Commissioner of Income Tax vs Harsh J. Punjabi

After hearing learned counsel for the parties, the following substantial question of law is framed:

Whether the income tax Appellate Tribunal was right in setting aside the order of the Commissioner of income tax dated February 25, 2010, u/s 263 of the income tax Act, 1961?

With the consent of the parties, the matter is taken up for final hearing and we proceed to decide the same.

The respondent-assessee is an exporter and has two units; one at Gurgaon, and the other in Trident SEZ, Chennai. Income from the Chennai unit is exempt u/s 10A of the income tax Act, 1961 ("the Act", for short).

For the assessment year 2005-06, the respondent-assessee filed a returned income of Rs. 1,41,70,404. The Assessing Officer passed an assessment order dated December 24, 2007, and assessed the income at Rs. 1,47,72,170. He accepted the profit earned from the SEZ unit at Chennai computed and declared by the assessee as Rs. 1,58,08,510. The said profit was held to be exempt u/s 10A of the Act. An addition of Rs. 6,01,765 was made in respect of profits from the unit at Gurgaon by disallowing some expenses.

The Commissioner of income tax ("the Commissioner", for short) issued notice u/s 263 of the Act and, after examining the reply of the respondent-assessee, directed the Assessing Officer to examine the aspect relating to payment of commission of Rs. 3.33 crores. The aforesaid commission had been debited in the profit and loss account of the non-SEZ unit at Gurgaon. In respect of the SEZ unit at Chennai, no amount was debited on account of commission. The Commissioner noticed that the agreement for payment of commission of Rs. 3.33 crores was for booking orders abroad and the export orders were executed by both SEZ and non-SEZ units. Purchases of the goods supplied by non-SEZ and SEZ units were by the common parties abroad.

Accordingly, the Commissioner observed as under:

On the third aspect of the net profit rate of 24,8 per cent, at SEZ unit as compared to 4.8 per cent, at non-SEZ unit, an explanation has been given for various major expenses. It has further been stated that since this aspect was also examined by the Assessing Officer while framing the assessment and the addition of Rs. 6,01,765 was made in the assessment order in this respect, the issue cannot be raised in the proceedings u/s 263 of the income tax Act, 1961, in view of the various judgments quoted in the reply. (However, as may be seen from point (vi) of the notice u/s 263, the objection has been raised specifically in respect of commission of Rs. 3.33 crores debited to the profit and loss account of non-SEZ unit, whereas there is no such debit in the profit and loss account of the SEZ unit. This issue has neither been examined during the assessment proceedings nor is there an indication to that effect in the assessment order. Considering the fact that invoices of both the non-SEZ and SEZ units were in the same name of Trident Buying House and export of goods had also been made to common parties, this appears a little abnormal that commission will be charged only in respect of the sales from the non-SEZ unit. The assessee has given a detailed reply on this point. This reply has been considered. Also, the point has been discussed in details with the representative of the assessee. Considering the fact that the sale prices of the product at the non-SEZ unit is much lower than the SEZ unit, which is evident from the lower GP rate, it is logical to expect that less efforts will be required to sell these products. Therefore, it is clearly unexplainable that commission will be required to be paid in respect of the products of lower prices whereas no commission will be required to be paid in respect of products of higher prices. Therefore, this aspect certainly requires proper examination which is not done during the proceedings u/s 143(3) of the income tax Act, 1961.

Considering the facts as above, the assessment order u/s 143(3) of the income tax Act, 1961, in the case is held to be erroneous and prejudicial to the interests of the Revenue as far as the total claim of commission is made only from the non-SEZ unit accordingly, the assessment order is set aside on the point with specific directions to the Assessing Officer to examine all the export sales of the SEZ and the non-SEZ units and to correlate the link of the same with the party to whom the commission has been paid and also to the parties to whom sales have been made. He is further directed to work out the figure of commission payment relatable to the sales made by the SEZ unit and to reduce the same from the claim of deduction u/s 10A of the income tax Act, 1961. An opportunity -may be given to the assessee to explain the discrepancy and after considering the same the assessment order may be revised accordingly as per law.

By the impugned order dated November 4, 2010, passed in I.T.A. No. 1245/Del/2010, the income tax Appellate Tribunal ("the Tribunal", for short) has quashed and set aside the order passed by the Commissioner u/s 263 of the Act on the ground that the assessee during the course of the original assessment proceedings before the Assessing Officer had submitted copies of the orders, details of commission paid, purchase details, etc. The Tribunal held that the Assessing Officer had conducted adequate enquiries during the course of the assessment proceedings and had accordingly rightly allowed the commission claimed of Rs. 3.33 crores, which was debited in the profit and loss account relating to the Gurgaon unit.

The query raised and the order passed by the Commissioner u/s 263 was specific and clear. The Commissioner did not dispute or deny that the assessee had filed invoices, commission vouchers and details. The Commissioner had noted that the Assessing Officer did not conduct any enquiry or verification whether the aforesaid commission of Rs. 3.33 crores was attributable to the orders placed and exports made by the Chennai unit. The Assessing Officer did not examine and go into the facet that the respondent-assessee had debited Rs. 3.33 crores as commission in the profit and loss account of the Gurgaon unit alone and not debited any part or portion towards and for exports made by the Chennai unit. Income of the Gurgaon unit is taxable and if the entire commission expense is attributed and debited in the profit and loss account of the Gurgaon unit, it reduces the profits earned from the said unit. Income of the Chennai unit is exempt u/s 10A of the Act. The Commissioner rightly observed that the Assessing Officer should have made enquiry and verified whether the aforesaid commission payment was attributable to the orders procured and supplies made by the Chennai unit.

We may also notice that it is accepted that the purchases from both units were made by common parties, who had placed orders for supply on the respondent-assessee.

In the present case, therefore, there was failure on the part of the Assessing Officer to conduct necessary and required enquiries. The finding of the Commissioner is clear and lucid. Failure to conduct the said enquiries, makes the assessment order erroneous and prejudicial to the interests of the Revenue. The Commissioner rightly exercised his revisionary power u/s 263 of the Act. The required conditions for exercise of the said power are satisfied. We may also note that the Commissioner in his notice u/s 263 had referred to six issues but had ultimately exercised power u/s 263 in respect of only one issue, i.e., commission of Rs. 3.33 crores.

In view of the aforesaid findings, the question of law is answered in negative, in favour of the Revenue and against the respondent-assessee. Accordingly, the appeal is allowed. There will be no order as to costs. It is clarified that we have not made any observations on the merits as the Commissioner has asked the Assessing Officer to conduct enquiries. The Assessing Officer will form an opinion on the merits without being influenced by the observations made above.