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Attorney(S)
  • P.N. MehtaA.P. JainC.S. Aggarwal
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  • S.C. TiwariN.V. Vasudevan
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  • P.N. MehtaA.P. JainC.S. Aggarwal
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  • S.C. TiwariN.V. Vasudevan
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Smart Summary

Summary of the Opinion — S.C. Tiwari, JM (Assessment Year 2000-01)

Factual and Procedural Background

The assessee filed this appeal on 29 April 2004 against an order of the Commissioner of Income-tax-III, New Delhi dated 15 March 2004. The Commissioner invoked his revisional powers under section 263 of the Income-tax Act and cancelled the assessment made under section 143(3) for the assessment year 2000-01.

The Assessing Officer (AO) had completed assessment under section 143(3) on 28 February 2003, determining total income at Rs. 15,78,77,720 as against the returned income of Rs. 13,92,23,280 filed on 30 November 2000. In the course of a review of assessments, the Administrative Commissioner issued a show-cause notice dated 13 February 2004 raising specific objections (listed as items (i) to (viii) in the show-cause) including questions about royalty payments, bad debts, business promotion expenses, discounts/commissions/incentives, interest to directors, changes in method of accounting, deviations under section 145A and treatment of rental income.

The learned CIT held that the assessment was "erroneous and prejudicial to the interests of the revenue" and in paragraph 28 of his order cancelled the assessment under section 263 and directed the AO to pass a fresh assessment after proper examination and inquiry. The assessee contested this action before the Tribunal (this court), arguing that the AO had in fact conducted detailed hearings and enquiries and that the CIT's order was based on subjective and unsupported observations.

The record shows correspondence and multiple hearings before the AO (dates listed in the record), the filing of tax audit reports and other material, and an order by the Additional CIT dated 22 March 2004 (in pursuance of the CIT's directions) in which disallowances were made only in relation to royalty.

Legal Issues Presented

  1. Whether the Commissioner was justified in exercising powers under section 263 to cancel the assessment on the ground that the assessment was "erroneous and prejudicial to the interests of the revenue" where the AO had conducted hearings, sought information and completed assessment under section 143(3).
  2. Whether specific aspects of the assessment (royalty treated as revenue expenditure versus capital, large bad-debt write-offs, business promotion expenses, discounts/commissions/incentives, interest to directors under section 40A(2)(b), changes in accounting method including implications under section 145A, and the head under which rental income was assessed) showed omission or failure of essential enquiry by the AO such as to warrant revision under section 263.

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • The assessment under section 143(3) was not erroneous and prejudicial to the revenue; the AO had legitimately adopted one of the permissible views where two views were possible.
  • The AO conducted extensive hearings (dates listed) and called for clarifications; the return was accompanied by audited accounts and an elaborate Tax Audit Report running to many pages, which justified reliance on audit certificates and the tax audit.
  • The CIT's show-cause and order reflected a pre-determined opinion and subjective observations without specifying what the "proper enquiry" should have been; the CIT did not point to any specific omission or escape of income.
  • On royalty, technical know-how payments are not necessarily capital in nature; reliance placed on the Supreme Court judgment in CIT v. CIBA of India Ltd. that technical know-how does not represent a capital asset.
  • Past assessment history and subsequent assessment (2001-02) showed that except for royalty no disallowances were sustained; hence no prima facie case of prejudice to revenue was made out by the CIT.
  • The CIT could not set aside the whole assessment merely because he believed more detailed enquiries could have been made (relying on authorities such as Addl. CIT v. J.K. Decosta and Andhra Valley Power Supply Co. Ltd. v. Dy. CIT).

