IT Appeal No. 5798 (Delhi) of 2011
[ASSESSMENT YEAR 2007-08]

S.V. MEHROTRA, ACCOUNTANT MEMBER AND A.D. JAIN, JUDICIAL MEMBER

Ajay Wadhwa for the Appellant.
Satpal Singh for the Respondent.

ORDER

A.D. Jain, Judicial Member - This is an appeal filed by the assessee for Assessment Year 2007-08, taking the following grounds:—

"1. Whether on the facts and in law, the Ld. CIT is justified in setting aside the assessment order dated 29.12.2009 passed u/s 143 (3) for making it afresh holding it to be erroneous and prejudicial to the interest of revenue within the meaning of section 263 of the Income-tax Act, 1961 on the ground that:—

2. The following additional ground has also been taken:—
"That the ld. CIT has erred in passing order u/s 263 of the Act despite the fact that the show cause notice issued by him contained a solitary ground/basis relating to deferred revenue expenses, whereas the final revision order completely ignored the said issue relating to deferred revenue expenditure and instead directed the ld. A.O. to inquire whether the advertisement expenses contained any capital expenditure or not."

3. The aforesaid additional ground has been said to be a legal ground, which inadvertently remained to be omitted in the original grounds taken. A request has been made for admission of the said additional ground.

4. Having read the additional ground, we find that indeed, this ground raises a legal issue as to whether the ld. CIT was correct in passing the order u/s 263 of the Act on a ground entirely different from that raised in show cause notice issued. The facts with regard to this ground are undisputedly already on record and no fresh fact is required to be gone into to decide this ground. On the other hand, this ground, as contended, will enable substantive justice to be dispensed with.

5. Thus, following National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC), the additional ground taken by the assessee is admitted.

6. As per the impugned order, the CIT, on examination of the assessee's income-tax record for Assessment Year 2007-08, i.e., the year under consideration, noted that during the year, the assessee had debited an amount of Rs. 2,76,79,914/- to its Profit & Loss Account under the head of advertisement. The CIT observed that since this expense had been incurred for the enduring benefit of the business, this expenses should have been capitalized; that during the earlier years, this expenditure had been treated as a deferred revenue expense since the management of the assessee company was of the opinion that the benefit to it realized over a period of at least five years; that during the year under consideration, this expenditure should have been treated as deferred revenue expenditure and only 1/5 of the expenditure, amounting to Rs.55,35,982/- should have been allowed; that such mistake resulted in under assessment of income of Rs. 2,21,43,932/-, involving a tax effect of Rs. 74,53,647/-. The CIT also noted that during the year under consideration, it was held by the A.O. that the royalty claimed of Rs. 1,65,48,377/- was capital expenditure and was added back to the income of the assessee; that however, as it was paid to obtain a non-exclusive licence for use of a licensed trade mark, it was in the nature of intangible asset and depreciation of Rs. 41,37,094/-, i.e., 25% of Rs. 1,65,48,377/-, should have been allowed; and that the omission to do so resulted in over-assessment of income of Rs. 41,37,094/-, involving a tax effect of Rs. 13,92,545/-.

7. Thus, the CIT considered the assessment order dated 29.12.2009, passed u/s 143 (3) of the IT Act, to be erroneous and prejudicial to the interests of the revenue. Accordingly, a show-cause notice dated 04.02.2011 was issued to the assessee.

8. In reply vide letter dated 04.06.2011 (APB 193-196), the assessee submitted details of advertisement expenditure incurred by the assessee in excess of Rs. 1 lac each, along with copies of invoices in respect thereof. The assessee submitted that in respect of one expenditure of Rs. 2,18,255/-, the assessee had purchased glow signs which had been treated as a revenue expenditure in view of the decision of the Hon'ble Delhi High Court in the case of CIT v. Orient Ceramics & Industries Ltd. [2013] 358 ITR 49/[2011] 200 Taxman 64 (Mag.)/11 taxmann.com 417; and that the entire expenditure on account of advertisement was revenue in nature, deserving to be allowed. The assessee also submitted that it had added back as income, a sum of Rs. 1,46,32,527/-, being deduction claimed in earlier year on account of advertisement and renovation; that hence, the assessee had suo motu added back as income the deferred revenue expenditure claimed in the audited Profit & Loss Account in respect of earlier assessment years and had claimed the entire expenses relating to the current year as a revenue expenditure; and that thus, there was no error in the method of accounting for advertisement and all the advertisement expenses incurred during the year had been claimed as business expenditure u/s 37(1) of the IT Act.

