KHANNA PAPER MILLS LIMITED,AMRITSAR V. DCIT, CIRCLE-1, AMRITSAR

ITA 325/ASR/2024

AI Insights

The case involves Khanna Paper Mills Ltd., which appealed against the orders of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, concerning the assessment years 2017-18 and 2018-19. The PCIT had set aside the assessment orders made by the National Faceless Assessment Centre (NFAC), alleging that they were erroneous and prejudicial to the interests of the revenue. The Tribunal examined whether the PCIT's invocation of Section 263 was justified, considering the detailed submissions and documents provided by the appellant during the assessment proceedings. The Tribunal concluded that the PCIT had not conducted a proper inquiry and that the orders were based on audit objections without substantial evidence to support the claim that the assessments were erroneous or prejudicial to the revenue.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 471770 (ITAT-AMRITSAR)
• Duration Of Justice: 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 12-09-2024
• Assessment Year: 2018-2019
• Appeal Filed On: 25-05-2024
• Other Referred Cases: National Thermal Power Co. Ltd vs CIT, Malabar Industrial Co. Ltd. v/s CIT, Principal Commissioner of Income-tax v. H.T.L Ltd., Principal Commissioner of Income-tax v. Shukla Dairy (P.) Ltd., CMJ Breweries (P.) Ltd. v. Union of India, Bajaj Housing Finance Ltd. v. Principal Commissioner of Income-tax, GyanInfrabuild (P.) Ltd. v. Principal Commissioner of Income-tax, AgraniBuildestate v. Principal Commissioner of Income-tax, ShriKeshoraipatanSahkari Sugar Mills Ltd. v. Principal Commissioner of Income-tax, Impact Foundation (India) v. Commissioner of Income-tax, (Exemptions), Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd., Principal Commissioner of Income-tax v. Earth Minerals Co. Ltd., Principal Commissioner of Income-tax v. Britannia Industries Ltd., Principal Commissioner of Income-tax v. S N Tradelink (P.) Ltd., Principal Commissioner of Income-tax v. Shukla Dairy (P.) Ltd., Principal Commissioner of Income-tax v. ShivshahiPunarvasanPrakalp Ltd., Commissioner of Income-tax v. M. K. Foundation, Commissioner of Income Tax, Bangalore v. Chemsworth (P.) Ltd., Commissioner of Income Tax, Bangalore v. Aztec Software Technology Ltd., Principal Commissioner of Income-tax v. Principal Commissioner of Income-tax, Central (1)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Set aside; Transfer pricing; International transaction; Depreciation; Sale consideration of property below Jantri Value; Rule of consistency; TDS; Audit objection; Assessment record; Rule 8D; Revision of order; Prejudicial to interest
• Section: 143(3); 142(1); 143(2); 119; 263; 48; 153; 92CA; 73; 144C; 80IA; 20

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR (HYBRID COURT) BEFORE DR. MITHA LAL MEENA, ACCOUNTANT MEMBER AND SH. UDAYAN DASGUPTA, JUDICIAL MEMBER I.T.A. Nos. 324 & 325/Asr/2024 Assessment Years: 2017-18 & 2018-19 Khanna Paper Mills Ltd. FatehgarhChurian Road, Amritsar-143001, Punjab [PAN: AAACK1375K] (Appellant) Vs. DCIT, Circle-1, Amritsar (Respondent) Appellant by Respondent by : : Sh. Rohit Kapoor, CA, Sh. Jatinder Nagpal, Adv. & V.S. Aggarwal, ITP Smt. Vandana Vijay Mohite, CIT-DR Date of Hearing Date of Pronouncement : : 12.09.2024 09.10.2024 ORDER Per Dr. Mitha LalMeena, AM: Both the captioned appeals are filed by the appellant-assessee against the orders of the Ld. Pr. Commissioner of Income Tax-1, Amritsar [hereinafter referred to as “the PCIT”] even dated 30.03.2024 passed u/s 263 of the Income Tax Act, 1961 (in short “the Act”) in respect of Assessment Years: 2 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 2017-18 & 2018-19 which are emanating from the assessment orders of the NFAC, Delhi, passed u/s Section 144B read with Section 144C(3) of the Act. 2. The Ld. AR of the appellant submitted a letter dated 04/09/2024 stating that while filing form 36, the appellant had inadvertently submitted incomplete grounds of appeal. The AR, however, further highlighted the grounds of appeal submitted physically before the registrar, were complete and correct. As such, the AR requested that the common grounds of appeal as submitted manually/physically should be taken into consideration for the purpose of the aforesaid appeal. The grounds of appeal raised by the assessee are produced hereunder: 1. That the order passed by Ld. Pr. CIT under section 263 is illegal, void ab initio & unsustainable as the same has been passed without following mandatory requirement of law. 2. That the Order Passed under Section 263 is bad in law since, the twin conditions as embedded in Section 263 i.e. the order passed by the AO is erroneous and is prejudicial to the interest of revenue have not been satisfied. 3. That the Ld. Pr. CIT has erred in invoking the provisions of section 263 and setting aside the assessment order for fresh enquiry without appreciating the fact that the order passed by the AO is neither erroneous nor prejudicial to the interest of Revenue. That the order passed under section 263 is without properly appreciating the facts & evidence of the case is unjust and arbitrary. 4. That the Order Passed under Section 263 is bad in law since, the order passed by the assessing officer is not in any case prejudicial to the interest of the revenue since, as against available deduction under Section 801A of Rs 83,51,81,669, the Assessee has claimed deduction of Rs 44,56,27,360/-. That even if it is alleged that some of the expenses of the Non Specified units are attributed to the Specified Unit, the resultant loss of the Non Specified Unit get reduced and correspondingly deduction of the Specified unit will stand increased, which will be revenue neutral 3 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT exercise and as such the order passed by the assessing officer cannot be said to the prejudicial to the interest of the revenue. 5. That the order passed under Section 263 is bad in law since, the Ld. PCIT has passed the order under Section 263 without conducting any enquiry and had he conducted any enquiry, this fact would have been very clear that the order is not prejudicial to the interest of the revenue. That the deduction has been claimed after adjusting loss of the non-specified unit and as such any shifting of expenses as alleged by the PCIT would result in no loss to the revenue. 6. That the Order Passed under Section 263 is bad in law as the PCIT has failed to examine the documents submitted before the Ld. PCIT and records available before A.O. 7. That the Order passed under Section 263 is bad in law, since the PCIT had the privilege of looking at the consolidated Profit & Loss account and also the standalone Profit & Loss account of the eligible unit. Further the PCIT have not pointed out which expenses of specified unit which was presumed to be in excess and as such the proceedings under section 263 are based on surmises and conjectures which renders the order passed under section 263 as bad in Law. 8. That That on facts and circumstances of the case, the learned PCIT has erred in invoking his revisionary powers on the basis of proposal submitted by the ward officer which was initiated at the instance of audit objection only. That the PCIT has failed to appreciate that the order has been passed by the A.O. by considering the submissions filed offline and online. That the PCIT has failed to appreciate that the audit objection was raised merely on the basis of online records and ignoring the submissions made offline. That the CIT has passed the order under section 263 ignoring clause (b) to explanation 1 of section 263, that record in assessment include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the PCIT. As such the order passed by the Ld. PCIT under section 263 of the Act is bad in law. 9. That on the facts and circumstances of the case, the Ld. Pr. CIT has erred both on facts and in law in ignoring the fact that the issue raised by him in notice u/s 263 was before the AO and as such the jurisdiction on this issue u/s 263 cannot be assumed by him. 10. That on the facts and circumstances of the case, of the case, Pr. CIT has erred both on facts and in law in setting aside the issue of allocation of expenses to the file of the AO without properly appreciating the explanation of assessee given during the assessment proceedings brought on record. That PCIT has failed to 4 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT appreciate that separate books of the eligible unit are being maintained from year to year and the same have been have been verified by the assessing officers and by the TPO. That the PCIT has ignored the detailed verification made by A.O. and TPO while passing the order under section 263. 11. That without prejudice to above grounds, on the facts and circumstances of the case and law, Ld. Pr. CIT erred in branding assessment order, as erroneous/prejudicial on an issue which itself was covered by ambit of such assessment. Order passed u/s 263 is illegal and is liable to be quashed. 12. In view of the facts and circumstances of the case, the learned PCIT has erred in not appreciating the facts that the AO after examining the details, has adopted a possible opinion on the point raised in the notice issued by him and, therefore, the CIT lacks jurisdiction to invoke s. 263 of the Act. 13. That the appellant reserves the right to add, amend or modify any of the ground s of appeal 3. The appellant has raised an Additional legal ground of appeal in ITA No. 324& 325/Asr/2024: “14. That the ld. Pr. CIT has erred in invoking the provisions of section 263 merely on the basis of audit objections vide audit memo dated 26.05.2013 and on the basis of suggestion in made by the AO in letter addressed to Joint Commissioner of Income Tax (Audit) dated 09.02.2024.” 4. The Ld. AR submitted that the appellant wish to take additional ground of appeal in the above said case with regard to the fact that the provisions of section 263 have been invoked merely on the basis of audit objections and on the basis of suggestion made by the AO. Since, this is a legal ground of appeal, the permission may, please, be granted in view of the judgment of M/s National Thermal Plant Co. Ltd vs CIT as reported in 229 ITR 383 and 5 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT oblige. Further, no new facts are required to be investigated and, as such, the permission be allowed for admission of legal ground. 