M/s Metricstream Infotech(India) Pvt Ltd , Bangalore V. Assistant Commissioner of Income Tax Circle-4(1)(2), Bangalore

ITA 1688/BANG/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 8970 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2020
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 21-05-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN BENGALURU
• Assessee Lawyers: H PADAMCHAN D KHINCHA
• Keywords: Gift; Services rendered outside India; Assessment record; Reason to believe; Speculative transactions; Set aside
• Section: 43B; 143(3); 142(1); 37(1); 143(2); 13; 37; 263; 63; 28; 154; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT A NO. 1688/BANG/2018 ASSESSMENT YEAR: 2014 - 15 M/S. METRIC STREAM INFOTECH (INDIA) PVT. LTD., AMR TECH PARK 4B, NO.23 & 24, HONGASANDRA VILLAGE, BEGUR HOBLI, BANGALORE 560 068. PAN: AACCM 4991K VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI H. PADAMCHAND KHINCHA, CA RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 01.01.2020 DATE OF PRONOUNCEMENT : 10 .01.2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 20.04.2018 OF THE PRINCIPAL COMMISSIONER OF INCOME-TAX, BENGAL URU-4, BENGALURU [HEREINAFTER REFERRED TO AS PR.CIT] PASSED U/S. 2 63 OF THE INCOME-TAX ACT, 1961 [THE ACT] IN RELATION TO ASSESSMENT YEAR 2014 -15. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINE SS OF RENDERING SOFTWARE DEVELOPMENT SERVICES. FOR THE AY 2014-15, THE ASSESSEE FILED A RETURN OF INCOME DECLARING A TOTAL INCOME OF RS.22, 85,60,630. THE ORDER OF 1688/BANG/2018 PAGE 2 OF 15 ASSESSMENT U/S. 143(3) OF THE ACT WAS PASSED BY THE AO ACCEPTING THE TOTAL INCOME RETURNED BY THE ASSESSEE. 3. THE PR. CIT IN EXERCISE OF HIS POWERS U/S. 263 O F THE ACT WAS OF THE VIEW THAT THE AFORESAID ORDER DATED 27.9.2016 PASSE D BY THE AO WAS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE R EVENUE FOR THE FOLLOWING REASONS:- 1. ON VERIFICATION OF ASSESSMENT RECORD IT WAS NOTICED THAT THE ASSESSEE HAD DEBITED RS.2,15,89,831/- T OWARDS SERVICE TAX INPUT RECEIVABLE WRITTEN OFF IN THE P&L ACCOUNT /NOTC- 20/OTHER EXPENSES. HOWEVER, THE SERVICE TAX RECE IPTS AND EXPENDITURE WERE NOT ROUTED THROUGH THE P&L ACCOUN T. THE SAME ARE MAINTAINED IN A SEPARATE LEDGER ACCOUNT AND TH EREFORE. DOES NOT QUALIFY AS AN ADMISSIBLE EXPENDITURE. 3. THE AO HAS FAILED TO CONDUCT ADEQUATE ENQUIRIE S REGARDING THE ABOVE ISSUE AND HAS FAILED TO BRING TO TAX TH E CORRECT INCOME WHILE COMPLETING THE ASSESSMENT U/S 143(3). THERE FORE, ACTION U/S.263 IS WARRANTED AND THE ASSESSMENT FOR THE A.Y.2014-15 WAS PROPOSED TO BE REVISED ACCORDING1Y. 4. IN REPLY TO THE AFORESAID SHOW CAUSE NOTICE OF T HE PR.CIT, THE ASSESSEE FILED REPLY POINTING OUT THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE SERVICES. THES E SOFTWARE DEVELOPMENT SERVICES ARE PROVIDED TO ITS HOLDING COMPANY METRICSTREAM INC, USA. DURING THE FINANCIAL YEAR RELEVANT TO AY 2014-15, THE ASSESSEE EXPORTED SOFTWARE SERVICES TO METRICSTREA M INC TO THE TUNE OF RS. 1,68,77,13,290/- AND AS PER THE RELEV ANT SERVICE TAX LAW PREVALENT DURING FY 2013-14, NO SERVICE TAX WAS REQUIRED TO BE PAID BY ANY EXPORTER OF SERVICE. HOWEVER, VARIOUS VENDORS W HO PROVIDED SERVICES TO THE ASSESSEE IN INDIA HAD CHARGED SERVI CE TAX ON THE SERVICES THEY PROVIDED TO THE ASSESSEE DURING THE RELEVANT P REVIOUS YEAR. THE SERVICE TAX SO CHARGED WAS A COST/EXPENDITURE FOR T HE ASSESSEE WHICH WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE ASSESSEE 1688/BANG/2018 PAGE 3 OF 15 COULD NOT UTILIZE THE SERVICE TAX SO CHARGED AS INP UT SERVICE TAX BECAUSE THE SERVICES PROVIDED BY THE ASSESSEE TO ITS PARENT COM PANY WAS EXPORT OF SERVICE WHICH IS NOT SUBJECT TO LEVY OF SERVICE TAX . SINCE SERVICE TAX WHICH WAS CHARGED BY THE SERVICE PROVIDERS TO THE ASSESSE E AND SINCE THE SERVICE TAX SO CHARGED WAS NOT AVAILABLE FOR USE AS SERVICE TAX INPUT CREDIT, THE SERVICE TAX CHARGED BY THE VENDORS WHO PROVIDED SERVICES TO THE ASSESSEE HAD TO BE REGARDED AS AN EXPENDITURE WHICH WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND HEN CE ALLOWABLE AS DEDUCTION UNDER SECTION 37(1) OF THE ACT. THE SERVI CE TAX INPUT CREDIT TO THE EXTENT NOT AVAILABLE TO THE ASSESSEE WAS WRITTEN OF F AND THE SAME SHOULD BE REGARDED AS EXPENDITURE THAT SHOULD BE ALLOWED A S DEDUCTION U/S.37(1) OF THE ACT. 5. IT WAS FURTHER SUBMITTED THAT THE SERVICE TAX P AID AND WRITTEN OFF IN THE BOOKS OF ACCOUNT WAS ACTUALLY PAID BY THE ASSES SEE TO VARIOUS VENDORS WHO PROVIDED SERVICES TO THE ASSESSEE DURING THE YE AR AND THEREFORE THE SERVICE TAX PAID WAS ALLOWABLE DEDUCTION UNDER SECT ION 43B OF THE ACT ALSO. 6. THE ASSESSEE ALSO POINTED THAT AS PER THE PROVIS IONS OF SECTION 145A OF THE ACT, THE COST OF GOODS FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS & GAINS O F BUSINESS OR PROFESSION' SHALL BE ADJUSTED TO INCLUDE ANY TAX, D UTY, CESS OR FEE (BY WHATEVER NAME CALLED) ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CON DITION AS ON THE DALE OF VALUATION. APPLYING THE SAME PRINCIPLES TO EVEN THE VALUATION OF SERVICES UTILIZED BY THE ASSESSEE, THE INPUT SERVICE TAX BEI NG OF REVENUE NATURE HAS BEEN RIGHTLY CLAIMED BY AS DEDUCTIBLE EXPENDITURE AS PART OF THE VALUATION OF THE SERVICES UTILIZED DURING THE YEAR UNDER THE PROVISIONS OF SECTION 37 R.W.S. 145 OF THE ACT. IN THIS REGARD T HE ASSESSEE RELIED ON THE FOLLOWING CASES LAWS. 1688/BANG/2018 PAGE 4 OF 15 TVC SKY SHOP LTD VS. DCIT ITA NO. 7907/MUM/2011 (I TAT. MUMBAI) (A.Y2008-09) NCS DISTILLERIES PVT. LTD V ITO ITA NO. 699/HYD/201 2 (ITAT, HYDERABAD) 7. WITHOUT PREJUDICE TO THE ABOVE CONTENTION, THE ASSESSEE CONTENDED THAT THE SERVICE TAX INPUT CREDIT WRITTEN OFF IS AL SO ALLOWABLE AS A 'BUSINESS LOSS' UNDER SECTION 28 ITSELF IN COMPUTING THE BUSI NESS INCOME FOR THE YEAR UNDER CONSIDERATION. THE WRITE OFF OF SERVICE TAX I NPUT CREDIT WHICH WAS ALREADY PAID BY THE ASSESSEE AND WOULD AMOUNT AMO UNT TO BUSINESS LOSS AND HENCE WAS ALLOWABLE IN COMPUTING THE BUSIN ESS INCOME. THE CONTENTION THAT WRITE OFF OF SERVICE TAX INPUT CRED IT AMOUNTING TO RS.2,15,89,831 DOES NOT QUALIFY AS AN ADMISSIBLE E XPENDITURE IS THEREFORE INCORRECT. 8. BESIDES THE ABOVE, THE ASSESSEE ALSO SUBMITTED T HAT THE CONDITION PRECEDENT FOR EXERCISE OF JURISDICTION U/S. 263 OF THE ACT BY THE PR.CIT WAS NOT PRESENT IN THE CASE OF ASSESSEE. IN THIS REGAR D, THE ASSESSEE POINTED OUT THAT AO BEFORE CONCLUDING THE ASSESSMENT HAS IS SUED A NOTICE U/S. 143(2) OF THE ACT DATED 29.8.2015 AND IN RESPONSE T O THE SAME, THE ASSESSEE FILED AUDITED FINANCIAL STATEMENT, TAX AUD IT REPORT, IT RETURN, ETC. ON 29.4.2015. THE ASSESSEE ALSO POINTED OUT THAT I N NOTE 20 TO THE FINANCIAL STATEMENT, THE DETAILS OF OTHER EXPENSES WHICH INCLUDE SERVICE TAX INPUT RECEIVABLE WRITTEN OFF HAS BEEN SPECIFICALLY MENTIONED. THE ASSESSEE THEREFORE CLAIMED THAT THE AO IS DEEMED TO HAVE MAD E ENQUIRY WITH REGARD TO SERVICE TAX INPUT RECEIVABLE WRITTEN OFF IN THE P&L ACCOUNT. 9. THE ASSESSEE ALSO POINTED OUT THAT THE AO AFTER CONCLUSION OF THE ASSESSMENT PROCEEDINGS ISSUED A NOTICE U/S. 154 OF THE ACT 5.12.2017 PROPOSING TO DISALLOW SERVICE TAX INPUT RECEIVABLE WRITTEN OFF AMOUNTING TO RS.2,15,89,831. THE ASSESSEE SENT A REPLY TO THE A FORESAID NOTICE U/S. 154 OF THE ACT DATED 5.12.2017. AFTER RECEIPT OF THE S AID REPLY DATED 1688/BANG/2018 PAGE 5 OF 15 19.12.2017, THE AO DID NOT PROCEED FURTHER. HOWEVER , PROCEEDINGS U/S.263 OF THE ACT HAS BEEN INITIATED BY THE PRINCIPAL CIT. THE ASSESSEE THEREFORE REQUESTED THAT THE PROCEEDINGS U/S. 263 OF THE ACT SHOULD BE DROPPED. 