ORDER
Pramod Kumar, A.M.
1. This assessee’s appeal is directed against CIT’s order dt. 19th Jan., 1996, passed under Section 263 of the IT Act, 1961.
2. The assessee has raised five grounds of appeal, and several sub-grounds under those five main grounds, but, in substance, assessee’s grievance is that on the facts and in the circumstances of the case, CIT. erred in assuming jurisdiction under Section 263 of the Act, and, that the order sought to be revised by the impugned order is not at all erroneous in law or on facts. We, therefore, deem it appropriate to take all these grounds of appeal together.
3. Briefly, the facts. The assessee is engaged in the business of manufacture of steel wires, steel wire ropes, wire rods, billets, wire drawing and allied machines, etc. The assessee filed its income-tax return for the asst. yr. 1991-92 on 31st Dec., 1991, disclosing a returned income of Rs. 2,35,47,1290 (sic) which, after being subjected to scrutiny assessment under Section 143(3), lead to the income being finally assessed at Rs. 2,39,19,589. However, on 19th Oct., 1995, learned CIT (West Bengal-V) issued a show-cause notice to the assessee requiring the assessee to show-cause as to why the assessment order under Section 143(3) should not be treated as ‘erroneous and prejudicial to the interest of Revenue’ and, accordingly, be made subject-matter of revision under Section 263 of the Act. In this show-cause notice, the CIT pointed out that :
(a) The assessee had claimed deduction of amounts of Rs. 14,30,416 and Rs. 15,51,373, on account of technical known-how fees and design and drawing expenses, which have been wrongly allowed by the AO as these expenses were in the nature of capital expenses.
(b) The assessee had advanced an interest-free advance of Rs. 2,26,23,000 to its subsidiary company, even though assessee had ‘huge liabilities for interest’. It was also pointed out that the assessee ‘did not get any business gains from the subsidiary company, directly or indirectly, by giving the interest-free loan’. It was then pointed out that an amount of Rs. 18,45,901 calculated @ 16.29 per cent as average rate of interest on the interest-free loan should have been disallowed at the time of making assessment under Section 143(3).
(c) The assessee had received dividend of Rs. 61,27,022 and the entire amount was claimed as a deduction under Section 80M. It was then pointed out that Section 80AA restricts Section 80M deduction to the net dividend income. Therefore, the AO should have deducted expenditure incurred in earning the dividend and, on that basis, restricted the deduction under Section 80M to the net dividend income.
4. It was in the background of the above mistakes pointed out by the learned CIT, he proposed to exercise his powers under Section 263 of the Act. In reply to the show-cause notice, the assessee, vide letters dt. 5th and 20th Dec., 1995 (copies of which were placed before us at pp. 9 to 42 of the paper book), inter aha submitted as follows ;
(a) Although the assessee had indeed debited technical fees aggregating to Rs. 14,30,416, the same was added back in computation of income. Therefore, it is incorrect to observe that this amount was claimed as a deduction. The assessee had, however, claimed deduction under Section 35AB, which is in respect
of capital expenditure only, aggregating to Rs. 16,22,528 which also included Section 35AB deduction for the aforesaid fees for technical services amounting to Rs. 14,30,416. With regard to second amount i.e., of Rs. 15,51,373 on account of payment for designs and drawings, assessee’s contention was that this amount was paid to M/s Stalberger and the drawings and designs so purchased were required for producing ‘Drum twister line, complete with all accessories’ which the assessee was to supply to M/s Incab Industries Ltd. It was also submitted that these drawings and designs were solely required for the purpose of executing aforesaid order of Incab Industries Ltd. and, therefore, payment for these drawings and designs, for all practical purposes, constituted a part of cost of executing that order. The assessee also pointed out that generally the assessee has consistently been amortizing, under Section 35AB, cost of drawings and designs but since this particular payment was for drawings and designs which were meant for one time use in execution of a particular order, it represented direct cost of the machinery manufactured and supplied to Incab Industries. The assessee also placed reliance on the auditor’s note.
