Dr.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY
ACADEMIC SESSION: 2022-2023

CORPORATE LAW

Submitted to: Submitted by:

Dr. Visalakshi Vegesna Saddhvi Nayak, Meghna
Associate Professor (Law) 200101114, 190101093
RMLNLU 6 th semester (Section B)
B.A.LLB.(Hons.)
 5TH JUSTICE DR. B.P SARAF NATIONAL TAX MOOT COURT COMPETITION,
2020

BEFORE

THE HON’BLE SUPREME COURT OF INDIA

SPECIAL LEAVE PETITION UNDER ARTICLE 136 OF THE CONSTITUTION OF

INDIA

[CIVIL APPEAL NO /2020]

M/S INDIAN MINING COMPANY LTD.(IMCL).......................................... PETITIONER

V.

PRINCIPAL COMMISSIONER OF INCOME TAX, KOLKATA-1 ........ RESPONDENT

WRITTEN SUBMISSION FOR RESPONDENT

CONTENTS
LIST OF ABBREVIATIONS .................................................................................................................... 4

Index of Authorities .................................................................................................................................... 6

STATEMENT OF JURISDICTION........................................................................................................................................ 9

STATEMENT OF FACTS ................................................................................................................................................... 10

QUESTIONS PRESENTED ................................................................................................................................................ 11

SUMMARY OF PLEADINGS ............................................................................................................................................ 12

PLEADINGS ........................................................................................................................................................................ 14

1. That The Present Petition Involves No SQL .................................................................................... 14

That the law is settled on the applicability of §37 and §263 .................................................................... 14

[1.1.1] Application of general principles to fact of the case ....................................................... 14

[1.1.2] No interpretation required ............................................................................................... 15

No involvement of question of law ........................................................................................... 15

[ARGUENDO] Difference between question of law and SQL ...................................................... 16

2. That The expense in question is not an allowable expense u/s 37 .................................................. 17

That the said expenditure was not wholly and exclusively incurred for the purpose of
business ............................................................................................................................................ 17

[2.1.1] For the purpose of business ............................................................................................. 17

[2.2.2] Incurred wholly and exclusively for the purpose of business ......................................... 18

That the nature of expense incurred is penal in nature ............................................................................ 19

[2.2.1] Nature of MMDRA ......................................................................................................... 19

[2.2.2] Purpose of explanation 1and violation of law ................................................................ 19

[2.2.3] Paramount to Right To Environment ............................................................................... 20

[2.2.3] Thin line between compensation and penal nature .......................................................... 20

That the Assessee was not bona fide ignorant.......................................................................................... 21

3. That The Order Was Passed Without Making Required Inquiries Or Verification........................ 22

AO is duty bound to ascertain the truth ..................................................................................... 22

Satisfaction should be based on relevant material ..................................................................... 23

 5th Edition Justice Dr. B. P. Saraf National Tax Moot Court Competition

4. That The PCIT Was Right In Exercising His Right U/S 263 Of IT Act, 1961 ............................... 24

Order was prejudicial to the interest of revenue ......................................................................................... 24

Order was erroneous in law......................................................................................................................... 25

[4.2.1] The AO didn’t verify the source of the payment............................................................. 25

[4.2.2] The AO ought to have made extensive enquiry as a prudent man would have, given the
facts of the case ........................................................................................................................... 26

5. That The Opinion Of CIT Was Not Purely Private Opinion ........................................................... 28

Opinion is bound to have certain amount of subjectivity ........................................................................... 28

That the explanation broadens the power of PCIT though it does not bring substantial change
in law ................................................................................................................................................ 29

PRAYER.................................................................................................................................................. 30

Written Submission on the behalf of Respondent 3|Page

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LIST OF ABBREVIATIONS

ACIT Additional Commissioner of Income Tax

Al. Allahabad
AO Assessing Officer
AIR All India Reporter
Bom. Bombay
Cal. Calcutta
CIT Commissioner of Income Tax
CIT(A) Commissioner of Income Tax (Appeals)
Co. Company
DCIT Deputy Commissioner of Income Tax
Del. Delhi
Guj. Gujarat
HC High Court
HP. Himachal Pradesh
Hyd. Hyderabad
IMCL M/s Indian Mining Company Limited
IT Act Income Tax Act
ITAT Income Tax Appellate Tribunal
ITO Income Tax Officer
ITR Income Tax Report
Kar. Karnataka
Ltd. Limited
MMRDA Mines and Minerals (Regulations and
Developments) Act, 1957
Ors. Others
P&H. Punjab and Haryana
PCIT Principal Commissioner of Income Tax
Pvt. Private
SC Supreme Court
SCN Show Cause Notice
SQL Substantial Question of Law