10. THE PR.CIT, HOWEVER, DID NOT AGREE WITH THE SUB MISSIONS OF THE ASSESSEE. SHE FOUND THAT ON FACTS, SCRUTINY OF REC ORDS REVEALED THAT THE AO DID NOT MAKE ANY ENQUIRIES ON THE ASPECT OF SERV ICE TAX INPUT RECEIVABLE WRITTEN OFF IN THE P&L ACCOUNT AND THEREFORE THERE WAS A FAILURE ON THE PART OF THE AO TO MAKE ANY ENQUIRIES ON THIS ASPECT BEFO RE CONCLUDING THE ASSESSMENT AND CONSEQUENTLY THE ORDER OF AO WAS ERR ONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE. 11. THE PR.CIT ALSO DEALT WITH THE CASE LAWS CITED ON BEHALF OF ASSESSEE IN THE FOLLOWING MANNER:- 6. THE OTHER CONTENTION OF THE ASSESSEE IS THAT T HE SERVICE TAX PAID HAS TO BE ALLOWED AS DEDUCTION EVEN THOUGH THE SAME IS NOT CLAIMED IN THE PROFIT AND LOSS ACCOUNT. IN THIS R EGARD THE ASSESSEE RELIED ON THE FOLLOWING CASE LAWS. TVC SKY SHOP LTD VS. DCIT ITA NO: 7907/MUM /2011 (I TAT, MUMBAI) (A.Y.2008-09) NCS DISTILLERIES PVT. LTD V ITO ITA NO. 699/HYD/201 2 (ITAT , HYDERABAD) IN THE CASE OF TVC SKY SHOP LTD VS. DCIT SERVICE TA X IS ALLOWED AS THE RELEVANT ASSESSEE COMPANY IS NEITHER A MANUF ACTURING COMPANY NOR A SERVICE PROVIDING COMPANY PAYING S ERVICE TAX AGAINST WHICH SUCH SERVICE TAX ON INPUT SERVICES CA N BE ADJUSTED. THE ASSESSEE COMPANY IS MERELY A TRADING COMPANY. T HERE IS NO PROVISION UNDER THE SERVICE TAX LAW TO REFUND SU CH INPUT SERVICE TAX IN THE ABSENCE OF ANY ADJUSTMENT FOR THE SAME W ITH THE OUTPUT SERVICE TAX LIABILITY OF THE COMPANY. THEREFORE, THE AMOUNT HAS BEEN HELD AS ALLOWABLE AS IT IS NOT ADJUSTABLE AGA INST ANY LIABILITY OF THE ASSESSEE OR REFUNDABLE BY THE SERVICE TAX DE PARTMENT. HOWEVER, THE FACTS AND CIRCUMSTANCES OF THE PRESE NT CASE ARE 1688/BANG/2018 PAGE 6 OF 15 ENTIRELY DIFFERENT AND THE ASSESSEE IS ENTITLED TO REFUND FROM SERVICE TAX DEPARTMENT. IT IS ADMITTED THAT THI S REFUND OF RS.2,04,68,882 HAS BEEN RECEIVED IN THE A.Y.2017-18 AS PER ITS LETTER DATED 28.03.2018. IN VIEW OF THE ABOVE THE CASE LAW CITED BY THE ASSESSEE IS NOT AVAIL TO THE ASSESSEE. IN THE CASE OF NCS DISTILLERIES PVT. LTD V ITO THE SERVICE TAX IS ALLOWED ON THE GROUND THAT THE RELEVANT COMPANY H AS CLOSED DOWN ITS MANUFACTURING UNIT AND CONSEQUENTLY TH E BENEFIT OF THE CENVAT CREDIT REMAINED UN-ADJUSTED. IN THE PRES ENT CASE THE ASSESSEE IS A GOI11G CONCERN AND NOT STOPPED ITS ACTIVITIES IN THE YEAR UNDER CONSIDERATION. THEREFORE, THIS CAS E LAW ALSO NOT HELP THE ASSESSEE'S CASE. SINCE THE ASSESSEE HAS NO T DEBITED THE SERVICE TAX PAID TO PROFIT & LOSS ACCOUNT AND THE ASSESSEE HAS ALTERNATE REMEDY TO GET REFUND OF THE ENTIRE SERVIC E TAX INPUT FROM THE SERVICE TAX DEPARTMENT , THE CLAIM OF THE ASS ESSEE IS NOT SUSTAINABLE IN LAW. 7. IN THE CASE OF CIT VS NOBLE AND HEWITT (I) (P) L TD (305 ITR 324), THE HON'BLE HIGH COURT OF DELHI HELD IN T HE CONTEXT OF 43B PAYMENTS HELD THAT WHEN THE ASSESSEE DID NOT DE BIT THE AMOUNT TO THE PROFIT & LOSS ACCOUNT AS AN EXPENDITU RE, THE QUESTION OF DISALLOWING THE DEDUCTION NOT CLAIMED W OULD NOT ARISE. IN VIEW OF THE ABOVE DECISION THE EXPENDITUR E I.E., SERVICE TAX NOT DEBITED TO PROFIT & LOSS ACCOUNT CANNOT BE DISALLOWED U/S 43B ON ACTUAL PAYMENT BASIS. TAKING THE SAME AN ALOGY, THE EXPENDITURE NOT DEBITED TO PROFIT & LOSS IS NOT ALLOWABLE AS AN EXPENDITURE. FURTHER IT IS NECESSARY TO NOTE THA T IN THE ASSESSEE'S CASE, THE CLAIM MADE IS ON ACCOUNT OF WR ITE OFF WHICH IS NOT IN ACCORDANCE WITH THE ACCEPTED ACCOUNTING P RINCIPLES OR PROVISIONS OF LAW. 12. FINALLY, THE PR. CIT GAVE THE FOLLOWING DIRECTI ONS TO THE AO:- 9. FROM THE FOREGOING DISCUSSION, IT IS MANIFEST LY CLEAR THAT THE ASSESSMENT ORDER DATED 27.09.2016 PASSED BY THE ASSESSING OFFICER IN THE CASE OF THE ASSESSEE FOR A.Y. 2014-15 IS NOT ONLY ERRONEOUS BUT ALSO PREJUDICIAL TO THE INTEREST S OF REVENUE AND THE TWIN CONDITIONS AS CONTEMPLATED IN SEC. 263 ARE SATISFIED IN THE PRESENT CASE. CONSEQUENTLY, THE ASSESSMENT IS S ET ASIDE TO THE FILE OF THE AO WITH A DIRECTION TO THE ASSESSING OF FICER TO 1688/BANG/2018 PAGE 7 OF 15 EXAMINE THE AFORESAID ISSUES AND REDO THE ASSESSMEN T AFRESH AS PER LAW AFTER AFFORDING REASONABLE OPPORTUNITY O F BEING HEARD TO THE ASSESSEE. 