Respondent's (Revenue's / CIT's) Arguments

  • The AO failed to make proper enquiry or verification on several material points; acceptance of Chartered Accountant certificates without independent verification, and perfunctory examination, rendered the assessment erroneous and prejudicial to revenue.
  • The CIT relied on show-cause items (i) to (viii) and contended that the AO did not obtain primary details for business promotion expenses, discounts/commissions/incentives and for rental income; that bad debts of Rs. 88.38 lakhs were accepted merely on CA certificate; and that there were significant accounting changes and section 145A deviations requiring further scrutiny.
  • The CIT pointed to excessive interest rates paid to directors (13–14% vs. prevailing bank rates of 9–10%) and large payments of remuneration/commission to directors as not properly examined for reasonableness.
  • On royalty, the CIT raised questions about the nature and continuity of the technical assistance agreement and whether the payments were of capital nature; reliance was placed on several authorities (e.g., Southern Switchgear Ltd. and others) to support revisional action.
  • The learned Departmental Representative emphasized that the CIT must satisfy himself that necessary enquiries were made and findings of fact were based on reasoning, and where not done the assessment may be revised under section 263.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Southern Switch Gear Ltd. v. CIT, 232 ITR 359 (SC) Cited by the Administrative Commissioner and by Revenue to question whether royalty/technical payments were of capital nature and to support revisional action under section 263. The opinion records that this case was cited by Revenue; the court did not treat this precedent as determinative on the facts and did not apply it as the ground for sustaining the section 263 order.
Gee Vee Enterprises v. Addl. CIT, [1975] 99 ITR 375 (Delhi) Cited by the learned CIT to support the proposition that failure to make necessary enquiries can render an assessment erroneous. The assessee argued the facts were different from Gee Vee; the court noted the distinction and did not apply Gee Vee to sustain the revision in this case.
Thalibai F. Jain v. ITO, [1975] 101 ITR 1 (Kar.) Cited by the learned CIT in support of revisional powers where enquiries were allegedly not made. The opinion records citation by the learned CIT; the court's reasons do not rely on this precedent as supporting the impugned order and no direct application is recorded.
Rampyari Devi Sarogi v. CIT, [1968] 67 ITR 84 (SC) Cited by the learned CIT among authorities supporting revision where assessment was alleged to be defective. The opinion notes the precedent was cited; the court did not treat it as controlling on the facts and did not apply it to uphold the section 263 order.
Smt. Tara Devi Aggarwal v. CIT, [1973] 88 ITR 323 (SC) Cited by the learned CIT in a list of authorities on revisionary jurisdiction. The opinion records citation but does not record specific application of this precedent by the court to sustain the impugned revision.
Tarajan Tea Co. (P.) Ltd. v. CIT, [1994] 205 ITR 45 (Gau.) & [1997] 225 ITR 456 (Del.) Cited by the learned CIT among authorities on revisionary powers and enquiry requirements. Cited by Revenue; the court's judgment does not rely upon this authority to uphold the section 263 order.
Addl. CIT v. J.K. Decosta, [1982] 133 ITR 7 Cited by the assessee to argue that the CIT should not set aside the assessment as a whole and that revisional powers have limits. The assessee relied on this precedent; the court considered this line of authority in its reasoning and treated it as supporting the proposition that mere difference of view is not a ground for revision.
Andhra Valley Power Supply Co. Ltd. v. Dy. CIT, [1995] 55 ITD 24 (Bom.) Cited by the assessee/Tribunal decisions to show limitations on CIT's power to set aside assessments. The opinion records citation by the assessee; the court considered the import of such authorities in concluding that revision cannot be based merely on a superior officer's disagreement.
CIT v. CIBA of India Ltd., [1968] 69 ITR 692 (SC) Cited by the assessee for the proposition that technical know-how does not necessarily constitute a capital asset. The assessee relied on this precedent to defend the revenue character of royalty payments; the court noted the submission and found no prima facie case that the AO's view was erroneous on this point.
CIT v. R.B. Rai Shamsher Jang Bahadur, [1953] 24 ITR 1 and [1989] 177 ITR 37 (SC) Cited by the assessee in the context of the nature of technical know-how and royalty payments. The opinion records the citation; the court considered the assessee's reliance on Supreme Court authority in concluding that royalty contention did not establish prima facie error by the AO.
Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83 (SC) Cited by the assessee for the proposition that revision under section 263 cannot be invoked merely because a superior officer takes a different view of the matter. The court expressly relied upon and applied this principle in holding that the CIT's order under section 263 was not legally sustainable where no prima facie error was shown beyond a mere difference of view.
Addl. CIT v. Jay Engineering Works Ltd., [1978] 113 ITR 389 Cited by the assessee/Tribunal to support the acceptance of audit reports and audit-based assessments where appropriate. The opinion notes the citation by the assessee; the court referred to the fact that audit reports and past practice were relevant to assess whether AO's enquiries were adequate and did not treat the CIT's general criticisms as sufficient.
Venkata Krishna Rice Co. v. CIT, [1987] 163 ITR 129 Cited by the assessee for the proposition that mere possibility of loss to revenue is insufficient to invoke section 263. The court noted this authority and used the same principle in concluding that the CIT had not demonstrated prima facie loss or error sufficient to justify revision.
CIT v. Chawla Trunk House, [1983] 139 ITR 182 Cited by the assessee to argue against setting aside the whole assessment merely because it was cryptic. The opinion records the citation and considers the point that cryptic nature alone does not automatically render an order erroneous; no direct application beyond consideration is recorded.
Pingle Industries Ltd. v. CIT, [1960] 40 ITR 67 (SC) Cited by the Department to support the proposition that CIT may exercise revisional powers where required enquiries were not made. The opinion notes the citation by Revenue; the court did not find that the facts warranted invoking that principle to sustain the impugned order.
Gotan Lime Syndicate v. CIT, [1966] 59 ITR 718 (SC) Cited by the Department among authorities supporting scope of revisionary jurisdiction. The opinion lists the citation; the court's reasoning does not indicate a specific application of this precedent to uphold the section 263 order.
Mewar Sugar Mills Ltd. v. CIT, [1973] 87 ITR 400 (SC) Cited by the Department in support of revisional action. The opinion records the citation; the court did not treat it as determinative in sustaining the impugned order.