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UOI Union of India

u/s Under Section
u/A Under Article
§ Section
¶ Paragraph

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INDEX OF AUTHORITIES

Cases

Appollo Tyres Ltd. v. Deputy CIT [2014] 360 ITR 36 (Kerala) ................................................. 23
CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC) .............................................................. 26
CIT v. Emergy Stone Mfg. Co. [1995] 2013 ITR 143 (Raj.) ....................................................... 24
CIT v. Krishnadas [2000] 242 ITR 443 (Guj.) .............................................................................. 16
CIT v. M.M. Khambhatwala [1992] 198 ITR 144 (Guj.) ............................................................. 22
CIT v. Mamta Enterprises [2004] 135 Taxman 393 (Kar.) .......................................................... 17
CIT v. Nagesh Knitwears Pvt. Ltd. [2016] 345 ITR (Del) ........................................................... 20
CIT v. Orissa Co. Ltd. [1986] 159 ITR 0078 (SC) ....................................................................... 13
CIT v. Pushpa Devi [1987] 164 ITR 639 (Pat.) ............................................................................ 22
CIT v. Seshasayee Paper & Board Ltd. [2000] 242 ITR 490 (Mad.) .......................................... 20
CIT v. Smt. Minal Rameshchandra [1987] 167 ITR 507 (Guj.) .................................................. 16
Cochin International Airport Ltd. v. ACIT [2018] 92 taxmann.com 277 (Cochin - Trib.) ...... 24
Eclat Construction Pvt. Ltd. v. CIT [1988] 172 ITR 84 (Pat.) ..................................................... 16
Free Wheels India Ltd. v. CIT [2001] 252 ITR 877 (Del.) .......................................................... 15
Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Del) ....................................................... 20
H.H. Maharaja Raja Pawar Dewas v. CIT [1982] 138 ITR 518 (MP) ........................................ 22
Hero Vinoth v. Seshammal AIR 2006 SC 2234 ........................................................................... 14
Hyderabad Chemicals Supplies Ltd. v. Assistant CIT [2011] 137 TTJ (Hyd.) 732 ................... 25
Indian Council for Enviro Legal Action v. UOI AIR1996 SC 1446 .......................................... 18
ITO v. DG Housing Projects Ltd. [2012] 343 ITR 329 (Del.) ..................................................... 23
Jaipur Electro Pvt. Ltd. v. CIT [1996] CTR (Raj.) 237 ................................................................ 20
Jeevan Investmensts & Finance Pvt. Ltd. v. CIT [2017] 88 taxmann.com 552 (Bom.) ............ 23
Lahshmi Narayan Court Shanar v. CIT [1975] 100 ITR 143 ....................................................... 16
Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) ....................................................... 22
Manu Sharma v. State (2010) 6 SCC 1 .......................................................................................... 20
MC Mehta v. UOI AIR 1987 SC 965 ............................................................................................ 18
Nek Ram Sharma and Co. v. ITAT & Ors. [2003] 262 ITR 692 (J&K)..................................... 14
NIIT v. CIT [2015] 60 taxmann.com 313 (Del-Trib) ................................................................... 21
Prakash Cotton Mills Pvt. Ltd. v. CIT (Central), Bombay AIR 1993 SC 2174 ......................... 13
Raghubir Prasad Gupta v. CIT, West Bengal -VI [1979] 120 ITR 789 ...................................... 15

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Raymond Wollen Mills Ltd v. ITO (1996) 236 ITR 35 (SC) ....................................................... 26
Senairam Doongarmall v. CIT [1961] 42 ITR 392 SC ................................................................ 16
Sir Chunilal Mehta & Sons Ltd. v. Century Spinning & Manufacturing Co. Ltd. AIR 1962 SC
1314 .............................................................................................................................................. 12
Spectra Shares & Scrips Pvt. Ltd. v. CIT [2013] 354 ITR 35 (Andhra Pradesh) ...................... 24
Subhlakshmi Vanijya Ltd. v. CIT [2015] 60 taxmann.com 60 (Cal. Trib.) ............................... 26
Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC) .................................................................. 21
Union Carbide v. UOI AIR 1989 SC 273 ...................................................................................... 18
Venkatakhrishna Rice Co. v. CIT [1987] 163 ITR 129 (Mad.) ................................................... 23
West Bengal Electricity Boards v. CIT [2002] 248 ITR 252 (Cal) .............................................. 14

Statutes

§114 Indian Evidence Act, 1872 ..................................................................................................... 26

§263 of IT Act, 1961 ....................................................................................................................... 13
§28 IT Act, 1961 .............................................................................................................................. 15
§37 of IT Act, 1961 ......................................................................................................................... 12
§37(1) of IT Act, 1961 .................................................................................................................... 17

Rules

CBDT Circular No. 19/2015 [F.NO.142/14/2015-TPL] ............................................................... 27

The Environment Impact Assessment Notification, 1994 ............................................................ 19

Constitutional Provisions

42nd Constitutional Amendment Act, 1976 ................................................................................... 18

Article 136, Constitution of India, 1950 ........................................................................................ 12

Books

Vinod K. Singhania & Kapil Singhania Direct taxes Law & Practice, 1272 (59th ed., 2017).17
Vinod K. Singhania & Kapil Singhania Direct taxes Law & Practice, 375 (59th ed., 2017). 15

JP Gupta, Law of Income Tax & Other Direct Taxes 283, available at
http://14.139.60.114:8080/jspui/bitstream/123456789/3776/1/014_1995_Law%20of%20In
come%20Tax%20and%20other%20Direct%20taxes.pdf last seen on 08/09/2020 .............. 13

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K.K. Jhanwar, Payments tainted with illegality: Whether deductible in determining taxable
income, [1998] 99 Taxman 301 (ART) ...................................................................................... 18
V. Pattabhiraman Penalties for infraction of law opposed to public policy- Whether allowable

as business expense [1998] 98 Taxmann 235 (ART) ................................................................ 17

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STATEMENT OF JURISDICTION

The Respondent has the honour to submit before the Hon’ble Supreme Court the
memorandum for respondent in the present case under Article 136 of the Constitution of
India. The appeal has been filed against the decision of the Hon’ble High Court of Calcutta
dismissing the appeal and refusing to quash the reassessment order framed by the PCIT u/s
263.

IN THE SUPREME COURT OF INDIA

THE RESPONDENT HUMBLY AND RESPECTFULLY SUBMITS TO THE
JURISDICTION OF THIS HON’BLE COURT

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STATEMENT OF FACTS

¶1. The Assessee, IMCL is a mining company which had taken iron ore mines on lease in
Orissa, from the Government of Orissa.
¶2. A PIL was filed in the Supreme Court in the matter of Common Cause v. UOI & Ors.
In regard to the matter of illegal mining. A Centrally Empowered Committee (CEC) reported
to the SC on the matter regarding issue of production without or in excess of Environmental
Clearance.
¶3. Accordingly, a notice dated 02.09.2016 was issued by the Deputy Director of Mines
to the assessee demanding a sum of Rs. 300 Crore as compensation u/s 21(5) of MMRDA
which was according to the decision given by the court in the above-mentioned case.
¶4. The assessee company made the entire payment and debited the said amount in its
Profit & Loss a/c for the year: 2016-17 and accordingly claimed a deduction u/s 37 of IT Act,
1961. from its taxable profits. AO raised a query regarding the deduction and was answered
by the AR of the assessee with a short reply stating that the expense incurred was for
compensatory purpose and was allowable deduction.
¶5. Later on, the asseessee received a SCN u/s 263 from the PCIT stating that the order
passed by the AO was erroneous in so far as prejudicial to the interest of revenue as the
expense incurred were for a purpose prohibited by law and not for a purpose of business and
were therefore not an allowable expense.
¶6. PCIT further stated that the AO didn’t make the necessary inquiries and didn’t care to
obtain the copy of judgement but instead accepted the claims of assessee. The Assessee
responded to the claims through their AR. The PCIT rejected the claims and passed an order
on 30.01.2020 holding assessment order of AO to be erroneous and prejudicial to the interest
of revenue.
¶7. The Assessee challenged the order of PCIT before the ITAT, Kolkata. The Ld. ITAT
dismissed the appeal of the assessee. The HC of Calcutta also did not admit the appeal u/s
260A holding that no SQL arose in the present matter. Aggrieved by the decision of the High
Court the assessee filed the present SLP in the SC u/A 136 of the Constitution of India.

