M/S Panyam Cements And Mineral ... vs Assessee

M/s Panyam Cements and vs. Addl. Commissioner of Mineral Industries Ltd., Kurnool. Income-tax, Kurnool Range, PAN - AABCP 2298M Kurnoo. (Appellant) (Respondent)

Assessee by : Shri D.V. Anjaneyulu Revenue by : Smt. G. Aparna Rao

Date of hearing 11-03-2015 Date of pronouncement 25-03-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by assessee is directed against the order dated 09/01/2014 passed by ld. CIT-III, Hyderabad u/s 263 of the Act for the AY 2008-09.

2. Briefly the facts are, assessee a company is engaged in manufacturing and sale of cement. For the AY under consideration, assessee filed its return of income on 29/09/08 declaring 'Nil' income after set off of brought forward losses. Assessee also declared book profit at 'Nil' u/s 115JB of the Act. During the assessment proceeding, AO noticed that assessee on 18/12/07 has entered into a development agreement with M/s Bhimshankar Realtors Pvt. Ltd. for development of its vacant land. Simultaneously, assessee also executed General Power of Attorney (GPA) in favour of the said developer. As per the terms of the development agreement, assessee was to receive 11.655% of the constructed area. Besides constructed 2 ITA No. 706 /Hyd/2013 M/s Panyam Cements & Mineral Industries Ltd.

area, the developer also agreed to pay interest from refundable deposits of Rs. 10 crores and non-refundable deposits of Rs. 43.10 crores to assessee. Further, as per the development agreement dated 08/07/07, the developer agreed to pay an additional amount of Rs. 11 crores to the owner of the land as non-refundable consideration. On going through the development agreement cum GPA, AO was of the view that there being a transfer of capital asset in terms of section 2(47)(V) of the Act, consideration received by assessee is subject to capital gain. However, since assessee did not declare any capital gain in the return filed, AO called for an explanation from assessee. Though, assessee submitted that the agreements have not yet been acted upon, hence, there is no question of accrual of capital gain, but, AO rejecting the submissions of assessee proceeded to complete the assessment u/s 143(3) of the Act vide order dated 31/12/2010 computing long term capital gain (LTCG) at Rs. 79,69,38,698. Being aggrieved of such assessment order, assessee preferred appeal before CIT(A).

3. During the pendency of appeal before ld. CIT(A), ld. CIT in exercise of power u/s 263 of the Act called for assessment records of assessee for the impugned AY and after verification of the same was of the view that assessment order is erroneous and prejudicial to the interests of revenue as AO while completing assessment has not computed book profit as per the provisions of section 115JB of the Act. He further noted that though, there is a delay in remittance of TDS on commission payment to Central Govt. Account, AO failed to apply the provisions of section 40(a)(ia). Accordingly, ld. CIT issued a show cause notice to assessee to explain. In response to the said show cause notice, assessee filed its written submissions objecting to initiation of proceeding u/s 263 of the Act. It was submitted by assessee that section 115JB would apply where the income assessed and tax thereon under the normal provisions is less than the book profit and tax thereon. However, since in case of assessee, the 3 ITA No. 706 /Hyd/2013 M/s Panyam Cements & Mineral Industries Ltd.

income determined by AO and the consequent income-tax there on is much more than the book profit as well as the tax to be paid thereon, neither there is any error in the assessment order nor it is prejudicial to the interests of revenue. Further, it was submitted by assessee that even otherwise also, no book profit can be computed u/s 115JB of the Act as assessee is a sick company and the entire net worth of such company becomes equal to the accumulated losses. Ld. CIT after going through the submissions of assessee, however, did not find merit in them. Ld. CIT observed that by virtue of order passed by ld. CIT(A) while deciding assessee's appeal against assessment order the capital gain towards transfer of land is assessable in the AY 2006-07. That being the case, income returned by assessee in the return of income stands restored and assessee would be liable to pay the tax computed under section 115JB. However, as AO has failed to compute book profit u/s 115JB of the Act, assessment order is erroneous and prejudicial to the interests of revenue. As far as the merits of the issue is concerned, ld. CIT held that for claiming relief u/s 115JB(2)(vii), the mandatory condition is there must be an order from BIFR u/s 17(1) of the Sick Industrial Companies Act, 1985. As in assessee's case, the Board has not passed any such order, no relief would be allowable u/s 115JB(vii). Ld. CIT, therefore, held that AO having failed to apply the provisions of section 115JB, the assessment order is erroneous and prejudicial to the interests of revenue. However, as far as the issue of applicability of section 40(a)(ia) is concerned, ld. CIT accepted assessee's explanation. Ultimately, ld. CIT passed the impugned order setting aside the assessment order with a direction to AO to compute book profit u/s 115JB of the Act. Being aggrieved of the order of ld. CIT, assessee is before us.