Court's Reasoning and Analysis

The court reviewed the record of proceedings before the AO, the show-cause issued by the Commissioner, the submissions of the assessee and the Departmental Representative, and the assessments for prior and subsequent years. The court's analysis proceeded along the following lines:

  1. Examination of the procedural record: The court observed that the assessee's return was supported by audited annual accounts and a detailed Tax Audit Report (running to many pages) and that the AO had held multiple hearings on specified dates and had sought clarifications during the assessment proceedings. The AO's assessment increased the returned income (an aggregate addition of Rs. 1,86,54,440), which the court treated as evidence that the AO had not merely accepted the assessee's version at face value.
  2. Nature of the CIT's criticisms: The court characterized the CIT's objections as largely general and subjective allegations that the AO had completed the assessment "in routine or perfunctory manner." The court noted that the CIT had not identified specific omissions in the AO's enquiry except by making general statements that the AO had not called for "primary details" on certain items.
  3. On specific items singled out by the CIT: the court reviewed each major contention raised by the CIT — bad debts, business promotion expenses, discounts/commissions/incentives, MODVAT/MODVAT-accounting/section 145A deviations, interest to directors, and royalty payments — and evaluated whether the CIT had pointed to omissions or defects amounting to a prima facie case of error prejudicial to revenue:
    • Bad debts: The court noted the assessee had supported the claim with a Chartered Accountant's certificate and found that the CIT had not identified any specific defect in that certificate or other omission showing the AO failed in an essential enquiry.
    • Business promotion expenses / discounts / commissions: The court observed that CIT's observations were general (e.g., some items included gifts or entertainment) but that the CIT had not shown that these resulted in an escapement of income; the subsequent order passed by the Additional CIT (in pursuance) made no disallowance except for royalty.
    • MODVAT / section 145A matters: The court noted the CIT's suggestion that an expert or a special audit under section 142(2A) could have been considered, but observed that no such requirement had been shown to be mandatory and that prior and subsequent assessments did not reveal a prima facie error requiring revision.
    • Interest to directors and payments to directors: The court noted the CIT's comment on higher interest rates and payments, but found the CIT's observations were based on scant material and not shown to establish prima facie prejudice.
    • Royalty: The court observed that the CIT's strongest contention appeared to be that royalty payments represented capital expenditure. However, the court found that the CIT had not made an in-depth factual examination before holding the assessment erroneous; the assessee relied on precedent (CIT v. CIBA) and on documentary material, and the court did not find a prima facie case that the AO's view on royalty was erroneous.
  4. Legal standard for invoking section 263: The court emphasized that section 263 cannot be invoked merely because a superior officer (CIT) holds a different view than the AO or would have preferred additional or more detailed enquiries. For the court to sustain revision, there must be omission or failure to make such enquiries as were essential on the facts and circumstances of the case such that the assessment is prima facie erroneous and prejudicial to revenue.
  5. Application of authorities: The court found "considerable substance" in the assessee's reliance on the principle in Malabar Industrial Co. Ltd. (that a difference of view alone does not warrant revision). The court distinguished the facts from decisions relied upon by the CIT which, in its view, did not establish the existence of the requisite omission in enquiry or a prima facie error here.
  6. Conclusion of analysis: On the whole of the evidence and in view of the past history of assessments, the tax audit report, the hearings, and the absence of specific omissions pointed out by the CIT, the court concluded that the CIT's order under section 263 was founded largely on subjective opinion and generalities rather than on demonstrable prima facie error. The court therefore found the impugned order unsustainable.

Holding and Implications

Holding: The Tribunal quashed the order passed by the Commissioner under section 263 and allowed the assessee's appeal.

Implications:

  • Direct consequence: The cancellation of the assessment under section 263 was set aside; the assessment completed by the AO under section 143(3) for assessment year 2000-01 remains unimpaired by the CIT's revisional order as per this decision.
  • Scope and precedent: The court reiterated that section 263 cannot be exercised merely because a superior officer prefers a different view or would have conducted additional enquiries; there must be omission or failure to make enquiries essential on the facts to constitute a prima facie error prejudicial to revenue. The court applied this principle (noted in Malabar Industrial Co. Ltd.) in allowing the appeal.
  • Broader implications: The opinion does not purport to lay down a new legal principle; it applies established principles to the facts and concludes that the CIT's order was not legally sustainable on the record before it.

Note: This summary strictly reflects only the matters and statements appearing in the provided opinion. No information not contained in the opinion has been added.

Show full summary ...

    Salora International Ltd. v. Additional Commissioner of Income-tax

    S.C. Tiwari, JM - This appeal has been filed by the assessee on 29th April, 2004 against the order of the learned Commissioner of Income-tax-III, New Delhi dated 15-3-2004 in the case of the assessee in relation to order under section 263 of the Act for the assessment year 2000-01. In this appeal the assessee has disputed the impugned order as without jurisdiction and requested that the same may be set aside. Facts of the case leading to this appeal briefly are that the Assessing Officer completed an assessment order under section 143(3) on total income of Rs. 15,78,77,720 on 28th Feb., 2003 as against the return of income filed by the assessee at Rs. 13,92,23,280 on 30th November, 2000. Under the policy of review of assessments by the Commissioner, the learned Administrative Commissioner of Income-tax called for and examined the records of the case. On 13-2-2004 he issued a show-cause notice to the assessee requesting the assessee to explain its stand in respect of the following issues and show cause as to why action under section 263 should not be taken :—

