M/S Parisons Milling Company Pvt Ltd v. Commissioner of Income Tax

**IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT:** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR. JUSTICE ASHOK MENON** **TUESDAY, THE 10TH DAY OF JULY 2018 / 19TH ASHADHA, 1940** **ITA.No. 211 of 2013** **AGAINST THE ORDER/JUDGMENT IN ITA 587/COCH/2011 of I.T.A.TRIBUNAL, COCHIN BENCH DATED 07-12-2012** **APPELLANT(S)/APPELLANT/ASSESSEE IN ITA** **M/S PARISONS MILLING COMPANY PVT LTD CHEROOTY ROAD, CALICUT - 673 001.** **BY ADVS.SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.GOPINATH SRI.P.BENNY THOMAS SRI.K.JOHN MATHAI SMT.PREETHA S.NAIR** ## **RESPONDENT(S)/RESPONDENT/REVENUE IN ITA:** **COMMISSIONER OF INCOME TAX AYAKAR BHAWAN, NORTH BLOCK, KOZHIKODE - 673 001.** **BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10-07-2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** **ITA 211/2013** ## **APPENDIX** ## **APPELLANT'S EXHIBITS** **ANNEXURE-A : COPY OF ASSESSMENT ORDER DATED 14.12.2009 FOR 2007-08 ISSUED BY THE INCOME TAX DEPARTMENT TO THE APPELLANT. ANNEXURE-B : COPY OF NOTICE UNDER SECTION 263 DATED 3.9.2011 ISSUED BY THE INCOME TAX DEPARTMENT TO THE APPELLANT. ANNEXURE-C : COPY OF LETTER DATED 14.10.2009 FILED BY THE APPELLANT BEFORE THE ASST.COMMISSIONER OF INCOME TAX. ANNEXURE-D : COPY OF DEMAND NOTICE DATED 6.4.2006 OF THE KERALA STATE ELECTRICITY BOARD ISSUED TO THE APPELLANT. ANNEXURE-E : COPY OF REPLY FILED BY THE APPELLANT BEFORE THE COMMISSIONER OF INCOME TAX DATED 15.9.2011. ANNEXURE-F : COPY OF ORDER OF THE COMMISSIONER OF INCOME TAX DATED 16.9.2011 TO THE APPELLANT. ANNEXURE-G : COPY OF TRIBUNAL'S ORDER DATED 7.12.2012 ISSUED TO THE APPELLANT.** **//TRUE COPY//** **PS TO JUDGE.** jg-17/7 K.VINOD CHANDRAN & ASHOK MENON, JJ. ------------------------------------------ITA No.211 of 2013 ------------------------------------------Dated this the 10[th] day of July, 2018 J U D G M E N T ## Vinod Chandran, J. The substantial question of law arising in the above case as framed in the memorandum of appeal is as follows:- “Whether on the facts and circumstances of the case the appellate tribunal was justified in sustaining the order of the Commissioner of Income Tax when it was accepted by the Tribunal that all the relevant details were before the assessing officer while completing the assessment under Section 143(3) of the Income Tax Act?” 2. The assessee purchased a premises with plant and machinery with an electricity connection in June, 2002. Subsequent to the purchase, in the year 2007-08 the assessee settled, pending electricity dues for the period prior to the purchase, under One Time Settlement Scheme as is seen from Annexure-D. The assessee claimed the sum as revenue expenditure, which was accepted as per the assessment order, but later suo motu revised under Section 263 of the Income Tax Act, 1961 ('Act', for short). The suo motu revision order is available at Annexure-F. The order was affirmed by ITA 211/2013 -2- the Income Tax Appellate Tribunal. Two issues were taken up in the suo motu revision order; one of which was set aside and the other affirmed by the Tribunal. We are only concerned with the affirmation made by the Tribunal of the electricity charges for the period prior to the purchase being taken as capital expenditure. 3. The learned counsel for the assessee relies on (2017) 14 SCC 548 [Commissioner of Income Tax GujaratII v. Kwality Steel Suppliers Complex] to contend that when two possible views are taken by the Assessing Officer (AO), there could be no suo motu revision effected under Section 263, for reason of the Commissioner having a different opinion. It is also submitted that there is not discernible any erroneous finding, since the revenue expenditure as claimed by the assessee was possible, for reason of the expenditure being incurred in the subject year though for prior dues of electricity charges. The assessee also has a case that there is no prejudice caused to the Revenue, insofar as even if the expenditure is treated as capital, definitely the assessee would be ITA 211/2013 -3- entitled to depreciation and the very same amount would be set off against the profits of the assessee. 4. The learned Senior Standing Counsel for Government of India (Taxes) contends that there is nothing in the assessment order to show that an opinion has been entered into by the AO. The Tribunal has also specified the same and affirmed the order of suo motu revision. It is further contended that the assessment order is erroneous and the expenditure for prior period electricity charges cannot be treated as a revenue expenditure; which if so treated causes prejudice to the Revenue. 