9. The ld. CIT, however, passed the impugned order, observing as follows:—

"3. I have considered the above submissions of the AR of the assessee company. It is observed that the assessee company has debited a sum of Rs. 2,76,79,914/- under the head advertisement expenses. On examination of the details filed in this regard, it is noticed that an amount of Rs. 14710314/- has been incurred towards expenses on advertisement and publicity. The balance of the expenses have been found to be as under:—

4. On examination of the nature of the large part of the aforesaid expenses, it emerges that incurring of such expenses has rendered enduring benefit to the assessee and so there is enough reason to disallow some part of these expenses as capital which has not been done in the regular assessment order passed by the A.O. u/s 143 (3) of IT Act. Even as per the material available on record, it appears that the A.O. has not caused any enquiry to ascertain the nature of such expenses being either revenue or capital. As a result such assessment order passed by the A.O. is erroneous and prejudicial to the interest of revenue. Therefore, by invoking the provision of section 263 of the IT Act, such assessment order is set aside on this limited issue with a direction to the A.O. to cause sufficient inquiries to find out the actual nature of the aforesaid expenses and re-frame the assessment by disallowing such expenses which are capital in nature after providing due opportunity to the assessee of being heard to meet the ends of justice."

10. Challenging the impugned order, the ld. counsel for the assessee has filed written submissions and has made oral arguments as well.

11. Apropos the additional ground, it has been submitted that the CIT had sought to revise the assessment order on the ground that the assessee ought to write off and claim only 1/5 of the advertisement expenditure, since the assessee had been following the concept of deferred revenue expenditure; that it had been explained by the assessee before the ld. CIT that the assessee had never followed the revenue expenditure concept for income-tax purposes and had claimed the entire advertisement expenses in the year it had been incurred; that the ld. CIT, thereafter, dropped this issue and instead, in the impugned order, directed the Assessing Officer to inquire whether the advertisement expenses incurred by the assessee contained any capital expenditure or not; that such a change in the revision order is impermissible in law; that an order passed u/s 263 of the Act cannot be on any other basis but that mentioned in the show cause notice issued u/s 263; and that any such change in the revisional order would amount to making an assessment in the garb of Section 263 of the Act, which is not permitted by the Act. For this proposition, the ld. counsel for the assessee has sought to place reliance on the following case laws:—

12. The Ld. DR, on the other hand, has placed strong reliance on the impugned order in this regard. Qua this issue, we find that the notice dated 04.02.2011 (copy at APB 182-183) reads as follows:—

"F.No.CIT-IV/263/2010-11/4009
Dated: 04.02.2011
The Principal Officer,
M/s Genesis Colors Pvt. Ltd.,
1A-2, Rao Tula Ram Marg,
New Delhi - 110022.

Sub: Proceedings u/s 263 of the IT Act, 1961 - M/s Genesis Colours Pvt. Ltd. - A.Y. 2007-08 - reg.
An examination of the income-tax assessment records of M/s Genesis Colors Pvt. Ltd. for A.Y. 2007-08 it transpires that

It is seen from the examination of record that these aspect were never considered while the A.O framed the assessment order. As also, no inquiry/investigation seems to have been carried out with regards to this aspect. It is settled position of law that the aforesaid lack of inquiry/investigation apart from the under assessment of income pointed out in earlier paragraph has made the order of the A.O. both erroneous as well as prejudicial to the interest of revenue.