    "(i )Royalty payment of Rs. 41,05,905 was allowed as a revenue expenditure despite the fact that the royalty payment was in lieu of technical know-how and was an advantage of enduring nature. Reference in this context was drawn to the Hon’ble Supreme Court’s judgment in the case of Southern Switch Gear Ltd. v. CIT 232 ITR 359;

    (ii) Bad debts of Rs. 88.38 lakhs were allowed on the basis of assessee’s Chartered Accountant’s certificate without making proper enquiry or verification;

    (iii)Business promotion expenses of Rs. 84.30 lakhs were allowed without proper examination or verification and without even obtaining the details thereof;

    (iv)Discount, commission and incentives amounting to Rs. 1.97 crores were allowed without proper examination or verification and without even obtaining the details thereof;

    (v)Interest amounting to Rs. 59,49,355 paid to the directors and others, being persons specified in section 40A(2)(b) was allowed without examining what was the rate of interest paid and whether it was reasonable;

    (vi)As per Annexure II of the audit report enclosed with assessee’s return, the profit for the year was lower by Rs. 15.90 lakhs on account of change in the method of accounting in respect of leave pay, by Rs. 21.61 lakhs on account of change in the method of accounting in respect of service charges and by Rs. 39.85 lakhs on account of change in the method of accounting in respect of depreciation. The Assessing Officer accepted this statement without examining why the change in the method of accounting was introduced in this year when the statutory requirement of following either the cash or mercantile system was bought about in the Income-tax Act w.e.f. 1-4-1997 and without examining whether the assessee’s income required any adjustment due to the aforesaid lowering of profit as a result of the change in the method of accounting;

    (vii)Despite assessee’s admission that there was significant deviation, having implication of several crores of rupees, in its method of accounting viz-á-viz that specified in section 145A in respect of excise duty on raw material and work-in-progress, the Assessing Officer accepted its results merely on the basis of the tax audit report, without making proper examination or independent verification;

    (viii)From the TDS certificates enclosed with assessee’s return, it was seen that it had received rental income, however, this appeared to have been wrongly assessed as business income instead of as income from house property."

    2. In response the assessee’s authorized representative appeared before the learned CIT and filed his submissions. The assessee argued that the assessment was not erroneous and prejudicial to the interests of the revenue. If the Assessing Officer adopted one of the courses permissible in law, and it resulted in lower revenue or where two views were possible and the Assessing Officer had taken one view, it could not be treated as an order erroneous and prejudicial to the interests of the revenue. The learned CIT did not accept this contention of the assessee on the ground that the Assessing Officer did not take a view of the matter after proper examination and enquiry and with due application of mind. The Assessing Officer did not obtain primary details of business promotion expenses, commission, discount and incentives and rental income. In respect of several other issues, the Assessing Officer routinely accepted the Chartered Accountant’s certificate filed by the assessee, for example, bad debts, change in the method of accounting and deviation from provisions of section 145A. In respect of application of section 40A(2)(a) and royalty, the view taken by the learned Assessing Officer could not be sustained on the facts available on record and it was incumbent upon him to make further enquiries and collect relevant facts. On this basis the learned CIT held that the assessment order was erroneous and prejudicial to the interest of revenue. In support of the view that the Assessing Officer’s failure to make the enquiries which were called for in the circumstances of the case would make the assessment order as erroneous, the learned CIT relied upon the judgments Gee Vee Enterprise…Petitioner v. Additional Commissioner Of Income Tax… [1975] 99 ITR 375 (Delhi); Thalibai F. Jain v. ITO [1975] 101 ITR 1 (Kar.); Rampyari Devi Sarogi v. CIT [1968] 67 ITR 84 (SC); Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC); Tarajan Tea Co. (P.) Ltd. v. CIT [1994] 205 ITR 45 (Gau.) and [1997] 225 ITR 456 (Del.)(sic).

    3. According to the learned CIT, the Assessing Officer did not obtain any detail and conducted no examination or enquiry before allowing business promotion expenses amounting to Rs. 88.38 lakhs and discount, commission and incentives amounting to Rs. 1.48 crores. From the details of expenses filed by the assessee before learned CIT, he found that these expenses included gift items such as, cameras, wrist watches, emergency lights. The Assessing Officer ought to have obtained the relevant details and examined the relevant bills of major purchases. The Assessing Officer should have also examined whether the gift items had been utilized in the year or there were any major left over. According to the learned CIT, business promotion expenses also included entertainment expenditure amounting to Rs. 10,46,913. In respect of rental income also the learned Assessing Officer had not obtained any details nor conducted any examination. Moreover the income was assessed under the head ‘business income’ and not under the head ‘income from other sources’. Even if on account of the rate of tax being the same there was no loss to revenue, the income should have been assessed under the correct head of income.

    4. According to the learned CIT, the Assessing Officer accepted the assessee’s claim of bad debts aggregating to Rs. 88.38 lakhs merely on the certificate from the Chartered Accountant. In the immediately preceding assessment year the assessee’s claim of bad debts was only Rs. 19.02 lakhs. The list furnished by the assessee did not contain the addresses of the debtors. The records showed that no attempt was made by the Assessing Officer to verify the write off of such substantial amounts of debts. The Assessing Officer also did not ascertain on test check basis that the debts written off had been accounted for as income in earlier years.

