C/SCA/12764/2017 JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 12764 of 2017 With SPECIAL CIVIL APPLICATION NO. 12765 of 2017 With SPECIAL CIVIL APPLICATION NO. 12766 of 2017 With SPECIAL CIVIL APPLICATION NO. 12768 of 2017 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV 1 Whether Reporters of Local Papers may be allowed to see judgment ? 2 To be referred to Reporter or not ? 3 Whether their Lordships wish to see fair copy of judgment ? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India or any order made thereunder ? HITECH ANALYTICAL SERVICES Petitioner(s) Versus PR. COMMISSIONER OF INCOME TAX - 3, AHMEDABAD & 1 Respondent(s) Appearance: MR B S SOPARKAR, ADVOCATE for Petitioner(s) No. 1 MR NITIN K MEHTA, ADVOCATE for Respondent(s) No. 1 Page 1 of 12 HC-NIC Page 1 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT NOTICE SERVED BY DS for Respondent(s) No. 2 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV Date : 19/09/2017 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This group of writ petitions arise in similar background. We may record facts from Special Civil Application No. 12765 of 2017 and 12764 of 2017. Petitioner of Special Civil Application No. 12765 of 2017 is partner of one M/s. Hitech Analytical Services and she would hereafter to be referred to as 'a partner of said firm'. For assessment year 2012-13, she had filed return of income on 30.09.2012 declaring total income of Rs. 2.82 lacs. return was taken in scrutiny. During assessment, Assessing Officer noted that petitioner, as partner of firm, had claimed expenses of Rs. 10.70 lacs (rounded off) which comprised of following: 1 Audit fees Rs. 28,090/- 2 Bank Charges Rs. 3,091/- 3 Car Loan interest Rs. 1,04,814/- 4 Depreciation Rs. 6,12,567/- 5 Petrol expenses Rs. 1,03,396/- 6 Travelling expenses Rs. 2,18,150/- Total Rs. 10,70,108/- 2. According to her, these expenditures were incurred for Page 2 of 12 HC-NIC Page 2 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT partnership business. Assessing Officer was, however, of opinion that petitioner's share of profit of partnership was exempt from payment of tax. expenditure she had claimed was thus for purpose of earning exempt income and therefore, not allowable under section 14A of Act. Assessing Officer, therefore, issued show-cause notice to partner on 20.10.2014 why such expenditure should not be disallowed. In this notice itself, he had observed that she could claim certain expenses like travelling expenses, car depreciation, car petrol etc in firm. 3. petitioner replied to such notice under communication dated 31.10.2014 justifying claim. petitioner wrote yet another letter to Assessing Officer in which, she took alternative stand pointing out to Assessing Officer's suggestion that expenditure could be claimed in hands of partnership firm. In said further communication, she conveyed as under: However you are of view that below expenses is not allowable in hand of assessee and are allowable in firm itself so you are herewith requested to please be allowed following expenses against total income of firm as below: Particular of Expenses Amount Car loan Interest Rs. 1,04,814/- Claimed proportionately in Depreciation Rs. 6,12,567/- two firm Hitech Outsourcing Services Petrol Expenses Rs. 1,03,396/- and Hitech Analytical Travelling Expenses Rs. 2,18,150/- Services Page 3 of 12 HC-NIC Page 3 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT Rs. 10,38,927/- Since assessee is not willing to go for further litigation and to purchase of mental peace hereby request yourself to kind do needful and allow above expenses in firm. And accordingly after considering your respective views assessee is claiming above expenses in respective firm and file revised computation statement of income of his both partnership firm and claiming above expenses. 4. Resultantly, in assessment of partner, such expenditure was not allowed when Assessing Officer passed order of assessment on 13.01.2015. 5. By time this order of assessment was passed on 13.01.2015 in case of partner, assessment of firm was still pending. On behalf of firm, which is petitioner of Special Civil Application No. 12764 of 2017, therefore, under letter dated 27.02.2015, revised computation of income was presented by Assessing Officer in which, said sum of Rs. 10.38 lacs was claimed by way of expenditure. Assessing Officer completed assessment of firm under section 143(3) of Act on 26.03.2015. In such order of assessment, he did not grant firm's claim for expenditure, however, without assigning any reason. In fact, he did not even refer to such claim in order of assessment. 6. partner as well as firm both therefore filed two separate Page 4 of 12 HC-NIC Page 4 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT revision petitions before Commissioner under section 264 of Act. Their case jointly put-forth was that expenditure was incurred for business of partnership firm and such expenditure therefore should have been allowed either in hands of partner or in hands of firm. Special Civil Applications No. 12766 and 12768 of 2017 are filed by partnership and partner respectively involving identical facts which are therefore not recorded separately. Commissioner disposed of four revision petitions by separate orders on 09.03.2017 which are challenged in these petitions. In case of partners, Commissioner confirmed view of Assessing Officer that expenditure was in relation to earning exempt income and therefore, not allowable deduction. In case of firm, Commissioner was of opinion that expenditure cannot be allowed for three reasons viz.