OPEN TO HIM TO REMAND THE MATTER TO THE INCOME TAX OFFICER FOR SUCH OTHER INVE STIGATION OR ENQUIRY AS MIGHT BE NECESSARY. BUT THAT WAS NOT THE COURSE WHICH THE COMMISSIONER PURSUED. THE TRIBUNAL WAS, THEREFORE, JUSTI FIED IN SETTING ASIDE THE ORDER OF THE INCOME TAX COMMISSIONER. THE LE ARNED COUNSEL FOR THE REVENUE URGED THAT, WHILE SETTING ASIDE THE ORDER OF THE COMMISSIONER, THE TRIBUNAL HAD PURPORTED TO RESTORE TH E ORDER PASSED BY THE INCOME TAX OFFICER AND THIS MEANT THAT THE CO MMISSIONER WAS PRECLUDED FROM TAKING UP THE MATTER AGAIN. WE DO NO T WANT TO EXPRESS ANY OPINION ON THIS QUESTION, SINCE OUR JURISDICTION I S CONFINED ONLY TO ANSWERING THE QUESTION REFERRED TO US. THE QUESTION REF ERRED TO US IS ANSWERED IN THE AFFIRMATIVE. THERE WILL BE NO ORDER AS TO COSTS. 33. WE FIND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GABRIEL INDIA LTD. (SUPRA) HAS HELD THAT CIT CANNOT REVISE AN ORD ER MERELY BECAUSE HE DISAGREES WITH THE CONCLUSION ARRIVED AT BY T HE AO. THE HONBLE HIGH COURT IN THE SAID ORDER HAS OBSERVED AS UN DER (SHORT NOTES) : THE POWER OF SUO MOTU REVISION UNDER SUB-SECTION (1) OF SECTION 263 OF THE INCOME-TAX ACT, 1961, IS IN THE NATURE OF SUPERV ISORY JURISDICTION AND CAN BE EXERCISED ONLY IF THE CIRCUMSTANCES SPECIFIED T HEREIN EXIST. TWO CIRCUMSTANCES MUST EXIST TO ENABLE THE COMMISSIONER TO EX ERCISE THE POWER OF REVISION UNDER THIS SUB-SECTION, VIZ., (I) THE ORDER SHOULD BE ERRONEOUS; AND (II) BY VIRTUE OF THE ORDER BEING ERR ONEOUS PREJUDICE MUST HAVE BEEN CAUSED TO THE INTERESTS OF THE REVENUE. AN O RDER CANNOT BE TERMED AS ERRONEOUS UNLESS IT IS NOT IN ACCORDANCE WITH LAW. IF AN LNCOME- TAX OFFICER ACTING IN ACCORDANCE WITH LAW MAKES CERT AIN 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 SU BSTITUTION OF THE JUDGMENT OF THE COMMISSIONER FOR THAT OF THE INCOME-T AX OFFICER, WHO PASSED THE ORDER, UNLESS THE DECISION IS HELD TO BE ERRO NEOUS. CASES MAY BE VISUALIZED WHERE THE INCOME-TAX OFFICER WHILE MAK ING AN ASSESSMENT EXAMINES THE ACCOUNTS, MAKES ENQUIRIES, APPLIES HIS MIND TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND DETERMINES THE INCOME EIT HER BY ACCEPTING THE ACCOUNTS OR BY MAKING SOME ESTIMATES HIMSELF. THE CO MMISSIONER, ON PERUSAL OF THE RECORDS, MAY BE OF THE OPINION THAT TH E ESTIMATE MADE BY THE OFFICER CONCERNED WAS ON THE LOWER SIDE AND LEFT TO THE COMMISSIONER HE WOULD HAVE ESTIMATED THE INCOME AT A HIGHER FIGUR E. THIS IS BECAUSE THE INCOME-TAX OFFICER HAS EXERCISED THE QUASI JUDICI AL POWER VESTED IN HIM IN ACCORDANCE WITH LAW AND ARRIVED AT A CONCLUSI ON AND SUCH A CONCLUSION CANNOT BE TERMED TO BE ERRONEOUS SIMPLY BEC AUSE THE COMMISSIONER DOES NOT FEEL SATISFIED WITH THE CONCLUSION. IT