(b) It was submitted by the assessee that the bank accounts from which the advances of Rs. 226.63 lakhs were made were not bank overdraft accounts, but all the receipts and collections were also deposited in those accounts. The assessee thus submitted that advances were thus made from common pools of funds which included collections and realizations from customers, and profits generated by the assessee over the years, as reflected in the general reserves, are also embedded in the same. In this backdrop, assessee placed reliance on Hon’ble jurisdictional High Court’s judgment in the case of Woolcombers of India Ltd. v. CIT (1982) 134 ITR 219 (Cal) which was also followed in the case of Reckitt & Coleman of India Ltd. v. CIT (1982) 135 ITR 698 (Cal), Indian Explosives Ltd. v. CIT (1984) 147 ITR 392 (Cal), Alkali & Chemical Corporation of India Ltd. v. CIT (1986) 161 ITR 820 (Cal) and British Paints (India) Ltd. v. CIT (1991) 190 ITR 196 (Cal). It was also pointed out that assessee’s profits for the relevant financial year was Rs. 518 lakhs. The assessee thus submitted that, therefore, “no question can be raised on the payment of any interest on any overdraft facility alleged to have utilized for the purpose of advancing the impugned loans”.
(c) As regards deduction under Section 80M, the assessee submitted that ‘no expenses were actually incurred in earning the dividend’ and that the allegation that certain expenditure were incurred was based on mere surmises and conjectures rather than any material on record. The assessee further relied on Hon’ble jurisdictional High Court’s judgment in the case of CIT v. United Collieries Ltd. (1993) 203 ITR 875 (Cal) in support of the proposition that only ‘actual expenditure incurred by an assessee in earning the dividend income can be deducted from gross amount of dividend earned’. It was thus submitted that there was no scope of making an estimate and no notional expenditure can be allocated to dividend income.
5. On the strength of the above submissions, assessee urged the learned CIT to drop the proceedings under Section 263, but the learned CIT was far from impressed
by these arguments. He went ahead with proposed revision order and, vide the revision order dt. 19th Jan., 1996, thus passed, directed the AO as follows :
(i) As regards payment of Rs. 29,81,789 on account of technical fees and payments for designs and drawings, the AO will consider the matter afresh and, in doing so, treat the expenditure a capital expenditure in respect of which deduction under Section 35AB will be admissible. But the CIT also added that “since these are capital expenditures, they cannot be allowed as a revenue deduction”.
(ii) As regards disallowance of notional interest of Rs. 18,45,901 on account of interest-free loan to subsidiary company, CIT stated that “the fact of borrowing (interest-bearing) and advancing interest-free loan makes it a colourable transaction’ and yet restored the matter to the file of the AO with a direction to look into the matter afresh on the basis of facts stated above.”
(iii) As regards Section 80M deduction, CIT stated that ‘it is not acceptable that such huge dividend income was earned without any expenses having been incurred by the assessee’. The AO was directed to ascertain the expenditure incurred in earning the dividend and deduct the same from gross dividend earned, for the purpose of arriving at amount deductible under Section 80M of the Act.
6. Aggrieved by the aforesaid order of the learned CIT, assessee is in appeal before us.
7. We have heard Shri Rahul Mitra, learned counsel for the assessee, and Shri L.D. Mahalik, learned Departmental Representative, at considerable length. We have also carefully perused the material before us and duly deliberated upon factual matrix of the case, as also the applicable legal position.
8. We find that connotations of expression ‘erroneous’, in the context of exercise of revisionary powers by the CIT under Section 263 or, for that purpose, under Section 264 of the Act, are much narrower than ordinary connotations of this expression in common parlance. Hon’ble Calcutta High Court, in unreported judgment dt. 19th Oct., 2001, in the matter of CIT v. Subhash Projects & Marketing Ltd. (ITA No. 448 of 2000) has observed that “when a possible view has been taken by the AO, it cannot be said that the order of the AO is erroneous”. Their Lordships have further observed that “In exercise of power under Section 263, the order of AO can be said to be erroneous only when impossible view has been taken” and that “If a possible view has been taken by the AO, the order of the AO cannot be said to be erroneous”. As to the nature of binding force of these views of Hon’ble High Court, we may only refer to the following observations of Hon’ble Supreme Court in the case of Collector of Central Excise v. Dunlop India Ltd. (1985) 154 ITR 172 (SC) at p. 180.
“We desire to add and as was said in Cassell & Co. Ltd. v. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that ‘in the hierarchical system of Courts’ which exists in our country, ‘it is necessary for each lower tier’, including the High Court, ‘to accept loyally the decisions of the higher tiers’. ‘It is inevitable in a hierarchical system of Courts that there are decisions of the supreme appellate Tribunal which do not attract the unanimous approval of all members of the judiciary…… But the judicial system
only works if someone is allowed to have the last word and that last word, once
spoken, is loyally accepted” (See observations of Lord Hailsham and Lord Diplock in Broome v. Cassell). The better wisdom of the Court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical judicial system.”
