Bombay High Court
Kec International Limited (As … vs The Deputy Commissioner Of Income … on 30 January, 2025
Author: M. S. Sonak
Bench: M. S. Sonak
2025:BHC-OS:1404-DB
Revati 901.ITXA.324.2003(J).docx
Digitally
SAYYED signed by IN THE HIGH COURT OF JUDICATURE AT BOMBAY
SAEED SAYYED
SAEED ALI
ALI AHMED ALI ORDINARY ORIGINAL CIVIL JURISDICTION
Date:
AHMED 2025.01.30
ALI 16:42:59
+0530 INCOME TAX APPEAL NO.324 OF 2003
KEC International Limited
(As successor to M/s RPG Cables Ltd.)
RPG Center, 30 Forjett Street,
Near Bhatia Hospital, Tardeo,
Mumbai - 400 036 ...Appellant
Versus
Deputy Commissioner of Income-
Tax, Special Range 19, Room 603,
6th Floor, Aayakar Bhavan, Churchgate,
Mumbai - 20 ...Respondent
_____________________________________________________
Mr. Madhur Agarwal a/w Mr. Punit Shah, Mr. Balasaheb Yewale and
Ms. Rupali Vasaikar i/b. Rajesh Shah & Co. for Appellant.
Mr. Suresh Kumar for Respondent.
_____________________________________________________
CORAM : M. S. Sonak &
Jitendra Jain, JJ.
RESERVED ON : 23 January 2025
PRONOUNCED ON : 30 January 2025
JUDGMENT (Per Jitendra Jain J):
–
1. This Income Tax Appeal is filed, under Section 260A of the
Income Tax Act, 1961, by the Appellant-Assessee for the assessment
year 1988-1989 challenging an order of the Income Tax Appellate
Tribunal (Tribunal) dated 8 October 2002, whereby the Appellant-
Assessee’s appeal challenging jurisdiction of the Commissioner of
Income Tax to invoke revisional power under Section 263 of the Income
Tax Act, 1961 (“the IT Act“) was dismissed.
Page 1 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
2. This appeal was admitted on 25 October 2004 on the
following substantial question of law. :-
“Whether on the facts and in the circumstances of the case and in
law, the Tribunal erred in holding that the deduction of the
decapitalised interest of Rs.317.63 lacs (Rs.396.94 lacs minus
Rs.79.21 lacs) pertaining to earlier years while computing book
profits under Section 115J had not assumed finality. ”
3. By consent of both the parties, the substantial question of law
is reframed to bring out the exact controversy :
“Whether the Tribunal was justified in upholding exercise of
revisional power by the CIT u/s 263 of the Act and further was
justified in holding that observations made by the CIT in his order
u/s 263 on the issue of Section 115J is not definite finding on the
merits of the issue?”
FACTS :
4. The Appellant-Assessee are successor to the erstwhile Asian
Cables Limited. On 1 January 1987, Asian Cable and Corporation Ltd.
amalgamated with Wiltech India Ltd. w.e.f. 1 January 1987 and the
name of the amalgamated company was changed to Asian Cables Ltd.
5. In the hands of Wiltech India Ltd., interest on term loan from
financial institutions were capitalised, including interest for the period
subsequent to the date of commencement of commercial production
(i.e. 1 May 1982). Total interest aggregating to Rs.617,07,00,000/- was
capitalised. Depreciation on such capitalised interest claimed by Wiltech
India Ltd. in the accounts for 1982-1983, 1983-1984, 1984-1985 and
1985-1986 was Rs.79.21 lakhs. From the accounting year, ending 31
March 1988, i.e. the year of the amalgamation, the accounting policy of
capitalising future interest was changed, whereby interest relating to
period from the commencement of production upto 31 December 1986
was decapitalised and charged as an expenditure in the profit and loss
Page 2 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
account of the year 1987-1988, and the depreciation claim on the said
capitalised interest in the earlier year was also written back to the profit
and loss account in 1987-1988.
6. On 28 July 1988, the Appellant-Assessee filed its return of
income declaring loss. The said return was revised on 7 July 1989 and
income under Section 115J of the IT Act was declared at
Rs.49,19,380/-. The said revised return was further revised on 23 April
1990 in which the deduction under Section 32AB of Rs.80,85,862/- was
claimed, but the income under Section 115J remained the same i.e.
Rs.49,19,380/-. The said return was selected for scrutiny assessment.
7. On 28 February 1991, an assessment order under Section
143(3) of the IT Act was passed by the assessing officer , assessing the
income under normal provisions of the IT Act at rupees ‘NIL’ after
making disallowance under Rules 6D, 37(2A), incentive payment,
40A(5), 43B, payment to club, addition on account of mortgage etc. and
after setting off unabsorbed losses. The assessing officer after
computing income under normal provisions of the IT Act, accepted
computation of income made by the Appellant-Assessee under Section
115J at Rs.49,19,377/-.
8. On 25 February 1993, a notice under Section 263 of the IT
Act was issued by the Commissioner of Income Tax (CIT) in which he
stated that the assessment framed by the ITO is erroneous insofar as it
is prejudicial to the interest of revenue on the ground that deduction
allowable under Section 32AB of the IT Act has not been computed
correctly, since interest on loans relating to prior period amounting to
Rs.3,96,84,098/- has been added to the book profit and further book
profit under Section 115J of the IT Act are not calculated correctly. The
Appellant-Assessee was called upon to show cause why the assessment
Page 3 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
order under Section 143(3) should not be revised under Section 263 of
the IT Act.