MAY BE SAID IN SUCH A CASE THAT IN THE OPINION OF THE COMMISSIONER THE ORDER IN QUESTION IS PREJUDICIAL TO THE INTERESTS OF THE REVENU E. BUT THAT BY ITSELF WOULD NOT BE ENOUGH TO VEST THE COMMISSIONER WITH THE POWER OF SUO 18 ITA NO.1179/PN/2013 MOTU REVISION BECAUSE THE FIRST REQUIREMENT, NAMELY, T HAT THE ORDER IS ERRONEOUS, IS ABSENT. SIMILARLY IF AN ORDER IS ERRONEO US BUT NOT PREJUDICIAL TO THE INTERESTS OF THE REVENUE, THEN THE POWER OF SUO MOTU REVISION CANNOT BE EXERCISED. ANY AND EVERY ERRONEOUS ORDER CA NNOT BE THE SUBJECT-MATTER OF REVISION BECAUSE THE SECOND REQUIREME NT MUST BE FULFILLED. THERE MUST BE SOME PRIMA FACIE MATERIAL ON RECORD TO SHOW THAT TAX WHICH WAS LAWFULLY EXIGIBLE HAS NOT BEEN IMPOSED O R THAT BY THE APPLICATION OF THE RELEVANT STATUTE, ON AN INCORRECT OR INCOMPLETE INTERPRETATION, A LESSER TAX THAN WHAT WAS JUST HAS BEEN IMPOSED. WHEN EXERCISE OF STATUTORY POWER IS DEPENDENT UPON THE EXIST ENCE OF CERTAIN OBJECTIVE FACTS, THE AUTHORITY BEFORE EXERCISING SUCH POWER MUST HAVE MATERIALS ON RECORD TO SATISFY IT IN THAT REGARD. IF T HE ACTION OF THE AUTHORITY IS CHALLENGED BEFORE THE COURT IT WOULD BE OPEN TO THE COURTS TO EXAMINE WHETHER THE RELEVANT OBJECTIVE FACTORS WERE AVAILABLE FROM THE RECORDS CALLED FOR AND EXAMINED BY SUCH AUTHORITY (SEE PP. 114D, E, H, 115A-F, 116D,E). HELD, THAT THE INCOME-TAX OFFICER IN THIS CASE HAD MA DE ENQUIRIES IN REGARD TO THE NATURE OF THE EXPENDITURE INCURRED BY THE ASSE SSEE. THE ASSESSEE HAD GIVEN A DETAILED EXPLANATION IN THAT REGARD BY A LETTER IN WRITING. ALL THESE WERE 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. THIS DECISION OF THE INCOME-TAX OFFICER COULD N OT BE HELD TO BE 'ERRONEOUS' SIMPLY BECAUSE IN HIS ORDER HE DID NOT MAKE AN ELABORATE DISCUSSION IN THAT REGARD. MOREOVER, IN THE INSTANT CASE , THE COMMISSIONER HIMSELF, EVEN AFTER INITIATING PROCEEDINGS FOR REVISIO N AND HEARING THE ASSESSEE, COULD NOT SAY THAT THE ALLOWANCE OF THE CLAIM OF THE ASSESSEE WAS ERRONEOUS ANT! THAT THE EXPENDITURE WAS NOT REVENUE E XPENDITURE BUT AN EXPENDITURE OF CAPITAL NATURE. HE SIMPLY ASKED THE IN COME-TAX OFFICER TO RE-EXAMINE THE MATTER. THAT WAS NOT PERMISSIBLE. THE T RIBUNAL WAS JUSTIFIED IN SETTING ASIDE THE ORDER PASSED BY THE COMMI SSIONER OF INCOME- TAX UNDER SECTION 263 (SEE P. 117A-C). 