In this view of the matter, we have to proceed on the premises that unless it can be established that the view taken by the AO is a perverse, or impossible view, CIT cannot invoke the revisionary powers conferred upon him by the statute. Therefore, we begin with examining whether the view taken by the AO was at all a possible view or not.
9. As far as allowing deduction for payment or technical fees and drawings and designs is concerned, CIT’s basis of assuming jurisdiction under Section 263 was that, according to the CIT, the assessee had claimed deduction of amounts of Rs. 14,30,416 and Rs. 15,51,373, on account of technical know-how fees and design and drawing expenses, which have been wrongly allowed by the AO as these expenses were in the nature of capital expenses. It is, however, not in dispute that the amount of Rs. 14,30,416, though debited in P&L a/c, was added back in computation of taxable income and only deduction under Section 35AB was claimed in respect of the same. These facts were duly brought to the notice of the CIT and even he has not controverted the same. That leaves us only with the amount of Rs. 15,51,373 which represents payment to one M/s Stolberger Maschinerfabrik GmbH & Co. a German company towards purchase of drawings and designs which were said to have been required for producing ‘Drum twister line, complete with all accessories’ which the assessee was to supply to M/s Incab industries Ltd. We may, in this regard, reproduce the following auditor’s relevant portion at pp. 39-40 of the paper book, for ready reference :
“4.4 According to the past practice, designs and drawings are capitalized under plant & machinery. Deviation from the said practice has been made in the case of designs and drawings amounting to Rs. 15,51,373,35 imported during the year from M/s Stolberger Maschinerfabrik GmbH & Co., West Germany, which have been charged off to revenue as consumption of materials as, in the opinion of the officials of the unit, these designs were primarily imported to execute a specific order for sales value of Rs. 1.8 crores (approx.) and accordingly they do not visualize receiving any such order in the near future. Other drawings and designs imported during the year have been capitalized…..”
10. We also find that the assessee has received an order dt, 19th Sept., 1989, from Incab Industries Ltd. (copy placed before us at p. 29 of the paper book) which Inter alia stated that :
SI No.
Materials
description
Material
Code
Qty.
Unit
Rate
(Rs)
1.
Drum twister line complete with all
components/accessories referred to below (including commissioning spares
only)
8400000
1
Set
1,55,00,000
2.
11. In the attached specifications, reference is made to “technical discussions with your (assessee’s) collaborator M/s Stolberger (West Germany)” and even in description of items, in remarks column, reference is made to “Stolberger” at several places.
12. We find that it is in the aforesaid background that the assessee placed order dt. 12th Dec., 1989, on M/s Stolberger (a copy of import order placed before us at p. 27 of the paper book) for “Line engineering drawings for direct haul off drum twister and manufacturing drawing for 1600 pay off with compensating device” and on 25th Oct., 1990, for “Drawings and designs for direct haul off type drum twister”. These two supplies were received by the assessee during the relevant previous year and the aggregate amount in respect of the same worked out to Rs. 15,51,373.
13. We find that even though all the above facts were brought to the notice of the CIT and it was submitted that it was because of these peculiar circumstances that the assessee had claimed the deduction for entire amount of Rs. 15,51,373, under Section 37(1) and as a part of direct cost of manufacture of machinery supplied to Incab Industries Ltd. the CIT did not adequately deal with these contentions, and rejected the same by observing that “since these are capital expenditures, they cannot be allowed as a revenue deduction”. However, the facts set out in assessee’s submissions dt. 5th and 20th Dec., 1995, filed before the learned CIT, were not controverted or disputed.
14. We find that, on one hand the CIT has not even dealt with any of the submissions of the assessee, and yet he comes to a categorical finding of fact that “since these are capital expenditures, they cannot be allowed as a revenue deduction”. No reasons have been assigned to CIT’s coming to the conclusion that the expenditure in question is in the nature of capital expenditure. Such an approach of the CIT cannot be said to be a judicious exercise of powers under Section 263, and, accordingly, unsustainable in law, Although CIT has restored the matter to the AO but then he has given a finding of fact that the expenditure in question is a capital expenditure. On these facts, even if an opportunity of hearing is given to the assessee, before the AO, such an opportunity cannot be a meaningful opportunity so far as determination of question about nature of expenditure is concerned.
