1. The appeal by the assessee is directed against the order under section 263 dated 30-3-1994 of the Commissioner, Bhopal pertaining to the assessment year 1989-90.
2. The assessee is a company engaged in the business of manufacture of electrodes. Return for assessment year 1989-90 was filed declaring income of Rs. 94,51,256 on 29-12-1989. In the year of account, the assessee had entered into joint venture with M/s. Lotherme Electrodes (India) Pvt. Ltd. and M/s. Fine Sport Electrodes (P.) Ltd. The assessment was completed on total, income of Rs. 1,66,10,960 on 27-3-1992 under section 143(3) of the Act.
3. The Commissioner set aside the said assessment in exercise or powers vested in him under section 263 for being made de novo on the following issues : (ii) That the, Assessing Officer allowed an amount of Rs. 3,67,723 being loss on remittance of foreign loan instalment without making any enquiry whatsoever.
(iii) That the joint ventures are altogether different entities and are liable to be taxed in the status of AOP. The profit and loss of AOP are not taxable in the hands of the members, as the assessee is having taxable income. Further in view of amendment w.e.f. 1-4-1989, the AOP is to be charged to tax at maximum marginal rate, as the member (assessee) had taxable income and accordingly, the assessee's share from AOP was not to be included in loss. As such the Members' share loss from AOP was also not to be included in the assessment.
(iv) That the assessee had paid the self-assessment tax short by Rs. 49,58,099 - (Rs. 54,58,099 - Rs. 5,00,000). The penalty under section 221 was to be initiated. This was not done.
(v) That the Assessing Officer erroneously allowed deduction under section 32AB on the amount of Rs. 1,85,88,564 which included the profit of Rs. 18,97,929 on sale of fixed assets, it being not the profit and gains of business.
5. Shri M. C. Mehta, the ld. counsel for the assessee invited our attention to the reply dated 10-3-1994 submitted before the Commissioner in response to show-cause notice. The copies of the same are available at pp. 3-4 and pp. 1-2 of the paper book. At the outset, Shri Mehta argued that the entire assessment order cannot be set aside and referred to the following decisions : (a) Query was made by the Assessing Officer in para 7 of his letter dated 31-1-1990 (pp. 7-10 of paper book).
(b) Vide letter dated 19-4-1990, the assessee intimated the Assessing Officer that sales tax penalty orders under various sections of sales tax Act have been finalised in assessment year 1989-90. The said amount of Rs. 6,83,304 stand paid in earlier years and have been allowed as deductions in assessments of the company-Request was made to increase the returned income, as the penalty may not be allowable as business deductions. It was also mentioned that it was voluntarily offered.
(c) The sum of Rs. 65 lacs surrendered (para 4 of page 55 of paper book) includes the amount of sales tax though the Assessing Officer has not discussed sales tax penalty separately.
Inviting our attention to copy of account of M/s. Dalamal & Sons (London) Ltd. in the books of the assessee (page 42 of paper book), it was submitted that as a result of final settlement through arbitration, the assessee had to pay equivalent of Rs. 21 lacs in foreign currency in May, 1988. The assessee debited Rs. 3,67,723 in accounts as net loss on remittance of foreign loan instalments as on 30-6-1988. Details of Rs. 1,62,81,019 being administrative and other expenses were filed before the Assessing Officer, who had applied his mind before allowing the assessee's claim. He submitted that from the correspondence at pp. 83-88 of the paper book, it would be obvious that the said sum of Rs. 3,67,723 did not represent debit on account of fluctuations in the rate of exchange. It represents the amount of interest on account of late payment of loan for one year as an outcome of settlement of account. This being the nature, all this amount is allowable as revenue expenditure. In case, it is not acceptable, it was alternatively pleaded that the said amount may be added to the cost of asset and depreciation/investment allowance be allowed.
(a) It was submitted that the Assessing Officer had made query (see para 1 of his letter dated 31-1-1990, copy at page 7 of the paper book and para 1 of Assessing Officer's letter dated 23-11-1990 at page 15 of the paper book). These were replied by the assessee, vide para 1 of letter dated 7-1-1991 (copy at pp. 20-21 of paper book), along with which photocopies of minutes of Board of Directors meeting dated 17-5-1988 and agreement of joint venture dated 1-7-1988 were enclosed, explaining the rationale and furnishing the opinion of an advocate that share of loss in joint venture is allowable as deduction in the case of the assessee.
(b) Vide order sheet entry dated 4-1-1991 (copy at page 31 of the paper book), the Assessing Officer made further query, which was replied to by the assessee vide letter dated 6-5-1991 explaining therein the indirect benefits derived by it through the joint ventures and reasons for loss e.g. increase in market competition, paucity of funds, non-availability of bank finance etc.
