Bombay H.C : the jurisdiction under Section 263 has not been invoked properly?

High Court Of Bombay

CIT-1, Mumbai vs. Hindustan Lever Ltd.

Assessment Year : 1998-99

Section 80-I, 80-IA, 80HH And 263

Dr. D.Y.Chandrachud And M.S.Sanklecha, JJ.

IT Appeal No.5818 Of 2010

February 1, 2012

JUDGMENT

Dr. D.Y. Chandrachud, J. – This appeal by the Revenue under Section 260A of the Income Tax Act, 1961, has raised the following two substantial questions of law :

“(a) Whether in the facts and circumstances of the case and in law, the Tribunal is right in setting aside the order passed by the Commissioner of Income Tax under Section 263 of the Act, holding that the jurisdiction under Section 263 has not been invoked properly? and

(b) Whether in the facts and circumstances of the case and in law, the Tribunal is right in holding that the entire cess can be claimed against taxable income?”

2. Both Counsel appearing on behalf of the Revenue and Counsel appearing on behalf of the Assessee are agreed that the first question is broad enough to determine the fate of this appeal. We accordingly admit the appeal on question (a). With the consent of Counsel, the appeal is taken up for hearing and final disposal.

3. The appeal relates to Assessment Year 1998-99. The assessee filed a return of income of Rs. 661.15 crores and claimed a deduction in the amount of Rs. 11.41 crores under Section 80-I, Rs. 218.62 crores under Section 80-IA and Rs. 20.20 crores under Section 80-HH. The Assessing Officer assessed the income under Section 143(3) at Rs. 814.66 crores and restricted the deduction claimed under Sections 80-I, 80-IA and 80-HH to Rs. 11.06 crores, Rs. 201.08 crores and Rs. 18.57 crores respectively. The Commissioner of Income Tax issued a notice under Section 263 on 21 March 2003 stating that on verification of the records, it was revealed that the following expenditure, though having a bearing on the profits of the units, had not been considered for allocation:

“(i) R & D Revenue expenditure Rs. 33,95,42,336/-
(ii) R & D Capital expenditure Rs. 12,39,73,377/-
(iii) Interest paid Rs. 32,16,45,000/-
(iv) Agency commission Rs. 35,59,51,682/-

(including Miscellaneous expenditure)

4. The Commissioner stated that as this expenditure has a bearing on the profits of the units, it should have been allocated proportionately. An excess allowance, the notice stated, has resulted in an under-assessment of Rs. 9.87 crores. In response to the notice, the assessee submitted a reply on 25 March 2003. The Commissioner by his order dated 28 March 2003, came to the conclusion that the research expenditure incurred by the assessee is inextricably linked with the business of the assessee, including business in those products which are manufactured in the units entitled to a deduction under Sections 80-I, 80-IA and 80-HH. The expenditure, noted the Commissioner, had been allowed in computing the income under the head “profits and gains from business or profession” for the whole of the business of the assessee, including of those units which are entitled to the aforesaid deductions. The logical corollary was held to be that in computing the profits derived from an eligible unit for the purpose of the aforesaid deductions, an appropriate part of the expenditure would have to be allocated to the units. As regards agency commission, the assessee had stated that an amount of Rs. 35.59 crores has already been allocated in arriving at the profit derived from the eligible units that was included under the head of advertisement. The assessee stated that there was no omission on its part and the amount should not once again be allocated in arriving at the profits of the units in respect of which a deduction was sought under Sections 80-I, 80-IA and 80-HH. The Commissioner held that the interest and agency commission which relate to the whole of the business would have to be allocated to the eligible units. During the course of the hearing before the Commissioner, pursuant to the notice under Section 263, a query was raised to the effect that cess which has been imposed on green leaf tea was required to be claimed entirely against the agricultural income in view of the decision of the Gauhati High Court in Jorehaut Group Ltd. v. Agrl. ITO [1997] 226 ITR 622. The assessee in its reply dated 27 March 2003 relied upon the provisions of Rule 8 of the Income Tax Rules, 1962 and submitted that in the case of an assessee, who is engaged in growing and manufacturing tea, the composite income calculated in accordance with the provisions of the Act, is required to be apportioned between the income on the manufacture of tea and income from agriculture in the ratio of 40 : 60. According to the assessee, cess on green leaves was a part of the expenditure incurred in the business of growing and manufacture of tea. The Commissioner in his order under Section 263 relied upon the judgment of the Gauhati High Court while coming to the conclusion that cess on green leaves was liable to be claimed entirely against agricultural income.