9. On 10 March 1993, the Appellant-Assessee filed its reply
giving its submissions on why the computation under Section 32AB and
115J of the IT Act is correct. The Appellant-Assessee prayed for
dropping the proceedings. In the said reply no grievance was raised on
assumption of jurisdiction by the CIT.
10. On 30 March 1993, the Commissioner of Income Tax passed
an order under Section 263 of the IT Act after hearing the
representative of the Appellant-Assessee. The operative portion of the
Commissioner’s order reads as under:-
“4. I have considered the facts of the case and also the arguments of
the assessee’s counsel. Taking the first point relating to deduction
allowable u/s. 32AB it is seen that the same has to be allowed with
reference to profits of the assessee for the assessment year under
consideration. It is noted from the Profit & Loss account for the
fifteen months ended 31.3.1988 that a net sum of Rs.
3,17,63,000/- has been debited by way of interest on Fixed Loans
after adjusting an amount of Rs.79,21,000/- being write back of
depreciation. This represents interest on term loans which were
capitalised in the earlier years in respect of (Wiltech India Ltd.)
Wiltech division subsequent to the date of commencement of
commercial production. Since this item of expenditure being
interest on loan has not been claimed as revenue expenditure being
interest on loan has not been claimed as revenue expenditure in the
books of Wiltech division in those years, the assessee is making this
adjustment in this year of amalgamation. The deletion of the prior
period interest debited in the books of accounts is not one of the
items referred to in the provisions of Section 32AB(3) which
defines the profits on business for the purpose of this Section. Since
the assessing officer has not taken this aspect into consideration,
the assessment made by the assessing officer is erroneous and
prejudicial to the interest of revenue on this account.
5. Taking the second point for the purpose of Section 115J the book
profits have to be taken into consideration. However, it does not
mean that the adjustments made by the assessee in respect of
earlier years should be allowed to alter the figures of business
profits of this year. If such adjustments has to be allowed for the
purpose of Section 115J the assessee will be at liberty to alter the
figures of the current year’s books by making adjustment entries. ItPage 4 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docxwill artificially have the effect of decreasing the book profits of this
year with sole intention of avoiding applicability of Section 115J.
Such attempt cannot be said to be within the scheme of the
provisions of Section 115J. Accordingly the deduction of the book
profits to the extent of Rs. 3,17,16,000/- by way of interest on fixed
loans could not be said to be a correct allowance made while
computing the profits u/s. 115J. Since the assessing officer has not
considered this aspect, the same is erroneous and prejudicial to the
interest of revenue.
6. In the light of the above discussions the assessment for the
assessment year 1988-89 is set aside on both the points referred to
above. The assessing officer will compute the relief u/s. 32AB and
also the book profits u/s.115J afresh by applying the correct
provisions of law and after providing an opportunity to the
assessee.”
[emphasis supplied]
11. The Appellant-Assessee being aggrieved by the revisional
order passed under Section 263 filed an appeal to the Tribunal. The said
appeal was disposed of by the Tribunal on 8 October 2002. The
operative portion of the Tribunal order reads as under:-
“11. We have considered the rival submissions and have gone
through the facts. Admittedly, the AO has not examined the
important issues as mentioned above and his order is completely
silent on these issues. Thus, he accepted the claim made by the
assessee without proper enquiry and without application of mind.
Therefore, the AO’s order is erroneous and prejudicial to the
interests of the revenue as held by the ITAT in the cases cited. In the
case of Arbit Exports Ltd., the ITAT relied upon Hon’ble Supreme
Court decision in the case of Malabar Industrial Co. Ltd. Vs. CIT
243 ITR 83. The arguments of the ld. Counsel that on merits the
issues are now covered by the Hon’ble Supreme Court decision in
the case of Appollo Tyres (supra) is not acceptable. Firstly, the
decision was not available at the point of time when the CIT passed
his order U/s. 263 of the IT Act. Secondly, whether the Supreme
Court decision is applicable or not would depend upon the facts of
particular case. The 1d. CIT in his order U/s. 263 has not decided
the merits and he has merely directed the AO to decide the issues
in accordance with the relevant provisions of law. Thus, on merits,
the issue is still open. Having regard to the facts and circumstances
mentioned above, we hold that the relevant assessment order was
erroneous and prejudicial to the interests of the revenue and
accordingly, the ld. CIT was justified in assuming jurisdiction U/s.
263 and setting aside the assessment. In the circumstances, we
refrain from commenting on the merits of the isues.”
Page 5 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
12. Meanwhile, the assessing officer on 31 January 1995 passed
an order pursuant to Section 263 order. The said order under Section
143(3) read with Section 263 of the IT Act was passed after giving an
opportunity to the Appellant-Assessee, who made various submissions
vide various letters on the issue of computation of deduction allowable
under Section 32AB and computation of book profit under Section
115J. After detailed analysis of the submissions made by the Appellant-
Assessee and after hearing the Appellant-Assessee on the merits, the
assessing officer passed an order under Section 143(3) read with
Section 263, wherein book profit under Section 115J was computed at
Rs.1,44,48,277/- and eligible income under Section 32AB was
computed at Rs.1,14,49,120/- but deduction was restricted to the
extent of amount utilised for acquiring the plant and machinery which
was Rs.80,85,862/-. The assessing officer with respect to
decapitalisation of interest gave the same treatment in computing
deduction under Section 32AB as given in computing book profit under
Section 115J and similarly with respect to write back of depreciation.