(c) These joint ventures are assessed to tax at Bombay (copies of intimations under section 143(1)(a) for assessment year 1989-90 are available at pages 57-60 of paper book. The Assessing Officer has allocated the share of loss in joint venture(s) to the assessee company.
(d) Attention was invited to the order dated 1-1-1993 of CIT(A), Bombay in the case of Lutherme Electrodes (India) Pvt. Ltd., one of the joint ventures for assessment year 1990-91, wherein also a question arose whether assessee's share of loss of Rs. 6,12,673 from D&H Lutherme joint venture can be allowed to be set off against his income under other heads. It was answered by the CIT(A) in affirmative. Para 16 of appellate Order at pp. 61-71 refers.
(e) It was submitted that it was on the basis of the material placed before the Assessing Officer that he after due application of his mind adopted the share of assessee's loss in the joint ventures subject to rectification. Section 67A(c) amended w.e.f. 1-4-1989 applies to the facts of the assessee's case. The Commissioner under some wrong notions substituted his own wisdom which is not permissible.
It was submitted that the Assessing Officer was conscious of assessee's default of non-payment of self-assessment tax, which is evident from the notice issued by him u/s 154. However, after noticing that the entire tax was paid within 8 months of due date of filing the return and before completion of assessment, he did not initiate penalty under section 221. The Commissioner cannot exercise his revisionary powers in this regard, in support of which reference to the following decisions was made : It was stated that the assessee had filed audit report along with the return (copy at pp. 25-29 of the paper book) claiming deduction of Rs. 32,97,989. The Assessing Officer made detailed discussion in the assessment order at pp. 1-3 thereof and restricted the assessee's claim at Rs. 24,29,543 only after due consideration and application of his mind. It was further stated that there is no provision of adjustment of section 41(2) profit for the purpose of deduction under section 32AB.Moreover, the profit under section 41(2) is also assessee's business income. Only the amount of depreciation has to be adjusted for this purpose. Reference was made to decision of the apex-court in Cambay Electric Supply Industrial Co. Ltd v. CIT [1978] 113 ITR 84.
(i) The Commissioner has not set aside the assessment order in toto.
He has partially set aside the assessment.
(ii) Mere application of mind by the Assessing Officer is not enough. If the assessment is erroneous as also prejudicial to the interests of revenue on certain issues, Commissioner may exercise his powers under section 263 despite there being application of mind by the Assessing Officer.
(iii) Para 3 of assessee's letter dated 3-3-1992 (pp. 55-56 of the paper book) does not refer to sales tax penalty and para 4 thereof speaks of expenses mentioned in para 3. The surrender of Rs. 55 lacs does not include sales tax penalty of Rs. 6,83,304, whereas the surrender of Rs. 12.5 lacs in the next year vide letter dated 3-3-1992 (copy at pp. 40-41 of the paper book) makes specific mention of sales tax penalties in para 3 thereof.
(iv) The expression 'being interest' in the copy of account of M/s.
Dalamal & Sons at page 42 of paper book is not supported by any documentary evidence. From para 2 of the communication dated 24-5-1988 of Dalamal & Sons (London) Ltd. page 85 of paper book, it is evident that the dispute between the parties was with regard to exchange rate fluctuations which is a matter covered by section 43A of the Act. In set aside assessment, depreciation/investment allowance have been allowed after adding this amount to the cost of assets. During original assessment proceedings, the assessee had filed details of administrative and other expenses aggregating Rs. 1,62,81,019 inclusive of the amount of Rs. 3,67,723 being net loss of remittance of foreign loan instalments. There was total non-application of mind by Assessing Officer, who had not made any query with regard to the amount of Rs. 3,67,723.
(v) Assessee's share of loss in the two joint ventures is to be regularised in the manner given under section 86(v) as it then stood. As per section 167B(2), the joint venture has to be charged at the maximum marginal rate, as the assessee member has taxable income. Therefore, in view of the change in law brought about by Direct Tax Laws (Amendment) Act, 1989 w.e.f. 1-4-1989, the share of loss from AOP (joint ventures) does not form part of total income of the assessee. Section 67A is not applicable to the assessee's case.