5. Against the decision of the Commissioner under Section 263, the assessee filed an appeal before the ITAT which was allowed on 5 July 2007. On the issue of the cess on green leaves, the Tribunal noted that a similar issue had come up for consideration before its Kolkata Bench in Bishanuth Tea Company Ltd. v. Jt. CIT [2002] 77 TTJ 45 wherein the amount paid on cess was held to be expenditure incurred in carrying on business of growing, manufacturing and sale of tea. The Tribunal held that the decision of the Gauhati High Court having been considered by the Kolkatta Bench, there existed a possible view in favour of the assessee, according to which, the amount of cess was deductible entirely from the total business operations. On this ground, it was held that the order of the Assessing Officer cannot be held to be erroneous and prejudicial to the interests of the Revenue, so as to warrant the exercise of the jurisdiction under Section 263. The Tribunal also held that under Sections 80-I and 80-HH, the income in order to be eligible for deduction, has to be derived from the activities specified in the sections and in a similar manner, any expenditure which is directly related to the activity, would fall for deduction against the income eligible for benefit under the section. According to the Tribunal, the Commissioner had presumed that some part of the expenditure on research and development as well as interest might have been incurred by the assessee without establishing the requirement of the nexus. Moreover, the Tribunal held that during the course of the assessment proceedings, a specific query was raised by the Assessing Officer to which the assessee submitted its reply and each and every item in relation to those deductions, was enquired into by the Assessing Officer. In this view of the matter, and after relying upon the decision of the Mumbai Bench in the case of Wockhardt Ltd. v. Asstt. CIT [IT Appeal No. 3991/Mum./2005, dated 24-2-2006], the Tribunal held that the exercise of the jurisdiction under Section 263 was not warranted.

6. In assailing the judgment of the Tribunal, Counsel appearing on behalf of the Revenue submitted that (i) There is a fundamental error in the approach of the Tribunal when it held that each item of expenditure pertaining to research and development was enquired into by the Assessing Officer and to which the assessee had submitted a reply following which the Assessing Officer had accepted the claim with regard to the deductions. As a matter of fact, the reply which was furnished by the assessee during the course of the assessment proceedings would indicate that the assessee had not furnished a detailed explanation which would have enabled the Assessing Officer to determine either the existence or absence of nexus. Moreover, as a matter of fact, and ex-facie, the assessment order would indicate that this aspect was not considered by the Assessing Officer at all. Consequently, it was in this view of the matter that the Commissioner in his order under Section 263 came to the conclusion that the Assessing Officer should have considered, while computing profits derived from the industrial undertakings to which the deductions under Sections 80-I, 80-IA and 80-HH pertained as to whether the expenditure incurred on research and development had a direct nexus with the business of the undertaking. The Commissioner opined that a failure to do so has resulted in the order being erroneous in so far as it is prejudicial to the interests of the Revenue; (ii) The assessee has allocated the agency commission as between all the eligible units. There was no reason not to allocate the expenditure incurred on account of research and development between the eligible units though full deduction has been claimed against the profits of the business as a whole; (iii) The Commissioner has acted within his jurisdiction under Section 263 as expounded in the judgment of the Supreme Court in Malabar Industrial Co. (P.) Ltd. v. CIT [2000] 243 ITR 83 / 109 Taxman 66 . There was an incorrect assumption of the facts by the Assessing Officer. The Assessing Officer had proceeded to accept the assessment without application of mind. The assessee having failed to make a full and proper disclosure before the Assessing Officer, the order of assessment has resulted in under-assessment to the extent of Rs. 9.87 crores as noted in the show cause notice. The exercise of the jurisdiction under Section 263 was clearly warranted since the requirements of the order being erroneous and prejudicial to the interests of the Revenue were fulfilled; (iv) As regards the cess on green leaves, a deduction cannot be claimed against non-agricultural income and the cess must be allocated entirely towards agricultural income.

