No.- I.T.A No. 329/Kol/2017

Sri N. V. Vasudevan, JM And Shri Waseem Ahmed, AM

For the Appellant : Shri Dilip S.Damle, FCA & Shri Akkal Dudhwewala, ACA
For the Respondent : Shri Niraj Kumar, CIT(DR)

ORDER

The order of the Bench was delivered by

N. V. Vasudevan, JM-This is an appeal by the Assessee against the order dated 12.01.2017 of Commissioner of Income Tax-I (CIT), Kolkata passed u/s 263 of the Income Tax Act, 1961 (Act).
2. The facts and circumstances under which the order u/s 263 of the Act was passed by CIT are as follows :-

The Assessee is a company engaged in the business of development of software technology Park and related infrastructure. For A.Y.2012-13, the assessee filed return of income on 28.09.2014 disclosing a total income of Rs. 17,55,09,500/-. An order of assessment dated 23.09.2014 u/s 143(3) of the Act was passed by the AO determining the total income at Rs. 17,55,09,500/-.

3. The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue for the following reasons :-

“1.In Form No. 3 CD of Tax Audit Report (TAR), the Assessee had claimed exemption of Rs. 76,00,000/- u/s 35 AC of the I.T. Act, 1961 apart from claim of exemption u/s 35(1)(iii) of Rs. 1,04,50,000/-. However, there was no mention of claim of exemption u/s 35AC of the Act in point no 29 of "Computation of income from business and profession". Exemption of Rs. 76,00,000/- u/s 35AC of the IT Act has been allowed in assessment but the same has not been claimed in the IT Return, as found from the records.

2. In the Audited Balance Sheet there was huge liability towards long term borrowings and short term borrowings. The Assessee had incurred finance cost of Rs. 22.51 Crores for AY 2012-13 in respect of such borrowings.

3. The Assessee had given short term loans and advances, the closing balances of which as on 31.03.12 and 31.03.11 were Rs. 173.40 Crs and Rs. 58.30 Crs respectively. The Assessee had not charged any interest for such huge advances made to the related parties. However while computing the disallowance u/s.14A of the Act in respect of expenses incurred to earn exempt income, Rs. 75,24,000/- only was disallowed. The fact that the Assessee had utilized major part of the long term borrowings and short term borrowing for giving advances to the related parties has not been considered in the assessment order. Therefore, in A.Y 2012- 13, the proportionate interest, which should be disallowed, should have been computed @ 66%, since the Assessee had advanced 66% of loan taken from the parties, as found from the audited accounts.

4. In the computation of total income the Assessee had shown long term capital gain of Rs. 60.05 Crs, however it was not clear how such figure of capital gain was arrived at, since no details or documentary evidences in this regard is on record. The A.O had examined nothing.

5. The Assessee had debited a sum of Rs. 1,16,10,615/- under the head 'Commission & Brokerage'. The Assessee had added back Commission paid Rs. 67,97,440/- in the computation stating such expenses were incurred in connection with long term lease. It is not clear under what basis you had made bifurcation of commission Expenses and added a certain sum stating that it was incurred in connection with long term lease. The A.O had neither questioned you nor had examined anything regarding this.

6. The Assessee was in the business of development of IT Park and providing services relating thereto which included developing, constructing and selling of building 'unit wise' and 'floor space wise'. The Assessee had claimed and was allowed depreciation on the unsold buildings built by it leading to allowance of depreciation on 'Trading Stock' and not on 'Capital Asset' used for the purpose of business.

For the above reasons, the CIT considered the order of the AO erroneous and prejudicial to the interest of the revenue and he accordingly issued a show cause notice to the Assessee dated 20.9.2013 to the Assessee calling upon the Assessee to show cause why the order of the AO should not be revised in exercise of the powers of the CIT u/s.263 of the Act.

4. The assessee by reply dated 11.01.2017 pointed out that there was no error in the order of AO and that all the above issues have been properly examined and dealt with by the AO in the order of assessment. The CIT after receipt of the aforesaid reply did not go into the correctness or otherwise of the contention of the assesse in the reply dated 11.01.2017 to the show cause notice u/s 263 of the Act, but came to the conclusion that the AO did not make proper enquiries on the various issues set out in the show cause notice issued u/s 263 of the Act. The following were the relevant observations of the CIT :-

“In response to the said notice the assessee submitted written reply on 12.01.2017. The assessee has sought to justify its claim. However, he could not disagree that the necessary inquiries which were called for and expedient on the set of facts and circumstances were not carried out by the assessing officer. Nevertheless, the assessee's Ld A/R has made a valid point on the issue of disallowance of interest paid by the Assessee because the Ld. CIT(A) - 1, Kolkata in appeal no.828/CIT(A)-1/C-2(1)/2014-15 order dated 10.03.2016 had detected the interest disallowance made by the AO. Therefore, the issue concerning allowability of interest paid on borrowed funds was considered and decided by the Ld. CIT(A) in his appellate order and as a corollary to it and in terms of Clause (c) of the Explanation to Section 263 of I TAct, 1961 show cause notice on the limited issue of allowability of interest may not be proceeded with further. The assessee has argued vehemently on this issue. But regarding other issues, during assessment proceedings all details were not furnished before the AO. The AO passed the impugned assessment orders dated 23.09.2014 without making inquiries or verification which should have been made by the AO. He has failed to apply provisions of section 14A of I TAct, 1961 read with Rule 8D of IT Rules, 1962 correctly and faithfully.”