    5. From the tax audit report the learned CIT found that certain changes had been effected by the assessee in the method of accounting. There were significant variations as a result of these changes in method of accounting. The learned Assessing Officer examined this issue in a perfunctory manner. The matter relating to MODVAT accounting and its impact on valuation of goods required a proper understanding of the principles of the subject. The Assessing Officer should have, therefore, consulted an expert. Alternatively he could consider the option of proposing a special audit under section 142(2A).

    6. The learned CIT found that the assessee paid interest @ 14% to the persons specified in section 40A(2)(b), except that in two cases the interest was paid @ 13%. Considering the prevalent interest rate on bank FDRs in the order of 9 to 10%, the interest rate of 13 to 14% was certainly excessive. According to the learned CIT, the Assessing Officer accepted the assessee’s claim without examining the relevant points. Further the assessee had made payment of remuneration and commission amounting to Rs. 31 lakhs each to two directors, namely, Shri R.P. Khaitan and Shri S.K. Jiwarajka. The Assessing Officer had not looked into the reasonableness or justification of those payments.

    7. The assessee paid royalty amounting to Rs. 41,05,905 to Kyushu Matsushita Electric Company Ltd. (KME), Japan. During the course of assessment proceedings the learned Assessing Officer asked the assessee to explain why the amount of royalty paid should not be held to be capital expenditure. The assessee stated that the royalties were based on the turnover. The agreement was duly approved by the Government of India. Royalty payment had been allowed as revenue expenditure since the assessment year 1991-92. The foreign company had to provide only technical assistance regarding the manufacture of the products. From record it was seen that the previous 5 years agreement had expired on 22-11-1998, but the new agreement was entered into only w.e.f. 10-5-1999. Thus for over six months there was no technical assistance agreement in force. In the absence of renewal of agreement, the assessee was required to stop manufacture of the products covered by the agreement. It was, therefore, required to be seen as to under what authority the assessee continued with the production during the period there was no agreement. Moreover it was also required to be seen whether the assessee had already acquired the technical know-how for manufacture of certain types of transformers. The assessee could, therefore, manufacture those products independent of the technical assistance agreement. The assessee was manufacturing these transformers earlier on its own. It was necessary to see as to what actual assistance was rendered by the foreign partner. It was necessary to find out whether any genuine service was being rendered by KME to the assessee.

    8. In view of the discussion in the impugned order, as briefly enumerated by us in the foregoing paragraphs, the learned CIT gave the following directions to the Assessing Officer in paragraph 28 of the impugned order :—

    "28. Thus, since the assessment order passed by the Assessing Officer is erroneous in as much as it is prejudicial to the interests of revenue, I, in exercise of my powers under section 263, cancel the assessment and direct the present Assessing Officer to pass a fresh assessment order after proper examination and inquiry on the issues mentioned above."

    9. During the course of hearing before us Shri C.S. Aggarwal, the learned counsel for the assessee argued that the assessee filed return of income along with a copy of Annual Accounts and a copy of Tax Audit Report which were Annexures. These documents itself were running into 117 pages, as would be seen from paper book pages 221 to 338. Thereafter the Assessing Officer heard the case on different dates viz., 8-10-2002, 5-12-2002, 16-12-2002, 23-12-2002, 27-12-2002, 10-1-2003, 16-1-2003, 5-2-2003 and 14-2-2003. During the course of those hearings, the learned Assessing Officer required the assessee to furnish clarifications on several points and further information on various points. The assessee filed the details as required by the Assessing Officer from time to time. Thereafter the Assessing Officer completed the assessment under section 143(3) on 28-2-2003 at a total income of Rs. 15,78,77,720 as against the returned income of Rs. 13,92,23,280. Thus, the Assessing Officer made an aggregate addition of Rs. 1,86,54,440, which showed that the learned Assessing Officer had examined the case for assessment very thoroughly and strenuously. In the impugned order under section 263, the learned CIT had been unfair and uncharitable to the Assessing Officer while observing that the assessment had been completed without proper examinat- ion or verification. These were entirely subjective observation of the learned CIT based on no material at all or inadequate material. These observations were also contrary to the material on record. The assessee was in the same line of business for last many years and a number of assessment orders had already been passed in past relating to earlier assessment years. The assessee was not being assessed for the first time. The expenditure incurred and claimed as deduction and various other facts of the case were identical to those in the earlier assessment year. Under these circumstances, the learned CIT erred in relying upon the judgment of the Hon’ble Delhi High Court in the case of Gee Vee Enterprises (supra). The facts of that case were entirely different and the assessee’s was not the case of the category of Gee Vee Enterprise’s case (supra).