5. The Ld. Authorized Representative (AR), vide letter dated 12.09.2024, has submitted a request for raising an additional ground of appeal wherein he contended that the provisions of Section 263 had been invoked merely based on audit objections. The AR relied on the judgment in the case of National Thermal Power Co. Ltd. vs CIT, as reported in 229 ITR 383.The Departmental Representative (DR) did not object to the legal ground, and after considering the legal issue raised by the appellant and the cited judgment in National Thermal Power Co. Ltd. vs CIT, the additional ground of appeal is hereby permitted. 6. Since, the appellant has raised common grounds and additional grounds in both the appeal and hence the facts are taken from ITA No. 324/Asr/2024 for discussion as a lead case. Briefly, the facts of the case are that the assessee is a company with PAN AAACK1375K, engaged in the manufacture of paper and paper products, as well as the production, collection, and distribution of steam and electricity (power). The appellant filed its income tax return for the assessment year 2017-18 on 16.11.2017, declaring NIL income after claiming a deduction under Section 80IA 6 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT amounting to Rs. 44,56,27,360/-as per the Income Tax Act, 1961. The number of units run under the group are as under: - Particulars Paper Unit Power Unit I- (70 TPH) Power Unit II- (100 TPH) Year 02.02.1985 01.02.2002 01.05.2005 Stream Manufacturing of paper Distribution of Steam &Electricity Distribution of Steam & Electricity Unit Non-Specified Unit Non-Specified Unit Specified Unit eligible for deduction u/s 80IA(4)(iv) The case of the appellant was selected for complete scrutiny through CASS, and a statutory notice under Section 143(2) of the Income Tax Act, 1961 was issued on 09/08/2018 to address the following issues: - S. No. Issues I. Claim of any other amount allowable as deduction in schedule BP II. Depreciation claim III. Specified domestic transactions IV. Deduction claimed u/s80IA/80IAB/80IAC/80IB/80IC/80IBA/10/ 10AA V. Investments/Advances/Loans VI. International Transactions VII. Disallowance for payment of gratuity 7. The AO has made a separate reference to the Assistant Commissioner of Income Tax (Transfer Pricing Officer) under Section 92CA(1) to verify the arm’s length pricing for domestic specified transactions with associated enterprises. The sequence of events as narrated by the AR of the appellant are produced hereunder: - 7 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT Particulars Date Issues Audit report filed under form 10CCB read with rule 18BBB as per section 80IA(7) 10.11.2017 Standalone balance sheet for the power unit, comprising a capacity of 100 TPH (Tons Per Hour). Standalone audited profit and loss account for the power unit, comprising a capacity of 100 TPH. Standalone block of assets related to the power unit, comprising a capacity of 100 TPH. Standalone statement of eligible additions and subtractions in accordance with the provisions of the Income Tax Act, 1961. Combined audited balance sheet of the whole group 09.06.2017 Combined audited balance sheet and profit & Loss account of the whole group as per section 134 of companies act 2013 ITR and computation 16.11.2017 As per Income tax act 1961 and as per MAT Questionnaire issued by DCIT Central Circle 25.02.2019 1. Detailed questionnaire comprising of 24 questions. Relevant question 11 related to deduction u/s 801A was specifically addressedrelevant question placed at page 134 of the PB 2. Detail of expenses made with sister concern covered u/s 40A(2) [relevant question no 9 refer page 134 of the PB] 3. Month wise Detail of electricity expenses [relevant question no 18 refer page 135 of the PB] 4. Reply of the appellant That the appellant submitted 8 replies on various dates addressing each and every query of the questionnaire dated 25.02.2019. [relevant reply to the above queries placed at page 135 of the PB] Reply to the questionnaires issued by TPO 18.11.2019 Detailed Submissions along with annexure vide reply dated 24.12.2019 13.10.2020 Reply Submitted on 24.10.2020 along with transfer pricing study 02.01.2021 Question:Appellant was asked to furnish: a) complete audit report of non eligible unit and eligible unit for FY 2015-16 and 2016-17 b) Complete cost analysis of generation of power and steam of eligible unit II 100 TPH and comparison with non eligible unit 70TPH Reply of the appellant on 05.01.2021 along with relevant annexure [Page no 149-151A of the PB] along with complete books of accounts of eligible unit [Page No 122- 255 of the PB] 8 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 18.01.2021 Show cause proposing addition in respect of power and steam Reply given on 20.01.2021 and 22.01.2021 enclosed at page no 293A-356 of the PB 28.01.2021 Show cause proposing addition in respect of power and steam Reply given on 29.01.2021 enclosed at page no 359-372 of the PB Questionnaire issued by Faceless Assessment Centre 07.12.2020 Question was asked regarding details of deduction claimed u/s 80IA [Relevant page no 141 of the PB] Reply of the appellant dated 05.04.2021 [Page no 143- 147 of the PB] 1. The appellant has clarified that the deduction claimed was Rs. 43.74 crore and also submitted form 10CCB along with separate balance sheet of eligible unit. It was also explained that the activities of this unit commenced on 13.05.2005 and the appellant has consistently been allowed deduction from AY 2012-13. 2. The appellant also submitted that TPO vide order dated 13.01.2021 where unit wise calculation of eligible unit has been accepted 3. Details of deductions claimed in computation of income from business head amounting to Rs. 27564259/- along with the amount disallowed at point no 3 of schedule of BP Draft order u/s 144C by NFAC 30.04.2021 Proposing addition on the basis of order passed by the TPO Reply submitted on 06.09.2021 Audit Memo 26.05.2023 Issues: No separate books of accounts were maintained for the power unit-II and the manufacturing unit. Addition of Rs. 9,79,36,703/- as suggested in the Transfer Pricing Officer (TPO) order under Section 9-2CA(3). The deduction of Rs. 49,56,36,170/- allowed by the Assessing Officer (AO) is deemed inappropriate, as it was granted based on the assumption that the expenses pertained to the eligible unit (Power). Failure to submit vouchers and details related to TDS deductions. Lack of segregation in the depreciation allowances for the paper unit and the electricity unit. 9 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT Show cause notice u/s 154 12.12.2023 -------------------DO--------------------- Reply submitted in response to show cause notice u/s 154 26.12.2023 Brief History: The principle of consistency has been adhered to in allowing the Section 80IA(4) deduction from AY 2012-13 through AY 2016-17(Please refer page 451- 463). ISSUE: SEPARATE BOOKS OF ACCOUNTS a) The appellant explained that maintaining separate books of accounts is mandatory only for the eligible unit to determine the amount eligible for deduction. It was emphasized that a standalone balance sheet was duly submitted in the reply dated April 5, 2021, and was also uploaded on the Income Tax portal enclosed at page no.56-68 relevant page no.63 of PB. b) Furthermore, it was stated that the Transfer Pricing Officer (TPO) had reviewed complete records for the specified unit and that ledger accounts were also provided to the TPO. c) The Transfer Pricing Officer (TPO) has accepted the cost sheet related to steam and power for Unit-2, as detailed in Annexure A, provided in the replies dated January 29, 2021, in response to SCN dated 28.01.2021 (refer to page no. 357-358, 359-372 of the Paper Book). The total cost determined for producing the power was calculated at Rs. 37,80,10,887 (refer to pages 120-132 of the Paper Book), compared to the total cost claimed of Rs. 89,78,75,526. d) The cost of steam constitutes 88.14% of the total power cost. Accordingly, the steam cost was calculated at Rs. 33,31,67,392/-. The sale price of the steam at Rs. 96,91,03,975/- has been accepted by the TPO (refer to page no. 130 and 132, relevant para 8.1 and 8.3). e) However, the TPO has recommended an adjustment for the price variation of Rs. 9,79,36,702/- related to the captive power consumption by the paper unit. This adjustment was suggested using the external CUP (Comparable Uncontrolled Price) method, with an average price taken at 5.57, as opposed to the 6.44 considered by the assessee. (Relevant page no.132) ISSUE: ADDITION IN RESPECT OF ADJUSTMENT OF RS. 9,79,36,703/- AS SUGGESTED IN THE TPO ORDER UNDER SECTION 92CA(3) It was clarified that the Assessing Officer (AO) appropriately adjusted the deduction and recalculated the eligible deduction to Rs. 73,72,44,966/-. However, this recalculated deduction was constrained by the total income of Rs. 44,56,27,360/-. Consequently, there was no substantive impact on the final assessment, and the AO’s order was deemed accurate.(Relevant page no.63-64) ISSUE: DEDUCTION OF RS. 495636170/- ALLOWED 10 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT BY THE AO Upon reviewing the standalone profit and loss account submitted for the power unit, it was demonstrated that the expenses related to power generation were correctly categorized under various headings and were claimed against the revenue generated by the power unit. It was further clarified that the audited balance sheet, endorsed by the Chartered Accountant (CA), was prepared based on distinct books of accounts specifically maintained for this unit. The deductions referred to in the audit objections were, in fact, disallowances that had already been reinstated in the income computation, rendering them irrelevant to the claimed deduction.(Relevant page no.64- 66) ISSUE: NON-SUBMISSION OF VOUCHERS AND DETAILS OF TDS DEDUCTION It was explained that the TDS returns were available with the AO and that TDS on expenses had been duly deducted. Consequently, the claim of non-deduction of TDS was incorrect.(Relevant page no.66) ISSUE: SEGREGATION OF DEPRECIATION ALLOWED FOR PAPER UNIT AND ELECTRICITY UNIT The appellant submitted separate balance sheets and profit and loss accounts for the power unit (eligible unit). Additionally, a separate computation of the depreciation amount eligible under the Income Tax Act, along with the block of assets, was duly provided. (Please refer page no. 5- 7and 66 -67 of PB ) Letter addressed to Joint Commissioner Income Tax (Audit) by the AO 11.01.2024 The letter, consisting of 5 pages, includes a detailed explanation by the Assessing Officer (AO) addressing each objection raised in the audit memo. The AO has clarified that all the objections are unfounded and has requested that these objections be resolved accordingly. The relevant findings of AO to JCIT audit objection are reproduced. (please refer page no.70 of the PB) The assessee has duly maintained the separate books of account of the eligible business and profit & loss and balance sheet were prepared which was duly audited as per the provisions of the Act. The Audited Financial statements of the eligible unit alongwith the Form 10CCB filed are duly available on the departmental records (on the e-filing portal). Deduction under section 80IA of the I.T. Act, 1961 is allowable to the Assessee on the Profits derived from the Undertakings or the Enterprises of the Assessee from the businesses referred to in the Sub section (4) of Section 801A on above mentioned grounds. 