5. The CIT thereafter referred to several judicial pronouncements particularly that of the decision of the Hon’ble Delhi High Court in the case of Gee Vee Enterprises vs Addl. CIT 99 ITR 375 (Delhi) wherein it was held that failure on the part of the AO to make an enquiry on an issue which calls for an enquiry, in the given facts and circumstances of a case, renders the order of AO erroneous and prejudicial to the interest of the revenue. The CIT thereafter set aside the order of assessment and remanded to the AO the various issues referred to in the order u/s.263 of the Act for fresh consideration by the AO after affording opportunity of being heard to the Assessee. The CIT in this regard gave the following directions to the AO :-

“12. Having regard to the facts and circumstances of the case and in the light of the aforesaid decisions of Hon'ble Supreme Court and Hon'ble High Court and in accordance with the amendment made in Section-263 of the Act with effect from 01.06.2015, I hold that the impugned assessment order dated 23.09.2014 passed by the A.O. is erroneous so far as it is prejudicial to the interests of the revenue. I further hold, after giving the assessee an opportunity of being heard, that the impugned assessment order dated 23.09.2014 is liable to set-aside. Therefore, I set aside the said assessment order directing the present A.O. to frame the assessment afresh after considering the aforesaid Hon'ble Supreme Court and Hon'ble High Court decisions and after completing inquiries and verification, as discussed in this order, except on the issues decided by Ld. CIT(A) and after giving an opportunity of being heard to the assessee.

13. In the result, the assessment order 143(3) dated 23.09.2014 for A.Y. 2012-13 is set-aside to the file of the Assessing Officer with a direction to pass a fresh assessment order after conducting inquiries and verification which are called for and discussed in this order and as per law and after giving an opportunity of being heard to the assessee.”

6. Aggrieved by the order of CIT the assessee has preferred the present appeal before the Tribunal.
7. Before we set out various contentions raised before us it has to be clarified that with reference to the interest cost of Rs. 22.51 crores referred to in item-2 & 3 of the show cause notice u/s 263 of the Act dated 20.09.2016 of CIT, the CIT agreed that the issue with regard to the disallowance of interest u/s.14A of the Act was the subject matter of the appeal by the assessee before CIT(A) and that the CIT(A) had also considered the aforesaid issue and therefore the order of AO to that extent would merge with the order of CIT(A) and therefore jurisdiction u/s 263 of the Act cannot be exercised by CIT in view of clause-C of Explanation to section 263 of the Act. The CIT, however, has still thought it fit to come to the conclusion that the provisions of section 14A of the Act were not fully and properly applied by the AO while concluding the assessment.

8. The ld. Counsel for the assessee firstly pointed out that in the show cause notice u/.s 263 of the Act dated 20.09.2016 the CIT had not raised the issue of lack of enquiry on the part of the AO before completing the assessment except on item-4 with regard to the computation of long term capital gain and item-5 with regard to the expenditure debited in the profit and loss account under the head ‘Commission and brokerage’. In respect of the other issues raised by CIT in his show cause notice dated 20.09.2016 u/s 263 of the Act, the assessee has given a specific reply pointing out as how the order of AO on these issues was not erroneous and prejudicial to the interest of the revenue. The CIT without dealing with those objections, has proceeded to pass the impugned order on the ground of lack of enquiry by the AO. It was submitted by him that even in respect of computation of long term capital gain and expenditure on account of commission and brokerage even proper enquiries were made by the AO while completing the assessment. It was therefore submitted by him that the impugned order should be quashed for the reason that

(a) the AO before completing the assessment had made proper enquiries with regard to computation of long term capital gain and expenditure on account of commission and brokerage.

(b) in respect of other items the show cause notice u/s 263 of the Act did not contain the allegation that there was failure on the part of the AO to make and proper enquiries before completing the assessment but the order has been passed on that ground holding that order of the AO was erroneous and prejudicial to the interest of the revenue. It was his submission that the assessee was not put to notice at any stage of the proceedings u/s.263 of the Act, with regard to the other issues set out in the show cause notice u/s 263 of the Act, on the aspect of lack of enquiry by the AO before completing the assessment and therefore order of CIT should be quashed. In this regard it was also pointed out that the Hon’ble Supreme Court in the recent decision rendered in the case of CIT Vs. Amitabh Bhachan 384 ITR 200 (SC) has taken the view that the CIT can go into any issues which are not set out in the show cause notice u/s 263 of the Act, but the assessee has to be put on notice, in the course of proceedings u/s 263 of the Act, on the issue which is not set out in the show cause notice u/s 263 of the Act. In this regard the ld. Counsel for the assessee placed reliance on the following decisions of the Tribunal

a) Damodar Valley Corpn vs CIT 72 taxmann 127 (ITAT Kol)
b) Vesuvius India Limited vs CIT 54 SOT 172 (ITAT Kol)
c) B.S.Sangwan vs ITO 67 SOT 447 (ITAT Delhi)

(c ) That the AO had in fact made proper and due enquiries of all the aspects set out by the CIT in the show cause notice u/s 263 of the Act. In this regard he drew our attention to the various pages of the paper book which would throw light on the fact as proper and due enquiries were made by the AO, to which we will make reference in the latter part of this order.