34. WE FIND THE HONBLE PUNJAB & HARYANA HIGH COURT IN TH E CASE OF KANDA RICE MILLS (SUPRA) HAS OBSERVED AS UNDER : A READING OF THE ENTIRE ORDER OF THE COMMISSIONER CL EARLY GOES TO SHOW THAT HE DID NOT FURNISH HIS OPINION OR CONSIDER THE CI TED CASES OR THE ARGUMENT RAISED AND MERELY OBSERVED THAT THESE WERE TH E POINTS WHICH DESERVED CONSIDERATION AND AFTER SETTING ASIDE THE ORDE R OF THE INCOME TAX OFFICER, ISSUED A DIRECTION FOR MAKING ASSESSMENT AFR ESH. THIS IS NOT PERMISSIBLE UNDER THE PROVISIONS CONTAINED IN SECTION 26 3 OF THE ACT. THE COMMISSIONER HAD TO COME TO A FIRM DECISION THAT T HE ORDER OF THE INCOME TAX OFFICER WAS ERRONEOUS AND WAS PREJUDICIAL T O THE INTERESTS OF THE REVENUE. SINCE NO DECISION ABOUT THE ERRONEOUS NA TURE OF THE ORDER WAS FIRMLY TAKEN, THE TRIBUNAL WAS RIGHT IN VACATING THE ORDER. ACCORDINGLY, WE ANSWER THE QUESTION IN FAVOUR OF THE ASSESSEE, THAT IS, IN THE AFFIRMATIVE, WITH NO ORDER AS TO COSTS. 35. WE FIND THE HONBLE MADRAS HIGH COURT IN THE CASE OF S AKTI CHARITIES (SUPRA) HAS HELD THAT REVISIONAL POWER IS NOT MEAN T TO 19 ITA NO.1179/PN/2013 CORRECT EVERY ERROR OF FACT. THE POWER OF REVISION SHOULD NOT BE EXERCISED FOR PURPOSE OF DIRECTING THE AO TO HOLD ANOTHER INVESTIGATION. WHEN THE ORDER OF THE CIT DOES NOT INDICAT E AS TO HOW THE ORDER OF THE ITO WAS ERRONEOUS AND PREJUDICIAL TO T HE INTEREST OF THE REVENUE, THE CIT LACKS THE JURISDICTION TO REVISE THE ORDER OF THE AO. THE RELEVANT OBSERVATION OF THE HONBLE HIGH COURT R EADS AS UNDER : WE ARE OF THE VIEW THAT THERE IS NO INFIRMITY IN TH E ORDER OF THE APPEL LATE TRIBUNAL. THE FACTS CLEARLY SHOW THAT THE INCOME TAX OFFICER HAD APPLIED HIS MIND TO ALL THE RELEVANT MATERIALS PRODUC ED BEFORE HIM AT THE TIME OF COMPLETION OF THE ASSESSMENT PROCEEDINGS AND THE N CAME TO THE CONCLUSION THAT THE INCOME OF THE ASSESSEE WAS EXEMPT UND ER THE PROVISIONS OF SECTION 11 OF THE ACT. ACCORDING TO THE INCOME TAX OFFICER, THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT V. DHARMODAYAM CO. [1977] 109 ITR 527 WOULD APPLY TO THE FACTS OF THE CASE. THE FACT THAT HE HAD DEPARTED FROM HIS VIEW ARRIVED AT IN THE EARLIE R YEAR SHOWS THAT HE HAD NOT ACTED IN A MECHANICAL MANNER AND HAS APPLIE D HIS MIND TO THE QUESTION OF GRANT OF EXEMPTION AND CONSIDERED THE M ATTER BEFORE GRANTING EXEMPTION UNDER THE ACT. THE COMMISSIONER O F INCOME TAX SET ASIDE THE ORDER OF THE INCOME TAX OFFICER ON THE SCO RE THAT THE INCOME TAX OFFICER WAS NOT AWARE OF THE FACT THAT THE BUSI NESS OF DISTRIBUTORSHIP IN FERTILIZER WAS DONATED IN FAVOUR OF THE ASSESSEE AND THE INCOME TAX OFFICER WAS NOT RIGHT IN NOT CONSIDERING THE EFFECT OF THE DONATION OF THE DISTRIBUTORSHIP BUSINESS IN FAVOUR OF THE ASSESSEE. HOWEVER , THE COMMISSIONER OF INCOME TAX HAS NOT EXAMINED THE QUESTI ON FURTHER THAT, EVEN ASSUMING THAT SUCH A MATERIAL WAS PLACED B EFORE THE INCOME TAX OFFICER, THE POSITION REGARDING THE GRANT OF EX EMPTION OF THE ASSESSEE'S INCOME WOULD BE DIFFERENT, HAD THE INCOME TA X OFFICER NOTICED THAT THERE WAS A DONATION OF THE DISTRIBUTORSH IP BUSINESS. IT IS NOT DISPUTED BY LEARNED COUNSEL