13. The said order of the assessing officer dated 31 January 1995
under Section 143(3) read with Section 263, where on merits the
contention raised by the Appellant-Assessee came to be rejected, has not
been challenged by the Appellant-Assessee and has become final.
14. It is in the above backdrop and being aggrieved by the
Tribunal’s order dated 8 October 2002 upholding the jurisdiction under
Section 263, the Appellant-Assessee has filed the present appeal which
was admitted by this Court vide order dated 25 October 2004 on
substantial question of law reproduced above which we have now
reframed.
Page 6 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
Submissions of the Appellant-Assessee :
15. Mr. Agarwal, learned counsel for the Appellant-Assessee
submits that the order under Section 263 of the IT Act records a definite
finding on merits and, therefore, the Appellant-Assessee are justified in
contesting the same on merits before the Tribunal and this Court. He
relies upon the decision of this Court in the case of Herdillia Chemicals
Ltd. Vs. Commissioner of Income Tax1 in support of this submission.
Secondly, he submits that the view taken by the assessing officer was in
consonance with the decision of the Cochin Bench in the case of Apollo
Tyres Ltd. Vs. Deputy Commissioner of Income Tax 2 and, therefore, he
contends that if two views are possible and one of the view is taken by
the assessing officer, then the CIT cannot exercise jurisdiction under
Section 263 of the Act. He relies upon the decision of the Supreme
Court in the case of Commissioner of Income Tax (Central), Ludhiana
Vs. Max India Ltd.3 for this proposition. He further submits that the
issue is now covered on merits by the decision of the Supreme Court in
the case of Apollo Tyres Ltd. Vs. Commissioner of Income Tax 4. He
further submits that since in the original assessment order, the assessing
officer has computed book profit under Section 115J of the Act, it
should be deemed that he had examined the computation of book profit
under Section 115J and, therefore, the jurisdiction exercised by the CIT
is not warranted. He further submits that the assessee has not
challenged the order giving effect to the order passed under Section 263
and, therefore, for all the above reasons this Court should answer the
question in favour of the Appellant-Assessee and against the revenue.
1 (1997) 90 Taxman 314 2 (1992) 43 ITD (Cochin) 3 (2008) 166 Taxman 188 (SC) 4 (2002) 255 ITR 273 (SC) Page 7 of 25 ::: Uploaded on - 30/01/2025 ::: Downloaded on - 30/01/2025 22:29:55 ::: Revati 901.ITXA.324.2003(J).docx Submissions of the Respondent :-
16. Per contra, Mr. Suresh Kumar, learned counsel for the
Respondent submits that the issue raised in the order under Section 263
was never examined by the assessing officer in the course of the original
assessment proceedings. He further submitted that the CIT can exercise
jurisdiction under Section 263 of the IT Act only if the order is
erroneous and prejudicial to the interest of the revenue. He submits that
to satisfy these twin jurisdictional conditions, the CIT after giving an
opportunity of hearing to the Appellant, has to form some opinion on
merits for coming to a conclusion that the order passed under Section
263 of the IT Act is erroneous and prejudicial to the interest of the
revenue. After having observed the same, he has remanded the matter
to the assessing officer to consider the same afresh by applying correct
provision of law and after providing an opportunity to the assessee. He
submits that on a holistic reading of paragraphs 4 to 6 of the order
under Section 263, it cannot be said that the CIT has given a definite
finding on merits. He further submits that in the order giving effect to
the Section 263 order, detailed submissions were made on merits by the
assessee and after adequate opportunity of hearing, the assessing officer
computed income under Section 115J and also computed eligible profit
under Section 32AB at a figure higher than the original assessment
order, but restricted the deduction to the extent of amount utilised for
plant and machinery. He submits that an attempt is made today to
attack the impugned order because the Appellant-Assessee has not
challenged the order giving effect to the Section 263 order and having
missed the bus, they cannot indirectly challenge the merits in the
present proceedings. He, therefore, prayed for dismissal of the appeal.
17. Learned counsel for the Respondent further distinguished the
decision in the case of Herdillia Chemicals Ltd. (supra) and stated that
Page 8 of 25::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docxin that case, the CIT has himself withdrawn the deduction under
Section 80J and, therefore, this Court held that the assessee in that case
ought to have challenged the order under Section 263 of the IT Act and
having not challenged the same, cannot pursue remedies by filing
appeal against the order giving effect to the Section 263 order.
18. We have heard learned counsel for the Appellant-Assessee and
the Respondent and with their assistance have perused the documents
shown to us. We note that other than what is recorded above, no other
submissions have been made by both the parties.
Analysis and Conclusion:
19. The issue which requires consideration is whether the order
passed under Section 143(3) dated 28 February 1991 is erroneous and
prejudicial to the interest of revenue and further whether the order
under Section 263 gives a conclusive finding on issue relating to Section
115J of the IT Act so as to permit the Appellant-Assessee to agitate the
issue on merits.