15. This also takes us to the question whether, on the peculiar facts, of this case, it was at all a possible view that the aforesaid amount of Rs. 15,51,373 was deductible under Section 37(1) of the Act. Section 37(1), it may be mentioned, states that “Any expenditure, not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses, laid out or expended wholly or exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head ‘profits and gains of business and profession’.” In the present case, it is not in dispute that the amount is spent wholly and exclusively for the purpose of business and the only question, therefore, is whether it can be excluded from the scope of Section 37(1) on the ground of its being ‘in the nature of capital expenditure’. We find that CBDT Circular No. 21, dt. 9th July, 1969, had inter alia taken a view that, as regards admissibility of expenditure in the assessments of Indian participant in foreign technical collaboration, “the
question would be whether the expenditure has been incurred for acquiring or bringing into existence an asset or advantage of enduring benefit to the assessee’s business. If so, the expenditure will have to be regarded as one on capital account.” It was further stated that “On the other hand, if the expenditure has been incurred on running the business and with a view to produce profits, the payment would be allowable as revenue expenditure. The question has necessarily to be examined with reference to facts of each particular case and no general proposition can be laid down that all payments for technical know-how should be regarded as revenue payments or that they are always capital in nature.” Later in that circular, it is stated that “As regards technical know-how obtained in the form of drawing and designs and technical information and knowledge, concerning the product to be manufactured and the process of manufacture, it will be sometimes difficult to decide whether the payment therefore is capital or revenue expenditure”. Suggesting various aspects to be examined for this purpose, it concludes by stating that “if as a result of this examination, it is found that no asset or advantage of a permanent or enduring character is acquired by the Indian participant, the expenditure should be treated as revenue expenditure and allowed as a deduction.” In the light of this guidance, let us look back at uncontroverted facts of the case, It is not in dispute that these drawings and designs were specifically acquired for one time supply of a particular machine to Incab Industries Ltd. and, as mentioned in the audit notes, unit officials did not visualize receiving any such order in the near future. The assessee’s contention that “these drawings and designs were solely required for the purpose of executing aforesaid order of Incab Industries Ltd. and, therefore, payment for these drawings and designs, for all practical purposes, constituted a part of cost of executing that order” is not disputed on facts, We have also noted that order for these drawings was placed in the light of, and immediately after, the order for related machine received by the assessee from Incab Industries Ltd. We have also noted that the foreign company was all along involved in assessee’s discussions with the Incab Industries Ltd. and, as evident from specifications set out by Incab Industries Ltd. itself, proximate reason for purchase of these drawings and designs was execution of Incab’s order. On these facts, it is not at all an unreasonable view to come to the conclusion that the expenditure was incurred for “running the business and with a view to produce profits” and, therefore, deductible as a revenue expenditure. Since the drawings and designs were required for this specific purpose and were goods only for that purpose, a view can indeed be taken that it did not result in acquiring “an asset or advantage of a permanent or enduring character”.
16. In view of these discussions, we are of the considered opinion that the view taken by the AO was a reasonable view and, therefore, the CIT was denuded of his powers to revise the order on this issue. As we give this finding, we make it clear that, in the present context, we are not even concerned whether such a view of the AO was indeed correct on merits or not, but our consideration is confined to whether a reasonable person, on the given facts, could have taken this view or not. Our conclusion is that such a view was indeed a possible and reasonable view.
17. We now move on second ground on which the order is sought to be revised. Learned CIT’s observation is that the assessee had advanced an interest-free advance of Rs. 2,26,23,000 to its subsidiary company, even though assessee had ‘huge liabilities for interest’. It is also pointed out that the assessee ‘did not get any business gains from the subsidiary company, directly or indirectly, by giving the interest-free loan’. It is in this background that, in CIT’s opinion, an amount of Rs. 18,45,901 calculated @ 16.29 per cent as average rate of interest on the interest-free loan should have been disallowed at the time of making assessment under Section 143(3). In the impugned revision order, learned CIT has given a finding to the effect that “the fact of borrowing (interest-bearing) and advancing interest-free loan makes it a colourable transaction” and then restored the matter to the file of the AO with a direction to look into the matter afresh “on the basis of facts stated above.”