FOR THE REVENUE THAT THE BUSINESS OF DISTRIBUTORSHIP WAS AN ASSET IN THE ASSESSEE'S BUSINESS AND IT WAS HELD UNDER A TRUST. THE INCOME TAX OFFICER HAD FOUND THAT THE INCOME FROM SUCH DISTRIBUTORSHIP BUSINESS WAS APPLIED FOR CHARITABLE P URPOSES ONLY. THE COMMISSIONER HAS NOWHERE RECORDED HOW THE FINAL CO NCLUSION OF THE INCOME TAX OFFICER WOULD VARY, HAD THE INCOME T AX OFFICER TAKEN INTO CONSIDERATION THE POSITION THAT THE BUSINESS OF DISTRIBU TORSHIP WAS DONATED IN FAVOUR OF THE ASSESSEE. LEARNED COUNSEL FOR THE REVENUE RELIED UPON THE DECI SION OF THIS COURT IN THE CASE OF K. A. RAMASWAMY CHETTIAR V. CIT [1996 ] 220 ITR 657, WHEREIN THIS COURT HELD THAT IF THE INCOME TAX OFFIC ER DID NOT MAKE AN ENQUIRY AS EXPECTED OF HIM, THAT WOULD BE A SUFFICIEN T GROUND FOR THE COM MISSIONER OF INCOME TAX TO REVISE THE ORDER UNDER SECTION 263 OF THE ACT. BUT, THIS DECISION HAS NO APPLICATION TO TH E FACTS OF THE INSTANT CASE, AS HERE, THE INCOME TAX OFFICER HAD FOLLOWED T HE DECISION OF THE APEX COURT AND HELD THAT THE ASSESSEE WAS ENTITLED TO EXEMPTION. FURTHER, IT IS NOT INDICATED BY THE COMMISSIONER IN HIS ORDER THAT THE ENQUIRY UNDERTAKEN BY THE INCOME TAX OFFICER FELL SHORT OF THE REQUIREMENT THAT IS EXPECTED OF HIM IN THE CONSIDERA TION OF THE QUESTION 20 ITA NO.1179/PN/2013 OF GRANT OF EXEMPTION. WE ARE OF THE VIEW THAT WHE RE THE MATERIAL RELIED UPON BY THE COMMISSIONER WHICH, ACCORDING TO HIM, WA S OMITTED TO BE NOTICED BY THE INCOME TAX OFFICER WOULD NOT HAVE A LTERED OR VARIED THE FINAL CONCLUSION ARRIVED AT BY THE INCOME TAX OFFIC ER, THE COMMISSIONER WOULD LACK THE JURISDICTION TO REVISE THE ORDER OF A SSESSMENT AND THE DECISION OF THIS COURT IN K. A. RAMASWAMY CHETTIAR'S C ASE [1996] 220 ITR 657 WOULD HAVE NO APPLICATION TO THE FACTS OF T HE CASE. WE ARE ALSO OF THE OPINION THAT IT IS FUTILE ON THE P ART OF THE COMMISSIONER TO SET ASIDE THE ORDER OF THE INCOME TAX O FFICER BY DIRECTING HIM TO CONSIDER THE FACT OF DONATION OF THE DISTRIBUTORSHIP BUSINESS IN FAVOUR OF THE ASSESSEE TRUST WHEN AFTER CONSIDE RING THE SAID FACT, THE CONCLUSION THAT MAY BE REACHED BY THE INC OME TAX OFFICER WOULD NOT BE DIFFERENT. WE, THEREFORE, HOLD THAT T HE COMMISSIONER HAD NO JURISDICTION TO SET ASIDE THE ORDER OF ASSESSMENT MERE LY TO CONDUCT ANOTHER PURPOSELESS AND FRUITLESS ENQUIRY TO REACH THE SAME RESULT WHICH WAS ARRIVED AT EARLIER, AND IF ANY FRESH ENQUI RY IS HELD, IT WILL BE AN EMPTY FORMALITY AS BY GOING THROUGH THE MOTION O F MAKING A FURTHER ENQUIRY AND REACHING THE SAME CONCLUSION NO USEFUL PU RPOSE WOULD BE ACHIEVED. THOUGH IT IS NOT EXPECTED OF THE COMMISSION ER TO RECORD HIS FINAL CONCLUSION IN THE ORDER PASSED IN REVISION, HE MU ST AT LEAST INDICATE IN