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Charak Pharmaceuticals v. Joint Commissioner of Income-tax

Income Tax Appellate Tribunal

Jul 25, 2005

Judgment

Subsequent
References

CaseIQ

Smart Summary (Beta)

Concise Analytical Summary of the Opinion (Tribunal)

Factual and Procedural Background

This appeal by the assessee was directed against an order of the Commissioner of Income Tax (CIT) who, invoking section 263 of the Income-tax Act, set aside an assessment order passed by the Assessing Officer (AO). The subject matter was the allowability of deferred revenue expenditure amounting to Rs. 90,82,297 (of which Rs. 62,81,806 related to commission and incentives).

The CIT considered that the AO had wrongly allowed the entire claim without proper investigation and issued a show-cause notice under section 263, eventually setting aside the assessment and directing a de novo reassessment. During the original assessment proceedings, the assessee had submitted detailed explanations and documentary evidence in support of treating the sums as allowable revenue expenditure under section 37(1) of the Income-tax Act, and the AO had accepted and allowed the claim. The assessee appealed to the Tribunal against the CIT's order under section 263. The Tribunal heard rival submissions, considered the records and the authorities relied upon.

Legal Issues Presented

Whether the CIT rightly invoked his revisional jurisdiction under section 263 of the Income-tax Act to set aside the AO's assessment order concerning the claim of deferred revenue expenditure.
Whether the deferred revenue expenditures claimed by the assessee (including incentives and discounts) were allowable as business expenses under section 37(1) of the Income-tax Act.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee furnished detailed explanations and documentary evidence during assessment proceedings showing that the claimed deferred revenue expenses (incentives, discounts, catalogue charges, advertising, professional fees, etc.) were incurred in relation to actual sales and were not advances.
The AO examined those explanations and documents and, being satisfied, allowed the claim under section 37(1) of the Income-tax Act; therefore, the assessment order could not be said to be erroneous or prejudicial to the interests of the revenue for purposes of section 263.
The assessee argued that the accounting treatment (showing some items as deferred for Companies Act purposes) did not alter their character for income-tax purposes; if they were incurred for business, they were allowable under section 37(1).
Counsel relied on a number of precedents to support propositions that (a) once the AO has considered and allowed a claim after examining evidence, section 263 is not invokable merely because a different view could be taken; (b) mere lack of elaborate discussion in an assessment order does not make the order erroneous; and (c) the Commissioner cannot substitute his opinion where the AO has adopted a possible view in law.

