Encorp E-Service Ltd, New Delhi v. DCIT, New Delhi

ITA 1998/DEL/2009 | 2004-2005
Pronouncement Date: 19-02-2010 | Result: Partly Allowed

Appeal Details

RSA Number 199820114 RSA 2009
Assessee PAN EMBER2003A
Bench Delhi
Appeal Number ITA 1998/DEL/2009
Duration Of Justice 9 month(s) 6 day(s)
Appellant Encorp E-Service Ltd, New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 19-02-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 19-02-2010
Date Of Final Hearing 28-01-2010
Next Hearing Date 28-01-2010
Assessment Year 2004-2005
Appeal Filed On 13-05-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : B NEW DELHI BEFORE SHRI RAJPAL YADAV JUDICIAL MEMEBR AND SHRI R.C. SHARMA ACCOUNTANT MEMBER I.T.A NO. 1998/DEL/09 ASSESSMENT YEAR 2004-05 ENCORP E-SERVICE LTD. OFFICE NO. 202 F46 BHAGAT SINGH MARKET NEW DELHI. VS. DCIT CIRCLE 11(1) NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ANOOP SHARMA ADVOCATE RESPONDENT BY : SHRI STEPHEN GEORGE CIT DR. ORDER PER RAJPAL YADAV JM: THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE ORD ER OF LD. COMMISSIONER DATED 13 TH MARCH 2009 PASSED U/S 263 OF THE INCOME TAX ACT. THE GRIEVANCE OF THE ASSESSEE IS THAT LD. CIT (A) HAS ERRED IN TAKING ACTION U/S 263 THEREBY SETTING ASIDE THE ASS TT. ORDER AND DIRECTING THE AO TO RE FRAME THE ASSTT. ORDER DENOVO AFTER HE ARING THE ASSESSEE. 2. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HA S FILED ITS RETURN OF INCOME ON 27.10.2004 DECLARING A LOSS OF RS. 31 77 59 491/-. THE AO ITA NO. 1998/DEL/09 ASSTT. YEAR 2004-05 2 HAD ISSUED A NOTICE U/S 143(2) AND AFTER HEARING TH E ASSESSEE PASSED THE ASSTT. ORDER U/S 143(3) ON 29.11.2006. HE DETER MINED THE LOSS AT RS. 18 50 80 367/-AS AGAINST THE DECLARED LOSS OF RS. 3 1 77 59 491/-. THE LD. COMMISSIONER ON PERUSAL OF RECORD FORMED AN OPI NION THAT ASSTT. ORDER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. THEREFORE HE ISSUED A SHOW CAUSE NOTICE U/S 263 OF THE ACT UP ON THE ASSESSEE INVITING HIS EXPLANATION AS TO WHY THE ASSTT. ORDER BE NOT SET ASIDE BEING ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E ON THE FOLLOWING GROUNDS:- I) THAT AS PER THE TDS CERTIFICATE THE INTEREST RE CEIVED WAS RS. 18 26 962/- WHEREAS IN THE PROFIT & LOSS ACCOUNT TH E INTEREST INCOME OF RS. 9 86 911/- WAS CREDITED. THE DIFFERE NCE OF RS. 8 40 051/- REMAINS TO BE TAXED WHICH HAS RESULTED IN UNDERASSESSMENT OF INCOME TO THE EXTENT OF RS. 8.40 LAKHS. II) DEPRECIATION ON PRINTERS MODEMS AND OTHER ACCE SSORIES UNDER THE HEAD COMPUTERS WAS ALLOWED @ 60% AS AGAIN ST ADMISSIBLE RATE OF 25% RESULTING