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QUESTIONS PRESENTED

I. W H E T H E R T HE P R E S E N T P E TI TI O N I N V OL V E S ANY SQL?
II. W HETHER T HE E XPENSE IN Q UESTION IS AN ALLO W AB LE EXP ENSE U/S
37?
III. W HETHER T HE A SSES SIN G OFF ICER H AS M ADE INQ UI RE S OR
VER IF IC ATION AS REQ UI RED D URIN G T HE ASSE SSMENT ?
IV. W HETHER §263 IS AP P LIC AB LE IN T HE P RESENT C ASE ?
V. W HETHER T HE OP INION OF PCIT CAN BE HIS P RIVATE OP INION AND
W HETHER T HERE WAS C HAN GE IN P OSITION OF LAW AFTE R T HE
I NSER TION OF E XP LANAT ION 2 U/S 263?

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SUMMARY OF PLEADINGS

[ISSUE: I] WHETHER THE PRESENT PETITION INVOLVES ANY SQL?

¶1. The Counsel humbly submits that the present petition involves no SQL. There are
neither substantial rights of the parties nor any question of substantial information is involved
in the present case. The question whether the payment made is an allowable expenditure is
purely a facts-based question and not a question of law.
¶2. The law u/s 263 is well settled and requires no interpretation. Moreover, there was no
final decision by AO, PCIT asked him to reconsider his decision, and this makes the present
petition devoid of substantial rights and question of law, therefore, making it without any
SQL.

[ISSUE: II] WHETHER THE EXPENSE IN QUESTION IS AN ALLOWABLE EXPENSE?

¶3. The Counsel humbly submits that the expense in question is not an allowable
expenditure u/s 37(1) of IT Act, 1961 as it was incurred for the purpose of an offence. IMCL
mined without and in excess of environmental clearance, therefore, it violated the
environmental law. For violation of this law, it has paid compensation which is hit by
Explanation 1, hence, making it non allowable expenditure.
¶4. Moreover, the nature of payments makes it unfit from being called incurred for
‘wholly and exclusively for the purpose of business’ as the payment was not directly linked
with the business nor it amounted to business expediency. Therefore, ousting the allowability
of expense in question u/s 37(1) for the deduction.

[ISSUE: III] WHETHER THE ASSESSING OFFICER HAS MADE INQUIRIES OR VERIFICATION
AS REQUIRED DURING THE ASSESSMENT?

¶5. AO is duty bound to ascertain the truth of the claims made by the assessee. It is
because it is incumbent on the ITO to further investigate the facts stated in the return since he
acts not only as adjudicator but also an investigator and requires to investigate and make
required enquiries to ascertain the truth.
¶6. Further satisfaction of AO should be based on proper materials to ensure the
objectivity in its order. Reaching at the conclusion after response of assessee on query raised

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without considering the relevant materials would be farce and renders the enquiry
incomplete.
[ISSUE: IV] WHETHER §263 IS APPLICABLE IN THE PRESENT CASE?

¶7. The Counsel humbly submits that the PCIT was well within his rights to invoke §263.
For PCIT to invoke §263 two conditions have to be satisfied, [A] The order must be
prejudicial to the interests of revenue. [B] The order must be erroneous.
¶8. It is submitted that in the present case, both the condition has been met and hence the
order. The view taken by the AO while passing the order brought about a visible loss of
revenue which is prejudicial and it also set in a bad trend wherein recoveries for illegal
mining would go evading income tax.
¶9. It is submitted that there was no application of mind on the side of the AO when he
did not care to look into the authenticity of the payment and the nature of source of it.
Judgement was the material evidence on the genesis of the payment in question and the facts
of the case demanded and extensive research. Therefore, the order passed by the AO is
erroneous in so far as prejudicial to the interest of revenue.

[ISSUE: V] WHETHER THE O PI NIO N OF PCIT CAN BE HIS P RIV A T E O PI NIO N

AN D WHE THER T HERE WAS C HANG E IN POSI TION OF LAW AF TER THE
I NSER TION OF E XP L A N A TI O N 2 U/S 263 ?

¶10. Opinion is bound to have certain amount of subjectivity. The opinion certainly
requires much lesser degree of material/evidence as compared to 'satisfaction' which in turn
requires much lesser degree of material/evidence as compared to 'reason to believe'. The
sufficiency of material cannot be challenged in case of 'opinion'. Though opinion of CIT
cannot be purely private, it would certainly have certain elements indicating the private
nature of opinion.
¶11. The object of the Explanation 2 inserted u/s 263 was made clear in the circular. The
objective of explanation was to broaden the jurisdiction of PCIT u/s 263 wherein AO is
required to conduct required enquiry. Though the explanation does not bring any substantial
change in law, it certainly broadens the scope of the jurisdiction of PCIT.

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PLEADINGS

1. THAT THE PRESENT PETITION INVOLVES NO SQL

¶1. The counsel humbly submits that the present petition involves no SQL, therefore, it
lies to be dismissed. This is the policy of this Court while entertaining Special Leave Petition
u/A 136 that it allows only in those cases which involves any SQL of general public
importance or amounts to some grave injustice.1 Neither of such condition arises in the
present case, therefore, the present SLP should be dismissed.