7. On the other hand, it has been urged by Counsel appearing on behalf of the Assessee that (i) The view which has been taken by the Tribunal on the issue of agricultural cess is consistent with the provisions of Rule 8 of the Income Tax Rules, 1962. Moreover, as a matter of fact, the view of the Tribunal accords with the view of the Calcutta High Court in the case of the assessee in Hindustan Lever Ltd. v. CIT [2011] 11 taxmann.com 64. The judgment of the Gauhati High Court which is relied upon by the Commissioner was based on the special provisions contained in the legislation in the State of Assam and would have no bearing on the matter; (ii) The jurisdiction under Section 263 is conditioned by twin requirements that (a) The order of assessment must be erroneous; and (b) The order of assessment must be prejudicial to the interests of the Revenue. Where the Assessing Officer has taken a possible view, the exercise of jurisdiction under Section 263 would not be warranted; (iii) It is a well settled principle of law that the expression “derived from” for the purposes of Sections 80-I, 80-IA and 80-HH does not have the same meaning as the expression “attributable to”. The expression “derived from” postulates a direct nexus with the income or, as the case may be, the expenditure; (iv) The Assessing Officer had, during the course of the assessment proceedings, conducted an enquiry, in the course of which, the assessee had submitted its reply. Having considered the claim of the assessee, the Assessing Officer had proceeded to accept it and it cannot be postulated that there was no application of mind; (v) The Tribunal has, in the course of its decision, come to the conclusion that the Commissioner had only presumed that some part of the research and development expenditure would have a nexus with the units in relation to which a deduction was sought under Sections 80-I, 80-IA and 80-HH without specifically establishing the existence of such a nexus. The order passed by the Commissioner was, therefore, held to be outside jurisdiction under Section 263 and it was urged that the decision of the Tribunal is consistent with the legal provisions. On this ground, it was urged that the appeal which arises before the Court under Section 260A out of an appellate order of the Tribunal on a decision under Section 263 would not warrant interference of the Court. Counsel submitted that the Commissioner had not interfered under Section 263 on the ground that the Assessing Officer had failed to carry out an enquiry, but on the ground that on merits, the Assessing Officer was not justified in granting deductions claimed under Sections 80-I, 80-IA and 80-HH. The Tribunal, in the circumstances, could not have substituted the reasons which weighed with the Commissioner, nor could it have sustained the order passed by the Commissioner on other grounds. This, it is submitted, must be applied to the exercise of the appellate jurisdiction of this Court under Section 260A.

8. The rival submissions now fall for consideration.

9. Before we deal with the grounds on which the Commissioner sought to exercise his jurisdiction under Section 263 and the decision of the Tribunal in appeal, it would, at the outset, be necessary to advert to the parameters for the exercise of the jurisdiction under Section 263 of the Act. Section 263 empowers the Commissioner to call for and examine the record of any proceeding “if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue”. The language of Section 263 imposes two requirements, the first being that the order of the Assessing Officer must be regarded as being erroneous and the second that the order must be prejudicial to the interests of the Revenue. Similarly, the Commissioner cannot exercise his jurisdiction under Section 263 merely on the ground that the interests of the Revenue are prejudiced without coming to the conclusion, in addition, that the order in respect of which he exercises his revisional jurisdiction is erroneous. Both the requirement of the order being erroneous and being prejudicial to the interests of the Revenue, must be fulfilled.

10. Several judgments of the High Courts had considered the ambit of the jurisdiction under Section 263 before the issue was comprehensively determined by the Supreme Court in Malabar Industrial Co. Ltd. (supra). A judgment of a Division Bench of this Court in CIT v. Gabriel India Ltd. [1993] 203 ITR 108 / 71 Taxman 585 , held that an order cannot be termed as erroneous unless it is not in accordance with law. Moreover, the Division Bench held that if the Assessing Officer acting in accordance with the law has made a certain assessment, it cannot be branded as erroneous by the Commissioner simply because the order should have been written more elaborately or because the Commissioner in substitution of his own judgment for that of the Assessing Officer holds that the decision is erroneous. The Division Bench held that an order of the Assessing Officer to be erroneous must be one which is not in accordance with law or an order which has been passed without making an enquiry in undue haste. Similarly, an order cannot be said to be prejudicial to the interests of the Revenue, if it is not in accordance with law in consequence whereof, the lawful revenue due to the Government has not been realised or cannot be realised. The judgment of the Division Bench has been followed by the Delhi High Court in CIT v. Vikas Polymers [2010] 194 Taxman 57 .