13. AGGRIEVED BY THE AFORESAID ORDER OF THE PR.CIT, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 14. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE PR. CIT IN THE FORM OF REPLY TO THE SHOW CAUSE NOTICE U/S. 263 OF THE ACT. ACCORDING TO HIM, THE SERVICE TAX INPUT THAT WAS WRITTEN OFF IN THE P&L A/C WAS OFFERED TO TAX IN THE SUBSEQUENT ASSESSMENT YEAR AND THEREFORE THERE WAS NO LOSS OF REVENUE AND THEREFOR E THE CONDITION FOR EXERCISE OF JURISDICTION U/S. 263 OF THE ACT THAT THERE SHOULD BE LOSS OF REVENUE IS NOT SATISFIED IN THE CASE OF ASSESSEE. IN THIS REGARD, HE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF CIT V. NTPC LTD. (2017) 88 TAXMANN.COM 561 (SC) WHEREIN THE HONBLE SUPREME COURT HELD THAT WHEN SUBSEQUENT EVENTS DEMONSTRATE THAT THERE WAS NO LEAKAGE OF REVENUE, JURISDICTION U/S. 263 OF THE ACT WAS NOT R EQUIRED TO BE EXERCISED. HE ALSO RELIED ON THE DECISION OF HONBLE SUPREME C OURT IN THE CASE OF MALABAR INDUSTRIAL COMPANY LTD. V. CIT 243 ITR 83 ( SC) FOR THE PROPOSITION THAT TWO CONDITIONS ARE REQUIRED TO BE SATISFIED FO R INVOKING JURISDICTION U/S. 263 OF THE ACT VIZ., THE ORDER SOUGHT TO BE REVISED MUST BE ERRONEOUS AND ALSO PREJUDICIAL TO THE INTERESTS OF REVENUE. HE A LSO SUBMITTED THAT THE JURISDICTION U/S. 263 OF THE ACT SHOULD BE EXERCISE D ONLY WHEN THE ORDERS CHALLENGED ARE UNSUSTAINABLE IN LAW. 15. ON MERITS OF THE ISSUE WHICH WAS SUBJECT MATTER OF THE ORDER U/S. 263 OF THE ACT, THE LD. COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF ITAT DELHI BENCH IN THE CASE OF MARUTI SUZUKI (I) LTD. V. ACIT [2015] 60 TAXMANN.COM 411 WHEREIN THE DELHI ITAT HAS DEALT WITH THE UNUTILISE D BALANCE OF EXCISE DUTY UNDER PLA IN THE CONTEXT OF PROVISIONS OF SECTION 1688/BANG/2018 PAGE 8 OF 15 43B AND SECTION 145A OF THE ACT AND THE RATIO LAID DOWN THEREIN IS IN FAVOUR OF ASSESSEE. 16. THE LD. DR RELIED ON THE ORDER OF PR.CIT AND HI GHLIGHTED THE FACT THAT THIS ASPECT OF SERVICE TAX INPUT RECEIVABLE WRITTEN OFF WAS NOT SPECIFICALLY ENQUIRED INTO BY THE AO BEFORE CONCLUDING THE ASSES SMENT PROCEEDINGS, NOR WAS ANY ENQUIRY RAISED IN THE NOTICE ISSUED U/S . 143(2) DATED 29.8.2015 AND NOTICE U/S. 142(1) DATED 12.4.2016. 17. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF DEVELOPMEN T OF SOFTWARE SERVICES. THESE SOFTWARE DEVELOPMENT SERVICES ARE P ROVIDED TO ITS HOLDING COMPANY METRICSTREAM INC, USA. DURING T HE FINANCIAL YEAR RELEVANT TO AY 2014-15, THE ASSESSEE EXPORTED SOFTW ARE SERVICES TO METRICSTREAM INC TO THE TUNE OF RS. 1,68,77,13,290/- AND AS PER THE RELEVANT SERVICE TAX LAW PREVALENT DURING FY 2013-14, NO SERVICE TAX WAS REQUIRED TO BE PAID BY ANY EXPORTER OF SERV ICE. HOWEVER, VARIOUS VENDORS WHO PROVIDED SERVICES TO THE ASSESSEE IN IN DIA HAD CHARGED SERVICE TAX ON THE SERVICES THEY PROVIDED TO THE AS SESSEE DURING THE RELEVANT PREVIOUS YEAR. THE SERVICE TAX SO CHARGED WAS A COST/EXPENDITURE FOR THE ASSESSEE WHICH WAS INCURRED WHOLLY AND EXCL USIVELY FOR THE PURPOSE OF BUSINESS. THE ASSESSEE COULD NOT UTILIZE THE SER VICE TAX SO CHARGED AS INPUT SERVICE TAX BECAUSE THE SERVICES PROVIDED BY THE ASSESSEE TO ITS PARENT COMPANY WAS EXPORT OF SERVICE WHICH IS