9. The next submission of the ld. Counsel for the assessee was that when CIT’s specific objection in the show cause notice u/s 263 of the Act was met with adequate explanation he ought to have given his own specific finding on those objections and without doing so, the CIT cannot exercise jurisdiction u/s 263 of the Act. In this regard the ld. Counsel for the assesse placed reliance on the following decisions :-

- DIT Vs Jyoti Foundation (357ITR 388) (Bom HC)
- ITO Vs D.G. Housing Projects Ltd (343 ITR 329) (Bom HC)
- CIT Vs Leisure War Exports Ltd (341 ITR 166) (Del HC)
- C.S.E. Ltd Vs CIT (ITA No. 268/K/15) (ITAT Kol)
- Crisil Ltd Vs Addl.CIT (142 TIK 62) (ITAT Mum)

10. The Ld. DR, on the other hand, submitted that the AO in the notice issued u/s 142(1) of the Act did not call for the books of accounts of the assessee. However in the order of assessment, he has made reference to the fact that books of accounts were produced by the assessee. He drew our attention to para-8 of the impugned order of CIT wherein the CIT has observed that the AO failed to examine the books of accounts maintained by the assessee. According to him the power vested with CIT u/s 263 of the Act is a power to supervise the proper working by the AO and if the AO passed an order without proper enquiry that would set a wrong precedent. The CIT therefore was right in exercising his power u/s263 of the Act. The ld. Counsel for the assessee also drew our attention to the decision of the Hon’ble Calcutta High Court in the case of CIT –Vs- Maithan International reported in (2015) 375 ITR 123 (Cal) wherein it was held that if the extent of enquiry conducted by the AO, being as good as no enquiry, then that would be sufficient ground to empower the CIT to invoke his jurisdiction u/s 263. Under such circumstances, one cannot cast an impossible burden on the CIT to show positive leakage of income in concrete terms, when he has simply set aside the assessment order and restored certain aspect of the assessment to the file of AO for making a proper enquiry and then deciding.

11. We have given a very careful consideration to the rival submissions. We shall deal with each of the issues set out in the show cause notice dated 20.09.2016 of CIT and deal with them individually.

12. The first issue raised by CIT in the show cause notice dated 20.09.2016 is that in Form No. 3 CD of Tax Audit Report (TAR), the Assessee had claimed exemption of Rs. 76,00,000/- u/s 35 AC of the I.T. Act, 1961 apart from claim of exemption u/s 35(1)(iii) of Rs. 1,04,50,000/-. However, there was no mention of claim of exemption u/s 35AC of the Act in point no 29 of the form of return of income "Computation of income from business and profession". Exemption of Rs. 76,00,000/- u/s 35AC of the IT Act has been allowed in assessment but the same has not been claimed in the IT Return, as found from the records.

13. It is seen from the paper book filed by the Assessee that tax audit report filed before the AO by the Assessee in Para - 15 specifically states that the amount admissible u/s 35AC was Rs. 76 Lacs. In Para - 15(a) the Auditor has provided the following specific information:

“15.(a). debited to the profit and loss account (showing the amount debited and deduction allowable under each section separately);

Debited Rs.l,04,50,000/- and Rs. 4,65,000/- and deduction allowable Rs.l,30,62,500/ - and Rs. 8, 13, 750/ - u/ s 35(1)(iii) and u/ s 35(1)(ii) respectively.

Debited and deduction allowable Rs. 76,00, 000/ - u/ s 35AC.”

The amounts for which deduction was permissible u/s 35(1)(iii), u/s 35(I)(ii) & u/s 35AC were all debited to the Profit & Loss A/c for the F.Y. 2011-12. The Net Profit of Rs. 15,04,56, 915/- as per the profit and loss account was the starting point for the purpose of computation of total income and this was arrived at after taking into account the aforesaid sums debited in the Profit & Loss A/c. As far as column No.29 of the form of return of income in respect of claim of deduction u/s.35AC of the Act in which the Assessee had shown deduction claimed was “Nil”, it has been explained by the Assessee that it was advised that separate disclosure in Clause-29 of the computation of business income as contained in return form was necessary only if the amount allowable as a deduction u/s 35AC was more than the amount debited In the Profit & Loss A/c. This interpretation was based on Sub-Clauses (a), (b) & (c) of Clause - 29 of the return of income and computation of income part of the return. Since in the Assessee's case the amount debited to the Profit & Loss A/c and the deduction permissible u/s 35AC was one and the same i.e. Rs. 76 Lacs the same was not separately disclosed in the return form. However, this fact in itself does not lead to conclusion that the deduction u/s. 35AC was not permissible or not allowable nor claimed by the Assessee. It is also seen that in the course of assessment, the AO had issued a detailed questionnaire u/s 142(1) of the Income Tax Act dated 28.07.2014. In para-29 of the questionnaire, the AO required the Assessee to submit the explanation along with relevant proof etc., related with deductions claimed u/s 35, 35(2AA)-, 35(2AB)of the Act. In response to the AO's specific requisition the Assessee had furnished before him the relevant information & supporting documents. Copy of the details which were furnished before the AO are in the paper book and shows that during the relevant previous year the Assessee made payments to following approved institutions for claiming deduction u/s 35AC of the Act.

Along with the details of payments made to qualifying institutions the Assessee had also disclosed copies of the Receipts & certificates issued in the prescribed form by the respective entities, wherein the particulars prescribed for claiming deduction u/s. 35AC were provided by the Payee institutions. The ld. DR in his submissions has pointed out that in col.29 of the return of income with regard to deduction u/s 35AC of the Act the assessee has shown a sum of nil. It is also explained by the assessee that the assessee under the impression that filling up of claue-29 was necessary only if the amount allowable as deduction u/s 35AC of the Act was more than the sum debited in the profit and loss account that the assessee was required to mention the excess figure in that column and therefore had shown the figure as nil in the return of income. In our opinion, this explanation of the assessee is a plausible explanation and in any even the AO before completing the assessment was fully conscious of the fact that the assessee had made a claim of deduction u/s 35AC and 35(1)(iii) of the Act and therefore it cannot be said that order of the AO was erroneous on this count. The action of CIT in invoking jurisdiction u/s 263 of the Act on this issue is held to be unsustainable.