20. Section 263(1) of the IT Act, as it stood at the relevant time,
reads as under :
Revision of orders prejudicial to revenue-
263. (1) The Commissioner may call for and examine the
record of any proceeding under this Act, and if he considers
that any order passed therein by the [Assessing] Officer is
erroneous insofar as it is prejudicial to the interests of the
revenue, he may, after giving the assessee an opportunity of
being heard and after making or causing to be made such
inquiry as he deems necessary, pass such order thereon as the
circumstances of the case justify, including an order
enhancing or modifying the assessment, or cancelling the
assessment and directing a fresh assessment.
[Emphasis supplied]
Page 9 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
21. The object of conferring revisional power on CIT under
Section 263 of the IT Act is that the revenue has no right of appeal to
CIT(A) against any order passed by the assessing officer. Therefore, this
section is enacted conferring supervisory power on the CIT to be
exercised when an order passed by the officer is found to be erroneous
and prejudicial to the interest of the revenue.
22. At the outset a query was raised by the Court as to whether
there is any material on record to show that the assessing officer in the
course of the original assessment proceedings had raised a query on the
issues which were the subject matter of proceedings under Section 263,
and whether the Appellant-Assessee had filed any response/reply to
such query on these issues having been raised by the assessing officer
during the course of the original assessment proceedings. We were not
shown any such material. Therefore, admittedly the assessing officer
had not examined the issue during the course of the original assessment
proceedings on the subject matter of Section 263 proceedings. Even in
reply to the show cause notice under Section 263, the Appellant-
Assessee has not stated that this issue was examined during the course
of the original assessment proceedings nor was it the case of the
Appellant-Assessee before the Tribunal. Therefore, there can be no
dispute that the issues raised in revisional proceedings were never
examined during the course of original assessment proceedings. The
finding of the Tribunal on this issue has also not been challenged in this
appeal.
23. The only contention raised by the Appellant-Assessee is that in
the original assessment order under Section 143(3), at the end of the
order, the assessing officer has computed income u/s 115J at
Rs.49,19,377/- and therefore it should be presumed that the officer has
Page 10 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
examined the issue of computation of book profit under Section 115J.
We are afraid to accept this submission. In the assessment order,
disallowance under regular provisions of the Act, namely disallowance
under Rule 6-B, travelling expenses, Rule 6-D, etc. were made which led
to the assessing officer computing assessed income at Rs.5,83,29,868/-
and after setting off unabsorbed losses arrived at ‘NIL’ income under the
normal provisions of the Act. Thus, the assessing officer had to
compare normal income with the book profit under Section 115J which
the Appellant-Assessee has declared at Rs.49,19,377/-. The additions
made in the assessment order were not related to the computation of
book profit under Section 115J of the IT Act. The assessing officer
therefore accepted the Appellant-Assessee’s computation made under
Section 115J at Rs.49,19,377/- since same was more than the income
under normal provisions of the Act.
24. In our view, the assessing officer at the end of the assessment
is always required to compute the assessed income under the normal
provisions of the Act and compare it with the book profit under Section
115J. Merely because the assessing officer for this comparison at the
end of the assessment order reproduces the computation of income
under Section 115J made by the assessee, it cannot be said that the
assessing officer has examined the issue of computation of book profit
under Section 115J moreso as observed by us above when admittedly
there was no query raised by the assessing officer during the course of
the original assessment proceedings on the issues raised in Section 263
proceedings, nor was it at any point of time argued before any of the
authorities that these issues were examined in the course of the original
proceedings. Therefore, in our view, merely because an assessing officer
reproduces the computation of book profit made by the assessee at the
end of the assessment order, it cannot be said that the assessing officer
Page 11 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
has examined the issue of computation of book profit under Section
115J of the IT Act. Therefore, the contention raised by the Appellant-
Assessee on this issue is rejected.
25. It is important to note that in the reply to show cause notice
to notice under Section 263, the Appellant-Assessee had not challenged
the jurisdiction of the CIT but made submissions on merits. However in
grounds of appeal to the Tribunal, assumption of jurisdiction was
challenged. However, on a perusal of the Tribunal’s order, submission on
jurisdiction appears to be that since on merits issue is covered by the
subsequent decision of the Supreme Court in the case of Apollo Tyres
(supra) the jurisdiction assumed is bad in law. Although initially Mr.
Agarwal sought to contend that due to subsequent decision of the
Supreme Court in the case of Apollo Tyres Limited (supra) revisional
proceedings are bad in law but on being confronted on this issue, he
fairly pointed out that the decision of the Supreme court in Max India
(supra) holds that the jurisdiction under Section 263 of the Act has to
be tested on the basis of law prevailing on the date when the CIT
exercised the jurisdiction. Therefore, the subsequent decision of the
Supreme Court in the case of Apollo Tyres Limited (supra) on Section
115J cannot be considered for testing the validity of exercise of
jurisdiction under Section 263 since on the day when the CIT exercised
his jurisdiction, the Supreme Court had not decided the issue. We make
it clear that we have not examined whether the decision of the Supreme
Court is at all applicable since we are not adjudicating upon the merits
of the case.
26. Section 263 confers powers on the Commissioner which are in
the nature of supervisory jurisdiction and same can be exercised only on
satisfaction of twin conditions that the order sought to be revised is not
Page 12 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
only erroneous, but also prejudicial to the interest of the revenue. The
Commissioner, therefore, has to give his reasons on satisfaction of these
two conditions in his order exercising jurisdiction under Section 263 of
the Act since such an order is amenable to appeal before the Tribunal.