IN THE ALLOWANCE O F EXCESS DEPRECIATION TO THE EXTENT OF RS. 11 19 43 370/-. III) THE GENUINENESS OF UNSECURED LOANS OF RS. 26 6 8 85 829/- WAS NOT VERIFIED BY THE ASSESSING OFFICER. IV) IT IS NOT CLEAR FROM THE ASSESSMENT RECORDS AS TO HOW THE COST OF ASSETS TRANSFERRED FROM THE PARENT COMPANY M/S. APOLLO INTERNATIONAL LIMITED WAS DETERMINED FOR THE PURPOSE OF CLAIMING DEPRECIATION BY THE ASSESSEE COMPANY. V) COMMISSION OF RS. 77 74 920/- INCLUDED IN THE DI RECT EXPENSES AS CLAIMED IN THE RETURN WAS ALLOWED IN TH E ASSESSMENT WITHOUT ANY INQUIRY OR VERIFICATION. ITA NO. 1998/DEL/09 ASSTT. YEAR 2004-05 3 VI) TERMINAL INSTALLATION EXPENSES OF RS. 1 16 95 9 52/- INCLUDED IN THE INDIRECT EXPENSES APPEAR TO BE OF CAPITAL NA TURE WHICH WERE ALLOWED AS REVENUE EXPENDITURE BY THE ASSESSIN G OFFICER. 3. THE ASSESSEE HAS FILED A REPLY WHICH HAS BEEN RE PRODUCED BY THE LD. COMMISSIONER IN PARAGRAPH 2 OF THE IMPUGNED ORD ER. ON AN ANALYSIS OF THE REPLY OF ASSESSEE LD. COMMISSIONER WAS NOT S ATISFIED WITH THE CONTENTION RAISED BY THE ASSESSEE AND HELD THAT AO HAS NOT VERIFIED THE DETAILS PROPERLY AND THEREFORE HIS ORDER IS ERRONEO US AND PREJUDICIAL TO THE INTEREST OF REVENUE. 4. LD. COUNSEL FOR THE ASSESSEE WHILE IMPUGNING THE ORDER OF LD. COMMISSIONER SUBMITTED THAT LD. COMMISSIONER HAS SE T ASIDE THE ASSTT. ORDER WITHOUT PROPERLY ANALYSING THE FACTS AND CIRC UMSTANCES AND APPLYING HIS MIND. HE TOOK US THROUGH THE REPLY OF ASSESSEE FILED BEFORE THE LD. CIT DATED 24 TH FEBRUARY 2009 AVAILABLE AT PAGE 3 6 OF THE PAPER BOOK. LD. COUNSEL FOR THE ASSESSEE POINTED OU T THAT THE FIRST GRIEVANCE OF THE COMMISSIONER IS THAT THERE IS UNDE R STATEMENT OF INCOME IN RESPECT OF INTEREST AND AO HAS NOT PROPER LY EXAMINED THIS ISSUE. TO THIS QUERY OF THE COMMISSIONER IT WAS CON TENDED BY THE ITA NO. 1998/DEL/09 ASSTT. YEAR 2004-05 4 ASSESSEE THAT IT HAD EARNED INTEREST INCOME OF RS. 18 26 962/- WHICH HAS BEEN DULY REFLECTED IN THE ACCOUNTS OF THE ASSE SSEE. OUT OF THE TOTAL INTEREST RECEIVED AN AMOUNT OF RS. 9 86 911/- HAS B EEN SHOWN UNDER THE HEAD OTHER INCOME IN SCHEDULE 6 TO THE P & L ACCO UNT AND REMAINING INTEREST OF RS. 8 40 050/- HAS BEEN NETTED UNDER TH E HEAD PRE-OPERATIVE EXPENSES DEBITED TO P & L ACCOUNT. THE ASSESSEE ANN EXED THE PHOTO COPY OF THE SCHEDULE 10 OF THE ANNUAL ACCOUNTS ALO NG WITH ITS REPLY. HE POINTED OUT THAT AO HAS DISALLOWED THE PRE OPERATIV E EXPENDITURE OF RS. 7 17 80 855/- BY TREATING THE SAME TO BE CAPITAL EX PENDITURE. SINCE THIS INTEREST INCOME OF RS. 8 40 000/- RELATES TO PRE O PERATIVE PERIOD THEREFORE THE