69- 73 Letter addressed to 09.02.2024 1. The AO partially accepted the audit objections raised 74- 11 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT Joint Commissioner Income Tax (Audit) by the AO by the audit party in respect of following issues: - a) Deduction claimed u/s 80IA needs proper verification. That the appellant has shown loss in no eligible unit and huge profit in the eligible business 2. Furthermore, in the concluding paragraph it has been pointed out by the AO that the audit objections can be settled by invoking the provisions of section 263. Please refer page no.78. 3. The AO highlighted to the joint commissioner audit that detailed enquiry was carried out by the AO in respect of deduction claimed u/s 80IA. It was also clarified that the eligible unit commenced its operation on 13.05.2005 and the block period starts from AY 2006-07 and expires in AY 2020-21. 78 Show cause notice u/s 154 26.02.2024 Limited issue of adjustment of 97936703/- made u/s 92CA(3) 79- 81 Reply in response to Show cause notice u/s 154 01.03.2024 It was explained that the adjustment of Rs. 97936703/- is not required for book profits. 82- 84 Order passed u/s 154 30.03.2024 Proceedings dropped 85- 89 8. The Ld. PCIT invoked provisions of section 263 of the Act by observing as under: 4. Attention of the assessee is invited to the amendment in section. Explanation 2 has been inserted by Finance Act w.e.f. 01.06.2015 which is reproduced as under: - “Explanation 2:- For the purpose of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,- i. The order is passed without making inquiries or verification which should have been made: ii. …………” 5. The records available and the replies/documents submitted by the assessee had been perused. The facts and observations had already been compiled in the SCN issued to the assessee on 27-02-2024, which had been reproduced in above 12 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT para 2 of this order. After considering the facts & circumstances of the case it is observed that:- 5.1 The case was initially taken up for scrutiny by the DCIT, central circle Amritsar. Thereafter, due to decentralization of the case, it was taken up by the jurisdictional AO at Amritsar. As the scrutiny assessment was not completed by the JAO by the time the Faceless Assessment Scheme was launched by the Income tax department. The pending scrutiny case was transferred by the JAO to Faceless AO. As there was TP issue involved, the case was referred to TPO by FAO. After the report of the TPO, the case was assessed by the National Faceless AO. 5.2 The replies of the assessee revolve around the fact that submissions of requisite details mentioned in the SCN were filed before DCIT, Central Circle Amritsar, JAO Amritsar and TPO. It is observed that all these offices were not faceless offices and it is possible that physical details might have been filed by the assessee before these offices. However, it appears that none of these jurisdictional offices had uploaded any such data of questionnaires & replies in the online system from where the correctness of facts stated by the assessee can be ascertained. In the online system, the National Faceless AO had no access to the earlier submissions made physically before the JAO/TPO, if any, made by the assessee. 5.3 The assessee had claimed that the exemption u/s 80IA(4)(iv) had been allowed from year to year in the past years and no variation on this account had been noticed in earlier years. It is observed that each assessment year is a separate year and if past history is to be the criterion, the case should not have been selected under CASS on this issue. In the year under consideration the assessee had incurred huge losses in the non-eligible unit and huge profits in the eligible unit, which mandated the AO to verify the expenses claimed and bifurcation of common expenses in these two category of units. The AO had not called for requisite enough details to examine these facts and passed the assessment order without making requisite inquires/examination of data on this issue, The issue in question in present proceedings is not the eligibility of deduction to eligible unit which is continuing from past years, but the examination of profitability of the two category of units based on bifurcation of expenses between these two categories bf units particularly in the given facts of huge profits of eligible unit & huge losses of non-eligible unit. 5.4 It is observed from the online records available that the Faceless AO had passed the assessment order without making any requisite inquiries or verification of claim of huge deduction claimed by the assessee u/s 80IA(4)(iv) which was one of the CASS parameters. The assessment order had been passed by the AO 13 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT without calling for separate P&L accounts of eligible & non eligible units, wherein the appropriation of common expenses claimed in both the units was required to be examined. Although the assessee had provided the P & L account/ Balance sheet of the eligible unit only, the schedules mentioning details were not provided. Further no Separate P&L account /Balance sheet is available on records for non-eligible unit. Further there are addition to fixed assets during the year under consideration. The AO had not examined in which category of units these assets had been put to use to allow depreciation claim in the correct unit. 6. In these facts & circumstances of the case, it is held that the AO had passed the assessment order without making necessary inquires/verification on the issue of claim of high deduction u/s 80IA(4)(iv), which was one of the main reasons of CASS out of the seven reasons mentioned under CASS. Therefore, the assessment order passed u/s 143(3) rws 144C(3) rws 1144B of the IT act 1961 dated 21.06.2021 is erroneous in so far as it is prejudicial to the interests of the revenue in view of Explanation 2 to section 263 on the particular issue of verification of claim of deduction u/s 80IA(4)(iv), which had been allowed without making requisite inquiries on the basis of insufficient material evidences on records. Therefore, the said assessment order dated 21.06.2021 is hereby partially set aside on the limited issue of verification of appropriation of expenses in two categories of units and huge claim of deduction u/s 80IA(4)(iv) of the IT act 1961. The Assessing Officer is directed to make assessment after giving reasonable opportunity of being heard to the assessee. 9. That the Ld. Pr. CIT has erred in invoking the provisions of section 263 and setting aside the assessment order for fresh enquiry without appreciating the fact that the order passed by the AO is neither erroneous nor prejudicial to the interest of Revenue. That the order passed under section 263 is without properly appreciating the facts & evidence of the case is unjust and arbitrary. 10. That the Order Passed under Section 263 is bad in law since, the order passed by the assessing officer is not in any case prejudicial to the interest of 14 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT the revenue since, as against available deduction under Section 801A of Rs 83,51,81,669, the Assessee has claimed deduction of Rs 44,56,27,360/-. That even if it is alleged that some of the expenses of the Non Specified units are attributed to the Specified Unit, the resultant loss of the Non Specified Unit get reduced and correspondingly deduction of the Specified unit will stand increased, which will be revenue neutral exercise and as such the order passed by the assessing officer cannot be said to the prejudicial to the interest of the revenue. 11. That the order passed under Section 263 is bad in law since, the Ld. PCIT has passed the order under Section 263 without conducting any enquiry and had he conducted any enquiry, this fact would have been very clear that the order is not prejudicial to the interest of the revenue. That the deduction has been claimed after adjusting loss of the non-specified unit and as such any shifting of expenses as alleged by the PCIT would result in no loss to the revenue. 12. That the Order Passed under Section 263 is bad in law as the PCIT has failed to examine the documents submitted before the Ld. PCIT and records available before A.O. 13. That the Order passed under Section 263 is bad in law, since the PCIT had the privilege of looking at the consolidated Profit & Loss account and 15 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT also the standalone Profit & Loss account of the eligible unit. Further the PCIT have not pointed out which expenses of specified unit which was presumed to be in excess and as such the proceedings under section 263 are based on surmises and conjectures which renders the order passed under section 263 as bad in Law. 14. The Ld. Counsel for the appellant submitted that on facts and circumstances of the case, the learned PCIT has erred in invoking his revisionary powers on the basis of proposal submitted by the ward officer which was initiated at the instance of audit objection only; that the PCIT has failed to appreciate that the order has been passed by the A.O. by considering the submissions filed offline and online and that the audit objection was raised merely on the basis of online records and ignoring the submissions made offline. The AR contended that the PCIT has passed the order under section 263 ignoring clause (b) to explanation 1 of section 263, that record of assessment include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the PCIT and therefore as such the order passed by the Ld. PCIT under section 263 of the Act is bad in law. The AR submitted that the Ld. Pr. CIT has erred both on facts and in law in ignoring the fact that the issue raised by him in notice u/s 263 was before the AO and as such the 16 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT jurisdiction on this issue u/s 263 cannot be assumed by him in law in setting aside the issue of allocation of expenses to the file of the AO without properly appreciating the explanation of assessee given during the assessment proceedings brought on record. He contended that PCIT has failed to appreciate that separate books of the eligible unit are being maintained from year to year and the same have been verified by the assessing officers and by the TPO, and that the PCIT has ignored the detailed verification made by A.O. and TPO while passing the order under section 263. The counsel stated that without prejudice to above grounds, on the facts and circumstances of the case and law, Ld. Pr. CIT erred in branding assessment order, as erroneous/prejudicial on an issue which itself was covered by ambit of such assessment and that the AR submitted that the learned PCIT has erred in not appreciating the facts that the AO after examining the details, has adopted a possible opinion on the point raised in the notice issued by him and, therefore, the CIT lacks jurisdiction to invoke s. 263 of the Act. Thus, he pleaded that the Order passed u/s 263 is illegal and is liable to be quashed. 