18. As far as this issue is concerned, we find that the issue is covered on merits by Tribunal’s order in the case of Dy. CIT v. India Foils Ltd. (ITA Nos. 1353-1354/Cal/1996 dt. 28th March, 2001; copy of the order placed before us) which was authored by one of us (learned JM) and to which both of us were parties. In that order, the Tribunal had, following the judgments of Hon’ble jurisdictional High Court in the cases of Woolcombers of India Ltd. (supra), Reckitt & Coleman of India Ltd. (supra), Indian Explosives Ltd. (supra) and British Paints India Ltd. (supra), held that “only because the account from which cheques was issued is an overdraft account, it cannot be presumed that the investments were made by the assessee out of interest-bearing funds because other various receipts were also deposited in that account”. A reference was then also made to the judgment in the case of Alkali Chemical Corp of India Ltd. (supra) wherein a view was taken by the Hon’ble jurisdictional High Court that “if the money is deposited by the assessee out of it’s profits in an overdraft account from which all payments including that of income-tax are made, the fact that the said account had a continued debit balance would make no difference to the presumption that the income-tax has, in fact, been paid out of the profits and not out of the borrowings”. In the present case also it is not in dispute that the bank accounts from which the advances of Rs. 226.63 lakhs were made were not bank overdraft accounts, but all the receipts and collections were also deposited in those accounts. The assessee submission that ‘advances were thus made from common pools of funds which included collection and realizations from customers, and profits generated by the assessee over the years, as reflected in the general reserves, are also embedded in the same’, also remains uncontroverted. It was also not in dispute that assessee’s profits for the relevant financial year was Rs. 518 lakhs. On these facts, and in the light of the Tribunal’s decision, which followed the judgments of Hon’ble jurisdictional High Court, as discussed above, it cannot be said that the view that no such disallowance of interest was called for, could be said to be an unreasonable view of the matter. Therefore, in our considered view, learned CIT did not have the jurisdiction to invoke his power rendered Section 163 to revise AO’s order on this aspect also. In any event, the CIT’s conclusion that “the fact of borrowing (interest-bearing) and advancing interest-free loan makes it a colourable transaction” is devoid of any basis or material on record. It is thus clear that there was no material before the CIT to suggest that the
view taken by the AO was not a reasonable view. Learned CIT’s directions on this issue also are not legally sustainable.
19. Coming to third and last ground of CIT’s exercise of powers under Section 263, we find that the learned CIT has observed that ‘it is not acceptable that such huge dividend income was earned without any expenses having been incurred by the assessee and it is in this background that the AO is directed to ascertain the expenditure incurred in earning the dividend and deduct the same from gross dividend earned, for the purpose of arriving at amount deductible under Section 80M of the Act.
20. We have noticed that the assessee has categorically stated that no specific expenses have been incurred in earning the dividend and that only ‘actual expenditure incurred by an assessee in earning the dividend income can be deducted from gross amount of dividend earned’. It was thus submitted by the assessee that there was no scope of making an estimate and no notional expenditure can be allocated to dividend income. We find that the CIT has not controverted these submissions but has made a bland statement that ‘it is not acceptable that such huge dividend income was earned without any expenses having been incurred by the assessee’. It is, however, not clear that on what basis the CIT has rejected assessee’s submissions and factual statements. We may mention that dividend income is inherently in the nature of a dormant income and, therefore, it is not at all necessary that there should always be some direct expenditure involved in earning the same. We may further mention that it is only an expenditure in the nature of direct and specific expenditure incurred in earning the dividend that is to be deducted from gross dividend to arrive at amount deductible under Section 80M of the Act. This view also finds support from following observations in Tribunal’s decision in the case of Shaw Wallace & Co. v. Dy. CIT (2001) 71 TTJ (Gal) 478 : (2002) 80 ITD 156 (Cal) which was authored by one of us (AM) and to which both of us were parties :
“Having considered the rival submissions and deliberated upon the judicial precedents on the issue before us, we are of the considered view that the deduction of expenditure incurred in earning dividend income, merely on notional or estimate basis and for the purpose of computing admissible deduction under Section 80M is not sustainable in law. In case an expenditure is really incurred in earning the dividend income, such an expenditure should undoubtedly be deducted from gross dividends to arrive at the allowable deduction under Section 80M. However, in the case before us the deduction for expenditure has been made on purely estimate basis. We are of the considered view that such an allocation of expenditure, as much by the AO in this case, is devoid of legally sustainable basis in the light of jurisdictional High Court’s judgment referred to earlier.”
In this view of the matter, we see no infirmity in the order of the AO and find that the learned CIT indeed erred in seeking to revise the order of the AO on this point also. There was no material before the CIT to suggest that the view taken by the AO was not a reasonable view.
21. In the light of the above discussions, we are of the considered opinion that the view taken by the AO, on all the three issues which are subject-matter of learned CIT’s revision, was a reasonable view having regard to the
uncontroverted facts of the case and the applicable legal position. Therefore, in
considered view, the impugned order passed by the CIT is unsustainable in
law, Accordingly, we hereby set aside the impugned order, dt. 19th Jan., 1996,
passed by the learned CIT.
22. In the result, appeal is allowed.