IN HIGH COURT OF DELHI AT NEW DELHI RESERVED ON: 27.10.2017 PRONOUNCED ON: 08.11.2017 ITA 387/2017 BSES RAJDHANI POWER LTD. .....Appellant Through: Mr. Ajay Vohra, Sr. Advocate with Mr. Rohit Jain, Advocate. Versus PRINCIPAL COMMISSIONER OF INCOME TAX, DELHI-2 ..... Respondents Through: Mr. Zoheb Hossain, Sr. Standing Counsel for Revenue. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE SANJEEV SACHDEVA S.RAVINDRA BHAT, J. 1. following questions of law arise for consideration: (a) Whether on facts and in circumstances of case, Tribunal erred in law in not holding that order dated 31.03.2016 passed under section 263 of Act was without jurisdiction, illegal and bad in law? (b) Whether on facts and in circumstances of case, Tribunal erred in law in not quashing order passed under section 263 of Act, considering that assessing officer had raised specific queries and applied his mind to concerned issues while framing original assessment? (c) Whether on facts and in circumstances of case, Tribunal erred in law in not quashing order passed under section 263 of Act in respect of issues pertaining to alleged ITA 387/2017 Page 1 of 13 violation in deduction of tax at source and related party transactions, which did not either form part of show cause notice or confronted to Appellant, instead in setting aside same for de novo adjudication by CIT? 2. appellant/assessee filed its return for assessment year (AY) 2010-11, declaring Nil income, which was subsequently revised on 30.03.2012.The return was selected for scrutiny and assessing officer (AO) initiated assessment proceedings and issued notice under Section 143(2) of Act. During course of assessment special audit of assesse s accounts was directed, under Section 142(2A) of Act on 05.03.2013. special auditor s report dated 30.08.2013 provided elaborate comments, inter alia, in connection with terms of reference for special audit framed by AO, concerning following issues: (i) reconciliation of fixed assets and depreciation thereon, (ii) arm s length nature of transactions entered into with related parties, and (iii) compliance with provisions of Chapter XVII- B of Act relating to tax deduction at source and effect of non- compliance thereof. 3. AO, after considering special auditor s report completed assessment by order-dated 29.10.2013, under Section 143(3) of Act. total income assessed was 838,38,00,790 after making, inter alia, disallowance of 66, 27,782 being depreciation on 6,44,81,091 capitalized for re-installing fixed assets. Further, AO also disallowed 94,20,842 due to related party transactions, added 38,58,60,000 in respect of arm s length price of transactions with related party and disallowed 2,58,28,863 under section 40(a)(ia) of ITA 387/2017 Page 2 of 13 Act. assessee appealed against AO s order; appeal was disposed of on 30.05.2014. CIT (A) decided issue with respect to disallowance of depreciation of 66,27,782 on capitalization of reinstallation costs of fixed assets and disallowance in respect of transactions with group concerns in favour of assesse. CIT (A), further, granted partial relief to assessee in respect of disallowance made under Section 40(a) (ia) of Act. 4. show cause notice under Section 263, on 16.03.2016, was issued by Commissioner, alleging that there was variation in cost of fixed assets, which aspect had not been verified or examined by AO while framing assessment under section 143(3) of Act. In response to show-cause notice issued under Section 263 of Act, assessee filed its replies, resisting move to revise completed assessments; appellant also pointed that since original order of AO had merged with that of CIT (A), after disposal of appeal, re-appraisal under Section 263 was unwarranted. Later, CIT (A) made order on 31.03.2016 under Section 263, setting aside original assessment order framed under section 143(3) of Act, holding same to be erroneous and prejudicial to interests of Revenue and directing AO to reconsider following issues: (i) Depreciation claimed in respect of fixed assets to extent of 298.93 crores (mentioned in show cause notice) [hereinafter also referred to as first issue ]; (ii) Applicability of TDS provisions to certain expenditure claimed by assessee. It was urged that this issue was not mentioned in ITA 387/2017 Page 3 of 13 show cause notice nor was any opportunity of hearing allowed to assessee. (iii) Benchmarking of transactions with group companies under Section 40A (2). It was urged that this issue was not mentioned in show cause notice nor was any opportunity of hearing allowed to assessee. 