(i) That assessee firm had not revised return and merely presented revision of statement. This cannot form basis of new claim. expenditure could not have been claimed without filing revised return. (ii) There was no evidence to establish that expenditure was incurred by partner wholly for earning business income. claim was not verified. expenses incurred by assessee firm and its partners being distinct, expenditure by partner cannot be allowed in hands of firm. (iii) claim of firm was against principle of accountancy. accounts of firm did not reflect expenditure and therefore, cannot be granted. Page 5 of 12 HC-NIC Page 5 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT 7. Having heard learned counsel for parties and having perused documents on record, we see no error in view of Commissioner when he holds that expenditure could not have been allowed in hands of partners. Even petitioners are unable to point out any manifest error in view of Assessing Officer and Commissioner since in hands of partners, expenditure would be related to earning exempt income. Nevertheless, claim of petitioners was not confined to expenditure being allowed in hands of partners. alternative claim was put forth by partners and firm that at any rate such expenditure cannot be disallowed in hands of firm. In this regard, we may recall that even during assessment of partner, stand was taken that Assessing Officer of firm may allow such expenditure. Therefore, after Assessing Officer passed order of assessment in case of partner on 13.01.2015, partnership firm had filed revised computation of income before Assessing Officer before whom assessment of firm was still pending. To extent, when Commissioner holds that such expenditure would not be allowed in hands of firm also, we are unable to accept stand. We have noted three objections of Commissioner in granting such expenditure. We may deal with these objections seriatim. 8. non-filing of revised return by firm could not have been ground for rejection of claim. Even if powers of Page 6 of 12 HC-NIC Page 6 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT Assessing Officer could be seen to be restricted in absence of any revised return, nothing prevented Commissioner from examining issue and if need be to have further inquiries made. In case of C.Parikh & Co. vs. Commissioner of Income Tax, Baroda reported in 122 ITR 610, Division Bench of this Court considered scope of powers of Commissioner under section 264 of Act. In said case, after assessment was completed, assessee discovered that mistake had been committed in its books of account in totaling purchases as result of which assessee had under-totalled purchases and on account of this, gross profit of assessee had gone-up. When Commissioner refused to allow assessee to correct such mistake, issue reached High Court. Court observed that powers are very wide. Subject to limitation prescribed in section itself, Commissioner in exercise of his revisional powers could pass such order as he thinks fit which is not prejudicial to assessee. It was further observed that there is nothing in section 264 placing any restriction on Commissioner's revisional powers to give relief to assessee in case where assessee detects mistakes on account of which he was over- assessed, after assessment was completed even where such over-assessment was due to mistake detected by assessee after completion of assessment. Commissioner could entertain even new ground not urged before lower authorities while exercising such revisional powers. Page 7 of 12 HC-NIC Page 7 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT 9. In case of Parekh Brothers vs. Commissioner of Income Tax, Kerala-II Ernakulam and ors reported in 150 ITR 105, Division Bench of Kerala High Court, referring to and relying upon judgement of this Court in case of C.Parikh & Co. (supra) observed that powers of Commissioner under section 264 are wider than under section 263 and not confined to correcting erroneous orders. It was held that deduction not claimed during assessment proceedings or appeals can be considered by CIT on application under section 264 of Act. 10. In case of Digvijay Cement Company Limited vs. Commissioner of Income Tax and anr reported in 210 ITR 797, assessee had not claimed weighted deduction on certain expenditure before Assessing Officer carrying belief that no such deduction could be claimed. In appeal before Appellate Commissioner also, no such claim was made and therefore such claim was not examined by Appellate Commissioner. In further appeal before Tribunal, this question did not arise. assessee, thereafter, filed revision petition before Commissioner under section 264 of Act claiming deduction which revision petition was rejected by Commissioner. High Court held that Commissioner ought to have entertained claim and decided it on merits. High Court referring to and relying upon decision of this Court in case of C.Parikh & Co.