In view of the above facts, the assessment order u/s 143 (3) of the IT Act, 1961 for the A.Y. 2006-07 appears to be erroneous and prejudicial to the interests of revenue. Therefore, I propose to invoke the provisions of section 263 of the IT Act, 1961 and modify the assessment accordingly. In case you have any objections to the proposed remedial action, you may file such objections before me at 11.30 A.M. on 17.02.2011. If no objections are received by the aforesaid date, it shall be presumed that you have nothing to say in this matter and suitable remedial orders u/s 263 will be passed on merits on the basis of material available on record.

Sd/-
(S.K. RAY)
Commissioner of Income-tax
Delhi-IV, New Delhi"

13. Thus, as per the notice u/s 263 of the Act, one of the issues on which the ld. CIT has sought to revise the assessment order was that the assessee ought to have written off and claimed only 1/5 of its advertisement expenditure, since the assessee had been following the concept of deferred revenue expenditure. However, a perusal of the impugned order (reproduced hereinabove) shows that while passing the said order, the ld. CIT dropped this issue. Instead, he directed the Assessing Officer to inquire as to whether the advertisement expenditure of the assessee contained any capital expenditure or not. Therefore, evidently, there is a change in the impugned order vis-a-vis the show cause notice qua the issue of advertisement expenditure. Such a course of action is not permissible in law, as has been held in various judicial decisions. In Ashish Rajpal (supra), it was held that where the notice issued by the Commissioner before commencing proceedings u/s 263 of the Act referred to four issues and the final order passed referred to nine issues, the revisional proceedings were vitiated as a result of breach of principles of natural justice.

14. In Contimeters Electricals (P.) Ltd. (supra), it was held that where an issue did not form part of the show cause notice issued u/s 263 of the Act and the assessee was not even confronted with it before the Commissioner, such issue could not form the basis for revision of assessment order u/s 263 of the Act.

15. In Infosys Technologies Ltd. (supra), it has been held that an order of revision by the Commissioner cannot be upheld on a different ground than the ground on which it has been revised.
16. In Vesuvius India Ltd. (supra), the Commissioner had invoked his jurisdiction u/s 263 of the Act by issuing a show cause notice on the ground that income on account of repairs of machinery and contract receipts was required to be added to the income assessed in the hands of the assessee. Subsequently, the Commissioner passed a revisional order on the ground that the Assessing Officer did not make necessary verification about the said transactions. It was held that when a revisional order is passed on a ground other than the grounds for which the revision proceedings are initiated, the same is not sustainable in law and that since there was a change in reasoning, the revisional order was not sustainable.

17. In Star India Ltd. (supra), it was held that when a ground of revision is not mentioned in the show cause notice, it cannot be made the basis of the revisional order for the reason that the assessee would have had no opportunity to meet the said point.

18. In Asia Resort Ltd. (supra), it has been held that an order u/s 263 of the Act must be on the basis of the same grounds as had been stated in the notice issued u/s 263 of the Act and if the basis or grounds for the decision given in the order are wrong or different, the order passed u/s 263 of the Act deserves to be set aside.

19. Thus, there is unanimous judicial decision on the issue that where the show cause notice issued is on one ground and the revisional order is passed on an entirely different ground, the order cannot be sustained in law. No decision to the contrary has been brought to our notice.

20. Accordingly, the additional ground filed by the assessee is accepted.

21. Concerning the objection in the show cause notice that since the assessee was following the concept of deferred revenue expenditure, it ought to have written off and claimed only 1/5 of the advertisement expenditure, as discussed above, though this issue has been mentioned as the first issue in the show cause notice, it is entirely absent in the revisional order. The assessee has contended that it had been explained before the CIT that the assessee had never followed the deferred revenue expenditure concept for income-tax purposes and had claimed the entire advertisement expenses in the year of incurrence; and that thereupon, the ld. CIT dropped this issue while passing the impugned order.