THAT THE LAW IS SETTLED ON THE APPLICABILITY OF §37 AND §263

¶2. It is submitted that the law is settled on the applicability of §37 and §263 of IT Act,
1961 and there is no new question involved in the present case.

[1.1.1] APPLICATION OF GENERAL PRINCIPLES TO FACT OF THE CASE

¶3. If the highest Court has already decided or has laid down the general principles for
deciding a question and only mere application of fact is required to apply those principles
then such a question would not be a substantial question of Law.2
¶4. It is contended before the Court that allowability of expenditure u/s 37 of IT Act,
1961 and SCN to be passed u/s 263 has been several times interpreted by this Court. The
present petition has no such matrix of the fact which may require interpretation by the law.
¶5. In the present case, the petitioner violated the law by mining without and in excess of
forest clearance for which they were made to pay compensation. Therefore, they cannot be
allowed expenditure under Explanation 1 which clearly prohibits deduction on any amount
which is incurred for any purpose which is an offence or is prohibited by law.3

1
Article 136, Constitution of India, 1950.
2
Sir Chunilal Mehta & Sons Ltd. v. Century Spinning & Manufacturing Co. Ltd. AIR 1962 SC 1314.
3
§37 of IT Act, 1961.

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[1.1.2] NO INTERPRETATION REQUIRED

¶6. Similarly, the order by A.O. who ignored the law and allowed deduction for
compensation was an erroneous order as it was prejudicial to the interests of revenue. Bare
reading of §263 provides for SCN to be served by PCIT against the assessment order in a
case of erroneous order which is prejudicial to the interests of revenue.4
¶7. The counsel humbly submits that the law under both the sections is crystal and clear
and requires no interpretation considering the facts and circumstances of the case.

NO INVOLVEMENT OF QUESTION OF LAW

¶8. It is humbly submitted before this Hon’ble Court that the present petition doesn’t
involve any question of law but an inference which is based on pure question of fact,
therefore, it stands to be rejected. This hon’ble Court has held that the questions of fact are
not allowed except in the exceptional cases where either High Court has ignored the material
evidence or finding reached by the Court is perverse5 or finding is of such nature that it
shocks the conscience of the Court.6 No such condition rises in the present case.
¶9. A mere question of fact cannot be turned into a question of law only to seek if an
authority as a matter of law has concluded correctly upon a matter of fact.7 In the instant case,
the issue involved whether the incurred expenditure is an allowable expenditure is a question
of fact. Moreover, this Court has also held that determination of deductible and non-
deductible parts by the Income Tax authorities could not give rise to a question of law u/A
136.8
¶10. It is well settled that in case where conclusions are based on fact and are reached
without proper discussion, SC doesn’t need to interfere.9 If assessment is set aside and a fresh
assessment is directed to be made, the assessment must be deemed to be still pending, which

4
§263 of IT Act, 1961.
5
UOI v. Rajeshwari & Co. [1986] 16 ITR 60 (SC).
6
Sanwat Singh v. State of Rajasthan AIR 1961 SC 715.
7
Mahavir Woollen Mills Assessee v. CIT [2000] 245 ITR 297.
8
Prakash Cotton Mills Pvt. Ltd. v. CIT (Central), Bombay AIR 1993 SC 2174.
9
CIT v. Orissa Co. Ltd. [1986] 159 ITR 0078 (SC).

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had to be completed.10 In a case where there was no final decision passed by the Assessing
Officer after the Order of PCIT, the Court held that the filed petition is in the controversy,
therefore, there arises no SQL or even question of law as no legal issue was decided and was
pending in the Commissioner (Appeals).11
¶11. In the present case, the PCIT only rejected the order and directed the Assessing
Officer to decide the issue after considering the Provisions of the Act and relevant decisions
but no final order was passed. Before the passing of final order, the petitioner moved to High
Court u/s 260A. When High Court rejected the appeal on the ground that there is no SQL, the
petitioner filed a SLP in this hon’ble Court u/A 136.

[ARGUENDO]: DIFFERENCE BETWEEN QUESTION OF LAW AND SQL

¶12. There exists a difference between question of law and SQL.12 A question of law
which is sufficiently serious is not enough to form a SQL.13 It is contended by the
Respondent that even if it is assumed that there is a question of law involved in the present
case, there is still no involvement of SQL.
¶13. The petitioner violated the law for which they were made to pay the compensation
and cannot be allowed deduction due to Explanation 1 of §37. It is contended that there is no
violation of substantial rights of the party nor there is a question of law which is not well
settled by the law, therefore, making the present petition devoid of SQL. And, for a SLP to be
admitted involvement of SQL is pre-requisite. Hence, after examining the instant case, it can
be concluded that the present petition stands to be dismissed.

10
JP Gupta, Law of Income Tax & Other Direct Taxes 283, available at

http://14.139.60.114:8080/jspui/bitstream/123456789/3776/1/014_1995_Law%20of%20Income%20Tax%20an

d%20other%20Direct%20taxes.pdf last seen on 08/09/2020.

11
Nek Ram Sharma and Co. v. ITAT & Ors. [2003] 262 ITR 692 (J&K).
12
Hero Vinoth v. Seshammal AIR 2006 SC 2234.
13
West Bengal Electricity Boards v. CIT [2002] 248 ITR 252 (Cal.).

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2. THAT THE EXPENSE IN QUESTION IS NOT AN ALLOWABLE EXPENSE U/S 37

¶14. The counsel humbly submits that the expense in question is not an allowable expense
u/s 37 of IT Act, 1961 as it was incurred for a purpose which is an offence, bringing it outside
the ambit of business expenditure and making it not an allowable expense. It is contended
that for claiming deduction under §37(1) of IT Act, 1961 there are following seven conditions
to be fulfilled, the expenditure should:14
i. not be covered u/s 30-36.
ii. neither be capital nor personal in nature.
iii. be incurred in the previous year.
iv. be expended wholly and exclusively for the purpose of business.
v. not have been incurred for a purpose which is an offence or is prohibited by any law.

THAT THE SAID EXPENDITURE WAS NOT WHOLLY AND EXCLUSIVELY INCURRED
FOR THEPURPOSE OF BUSINESS

¶15. It is contended that the said expenditure is not an allowable expense as it does not
come under the ambit of wholly and exclusively for the purpose of business.