(supra) held Page 8 of 12 HC-NIC Page 8 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT thus: In alternative, it was submitted that assessee not having made any claim before Income tax Officer, there was no order of Income tax Officer in this behalf and, therefore, section 364 could not have been invoked by assessee. What was submitted was that revision application would lie only against order of Income tax Officer and if there was no order of Income tax Officer with respect to claim made before Commissioner, revision would not be maintainable. We are concerned in this case with order of assessment and not with any other type of order. What in fact assessee did by filing revision application before Commissioner was to challenge order of assessment on ground that it was erroneous. It may be that error was committed not by Income tax Officer but by assessee and that error was detected by assessee later on. But that certainly cannot preclude assessee from challenging order of assessment on ground that order was erroneous inasmuch as, under law, deduction under section 35B ought to have been granted to assessee. power of revision under section 264 cannot be restricted to such erroneous orders which have become erroneous as as result of some error committed by Income tax Officer while passing orders. Independently of any decision or absence of any decision on part of Income tax Officer, order of assessment can be challenged as erroneous if, for example, some provision was overlooked not only by assessee but also by Income tax Officer. Even in such case, order of assessment can be challenged by filing revision application before Commissioner. Therefore, even this contention raised on behalf of Revenue deserves to be rejected. 11. In case of Vijay Gupta vs. Commissioner of Income Tax and anr reported in 386 ITR 643, Division Bench of Delhi High Court observed that powers conferred upon Commissioner under section 264 are very wide. Page 9 of 12 HC-NIC Page 9 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT Commissioner is bound to apply his mind to question whether assessee was taxable on particular income. Section 264 uses expression 'any order'. It would imply that section does not limit power to correct errors committed by subordinate authorities but could even be exercised where errors are committed by assessee. There is nothing in section 264 which places any restriction on Commissioner's revisional power to give relief to assessee in case where assessee detects mistakes after assessment is completed because of which he is over-assessed. First objection of Commissioner was therefore not valid. 12. Second objection of Commissioner appears to be that there was no evidence to prove that expenses claimed by partner in return were incurred wholly for earning business income of firm. Merely because claim of expenditure being incurred wholly for purpose of partnership business was not verified, cannot be ground for rejecting claim. occasion arose before both Assessing Officers, that of partner as well as of firm to examine veracity of expenditure and claim of petitioners that it was expended wholly for purpose of business of firm. In case of partner claim was rejected not on ground that expenditure was not wholly for purpose of business of firm but on entirely different ground. In case of firm claim was not even examined, despite which, if Commissioner desired to examine it or have it examined, it was Page 10 of 12 HC-NIC Page 10 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT always open for him to call for remand report or place issue back before Assessing Officer for passing appropriate order. 13. last objection of Commissioner was that expenditure was not shown in account of firm and therefore allowing expenditure would run counter to accountancy principle. Act proceeds on fundamental principle of taxing real income. accounts cannot change taxability or non-taxability of certain receipt which depends on nature of receipt and legal principles applicable. In case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs. Commissioner of Income Tax reported in 227 ITR 172 Supreme Court observed that income tax is attracted at point when income is earned. 14. In result, Special Civil Application Nos. 12765 of 2017 and 12768 of 20174 are dismissed. Special Civil Application Nos. 12764 of 2017 and 12766 of 2017 are allowed by setting aside impugned orders passed by Commissioner under section 264 of Act. It is held that expenditure in question, if found to be wholly and exclusively incurred for purpose of business of firm and by or on behalf of firm, same would be allowed in hands of firm. To verify this aspect, proceedings are placed before Commissioner who shall pass fresh order on revision petitions of firm, if need be, after calling for Page 11 of 12 HC-NIC Page 11 of 12 Created On Sat Sep 23 17:27:04 IST 2017 C/SCA/12764/2017 JUDGMENT remand report from Assessing Officer. This may be done preferably within four months from date of receipt of copy of this order. Petitions are disposed of accordingly. (AKIL KURESHI, J.) (BIREN VAISHNAV, J.) Jyoti Page 12 of 12 HC-NIC Page 12 of 12 Created On Sat Sep 23 17:27:04 IST 2017 Hitech Analytical Services v. Pr. Commissioner of Income-tax - 3, Ahmedabad & 1