    10. The learned counsel argued that show-cause notice under section 263 issued by the learned CIT itself showed that the learned CIT had a pre-determined opinion. The assessee replied to the show-cause notice by written submissions along with a paper book in support thereof. The assessee once again on 8th March, 2004 filed further details in reply to the queries of the learned CIT as per Annexures A to E. From paragraph 6 of the order of the learned CIT, it would be seen that he has made general observation that before completing the assessment in February, 2003, no proper enquiry had been made. The learned CIT had not spelt out what was the yardstick of such proper enquiry. The learned CIT did not specify as to what could be said to be a proper enquiry and vice versa. Inferences drawn on such highly subjective basis could not be legally sustainable. Moreover, while revising an order under section 263 the CIT was required to give specific directions. The Hon’ble Delhi High Court in the case of Addl. CIT v. J.K. Decosta [1982] 133 ITR 71 had held that the CIT would not be justified to set aside the assessment as a whole. In the decision reported in Andhra Valley Power Supply Co. Ltd. v. Dy. CIT [1995] 55 ITD 24 (Bom.), the Tribunal had also similarly held. In the case of the assessee, assessment had been framed after detailed examination and hearing, which lasted for more than 15 months. The assessee had furnished complete and full details of expenses incurred. In that view of the matter it was not sufficient to say that the examination done by the Assessing Officer was perfunctory. It was necessary to spelt out as to what had not been inquired into and why it was necessary to carry out that enquiry. The observations of the learned CIT that the Assessing Officer had not obtained the primary details were entirely incorrect. During the course of assessment proceedings the entire accounts of the assessee had been examined. There was neither any requirement in law nor any under the rules, whereby the learned Assessing Officer was required to obtain and place on record copies of details by getting extracts from the books of account, particularly in a case where the accounts were duly supported by auditor’s certificate and Tax Audit had been carried out. There was no hard and fast rule about keeping any particular extracts from the accounts on the assessment record. It was the matter of mere discretion. The learned CIT for reason only that he did not find certain extracts/details on file, held that the assessment order was erroneous and prejudicial to the interests of revenue. The learned counsel relied upon the judgment of Hon’ble Delhi High Court in the case of Addl. CIT v. Jay Engineering Works Ltd. [1978] 113 ITR 389 where the Tribunal accepted the results based upon audit report, where books of account could not be produced and it was held that there was no error in the order of Tribunal.

    11. The learned CIT objected also to the Assessing Officer relying upon Chartered Accountant’s certificate in respect of certain deductions, such as bad debts, change in method of accounting and deviation from provisions of section 145A. According to the learned CIT, the revenue implication ran into crores of rupees. That fact in itself could not make the order of the Assessing Officer erroneous. There was no material on the basis of which the learned CIT could say that Assessing Officer had routinely accepted the Chartered Accountant’s certificate. He did not specify what according to him routine acceptance was and what according to him was the course to be adopted. Under the provisions of law, discretion was vested in the Assessing Officer to be exercised judicially on the facts of each case. The powers of the learned CIT were limited to correct the assessment order being not in accordance with law. He could not hold the order erroneous for reason only that he considered that more detailed enquiries could have been made in respect of any particular item. The learned CIT could not usurp the power of the Assessing Officer and proceed to make and assessment order in his own way. For that reason the further observations made by the learned CIT that it was incumbent upon the Assessing Officer to collect relevant facts before arriving at well considered view in respect of application of section 40A(2)(a) and royalty were erroneous. The learned counsel argued that if the turnover was high and the profit was also high, how could there be any justification to allege that there was revenue implication running into several crores of rupees. The learned CIT did not specify how had the revenue suffered loss as the same had not been demonstrated. The Hon’ble Madras High Court had in the judgment Venkata Krishna Rice Co. v. CIT [1987] 163 ITR 129 1 held that merely there was loss of revenue was insufficient to initiate proceedings under section 263 of the Act. The same view had been expressed by the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 2 (SC). It was not the case of the learned CIT that the Assessing Officer granted any deduction or allowed any claim which was not allowable according to law. There was no prima facie finding of error in the assessment order recorded by the learned CIT.

    12. The learned counsel argued that the assessee had submitted that there was no implication at all of section 145A. The observations of the learned CIT that there were implications of several crores of rupees in the method of accounting in respect of excise duty of raw material and work-in-progress were entirely incorrect. The learned counsel relied upon its letter dated 14-2-2003 addressed to the Assessing Officer and placed at paper book page 350 that the excise duty on work-in-progress and raw-material could not be taken in terms of section 145A of the Act. The assessee had already included the excise duty of Rs. 35,84,455 in the finished stock in hand, which was evident from the report of the auditor under section 43B of the Act. The assessee had valued the finished goods at cost, which included cost of material, labour, manufacturing cost and excise duty.

    13. The learned counsel pointed out that in pursuance to the impugned order of the learned CIT, the learned Additional CIT, Range-9, New Delhi has passed the order dated 22-3-2004 wherein no disallowances or additions have been made on any of the points stated by the learned CIT in his notice, except in relation to royalty. While the assessee had claimed the royalty as revenue expenditure, the learned Additional CIT held otherwise. There was no justification to hold that the expenditure was not of revenue character. In the latter assessment years, viz., 2001-02 also apart from disallowance of royalty expenditure no addition had been made. Therefore, at best the learned CIT could allege that the assessment order was cryptic. The same could not be made the basis for holding that order to be erroneous. Reliance in this respect was placed on the judgment of Hon’ble Punjab & Haryana High Court in the case of CIT v. Chawla Trunk House [1983] 139 ITR 182 1.