Respondent's (Revenue's) Arguments

The Departmental Representative relied upon the CIT's order and contended that the assessee did not file complete details before the Assessing Officer; on that basis the CIT was justified in setting aside the assessment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Dhruv N. Shah v. Dy. CIT [2005] 273 ITR (AT) 59 (Mum.)	Supports the proposition that where the AO has examined the details and allowed a claim, the order cannot be treated as erroneous for the purposes of section 263.	The Tribunal noted this line of authority as being relied upon by the assessee to show that the AO had applied his mind; it formed part of the materials considered in reaching the conclusion that the CIT's revision was not justified.
Crown Frozen Foods v. Addl. CIT [2005] 93 TTJ (Mum.) 485	Advanced in support of the same proposition that an AO's allowance after examination should not be upset under section 263.	Taken by the Tribunal as supporting the assessee's contention that the AO had applied his mind and that revisional action was unwarranted.
Shital Trading & Investment Co. (P.) Ltd. v. ITO [1993] 45 ITD 399	Cited for the proposition that an AO's considered allowance cannot be lightly held to be erroneous and prejudicial to revenue.	Recognized by the Tribunal among precedents which bolster the assessee's argument that the AO had properly considered the claim.
Dewas Silk Mills v. CIT [2005] 143 Taxman 38 (Indore) (TM) (Mag.)	Relied upon as supporting the principle that section 263 should not be used where the assessment has been properly framed after enquiry.	Included among cases cited by the assessee that the Tribunal considered when concluding the CIT had not justified revisional jurisdiction.
Eureka Sales Corpn. v. Asstt. CIT 1 SOT 490	Used to support the proposition that the AO's acceptance of explanations and documents precludes treating the order as erroneous under section 263.	Noted by the Tribunal as one of the decisions relied upon by the assessee in arguing that the AO had applied his mind.
Indian Hotels Co. Ltd. v. Dy. CIT 68 TTJ (Mum.) 706	Cited for the proposition that absence of elaborate discussion in the assessment order does not make it erroneous.	The Tribunal acknowledged this line of authority in connection with the assessee's contention that the AO's order need not be elaborate to be valid.
CIT v. Goyal (P.) Family Specific Trust [1988] 171 ITR 698 (All.)	Relied upon for the proposition that lack of discussion in an assessment order is not a ground to treat it as erroneous.	Referred to by the Tribunal as part of the jurisprudence relied upon by the assessee to contest the CIT's action.
Sunil Lamba v. Dy. CIT [2003] 131 Taxman 35 (Delhi - Trib.)	Supports the same principle concerning sufficiency of assessment order discussion.	Considered by the Tribunal as reinforcing the assessee's submissions about the AO's order being valid despite any perceived lack of elaboration.
CIT v. Gabriel India Ltd. [1993] 203 ITR 108	Invoked to show that the Commissioner cannot substitute his own opinion if the AO has acted in accordance with law.	The Tribunal treated this authority as supporting the assessee's contention that differing views alone do not make the AO's order erroneous for purposes of section 263.
Patel Cotton Co. Ltd. v. Asstt. CIT [1993] 64 ITD 273 (Mum.)	Relied upon for the principle that mere disagreement by the Commissioner does not justify revisional action.	Included among authorities the Tribunal considered when concluding the CIT could not substitute his view for that of the AO.
Jhulelal Land Development Corpn. v. Dy. CIT [1996] 56 ITD 345 (Bom.)	Cited to support the proposition that when two views are possible, the Commissioner should not hold the assessment order to be erroneous.	Noted by the Tribunal as part of the line of cases showing that differing possible views are not a ground for invoking section 263.
Ajay Choudhary v. Dy. CIT [2000] 74 ITD 350 (Delhi)	Advanced for the same proposition that the Commissioner cannot overturn a reasonably possible view taken by the AO.	Referenced by the Tribunal in the context of the assessee's submission that the AO's view was a possible view and thus not open to being treated as erroneous.
Rayon Silk Mills v. Commissioner Of Income-Tax [1996] 221 ITR 155 (Guj.)	Cited as authority for the limited revisional scope of the Commissioner where the AO has adopted a possible answer under the law.	Considered by the Tribunal as part of authorities supporting the assessee's claim that the CIT had no jurisdiction to revise the order under section 263.
Commissioner Of Income-Tax v. Smt. D. Valliammal [1998] 230 ITR 695 (Mad.)	Relied upon for the principle that the Commissioner cannot substitute his own opinion where the AO's view is plausible.	Taken into account by the Tribunal in affirming the position that the CIT's revisional jurisdiction was not properly invoked.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded on the following factual and legal points (as recorded in the opinion):

Factual baseline: The assessee claimed Rs. 90,82,297 as deferred revenue expenditure in its accounts; detailed breakdowns and documentary supports (bills, charts, letters) were placed before the Assessing Officer during assessment proceedings.
AO's action: The AO raised queries, examined the explanations and documents furnished by the assessee, and, being satisfied that the expenses were allowable for business purposes, allowed the claim under section 37(1) of the Income-tax Act.
CIT's action: The CIT believed that certain items (notably commissions/incentives) were paid in advance and that the AO had not properly investigated; on that basis, the CIT issued a show-cause under section 263 and set aside the assessment, directing a fresh enquiry.
Assessee's rebuttal and appellate route: The assessee maintained that incentives/discounts were linked to actual sales (not advances), explained the business rationale (marketing through RSAs/middlemen to effect sales across India) and produced documentary support; the assessee also relied upon several authorities to submit that the AO's considered view could not be revised merely because the CIT disagreed.
Tribunal's legal reasoning: The Tribunal carefully reviewed the assessment record, the explanations and documentary material placed before the AO, the AO's order that recorded his satisfaction under section 37(1), and the CIT(A)'s order (in a subsequent round) which examined and allowed the claim. The Tribunal emphasized that for income-tax purposes the true test is the nature of the expenses: if an expense is incurred for business purposes and is allowable under section 37(1), it should be allowed irrespective of the accounting classification for Companies Act purposes or the desire to show profits in the books.
On the question of jurisdiction under section 263: because the AO had applied his mind, looked into explanations and documents, and arrived at a permissible conclusion, the Tribunal concluded that the CIT's order setting aside the assessment was not justified. The Tribunal held that the CIT exceeded his jurisdiction under section 263 and therefore quashed the revisional order.

Holding and Implications

Final Holding: The Tribunal quashed the order passed by the Commissioner under section 263 of the Income-tax Act and allowed the assessee's appeal; in consequence the AO's assessment (which had allowed the deferred revenue expenditure under section 37(1)) stands.