5. assessee s appeal to ITAT was rejected by impugned order. Tribunal held that assessment was concluded by AO without making adequate enquiries with respect to variation in cost of fixed assets and accordingly, order passed by Respondent under Section 263 of Act was upheld. As regards issues concerning applicability of TDS provisions on expenditure claimed by assessee and benchmarking of transactions with group concerns, Tribunal set aside order of CIT, holding that no opportunity was provided to assessee regarding those issues and accordingly, directed Respondent to pass fresh order in respect thereof after providing reasonable opportunity to assessee. 6. Relying on Malabar Industrial Co. Ltd. vs Commissioner of Income Tax 243 ITR 83 (SC) and Commissioner of Income Tax vs Max India Ltd 295 ITR 282 (SC) it was contended, by Mr. Ajay Vohra, learned senior counsel, that having regard to fact that each of issues which were sought to be re-opened, were subject matter of scrutiny in original assessment order, it could not be said that such assessment order was prejudicial to interests of revenue and erroneous in law. It was emphasized that process of ITA 387/2017 Page 4 of 13 verification of materials, specifically included considering special auditor s report. AO went through report, and made his additions in respect of all matters. assessment was scrutiny assessment under Section 143 (3). That order, according to learned senior counsel, merged with appellate order of CIT (A) on 30.05.2014. 7. Counsel submitted that issue relating to depreciation in fact merged with decision of CIT (A). Thus, if there was any concern with respect to AO s order, that stood addressed and became final upon application of mind at appellate stage. Particular notice of court was drawn to following observations of CIT (A): 5.5.7. Therefore, I am of opinion that expenditure incurred by appellant, including inter alia, installation cost, borrowing cost and other charges etc, were relating directly or indirectly to installation of transformers and are therefore, eligible to be included in actual cost of relevant block of fixed assets and therefore, AO is hereby directed to allow depreciation on cost of recapitalized assets. 8. It was submitted that as regards addition of `94,20,842/- under Section 40A(2)(b) of Act, CIT (A) ruled on this issue too. Counsel relied on following extract of CIT (A) s order: Considering peculiar facts of case and material on records, I am of view that AO has added on ad hoc basis Rs.38.58 crores on account of lack of arms length price in appellants transaction with M/s RETL as regard power ITA 387/2017 Page 5 of 13 purchase without valid legal and factual support as all purchases and sales of power by distribution companies (Discoms) in Delhi require approval from Delhi Power Procurement Group (DPPG), body constituted vide Delhi Transco Limited's order, with objective of formulating procedure to be followed by all discoms in Delhi for sale and purchase of power and moreover, expenditure was factually expended for purpose of business. Therefore, AO cannot it in armchair of assessee to determine what part of expenditure is reasonable and allowable (Refer SA Builders case Supra). expenditure on this count are held to be allowable, "including amount disallowed by AO of Rs. 38.58 crores. 9. As regards TDS too, it was argued that issue had been gone into; Commissioner could not legitimately have sought to re-open such matters, under Section 263 on re-appreciation of merits. Learned counsel relied on decision of this Court in Commissioner of Income Tax v Sunbeam Auto Ltd 332 ITR 167 (Del) where it was observed that: 12. We have considered rival submissions of counsel on other side and have gone through records. first issue that arises for our consideration is about exercise of power by Commissioner of Income-tax under section 263 of Income-tax Act. As noted above, submission of learned counsel for revenue was that while passing assessment order, Assessing Officer did not consider this aspect specifically whether expenditure in question was revenue or capital expenditure. This argument predicates on assessment order, which apparently does not give any reasons while allowing entire expenditure as revenue expenditure. However, that by itself would not be indicative of fact that ITA 387/2017 Page 6 of 13 Assessing Officer had not applied his mind on issue. There are judgments galore laying down principle that Assessing Officer in assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from record as to whether there was application of mind before allowing expenditure in question as revenue expenditure. Learned counsel for assessee is right in his submission that one has to keep in mind distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself give occasion to Commissioner to pass orders under section 263 of Act, merely because he has different opinion in matter. It is only in cases of "lack of inquiry", that such course of action would be open. 10. Counsel argued that order of CIT under Section 263 could not be upheld under any circumstance and ITAT, in refusing to set it aside, compounded error. It was particularly stressed that issues in addition to one relating to depreciation were not part of show cause notice and could not have been made subject matter of revision; furthermore, no opportunity of hearing was granted by Commissioner. 