15. The AR further submitted that the Ld. PCIT initiated proceedings under section 263 of the Act vide show cause notice u/s 263 on 27.02.2024 seeking to revise the assessment order passed on 21.06.2021 with a view that the assessment order is erroneous and prejudicial to the interest of revenue and 17 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT alleged that the AO had failed to carry out necessary inquiries and verification on the issue of verification of apportionment of expenses between eligible unit claiming deduction u/s 80IA(4)(iv) and non-eligible unit’. As per the Ld. PCIT in show cause notice u/s 263, the following issues has not been considered by the AO while passing the order: - I. Quantum of allowability of deduction u/s 801A(4)(iv) II. SEPARATE BOOKS OF ACCOUNTS III. THE APPELLANT DID NOT PROVIDE THE SCHEDULE AND ANNEXURES IV. APPELLANT DID NOT PROVIDE BALANCE SHEET AND PROFIT & LOSS A/C OF NON-ELIGIBLE UNIT V. THE AO DID NOT EXAMINE APPROPRIATION OF EXPENSES AMONGST ELIGIBLE AND NON ELIGIBLE UNIT VI. NON-SUBMISSION OF VOUCHERS AND DETAILS OF TDS DEDUCTION VII. NO SEGREGATION IN RESPECT OF DEPRECIATION ALLOWED FOR PAPER UNIT AND ELECTRICITY UNIT 16. The Ld. AR drew our attention towards the response submitted regarding the show cause notice dated February 27, 2024, issued under Section 263. The AR clarified that all relevant issues were comprehensively addressed before the Principal Commissioner of Income Tax (PCIT), emphasizing that separate books of accounts are maintained for Power Unit II (100 TPH). It was further stated that a copy of the books of accounts was included with the response submitted to the PCIT. The AR also indicated that the documents presented to the Transfer Pricing Officer (TPO) were incorporated into the enclosure provided to the PCIT. Additionally, it was noted that the PCIT, prior to issuing the show cause notice, failed to verify the records of the documents submitted to the TPO. It was asserted that the 18 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT allegation concerning the quantum of expenses allocated from Unit-II 100TPH to Unit-I 70TPH is unfounded, as the profit ratios for both units are nearly identical. Furthermore, it was noted that the cost elements have already been subjected to verification by the Transfer Pricing Officer (TPO). A copy of the response to the show cause notice is available at pages 93-119 of the Paper Book (PB). 17. It was further emphasized that the Principal Commissioner of Income Tax (PCIT) did not make any effort to review the order issued by the Transfer Pricing Officer (TPO), which included a comparison of the costs for Unit I and Unit II submitted by the assessee. Following a detailed verification, the TPO accepted these costs. It was also highlighted that the joint costs associated with the units, such as administration and finance costs, were similarly verified by the TPO. Therefore, there is no doubt that the assessee has maintained separate books of accounts, and the allegations made by the PCIT are based solely on surmises and conjectures. 18. The PCIT passed the order u/s 263 on the limited issue regarding verification of apportionment of expenses between eligible unit II 100 TPH claiming deduction u/s 80IA(4)(iv) and non-eligible unit I 70 TPH’ and paper unit. The allegations of the PCIT are being summarized as under: - 19 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT a) Failed to call for separate P&L accounts for eligible and no eligible unit b) Failed to appreciate that the appellant had not provided annexure and schedules in respect of form 10CCB. c) Failed to examine quantum of allowability of deduction claimed by the assessee u/s 801A(4)(iv) of the Act d) Failed to appreciate that no separate books for power unit and manufacturing unit were maintained e) Failed to appreciate that the documents submitted before the jurisdictional AO/ TPO were not uploaded for the perusal of NFAC authorities In support, the Ld. AR filed a written synopsis and a paper book comprising of 66 pages and 385 pages respectively which are placed on record for ready reference. The Ld. AR submitted that the proceedings under section 263 were initiated on the basis of the audit objections as is noted by the learned Commissioner in his order. The honourable Punjab and Haryana High Court in the case of CIT v. Sohana Woollen Mills [2006 (9) TMI 157 - PUNJAB AND HARYANA High Court] wherein held Commissioner of Income-tax not justified in invoking jurisdiction under section 263 on the strength of an audit note - Decided in favour of assessee. He pleaded that the impugned order passed u/s 263 of the act is bad in law and it deserves to be quashed. 19. Per contra, the Ld. CIT(DR) relied on the impugned order. However, he failed to rebut the contention of the AR that the proceedings initiated u/s 154 20 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT based on the internal audit objection were dropped with the approval of the JCIT which was the issue of invoking the provisions of section 263 of the act and the sequence of events narrated as above before the AO; TPO and the PCIT in explaining that the assessment order was neither erroneous or prejudicial to the interest of the revenue. 20. We have heard both the sides, perused the material on record, Assessment Order, TPO’s Order, impugned order, written submission and relevant case law cited before us. Admittedly, the appellant has submitted a comprehensive sequence of events with the emphasis that sufficient material was presented before both the Assessing Officer (AO) and the Transfer Pricing Officer (TPO), substantiating that the assessment was conducted by the AO after appropriate inquiry. The Ld. AR contended that the assessment under Section 143(3) was completed with due regard to the TPO's report, including necessary adjustments to the net profits. 21. The primary issue at hand pertains to whether the assessee submitted the requisite documents to the department as called for by the AO/TPO/PCIT. The Principal Commissioner of Income Tax (PCIT), in the order issued under Section 263, indicated that while the documents may have been submitted to the Assessing Officer (AO), they did not come to light due to the implementation of the faceless assessment scheme, resulting in the 21 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT assessment being completed by the National Faceless Assessment Centre (NFAC). The Authorized Representative (AR) clarified that these documents were indeed submitted to the Transfer Pricing Officer (TPO), and following a thorough examination of the records, a speaking order under Section 92CA (3) was passed, wherein the TPO accepted the costs associated with the generation of steam and power. This order from the TPO was duly considered by the NFAC; thus, the allegations made by the PCIT are incorrect and lack a solid foundation. Furthermore, the AR drew the attention of bench to the questionnaire issued by the NFAC, which specifically addressed the deduction under Section 80IA. 22. Admittedly, the following were the sequence of event before the Ld. PCIT: Show cause notice u/s 263 27.02.2024 1. AO did not examine quantum of allowability of deduction claimed by the assessee u/s 801A(4)(iv) of the Act. Further, no separate books for power unit and manufacturing unit were maintained and the appellant failed to provide annexure and schedules in respect of form 10CCB. 2. The AO did not examine appropriation of expenses amongst eligible and non eligible unit 3. Non submission of vouchers and statement of TDS deduction 4. No segregation in respect of depreciation allowed for paper unit and electricity unit 90-92 Reply in response to Show cause notice u/s 263 11.03.2024 ISSUE: Quantum of allowability of deduction u/s 801A(4)(iv) 1. It was explained that the appellant has constantly availed the benefit of 80IA from AY 2012-13 till AY 2021-22. It was further explained that the assessment for the earlier years vis AY 2012-13 to AY 2016-17 has already been completed and the deduction u/s 80IA has duly been accepted in every 93-119 22 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT assessment year based upon the information submitted through the SAP Software. (Internal page no 2-3 of reply and relevant page no 94-95) 2. It was further clarified that the AO had duly examined the records maintained by the assessee to justify the claim of deduction u/s 801A through notices issued u/s 142(1) from time to time and replies furnished therein. (Internal page no 3 of reply and relevant page no 95) 3. It was also stated that complete records were also analyzed by the TPO in respect of specified unit. It was also clarified that ledger accounts were also submitted before the TPO. (Internal page no 7 of reply and relevant page no 99) ISSUE:SEPARATE BOOKS OF ACCOUNTS It was explained by the appellant that separate books of accounts are only mandatory for eligible unit to arrive at the amount eligible for deduction and emphasized that standalone balance sheet had duly been submitted in reply dated 05.04.2021 and also uploaded on income tax portal.(Internal page no 3- 7 of reply and relevant page no 95-99) ISSUE: THE APPELLANT DID NOT PROVIDE THE SCHEDULE AND ANNEXURES It was explained that the appellant had provided all the details along with the books of eligible unit, annexure, schedules and other workings related to calculation of profits of eligible unit for claiming deduction u/s 80IA in reply dated 03.06.2019, 04.01.2021, 05.01.2021 and 18.01.2021.