11. Now, it must be noted that subsequent to the judgment of the Division Bench of this Court in Gabriel India Ltd. (supra), the provisions of Section 263 were interpreted by the Supreme Court in the decision in Malabar Industrial Co. Ltd. (supra). In the case before the Supreme Court, the assessee had entered into an agreement for sale of a plantation. The purchaser not having adhered to the Schedule prescribed for payment by instalments, parties agreed to the extension of time on condition of payment of compensation/damages. In the return filed by the assessee, the amount was noted as compensation and damages for loss of agricultural income. The Assessing Officer accepted this and endorsed a nil assessment for the assessment year. The Commissioner in the exercise of his jurisdiction under Section 263 concluded that the amount was unconnected with any agricultural operation and was liable to be taxed under the head “income from other sources”. Both, the Tribunal in appeal and the High Court held against the assessee. The Supreme Court while dismissing the appeal came to the conclusion that the order of nil assessment by the Income Tax Officer was passed without application of mind. There was no material to support the claim of the assessee that the amount paid represented compensation for loss of agricultural income. The Assessing Officer, noted the Supreme Court, had accepted the entry in the statement of account filed by the assessee in the absence of any supporting material and without making any enquiry. On these facts, the conclusion that the order of the Income Tax Officer was erroneous was held to be irresistible and the jurisdiction under Section 263 was held to be a justifiable exercise.

12. The judgment of the Division Bench of this Court in Gabriel India Ltd. (supra) had confined the categories within which the jurisdiction under Section 263 could be exercised, to a situation in which the order of the Assessing Officer could be regarded as not being in accordance with law or which had been passed without making an enquiry in undue haste. The exposition of law in the judgment of the Division Bench, to the extent to which it confined the jurisdiction under Section 263 only to these categories stands modified by the law laid down by the Supreme Court in Malabar Industrial Co. Ltd. (supra). The judgment of the Supreme Court clearly does not warrant a restriction of the jurisdiction under Section 263 only to a situation where the judgment of the Assessing Officer is contrary to law or where the Assessing Officer has not made any enquiry in undue haste. The Supreme Court has in Malabar Industrial Co. Ltd. (supra) observed that the Commissioner has to be satisfied of the existence of two conditions, namely, (i) The order of the Assessing Officer sought to be revised is erroneous; and (ii) The order of the Assessing Officer is prejudicial to the interests of the revenue. If one of those requirements is absent, recourse cannot be had to Section 263. Moreover, it has been held that every kind of mistake or error of the Assessing Officer cannot warrant the exercise of jurisdiction under Section 263 and it is only when an order is erroneous that the section would be attracted. The Supreme Court held that “an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous.” In the same category, according to the Supreme Court, would fall orders “passed without applying the principles of natural justice or without application of mind”. Consequently, in view of the affirmative principle of law laid down by the Supreme Court, the exercise of the jurisdiction under Section 263 cannot be confined only to those cases where it can be held that the order of the Assessing Officer is not in accordance with law in the restricted sense in which that expression has been used in Gabriel India Ltd. (supra). As regards the order being prejudicial to the interests of the Revenue, the judgment in Malabar Industrial Co. Ltd. (supra) adverts to the decisions of the Karnataka and Gujarat High Courts and of the view of the Division Bench in Gabriel India Ltd. (supra), according to which, a loss of tax has been regarded as prejudicial to the interests of the Revenue. The Supreme Court has held that if due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it would certainly be prejudicial to the interests of the Revenue. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue. For instance, where the Assessing Officer adopted one of several courses permissible in law or where two views are possible and the Assessing Officer has adopted one view with which the Commissioner does not agree, it has been held that it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken is unsustainable in law.