11. Mr. Vohra submitted that each of three points on which revisional jurisdiction was exercised, had been inquired into during original assessment; appellate order had dealt with those aspects. Consequently, it could not be held that such view was erroneous, even if another view was possible. It was argued that courts have held that once relevant details/ documents are available on record pertaining to original assessment, and if on basis of material ITA 387/2017 Page 7 of 13 available on record, view could be formed by assessing officer, it may not even be necessary for AO to conduct detailed enquiry; in such circumstances, it cannot be presumed that assessing officer had not examined claims of assessee. He cited Commissioner of Income Tax v DLF Ltd 350 ITR 555 (Del.); Commissioner of Income Tax v. International Travel House Ltd. 344 ITR 554 (Del.) Commissioner of Income Tax v. Leisurewear Exports 341 ITR 166 (Del.) Commissioner of Income Tax v. Hero Auto Ltd. 343 ITR 342 (Del.) and Commissioner of Income Tax v. Vikas Polymers 341 ITR 537 (Del). It was argued that this would be position for all three questions framed. 12. revenue defends its position and urges this court not to interfere with findings of ITAT. According to its counsel, Mr. Zoheb Hossain, provision of second explanation to Section 263 (1) empowers Commissioners to issue notices in precisely kind of cases as present one. said provision reads as follows: "Explanation. - For removal of doubts, it is hereby declared that, for purposes of this sub-section, - (a) order passed on or before or after 1st day of June, 1988 by Assessing Officer shall include - (i) order of assessment made by Assistant Commissioner or Deputy Commissioner or Income-tax Officer on basis of directions issued by Joint Commissioner under section 144A; (ii) order made by Joint Commissioner in exercise of powers or in performance of functions of Assessing ITA 387/2017 Page 8 of 13 Officer conferred on, or assigned to, him under orders or directions issued by Board or by Chief Commissioner or Director General or Commissioner authorised by Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at time of examination by Commissioner; (c) where any order referred to in this sub-section and passed by Assessing Officer had been subject matter of any appeal filed on or before or after 1st day of June, 1988], powers of Commissioner under this sub-section shall extend and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal. revenue relied on Commissioner Of Income Tax vs Ratilal Bacharilal & Sons (2006) 282 ITR 457; Commissioner of Income Tax v Aruba Mills 1998 (231) ITR 50 (SC) where position was clarified as follows: consequence of said amendment made with retrospective effect is that powers under Section 263 of CIT shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in appeal. Accordingly, even in respect of aforesaid three items, powers of CIT under Section 263 shall extend and shall be deemed always to have extended to them because same had not been considered and decided in appeal filed by assessee." In Ratilal (supra) following Aruba (supra), Bombay High Court ruled as follows: 20. consequence of aforesaid Clause (c) introduced ITA 387/2017 Page 9 of 13 with retrospective effect, is that powers under Section 263 of CIT shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in order passed in appeal on or before or after 1st June, 1988. very fact that Expln. (c) was given retrospective effect by using words "on or before or after" itself denotes that intention of legislature is to embrace all orders whether passed on or after or before 1st June, 1988. use of phrase "on or before or after" is no doubt little uncommon. phrase "on or before" denotes immediately at or at any time before. phrase "on or before or after" to our mind means either immediately at or in past or future. It means at any time during continuance of Act, if it is to be understood in context of legislation. It was argued that previous decision of this Court in Commissioner Of Income Tax vs Printers House(1998) 233 ITR 666 was in accord with law declared in Aruba (supra), holding that those issues that were not subject matter of appeal were capable of revision. 