[2.1.1] FOR THE PURPOSE OF BUSINESS

¶16. It is contended that the expenditure incurred is not covered under the head ‘profits and
gains for business or profession’15. This Court has been of the view that infraction of law
cannot be treated as a normal incident to the business16 and a penalty paid for the infraction is
not a business in commercial sense, therefore, not deductible while computing the profits or
business u/s 28 of IT Act, 1961.17
¶17. It has been further held that penalties incurred by an assessee in proceedings launched
against him for an infraction of law cannot be deducted since they fall on the assessee in
some character other than that of a trader.18 Where a fine was paid in lieu of confiscation of

14
Vinod K. Singhania & Kapil Singhania Direct taxes Law & Practice, 375 (59th ed., 2017).

15
§28 IT Act, 1961.
16
Free Wheels India Ltd. v. CIT [2001] 252 ITR 877 (Del.).
17
Raghubir Prasad Gupta v. CIT, West Bengal -VI [1979] 120 ITR 789.
18
CIT v. Mihir Textiles Ltd. [1976] 104 ITR 167 (Guj.).

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goods u/s 125 of Customs Act, J. B. Saraf held that it is not less than penalty and did not
allow deduction by refusing to accept it as business expenditure u/s 37(1) of IT Act. 19
¶18. For being an activity of ‘business’ nature, it requires regularity of transactions and
generally a single transaction is not taken as business.20 In the instant case, the compensation
paid by the petitioner was a single transaction which was incurred for the illegal mining that
petitioner committed. Therefore, the payment of compensation cannot be taken as of
‘business’ nature.
¶19. It is humbly submitted that an essential requirement for an activity or transaction to be
of business nature, it should be done with an object to earn profit.21 There should be
investment with the motive of gaining profit while involving some kind of risk, uncertainty or
foresightedness.22
¶20. In the instant case, the petitioner did not make the payment with the objective of
gaining any profit nor there was involvement of any kind of risk, therefore, the counsel
contends that the payment made was not incurred for the purpose of business.

[2.2.2] INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS

¶21. It is humbly submitted that the expenditure in question was not incurred wholly and
exclusively for the purpose of business. It was held by this Court that the direct concern and
direct purpose should be considered and not remote or indirect results while deciding whether
an expenditure was incurred wholly and exclusively for the purpose of the business. 23
¶22. In Lahshmi Naryan v. CIT,24 the Patna High Court held that expenditure for violation
of law is not incidental to the carrying on business nor it can be said to be expended wholly
and exclusively for carrying the business.25 In the instant case also, the compensation paid
was not directly concerned with the business but was paid as recovery amount to the

19
Rohit Pulp v. CIT [1995] 215 ITR 919 (Bom.).
20
Eclat Construction Pvt. Ltd. v. CIT [1988] 172 ITR 84 (Pat.).
21
Senairam Doongarmall v. CIT [1961] 42 ITR 392 SC.
22
CIT v. Smt. Minal Rameshchandra [1987] 167 ITR 507 (Guj.).
23
CIT v. Krishnadas [2000] 242 ITR 443 (Guj.).
24
Lahshmi Narayan Court Shanar v. CIT [1975] 100 ITR 143.

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government for violating the environmental clearance.26 Therefore, the counsel pleads that
the amount in question was not incurred wholly and exclusively for the purpose of business.

THAT THE NATURE OF EXPENSE INCURRED IS PENAL IN NATURE

¶23. This counsel humbly submits that the said amount in the question is of penal nature.
And, it well settled position of law that where a payment is made as penalty, it cannot be
allowed deduction not being allowable expenditure under the law.27

[2.2.1] NATURE OF MMDRA

¶24. It is contended before the Court that MMDRA is an act which penalises illegal
mining, therefore, compensation made under MMDRA is penalty in itself. The very purpose
of enacting MMDRA was to curb and punish the illegal mining u/s 21 of MMDRA, done
while violating the environment laws.
¶25. The intent of legislature was to punish the wrongdoer and make him liable for the loss
he did. Considering the intention of legislature, it can be inferred that §21 under itself is penal
in nature as whole. Therefore, the counsel contends that the payment was made under a penal
provision.

[2.2.2] PURPOSE OF EXPLANATION 1AND VIOLATION OF LAW

¶26. It is contended before the Court that Explanation 1 was inserted by the Finance (No.
2) Bill, 1998 with the intention to disallow the deduction on any amount which was incurred
for the purpose of an offence or which is prohibited by law as it is also opposed to public
policy.28 It has been held that compounding of the offence, will invoke ‘shall not be deemed
to have been incurred’ provided by Explanation 1 and assessee’s claim lies to be rejected. 29

26
¶7, Moot Proposition.
27
Supra 8.
28
V. Pattabhiraman Penalties for infraction of law opposed to public policy- Whether allowable as business
expense [1998] 98 Taxmann 235 (ART).
29
CIT v. Mamta Enterprises [2004] 135 Taxman 393 (Kar.).

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¶27. When there is a penalty imposed for the contravention of a specific statutory
provision, it is not commercial loss falling on the assessee, therefore, not deductible.30 If the
question in expense is treated as an allowable expenditure, it will defeat the whole purpose of
insertion of this Explanation to the section.
¶28. In Haji Aziz & Abdul Shakoor Bros v. CIT,31 where a fine was paid by the assessee to
salvage his stock in trade claimed deduction arguing that despite fine there was no moral
turpitude involved, this Court negative the argument holding that no deduction should be
allowed.