    14. In support of various contentions made the learned counsel for the assessee took us closely through the paper book filed by the assessee. He referred to the past history of the assessment in the case of the assessee for which purpose Annual Accounts, copies of assessment orders, orders passed by appellate authorities, including Tribunal for assessment years 1995-96 to 1999-2000 were furnished. He also took us through the copy of the letter dated 12-2-2002 furnished during the course of assessment proceedings. The learned counsel also took us through the assessment order in the case of the assessee for subsequent assessment year 2001-02. The learned counsel pointed out that only fault found by the Assessing Officer after the impugned order was in relation to the assessee’s claim of deduction on account of royalty. The learned counsel argued that the view taken by the Assessing Officer was erroneous in law. After the judgment of Hon’ble Supreme Court in the case of CIT v. CIBA of India Ltd. [1968] 69 ITR 692 (SC), it was settled legal position that technical know-how does not represent a capital asset. The reliance was also placed on subsequent judgments of Hon’ble Supreme Court CIT v. R.B. Rai Shamsher Jang Bahadur [1953] 24 ITR 1 and [1989] 177 ITR 37 (SC) (sic). Another point of dispute was in relation of bad debts. In this respect merely there was difference of opinion between the Assessing Officer and the learned CIT. Relying on the decision in the case of Malabar Industrial Co. Ltd. (supra), the learned counsel submitted that powers under section 263 could not be invoked merely because the learned CIT held a different view of the matter.

    15. In his reply the CIT, DR argued that there was a duty cast upon every Assessing Officer to properly look into every case before passing assessment order under section 143(3). While exercising revisionary powers under section 263, the CIT was required to see whether various aspects of a case had been properly looked into. Furthermore it was also required to be looked into as to whether the findings of fact had been based on reasoning. On this basis an assessment order could be held to be erroneous and prejudicial to the interest of revenue. In support of this contention, the learned CIT, DR relied upon the judgments Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC); Gotan Lime Syndicate v. Commissioner Of Income Tax, [1966] 59 ITR 718 (SC); Mewar Sugar Mills Ltd. v. CIT [1973] 87 ITR 400 (SC) and Southern Switchgear Ltd. v. CIT [1998] 232 ITR 359 (SC).

    16. The learned CIT, D.R. specifically emphasized upon the observations of the learned CIT at items 1 to 4 in paragraph 27 in the impugned order. These were the specific issues on the basis of which the learned CIT had held that the assessment had been made without proper enquiry and on perfunctory examination of facts of the case. The learned CIT, D.R. argued that from the order passed by the Assessing Officer after revision under section 263 and the assessment order for next year i.e., assessment year 2001-02, it was clear that there was error and prejudice to the interest of revenue in the order of the Assessing Officer in relation to deduction allowed by the Assessing Officer of royalty and bad debts. The learned DR emphasized the observations of the learned CIT in the impugned order in paragraphs 9 to 14. He argued that findings of the learned CIT in that behalf were quite clear. The learned CIT, DR also referred to item 6 at page 2 of the impugned order and argued that it showed that there was no application of mind on the part of the learned Assessing Officer. Both in respect of powers under section 263 and royalty payment for technical know-how the learned DR referred to a number of case law as per the list placed on file.

    17. In his reply the learned counsel referred to the letters of the learned Assessing Officer dated 8th October, 2002, the assessee’s reply dated 5-12-2002, 13-12-2002, 23-12-2002 and 27-12-2002. The assessee also referred to his letter dated 14-2-2003 along with certificate of Chartered Accountant M/s. K. Prasad & Co. regarding bad debts. He argued that the correspondence that ensued between the Assessing Officer and the assessee and the details being called for by the learned Assessing Officer on various dates of hearing showed that there was proper enquiry and application of mind on the part of the Assessing Officer. The learned CIT did not appreciate that it was the case of an assessee with long past history and, therefore, each and every item of expenditure and claim of deduction was not required to be examined in the absence of any material change in the facts of the case. For this purpose, Tax Audit had been prescribed. There was no point made by the auditors of the company and the tax auditors which had been over looked by the Assessing Officer. In the garb of exercise of power under section 263, the CIT was not entitled to make roving enquiries. As to the royalty the assessee had placed technical assistance agreement with the Japanese company on record. This agreement, though made on 10th May, 1999, had clearly stated that the agreement was for a period of 5 years until November 22, 2003. The learned CIT was not justified in his argument that for a couple of months the assessee had operated without a licence from the foreign company. The observations of the learned CIT in relation to income from sub-letting were also without legal basis. As to bad debts the learned Assessing Officer had relied on the certificate of Chartered Accountant. The learned counsel argued that while in the impugned order the learned CIT had raked up various issues, there was no specific finding adverse to the assessee in the impugned order. The learned AR referred to page 3 of the assessment order and pointed out that the Assessing Officer had computed assessee’s total income in view of the discussion with the assessee and after examining the material on record. Documents from paper book pages 52 to 220 represented various material furnished during the course of assessment proceedings. However, the learned CIT had set aside the entire assessment without specifying any escapement of income.