HIS ORDER HOW THE ORDER OF THE INCOME TAX OFFICE R IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. WE, THE REFORE, HOLD THAT THE POWER OF REVISION CANNOT BE EXERCISED AS A MATTER OF COURSE, BUT IT MUST BE EXERCISED TO CORRECT SOME ERROR IN THE ORDERS PASSED BY THE ASSESSING OFFICER. THE REVISIONAL POWER IS NOT MEANT TO BE EXE RCISED TO CORRECT EVERY ERROR OF FACT, BUT THE ERROR MUST BE OF SUCH A NATURE THAT IT IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVE NUE. WE ARE OF THE VIEW THAT THE COMMISSIONER WOULD HAVE NO JURISDICTION TO REVISE AN ORDER OF ASSESSMENT, IF THE FINAL CONCLUSION ARRIVED AT BY THE INCOME TAX OFFICER COULD NOT BE DIFFERENT EVEN AFTER CONSIDERIN G THE PARTICULAR FACT WHICH THE COMMISSIONER HAS DIRECTED THE INCOME TAX OFF ICER TO CONSIDER. FURTHER, THE POWER OF REVISION IS NOT MEANT TO BE EXERCISED FOR THE PURPOSE OF DIRECTING THE INCOME TAX OFFICER TO H OLD ANOTHER INVESTIGATION WHEN THE ORDER OF THE ASSESSING OFFICER WA S NOT FOUND TO BE ERRONEOUS. THE COMMISSIONER OF INCOME TAX IN THE INSTANT CASE, IN OUR OPINION, HAS MERELY SET ASIDE THE ORDER OF THE INCOME TAX OFFICER DIRECTING THE OFFICER TO HOLD FURTHER INVESTIGATION WITHOUT RECORDING ANY FINDING THAT THE ORDER PASSED BY THE INCOME TAX OFFICER WAS IN ANY WAY ERRONEOUS OR PREJUDICIAL TO THE INTERESTS OF THE REVENUE. WE HOLD THAT THE TRIBUNAL WAS QUITE JUSTIFIED IN HOLDING THAT THE ORDER DID NOT CALL FOR ANY INTERFERENCE IN THE REVISION DONE BY THE COMMISSIONER OF INCOME TAX. ACCORDINGLY, WE ANSWER THE QUESTION OF LAW REFERRED T O US IN THE AFFIRMATIVE AND AGAINST THE REVENUE. THE ASSESSEE WIL L BE ENTITLED TO COSTS OF A SUM OF RS. 750. 36. SINCE THE ASSESSEE IN THE INSTANT CASE HAS FURNISHED FULL DETAILS AS CALLED FOR BY THE AO DURING THE COURSE OF ASSE SSMENT PROCEEDINGS AND SINCE THE ORDER OF THE CIT IS SILENT AS T O HOW THE ORDER OF THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTER EST OF THE 21 ITA NO.1179/PN/2013 REVENUE, THEREFORE, IN VIEW OF THE ABOVE DECISIONS CITED (SU PRA), WE ARE OF THE CONSIDERED OPINION THAT THE LD.CIT WAS NOT JU STIFIED IN SETTING ASIDE THE ORDER PASSED U/S.143(3) R.W.S. 144C(13) OF THE I.T. ACT BY INVOKING THE PROVISIONS OF SECTION 263 OF THE I.T. A CT, 1961. WE, THEREFORE, SET ASIDE THE SAME. THE GROUNDS RAISED B Y THE ASSESSEE ARE ALLOWED. 37. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 23-10-2015. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER IQ.KS PUNE ; # DATED : 23 RD OCTOBER, 2015. LRH'K ( )'+ , / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. CIT(A) - I V , PUNE 4. 5. ' *, *, IQ.KS / DR, ITAT, B PUNE; / GUARD FILE. / BY ORDER , ' //TRUE COPY// / * / SR. PRIVATE SECRETARY *, IQ.KS / ITAT, PUNE