Implications:

Direct effect: The CIT's exercise of revisional jurisdiction under section 263 was held to be improper in the facts of this case and his order was quashed; the assessment order that had allowed the claim of deferred revenue expenditure on the basis that it was incurred for business and allowable under section 37(1) is restored.
Scope and limits: The Tribunal reiterated the principle (supported by the authorities relied upon by the assessee) that where the AO has examined material, applied his mind and taken a reasonable view, the Commissioner should not invoke section 263 merely because he disagrees with that view. The nature of the expense for income-tax purposes governs its allowability irrespective of companies-act accounting labels.
Precedential note: The opinion resolves the dispute on the facts presented and applies established principles; the decision primarily effected the parties (assessee and revenue) by restoring the AO's allowance—no broader novel precedent beyond the application of these established principles is articulated in the text.

Result recorded in the opinion: "In result, appeal of the assessee is allowed."

Show all summary ...

Sunil Kumar Yadav, Judicial Member. - This appeal by the assessee is directed against the order of the CIT(A) on the ground that he has erred in setting aside the order passed by JCIT under section 143(3) of the Income-tax Act and questioned the allowability of deferred revenue expenditure to the extent of Rs. 90,82,297.

2. We have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record.

3. Briefly stated, on examination of the case records, we find that it was noticed by the CIT, that the assessee has claimed a sum of Rs. 90,82,297 being deferred revenue expenditure. Out of Rs. 90,82,297, a sum of Rs. 62,81,806 were spent for commission and incentive. Having observed that commission/incentive is normally paid after the sales and not paid in advances, the CIT observed that the Assessing Officer has wrongly allowed the entire claim of Rs. 90,82,297 which were claimed to be deferred revenue expenses without proper investigation. He, accordingly, issued a show-cause notice under section 263 of the Income-tax Act calling upon the assessee to show cause as to why the order of the assessment made by the Assessing Officer should not be enhanced or modified being erroneous and prejudicial to the interests of the revenue. In response to the show-cause notice, the assessee submitted the details of payments made for deferred revenue expenses in chart and the copies of bills of the deferred revenue expenses. The CIT examined the explanations of the assessee, but, was not convinced with it and he set aside the assessment order with a direction to finalize the assessment de novo as per law, after making enquiry and investigation.

4. Now the assessee has preferred an appeal before the Tribunal with the submissions that during the course of the assessment proceedings, assessee has furnished the detailed explanations with regard to the deferred revenue expenses and the Assessing Officer has examined the same and after being convinced with it, he allowed the entire claim under section 37(1) of the Income-tax Act.

5. The learned counsel for the assessee has invited our attention to the detailed reply filed by it before the Assessing Officer which is appeared at page No. 13 of the compilation of the assessee in which he has explained the deferred revenue expenses comprising of incentive and discounts, price list and catalogue charges or book charges, advertisements and share promotion expenses, professional charges and other expenses. Full details of these expenses were also furnished before the Assessing Officer. The assessee has also explained to the Assessing Officer that these incentives and discounts were claimed on actual sales and not on account of advances. Through his letter dated 22nd February, 1999 the learned counsel for the assessee has explained that all these incentives and discounts debited to revenue expenditure, are basically incurred for the incentive and discounts on sales through various RSAs. In normal course of business, it is not possible for the assessee to sale its ayurvedic products all over India unless there is a wide spread marketing of its products. Thus, incentives and discounts are offered to such middlemen who are the Linkage between the assessee’s products and actual consumers. Hence, expenditure incurred by the assessee by way of incentives and discounts should be allowed in full to the assessee. The assessee also filed details of expenses along with letter dated 22nd December, 1998. All these evidences were examined by the Assessing Officer before allowing the claim of the assessee. The learned counsel for the assessee has further invited our attention to the order of the CIT(A) in which he has deleted the additions made by the Assessing Officer while passing a consequential order. The copy of the order of the CIT(A) is also placed on record. The learned counsel for the assessee has contended that the assessee has deferred the revenue expenses to show its book profits, but, in fact he has incurred all these expenses during the year and as such the same are allowable under section 37 of the Act. In support of his plea that once the Assessing Officer has called for the details and explanations with regard to the claim of deferred revenue expenses during the assessment proceedings and allowed the same after verifying the details, explanations, documentary evidence etc., submitted by the assessee, his assessment order cannot be said to be erroneous and prejudicial to the interests of the revenue, the learned counsel for the assessee has relied upon the following judgments :—

1.Dhruv N. Shah v. Dy. CIT [2005] 273 ITR (AT) 59 (Mum.)

2.Crown Frozen Foods v. Addl. CIT [2005] 93 TTJ (Mum.) 485

3.Shital Trading & Investment Co. (P.) Ltd. v. ITO [1993] 45 ITD 399

4.Dewas Silk Mills v. CIT [2005] 143 Taxman 38 (Indore) (TM) (Mag.)