    18. We have carefully considered the rival submissions. We find that by and large the case of the learned CIT in the impugned order under section 263 is that the Assessing Officer completed the assessment order without proper enquiry and in a routine manner. Facts of the case as brought out during the course of hearing before us do not support these conclusions of the learned CIT. The assessee filed return of income declaring total income at Rs. 13,92,23,280, whereas the assessment was made at total income of Rs. 15,78,77,720. It cannot therefore, be said that the Assessing Officer completed the assessment taking the version of the assessee at its face value and without application of mind. In respect of a number of claims of deduction of the assessee, the learned CIT has observed that the Assessing Officer did not call for full details. In our view it has been rightly pointed out by the learned counsel for the assessee that in this case the accounts of the assessee had been audited and the return of income was backed by an elaborate Tax Audit Report on various points relating to the assessment. The assessee has been assessed year after year and the past history of the case contained nothing to provoke intensive investigation into the facts of the case. The learned counsel has placed assessment orders for various assessment years prior to the completion of the assessment order in question by the Assessing Officer and compared against them, there does not appear to be any prima facie case that the learned Assessing Officer was oblivious of his responsibilities while completing assessment under section 143(3), as alleged by the learned CIT. The learned CIT has stated that the assessment has been completed in routine manner, but he has not pointed out that any extraordinary circumstances existed so as to warrant assessment proceedings in an extraordinary manner in this case. As to the examination of the facts and bringing material on record, it is quite possible that the learned CIT would have liked it in more depth and detail. From that it does not follow that the learned Assessing Officer did not perform his task properly. While it is true that on the particular facts and the circumstances of a case want of enquiry and examination of facts on the part of the Assessing Officer in itself may render the assessment order erroneous and prejudicial to the interest of revenue, but it is not that if an assessment order suffers from some deficiency from the perfectionist point of view that order is erroneous and prejudicial to the interest of revenue. We, therefore, do not see much substance in various general observations of the learned CIT in relation to the Assessing Officer carrying out enquiring in a routine or perfunctory manner.

    19. As to the specific issues raised by the learned CIT in the impugned order under section 263, he has alleged that the Assessing Officer routinely accepted Chartered Accountant’s certificate in respect of bad debts and deviation from provisions of section 145A. However, the learned CIT has not pointed out any omission or defect or infirmity in the certificate submitted by the Chartered Accountant during the course of assessment proceedings. In respect of expenditure on discount, commission and incentives, the learned CIT has not able to state anything specifically except that according to him, business promotion expenses included entertainment expenditure of Rs. 10,46,913. There is no further finding in the order of the learned CIT that the assessment order resulted into under-assessment on that score. It is pointed by the learned counsel for the assessee that in the order passed by the Assessing Officer in pursuance to the impugned order under section 263, no such disallowance has been made. In respect of MODVAT accounting and its impact on valuation of goods, the learned CIT has held that the Assessing Officer should have consulted an expert. We find that no such expert was consulted while completion of the assessment order for the earlier assessment years as well as the assessment orders made subsequent to impugned order under section 263. It is noteworthy that learned CIT did not feel it necessary to do so himself before making the impugned order. The observations of the learned CIT in relation to rate of interest paid to directors are based on scant material. The same applies to the finding of the learned CIT that royalty paid by the assessee represented capital expenditure and should not have been allowed. The learned CIT has not based these observations on any proper examination of the facts of the case. It is important to bear in mind that it is equally true that a disallowance should not be made without proper enquiry and in a perfunctory manner. We do not see any basis for the observation of the learned CIT that royalty payments of the assessee were disallowable as capital expenditure. That being so the impugned order under section 263 itself has been made on subjective opinion without indepth examination of facts of the case. In the case of Malabar Industrial Co. Ltd. (supra), the Hon’ble Supreme Court have held that an order cannot be said to be erroneous and prejudicial to the interest of revenue merely because the superior officer takes a different view of the matter. We find considerable substance in the contention of the learned counsel for the assessee that the impugned order under section 263 has been made without finding any prima facie error in the assessment order, except the unsubstantiated finding that royalty payments represented capital expenditure. As to the bad debts here again the claim of the assessee was supported by a certificate of the Chartered Accountant. The learned CIT has not pointed out as to in what manner or in what respect the Chartered Accountant had gone wrong. In short, we find that the learned CIT has cancelled the assessment in question more or less on the allegation that the assessment was completed routinely without proper enquiry. For the purpose of holding an assessment order to be erroneous and prejudicial to the interests of revenue on that ground, there should be omission or failure to make such enquiry as was essential on the facts and circumstances of the case. Merely because from a perfectionist point of view it is felt that some more enquiries and verifications could have been made by the Assessing Officer, the order cannot be declared to be erroneous. In the case before us, we find that the assessment order has been made by the Assessing Officer in accordance with the past history of the case. For the main objection raised by the learned CIT in relation to royalty allowed by the Assessing Officer no prima facie case has been made out that the view taken by the Assessing Officer is erroneous. We, therefore, hold that the impugned order under section 263 is not legally sustainable. We quash the order under section 263 and allow this appeal filed by the assessee.

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