13. Now, it is in this background that it would be necessary for the Court to assess as to whether the Tribunal in interfering with the order of the Commissioner passed under Section 263 has acted within the parameters of law. During the course of the assessment proceedings, the Assessing Officer had issued a notice to the assessee on 30 January 2001. The notice contained in Sr. No.18 a list of queries in regard to the claim of the deduction under Section 80-HH. The Assessing Officer inter alia required the assessee to explain why the head office expenses had not been allocated like earlier years and why the capital expenditure on research and development had not been allocated. Similarly, in regard to the deduction claimed under Sections 80-I and 80-IA, the Assessing Officer called upon the assessee to disclose inter alia the allocation of scientific capital expenses as well as the expenditure under Section 35(1). In its reply dated 9 February 2001, the assessee dealt with the issue of the head office expenses and stated that since the deduction admissible under Section 80-HH is on the basis of profits derived from the industrial undertaking (which has a narrower scope than the words ‘attributable to’) the common unallocated head office expenses could not be regarded as being derived from the units in question. As regards the issue of capital expenditure on scientific research, the assessee stated as follows:

“The capital expenditure on scientific research cannot be reduced from the profits of eligible undertaking as these have not been incurred at the undertakings. Further, these expenses are not directly linked to the operations of the undertaking.”

14. The Assessing Officer in the order of assessment held that the unallocated head office expenses needed to be apportioned to determine the quantum of profits derived from an industrial undertaking. According to the Assessing Officer, the Act does not require that all expenses relatable to an industrial undertaking should be incurred at the unit and any expenses wherever incurred having nexus with the unit, need to be deducted to determine true profits of the unit. The assessee submitted a working of the deduction after considering administrative expenses and brought forward loss and on this basis, the Assessing Officer restricted the deduction under Section 80-HH to Rs. 18.57 crores (as against the claim of Rs. 20.20 crores) and under Sections 80-I and 80-IA to Rs. 212.15 crores (as against the claim of Rs. 230.03 crores). The order of the Assessing Officer was, however, completely silent in regard to the allocation of expenditure incurred towards research and development. Ex-facie, the order does not deal with that aspect at all. Consequently, when a notice to show cause was issued to the assessee under Section 263, the Commissioner stated that on verification of the records, expenditure under four heads though having a bearing on the profits of the units, had not been considered for allocation. The notice set out the case of the department that the expenditure under the four heads stated therein also had a bearing on the profits of the units and should be allocated proportionately. The assessee was, therefore, placed on notice that the case of the Revenue was that though certain items of expenditure had a nexus with the industrial undertakings in respect of which a deduction had been claimed under Sections 80-I, 80-IA and 80-HH the Assessing Officer had failed to apply his mind. The stand of the assessee was that the agency commission of Rs. 35.59 crores had already been allocated in arriving at profit derived from eligible units, being calculated under the head of advertisement. As regards the other items, the explanation of the assessee was as follows :

“In so far as other items are concerned, these do not have bearing on the profits of the units. The expenditure on Scientific research is in respect of certain business related research activities carried on at our research centres. These expenses are in no way related to the current year’s operations of the units in respect of which deduction under Sec. 80-I/80-IA has been claimed. It may be pertinent to note that research on a particular product precedes its commercial production. In fact, the products which are being manufactured at the units in respect of which deduction under Sec. 80-I/IA has been claimed are those in respect of which the company already possesses the requisite know-how. Therefore, expenditure incurred on Scientific Research cannot be allocated in determining the profits from these units.”

15. The explanation tendered by the assessee on 25 March 2003, in the aforesaid terms, upon the issuance of a notice to show cause was, therefore, at variance with what was stated before the Assessing Officer. Before the Assessing Officer, the contention of the assessee was that the expenditure on scientific research could not be reduced from the profits of the eligible undertaking as it was not incurred at the undertaking and was not moreover, directly linked with the operation of the undertaking. In the proceedings under Section 263, the assessee stated that research on a particular product preceded its commercial production and the products which were being manufactured at the units in respect of which a deduction under Section 80-I/80-IA had been claimed were those for which the assessee already possessed the requisite know-how. Consequently, it was submitted that expenditure incurred on scientific research cannot be allocated in determining the profits from these units in the current year’s operations.