(vi) Section 41(2) stands omitted by the Taxation Laws (Amendment and Misc. Provisions) Act, 1986 w.e.f. 1-4-1988. Hence, the decision in Cambay Electric Supply Industrial Co. Ltd.'s case (supra) is not applicable to the assessee's case. Sub-clause (c) of sub-section (6) of section 43 has been inserted by the Taxation Laws (Amendment and Misc. Provisions) Act, 1986 w.e.f. 1-4-1988. It has defined the 'written down value' in the context of the block system. In this system, the value of assets sold is adjusted to arrive at the WDV of any asset in relation to assessment year 1989-90 and subsequent year. Sub-section (1) of section 50 as substituted w.e.f. 1-4-1988 provides for bringing to tax short-term capital gains on transfer of depreciable assets. Without applying his mind to the above provisions, the Assessing Officer erroneously allowed deductions under section 32AB on profit on sale of fixed assets.
(vii) Item 4, Part III of Form No. 3AA in which audit report under section 32AB(v) requires the Auditors to indicate the amount of profit computed in accordance with the requirements of Part II & III of Sixth Schedule to the Companies Act, 1956. The said provisions do not require that profit on sale of fixed assets has to be included in profit and loss account as business income.
(viii) The Commissioner can exercise his revisionary powers for non-initiation of penalty proceedings.
8. We have considered the submissions of the parties carefully.
Sub-section (1) of section 263 empowers the Commissioner to call for and examine the record of any proceeding and if he considers that the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of revenue, he may pass an order enhancing or modifying the assessment or cancelling the same with a direction to make it afresh. The term 'record' includes all records relating to any proceeding under the Act at the time of examination by the Commissioner. Further, he is competent to revise an order of assessment on all matters except those that have been considered and decided in appeal. In the instant case, the Commissioner has set aside the assessment on the issues enumerated by him in para 3 of his order and directed the Assessing Officer to frame the assessment de novo on those issues after allowing reasonable opportunity of being heard to the assessee. Para 5 of the Commissioner's order refers. We, therefore, hold that the preliminary objection of Shri Mehta, the ld. counsel for the assessee, has no merit, as the Commissioner has not set aside the entire assessment order as stated above. The assessment order has been set aside on certain issues only. Other issues decided by the Assessing Officer have not been disturbed. Now we proceed to decide whether the Commissioner has rightly exercised his revisionary powers in respect of those issues or not.
9. As to the revision of the assessment order on the issue of sales tax penalty, the letter dated 19-4-1990 of the assessee filed during assessment proceedings makes it abundantly clear that the assessee had made false claim of deduction in the return, as the amount(s) of sales tax penalty had been claimed and allowed in earlier years. It was in this back drop that the assessee had requested the Assessing Officer to increase the returned income by the amount of sales tax penalty of Rs. 6,83,304. If that be so, the question of including this sum in the surrendered amount of Rs. 55 lacs does not arise, as the fact of inclusion of the said sum being sales tax penalty is conspicuous by its absence in the assessee's letter of surrender dated 3-3-1992 relating to assessment year 1989-90. Paras 3 & 4 thereof do not refer to sales tax penalty. In sharp contract, letter of surrender of the same date does make mention of sales tax penalty in para 3 thereof in clear terms. This conduct of the assessee itself negatives the assessee's claim of inclusion of the impugned sum of sales tax penalty in the surrendered amount of Rs. 55 lacs in assessment year 1989-90. Since the Assessing Officer had erroneously not increased the income originally returned by the amount of sales tax penalty of Rs. 6,83,304 as requested by the assessee, vide letter dated 19-4-1990 while framing the assessment, the assessment was erroneous due to non-inclusion of this sum in the total income causing prejudice to the interests of revenue. The Commissioner was justified in invoking his revisionary powers in respect of this issue.
10. As to the issue of deduction of Rs. 3,67,723 being loss on remittance of foreign loan instalments, no doubt, the assessee had filed details of administrative and other expenses aggregating Rs. 1,62,81,019 which included the amount of Rs. 3,67,723 being net loss on remittance of foreign loan instalments but there is no inkling at all in the assessment order that the Assessing Officer had made any query with regard to this claim nor it is a case of the assessee that the nature of this claim was explained to the Assessing Officer during assessment proceedings. The communication dated 24-5-1988 of Dalamal & Sons (London) Ltd. was not placed by the assessee before the Assessing Officer. Had it been done, the Assessing Officer would have known that the assessee had to pay an increased liability on account of exchange rate fluctuations necessitating adjustment in the actual cost of the asset acquired from abroad. Since it was not done, the assessment suffered an error inasmuch as the impugned amount was erroneously allowed as deduction instead of its treatment being accorded as per the provisions of section 43A of the Act. The error was undoubtedly prejudicial to the interests of revenue. The Commissioner was, therefore, within his powers to exercise his revisionary jurisdiction on the ground that the claim of impugned deduction was allowed by the Assessing Officer without enquiry. Failure to make enquiry where such enquiry is warranted makes the assessment order erroneous as also prejudicial to the interests of revenue. Reference may be made to the following decisions : K. A. Ramaswamy Chettiar v. CIT [1996] 220 ITR 657/88 Taxman 526 (Mad.); Swarup Vegetable Products Industries Ltd. (No. 1) v. CIT [1991] 187 ITR 412/54 Taxman 175 (All.); In a recent decision in CIT v. Emery Stone Mfg. Co. [1995] 213 ITR 843 at page 850/83 Taxman 643, their lordships of Raj. High Court have held that where the facts have been disclosed by the assessee to the Assessing Officer and the correct provisions of law have not been examined by the Assessing Officer, the Commissioner can invoke his powers under section 263. In that case, the Commissioner was held justified in setting aside the assessment with the direction to work out actual cost of the assets after applying the provisions of Explanation 3 to section 43(1).