22. Be that as it may, since the impugned order does not seek to revise the assessment order on the alleged issue of deferred revenue expenditure, this question does not require to be gone into, though detailed arguments have been addressed with regard thereto and reliance has been sought to be placed on numerous case laws.

23. Now, we take up the issue as to whether the ld. CIT was justified in holding that some part of the expenditure amounting to Rs. 2,76,79,914/- claimed by the assessee under the head 'advertisement' was of capital nature and had been wrongly allowed by the Assessing Officer without making any inquiry to ascertain the nature of such expenditure.

24. In this regard, the ld. CIT observed that the assessee-company debited an amount of Rs. 2,76,79,914/- as advertisement expenses; that as per the details furnished, an amount of Rs. 1,47,10,314/- had been incurred towards advertisement and publicity expenses, whereas the other expenses amounted to Rs. 1,29,69,600/-; that an examination of the nature of a large part of the expenses showed that incurrence of such expenditure had rendered enduring benefit to the assessee; that so, there was enough reason to disallow some part of these expenses as capital expenses; and that it appeared that the Assessing Officer had not undertaken any inquiry to ascertain the nature of such expenses, thereby rendering the assessment order erroneous and prejudicial to the interests of the revenue. The CIT set aside this issue to the Assessing Officer, directing the Assessing Officer to conduct sufficient inquiries to find out the actual nature of the expenses and to disallow the ones found to be of capital nature.

25. Now this aspect, as gone into hereinabove, was nowhere part of the show cause notice issued to the assessee u/s 263 of the Act. The assessee was never put to show cause, by way of the notice, as to whether the Assessing Officer had not undertaken any inquiry to ascertain the nature of the assessee's expenses and had, as such, failed to disallow the capital expenditure incurred by the assessee. In 'Ashish Rajpal' (supra) (cited by the assessee), it has also been held that it is a requirement of Section 263 of the Act that the assessee must have an opportunity of being heard in respect of those errors which the Commissioner proposes to revise. In the present case, the issue of the alleged failure of the Assessing Officer to inquire into the nature of the assessee's expenditure never formed part of the show cause notice issued to the assessee, before the revision of the assessment order by the CIT on this score. In keeping with Ashish Rajpal (supra), to accord such an opportunity to the assessee after setting aside the assessment order would not meet the mandate of Section 263 of the Act. Therefore, the CIT's order needs to be held to be not legally sustainable for this reason also. However, it has been contended on behalf of the assessee that complete details of the expenditure of Rs. 2,76,79,914/- had been furnished before the ld. CIT. Attention in this regard has been drawn to APB 184-192, which is a copy of the assessee's letter dated 03.06.2011. In this letter, qua the issue at hand, the assessee submitted before the ld. CIT that the expenditure on advertisement was purely revenue expenditure, having been incurred during the year for the advancement of the assessee's business. Also, in the assessee's reply dated 06.09.2011 (APB 193-196) to the Commissioner, the assessee furnished details of advertisement expenses incurred by the assessee in excess of Rs. 1 lac each, as desired by the Commissioner. It was explained that the entire advertisement expenditure was revenue in nature.

26. Hence, the assessee did get the opportunity of being heard in respect of the error in this regard, which the Commissioner proposed to revise. Provision of such opportunity to the assessee takes the proposed action of the ld. CIT outside the ken of Ashish Rajpal (supra). It is therefore, that the action of the ld. CIT is not being rejected outright and its merits are being gone into infra.

27. The issue is as to whether indeed, as alleged by the ld. CIT, the Assessing Officer did not make any inquiry to ascertain the nature of the expenses incurred by the assessee.