16. The Commissioner in his order under Section 263 observed that the assessee spends money on research to improve upon its existing products to compete in the market and also to bring in new brands in the existing category of products. The Commissioner took note of the fact that research is an ongoing process and is inextricably linked with the business of assessee, including business in those products which are manufactured in the units for which deductions were claimed under Sections 80-I, 80-IA and 80-HH. The Commissioner noted that there was common expenditure across all the products/brands and this expenditure had been allowed in computing the income under the head “profits and Gains from Business or Profession” for the whole of the business of the assessee. The logical corollary was that in computing the profits derived from an eligible unit, an appropriate part of the aforesaid expenditure would also have to be allocated. The order of the Commissioner contains a finding also to the effect that the expense should have been considered by the Assessing Officer in computing the profits derived from the industrial undertaking to which the deduction pertained. The failure to do so resulted in the order being erroneous, according to the Commissioner, in so far as it was prejudicial to the interests of the Revenue.

17. The Tribunal has interfered with the finding of the Commissioner under Section 263 in appeal. The Tribunal proceeded on the basis that during the course of the assessment proceedings, the Assessing Officer made a specific query with reference to the deduction under Sections 80-I, 80-IA and 80-HH; that the assessee gave a reply and that each and every item qua this deduction which was enquired into by the Assessing Officer was replied “one by one” and it was only thereafter that the Assessing Officer accepted the claim of the assessee. There is a patent fallacy in the approach of the Tribunal. For one thing, it is evident that though the Assessing Officer had in his letter dated 30 January 2001 sought an explanation on why capital expenditure on research and development and on scientific capital expenses should not be allocated, the reply of the assessee dated 9 February 2001 contained virtually no material or details to establish that there was no direct nexus between the expenditure incurred under the head in question and the business of the undertakings with reference to which the deduction was claimed. As we have noted earlier, all that the assessee stated was that the capital expenditure on scientific research had not been incurred at the undertakings and is not directly linked with the operations of the undertakings. Besides this statement, the assessee within whose knowledge, the facts pertaining to the business of the undertaking and the nature of the research expenditure rested, came forth with no detailed explanation. As a matter of fact, as we have noted earlier, in the course of the proceedings under Section 263, the explanation which was tendered by the assessee on 25 March 2003, was not that the research was not undertaken at the units, but that the products which were being manufactured by the units were those in respect of which the Company already possessed the requisite know-how. Be that as it may, the fundamental basis on which the Tribunal has proceeded which is that there was due application of mind by the Assessing Officer during the course of the enquiry is erroneous. As a matter of fact, as the order passed by the Commissioner notes in para 4 the Assessing Officer ought to have considered whether in computing profits derived from the industrial undertaking, the expenditure incurred by the assessee inter alia on research and development was proximately and directly connected with the business of the undertaking. The Assessing Officer’s order shows that he failed to do so. Consequently, the Commissioner was justified in taking recourse to his power under Section 263. The order passed by the Assessing Officer was without application of mind. The crucial issue namely, as to whether the expenses in question, bore a direct nexus with the undertaking in respect of which the deduction was sought under Sections 80-I, 80-IA and 80-HH so as to warrant an allocation of expenditure between the units was not considered by the Assessing Officer. Even if the Assessing Officer were to be regarded as having proceeded on a certain hypothesis, he has acted on an incorrect assumption of the fact without a due and proper application of mind. That certainly, in our view, would warrant the exercise of the revisional jurisdiction under Section 263.