NOT S UBJECT TO LEVY OF SERVICE TAX. SINCE SERVICE TAX WHICH WAS CHARGED BY THE SERVICE PROVIDERS TO THE ASSESSEE AND SINCE THE SERVICE TAX SO CHARGE D WAS NOT AVAILABLE FOR USE AS SERVICE TAX INPUT CREDIT, THE SERVICE TAX CH ARGED BY THE VENDORS WHO PROVIDED SERVICES TO THE ASSESSEE HAD TO BE REGARDE D AS AN EXPENDITURE WHICH WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE P URPOSE OF BUSINESS AND HENCE ALLOWABLE AS DEDUCTION UNDER SECTION 37(1) OF THE ACT. THE SERVICE TAX INPUT CREDIT TO THE EXTENT NOT AVAILABLE TO THE ASSESSEE WAS WRITTEN OFF 1688/BANG/2018 PAGE 9 OF 15 AND THE SAME SHOULD BE REGARDED AS EXPENDITURE THAT SHOULD BE ALLOWED AS DEDUCTION U/S.37(1) OF THE ACT. 18. THE FIRST ASPECT WHICH NEEDS TO BE EXAMINED IS AS TO WHETHER THE AO BEFORE CONCLUDING THE ASSESSMENT DID MAKE ANY ENQUI RY ON THIS ASPECT. ADMITTEDLY THE AO BEFORE CONCLUDING THE ASSESSMENT PROCEEDINGS DID NOT MAKE ANY ENQUIRIES WITH REGARD TO THE DEDUCTION CLA IMED IN THE PROFIT AND LOSS ACCOUNT WHILE COMPUTING INCOME FROM BUSINESS O N ACCOUNT OF SERVICE TAX INPUT WRITTEN OFF. THE QUESTION WHETHER LIABIL ITY ON ACCOUNT OF SERVICE TAX INPUT WRITTEN OFF WAS ALLOWABLE AS DEDUCTION OR NOT IS NOT THE ISSUE IN THESE PROCEEDINGS. THE ISSUE IS WHETHER THE AO FAI LED TO MAKE ENQUIRIES ON THIS ASPECT WHILE CONCLUDING THE ORIGINAL ASSESS MENT. FROM THE NOTICE ISSUED U/S.143(2) AND 142(1) OF THE ACT, WE DO NOT FIND ANY QUERY HAVING BEEN RAISED BY THE AO ON HOW SERVICE TAX INPUT WRIT TEN OFF WAS AN EXPENDITURE WHICH CAN BE CLAIMED WHILE COMPUTING IN COME FROM BUSINESS. THE LD. COUNSEL FOR THE ASSESSEE COULD NOT SUBSTANT IATE BEFORE US AS TO HOW THE AO MADE ENQUIRIES ON THIS ISSUE BEFORE CONC LUDING THE ASSESSMENT, EXCEPT BY POINTING OUT THAT ALL FACTS W ERE LAID BEFORE THE AO AND IT CAN BE PRESUMED THAT HE HAD TAKEN NOTE OF TH IS ASPECT WHILE CONCLUDING THE ASSESSMENT. THE FACT THAT THE AO HI MSELF INITIATED PROCEEDINGS U/S.154 OF THE ACT TO RECTIFY ERROR APP ARENT ON RECORD ON THE ASPECT OF HAVING ALLOWED SERVICE TAX INPUT WRITTEN OFF AS A DEDUCTION GOES TO SHOW THAT HE HAD WHILE COMPLETING THE ASSESSMENT NO T ENQUIRED OR WAS NOT CONSCIOUS OF THE MERITS OF THE CLAIM FOR DEDUCTION OF THE AFORESAID SUM WHILE COMPUTING INCOME. THE LAW IS WELL SETTLED TH AT IF THERE IS A FAILURE ON THE PART OF AO TO MAKE AN ENQUIRY ON THE ISSUE WHIC H CALLS FOR AN ENQUIRY, THAT BY ITSELF WILL RENDER THE ORDER OF ASSESSMENT ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. IT HAS BEEN SO HEL D BY THE HONBLE DELHI HIGH COURT IN THE CASE OF GEE VEE ENTERPRISES VS. DCIT 99 ITR 375 & 1688/BANG/2018 PAGE 10 OF 15 386(DELHI) . THE FOLLOWING PASSAGE FROM THE SAID DECISION WOU LD EXPLAIN CLEARLY THE LEGAL POSITION IN THIS REGARD:- (13) SHRI G.C. SHARMA ARGUED THAT THE ORDERS PASSE D BY INCOME- TAX AUTHORITIES UNDER SECTIONS 34 AND 33B OF THE OL D ACT CORRESPONDING TO SECTION 147, AND 263 OF THE NEW AC T STOOD ON THE SAME FOOTING WHEN THEY WERE CHALLENGED AS BEING WIT HOUT JURISDICTION BY WAY OF A WRIT PETITIONS WE DO NOT, HOWEVER, THINK THAT HE CAN DERIVE ANY ASSISTANCE FROM THE DECISION IN C ALCUTTA DISCOUNT COMPANY'S CASE. AS POINTED OUT BY THE SUPREME COURT IN MYSORE STATE ROAD TRANSPORT CORPORATION V. THE MYSORE ROAD APPELLATE TRIBUNAL, (CIVIL APPEAL NO.1801 OF 1970 DECIDED ON AUGUST 8, 1974) REFERRING TO AN ESSAY ON 'DETERMINING THE RATIO DEC IDENDI OF A CASE' BY DR. A. L. GOODHART, 'THE PRINCIPLE OF A' CASE IS DETERMINED BY TAKING INTO ACCOUNT THE FACTS TREATED BY THE JUDGE DECIDING A CASE AS MATERIAL AND HIS DECISION AS BASED THEREON.' THE RA TIO OF THE DECISION IN CALCUTTA DISCOUNT COMPANY'S CASE CANNOT APPLY TO THE FACTS OF THE PRESENT CASE FOR THE FOLLOWING REASONS :- (I) UNDER