4. Ld. AR submitted before us, invoking power u/s 263 of the Act for the purpose of directing AO to compute book profit u/s 115JB of the Act is without jurisdiction as AO has enquired into the matter and 4 ITA No. 706 /Hyd/2013 M/s Panyam Cements & Mineral Industries Ltd.

examined the issue in course of assessment proceeding. Ld. AR referring to the show cause notice issued by AO on 18/11/10 and 21/12/10 as well as assessee's reply dated 30/11/10 submitted before us that the issue was examined in detail by AO during the assessment proceeding, however, AO since determined the income of assessee at much higher figure than the book profit u/s 115JB, there was no need to apply the provisions of section 115JB of the Act, as required under law. Accordingly, AO passed assessment order by raising the tax demand on the income determined under the normal provisions of the Act since it was more than the tax computed on the book profit. Ld. AR submitted, ld. CIT while exercising power u/s 263 of the Act, can consider the assessment order to be erroneous and prejudicial to the interests of revenue on the basis of the facts and materials on record as on the date of completion of assessment. However, in the present case, only because ld. CIT(A) subsequently passed the order holding that capital gain would be taxable in AY 2006-07 by virtue of which the income returned by assessee was restored, for that reason alone, it cannot be held that assessment order is erroneous and prejudicial to the interests of revenue. Ld. AR submitted, on the date assessment order was passed, the income computed under the normal provisions was more than the book profit computed u/s 115JB. Therefore, assessment order as was passed is in accordance with the statutory provisions and there was no need to compute book profit u/s 115JB of the Act. He submitted that at that stage, AO could not have foreseen or apprehended that the income determined by him would not be sustained by the appellate authority. Therefore, even if there might be an error in the assessment order for not computing the book profit, but, there is no prejudice caused to revenue as income computed under normal provisions was much more than the book profit u/s 115JB and the demand raised on such income computed under normal provisions is enforceable as per the provisions of law. Ld. AR submitted, as there was no prejudice caused to revenue by virtue of the assessment order, one of the conditions of section 263 is not 5 ITA No. 706 /Hyd/2013 M/s Panyam Cements & Mineral Industries Ltd.

satisfied, hence, the order passed u/s 263 is invalid. In support of his submissions, ld. AR relied on the following decision:

1. CIT Vs. Greenworld Corporation, [2009] 314 ITR 81 (SC)

5. Ld. DR, on the other hand, submitted before us, the assessment order is erroneous and prejudicial to the interests of revenue as AO while completing the assessment has failed to compute book profit u/s 115JB of the Act though the said provision is clearly applicable. Ld. DR submitted, assessee's claim that section 115JB is not applicable as it is a sick company having accumulated losses, cannot be accepted in absence of an order from BIFR u/s 17(1) of the Act, Sick Industrial Companies Act, 1985.

6. We have considered the submissions of the parties and perused the materials on record. We have also carefully applied our mind to the decisions relied upon by ld. AR. At the outset, it needs to be put on record that the primary contention of ld. AR while challenging the impugned order passed u/s 263 is, there is no prejudice caused to the revenue as a result of the assessment order, hence, invoking power u/s 263 is invalid. Keeping in view the aforesaid contention, we proceed to decide the issue. Undisputedly, assessee filed its return of income declaring 'Nil' income after set off of brought forward losses of Rs. 36,00,51,214 under the normal provisions of the Act. Simultaneously, assessee also declared book profit at Nil under section 115JB of the Act on the plea that it being a sick company, there is no book profit. As can be seen from the show cause notices issued by AO on 30/11/10 and 18/11/10 in course of assessment proceeding, copies of which are placed at pages 27 to 34 of assessee's paper book, AO during the assessment proceeding did conduct enquiry with regard to applicability of section 115JB. From the reply submitted by assessee on 30/11/10, a copy of which is at page 32 of paper book, it is seen that assessee submitted that since it is a sick company as per the BIFR proceeding, no book profit is to 6 ITA No. 706 /Hyd/2013 M/s Panyam Cements & Mineral Industries Ltd.