28. On this, the assessee has maintained that a specific query in this regard had been put to the assessee by the Assessing Officer in the assessment proceedings and in response thereto, the assessee had filed complete details of the expenditure incurred by it. Attention in this regard has been invited to Question No.11 at APB 197 raised by the Assessing Officer and to APB 200-216, which is a copy of the assessee's ledger of advertisement expenses, which was filed before the Assessing Officer as an annexure to the assessee's reply dated 17.12.2009 (APB 199A-199B). It has been contended that complete details of the advertisement expenditure were thus furnished at the instance of the Assessing Officer; that all these details were duly considered by the Assessing Officer before allowing them; that the very fact that the Assessing Officer had himself called for the details showed that he had applied his mind to the issue; and that if, as in the present case, information was sought by the Assessing Officer and reply was duly given, the factum of no finding having been recorded in the assessment order cannot and does not lead to the inference that no inquiry was carried out by the Assessing Officer.

29. It has next been contended on behalf of the assessee that the ld. CIT erred in observing that since the expenditure incurred by the assessee had brought enduring benefit to the assessee, there was enough reason to disallow some part of the expenses as capital expenses; that enduring benefit is not the sole test for deciding whether expenditure is capital or revenue; that every expenditure can render enduring benefit; that the mere fact that the expenditure later on could bring enduring benefit to the assessee is not an error of law entitling the provisions of Section 263 of the Act to be invoked; that the order under appeal is bereft of any finding by the ld. CIT as to why he thought the expenditure to be capital expenditure; that the ld. CIT had himself asked for details of expenses exceeding Rs. 1 lac each, which details were duly furnished and were perused by the CIT; that still, the ld. CIT did not give any basis to arrive at the finding that since the expenditure had brought enduring benefit to the assessee, there was reason enough to disallow some of the expenses as capital in nature; and that the ld. CIT erred in merely issuing a vague direction based on an illegal proposition of law. For the proposition that enduring benefit test is not the sole test for deciding the nature of an expenditure , the following judgements have been relied on:—

30. The ld. Counsel for the assessee has then contended that the expression "it appears" used by the ld. CIT before the words "that the AO has not caused any inquiry to ascertain the nature of such expenses being either revenue or capital" shows that the ld. CIT was himself not sure that no inquiry had been undertaken; and that if there is an inference of adequate inquiry from the assessment order, the provisions of Section 263 of the Act cannot be invoked. The following case laws have been sought to be relied on:—

31. It has further been contended that undisputably, the question of capital/revenue expenditure is always a debatable issue and therefore, the CIT must show an expenditure to be capital u/s 263 of the Act, which has not been done in the assessee's case.

32. It has also been contended that as held in CIT v. R.K. Metal Works [1978] 112 ITR 445 (Punj. & Har.) and Vikas Polymers (supra), a vague direction cannot be the basis of revision u/s 263 of the Act.

33. On this issue, it has lastly been contended on behalf of the assessee, that thus, the CIT has failed to specifically point out any error in the assessment order; that as submitted, the assessment order is not erroneous; that in order to enable the provisions of Section 263 to be invoked, an assessment order has to be both erroneous as well as prejudicial to the interests of the revenue; that here since the assessment order is not erroneous, there is no question of it being prejudicial to the interests of the revenue; and that therefore, the order passed u/s 263 of the Act is invalid.

34. Here again, the ld. DR has sought to place strong reliance on the order under appeal. It has not been denied that the expenditure incurred rendered enduring benefit to the assessee; that therefore, the ld. CIT was well justified in observing that some part of the expenditure ought to have been disallowed by the AO; that the fact that no such disallowance had been made in the assessment order was amply indicative of the fact that no inquiry whatsoever had been carried out by the AO to ascertain the nature of the expenditure incurred; that in the absence of ascertainment of nature of such expenses, part of which were undeniably capital expenses, led the AO not to make any disallowance; that it was this action of the AO in omitting to make disallowance, which rendered the assessment order erroneous, causing prejudice to the interests of the revenue; that as such, error as well as prejudice are writ large in the assessment order; that so, there was due ground to revise the assessment order by invoking the provisions of Section 263 of the Act; and that the ld. CIT cannot at all be said to have issued vague directions to the AO in this regard.