In the instant case, admittedly the issues for which revisional
proceedings were initiated were not examined by the assessing officer .
Therefore, merely because the assessing officer has not examined this
issue and therefore order is erroneous, could not have been the only
ground for exercising the jurisdiction but in addition to the same the
Commissioner would have to form some opinion for coming to the
conclusion that the order sought to be revised is not only erroneous, but
also prejudicial to the interest of revenue. For satisfaction of the
condition of ‘prejudicial to the interest of revenue’, the Commissioner is
required to say something on merits moreso when same was not
examined during original assessment proceedings. It is in these contexts
that the Commissioner has observed that computation of book profit to
the extent of Rs.3,17,16,000/- by way of interest on fixed loans could
not be said to be a correct allowance made while computing the profits
under Section 115J. The CIT after observing so has stated that this issue
was not considered by the assessing officer and, therefore, same is set
aside for computation of book profit under Section 115J afresh by
applying the correct provisions of law, and after providing an
opportunity of hearing to the assessee.
27. The very fact that the Commissioner is required to make an
order after affording an opportunity of hearing to the assessee ingrains
in the process the requirement of recording reasons for its conclusion,
as is necessary for any quasi-judicial order required to be made by a
quasi-judicial authority. It cannot be doubted nor has it been questioned
that orders under Section 263 bear stamps of quasi-judicial nature and
Page 13 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
require to be supported by reasons for its conclusion. Necessary
consequence is that while passing the order revising an order passed by
subordinate officer, the Commissioner must record reasons in support of
his conclusion that the order is revised being erroneous and that it
would be prejudicial to interests of revenue due to such erroneousness.
28. In our view, the Appellant-Assessee cannot pick up one
sentence of the operative order and contend that the Commissioner has
given a definite finding on the merits of the case. There has to be a
holistic reading of whole of the operative parts of the order and if one
reads holistically the whole of the operative parts, it can be safely
concluded that for coming to the satisfaction of twin conditions
mandated by Section 263 of the Act, the CIT had to make some
observations on the merits of the case moreso because the issue was not
examined during the course of the assessment proceedings. The CIT
having said so has directed the assessing officer to recompute the book
profit afresh by applying the correct provision of law, and after
providing an opportunity to the assessee. In our view on a complete
reading of the operative paragraphs of order under Section 263, it
cannot be said that the observations made by the Commissioner on
computation of book profit was definite and conclusive, but he had to
make these observations for satisfaction of the twin conditions
mentioned in Section 263 for assumption of jurisdiction. If he had not
made such observation, then the order under Section 263 would have
fallen foul of the mandatory conditions required for exercising
jurisdiction under Section 263. Therefore, on a holistic and complete
reading of the operative paragraphs, we cannot accept the submission
made by the Appellant-Assessee that the observation made by the CIT
on computation of book profit is definite and therefore he is entitled to
challenge the same on merits before the Tribunal and before this Court.
Page 14 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
In our view, the observation made by CIT cannot be to read dehors the
other directions of the operative portion of paragraph 5 and 6 of the
revisional order and therefore this contention of the Appellant-Assessee
is rejected.
29. We also do not accept the submission made by the Appellant-
Assessee that merely because they have not challenged the order giving
effect to Section 263 order, this Court should permit the Appellant-
Assessee to agitate the issue on merits. In our view, this would amount
to achieving indirectly what could not be achieved directly. Admittedly,
the order giving effect to Section 263 order has become final since same
has not been challenged till today. Having not challenged the said order,
we cannot permit the Appellant-Assessee to agitate the issue on merits
before us since that would amount to adjudicating upon the assessment
order giving effect to Section 263 order which has become final and
same is not before us and certainly under the scope of Section 260A of
the Act, we cannot permit such course of action since we are in
appellate jurisdiction and not in equity jurisdiction.
30. Learned counsel for the Appellant relied upon the decision of
this Court in the case of Herdillia Chemicals Ltd. (supra) in support of
his submission that there is a definite finding of the CIT in his order on
the merits of the case and, therefore, the Appellant should be permitted
to agitate the issue on merits. In our view, in the case of Herdillia
Chemicals Ltd. (supra), the CIT expressly stated that he is withdrawing
the reliefs under Section 80J of the Act granted by the ITO and after
withdrawing the reliefs, the ITO was directed to determine the reliefs
afresh in accordance with law after giving opportunity to the assessee of
being heard only for ministerial purpose. In the present case before us,
admittedly the issues raised in the revisional proceedings were not
examined by the assessing officer during the course of the original
Page 15 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
assessment proceedings. The Commissioner, therefore, had to make
observations on the merits for satisfying the twin conditions of
assuming jurisdiction under Section 263 of the Act. Having made so, the
CIT noted that since this issue was not examined during the course of
the assessment proceedings, he directed the officer to decide the issue
afresh in accordance with law and after giving opportunity of hearing.
In the case before us, there is no express/definite direction by the CIT to
the Officer that the Officer has to compute book profit under Section
115J in accordance with the observations made by the CIT. On the
contrary, the assessing officer was directed to recompute the book
profit under Section 115J in accordance with law afresh and after
giving opportunity of hearing. Pursuant to the said direction of the CIT,
the assessee filed detailed submissions on merits in the course of the
proceedings giving effect to the revisional proceedings. Therefore, in
our view, on a holistic reading of the operative part of Section 263
order, the decision of Herdillia Chemicals Ltd. (supra) is not applicable
to the facts of the present case.