SAID INCOME HAS BEEN CORRECTLY NETTED OFF AGAINST THE PRE OPERATIVE EXPENSES. WITH REGARD TO THE SECOND QUERY OF ALLOWANCE OF DEPRECIATION @ 60% IT WAS CONTENDED BY THE ASSESSEE THAT DEPRECIATION WAS ALLOWED @ 25% ONLY AND NOT AT 60%. LD. COMMISSI ONER HAS HARBOURED A WRONG BELIEF WHILE CONSIDERING THIS ASP ECT. THE LD. COUNSEL FURTHER CONTENDED THAT NEXT REASON ASSIGNED BY THE COMMISSIONER IN THE SHOW CAUSE NOTICE IS THAT AO FAILED TO TAKE COGNIZA NCE AS TO HOW THE COST OF ASSETS TRANSFERRED FROM THE PARENT COMPANY M/S APOLLO INTERNATIONAL LTD. WAS DETERMINED FOR THE PURPOSE O F CLAIMING DEPRECIATION BY THE ASSESSEE. IT WAS CONTENDED BY T HE ASSESSEE THAT ENCORP E SERVICE WAS A DIVISION OF APOLLO INTERNATI ONAL LIMITED TILL THE ITA NO. 1998/DEL/09 ASSTT. YEAR 2004-05 5 YEAR UNDER ASSTT. WHEN IT WAS DE MERGED FROM AIL AN D BECOME AN INDEPENDENT ENTITY IDENTITY UNDER THE NAME OF ENCOR P E SERVICE LTD. THE DEMERGER HAS BEEN APPROVED BY THE HONBLE DELHI HIGH COURT U/S 394 OF THE COMPANIES ACT I.E. 1 ST DECEMBER 2003 AND THE ASSETS HAVE BEEN INCORPORATED IN THE BOOKS OF ASSESSEE ON THE A PPOINTED DATE AT BOOK VALUE. THEREFORE AO HAS NOT COMMITTED ANY ERRO R IN TAKING THE COST OF THE ASSETS FOR THE PURPOSE OF THE DEPRECIATION. THE NEXT REASON ASSIGNED BY THE LD. COMMISSIONER IS THAT AO FAILED TO VERIFY THE COMMISSION INCLUDED IN THE DIRECT EXPENSES. IT WAS CONTENDED BY THE ASSESSEE THAT AO HAD ASKED THE ASSESSEE COMPANY TO FURNISH THE DETAILS OF EXPENDITURE INCURRED ON COMMISSION ON SA LES AND AFTER VERIFICATION HE ALLOWED THE CLAIM. WITH REGARD TO Q UERY NO. 6 THAT AO FAILED TO EXAMINE INSTALLATION EXPENSES INCLUDING I N THE DIRECT EXPENSES WHETHER CAPITAL IN NATURE OR REVENUE. LD. COUNSEL F OR THE ASSESSEE SUBMITTED THAT THIS HAS ALSO BEEN DULY EXAMINED BY THE AO AND ONLY THEREAFTER IT WAS ADJUDICATED. THE REASON NO. 3 RE LATES TO NON EXAMINATION OF GENUINENESS OF UNSECURED LOANS AMOUN TING TO RS. 26 68 85 829/-. LD. COUNSEL FOR THE ASSESSEE SUBMIT TED THAT CONFIRMATIONS WERE NOT FILED BEFORE THE AO IN RESPE CT OF THESE UNSECURED LOANS OTHERWISE DETAILS WERE REFLECTED IN THE ANNUA L ACCOUNT AND THESE WERE WITH THE AO. HE PREYED THAT THE LD. COMMISSION ER HAS BRANDED ITA NO. 1998/DEL/09 ASSTT. YEAR 2004-05 6 THE ASSTT. ORDER AS ERRONEOUS AND PREJUDICIAL TO TH E INTERESTS OF REVENUE WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES. 5. LD. DR ON THE OTHER HAND RELIED UPON THE ORDER O F LD. COMMISSIONER AND DREW OUR ATTENTION TOWARDS THE ASS TT. ORDER . HE POINTED OUT THAT FROM PERUSAL OF THE ASSTT. ORDER N O DISCUSSION IS