18. The Tribunal, in the course of its decision, relied upon the judgment in Wockhardt Ltd. (supra). We have perused the judgment of the Tribunal in its decision in Wockhardt Ltd. (supra). The Tribunal noted in its decision there that the details of the research expenditure had been prepared separately; they were shown separately and the expenditure incurred had nothing to do with the activity of the unit in which the deduction under Section 80-IB had been claimed. There was thus a finding of fact by the Tribunal in Wockhardt Ltd. (supra), based on the material on the record, that the expenditure which was incurred had no proximate nexus with the activity of the units in which the deduction had been claimed. The reliance placed on the decision in the Wockhardt Ltd. ( supra) is misconceived for the simple reason that in the present case, there was a complete failure on the part of the Assessing Officer to apply his mind to the issue of whether the expenditure which was claimed should be allocated as between the units in respect of which the deduction had been claimed and on whether there was a direct or proximate nexus. In this view of the matter, and on this aspect, we accept the submission which has been urged on behalf of the Revenue that the recourse which was taken to the jurisdiction under Section 263 was in order and that the Tribunal was not justified in interfering with the order passed by the Commissioner. Both the requirements of Section 263 have been fulfilled. The Commissioner was justified in coming to the conclusion that the order of the Assessing Officer is erroneous. As a result of an erroneous order passed by an Assessing Officer, where the Revenue is losing tax lawfully payable by an assessee, the order is prejudicial to the interests of the Revenue. Both the requirement of Section 263, as laid down in Malabar Industrial Co. (P.) Ltd. (supra) are fulfilled.

19. On the issue of allocation of cess on green leaves, we are in agreement with the view which has been taken by the Tribunal. Rule 8 of the Income Tax Rules, 1962 stipulates that income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. Rule 8 provides for a legal fiction for determining what part of the income of an assessee, who engages in the growing of tea leaves and the manufacture of tea, would be regarded as being attributable to income from the manufacturing operations and liable to tax. As a result of the fiction brought in by Rule 8, the entire income which is derived from the sale of tea grown and manufactured by the seller is required to be computed, in the first instance, as if it is an income derived from business. 40% of the income which is so derived, is then deemed to be income which is liable to tax. The expenditure which was incurred by the assessee on the payment of cess on green leaves, is expenditure which is liable to be taken into account in computing the income of the assessee from the business. As a matter of fact, this view has been taken by the Calcutta High Court in Income Tax Appeal 193 of 2002 decided in the case of the assessee itself on 4 February 2011. One of the questions which was formulated for the decision of the Calcutta High Court was to the following effect:

“Whether in computing the composite income derived from sale of tea grown and manufactured by the assessee cess payable under the Assam Agricultural Income Tax Act on green tea leaves is allowable as a business expenditure in computing the composite income under Rule of the Income Tax Rules, 1962?”

The Division Bench of the Calcutta High Court relied upon the decision in CIT v. AFT Industries Ltd. [2004] 270 ITR 167 / 141 Taxman 433 , and held that the amount of cess so payable was deductible. In view of the fact that the decision of the Calcutta High Court holds the field now in so far as the assessee is concerned, we do not find any merit in the challenge which has been advanced on behalf of the Revenue to that aspect of the order passed by the Tribunal.

20. On the issue of agency commission and on the issue of interest, we find that there are no reasons in the order of the Commissioner for taking recourse to the revisional jurisdiction under Section 263. As regards agency commission, the assessee had stated before the Commissioner that the agency commission has already been factored in while computing the profits of the eligible units. Similarly, as regards the element of interest, the assessee disclosed before the Commissioner that it had not depended upon borrowed funds and that there was sufficient accruals in the eligible units themselves. The assessee stated before the Commissioner that it had not borrowed funds for setting up of the units and units had been set up with internal accruals. The assessee has placed reliance on the fact that on the date of the balance sheet, the assessee had invested an aggregate of Rs. 739 crores and that since each of the units in respect of whom the deduction is claimed had earned substantial profits they were not in need of borrowed funds for their operations. There is no finding to the contrary in the order passed by the Commissioner.

21. Consequently, the recourse to the jurisdiction under Section 263 was not warranted as regards the following, namely (i) The allocation of the agricultural cess on green leaves; (ii) Agency commission; and (iii) Interest.

22. As regards the Research and Development expenditures, the Tribunal was not justified in setting aside the order passed by the Commissioner under Section 263 and in holding that the jurisdiction under Section 263 had not been properly invoked.

23. We answer the question of law in the aforesaid terms. The Appeal is accordingly disposed of. There shall be no order as to costs.

[Citation : 343 ITR 161]

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