13. As far as question of dealing with issues that were not subject matter of show cause notice is concerned, counsel points out that previous judgments of this Court and several other High Court has now been overruled in Commissioner of Income tax v Amitabh Bacchan 2016 SCC Online SC 484. In that judgment, Supreme Court held that failure to issue notice on any particular issue does not vitiate exercise of power under Section 263, as long as assessee is heard and given opportunity. 14. Countering assessee s arguments, it is submitted that lack of opportunity at revisional stage under Section 263 does not ITA 387/2017 Page 10 of 13 vitiate entire order, or proceedings; rather it is curable defect. It was submitted that in present case, however, even that situation did not arise. 15. As far as first aspect with respect to exercise of power under Section 263 is concerned, issue stands concluded, in light of amendment with effect from 1989, by insertion of Explanation (c) to Section 263 (1). non-consideration of larger claim for 298.93 crores as depreciation and consideration of only part of it ( 644,81,091) by assessing officer, who did not go into issue with respect to whole amount, was error, that could be corrected under Section 263. Aruba (supra) is decisive, in that provision of Section 263 (1) Explanation (c) was introduced to cater to precisely this kind of mischief. 16. On aspect of show cause notice, i.e., second and third questions framed, court is of opinion that ruling in Amitabh Bachhan (supra) is decisive; it upholds power of Commissioner to consider all aspects which were subject matter of AO s order, if in his opinion, they are erroneous, despite assessee s appeal on that or some other aspect. Court held that: Reverting to specific provisions of Section 263 of Act what has to be seen is that satisfaction that order passed by Authority under Act is erroneous and prejudicial to interest of Revenue is basic pre-condition for exercise of jurisdiction under Section 263 of Act. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise power would be available subject to observance of principles of natural ITA 387/2017 Page 11 of 13 justice which is implicit in requirement cast by Section to give assessee opportunity of being heard. It is in context of above position that this Court has repeatedly held that unlike power of reopening assessment under Section 147 of Act, power of revision under Section 263 is not contingent on giving of notice to show cause. In fact, Section 263 has been understood not to require any specific show cause notice to be served on assessee. Rather, what is required under said provision is opportunity of hearing to assessee. two requirements are different; first would comprehend prior notice detailing specific grounds on which revision of assessment order is tentatively being proposed. Such notice is not required. What is contemplated by Section 263, is opportunity of hearing to be afforded to assessee. Failure to give such opportunity would render revisional order legally fragile not on ground of lack of jurisdiction but on ground of violation of principles of natural justice. Reference in this regard may be illustratively made to decisions of this Court in Gita Devi Aggarwal vs. Commissioner of Income Tax, West Bengal and others[1] and in C.I.T., West Bengal, II, Calcutta vs. M/s Electro House[2]. Paragraph 4 of decision in C.I.T., West Bengal, II, Calcutta vs. M/s Electro House (supra) being illumination of issue indicated above may be usefully reproduced hereunder: "This section unlike Section 34 does not prescribe any notice to be given. It only requires Commissioner to give opportunity to assessee of being heard. section does not speak of any notice. 17. This Court is of opinion that revisional order, to extent that it did not provide any pre-decisional opportunity to address issues it dealt with, could not be sustained; ITAT has granted relief of limited nature on that score. However, we do not agree that those issues were incapable of consideration as they were gone into by ITA 387/2017 Page 12 of 13 AO. Accordingly, CIT, in exercise of his power under Section 263 will proceed to consider assessee s submissions only on those two aspects, before making his order. 18. All questions framed are, therefore, answered in negative, against assessee. 19. For above reasons there is no merit in appeal; it is accordingly dismissed. No costs. S. RAVINDRA BHAT (JUDGE) SANJEEV SACHDEVA (JUDGE) NOVEMBER 08, 2017 ITA 387/2017 Page 13 of 13 BSES Rajdhani Power Ltd. v. Principal Commissioner of Income-tax. Delhi-2