14. With regard to the issue on interest expenses debited in the profit and loss account of Rs. 22.51 crores, the following transpired in the course of completion of assessment by the AO. In the course of assessment, the assessee had furnished before the AO full particulars of the interest/finance cost incurred during the relevant year. The Assessee had also furnished before the AO full particulars or the short term & long term borrowings made and which were outstanding as on 31.01.2012. The Assessee had also furnished before the AO full particulars of the investments which the Assessee made in its Group, Associate & Subsidiary Companies to promote its core business of development of Civil Infrastructure in various formats. The Assessee had also furnished full particulars of the advances which the Assessee had made to its associate Companies & subsidiaries. After examining these particulars, the AO had reached a conscious decision to disallow part of the interest paid on the ground that loan funds were invested by the Assessee in the manner which did not produce any income and therefore part disallowance of interest expense was warranted. On perusal of para-2 of the impugned order, it is apparent that the AO was well aware of the fact that the Assessee had provided interest-free advances to related parties to the order of Rs. 154.19 Crores and the Assessee had incurred finance cost of Rs. 22.51 crores . The AO had also noted the fact that the Assessee had made investment in shares amounting to Rs. 12.43 crores. Both these investments had not produced any taxable income during F.Y.2011-12. Having taken into account these facts & after taking into account the Assessee's submissions the AO had disallowed Rs. 75.24 Lacs out of interest paid as disallowance u/s.14A of the Act.

15. In a notice dated 28.7.2014 issued u/s.142(1) of the Act, the AO had during the course of assessment proceedings, specifically required the Assessee to furnish its explanation with regard to allowability of interest paid on borrowings in item No.21 of the said notice. In the record of proceedings before the AO in respect of hearings before the AO on 29.08.2014 & 04.09.2014, the AO had specifically directed the Assessee to submit explanation for disallowance of interest relatable to nonproductive investment and has recorded the fact in the hearing conducted on 04.09.2014 that the Assessee had furnished his explanation.

16. It is material to submit that against the disallowance made by the AO out of interest paid the Assessee had filed appeal before the CIT (A). The CIT (A)-1Kolkata vide his order dated 10.03.2016 in Appeal No. 828/CIT(A)-1/C-2(1)/2014-15 after considering the AO's finding, deleted the interest disallowance made by the AO. Therefore the issue with regard to allowability of the interest paid on borrowings made had merged in the order of the CIT (A) and therefore in terms of Clause (c) of the Explanation to Sec. 263 revision proceedings are not permissible with regard to the issue which was considered and decided by the CIT (A) prior to invocation of Sec. 263 of the Act.

17. The above discussion would show that as far as disallowance of interest expenses u/s.14A of the Act, the AO has applied Rule 8D(2)(ii) of the Act and determined the disallowance u/s.14A of the Act. The disallowance u/s.14A of the Act in terms of other direct expenses contemplated under rule 8D(2)(i) and other expenses contemplated under rule 8D(2)(iii) has neither been considered by the AO nor explained by the Assessee. To this extent there was lack of enquiry on the part of the AO. As we have already seen in the show cause notice u/s.263 of the Act dated 20.9.2016, the CIT was of the view that the disallowance u/s.14A of the Act ought to have been 66% of the interest expenses claimed by the Assessee as against a sum of Rs. 75,24,000/- disallowed by the AO. However in the order passed u/s.14A of the Act when the Assessee pointed out that interest disallowance u/s.14A of the Act was already subject matter of appeal filed by the Assessee before CIT(A) and that the order of the AO had merged with the order of the CIT(A) and therefore jurisdiction u/s.263 of the Act cannot be invoked by the AO in view of Explnation (c ) to Sec.263(1) of the Act, the CIT has taken the plea of lack of full enquiry on applicability of Sec.14A of the Act. In this regard it is seen that the show cause notice u/s.263 of the Act issued by the CIT was dated 20.9.2016. The Assessee had filed his reply to the said show cause notice on 12.1.2017 and on the very same date, the CIT had passed the impugned order. It is thus clear that the Assessee was not put on notice that the CIT intends to invoke jurisdiction u/s.263 of the Act on the ground of lack of enquiry by the AO. It has been held by the ITAT Kolkata in the case of Damodar Valley Corporation Vs. DCIT (2016) 72 Taxmann.com 127 (Kolkata-Trib.) that the CIT can pass order u/s.263 of the Act on a ground other than the one set out in the show cause notice u/s.263 of the Act. The said position in law was laid down by the Hon’ble Supreme Court in the case of CIT Vs. Amitabh Bachan (supra) but with a rider that the Assessee should be given opportunity of the intended ground to be invoked by the CIT. The Tribunal held that in the absence of such opportunity being given, the exercise of jurisdiction u/s.263 of the Act on a ground different from the ground set out in the show cause notice was bad in law and such order u/s.263 of the Act deserved to be quashed.