DISCERNABLE ON THESE ASPECTS. THEREFORE LD. COMMISS IONER IS JUSTIFIED IN TAKING ACTION U/S 263 OF THE INCOME TAX ACT. HE FUR THER SUBMITTED THAT LD. COMMISSIONER HAS RELIED UPON THE JUDGMENT OF HO NBLE DELHI HIGH COURT IN THE CASE OF M/S. GEE VEE ENTERPRISES VS. ACIT REPORTED IN 99 ITR 373 AND OBSERVED THAT IF INCOME TAX OFFICER FAI LED TO INVESTIGATE THE ISSUE PROPERLY THEN HIS ORDER WOULD BE ERRONEOUS. THE INCOME TAX OFFICER CANNOT REMAIN PASSIVE ON THE ISSUES AVAILAB LE IN THE RETURN. HE IS BOUND TO INVESTIGATE THOSE ISSUES. 6. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AN D GONE THROUGH THE RECORD CAREFULLY. THE ITAT IN THE CASE OF MRS. KHATIZA S. OOMERBHOY VS. ITO MUMBAI 101 TTJ 1095 ANALYZED IN DETAIL V ARIOUS AUTHORITATIVE PRONOUNCEMENTS INCLUDING THE DECISION OF HONBLE SU PREME COURT IN THE ITA NO. 1998/DEL/09 ASSTT. YEAR 2004-05 7 CASE OF MALABAR INDUSTRIES 243 ITR 83 AS WELL AS HO NBLE BOMBAY HIGH COURT RENDERED IN THE CASE OF GABRIEL INDIA LTD. AN D HAS PROPOUNDED THE FOLLOWING BROADER PRINCIPLE TO JUDGE THE ACTION OF CIT TAKEN UNDER SECTION 263. THE FUNDAMENTAL PRINCIPLE WHICH EMERGE FROM THE AB OVE CASES MAY BE SUMMARIZED BELOW (I) THE CIT MUST RECORD SATISFACTION THAT THE ORDER OF THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE. BOTH THE CONDITIONS MUST BE FULFILLED. (II) SEC. 263 CANNOT BE INVOKED TO CORRECT EACH AND EVERY TYPE OF MISTAKE OR ERROR COMMITTED BY THE AO AND IT WAS ONLY WHEN AN ORDER IS ERRONEOUS THAT THE SECTION WILL BE ATTRACTED. (III) AN INCORRECT ASSUMPTION OF FACTS OR AN INCORR ECT APPLICATION OF LAW WILL SUFFICE THE REQUIREMENT OF ORDER BEING ERR ONEOUS. (IV) IF THE ORDER IS PASSED WITHOUT APPLICATION OF MIND SUCH ORDER WILL FALL UNDER THE CATEGORY OF ERRONEOUS ORDER. (V) EVERY LOSS OF REVENUE CANNOT BE TREATED AS PREJ UDICIAL TO THE INTERESTS OF THE REVENUE AND IF THE AO HAS ADOPTED ONE OF THE COURSES PERMISSIBLE UNDER LAW OR WHERE TWO VIEW S ARE POSSIBLE AND THE AO HAS TAKEN ONE VIEW WITH WHICH T HE CIT DOES NOT AGREE IF CANNOT BE TREATED AS AN ERRONEOU S ORDER UNLESS THE VIEW TAKEN BY THE AO IS UNSUSTAINABLE UN DER LAW. (VI) IF WHILE MAKING THE ASSESSMENT THE AO EXAMINE S THE ACCOUNTS MAKES ENQUIRIES APPLIES HIS MIND TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND DETERMINE THE INCOME THE CIT WHILE EXERCISING HIS POWER UNDER S. 263 IS NOT PERMITTED TOS SUBSTITUTE HIS ESTIMATE OF INCOME IN PLACE OF T HE INCOME ESTIMATED BY THE AO. ITA NO. 1998/DEL/09 ASSTT. YEAR 2004-05 8 (VII) THE AO EXERCISES QUASI-JUDICIAL POWER VESTED IN HIS AND IF HE EXERCISES SUCH POWER IN