35. On considering the rival contentions on this issue with reference to the material on record, it is seen that in this case, admittedly, the AO had put a specific query to the assessee regarding the expenses incurred. Question No. 11 at APB 197 states as follows:—

"11. Detail of following expenses:—

Gratuity, PF, Leave encashment, staff welfare, advertisement & Royalty, party wise commission & TDS thereon."

36. The assessee, in its reply dated 09.11.2009 (APB 198-199), stated as follows (relevant portion):—

"Kindly refer to your notice u/s 142 (2) of Income-tax Act, 1961 requiring certain information/documents. The required information as per the questionnaire is as detailed hereunder:-

[Refer to note 20(i) and (ii) of Schedule 14 of notes on Accounts to the balance sheet]"

37. Note 20(ii) (APB 172) (in Schedule 14 to the Assessee's Notes to the Accounts) reads as follows:—

"(ii) Advertising expenses of Rs. 2,500,000 (balance Rs. 1,500,000 as at 31 March, 2006, net of Rs. 1,000,000 already charged off in the previous years) and leasehold expenses of Rs. 14,632,527 (balance Rs. 10,179,515) as at 31 March, 2006, net of Rs. 4,453,012 already charged off in the previous years) incurred during the previous years were erroneously considered as a part of miscellaneous expenses and, therefore, have been rectified during the year. Accordingly, advertisement expense for the year includes Rs. 1,500,000 as prior period expense. Further, additions to gross block of leasehold improvements amounting to Rs. 14,632,527 and depreciation relatable to the same in respect of the prior years amounting to Rs. 4,453,012 has been shown as adjustment in the fixed assets schedule."

38. Then, along with its reply dated 27.12.2009 (APB 199A-199B), the assessee furnished before the AO its ledger of advertisement expenses (APB 200-216). The details of the expenditure of Rs. 2,76,79,914/- are at APB 200, as follows:—

39. Thereupon, on the assessee having furnished these details before the AO on the asking of the AO in the assessment order dated 29.12.2009, no addition was made.

40. Now, in Vikas Polymers (supra), the Hon'ble jurisdictional High Court has held that if a query was raised during the course of scrutiny by the AO, which was answered to the satisfaction of the AO, but neither the query nor the answer was reflected (as in the present case) in the assessment order, that would not, by itself, lead to the conclusion that the order of the AO called for interference and revision. This, particularly so, when in the present case, as has been considered in the preceding discussion, details were asked for of the assessee by the AO by putting a specific query, all possible details were duly furnished by the assessee in response, and no further question was asked by the AO. This conduct shows that the AO had duly considered the details called for by him and supplied by the assessee and that the AO stood satisfied from such details. Therefore, the ld. CIT, evidently, is not justified in observing that no inquiry was carried out by the AO. In this regard, the assessee is correct in contending that the ld. CIT was himself not sure that the AO had not carried out any inquiry. It is as such, that the CIT observed in the impugned order that it appeared that the AO had not caused any inquiry to ascertain the nature of the expenses. The CIT, as available from the order, had no basis for such finding of no inquiry into the nature of the expenses by the AO. Rather, instead of relying on anything in the assessment order to perceive such lack of inquiry by the AO, the CIT was swayed by his own misconceived opinion that since the incurrence of the expenditure had brought enduring benefit to the assessee, this was reason enough to disallow some part of the expenses as being capital in nature. Now this, in our considered opinion, cannot be the basis for invoking revisional jurisdiction by the CIT. As correctly contended, the mere factum of enduring benefit having accrued to the assessee is not, by itself, a decisive factor to hold the nature of the expenses incurred to be capital. Any expenditure can bring enduring benefit, as held in:—

41. As for the CIT, he himself was unable to point out even a single item of expenditure incurred by the assessee to be capital expenditure. While invoking the provisions of Section 263 of the Act, the CIT was required to point out such items of expenditure as he found to be capital in nature and the specific reason for such finding was also to be stated. However, these requirements have not been made manifest in the order under appeal, even though the CIT had himself examined the details of advertisement. The Order under appeal, qua this issue, therefore, is a result of complete misreading and non-reading of material documentary evidence brought on record by the assessee. It is also an outcome of mere conjectures and surmises unsupported by anything contrary to the evidence furnished by the assessee.