18. In our opinion, the issue with regard to the disallowance of interest u/s 14A of the Act was the subject matter of the appeal by the assessee before CIT(A) against the order of assessment and the CIT had already decided the said issue prior to the impugned order of CIT and therefore the CIT cannot exercise jurisdiction on an issue which is already merged with the order of CIT(A). The disallowance u/s.14A of the Act in terms of other direct expenses contemplated under rule 8D(2)(i) and other expenses contemplated under rule 8D(2)(iii) has neither been considered by the AO nor explained by the Assessee. To this extent there was lack of enquiry on the part of the AO. However show cause notice u/s.263 of the Act dated 20.9.2016, the CIT was of the view that the disallowance u/s.14A of the Act ought to have been 66% of the interest expenses claimed by the Assessee as against a sum of Rs. 75,24,000/- disallowed by the AO. However in the order passed u/s.14A of the Act when the Assessee pointed out that interest disallowance u/s.14A of the Act was already subject matter of appeal filed by the Assessee before CIT(A) and that the order of the AO had merged with the order of the CIT(A) and therefore jurisdiction u/s.263 of the Act cannot be invoked by the AO in view of Explanation (c ) to Sec.263(1) of the Act, the CIT has taken the plea of lack of full enquiry on applicability of Sec.14A of the Act. In this regard it is seen that the show cause notice u/s.263 of the Act issued by the CIT was dated 20.9.2016. The Assessee had filed his reply to the said show cause notice on 12.1.2017 and on the very same date, the CIT had passed the impugned order. It is thus clear that the Assessee was not put on notice that the CIT intends to invoke jurisdiction u/s.263 of the Act on the ground of lack of enquiry by the AO. Therefore exercise of jurisdiction u/s 263 of the Act on the issue of disallowance u/s.14A of the Act cannot be sustained and the impugned order to this extent is quashed.

19. The next issue considered by CIT in the show cause notice u/s 263 of the Act dated 20.09.2016 is with regard to computation of long term capital gain of Rs. 60.05 crores. On this issue the allegation of the CIT in the show cause notice is that the AO did not call for any details or documentary evidence with regard to long term capital gain and he did not examine anything on this aspect. Examination of the record reveals that in the notice issued u/s 142(1) the Assessee was required to provide computation of total income and the same was furnished before the AO. The said computation statement contained a detailed working of the income under the head 'Long Term Capital Gain' assessable in A.Y. 2012- 13. In the proceedings before the AO vide record of proceedings (order-sheet entry) dated 04.09.2014, the AO directed the Assessee to submit details of LTCG appearing in the computation of income. The Order-sheet entry dated 08.09.2014 further shows that in the hearing conducted on that date, the Assessee had filed details of LTCG and also furnished related valuation report. The supporting documents with reference to long term capital gain are available at page 128 to 135 of the assessee’s paper book. At pages 128 to 130 of the paper book the assessee has given complete history of the fact giving rise to long term capital gain. Page 131 of the paper book is the notification in the official gazette by Government of West Bengal increasing the permission fee for transfer of lease hold rights in respect of lease granted by the Government of West Bengal. Page 133 is the statement of expenses incurred on the capital work in progress for the period upto 31.03.2011. Pages 134 and 135 are the letter of handing over the possession to the assessee by Godrej Waterside Properties Pvt. Ltd., the person who carried out the development. Pages 136 to 155 is the report of the valuer in support of the long term capital gain in the light of the documentary evidence filed by the assessee it cannot be said that there was no failure on the part of AO to make proper and adequate enquiries with regard to the computation of long term capital gain. The exercise of jurisdiction by CIT on this ground is therefore held to be unsustainable.

20. The next issue for consideration raised in the impugned order is non examination of commission and brokerage of Rs. 1,16,10,615/- expenses by the AO before completing the assessment. On this aspect the records reveal that in the course of assessment the Assessee was called upon by the AO to furnish extracts from Ledger a/c of all revenue expenses debited in the Profit & Loss e] vide Clause (28) of the Notice u/s 142(1) of the Act. In response the Assessee had provided the Ledger a/ c of revenue expenses amounting to Rs. 52,40,44,462/ - debited to the Profit & Loss A/c. This amount inter-alia included commission and brokerage of Rs. 1,16,l0,615/-. While explaining the income disclosed under the head LTCG the Assessee had explained that it had developed LT. Parks which were also operated & maintained by the Assessee. The spaces contained in the I T Parks were commercially exploited in 2 ways. The developed spaces in the IT Park were leased by the Assessee either on short term basis or on long term basis. Where the Assessee leased the developed spaces on monthly lease basis, the Assessee earned monthly lease rent & service charges for operating & maintaining the I T Park. In such cases, the gross revenue earned credited to the Profit & Loss A/c is assessed under the head 'profits & gains of business'. Brokerage or commission incurred in connection with securing monthly lessees was considered revenue expense and deduction therefore was claimed in the computation of income. However, in cases where the lessees acquired long lease of the constructed spaces for period of 99 years against lump sum lease premium, such transactions were considered as transfer of the property in terms of Sec. 269UA read with Sec. 27 of the Act. Accordingly transfer of the leasehold rights in the building against receipt of lease premiums was considered as transaction in capital field. In such cases lease premium was reduced from the opening of the WDV of the block of the building. Since the transaction of granting long term leases was in the capital field, brokerage & commission expense incurred in connection with long term lease transaction was considered as capital expense & deduction therefore was not claimed. Brokerage & commission paid on long term leases were deducted from the gross lump sum lease premium received from the Lessees and only net premium amount was reduced from the opening WDV of the building block. It is pertinent to submit that this method of bifurcating expenses has been consistently followed by the Assessee for the past several years and the same has been accepted by the Revenue Authorities in all the past assessments. In the course of assessment for the A.Y. 2012-13, the Assessee had furnished full particulars of such brokerage & commission paid before the AO. In the details furnished the Assessee had clearly bifurcated the commission & brokerage which was paid for transfer by way of long term leasehold interest in the building space amounting to Rs. 67,97,440 / - and which was considered to be capital expense and for which no deduction was claimed. Moreover, since the method of claiming the deduction for brokerage paid was same and identical in the past and the same was always accepted in the past assessments, it is incorrect to state that the AO did not question or examine this issue prior to completion of assessment. Therefore the assessment order for the A.Y. 2012-13 cannot be considered to be erroneous.