[2.2.3] PARAMOUNT TO RIGHT TO ENVIRONMENT

¶29. It is further contended that violation of environmental law is different from other socio-
economic offences. Articles 51(a)(g), 48A, 37was added to recognise the rights in
Constitution32and u/A 21, Right to environment emerged in 1978.33 After which through
various pronouncements like Indian Council,34 MC Mehta,35 Bhopal Mass Disaster,36 SC has
given paramount importance to Right to Environment.
¶30. It is contended that after violating the environmental clearance, the petitioner should
not be allowed deduction else it will be giving edge to the assessee who commit atrocities to
the environment and are even allowed deduction notwithstanding they’ve indirectly violated
Article 21 by violating Right to Environment.37

[2.2.3] THIN LINE BETWEEN COMPENSATION AND PENAL NATURE

¶31. It is contended before the Court that there exists very thin line between compensation
and penal nature. While conducting business, there are acts of omission or commission in

30
Vinod K. Singhania & Kapil Singhania Direct taxes Law & Practice, 385 (59th ed., 2017).
31
Haji Aziz & Abdul Shakoor Bros v. CIT, [1961] 41 ITR 350 (SC).
32
42nd Constitutional Amendment Act, 1976.
33
Maneka Gandhi v. UOI AIR 1978 SC 597.
34
Indian Council for Enviro Legal Action v. UOI AIR1996 SC 1446.
35
MC Mehta v. UOI AIR 1987 SC 965.
36
Union Carbide v. UOI AIR 1989 SC 273.
37
Supra 31.

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violation of law and incur penalty or fine for the same.38 Such acts are tainted with illegality
therefore, payment should be considered penal in nature and should not be allowed
deduction.
¶32. In the present case, the compensation paid was even though only recovery of 100%
cost of minerals disposed of, it can be said as a penalty. The reason for this contention is that
for extracting that mineral the petitioner had to invest some input. Now, when the petitioner
has paid Rs. 300 Crore as the compensation, the petitioner has to bear with the extracting
cost. Therefore, making it of penal nature.

THAT THE ASSESSEE WAS NOT BONA FIDE IGNORANT

¶33. This counsel humbly submits that the petitioner was not bona fide ignorant of the fact

that there is violation of law. An assessee ordered palm kernel seeds even when they knew

that it was not there in the open general licence, the Court did not allow the deduction on the

penalty u/s 37 of IT Act, 1961 holding that the assessee was not bona fide ignorant about the

situation and the penalty which is being levied.

¶34. It is contended that considering the intention of the petitioner, deduction u/s 37 of IT

Act, 1961 should not be allowed. In the instant case, the petitioner was also aware that there

is a prescribed environmental clearance for expansion and modernisation of existing projects

released by adding an Explanatory note to notification39 of Central Government. But the

petitioner proceeded with the mining without and in excess of environmental clearance.

Therefore, the deduction should not be allowed for their mala fide wrong done to the

environment by petitioner as it will affect the deterrence factor that a law is supposed to

create in the society. Hence, it is contended that the petitioner should not be allowed

deduction.

38
K.K. Jhanwar, Payments tainted with illegality: Whether deductible in determining taxable income, [1998] 99
Taxman 301 (ART).
39
The Environment Impact Assessment Notification, 1994.

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3. THAT THE ORDER WAS PASSED WITHOUT MAKING REQUIRED INQUIRIES OR

VERIFICATION

¶35. The counsel humbly submits that order was passed by AO without making the
required inquiries or verification. Not ascertaining the truth or being satisfied of the response
without referring to required material would render the inquiry of AO incomplete.

AO IS DUTY BOUND TO ASCERTAIN THE TRUTH

¶36. It is humbly submitted that the AO is not only an adjudicator but also an
40
investigator. It is not the law that the Occupying the position of an investigator and
adjudicator can discharge his function by perfunctory or inadequate investigation.41 It is his
duty to ascertain the truth of the facts stated in the return when the circumstances of the case
are such as to provoke an inquiry. If the AO fails to conduct the required investigation or
enquiries, he commits an error and the word ‘erroneous’ includes failure to make enquiry. 42
¶37. It is because it is incumbent on the Income-tax Officer to further investigate the facts
stated in the return.43 AO has a right and duties to enquire into the purpose of the expenditure
in an order to ascertain the truth of assessee claims.44 It is incumbent upon the AO investigate
facts required to be examined and verified to compute the taxable income.45 Investigation
should always be faithful and fruitful. Unless all fruitful areas of enquiry are pursued the
enquiry cannot be said to have been faithfully conducted.46 Even if is found to be prejudicial
to the interest of revenue, order can be revised.47 Failure of AO to make required enquiries
before granting deduction would render the assessment erroneous and prejudicial to the
interest of revenue.48 An order which simply accepts what the assessee has said in return and

40
Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Del.).
41
Manu Sharma v. State (2010) 6 SCC 1.
42
CIT v. Nagesh Knitwears Pvt. Ltd. [2012] 345 ITR 135 (Del.).
43
Supra 19.
44
Jaipur Electro Pvt. Ltd. v. CIT [1996] CTR (Raj.) 237.
45
CIT v. Nagesh Knitwears Pvt. Ltd. [2016] 345 ITR (Del.).
46
Supra 20.
47
Indian Textiles v. CIT [1986] 157 ITR 112 (Mad.).
48
CIT v. Seshasayee Paper & Board Ltd. [2000] 242 ITR 490 (Mad.).

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fails to make enquiries which are called for in the circumstances of the case, the PCIT is
justified in holding that the order is erroneous and prejudicial to the interest of revenue. 49
¶38. Assessment made without considering the relevant material for which a reference has
been made in the course of assessment is erroneous and prejudicial to the interest of
revenue.50 In the present case, assessee claimed deduction on amount paid as compensation to
the state government in pursuant of apex court decision. Deduction is allowed on expenditure
meant for the business expenditure. Any prudent person would be required to refer the apex
court decision to ascertain the truth of claim made by the assessee. AO, acting as investigator,
failed to make the required verification in an order to ascertain the truth.

SATISFACTION SHOULD BE BASED ON RELEVANT MATERIAL

¶39. It is humbly submitted that if AO, after raising query, accepts or rejects any claim of
the assessee without due application of mind, such enquiry would be just farce or mere
pretence of inquiry and farce enquiry cannot be said to be an inquiry at all, much less an
51
inquiry needed to reach the level of satisfaction of the AO on the given issue. The level of
satisfaction would obviously mean that he has conducted the inquiry in a manner whereby he
places on record the material enough to reach the satisfaction, which a rational person, being
informed of the nuances of tax laws would reach after due appreciation of such material. If
this component is missing, it will always be a case of lack of inquiry and not inadequate
inquiry.52
¶40. In present case assessee respond on query raised by AO was based on apex court
decision. AO fails to refer to this material. Thus, it cannot be said that satisfaction of AO
satisfaction was based on relevant materials.