42. Besides, it is also seen that the issue of determination of the nature of the expenditure incurred by the assessee was nowhere delineated in the show cause notice issued u/s 263 of the Act to the assessee. For this sole reason, the assessment order could not have been revised on this basis. Accordingly, we hold that the assessment order does not suffer either from the vice of being erroneous, or being prejudicial to the interests of the revenue. The ld. CIT was, as such, not justified in directing the AO to carry out inquiry to ascertain the nature of the expenses and to reframe the assessment by disallowing the expenses to be found to be capital in nature.

43. Further, the issue as to the nature of expenditure being capital or revenue has always been and remains a vexed and debatable issue. For this reason also, it was incumbent on the ld. CIT to specifically show an item of expenditure to be capital, which has not been done here.

44. So far as regards the direction issued by the ld. CIT, we have considered hereinabove that the direction issued by the ld. CIT is but a vague direction, inasmuch as the CIT did not point out any item to hold that the expense was capital expenditure. He merely stated that a large part of the expenses had rendered enduring benefit to the assessee. The observation of the CIT (A) was, therefore, a result of mere guess work, conjectures and surmises, without any specific finding of error of claim. It goes without saying that merely observing that there is reason to disallow some of the expenses as capital, without pointing out specifically as to which of the expenses were found by the ld. CIT to be of capital nature, cannot and does not comprise a finding u/s 263 of the Act. The direction issued by the ld. CIT is, therefore, a vague direction unsustainable in law.

45. The other issue taken up by the ld. CIT was that according to him, during F.Y. 2006-07, relevant to the year under consideration, it had been held that royalty claimed of Rs. 1,65,48,377/- was capital expenditure and had been added back to the income of the assessee; that since it had been paid to obtain a non-exclusive licence for use of a licensed trade mark, it was in the nature of intangible asset and depreciation of Rs. 41,37,094/- (25% of Rs. 165,48,377/-) should have been allowed; and that omission to do so had resulted in over assessment of Rs. 41,37,094/-, involving a tax effect of Rs. 13,92,545/-.

46. In this regard, the ld. CIT held the assessment order to be erroneous and prejudicial to the interests of the revenue, observing as follows:—

"5. The second issue relates to the claim of royalty to the tune of Rs. 1,65,48,377/- which has been treated as capital expenditure and added back to the income of the assessee-company. However, since the amount paid on account of royalty was to obtain a non exclusive license for use of licensed trade mark, it was in the nature of intangible asset and depreciation @ 25% on the said capital expenditure should have been allowed and failure to do so has apparently resulted in over assessment of income of Rs. 4137094/-. This fact has also been confirmed by the AR of the assessee company. As a result, on this issue also, the assessment order has to be revised by allowing depreciation @ 25% on royalty payment being treated as capital expenditure and the A.O. is hereby directed to allow such depreciation while re-framing the assessment order."

47. On this issue, the ld. Counsel for the assessee has contended that by virtue of the CIT's order on this aspect, the ld. CIT is seeking to reduce the assessment by a sum of Rs. 41,37,093/-; that this cannot be done u/s 263 of the Act; and that if at all, this can only be brought about by invoking the provisions of Section 264 of the Act.

48. The ld. DR has, on this aspect also, sought to place reliance on the impugned order.

49. Qua this issue, we find that indeed, by the passing of the impugned order, the effect is that of reducing the assessment by Rs. 41,37,093/-. Now, evidently, reduction of the assessment is nowhere the purport of invocation of the provisions of Section 263 of the Act. Therefore, the order under appeal on this score too, is found to be unsustainable in law and to this extent also it stands cancelled.

50. In view of the above, the grievance sought to be raised by the assessee by way of grounds of appeal taken, is found to be justified and is accepted as such.

51. In the result, the appeal filed by the assessee is allowed.