21. The evidence filed by the Assessee in the course of assessment proceedings the assessee were details with regard to brokerage and commission namely copy of ledger of revenue expenditure at page 156 of the paper book, details of brokerage and commission paid during the year ended 31.03.2012 at page 157 of the paper book, details of legal fees paid for the year ended 31.03.2012 at page 158 of the paper book. In the light of the evidence filed as above it cannot be said that there is any failure on the part of the AO to make adequate and proper enquiries before completing the assessment on the aforesaid issue. Exercise of jurisdiction on this issue is therefore held to be not sustainable and the order u/s.263 of the Act to this extent is quashed.

22. The last issue set out in the show cause notice u/s 263 of the Act is with regard to depreciation on unsold building wrongly allowed by the AO. On this aspect the following aspects are noticed from perusal of the record. We have already seen that the Assessee is in the business of developing IT park and either selling the space so developed or giving it on lease with all amenities for operating a software development business. The "IT Park buildings" constructed and developed by the Assessee is always held and accordingly disclosed in the Assessee's books as "Fixed Assets" and not as "stock-in-trade" as alleged in the show cause notice.

23. It is also seen from the Assessee’s assessment records for AYs 2002-03 and onwards the block of "IT Park buildings" came into being and got recognized for tax purposes for the first time in AY 2002-03 when first phase of Assessee's project known as "Infinity Think Tank" got completed. In the assessment for the year under consideration as also for the earlier years, the nature of Assessee's business is considered as "Development of software Technology Parks and related infrastructure facilities for IT, ITES, Electronics etc". For the purposes of carrying on this business the Assessee had obtained on long term lease basis plots of land in Sector V, Salt Lake City from WEBEL a Govt. of West Bengal Undertaking, After the Assessee obtained the lease hold rights in the lands the Assessee developed its first Information Technology Park building known as Infinity Think Tank at Plot No, A3, Block GP, Sector V, Salt Lake City, Kolkata. The development and construction of the said IT Park building was completed in 2 phases. The first phase of the construction comprising of Tower I was completed ill AY 2002-03 and 2nd phase comprising of Tower II was Completed in AY 2006-07. Besides completing development of the said building the Assessee continued to operate and maintain the said building as Information Technology Park and derive income from lease rent and service charges which is assessed under the head profits & gains of business. The said IT Park was approved by the CBDT as an Industrial Park for the purpose of Sec 80IA(4) of the Act.

24. The Assessee similarly developed another IT Park Building known as Infinity Benchmark situated at Plot G 1, Block- EP&GP, Sector V, Salt Lake City, Kolkata. The development and construction of this IT Park got completed in FY 2008-09 relevant to AY 2009-10. The said IT Park building was also approved by the CBDT u/s 80IA(4) of the Act. The said I T Park was also .being operated and maintained by the Assessee during AY 2012-13 and income in the form of lease rent and service charges was assessed as our business income. These IT Parks comprised constructed spaces which were used for carrying on IT ITES businesses. Some parts of these buildings were leased by the Assessee on long term basis after collecting lump sum lease premium from the lessees. However majority portion of the constructed spaces in these IT parks were leased out by the Assessee on short term basis to numerous lessees who pay monthly lease rent for use of office space. Besides paying monthly lease rent, service charges are also paid by all the occupants for use of the facilities as also for operation and maintenance of the IT Park. The lease rent, maintenance/ service charges recovered from the lessees and occupants are assessed in our assessment under the head "business". The IT Parks developed and constructed by the Assessee not only contain civil structure of the building but substantial costs are incurred by the Assessee on installation and commissioning of sophisticated plants, equipments and electrical apparatus etc so as to make the buildings fit for carrying on specialized Information Technology based businesses and enterprises. The costs incurred by the Assessee on development and construction of IT Parks were always capitalized in the Assessee's books arid shown in the audited annual accounts as and by way of "Fixed Assets" and not as "Current Assets" or "stock-in-trade" as alleged in show cause notice dated 20.9.2016 u/s.263 of the Act. By using these fixed assets the Assessee regularly earns Income in the form of lease rent and service charges. Since commencement of operations of the IT Parks in AY 2002-03 and onwards the income so derived from commercial exploitation of IT Parks has been assessed by the AOs under the head 'profits & gains of business". Since such business income is earned by the Assessee by use of the "IT Park" owned and developed by the Assessee, in terms of section 32 of the I T Act, depreciation on the actual cost/ WDV of the depreciable assets comprised in the IT Park has always been allowed in the orders passed u/s 143(3) of the Act.

25. It is also seen that in the Income Tax Assessments of the Assessee for AYs 2002- 03 & 2003-04 were completed u/s 143(1). The assessments for the AYs 2004-05 and onwards were however completed u/s 143(3) of the Act. While completing the assessments u/s 143(3) of the Act, the AOs have consistently allowed deduction for depreciation u/s 32 on the WDV of the block of fixed assets comprised in the IT· Park -including WDV of the buildings. Deduction for depreciation was allowed in the orders for AY s 2004-05 & 2005-06 after discussion. In these years there were disputes with regard to the manner of calculation of the depreciation allowable but the AO never disputed the fact that the IT Park building and plant & machineries installed therein constituted assessee's "fixed assets" eligible for depreciation. In the assessments of these years, no case was ever made by the Revenue that depreciation was not permissible because the building was our trading stock. The only dispute which the AO raised, related to the manner in which the quantum of the depreciation was to be allowed. On appeal the Assessee's manner of computation of depreciation on fixed assets was allowed by the CIT(A) and by the ITAT in AYs 2004-05 & 2005- 06 respectively.