49
Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC).
50
CIT v. Shivanand Electronics [1994] 209 ITR 63 (Bom.).
51
NIIT v. CIT [2015] 60 taxmann.com 313 (Del-Trib).
52
Ibid.

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4. THAT THE PCIT WAS RIGHT IN EXERCISING HIS RIGHT U/S 263 OF IT ACT, 1961

¶41. The Counsel humbly submits that the PCIT was well within his right to object to the
assessment given by the AO in the present case for the assessee company. For the PCIT to
pass such an order u/s 263 there are two major pre-requisites, the assessment order must be
erroneous and it must be prejudicial to the interest of revenue.53
¶42. The order was erroneous in its essence and also prejudicial to the interest of revenue
and therefore the PCIT was bound by law to pass an order u/s 263 of IT Act, 1961. It is also
contended that although the issue was debatable the PCIT still had the power to invoke §263
and pass the order54 against an assessment order that blatantly wrong and patently erroneous.

ORDER WAS PREJUDICIAL TO THE INTEREST OF REVENUE

¶43. It is submitted that the order passed by the AO considering the amount as an
allowable expense was erroneous such that it was prejudicial to the interest of revenue. There
was visible loss of tax on the amount of 300 Crores55 which would have been paid by the
assessee. It is absolutely necessary that the order be prejudicial to the interest of revenue, as it
has been established that if the order is erroneous but not prejudicial to the interest of
revenue, the Commissioner cannot exercise the revisional jurisdiction under §263(1).56
¶44. Due to the erroneous order of the AO, the revenue is losing tax lawfully payable by
57
the assessee, therefore it is most certainly prejudicial to the interest of revenue. If the
procedure adopted by the AO brings in lesser tax than what was to be paid by adopting a
different procedure, the order passed by the ITO would certainly be prejudicial to the interest
of revenue and would give jurisdiction to the PCIT under §263.58 Assessment made in undue
haste or without proper enquiry is prejudicial to the interest of revenue.59

53
Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC).
54
CIT v. M.M. Khambhatwala [1992] 198 ITR 144 (Guj.).
55
¶2, Moot Proposition.
56
H.H. Maharaja Raja Pawar Dewas v. CIT [1982] 138 ITR 518 (MP).
57
Supra 26.
58
CIT v. Pushpa Devi [1987] 164 ITR 639 (Pat.).
59
Thalibai F. Jain v. ITO [1995] 101 ITR 1 (Kar.).

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¶45. It is also submitted that the order set by the AO would set in a bad trend wherein the
amount collected for an act which was not permissible in law, even though by means of
recovery would lead to no taxation, which would lead to people taking chances on illegal
mining. Such orders set bad example which on a broader perspective would be prejudicial to
the interest of revenue.60 Therefore the assessment order terming the expense incurred by the
assessee as an allowable expense is prejudicial to the interest of revenue.

ORDER WAS ERRONEOUS IN LAW

¶46. It is submitted that the order passed by the AO was cryptic and erroneous. The AO
was obligated to inquire into the genuineness of the claims of the assessee and refer to the
judgement to do so. The facts of the case demanded an extensive research and the AO didn’t
care about it.61 There was lack of application of mind by the AO when he without any
verification accepted the claims of the assessee.62

[4.2.1] THE AO DIDN’T VERIFY THE SOURCE OF THE PAYMENT

¶47. It is humbly submitted that the AO didn’t refer to the Court’s decision which was not
only the primary source to verify the genuineness of the claim of the assessee but also played
important role in determining the nature of the amount paid by the assessee that is in
question. Not referring to the judgement is a clear case of non – application of mind on the
part of the AO leading to the loss of revenue and thereby making the order prejudicial to the
interest of revenue.63
¶48. Although it might be contented by the assessee that the AO had raised a query which
was subsequently been answered by the representative of the assessee, the fact that the
AO accepted the response without the court judgement, show the lack of application of
mind and the failure to make the necessary enquiry makes it erroneous.64 Allowing

60
Venkatakhrishna Rice Co. v. CIT [1987] 163 ITR 129 (Mad.).
61
Jeevan Investmensts & Finance Pvt. Ltd. v. CIT [2017] 88 taxmann.com 552 (Bom.).
62
Linewell Telesystems Pvt. Ltd. v. ACIT 2013] 32 taxmann.com 369 (Hyderabad - Trib.).
63
Appollo Tyres Ltd. v. Deputy CIT [2014] 360 ITR 36 (Ker.).
64
ITO v. DG Housing Projects Ltd. [2012] 343 ITR 329 (Del.).

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certain deductions without proving the claim or proper verification is prejudicial to the
interest of revenue.65
¶49. It is also submitted that the court in its reasoned order had opined how the amount in
question had come about, and which was absolutely necessary in identifying whether the
amount was an allowable expense. The genesis of the allowability of the amount in question
provides for the big picture in as much as how it is not an allowable expense and can be
found only by examining the full court order. Enquiry into the source of the capital is crucial
for the AO, if that has not been done, the assessment is erroneous and prejudicial to the
interest of revenue.66
¶50. It has been held by court that there must be some prima facie material on record to
show that the tax which was to be lawfully levied has not been imposed or that by the
application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax
than was just, has been imposed.67 In the present case that material happened to be the
judgement delivered by the court.
¶51. It is respectfully submitted that the Supreme Court held that the power under §263
"cannot be invoked to correct each and every type of mistake or error committed by the
Assessing Officer" and "it is only when an order is erroneous that the section will be
attracted". The Supreme Court held that an incorrect assumption of fact or an incorrect
application of law will satisfy the requirement of the order being erroneous. An order passed
in violation of the principles of natural justice or without application of mind would be an
order falling in that category.68 Hence, it can be derived that the assessment order by the AO
was erroneous as there was no application of mind.

[4.2.2] THE AO OUGHT TO HAVE MADE EXTENSIVE ENQUIRY AS A PRUDENT MAN WOULD HAVE,
GIVEN THE FACTS OF THE CASE.