(Internal page no 8-11 of reply and relevant page no 100- 103) ISSUE: APPELLANT DID NOT PROVIDE BALANCE SHEET AND PROFIT & LOSS A/C OF NON-ELIGIBLE UNIT It was explained by the appellant that separate books of accounts are only mandatory for eligible unit to arrive at the amount eligible for deduction(Internal page no 11-15 of reply and relevant page no 103-107) ISSUE: THE AO DID NOT EXAMINE APPROPRIATION OF EXPENSES AMONGST ELIGIBLE AND NON ELIGIBLE UNIT It was explained that the appellant is maintaining 23 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT separate balance sheet, profit & Loss account in respect of specified and non-specified unit using SAP (System Application products in data processing). That all transactions, including expenses incurred, are recorded with proper codes that distinctly separate expenditures related to each of the Appellant's ventures. It was further clarified that the expenses like Provision for Bonus, Provision for Gratuity, Provision for Leave encashment, CSR, Disallowance under rule 8D, Donation and Depreciation etc. correspond to the expenses/provisions which have been added back to income while computing the income under the head business and profession and do not relate to the deductions claimed by the assessee in the return of income. (Internal page no 16-17 of reply and relevant page no 108-109) ISSUE: NON SUBMISSION OF VOUCHERS AND DETAILS OF TDS DEDUCTION It was explained that complete bills and vouchers were produced and verified by the AO. Furthermore, all the expenses were also verified by the TPO. That the TDS returns were already available with the AO and the TDS on the expenses have duly been deducted. Hence, the allegation regarding the non deduction of TDS is incorrect. (Internal page no 17- 18 of reply and relevant page no 109-110) ISSUE: NO SEGREGATION IN RESPECT OF DEPRECIATION ALLOWED FOR PAPER UNIT AND ELECTRICITY UNIT The appellant has submitted separate balance sheet and profit & loss account of power unit (eligible unit). Further, separate computation regarding depreciation amount eligible as per income tax along with the block of assets has duly been submitted. (Internal page no 19 of reply and relevant page no 111) Order u/s 263 30.03.2024 Partially setting aside the assessment order passed u/s 143(3) on limited issue regarding verification of apportionment of expenses between eligible unit claiming deduction u/s 80IA(4)(iv) and non eligible unit 357-399 24 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 23. Apropos ground no 2-4, the appellant has challenged that the order passed u/s 263 is illegal as the twin conditions embedded in Section 263 have not been satisfied. 23.1 The Ld. PCIT in order passed u/s 263 had alleged that the appellant failed to provide any bifurcation in respect of specified unit and non-specified unit is factually incorrect as the detailed submissions are filed by the appellant in this regard. The Ld. Counsel Sh. Rohit Kapoor for the appellant has drawn the attention of the bench towards the following documents furnished before the ACIT and the TPO to refute the allegation of the PCIT that there was no bifurcation in respect of specified unit and non-specified unit. a) Stand-alone profit & loss account along with balance sheet of power unit 100TPH and 70TPH enclosed at page no 8 and page no 150A of the PB. b) consolidated balance sheet for unit I, unit-II and paper unit placed at page no 15-45 of the PB. c) complete books of accounts of specified unit. d) Complete cost analysis for non-eligible Unit I and eligible Unit II placed at page no 150-151A of the PB. 25 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT e) cost sheet of allocation of cost in Power and steam unit placed at page no 150-151A of the PB, etc. 23.2 The AR emphasized that there was no shifting of expenses from Unit II to Unit I, as the profit ratios for both units are nearly identical. It was further explained that Unit I was established in 2002, while Unit II commenced operations in 2005. The AR explained that both power generation and steam generation are metered. Further, the AR clarified that the slight variation in gross profit is attributable to the later installation of Unit II, resulting in a slightly higher profit for Unit II compared to Unit I. 23.3 The AR further produced detailed working in respect of power and steam produced by each unit which is produced as follows: - TABLE A: STEAM AND ELECTRICITY UNITS PRODUCED Particulars Power Unit-I [70 TPH] Power Unit-2 [100TPH] Category Non-Eligible Unit Page no 151-151A Eligible Unit Page no 150B-150C Power 74147468 units 112570925 units Steam 321791 MT 509463 MT 26 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 23.4 The AR further produced detailed working in respect of expenses claimed revenue generated qua units and their profitability ratio which is produced as follows: - TABLE B: Particulars Notati on Expenditure in Power Unit-I [70 TPH] Expenditure in Power Unit-2 [100TPH] Total Coal A 525611819 771277964 129688978 3 Chemical B 2975818 4366687 7342505 Water C 322518 460740 783258 Other Manufacturin g Cost Manpower D 11328190 16183128 27511318 Consumables / repair & Maintenance E 10769184 15802602 26571786 Depreciation F 11440521 22059387 33499908 Finance and Admin Cost Finance Cost @ 10.80 G 1037139 1521888 2559027 Admin Cost H 6852422 9789174 16641596 TOTAL COST I= A+B+ 570337610 841461570 141179918 0 27 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT C+D+ E+F+G +H SALE REVENUE J 1089623351 1694060731 278368408 2 PROFIT K=J-I 519285741 852599161 137188490 2 PERCENTAG E L=K/J* 100 47.66% 50.33% 23.5 Without prejudice the above arguments the AR drew the attention of the bench towards the fact that even if the combined profit ratio is made applicable then also there is no prejudice to the revenue. The working was made taking into consideration the profit rate 49.22% Table C: Revised Profits after considering the adjustment of Rs. 1.50 crore Particulars Notation Power Unit I- 70TPH Unit II- 100TPH SALE REVENUE A 1089623351 1694060731 Total Cost as per audited books B -570337610 -841461570 Adjustment C 17000000 -17000000 REVISED NET PROFIT D=A-B+C 536285741 835599161 PERCENTAGE E=D/A*100 49.22% 49.22% TABLE D: REVISED PROFIT/ LOSS AS PER INCOME TAX ACT Net loss for paper unit - 28 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 1190038743 Revised Net Profit from Paper Unit I 536285741 As per table C Net Profit from Non-Specified Unit -653753002 Revised Net profit from Paper Unit II 835599161 As per table C TOTAL PROFIT 181846159 Add: Adjustments made in computation of income 753824653 Page 10 Less: Adjustments for separate consideration in computation of income -491585307 Page 10 GROSS TOTAL INCOME 444085505 Table E: Calculation of tax payable as per income tax GROSS TOTAL INCOME 444085505 Less: Deduction u/s 80IA - 835599161 Restricted to profit as per table C Add: Adjustment made by TPO 97936703 Deduction Eligible - 737662458 444085505 Less: Deduction to political parties -7500000 0 Not provided as deduction cannot be negative as per page 10 of the paper book Less: Deduction u/s 80G -726794 0 Income Tax Payable NIL Table F: Calculation of tax payable as per MAT Page No. Profit as per MAT after adjustments 181779153 12 29 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT MAT @ 18.5% including surcharge and education Cess 38794579 12 Table G: Calculation of tax after considering the provisions of 115JB Sr. No Particulars Amount 1 Tax as per Income Tax as per Table E above NIL 2 Tax as per MAT as per Table F 38794579 Higher of Sr. No 1 and Sr. No. 2 38794579 23.6 The AR of the appellant further contended that the maximum variation in the net profit was to the extent of 2% and contended that the maximum variation can only be limited to 1.70 crores in respect of shifting of expenses from non-specified Unit I to Unit II. Furthermore, the AR relied upon the working produced at para 17.3 above to contend that there is no tax payable even after adjustment of Rs. 1.70 crore and as such, the condition of order being erroneous and prejudicial to the interests of the revenue is not fulfilled. 24. In the case of Malabar Industrial Co. Ltd. v/s CIT (2000) 243 ITR 83 (SC) the Hon’ble Apex Court held that provisions of section 263 can only be invoked when twin conditions viz; order should be erroneous and prejudicial to interest of revenue, are fulfilled. The relevant text of the order is as under: - 30 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interests of revenue - Assessment year 1983-84 - Whether in order to invoke section 263 Assessing Officer's order must be erroneous and also prejudicial to revenue and if one of them is absent, i.e., if order of Income-tax Officer is erroneous but is not prejudicial to revenue or if it is not erroneous but is prejudicial to revenue, recourse cannot be had to section 263(1) - Held, yes -Whether if due to an erroneous order of ITO, revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to interests of revenue - Held, yes - Assessee-company entered into agreement for sale of estate of rubber plantation - As purchaser could not pay installments as scheduled in agreement, extension of time for payment of installments was given on condition of vendee paying damages for loss of agricultural income and assessee passed resolution to that effect - Assessee showed this receipt as agricultural income - Resolution passed by assessee was not placed before Assessing Officer - Assessing Officer accepted entry in statement of account filed by assessee and accepted same - Commissioner under section 263 held that said amount was not connected with agricultural activities and was liable to be taxed under head 'Income from other sources' - Whether, where Assessing Officer had accepted entry in statement of account filed by assessee, in absence of any supporting material without making any enquiry, exercise of jurisdiction by Commissioner under section 263(1) was justified - Held, yes 24.1 The AR further relied upon the following case laws: - i) [2023] 152 taxmann.com 565 (Delhi) HIGH COURT OF DELHI Principal Commissioner of Income-tax v. H.T.L Ltd.* ii) [2022] 141 taxmann.com 512 (Gujarat) HIGH COURT OF GUJARAT Principal Commissioner of Income-tax v. Shukla Dairy (P.) Ltd.