26. The dispute with regard to the character of the IT Park building was again raised by the AO while faming the assessment order for the AY 2007 -08. In the return filed for AY 2007-08 the Assessee had claimed depreciation of Rs. 4,17,62,205/- respect of Assessee's. IT Park being Infinity Think Tank, Towers I & 11. The AO noted that during FY 2006-07 Assessee granted long term lease of 6872 sq. ft of the developed space against lump sum lease premium of Rs. 2,40,95,000/-. Besides the Assessee received refundable deposit of Rs. 86,74,200/-. In AO's opinion both the sums totalling Rs. 3,27,69,200 were in the nature of lease premium and therefore he considered it as the consideration received for granting long term lease. The AO further noted that for the purpose of computing depreciation allowance Assessee had reduced lease premium of Rs. 2,40,95,000/ - from the opening WDV of the building block and on the reduced WDV depreciation was claimed. In AO's opinion however the assessee should have offered "short term capital gain" on grant of long term lease of 6972 sq.ft of office space after deducting proportionate WDV of the office space. The AO computed the prorate WDV of the building attributable to 6972 sq.ft. at Re.l, 77,42,577 / -. Deducting such prorata WDV of the building block from the gross lump sum premium of Rs. 3,27,69,200 / - (24095000 + 8674200) the AO assessed Rs.l,50,26,623/- as Assessee's "short term capital gain". Even though the AO assessed pro rata income on transfer of long term lease of 6972 sq.ft. of constructed space under the head capital gain he did not out rightly reject Assessee’s depreciation claim for the remaining/unsold IT Park space leased on short term basis to other lessees on the ground that the IT Park building was Assessee's trading stock and not a depreciable asset.

27. Against the assessment order for the AY 2007-08 the matter was taken in appeal. The CIT(A) deleted both the additions made in the assessment order. The CIT(A) in the first instance held that refundable deposit of Rs. 86,74,200/ - represented assessee's liability and could not be taken into account for determination of the income of the Assessee. As regards the assessment of short term capital gain computed on prorata basis, the CIT(A) upheld Assessee's plea that the provisions of Sec 50 were applicable only when sale proceeds exceeded WDV of the block of depreciable asset and not when the WDV of any block was positive. The relevant finding of the CIT(A) for AY 2007 -08 were as follows:

“Provisions of section 50 of the Income Tax Act, 1961 are specific and undisputedly applicable in this case. The Assessing Officer has himself stated in the order that the capital asset in question is a depreciable asset. I, therefore, agree with the A/ R that if provision of section 50 of the Income Tax Act. 1961 are applied (which in this case is applicable) there will be no amount of capital gain chargeable to tax as computed by the Assessing Officer. "

28. Thus in the appellate order for AY 2007-08 the CIT(A) specifically dealt with the nature and character of the IT Park building and held it to be "depreciable asset" whose WDV had to be dealt with in accordance with provisions of Sec 43(6) and Sec 50 of the I T Act. Since the CIT(A) found that only a part of the depreciable block was transferred by the Assessee and the proceeds realized on such transfer did not exceed the opening WDV of the building block, Sec 50 was not applicable. Even though the CIT(A) allowed the relief by deleting the addition made on account of prorata computation of short term capital gain the Commissioner of Income Tax did not recommend filing of second appeal against CIT(A)'s said finding. It will therefore be appreciated that in the AY 2007-08 the administrative CIT in principle accepted that the Assessee's IT Park building was its "depreciable asset. The CIT however recommended the appeal against the relief allowed by the CIT(A) in respect of refundable deposit of Rs. 86,74,200/ - which the CIT(A) held to be Assessee's liability. While deciding the Revenue's appeal the ITAT considered the Assessee's transactions with the lessee in its entirety and recorded the following finding.

We agree with the Ld. A/ R that if the D/ Rs contention is accepted in that case the WDV attributable to the portions sub-leased by the assessee will be affected but CIT(A) has directed the AO to reduce the sale proceeds of Rs. 2,49,95,000/- out of opening WDV of Rs. 32,60, 17,820/- which was brought forward from earlier years. It is a fact that the department has not disputed the said part of order of CIT(A). It is not in dispute that space constructed by the assessee in the said towers has been considered as block of assets in respect of which depreciation has been allowed to assessee in the past assessment years".

29. Thus in AY 2007-08 the CIT(A) and the ITAT concurrently considered the nature and character of the IT Park building and held the same depreciable asset on which depreciation was allowed. The orders of the and ITAT for the AY 2007-08 became final.

30. The IT Park buildings in respect of which depreciation was claimed and allowed in the order for AYs 2012-13 were brought forward from earlier years. In the regular assessments u/s 143(3) passed for all the earlier years depreciation allowance u/s 32 on actual cost/WDV of the block of the IT Park building as also on the plant & machineries and fixtures installed therein have always been allowed on the footing that these assets were "fixed assets” of the Assessee's business. In the audited accounts of the Assessee IT park building as also the plant & machineries installed therein have been capitalized. In the Balance Sheet the IT Park building as also the plant and machinery, fixtures installed therein have always been shown under the head “Fixed Assets". At no point in time in the past, any of the IT Park buildings were shown in the Assessee's books as forming part of the circulating capital or trading stock or as current assets, In all the past assessments beginning from Ays 2002-03 and onwards the AOs have always considered and treated the IT Park buildings, plant & machineries, fixtures situated therein to be part of the block of depreciable assets and accordingly the depreciation has always been allowed u/s 32. In view of the consistent stand taken by the department, the action of the CIT in AY 2012-13 seeking to claim that depreciation was wrongly allowed on the footing that IT Park building was Assessee’s trading stock and not fixed asset cannot be sustained.