5.Eureka Sales Corpn. v. Asstt. CIT 1 SOT 490 .

6. The learned counsel for the assessee further invited our attention to the following judgments in support of his contention that mere lack of discussion of the issue in the assessment order would not render that the said assessment order erroneous merely because the Assessing Officer does not meticulously deal with the issues :

1.Indian Hotels Co. Ltd. v. Dy. CIT 68 TTJ (Mum.) 706 (sic)

2.CIT v. Goyal (P.) Family Specific Trust [1988] 171 ITR 698¹ (All.)

3.Sunil Lamba v. Dy. CIT [2003] 131 Taxman 35 (Delhi - Trib.)

The learned counsel for the assessee further contended that the CIT cannot revise the orders merely because he disagrees with the conclusion arrived at by the ITO. If the ITO acts in accordance with law and frames the assessment, the same cannot be treated to be erroneous by the CIT simply because the order should have been written more elaborately. In support of this contention, the learned counsel for the assessee has relied upon the decision in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108² and Patel Cotton Co. Ltd. v. Asstt. CIT [1993] 64 ITD 273 (Mum.). It was further contended on behalf of the assessee that there are two views possible in a case, than, mere fact that the Assessing Officer has taken one view, which is not acceptable to the CIT, the CIT cannot hold the assessment order as erroneous and prejudicial to the interests of the revenue. In support of this contention, the learned counsel for the assessee has relied upon the following judgments:—

1.Jhulelal Land Development Corpn. v. Dy. CIT [1996] 56 ITD 345 (Bom.).

2.Ajay Choudhary v. Dy. CIT [2000] 74 ITD 350 (Delhi).

The learned counsel for the assessee further contended that the Commissioner cannot substitute his own opinion where the view taken by the Assessing Officer is also a possible view. In support of this plea, the learned counsel for the assessee has relied upon the order of the Gabriel India Ltd. (supra) and Rayon Silk Mills v. Commissioner Of Income-Tax. [1996] 221 ITR 155 (Guj.) and Commissioner Of Income-Tax v. Smt. D. Valliammal [1998] 230 ITR 695 (Mad.).

7. The learned DR on the other hand has placed reliance upon the order of the CIT and also invited our attention to the fact that the assessee did not file complete details before the Assessing Officer, as such, the CIT was justified in setting aside his order.

8. Having carefully perused the orders of the lower authorities and the aforesaid judgments referred to by the assessees, we find that during the course of the assessment proceedings, the assessee has claimed the deductions of all these expenses which were claimed to be deferred revenue expenses in the P & L account prepared for the purpose of Companies Act. During the course of the assessment proceedings, in response to querry raised by the Assessing Officer, the assessee placed the detailed explanations as to why the deduction of these deferred revenue expenses was claimed under section 37 of the Income-tax Act. The details of expenses were also placed before the Assessing Officer. The Assessing Officer has examined the same and after being convinced with it, he allowed the claim of the assessee, after having noticed that all these expenses which were claimed by the assessees are allowable expenses under section 37(1) of the Income-tax Act. It is also noticed from the order of the CIT that he has observed that incentives and discounts were claimed in advance without effecting the sale. Whereas the facts are otherwise, as the incentives and discounts were claimed after the sales was effected. The details of incentive and discounts were furnished before the Assessing Officer. Other expenses were also explained to the Assessing Officer during the course of the assessment proceedings. We have also carefully examined the order of the CIT(A) which was passed in second round where consequential order disallowing the claim of the assessee, was passed by the Assessing Officer and we find that the CIT(A) examined the issue and allowed the claim of the assessee. It is not the case of the revenue that method of accounting adopted by the assessee is not permissible under the law. If the assessee is permitted under Companies Act to maintain its accounts and to claim the entire expenses as deferred revenue expenses and part of it is debited to the P & L account, the revenue cannot disallow the claim of the assessee that he has treated it to be deferred revenue expenses of the P & L Account if the expenses allowable under section 37(1) of the Income-tax Act. For the purpose of Income-tax Act, we have to examine the nature of the expenses. If the nature of the expenses are allowable as incurred for business purposes, it should be allowed in toto irrespective of the fact that it was claimed to be deferred revenue expenditure for the purpose of the Companies Act or to show higher book profit to its shareholders. Since the Assessing Officer has applied his mind while dealing with the issues and duly considered the explanations of the assessee, we do not agree with the findings of the CIT that the assessment order is erroneous and prejudicial to the interests of the revenue. We, therefore, hold that CIT acceded his jurisdiction under section 263 of the Income-tax Act. We, therefore, quash his order.

9. In result, appeal of the assessee is allowed.