5. Admittedly, the assessee purchased a plant and machinery for utilisation in its business, that too long before the electricity charges were demanded from the assessee. Obviously, the demand was settled by the assessee, since otherwise the same would be a charge created on the plant and machinery as also on the property. Only to avoid such distress on the property, the assessee settled the dues of the prior owner. According to us, this is the hidden cost of the plant and machinery, which the assessee was not aware of at ITA 211/2013 -4- the time of purchase. When the demand was raised; for further utilisation of the plant and machinery, it was necessitated that the prior charges be paid up, which necessarily would be a capital expenditure and not a revenue expenditure. 6. Kwality Steel Suppliers Complex (supra) was a case in which there was dissolution of the firm by the demise of one partner and the business itself was carried on by the son, who was the other partner. Closing stock was valued on cost price which was accepted by the AO. Under Section 263, there was a suo motu revision effected on the ground that the closing stock had to be valued at market price. We extract paragraph 16 of the decision: “16. The question is as to whether this situation would apply in the instant case where the partnership firm stood dissolved by the operation of law in view of the death of one of the partners i.e. the mother, but the business did not come to an end as the other partner viz. son, who inherited the share of the mother, continued with the business. In a situation like this, there was no question of selling the assets of the firm including stock-in-trade and, therefore, it was not necessary to value stock-in-trade at market price.” ITA 211/2013 -5- 7. The Hon'ble Supreme Court held that in such circumstances, there was no scope for a suo motu revision especially since valuation of closing stock at cost price was one of the possible views. Reliance was also placed on 2000 (2) SCC 718 [Malabar Industrial Co. Ltd. v. CIT] to find that for validly carrying out a suo motu revision, there should be, in conjunction, an erroneous decision and prejudice occasioned to the Revenue. Though each and every mistake or error cannot be deemed to be an erroneous finding, it was held that “an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous.” (sic para 9) 8. As noticed by the Tribunal, we do not see any discussion by the AO of having accepted the claim of the assessee that the remittance of prior electricity charges under One Time Settlement Scheme was a revenue expenditure. The learned counsel for the assessee has relied on Annexure-C reply submitted before the AO to contend that the specific claim along with the demand letter received from the KSEB was produced before the AO. However, that is not to say that the AO had come ITA 211/2013 -6- to a conclusion as to whether the claim was allowable as a revenue expenditure. The AO erroneously did not disallow electricity charges paid; claimed as revenue expenditure, erroneously assuming that the charges are for the subject year. There is hence erroneous assumption of facts and wrong application of law. It cannot also be said that the claim raised as revenue expenditure is a plausible view, for the reasoning already supplied by us that the electricity charges for the period prior to sale was a hidden cost which had to be settled by the assessee after the sale. We are of the opinion that there was an erroneous decision entered into by the AO which could have been revised under Section 263, provided there is a prejudice caused to the Revenue. The mere fact that capital expenditure could be claimed as depreciation cannot avoid the prejudice caused to the Revenue. First of all, the capital expenditure could be claimed as depreciation only in the course of a period of years. Then it would depend upon whether there was any profit earned by the assessee in the subsequent years. Further the question whether prejudice is caused has to be examined on the tax liability for the subject year and not the anticipated ITA 211/2013 -7- claims that could arise in the future years which again is dependent on various elastic factors. We are of the opinion that there is clear prejudice caused to the revenue. In such circumstances, we answer the question in favour of the Revenue and against the assessee. We reject the appeal leaving the parties to suffer their respective costs. Sd/K.VINOD CHANDRAN JUDGE Sd/ASHOK MENON JUDGE jg