SECTION 34, THE DUTY OF THE ASSESSED IS O NLY TO STATE THE MATERIAL FACTS NECESSARY FOR THE PURPOSE OF .ASSESS MENT. ONCE THESE FACTS ARE ACCEPTED AND AN ASSESSMENT IS MADE, THE INCOME TAX OFFICER CANNOT REOPEN THE ASSESSMENT UNLESS HE HAD REASON TO BELIEVE THAT THE MATERIAL FACTS WERE NOT TRULY DISC LOSED.. THE REASON WHY THE REOPENING OF THE ASSESSMENT IS THUS MADE SO MEWHAT DIFFICULT IS TO PRESERVE THE FINALITY OF THE PREVIO US DECISION WHICH SHOULD NOT BE DESTROYED EXCEPT FOR A GOOD REASON. O NCE IT IS FOUND THAT THE DISCLOSURE OF FACTS WAS COMPLETE, NO JURIS DICTION COULD ARISE FOR THE REOPENING OF THE ASSESSMENT. (II) ON THE OTHER HAND, THE CONDITION FOR THE ASSUMPTION OF JURISDICTION UNDER OLD SECTION 33B AND THE NEW SECT ION 263 IS EASIER TO FULFILL. THE REASON IS THAT IT IS NOT THE INCOME TAX OFFICER BUT A SUPERIOR OFFICER LIKE THE COMMISSIONE R WHO IS EXERCISING A REVISIONAL JURISDICTION SUO MOTU THERE UNDER. THE SUPERIOR OFFICER COULD BE TRUSTED WITH A LARGER POW ER. THE ONLY REQUIREMENT FOR THE EXERCISE OF THIS POWER IS THAT THE COMMISSIONER SHOULD CONSIDER THAT THE ORDER PASSED BY THE. INCOME TAX OFFICER IS 'ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE.' WHAT IS THE MEANING OF 'ERRONEOUS' IN THIS CONTEXT? IT WAS ARGUED FOR THE ASSESSEE BY SHRI G. C. SHARMA THAT THE WORD 'ERRONEOUS' MEANS THAT THE ORDER MUST APPEAR TO BE WRONG ON THE FACE OF IT. IN OTHER WORDS, HE EQUATED THE 'ERROR' WITH 'ERROR OF LAW APPARENT ON THE FACE OF RECORD' WHICH IS A WELL-KNOWN 1688/BANG/2018 PAGE 11 OF 15 GROUND FOR THE REVIEW OF A QUASI-JUDICIAL ORDER BY THIS COURT UNDER ARTICLE 226. WE ARE UNABLE TO AGREE WITH TH IS INTERPRETATION. THE INTENTION OF THE LEGISLATURE WAS TO GIVE A WIDE POWER TO THE COMMISSIONER. HE MAY CONSIDER THE ORDER OF THE INCO ME TAX OFFICER AS ERRONEOUS NOT ONLY BECAUSE IT CONTAINS S OME APPARENT ERROR OF REASONING OR OF LAW OR OF FACT ON THE FACE OF IT BUT ALSO BECAUSE IT IS A STEREO-TYPED ORDER WHICH S IMPLY ACCEPTS WHAT THE ASSESSED HAS STATED IN HIS RETURN AND FAILS TO MAKE INQUIRIES WHICH ARE CALLED FOR IN THE CIRCUMST ANCES OF THE CASE. SHRI SHARMA'S CONTENTION THAT THIS WOULD GIVE THE COMMISSIONER THE POWER TO REVISE THE ORDER OF THE I NCOME TAX OFFICER MERELY ON THE GROUND OF SUSPICION IS. UNTEN ABLE IN VIEW OF THE FOLLOWING TWO SUPREME COURT DECISIONS WHICH HAVE AL READY CONSTRUED THE OLD SECTION 33B CONTRARY TO SHRI SHAR MA'S CONTENTION. IN RAMPYARI DEVI SARAOGI V. CIT, 67 I.T .R. 84, THE INCOME TAX OFFICER ACCEPTED THE RETURN OF THE ASSES SED IN RESPECT OF THE INITIAL CAPITAL, THE GIFT RECEIVED AND THE SALE OF JEWELLERY, THE INCOME FROM BUSINESS, ETC., WITHOUT ANY INQUIRY OR EVIDENCE WHATSOEVER. FOR THIS REASON THE COMMISSIONER HELD T HE ORDER TO BE ERRONEOUS. IN REVISION, HE CANCELLED THE ORDER AND ORDERED THE INCOME TAX OFFICER TO MAKE A FRESH ASSESSMENT. IN H IS ORDER THE COMMISSIONER HAD USED CERTAIN NEW GROUNDS WHICH HAD NOT BEEN DISCLOSED TO THE ASSESSED IN THE NOTICE GIVEN TO HI M TO SHOW CAUSE WHY THE ORDER OF THE INCOME TAX OFFICER SHOULD NOT BE REVISED. BUT APART FROM THESE NEW GROUNDS, THE SUPREME COURT OBS ERVED AT PAGE 88 OF THE REPORT THAT- 'THERE WAS AMPLE MATERIAL TO SHOW THAT THE INCOME T AX OFFICER MADE THE ASSESSMENTS IN UNDUE HURRY........ ,...THE ASSESSED MADE A DECLARATION GIVING THE FACTS REGARD ING INITIAL CAPITAL, THE ORNAMENTS AND PRESENTS RECEIVED AT THE TIME OF MARRIAGE, OTHER GIFTS RECEIVED FROM HER FATHER-IN L AW, ETC., WHICH SHOULD HAVE PUT ANY INCOME TAX OFFICER ON HIS GUARD. BUT THE INCOME TAX OFFICER WITHOUT MAKING ANY INQUI RIES TO SATISFY HIMSELF PASSED THE ASSESSMENT ORDER ....... A SHORT- TYPED ASSESSMENT ORDER WAS MADE FOR EACH ASSESSMENT YEAR......NO EVIDENCE WHATSOEVER WAS PRODUCED IN RE SPECT OF THE MONEY-LENDING BUSINESS DONE. ............NO NAM ES WERE GIVEN AS TO THE PARTIES TO WHOM THE LOANS WERE ADVA NCED.' IN TARA DEVI AGGARWAL VS. CIT, 88 I.T.R. 323, ALSO THE INCOME TAX OFFICER, HOWRAH, WHILE REMARKING THAT THE SOURCE OF INCOME OF THE ASSESSED WAS INCOME FROM SPECULATION AND INTEREST O N INVESTMENTS STATED THAT NEITHER THE ASSESSED , ABLE TO PRODUCE THE DETAILS AND 1688/BANG/2018 PAGE 12 OF 15 VOUCHERS OF THE SPECULATIVE TRANSACTIONS MADE DURIN G THE ACCOUNTING YEAR NOR WAS THERE ANY EVIDENCE REGARDING THE INTER EST RECEIVED BY THE ASSESSED FROM DIFFERENT PARTIES ON HER INVESTME NTS. NOTWITHSTANDING THESE DEFECTS THE INCOME TAX OFFICE R DID NOT INVESTIGATE INTO THE VARIOUS SOURCES BUT ASSESSED T HE ASSESSED ON A TOTAL INCOME OF RS. 9037.00 . THE INQUIRIES MADE BY THE COMMISSIONER REVEALED THAT THE ASSESSED DID NOT RES IDE OR CARRY ON BUSINESS AT THE ADDRESS GIVEN IN THE RETURN. THE CO MMISSIONER WAS ALSO OF THE VIEW THAT THE INCOME TAX OFFICER WAS NO T JUSTIFIED IN ACCORDING THE INITIAL CAPITAL, THE SALE OF ORNAMENT S, THE INCOME FROM BUSINESS, THE INVESTMENTS, ETC., WITHOUT ANY INQUIR Y OR EVIDENCE WHATSOEVER AND THAT THE ORDER OF ASSESSMENT WAS ERR ONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. THE HI GH COURT HELD THAT THERE WERE MATERIALS TO JUSTIFY THE COMMISSIONER'S FINDING THAT THE ORDER OF ASSESSMENT WAS ERRONEOUS INSOFAR AS IT WAS PREJUDICIAL TO THE INTERESTS OF THE REVENUE. SHRI SHARMA TRIED TO DISTINGUISH THIS DECISION ON THE GROUND THAT THE ADDRESS OF THE ASSE SSED IN THAT CASE WAS GIVEN INCORRECTLY. THE DECISION OF THE HIGH COU RT AND THAT OF THE SUPREME COURT WERE NOT, HOWEVER, BASED ON THAT GROU ND AT ALL. ON THE CONTRARY, THE SUPREME COURT FOLLOWED THEIR PREV IOUS DECISION IN RAMPYARI DEVI'S CASE AND UPHELD THE DECISION OF THE HIGH COURT PRECISELY ON THE SAME GROUNDS. THESE TWO DECISIONS SHOW THAT IT IS NOT NECESSARY FOR THE COMMISSIONER TO MAKE FURTH ER INQUIRIES BEFORE CANCELLING THE ASSESSMENT ORDER OF THE INCOME TAX OFFICER. THE COMMISSIONER CAN REGARD THE ORDER AS ERRONEOUS ON THE GROUND THAT IN THE CIRCUMSTANCES O F THE CASE THE INCOME TAX OFFICER SHOULD HAVE MADE FURTHER INQ UIRIES BEFORE ACCEPTING THE STATEMENTS MADE BY THE ASSESSE D IN HIS RETURN. (14) THE REASON IS OBVIOUS. THE POSITION AND FUNCTION OF THE INCOME TAX OFFICER IS VERY DIFFERENT FROM THAT OF A CIVIL COURT. THE STATEMENTS MADE IN A PLEADING PROVED BY THE MIN IMUM AMOUNT OF EVIDENCE MAY HE ACCEPTED BY A CIVIL COURT IN THE ABSENCE OF ANY REBUTTAL. THE CIVIL COURT IS NEUTRAL . IT SIMPLY GIVES DECISION ON THE BASIS OF THE PLEADING AND EVI DENCE WHICH COMES BEFORE IT. THE INCOME TAX OFFICER IS NOT ONLY AN ADJUDICATOR BUT ALSO AN INVESTIGATOR. HE CANNOT REM AIN PASSIVE IN THE FACE OF A RETURN WHICH IS APPARENTLY IN ORDE R BUT CALLS FOR FURTHER INQUIRY. IT IS HIS DUTY TO ASCERTAIN THE TR UTH OF THE FACTS STATED IN THE RETURN WHEN THE CIRCUMSTANCES OF THE CASE ARE SUCH AS TO PROVOKE AN INQUIRY. THE MEANING TO BE GI VEN TO THE WORD 'ERRONEOUS' IN SECTION 263 EMERGES OUT OF THIS CONTRACT. IT IS BECAUSE IT IS INCUMBENT ON THE INCOME TAX OFFICE R TO FURTHER 1688/BANG/2018 PAGE 13 OF 15 INVESTIGATE THE FACTS STATED IN THE RETURN WHEN CIR CUMSTANCES WOULD MAKE SUCH AN INQUIRY PRUDENT THAT THE WORD 'E RRONEOUS' IN SECTION 263 INCLUDES THE FAILURE TO MAKE SUCH AN INQUIRY. THE ORDER BECOMES ERRONEOUS BECAUSE SUCH AN INQUIRY HAS NOT BEEN MADE AND NOT BECAUSE THERE IS ANYTHING WRONG W ITH THE ORDER IF ALL THE FACTS STATED THEREIN ARE ASSUMED T O BE CORRECT. (EMPHASIS SUPPLIED) 19. SINCE THERE WAS A FAILURE ON THE PART OF AO TO MAKE NECESSARY ENQUIRY, WE ARE OF THE VIEW THAT THE CIT WAS