31. Learned counsel for the Appellant, thereafter, relied upon the
decision of Max India Ltd. (supra) in support of his submission that
where the Officer has adopted one of the courses permissible in law and
has taken a view which was in accordance with the Cochin Tribunal’s
view in the case of Apollo Tyres (supra), the order passed under Section
263 cannot be said to be erroneous and prejudicial to the interest of the
revenue. In our view, the said decision of Max India Ltd. (supra) is not
applicable to the facts of the Appellant before us. In the instant case
before us, the assessing officer had not raised any query on any of the
issues of computation under Section 115J of the Act. Therefore, the
question of the Officer applying his mind to the computation of book
profit under Section 115J does not arise. If the assessing officer had
Page 16 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
raised the query on the computation of book profit under Section 115J
and after seeking response from the assessee had accepted the
submissions by not making any adjustment, then in that scenario, it
could have been contended that the assessing officer has adopted one
of the views which was in consonance with the Tribunal’s decision. If
the assessing officer has not examined computation of book profit
under Section 115J at all in the course of the original assessment
proceedings, then in that scenario, it cannot be presumed and said that
he has applied his mind and therefore, the question of forming any
opinion does not arise which could be said to have been adopted or
taken. The decision in the case of Max India Ltd. (supra) itself states
that when the ITO adopted one of the courses permissible in law or
where two views are possible and ITO has taken one view and the CIT
disagrees with it then, in that scenario, the order cannot be treated as
erroneous or prejudicial to the interest of the revenue. In the instant
case before us, since the issue of computation of book profit was never
examined by the assessing officer on any count, the issue of taking a
view by the assessing officer or adopting anything and consequently
the CIT disagreeing also does not arise and, therefore, the observations
made in the case of Max India Ltd. (supra) would not apply to the facts
of the present case.
32. The decision of Max India Ltd. (supra) follows decision of the
Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT 5
wherein exercise of jurisdiction under Section 263 of the IT Act was
upheld since the ITO failed to apply his mind to the case and it is in that
context the Supreme Court further observed, by way of example, that
when an ITO adopted one of the courses permissible in law and it has
resulted in loss of revenue, or where two views are possible and the ITO
5 (2000) 243 ITR 83
Page 17 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
has taken one view with which the Commissioner does not agree, it
cannot be treated as an erroneous order prejudicial to the interest of the
revenue. These observations read in the context of the facts before the
Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) clearly
show that application of mind by the ITO in the course of original
assessment proceedings is a must and if the CIT does not agree to such
a view, order cannot be treated as erroneous order prejudicial to the
interest of the revenue. In the instant case, admittedly and undisputedly
there is no examination of computation of book profit by the assessing
officer at the time of assessment and therefore, the case of the
Appellant-Assessee is covered by this decision of the Supreme Court in
the case of Malabar Industrial Co. Ltd. (supra).
33. The next submission of Mr. Agarwal that on account of Cochin
Tribunal’s decision in the case of Apollo Tyres Limited (supra), the
assessment order cannot be said to be erroneous and prejudicial is also
to be rejected. In this case the original assessment order is dated 28
February 1991 whereas Cochin Tribunal’s decision is of 29 July 1992 i.e.
much after assessment order was passed and moreso when the assessing
officer has not examined. Also Apollo Tyres Limited (supra) was a case
where assessee had filed an appeal, which indicates that at the time of
passing the assessment order in the present case, the view on merits (if
at all applicable) was against the assessee and in favour of the revenue.
Therefore, even on these facts, decision in the case of Max India Ltd.
(supra) on this proposition does not come to the rescue of the
Appellant-Assessee.
34. After the hearing was concluded, this Court came across a
decision of the Co-ordinate Bench, (which was not cited by any of the
parties). The Court brought to the notice of the learned counsel for the
Page 18 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
Appellant-Assessee and the respondent the said decision. This Court in
the case of CIT, Nagpur Vs. Ballarpur Industries Ltd.6 was faced with a
very similar and identical situation with which we are faced today. The
issue before the High Court was validity of jurisdiction under Section
263 of the Act with respect to deduction under Section 80HHC, where
the AO had not examined the issue in the course of the assessment
proceedings. The argument of the assessee was that in view of
conflicting decision with respect to deduction under Section 80HHC and
by placing reliance on the decision of the Supreme Court in the case of
Max India Ltd. (supra) was that the jurisdiction was wrongly assumed.
The Coordinate Bench reconciled and explained the decision in the case
Malabar Industries Co. Ltd. (supra) and Max India Ltd. (supra) and has
observed as under :
10. The law on exercise of jurisdiction under Section 263 of the Act is
settled by the decision of the Apex Court in the case of Malabar
Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 wherein it
has recorded that power of revision under Section 263 of the Act can be
exercised only on satisfaction of twin conditions namely the order of the
Assessing Officer must be erroneous, and also prejudicial to the interest
of the revenue. The Court further observed that where a claim made by
the assessee is allowed by the Assessing Officer without having made
any enquiry, then the order of the Assessing Officer to the extent it
allowed such a claim is erroneous in law. The Apex Court also recorded
the fact that where two views are possible, and the Assessing Officer has
taken one possible view, then even if the CIT does not agree with the
view, it would not give him the jurisdiction to exercise jurisdiction under
Section 263 of the Act.