31. In the light of the above submissions we are of the following view that the assessee is in the business of developing, operating & maintaining IT Parks which are situated in Sec-V, Saltlake, Kolkata. The Parks were also approved by the CBDT under Section 80IA(4) under Industrial Parks Scheme. The IT Parks which are operated & maintained by the assessee are substantially leased on short-term basis. However some of the spaces a transferred on long term basis and the premium charged is recognized as "Sale". Since the initial year of operation of IT Parks, the cost of developing IT Parks has always been disclosed in the books as "Fixed Assets" and is never considered or regarded either by the assessee or by the Department to be part of 'Trading Stock". Since first year of operation i.e. A.Y. 2002-03, the assessee has been claiming and the Department is allowing depreciation on the actual cost / WDV of the “Fixed Assets" comprised in IT Parks, i.e., building, P&M and fixtures. This is evident from the assessment orders from AY 2004-05 and onwards [See Pages 161 to 164 of PB]. As such the CIT's notice proceed on incorrect assumption with regard to the character and nature of the IT Park building which he erroneously considered to be "Trading Stock". The CIT therefore could not proceed u/s 263 by assuming incorrect facts which are not borne out from records. It is also noticed that on same incorrect assumption of facts, the CIT for AYs 2007-08 & 20. 11 had similarly revised the assessment orders u/s 263 which was cancelled by the ITAT by its order dated 9.6.2015 in ITA No. 413 & 414/Kol/2015 for AY 2007-08 & 2010- 11.[See Pages 282 to 288 of PB]. No revision or reassessment proceedings have been taken for any other years. In the light of the aforesaid facts and circumstances of the case, it cannot be said that the claim of depreciation was made on trading stock by the Assessee. Therefore exercise of jurisdiction u/s 263 of the Act on this issue cannot be sustained and the impugned order to this extent is quashed.

32. In respect of other items set out in the show cause notice u/s 263 of the Act where there was no allegation that there was failure on the part of the AO to make and proper enquiries before completing the assessment, the CIT in the impugned order has held that the order of the AO on those items were also liable to be set aside on that ground holding that order of the AO was erroneous and prejudicial to the interest of the revenue. In this regard it is seen that the show cause notice u/s.263 of the Act issued by the CIT was dated 20.9.2016. The Assessee had filed his reply to the said show cause notice on 12.1.2017 and on the very same date, the CIT had passed the impugned order. It is thus clear that the Assessee was not put on notice that the CIT intends to invoke jurisdiction u/s.263 of the Act on the ground of lack of enquiry by the AO. It is also seen that when CIT’s specific objection in the show cause notice u/s 263 of the Act on issues other than the issues on which the CIT in his show cause notice has alleged lack of enquiry on the part of the AO, the Assessee has given his explanation as to how on those issues the order of the AO was not erroneous. The CIT before exercising jurisdiction u/s.263 of the Act by setting aside the order of the AO, ought to have given his own specific finding on those objections and without doing so, the CIT cannot exercise jurisdiction u/s 263 of the Act. The Hon’ble Delhi High Court in the case of ITO Vs. D.G.Housing Projects Ltd. (supra) has taken the view that while the AO is both an investigator and an adjudicator, a distinction has to be drawn between a case where the AO has not conducted any enquiry or examined any evidence whatsoever (“lack of inquiry”) from one (i) where there is enquiry but the findings are erroneous; and (ii) where there is failure to make proper or full verification or enquiry (“inadequate inquiry”). The fact that the assessment order does not give any reasons for allowing the claim is not by itself indicative of the fact that the AO has not applied his mind on the issue. All the circumstances have to be seen. A case of lack of enquiry would by itself render the order being erroneous and prejudicial to the interest of the Revenue. In a case where there is inquiry by the AO, even if inadequate, the CIT would not be entitled to revise u/s 263 on the ground that he has a different opinion in the matter. Also, in a case where the AO has formed a wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry before passing the s. 263 order. The CIT is entitled to collect new material to show how the order of the AO is erroneous. The CIT cannot remand the matter to the AO for further enquiries or to decide whether the findings recorded are erroneous without a finding that the order is erroneous and how that is so. A mere remand to the AO implies that the CIT has not decided whether the order is erroneous but has directed the AO to decide the aspect which is not permissible. On facts, as the CIT had doubts about the valuation and sale consideration received, he ought to have examined the said aspect himself and given a finding on the merits on how the consideration was understated.

33. In the following cases, similar proposition has laid down by Hon’ble High Courts as well as various Benches of ITAT :-

- DIT Vs Jyoti Foundation (357ITR 388) (Bom HC)
- CIT Vs Leisure War Exports Ltd (3411TR 166) (Del HC)
- C.S.E. Ltd Vs CIT (ITA No. 268/K/15) (ITAT Kol)
- Crisil Ltd Vs Addl.CIT (142 TIK 62) (ITAT Mum)

34. We therefore agree with the submission of the learned counsel for the Assessee that when CIT’s specific objection in the show cause notice u/s 263 of the Act was met with adequate explanation he ought to have given his own specific finding on those objections and without doing so, the CIT cannot exercise jurisdiction u/s 263 of the Act. Even on this ground the order u/s.263 of the Act, in so far it concerns, issues other than the issues for which the allegation in the show cause notice was lack of enquiry on the part of the AO before concluding the assessment rendering the order of the AO erroneous and prejudicial to the interest of the revenue.

35. For the reasons given above we are of the view that jurisdiction u/s 263 of the Act in the facts and circumstances of the case was not proper. Accordingly order u/s 263 of the Act is quashed and the appeal of the assessee is allowed.

36. In the result the appeal by the assessee is allowed.