¶52. It is submitted that the facts of the case demanded an extensive enquiry and failure on
the part of the Assessing Officer to make further investigation of the facts stated by the
assessee when circumstances would make that such an enquiry is prudent. The word
'erroneous' in section 263 includes failure to make such an enquiry by the Assessing

65
CIT v. Emergy Stone Mfg. Co. [1995] 2013 ITR 143 (Raj.).
66
Supra 31.
67
Spectra Shares & Scrips Pvt. Ltd. v. CIT [2013] 354 ITR 35 (Andhra Pradesh).
68
Cochin International Airport Ltd. v. ACIT [2018] 92 taxmann.com 277 (Cochin - Trib.).

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Officer.69 It has been held by the courts multiple times that it is not necessary for the PCIT to
examine the same records examined by the AO, the Commissioner has to examine not only
the assessment order but also the entire facts on the record.70
¶53. The Commissioner can regard The ITO’s order as erroneous on the ground that in the
circumstances of the case the ITO should have made further enquiries before accepting the
statements made by the assessee in his return.71 The AO is not only an adjudicator but also an
investigator. He cannot silently accept every fact presented by the assessee wherein such facts
call for further inquiry.72 It is his duty to ascertain the truth of the facts stated in the return
when the circumstances of the case are such as to provoke an inquiry.73 Therefore, it can be
concluded that the AO was negligent in his duty as an investigator and the assessment order
passed by him is cryptic and was righty set aside by the PCIT.

69
Hyderabad Chemicals Supplies Ltd. v. Assistant CIT [2011] 137 TTJ (Hyd.) 732.
70
Ibid.
71
Supra 19.
72
Meerut Roller Flour Mills Ltd. v. CIT [2013] 35 taxmann.com 183 (Al.).
73
Ibid.

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5. THAT THE OPINION OF CIT WAS NOT PURELY PRIVATE OPINION

¶54. The counsel humbly submits that the opinion of PCIT cannot be purely private in
nature. Though it may certainly have certain element of subjectivity. Further, explanation 2
inserted after amendment broadens the scope of jurisdiction of PCIT but it does not bring any
substantial change in comparison with earlier position.

OPINION IS BOUND TO HAVE CERTAIN AMOUNT OF SUBJECTIVITY

¶55. It is humbly submitted that PCIT has given his opinion that no enquiry or
investigation was made by the AO on the above discussed issues. During the course of
proceedings u/s 263 of IT Act, 1961, opinion is bound to have a certain amount of
subjectivity. The opinion certainly requires much lesser degree of material/evidence as
compared to 'satisfaction' which in turn requires much lesser degree of material/evidence as
compared to 'reason to believe'.74 The sufficiency of material cannot be challenged in case of
'reason to believe'.75 Therefore, the same cannot be done in case of 'opinion' also. Further
reaching at the conclusion without considering relevant material is lack of enquiry wherein
PCIT is authorised to invoke jurisdiction u/s 263.76 Thus, passing order without considering
relevant material by AO would invite the jurisdiction u/s 263 of the Act.77
¶56. Though opinion might have certain subjectivity, we are not arguing that opinion
should be purely private. PCIT reached at conclusion only after considering the response of
assessee after providing an opportunity of hearing and order passed by AO wherein he failed
to make enquiries which should be made. AO, as an investigator should have been an
inquisitor in the given situations.78 Presumption is in the favour of the revenue79 and the law
casts onus upon the assessee to prove with cogent material80 as to why the AO was not

74
Raymond Wollen Mills Ltd v. ITO (1996) 236 ITR 35 (SC).
75
Ibid.
76
CIT v. Maithan International [2015] 375 ITR 123 (Cal.).
77
Subhlakshmi Vanijya Ltd. v. CIT [2015] 60 taxmann.com 60 (Cal. Trib.).
78
Supra 19.
79
§114 Indian Evidence Act, 1872.
80
CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC).

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required to become inquisitor to ascertain the truth. However, the assessee has not submitted
any cogent material to rebut this presumption. Considering these circumstances, we can
conclude that opinion rendered is not purely private in nature.

THAT THE EXPLANATION BROADENS THE POWER OF PCIT THOUGH IT DOES NOT BRING
SUBSTANTIAL CHANGE IN LAW

¶57. It is humbly submitted that the Explanation 2 u/s 263 provides that the order passed
without making inquiries or verification ‘which should have been made’ will be deemed to be
erroneous insofar as it is prejudicial to the interest of the Revenue. The aim and object of
introduction of aforesaid Explanation by Finance Act, 2016 was explained in circular.81
¶58. The object of such Explanation is probably to dissuade the AO from passing orders in
a routine and perfunctory manner and where he failed to carry out the relevant and necessary
inquiries or where the AO has not applied mind on important aspects. The use of expression
‘which should have been made’ in clause (a) to Explanation 2 to §263 of the Act is
significant. This impliedly tests the action of AO on the touchstone of reasonableness and
rationality in approach.
¶59. A nuanced understanding of Explanation on the basis of circular suggests that
inadequacy in inquiry ought to be of cardinal nature to ignite the potent powers of review.
Though insertion of explanation does not bring any substantial change in law, it certainly
broadens the power of PCIT to invoke jurisdiction u/s 263 in case AO failed to make
enquiries which should be done.

81
CBDT Circular No. 19/2015 [F.NO.142/14/2016-TPL].

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PRAYER

Wherefore it is prayed, in light of the issues raised, arguments advanced, and authorities
cited, that the Hon’ble Court may be pleased to:
1. Declare that there exists no SQL in the present petition, therefore, the SLP should be
dismissed.
2. Declare that the expense is not an allowable expenditure and is liable to be not
deducted u/s 37 of IT Act, 1961.
3. Declare that the AO did not inquire or verify the claims of the assessee as required
during the assessment.
4. Declare that the provision of §263 is applicable in the present case.
5. Declare that the opinion of PCIT was not his private opinion.
And Pass any other Order, Direction or Relief that may deem fit in the Best Interests of
Justice, Fairness, Equity and Good Conscience.
For this act of Kindness, the Petitioner shall duty bound forever pray.

Sd/-
(Counsel for the Petitioner)

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