* iii) [2021] 130 taxmann.com 496 (Gauhati) HIGH COURT OF GAUHATI CMJ Breweries (P.) Ltd. v. Union of India 31 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT iv) [2022] 145 taxmann.com 590 (Calcutta) HIGH COURT OF CALCUTTA Principal Commissioner of Income-tax v.ReetaLakhmani* v) [2024] 161 taxmann.com 213 (Pune - Trib.) IN THE ITAT PUNE BENCH 'A' Bajaj Housing Finance Ltd. v. Principal Commissioner of Income-tax vi) [2024] 162 taxmann.com 664 (Patna - Trib.) IN THE ITAT, PATNA GyanInfrabuild (P.) Ltd. v. Principal Commissioner of Income-tax 25. We find that the AO had done detailed verification by conducting proper enquiry and thereafter took a plausible view regarding the cost of steam and power produced by the specified unit II 100 TPH. Furthermore, from the comparison it was noticed that the cost of non-specified unit I 70 TPH in respect of power and steam is almost the same as considered for 100TPH. Therefore, the view of Ld. AO being a plausible view, the assessment order could not be considered erroneous or prejudicial to interest of revenue. In this regard, the assessee has relied upon the case of Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd.* Supreme Court of India reported in 130 taxmann.com 294 to support the contention that in order to invoke section 263, it is a judicial requirement to satisfy twin conditions and if the AO has taken a plausible view, the order cannot be said to be erroneous and prejudicial to the interests of the revenue. If any one of them is absent 32 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT i.e. if the assessment order is not erroneous but it is prejudicial to the Revenue, Sec.263 cannot be invoked. Further the appellant has placed reliance upon the following case laws: - a) [2024] 158 taxmann.com 514 (Gujarat) HIGH COURT OF GUJARAT Principal Commissioner of Income-tax v. National Dairy Development Board* b) HIGH COURT OF CALCUTTA Principal Commissioner of Income- tax v. Britannia Industries Ltd.* c) [2022] 145 taxmann.com 73 (Gujarat) HIGH COURT OF GUJARAT Principal Commissioner of Income-tax v. S N Tradelink (P.) Ltd.* d) [2022] 145 taxmann.com 139 (Gujarat) HIGH COURT OF GUJARAT Principal Commissioner of Income-tax v. Shukla Dairy (P.) Ltd.* e) [2023] 155 taxmann.com 408 (Bombay) HIGH COURT OF BOMBAY Principal Commissioner of Income-tax v. ShivshahiPunarvasanPrakalp Ltd.* f) [2023] 148 taxmann.com 314 (Calcutta) HIGH COURT OF CALCUTTA Commissioner of Income-tax v. M. K. Foundation* g) [2020] 119 taxmann.com 358 (Karnataka) HIGH COURT OF KARNATAKA Commissioner of Income Tax, Bangalore v. Chemsworth (P.) Ltd.* 33 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT h) [2020] 119 taxmann.com 318 (Karnataka) HIGH COURT OF KARNATAKA Commissioner of Income Tax, Bangalore v. Aztec Software Technology Ltd.* i) [2023] 156 taxmann.com 369 (Ahmedabad - Trib.) IN THE ITAT AHMEDABAD BENCH 'A' Comtrade Commodities Services Ltd. v. Principal Commissioner of Income-tax j) [2023] 157 taxmann.com 811 (Kolkata - Trib.) IN THE ITAT KOLKATA BENCH 'A' Konsortia Construction Company (P.) Ltd. Deputy Commissioner of Income-tax* k) [2023] 153 taxmann.com 300 (Jaipur - Trib.) IN THE ITAT JAIPUR BENCH 'A' AgraniBuildestatev. Principal Commissioner of Income-tax* l) [2023] 153 taxmann.com 290 (Jaipur - Trib.) IN THE ITAT JAIPUR BENCH 'B' ShriKeshoraipatanSahkari Sugar Mills Ltd. v. Principal Commissioner of Income-tax* m) [2023] 149 taxmann.com 189 (Mumbai - Trib.) IN THE ITAT MUMBAI BENCH 'C' Impact Foundation (India) v.Commissioner of Income-tax, (Exemptions)* 26. It is seen that the Principal Commissioner of Income Tax (PCIT), in the order issued under Section 263, has asserted that separate books of accounts were not maintained, suggesting the possibility of expense shifting 34 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT from specified units to non-specified units. This allegation is factually incorrect, as the appellant has maintained separate books of accounts. Furthermore, the profit ratios for both units are consistent, and therefore, the observations made by the PCIT are perverse to the facts on record and accordingly, it cannot be approved. Moreover, even if the alternative calculations relied upon by the AR are considered, there would be no loss to the revenue. 27. Under the facts and circumstances, and the findings of the Hon’ble Supreme Court in the case of *Principal Commissioner of Income-tax, Surat- 2 v. Shreeji Prints (P.) Ltd. (Supra), the revision order passed by the Ld. PCIT under Section 263 is deemed unjustified. Consequently, the ground no. 2 to 4 raised by the appellant is hereby allowed. 28. In ground no 7, the AR of the appellant reiterated the fact that complete cost analysis sheet for the eligible unit was uploaded on the portal which stood verified by the TPO as well as the ACIT. The AR argued that the expenses claimed in the audited and trading account of Power unit –II (100 TPH) were substantiated by independent bills that the appellant had considered the common expenditure while computing the profit of eligible unit. The AR further submitted the basis of allocation of various expenses which is produced as follows: - 35 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT Item Basis TPO Remarks Coal Consumption Actual Part of Value determined by TPO. The steam is valued by cost method and power is valued by CUP method. 1) Part of cost sheet submitted before TPO vide reply dated 05.01.2021 at page no.149 to 150A. 2) Ledger account submitted before TPO at page no.169-187 3) Ledger account submitted before CIT at page no.169-187 Chemical Consumption Actual Ledger enclosed at page no 160 to 167 Water Actual Reply dated 05.01.2021 submitted to TPO enclosed at page no.255 Manpower Actual Reply dated 05.01.2021 submitted to TPO enclosed at page no.243 Consumables Allocation on monthly basis Ledger enclosed at page no 188 Depreciation Actual Based on company act in books of accounts and income tax act in computation. 1) Ledger account submitted at page no.189-190 2) Depreciation chart as per income tax of eligible unit please refer page 7 3) Audited profit and loss account Please refer page 5-6. Finance cost Other method Compared the interest rate with effective cost of borrowings 1) Part of TPO report and benchmarking is done based on cost of borrowing. Please refer page no 376 and part of TPO order refer Page no 120 2) ledger enclosed at page no 199 36 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT Administration cost Other method Allocated based on employee cost. 1) Part of TPO report and benchmarking is done on basis of cost of borrowing. Please refer page no 376 and part of TPO order refer Page no 120 2) ledger enclosed at page no 158 28.1 The AR referred to the definition of \"records\" as articulated in Explanation 1, Clause (b) of Section 263. Additionally, the AR refereed the explanation provided under Section 92CA, which clarifies that the Transfer Pricing Officer (TPO) includes the Joint Commissioner, Deputy Commissioner, or Assistant Commissioner of Income Tax as authorized by the Board to perform all functions of the Assessing Officer (AO). The AR cited various responses submitted to the TPO and the AO to demonstrate that a proper inquiry was conducted by the AO. Given the facts and circumstances, it is evident that the documents submitted to the TPO constitute part of the assessment records as envisioned under Section 263. 28.2 It is noted that the evidence related to steam produced by unit I and unit II along with its comparison was duly submitted before the Transfer Pricing Officer(TPO) vide reply dated 22.01.2021 placed at page no 348 of the PB. The relevant snapshot is produced hereunder: - 37 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 38 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 28.3 From the record and the explanation furnished by the Ld. AR further highlighting the subjectivity emerging from the assessment order as such there was no justification for invoking the provisions of section 263. This view gets support from the following case laws to challenge the invocation of provisions of section 263 :– a) [2014] 45 taxmann.com 335 (Pune - Trib.) IN THE ITAT PUNE BENCH 'A' Nyati Builders (P.)Ltd. v. Deputy Commissioner of Income- tax, Circle -2* b) [2013] 36 taxmann.com 589 (Hyderabad - Trib.) IN THE ITAT HYDERABAD BENCH 'A' Leo Meridian Infrastructure Projects & Hotels Ltd. v. Deputy Commissioner of Income-tax* c) [1994] 50 ITD 336 (Bombay)[20-05-1994] 28.4 Thus, it is evident that the appellant maintains separate records for Unit I and Unit II. Additionally, proper records were submitted to both the Transfer Pricing Officer (TPO) and the Assessing Officer (AO). The appellant utilizes SAP for its accounting, ensuring a complete demarcation of each unit. Furthermore, the appellant has been granted deductions under Section 80IA in previous years, and thus, it cannot be alleged for the year under consideration that separate books of accounts were not maintained for eligible units, especially given that the same SAP software was used in those 39 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT prior years. Accordingly, the ground no 7 raised by the appellant is hereby allowed. 29. In respect of ground no 10-11, the Ld. AR has argued that the assessment u/s 143(3) was completed after detailed enquiry and examination of books of account. The AR submitted a summary of notices issued from time to time and the reply furnished in response to the notices issued. The same is being reproduced as under; - Sr. No Notice issued under section Date of Notice Date of submission of documents for physical verification Authority before which submissions made 1 143(2) 09-08-2018 20-08-2018 DCIT, Central Circle 2 142(1) 25-02-2019 02-05-2019 DCIT, Central Circle 3 142(1) 25-02-2019 04-05-2019 DCIT, Central Circle 4 142(1) 25-02-2019 20-05-2019 DCIT, Central Circle 5 142(1) 25-02-2019 25-05-2019 DCIT, Central Circle 6 142(1) 25-02-2019 03-06-2019 DCIT, Central Circle 7 142(1) 25-02-2019 03-06-2019 DCIT, Central Circle 8 142(1) 25-02-2019 25-07-2019 DCIT, Central Circle 9 129 30-09-2019 03-10-2019 Circle-5, Amritsar 10 142(1) 05-02-2019 11-02-2019 DCIT, Central Circle 11 142(1) 03-04-2021 05-04-2021 NFAC 12 92CA 13-10-20 24-10-2020 TPO 13 92CA 18-11-2019 24-11-2019 TPO 14 92CA 02-01-2021 05-01-2021 TPO 15 92CA 18-01-2021 20-01-2021 TPO 16 92CA 18-01-2021 22-01-2021 TPO 17 92CA 28-01-2021 29-01-2021 TPO 40 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 29.1 Again, the AR has provided a point-wise summary of the submissions made before the AO regarding the core issues raised by the Principal Commissioner of Income Tax (PCIT) in the order passed under Section 263. The AR emphasized that this is not a case of no inquiry, as specific questionnaires were issued by both the AO and the Transfer Pricing Officer (TPO), to which the assessee provided detailed responses briefly narrated in tabular form hereunder: - Sr. No. Details of the Notice Query Raised Documents produced 1. Notice dated 25-02-2019 issued u/s 142(1) of the Income Tax Act, 1961 by DCIT, Central Circle, Amritsar Para 11 of the Notice of the PB “File detail along with the documentary evidence of the deduction claimed under chapter VI i.e. 80IA and 80G.” 1. The assessee duly submitted the response on 03-06-2019 and submitted all the necessary documents evidencing the claim of deduction u/s 80 IA including the Form 10CCB, Copy of P&L account of the power units along with the all schedules and annexures and detailed workings of the expenses for the eligible power unit. 2. Moreover, the separate books of accounts of the eligible unit were also called for by the AO which were duly produced for verification before the DCIT, Central Circle. Such books of accounts along with all other documentary evidences supporting 41 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT the claim and eligibility of the deduction were verified deeply by the AO on the basis of which the claim of the assessee was accepted. All the documents provided by the assessee duly forms part of the record of the AO. The copy of the notice as well as the reply is enclosed herewith for your reference. 