be computed as per the provisions of section 115JB(2)(vii). Of course, it is a fact that AO while completing assessment has not computed book profit u/s 115JB of the Act. However, it is also a fact that AO while completing the assessment has not accepted 'Nil' income offered by assessee and on the other hand, has determined the total income under the normal provisions at Rs. 79,69,38,698 by computing LTCG, on which tax along with interest was computed at Rs. 23,78,47,932. Whereas the book profit as per the assessee's computation, which is also not disputed by ld. CIT, is Rs. 45,08,84,000 and tax thereon is Rs. 4,64,41,052. Therefore, the income computed under the normal provisions and tax thereon being much more than the tax payable on the book profit computed u/s 115JB of the Act, AO proceeded to complete assessment and enforce the demand under the normal provisions of the Act without computing the book profit. In our view, since income determined and tax computed under the normal provisions is much more than the book profit and tax thereon u/s 115JB, action of the AO in not computing/enforcing the tax demand on the profit computed u/s 115JB cannot be considered to be prejudicial to the interests of revenue. Only because subsequently, ld. CIT(A) while considering assessee's appeal against assessment order has held that capital gain is taxable in AY 2006-07 and as a result of which income returned by assessee was restored, that will not render assessment order erroneous and prejudicial to the interests of revenue.

7. While assuming jurisdiction u/s 263, ld. CIT has to examine the error and prejudice caused to revenue by virtue of assessment order on the basis of the facts and materials on record as on the date of completion of assessment. He cannot take into consideration any event subsequent thereto. As can be seen, ld. CIT upon considering the fact that by virtue of order of ld. CIT(A) passed on 25/03/13 income of assessee was again restored back to the returned income, 7 ITA No. 706 /Hyd/2013 M/s Panyam Cements & Mineral Industries Ltd.

has held the assessment order to be erroneous and prejudicial to the interests of revenue as in that event assessee would have paid tax on the book profit. However, the order of ld. CIT(A) being a subsequent event not available on record on the date of completion of assessment, by relying upon such order of ld. CIT(A), assessment order cannot be considered to be erroneous and prejudicial to the interests of revenue. It is well known that ld. CIT can exercise power u/s 263 of the Act, on fulfillment of the twin conditions enshrined in the said provision cumulatively. The conditions are, an order sought to be revised must be erroneous as well as prejudicial to the interests of revenue. In absence of any one of the aforesaid conditions, exercise of power u/s 263 becomes invalid. In the present case, even assuming that there is an error in the assessment order as AO has failed to compute book profit u/s 115JB, it cannot be said that assessment order passed is prejudicial to the interests of revenue as the income determined under the normal provisions was much more than the book profit computed u/s 115JB of the Act. Therefore, as one of the conditions of section 263 is not fulfilled, exercise of power u/s 263 is not valid. Accordingly, we set aside the impugned order of ld. CIT and restore the assessment order.

8. Before parting, we may observe that we have not gone into the merits of the issue as to whether assessee is eligible for relief u/s 115JB(2)(vii) as ld. AR has not advanced any specific argument on that issue and has confined his argument only to the validity of power exercised u/s 263 of the Act by contending that assessment order is not prejudicial to the interests of revenue. Further, we make it clear that the finding given by us is purely in the context of the validity of power exercised u/s 263 of the Act, and it does not prevent the AO from taking action for computing the correct income tax liability of assessee for the year under consideration, if it is otherwise permissible under the provisions of the Act.

8 ITA No. 706 /Hyd/2013 M/s Panyam Cements & Mineral Industries Ltd.

8. In the result, appeal of assessee is considered to be allowed.

Pronounced in the open court on 25 th March, 2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 25 th March, 2015 kv

Copy to:-

1) M/s Panyam Cements and Mineral Industries Ltd., C/o M/s Anjaneyulu & Co., C.As., 30, Bhagyalakshmi Nagar, Gandhi Nagar, Hyderabad - 500 080.

2) Addl. CIT, Kurnool Range, Kurnool 3 CIT(A)-III, , Hyderabad

4) The Departmental Representative, I.T.A.T., Hyderabad.