11. Regarding the taxability of loss from joint ventures we find that during assessment proceedings, the Assessing Officer had made pointed queries about the allowability or otherwise of the assessee's share of loss in joint ventures. The assessee brought on record the documents relating thereto; explaining the reasons as to why the assessee entered into joint venture agreements and the factors responsible for incurring loss in joint ventures. Both the joint ventures are assessed to tax as AOP in Bombay. The shares of the members are determinate which is evident from the copies of intimation under section 143(1)(a) (pp.
57-60 of assessee's paper book), where the share(s) of loss of the assessee in joint ventures have been allocated by the Assessing Officer. It was on the basis of appreciation of the evidence/material placed before the Assessing Officer and after due application of his mind that the Assessing Officer adopted the share(s) of assessee's loss(es) in the joint ventures subject to rectification. The setting aside of the assessment on this issue is not sustainable. What repercussion the amended law w.e.f. 1-4-1989 will have on the taxability of joint venture AOPs. is a matter to be examined by the authorities assessing the joint venture(s) which are admittedly not assessed under the jurisdiction of the Commissioner, Bhopal. So far long as the assessment of joint ventures are not disturbed, the share of assessee's profit/loss as a member thereof has to be assessed in the hands of the assessee. This is what has been done by the Assessing Officer. Erroneous assessment refers to an assessment that deviates from the law or that which is not, in other words, in accordance with law. Nothing convincing has been demonstrated by the revenue before us to enable us to take a view that adoption of share(s) of assessee's losses in joint ventures in the assessment is contrary to law. On the other hand, the assessment order would go to reveal that the Assessing Officer was alive to the relevant facts and provisions of law with regard to this issue. It has been held in CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.) that section 263 does not visualise a case of substitution of the judgment of the Commissioner for that of the Assessing Officer who passed the order unless the decision is held to be erroneous. As stated earlier, the assessment is not erroneous on this issue. As such, revision of assessment on the point is liable to be vacated. We do so and order accordingly.
12. As to the issue of non-initiation of penalty under section 221 for short payment of self-assessment tax, it may be stated that unlike the provisions of section 271(1) or 273 where initiation of penalty during the course of assessment proceedings is a must, such initiation of penalty proceedings under section 221 is not mandatory for imposing penalty under the said section. Penalty under section 221 can be initiated and imposed for default in making payment of tax if the default is without good and sufficient reasons. Initiation of proceedings in assessment order is not sine qua non of the levy of penalty under section 221. As such the assessment order cannot be said to be erroneous for the reasons that penalty under section 221 was not initiated. Exercise of revisionary power by the Commissioner on this issue is without jurisdiction. His order on this issue is hereby vacated.
13. Regarding deduction under section 32AB on the profit on sale of fixed assets, it is not in dispute that amendment has been brought by the Taxation Laws (Amendment and Misc. Provisions) Act, 1986 w.e.f.
1-4-1988 in section 43(6)(c) and section 50(1) defining the WDV in the context of the block system and bringing to tax short-term capital gains on transfer of depreciable assets. The assessment order would go to reveal that the entire focus of the Assessing Officer was concentrated upon the assessee's claim of deduction under section 32AB on the basis of income before adjustment of losses arising out of joint ventures. After detailed discussion, he reached the conclusion that losses from joint ventures have to be reduced from the profit of the assessee-company for the purpose of allowing deduction under section 32AB. There is not even one word in the order about the eligibility of profit on sale of fixed assets for deduction u/s 32AB. Whether profit on sale of fixed assets constitutes eligible profit or not in the context of the amended provisions stated above is a matter of debate.
Looked at from this perspective also, as the issue in debatable, the Commissioner can exercise his powers under section 263. For taking this view, support may be derived from the decision in CIT v. M. M.Khambhatwala [1992] 198 ITR 144 (Guj.).