2. Notice u/s 142(1) of the Income Tax Act, 1961 dated 03-04- 2021 issued by e- assessment Unit Para 2 of the Notice “It is seen that you have claimed a deduction of Rs. 83,51,81,669/- for the power unit commissioned by you. In this regard, kindly furnish separate books of accounts for the undertaking along with all the schedules and annexure. Also furnish the The query was once again raised by the AO to verify the deduction claimed u/s 80IA in response to which the copy of the Form 10CCB, Audited Balance sheet and P&L account of the eligible unit were once again submitted on 07-04-2021. 42 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT genuineness of the claims like commissioning certificate etc.” 3. Notice u/s 92CA of the Income Tax Act, 1961 dated 02-01- 2021 issued by Transfer Pricing Officer Para 2 of the Notice “Furnish complete Financial, Audit Report and Computation of Income of Power generating Unit-I (Non- Eligible Unit during the FY 2016-17) and Unit-II an eligible unit during the FY 2016-17.” In response to the query raised by the TPO, the assessee filed a response vide letter dated 05-01- 2021 in which it is clearly mentioned that most of the information requisitioned in the notice is already requested when the assessee appeared before the TPO for physical hearing held on 02-01-2021 and which was submitted in hard copy vide letter dated 04-01-2021. Further, the response to the query raised is reproduced as under: “Audited Financial statements of the power generating units for the FY 2016-17 along with the cost sheet and mechanism of calculation of the selling price of steam and power have also been submitted with the submissions dated 04-01-2021. We may also wish to state that during the transfer pricing proceedings for the AY 2013-14, the sale rate for steam was accepted at 2011.05/MT, whereas the steam rate for the AY 2016-17 is 1902.2/MT. There is no 43 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT change in the computation mechanism as compared to the AY 2013-14. Copy of the letter dated 30- 08-2015 filed before the Ld. TPO is also enclosed herewith” Your goodself shall appreciate the fact that the submission of cost sheets for determination of calculation of selling price of power and steam which have been duly uploaded on the portal and also physically verified by the erstwhile TPO as well as the assessing officer clearly demonstrate that proper books of accounts of eligible unit has been prepared and have been presented before the authorities. Cost sheets are analytical analysis of books of accounts which are prepared, which could not have been presented had separate books of accounts being not prepared. 4. Notice u/s 92CA of the Income Tax Act, 1961 dated 02-01- 2021 issued by Transfer Pricing Officer Para 4 of the Notice “Furnish the complete Cost Analysis of Generation of the Power and Steam. Also furnish TP study In response to the query raised, the assessee submitted that “Complete cost analysis of steam and power has been submitted vide letter dated 04-01-2021. Steam is of various bars and used in different processes across different industries. The assessee company uses low pressure steam of 4.5 bars 44 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT demonstrating that cost of power and steam generation by the eligible unit is at ALP as compared to similar non- eligible power generating taxpayers” (Kg/ per square centimetre) and medium pressure steam of 11 bars (Kg per square centimetre). The sale price of steam is desired based on the profit generated on the sale of power after considering the component of steam used in the generation thereof. Thus, sale price of steam is a derivative of sale price of power. The sale of power has been bench-marked based on CUP, for which external CUP invoices have been furnished vide letter dated 04/01/2021. Even during the course of earlier TP proceedings for AY 2013-14, the same formulae and method was duly accepted and there is no change in therein.” 29.2 Thus, the appellant has duly furnished the requisite documents which were duly examined during assessment proceedings. As such, the allegation of the PCIT that the AO failed to make any enquiry is not applicable to the facts and circumstances of the present case. 29.3 The Hon’ble Supreme Court of India in the case of Principal Commissioner of Income-tax-1 v. SPML Infra Ltd [2024] 164 taxmann.com 505 held that where there was due application of mind by the Assessing Officer after making proper enquiries jurisdiction under section 263 could not 45 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT be exercised. Further the appellant placed reliance upon the following case laws: - a) [2023] 146 taxmann.com 281 (SC) SUPREME COURT OF INDIA Principal Commissioner of Income-tax v. Cartier Leaflin (P.) Ltd. b) 2017] 77 taxmann.com 15 (SC) SUPREME COURT OF INDIA CIT v. NiravModi* c) Meerut Roller Flour Mills (P.) Ltd v Commissioner of Income tax 110 taxmann.com 170 (Allahabad)/[2019] 267 Taxman 18 d) CIT v Hindustan Marketing & Advertising Co. Ltd.196 Taxman 368 e) Copy of judgment of ITAT, Amritsar Bench SMT. ANITA MALPOTRA V.INCOME-TAX OFFICER 109 TTJ 76 f) Loil Continental Foods Ltd. vs. Pr. CIT in ITA No. 577/Chd/2019 Chd- Trib. g) Commissioner of Income Tax vs. Anil Kumar Sharma 194 taxman 504 29.4 From the record, it is evident that all relevant documents were submitted before both the Assessing Officer (AO) and Transfer Pricing Officer (TPO) and the Principal Commissioner of Income Tax (PCIT) and thus the contention raised by the Ld. AR is correct. Furthermore, based on the questionnaires issued by the AO over time and the order of the Transfer 46 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT Pricing Officer (TPO) places at pages 120-132, it is clear that a proper inquiry was conducted by the AO. Consequently, the jurisdictional provisions as stipulated in the Act have been duly complied with by the AO. 29.5 It is important to note that the condition to deem an assessment order as erroneous can only be established if the AO failed to make any inquiry, which is not applicable in the present case. In this regard, we rely on the judgment of the Delhi High Court in *Geevee Enterprises v. Addl. CIT*, 99 ITR 375 (Del.), where it was held that an order would be considered erroneous only if the AO does not conduct any inquiries during the assessment proceedings. For the invocation of provisions under Section 263, it is necessary that the assessment order be both erroneous and prejudicial to the interests of revenue. 29.6 Without prejudice to either side, it is observed that the assessments for the earlier assessment years—specifically, AY 2012-13, 2013-14, 2014-15, and 2015-16—were conducted by the department with the acceptance of the fact that the assessee maintained separate books of accounts for both the Units. It is noted that these separate books of accounts were submitted during the assessment proceedings and also before the Principal Commissioner of Income Tax (PCIT) concerning the specified Unit II. 47 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT Additionally, Form 10CCB, in conjunction with Rule 18BBB as per Section 80IA(7), along with a standalone balance sheet, was also submitted to the Assessing Officer (AO). Moreover, separate disallowances required as per income tax for the specified unit for the year ending March 31, 2017, have been included at page 7 of the Paper Book (PB). 29.7 The cost sheets, along with the standalone profit and loss statements submitted before the Transfer Pricing Officer (TPO), are located at pages 150A to 151A and demonstrate the bona fides of the assessee in maintaining separate books of accounts. Again, it is necessary to upload a consolidated balance sheet on the Income Tax portal; however, this requirement does not negate the fact that separate books of accounts were maintained, especially given that the appellant has submitted all relevant documents to substantiate this assertion. 29.8 In view of the above facts and circumstances, the assessee has in fact maintained separate books of accounts. Therefore, the ground no. 10-11 raised by the Appellant is allowed. 30. In ground no 5-6, the appellant challenged that the Ld. PCIT has failed to make an enquiry and emphasized that the provisions of section 263 can be invoked only if it is preceded by some enquiry by the PCIT. The AR argued 48 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT that the condition to hold an assessment order being erroneous could be proved only if the PCIT undertakes certain enquiry which has not been done in present case. 30.1 The AR submitted a list of documents furnished before the PCIT/AO to prove that the allegation of the PCIT is unfounded and without any application of mind. Particulars Remarks Copy of notice issued u/s 142(1) dated 25.02.2019 along with the reply 133-39(I) Questionnaire issued by Faceless Assessment Centre dated 03.04.2021 and reply dated 05.04.2021 specifically enquiring the deduction claimed u/s 80IA 140-47A Copy of the letter dated 24.12.2019 filed before the Ld. TPO 256-56A copy of the Form 10CCB, Audited Balance sheet and P&L account of the eligible unit 1-7 Complete set of books of accounts of the eligible unit 157-255 Complete cost analysis for non-eligible Unit I and eligible Unit II 150-51A Copy of cost sheet of allocation of cost in Power and steam unit 150-51A copy of the adjustments made for the depreciation to arrive at the profits of the eligible unit for deduction u/s 80IA 7 Reply mentioning the fact regarding submission of the invoice for purchase of turbine 347 Reply mentioning the fact regarding submission of the technical drawings of the turbines 347 Copy of the certificate issued by the Technical consultant against the contention that steam is a by-product for which no consideration is warranted 347 Copy of the SCN issued and the response submitted by the 260-358 49 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT assessee before the TPO Questionnaire issued by Faceless Assessment Centre dated 03.04.2021 and reply dated 05.04.2021 specifically enquiring the deduction claimed u/s 80IA 140- 147A Copy of TPO study report 373-407 30.2 The AR explained that all the requisite documents were furnished before the PCIT, however, no discrepancy was pointed out in the documents furnished. In this regard the AR relied upon the order passed by Punjab and Haryana High Court in the case of Pr. Commissioner of Income-tax (Central) v. Kanin (India) reported in 141 taxmann.com 83 in which it was held that the revisionary authority itself has to undertake some enquiries to establish that assessment order is erroneous and prejudicial to interests of revenue. 