ACCORDANCE WITH LAW AND ARR IVE AT A CONCLUSION SUCH CONCLUSION CANNOT BE TERMED TO BE ERRONEOUS SIMPLY BECAUSE THE CIT DOES NOT FEEL SATI SFIED WITH THE CONCLUSION. (VIII) THE CIT BEFORE EXERCISING HIS JURISDICTION UNDER S. 263 MUST HAVE MATERIAL ON RECORD TO ARRIVE AT A SATISFACTION . (IX) IF THE AO HAS MADE ENQUIRIES DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON THE RELEVANT ISSUES AND T HE ASSESSEE HAS GIVEN DETAILED EXPLANATION BY A LETTER IN WRITING AND THE AO ALLOWS THE CLAIM ON BEING SATISFIED WITH THE EXPLANATION OF THE ASSESSEE THE DECISION OF THE AO CANNOT BE HELD TO BE ERRONEOUS SIMPLY BECAUSE IN HIS ORDER HE DOES NOT MAKE AN ELABORATE DISCUSSION IN THAT REGARD. 7. IN THE LIGHT OF ABOVE PROPOSITION LET US EXAMINE THE FACTS OF THE PRESENT CASE. THE AO HAS NOT ALLOWED THE DEPRECIATI ON @ 60% ON COMPUTERS AS CONSTRUED BY THE LD. COMMISSIONER. IT INDICATE THAT LD. COMMISSIONER FAILED TO ANALYSIS THE FACTS IN RIGHT PERSPECTIVE. SIMILARLY THE INTEREST INCOME RECEIVED BY ASSESSEE AT RS. 18 26 962/- HAS DULY BEEN DISCLOSED. IT HAS ALLOCATED A SUM OF RS. 8 40 051/- TOWARDS PRE OPERATIVE EXPENSES WHICH HAS BEEN DISALLOWED BY THE AO BY TREATING THEM AS CAPITAL EXPENDITURE. AGAIN LD. COMMISSIONER FAILED TO TAKE NOTE OF THIS ASPECT WHILE TAKING COGNIZANCE U/S 263 OF T HE ACT. THUS ON AN ANALYSIS OF THE REPLY OF ASSESSEE VIS. A VIS. THE R EASONS ASSIGNED IN THE SHOW CAUSE NOTICE EXTRACTED SUPRA WE ARE OF THE OPI NION THAT THE ONLY ITA NO. 1998/DEL/09 ASSTT. YEAR 2004-05 9 ISSUE FOR WHICH NO PROPER INQUIRY WAS CONDUCTED BY THE AO IS NON EXAMINATION OF UNSECURED LOANS. AS FAR AS OTHER REA SONS TAKEN UP BY THE LD. COMMISSIONER FOR CONSIDERING THE ASSTT. ORDER A S ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE ARE NOT SUST AINABLE. THE ASSESSEE HAS DEMONSTRATED THAT ALL THESE ISSUES HAVE BEEN GO NE THROUGH BY THE AO AND HE HAS ACCEPTED THE ENTRIES AS WELL AS CONTE NTIONS OF THE ASSESSEE ON THESE ISSUES AFTER DUE VERIFICATION. TH EREFORE WE ALLOW THE APPEAL OF ASSESSEE PARTLY. WE MODIFY THE ORDER OF T HE LD. COMMISSIONER TO THE EXTENT THAT ASSTT. ORDER IS ERRONEOUS AND PR EJUDICIAL TO THE INTEREST OF REVENUE IN RESPECT OF NON EXAMINATION OF UNSECUR ED LOANS. THE AO SHALL CONSIDER AND READJUCATE THIS ISSUE AFTER PROV IDING DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 19.2.2010 [R.C. SHARMA] [RAJPAL YADAV] ACCOUNTANT MEMBER JUDICIAL MEMBER VEENA DATED: 19.2.2010 ITA NO. 1998/DEL/09 ASSTT. YEAR 2004-05 10 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR ITAT TRUE COPY BY ORDER DEPUTY REGISTRAR ITAT