JUSTIF IED IN INVOKING JURISDICTION U/S. 263 OF THE ACT IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 20. THE DECISION IN THE CASE OF NTPC LTD. (SUPRA) IS NOT RELEVANT IN THE PRESENT CASE BECAUSE THE JURISDICTION U/S.263 OF TH E ACT IS EXERCISED ON THE GROUND THAT THE AO FAILED TO MAKE NECESSARY ENQUIRI ES WHICH HE OUGHT TO HAVE BEEN MADE AND IF THAT GROUND IS FOUND TO BE CO RRECT THEN THAT BY ITSELF IS ENOUGH TO CONCLUDE THAT THE ORDER OF THE AO IS B OTH ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. THE DE CISION IN THE CASE OF MALABAR INDUSTRIES LTD. (SUPRA) IS AGAIN ON THE GEN ERAL PRINCIPLES FOR INVOCATION OF POWER U/S.263 OF THE ACT AND THOSE CO NDITIONS ARE SATISFIED IN THE PRESENT CASE. 21. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT EXPLANATION 2 TO SEC.263 OF THE ACT WHICH WAS INTRODUCED BY THE F INANCE ACT, 2015 W.E.F. 1.6.2015 IS NOT APPLICABLE TO THE PRESENT CASE WHIC H RELATES TO AY 2014-15 AND IS APPLICABLE ONLY FROM AY 2015-16 ONWARDS. EX PLANATION-2 TO SEC.263 READS THUS:- EXPLANATION 2.FOR THE PURPOSES OF THIS SECTION, I T IS HEREBY DECLARED THAT AN ORDER PASSED BY THE ASSESSING OFFI CER SHALL BE DEEMED TO BE ERRONEOUS IN SO FAR AS IT IS PREJUDICI AL TO THE INTERESTS OF THE REVENUE, IF, IN THE OPINION OF THE PRINCIPAL COMMISSIONER OR COMMISSIONER, 1688/BANG/2018 PAGE 14 OF 15 (A) THE ORDER IS PASSED WITHOUT MAKING INQUIRIES OR VERIFICATION WHICH SHOULD HAVE BEEN MADE; (B) THE ORDER IS PASSED ALLOWING ANY RELIEF WITHO UT INQUIRING INTO THE CLAIM; (C) THE ORDER HAS NOT BEEN MADE IN ACCORDANCE WITH ANY ORDER, DIRECTION OR INSTRUCTION ISSUED BY THE BOARD UNDER SECTION 119 ; OR (D) THE ORDER HAS NOT BEEN PASSED IN ACCORDANCE W ITH ANY DECISION WHICH IS PREJUDICIAL TO THE ASSESSEE, REND ERED BY THE JURISDICTIONAL HIGH COURT OR SUPREME COURT IN THE C ASE OF THE ASSESSEE OR ANY OTHER PERSON. 22. WE ARE OF THE VIEW THAT WE NEED NOT EXAMINE TH E ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD BEC AUSE EXPLNATION-2 IS ONLY A DEEMING PROVISION AND IF ON FACTS IT IS FOUN D THAT THE AO DID NOT MAKE ANY ENQUIRIES BEFORE CONCLUDING THE ASSESSMENT ON THE QUESTION WHETHER SERVICE TAX INPUT WRITTEN OFF CAN BE ALLOWE D AS A DEDUCTION IN COMPUTING INCOME FROM BUSINESS, THERE IS NO NEED TO TAKE RECOURSE TO THE DEEMING PROVISIONS. 23. AS FAR AS THE MERITS OF THE CLAIM MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SERVICE TAX INPUT WRITTEN OFF IS AN ALLOWABLE DEDUCTION, HE RELIED ON THE DECISION OF DELHI ITAT IN THE CASE OF MARUTI SUZUKI LTD. (SUPRA) . WE DO NOT THINK IT NECESSARY TO DEAL WITH THE ME RITS OF THE CLAIM OF THE ASSESSEE AS THE SAME WILL BE EXAMI NED BY THE AO IN THE SET ASIDE PROCEEDINGS. WE, HOWEVER, MAKE IT CLEAR THAT THE OBSERVATIONS OF THE CIT IN PARAGRAPHS 6 & 7 OF THE IMPUGNED ORDER WITH REGARD TO CORRECTNESS OF THE CLAIM OF THE ASSESSEE REGARDING DEDUCTIBILITY OF THE SUM IN QUESTION ARE NOT WARRANTED BECAUSE THE JURISDICT ION U/S.263 OF THE ACT IS INVOKED ON THE GROUND THAT THE AO FAILED TO MAKE NE CESSARY ENQUIRY WHICH HE OUGHT TO HAVE MADE BEFORE COMPLETING THE ASSESSM ENT. THE AFORESAID OBSERVATIONS IN THE IMPUGNED ORDER SHOULD NOT THERE FORE HAVE ANY EFFECT IN 1688/BANG/2018 PAGE 15 OF 15 THE SET ASIDE PROCEEDINGS BEFORE THE AO AND THE SUB SEQUENT APPELLATE AUTHORITIES. 24. WITH THE ABOVE OBSERVATIONS, THE APPEAL OF THE ASSESSEE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF JANUARY, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESID ENT BANGALORE, DATED, THE 10 TH JANUARY, 2020. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. PR. CIT 4. C IT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FIL E BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.