30.3 Further reliance was placed upon the following case laws: - a) [2024] 162 taxmann.com 273 (SC) SUPREME COURT OF INDIA Principal Commissioner of Income-tax v. Earth Minerals Co. Ltd. b) 2024 (2) TMI 989 - ITAT CHANDIGARH MANUJ JAIN HUF N.K. OSWAL HOSIERY DAL BAZAR VERSUS THE PR. CIT-1 LUDHIANA c) 2017 (9) TMI 529 - DELHI HIGH COURT PR. COMMISSIONER OF INCOME TAX - 3, NEW DELHI VERSUS DELHI AIRPORT METRO EXPRESS PVT. LTD 50 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT d) 2013 (7) TMI 483 - DELHI HIGH COURT Other Citation: [2013] 357 ITR 388 DIT VERSUS JYOTI FOUNDATION e) DELHI HIGH COURT Other Citation: [2012] 20 taxmann.com 587 (Delhi) INCOME TAX OFFICER VERSUS DG HOUSING PROJECTS LTD f) 2019 (4) TMI 1044 - DELHI HIGH COURT THE COMMISSIONER OF INCOME TAX. VERSUS KOHINOOR FOODS LIMITED g) 2017 (9) TMI 1238 - DELHI HIGH COURT PR. COMMISSIONER OF INCOME TAX -6 VERSUS MODICARE LIMITED h) 2017 (4) TMI 1435 - DELHI HIGH COURT PR. COMMISSIONER OF INCOME TAX-12 VERSUS LAKSHYA SETH i) DwarkadhisBuildwell Pvt. Ltd. v. CIT – ITA No.3097/Del/2014 – 109 taxmann.com 5 (Delhi - Trib.)order dated 1 July 2019. j) 2022 (8) TMI 510 - ITAT CUTTACKASHOK KUMAR MOHAPATRA VERSUS PR. CIT, BHUBANESWAR k) 2022 (3) TMI 1282 - ITAT DELHIEVON TECHNOLOGIES (P) LTD. VERSUS ITO WARD 1 (3) DEHRADUN l) 2021 (10) TMI 273 - ITAT RAIPURM/S R.R. ISPAT LIMITED VERSUS CIT-1, RAIPUR 51 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT m) 2019 (12) TMI 253 - ITAT MUMBAIM/S. ESSAR SHIPPING LIMITED VERSUS PR. CIT-5 n) 2018 (2) TMI 2025 - ITAT MUMBAISHRI SURENDRA L. HIRANANDANI VERSUS PRINCIPAL COMMISSIONER OF INCOME TAX, CENTRAL – I MUMBAI o) SANJAY JAIN V. PCIT ITA NO. 140/CHD/2021 p)2024 (8) TMI 1181 - ITAT AHMEDABAD POSUN CREDIT CO. OP. SOCIETY LIMITED VERSUS THE PRINCIPAL COMMISSIONER OF INCOME TAX, VADODARA-1, VADODARA. 30.4 The Authorized Representative (AR) has submitted all relevant documents before the Principal Commissioner of Income Tax (PCIT), which were also provided to the Assessing Officer (AO), and no specific defects were pointed out by the PCIT to contest these submissions. Therefore, the order passed under Section 263 by PCIT is hereby quashed, as the deficiencies in the AO's inquiry have not been adequately highlighted. The PCIT was obligated to conduct at least a minimal inquiry himself, which is notably absent in this case. 30.5 In this case of *Principal Commissioner of Income-tax v. Earth Minerals Co. Ltd.*, reported in 162 taxmann.com 273.the Hon’ble Supreme Court dismissed the Special Leave Petition (SLP) of the department, affirming that 52 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT the Commissioner under Section 263 cannot revise an assessment by requiring the Assessing Officer to undertake a fresh exercise of assessment when the PCIT has not conducted any inquiry. 30.6 Consequently, in the present case, the order issued by the PCIT under Section 263 is liable to be set aside. Thus, the ground no. 5-6 of appeal is allowed. 31. Apropos ground no 8, 9 and additional ground no 14, the AR challenged that the jurisdiction under Section 263 was invoked solely based on audit objections and the proposal from the Assessing Officer (AO), and without any independent application of mind by the Principal Commissioner of Income Tax (PCIT). 31.1 The Ld. AR directed the Tribunal's attention to the sequence of dates and issues raised therein, indicating that the proceedings under Section 263 were purely based on audit objections. It was noted that the Assessing Officer (AO), in a letter dated January 11, 2024, explicitly negated the objections raised by the audit team. Importantly, in that letter, the AO acknowledged that the assessee was maintaining separate books of accounts for the specified unit. However, in a subsequent letter dated February 9, 2024, the audit objections were partially accepted. Such contradictory behavior on the part of the department is untenable, especially 53 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT considering that complete records were submitted during the assessment proceedings. A relevant excerpt from the letter dated February 9, 2024, is reproduced below for reference: - 54 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 55 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 56 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 31.2 Furthermore, we find that while partially accepting the audit objections, the Assessing Officer (AO) stated in the concluding paragraph of the letter dated February 9, 2024, that the objections raised would be settled by invoking the provisions of Section 263. This statement underscores the reliance on audit findings, despite the AO's prior acknowledgment of the separate books of accounts maintained by the assessee. 31.3 In view of the above discussion referring the facts and circumstances of the present case, it is evident that the proceedings u/s 263 were culminated on the basis of audit objections without application of mind. 31.4 The Hon’ble HIGH COURT OF PUNJAB AND HARYANA in the case of Commissioner of Income-tax v. Sohana Woollen Mills reported in [2008] 296 ITR 238 held that invocation of section 263 merely based upon audit objection is bad in law. Further the view is supported by the following case laws relied by the Ld. AR: - a) [2024] 162 taxmann.com 759 (Delhi - Trib.) IN THE ITAT DELHI BENCH 'A' AhlconParenterals (India) Ltd. v. Principal Commissioner of Income-tax* MAY 21, 2024 57 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT b) [2024] 163 taxmann.com 574 (Kolkata - Trib.) IN THE ITAT KOLKATA BENCH 'C' Rajesh Kumar Jalan v. Principal Commissioner of Income-tax c) [2024] 158 taxmann.com 686 (Mumbai - Trib.) IN THE ITAT MUMBAI BENCH A' Grasim Industries Ltd. v. Principal Commissioner of Income-tax, Central (1)* d) [2022] 145 taxmann.com 590 (Calcutta) HIGH COURT OF CALCUTTA Principal Commissioner of Income-tax v. ReetaLakhmani* e) [2022] 141 taxmann.com 269 (Rajkot - Trib.) IN THE ITAT RAJKOT BENCH Gujarat State Lion Conservation Society v. Commissioner of Income-tax (Exemption) f) 2018 (9) TMI 294 - BOMBAY HIGH COURT THE COMMISSIONER OF INCOME TAX MUMBAI CITY-1 MUMBAI VERSUS M/S. MAHARASHTRA HYBRID SEEDS CO. LTD. g) 2022 (8) TMI 1218 - ITAT MUMBAI SHRI MURLI MANOHAR NAGARI SAHAKARI PATASANTHA MARYADIT VERSUS PRINCIPAL COMMISSIONER OF INCOME TAX-1, MAHARASHTRA h) SMT.DIVA SINGH, JUDICIAL MEMBER AND SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER 2016 (6) TMI 793 - ITAT AMRITSAR Other Citation: [2016] 48 ITR (Trib) 604 58 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 31.5 Having examined the facts of the present case, after perusal of the submissions and citations placed on record, we find that the whole case has been framed based on audit objections without application of mind by the Ld. PCIT. In our view, the AO has undertaken complete enquiry and as such, the subsequent cause of action of invocation of section 263 is held to be without jurisdiction. 32. The revenue in the present case has failed to demonstrate how the order passed by the Assessing Officer (AO) was erroneous or prejudicial to the interests of the revenue. The Principal Commissioner of Income Tax (PCIT) has not substantiated any claims of non-application of mind by the AO, particularly given that the appellant submitted all requisite documents, including standalone profit and loss statements, cost sheets for Unit I and Unit II, turbine bills, invoices, and other relevant materials to the Assistant Commissioner of Income Tax (ACIT), Transfer Pricing Officer (TPO), and the PCIT. All submitted documents have been verified by the respective authorities, and, in our view, mere allegations that the AO issued the order without proper consideration are insufficient to justify the setting aside of the assessment order through the invocation of Section 263 of the Act. 59 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT 33. Considering the factual matrix and the judicial precedents, we do not concur with the PCIT that the AO did not verify the transactions and that the order was passed without application of mind. Accordingly, we hold that the Ld. PCIT finding, and observation are infirm and perverse to the facts on record. Therefore, we hold that this is not a fit case for invoking the provisions of section 263 of the Act. 34. In the above view, we hold that the order passed under section 263 is bad in law and as such, it is quashed. 35. The facts and issues in ITA number 324/Asr/2024 in respect of the assessment year 2017-18 are identical to the facts and issues involved in the ITA number 325/Asr/2024 in respect of the assessment year 2018- 19. Therefore, our findings and observation given in ITA number 324/Asr/2024 shall be applicable to the issues involved in ITA number 325/Asr/2004 in mutatis mutandis, ordered accordingly. 36. In the result, both the appeals filed by the assessee are allowed. Order pronounced in accordance with Rule 34(4) of the Income Tax (Appellate Tribunal) Rule, 1963 on 09.10.2024 Sd/- Sd/- (Udayan Dasgupta) (Dr. Mitha Lal Meena) Judicial Member Accountant Member *GP/Sr.PS* 60 ITA Nos. 324 & 325/Asr/2024 Khanna Paper Mills Ltd. v. Dy. CIT Copy of the order forwarded to: (1)The Appellant: (2) The Respondent: (3) The CIT concerned (4) The Sr. DR, I.T.A.T. True Copy By Order Date Initial 1. Draft dictated on 12.09.24 Sr.PS/PS 2. Draft placed before author 13.09.24 Sr.PS/PS 3. Draft proposed & placed before the Second Member JM/AM 4. Draft discussed/approved by Second Member JM/AM 5. Approved Draft comes to the Sr. P.S./P.S. Sr.PS/PS 6. Kept for pronouncement on Sr.PS/PS 7. File sent to the Bench Clerk Sr.PS/PS 8. Date on which file goes to the Head Clerk 9. Date on which file goes to the AR 10. Date of dispatch of Order "