11. In the above view, Mr. Bhattad, learned counsel for the applicant-
Revenue submits that it is very clear that the claim of the respondent –
assessee for deduction under Section 80 HHC of the Act was allowed
without any discussion and/or consideration of the eligibility and/or
extent of eligibility of claim under Section 80 HHC of the Act. Therefore,
the substantial question of law be answered in favour of Revenue.
6 (2017) 85 taxmann.com 10 (Bombay)
Page 19 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
12. However, Mr. Dewani, learned counsel for the respondent-assessee
while not disputing the above position in law with the requirement of
satisfaction of twin requirements, submits that in this case the issue was
debatable and two views were inherently possible in view of the
complexity of Section 80 HHC of the Act. In support he placed reliance
upon the decision of the Apex Court in Max India Ltd. (supra) which
also reiterates that where two views are possible, the exercise of the
revisional power under Section 263 of the Act is not called for. The two
views he submits by inviting our attention to the fact that statement of
case refers to the decision of the Tribunal placing reliance upon its
decision in Mysore Exports Ltd. (supra) taking the same view. Further in
support that there were two views possible at the time when the
Assessing Officer passed the order, reliance was placed upon the decision
of the Andhra Pradesh High Court in CIT v. Gogineni Tobacco Ltd.
[1999] 238 ITR 970 which relies upon the orders passed under the Act
indicating the issue is debatable. Without prejudice to the above, it is
also submitted that from a bare reading of the statement of case it is
clear that the Assessing Officer had allowed deduction under Section 80
HHC of the Act only after due application of mind. In support of the
aforesaid, he relied upon the fact of the statement of case refers to the
words “allowed deduction under Section 80 HHC of the Act”. Further
observation in the statement of case ” Assessing Officer is thus seemed to
have allowed deduction under Section 80 HHC without subjecting the
claim to due verification and/ subsequent quantification and
allowability”.
13. The above issue which comes for our consideration is, did the
Assessing Officer consider and examine the claim of the respondent
before allowing a claim for deduction under Section 80 HHC of the Act.
The respondent- assessee seeks to draw inference from the statement of
case that there was an inquiry made before allowing the claim of
deduction under Section 80 HHC of the Act at Rs.92.81 lakhs. This
inference is not justified. Mere using the word “allowed” does not mean
examination and enquiry before allowing deduction under Section 90
HHC of the Act. The words “due verification” would include within its
ambit not only inadequate inquiry/verification but also no
enquiry/verification. However, in case the respondent-assessee was of
the view that the claim has been examined by the Assessing Officer
before allowing it, then respondent-assessee ought to have the statement
of case modified/amended so as to bring the aforesaid facts on record,
as held by the Apex Court in the case of Calcutta Agency Ltd. (supra).
This not being done and now to draw far fetched inference cannot be
Page 20 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
accepted. It is now settled in view of Malabar Industries (supra) that
non-enquiry before allowing the claim would make the order of the
Assessing Officer amenable to jurisdiction under Section 263 of the Act.
The non-enquiry by the Assessing Officer gives jurisdiction under Section
263 of the Act. Merely because the issue is debatable, it does not absolve
the Assessing Officer from examining the issue and taking a view on the
claim after examination. Similarly because the two views are possible
and or that there are contrary view of higher forums, does not permit
non-examination of the claim and taking one of the possible view by
giving reasons. In this case no examination of the claim under Section
80 HHC of the Act has been done by the Assessing Officer. Therefore, the
exercise of jurisdiction by the Commissioner of Income Tax under
Section 263 of the Act was valid.
14. The decision of the Apex Court in Max India Ltd. (supra) relied
upon by the respondent-assessee to our mind would not come to its
rescue for the reason that in the present facts the statement of the case
does not indicate that the view taken to allow the claim under Section
80 HHC of the Act was after examination/inquiry. Mere taking of a view
by the Assessing Officer without having subjected the claim to
examination would not make it a view of the Assessing Officer. A view
has necessarily to be preceded by examination of the claim and opting to
choose one of the possible results. In the absence of view being taken,
merely because the issue itself is debatable, would not absolve the
Assessing Officer of applying his mind to the claim made by the assessee
and allowing the claim only on satisfaction after verification/enquiry on
his part. A view in the absence of examination is no view but only a
chance result. Therefore, even the decision of the Andhra Pradesh High
Court in Gogineni Tobacco Ltd. (supra) will also have no application.
15. It appears from the decision of the Apex Court in Max India Ltd.
(supra) that the Assessing Officer had taken one of the two views of the
word “profit” as occurring in Section 80 HHC of the Act. Therefore, it
was in that context that the Apex Court held that Section 263 of the Act
would not be attracted particularly when the view of the Assessing
Officer was found to be a view taken by various authorities under the
Act. In passing we may point out that as recorded in the statement of
case, the Tribunal held the exercise of powers under Section 263 of the
Act by the Commissioner of Income Tax to be bad in law as the view of
the Assessing Officer was in line with the decision of the Tribunal in
Mysore Exports Ltd. (supra). It is relevant to note that on the date when
the Commissioner of Income Tax exercised his powers under Section 263
Page 21 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
of the Act on 31.03.1995, the decision of the Tribunal in Mysore Exports
Ltd. (supra) was not available before him as it was rendered on
19.05.1995.
16. Therefore, we are of the view that the Assessing Officer cannot
abdicate his responsibility of examining the claim for deduction before
allowing it. Absence of examination of the claim made by the assessee
while passing an assessment order and allowing the claim made, would
render the order of the Assessing Officer erroneous and coupled with the
fact that in this case it is admitting prejudicial to the interest of the
revenue, exercise of the revisional jurisdiction under Section 263 of the
Act by the Commissioner of Income Tax proper and valid.
35. In our view, this decision of the Coordinate bench supports the
reasoning given by us in rejecting the submissions of the Appellant-
Assessee.
36. We may also point out that in the written submissions, the
Appellant-Assessee has referred to various decisions but at the time of
hearing, some of them were not relied upon and, therefore, we are not
considering the same. The decisions which were relied upon have been
discussed above.
37. It is also important to note that during the course of the
original assessment proceedings, deduction under Section 32AB was
also not examined. In the show cause notice under Section 263 of the
Act, the CIT proposed to initiate the revision proceedings on calculation
of deduction allowable under Section 32AB with regard to interest on
loan amounting to Rs. 3,96,86,398/- relating to prior period, in
addition to computation of book profit under Section 115J on this very
item. The proposal of computation of book profit was also not examined
in the original assessment proceedings. In response to the show cause
notice, the Appellant made submissions with respect to the interest
written off and depreciation written back in computation of deduction
Page 22 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
under Section 32AB as well as book profit under Section 115J of the Act
on merits. The order under Section 263 of the Act records in paragraph
4 that deletion of prior period interest debited in the books of account is
not in accordance with the provisions of Section 32AB and, therefore,
since the Officer has not taken this aspect into consideration, the
assessment order is erroneous and prejudicial to the interest of the
revenue. Similar observation was made in paragraph 5 with respect to
computation of book profit under Section 115J of the Act.
38. In the grounds of appeal before the Tribunal, the Appellant
did not raise any ground with respect to calculation of deduction under
Section 32AB but only raised the ground with respect to computation of
book profit under Section 115J. Therefore, it is an admitted position
that the assessee accepted the revisional proceedings being within
jurisdiction so far as Section 32AB is concerned. If that be so, then, we
fail to understand that on the same grounds, how can the Appellant-
Assessee challenge the assumption of jurisdiction of computation of
book profit. Placing reliance on the order giving effect to the Section
263 order to justify the acceptance on the issue of Section 32AB would
not be correct since the order giving effect to the Section 263
proceedings is dated 31 January 1995, whereas the grounds of appeal
filed before the Tribunal are dated 2 May 1994. Secondly, in the order
giving effect to the Section 263 proceedings, eligible profit computed
under Section 32AB has been revised but since the said profit was more
than the amount utilised in the plant and machinery, the deduction was
restricted to the amount utilised for acquiring the plant and machinery.
The calculation of eligible profit differed in the original assessment
order and order giving effect to the Section 263 order. Therefore, to
justify acceptance of revisional jurisdiction when it comes to Section
32AB deduction, but at the same time on similar grounds to challenge
Page 23 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
the jurisdiction when it comes to computation of book profit under
Section 115J, in our view, would be self-contradictory insofar as
assumption of jurisdiction is concerned. Even before us, the Appellant
has not raised any grievance on assumption of jurisdiction under
Section 32AB by the CIT. If that be so, then, on very same ground the
Appellant-Assessee cannot raise any grievance with respect to
assumption of jurisdiction qua computation of book profit is concerned.
39. The learned counsel for the Appellant-Assessee further
submitted that in the revisional order, CIT has not stated as to under
which clause of Explanation to Section 115J, the addition could have
been made and therefore, the revisional order is bad in law. This
submission of the Appellant supports the case of the revenue’s
contention that CIT has directed the assessing officer to decide afresh in
accordance with law. As to under which clause of the Explanation the
adjustment could be made, if at all, was left to the assessing officer
since CIT had directed the officer to examine the issue afresh in
accordance with law. This submission also mitigates against the
Appellant-Assessee’s argument on CIT having given definite finding
which submission as observed by us above is incorrect.
40. In our view, for the reasons stated above, there is no infirmity
in the exercise of revisional jurisdiction by the CIT and upheld by the
Tribunal. We make it clear that we have not expressed any opinion on
merits of the claim since same has been accepted by the Appellant-
Assessee by not challenging the order giving effect to revisional order
(atleast which assessee ought to have challenged after Tribunal’s order)
and same for reasons stated above could not have been agitated before
us. We have only approved the Tribunal’s order upholding the exercise
Page 24 of 25
::: Uploaded on – 30/01/2025 ::: Downloaded on – 30/01/2025 22:29:55 :::
Revati 901.ITXA.324.2003(J).docx
of revisional jurisdiction by the CIT and not adverted to the merits of
the claim in this appeal.
41. In view of above and for the reasons stated above, the appeal
filed by the Appellant-Assessee is dismissed and the question of law is
answered against the Appellant-Assessee and in favour of the
Respondent-revenue.
42. Appeal is dismissed.
(Jitendra S. Jain, J.) (M. S. Sonak, J.) Page 25 of 25 ::: Uploaded on - 30/01/2025 ::: Downloaded on - 30/01/2025 22:29:55 :::