JUDGMENT

A.K. Sikri, J.

1. This appeal was admitted on the following question of law:

"Whether Commissioner of Income Tax correctly assumed jurisdiction under Section 263 in revising the assessment order under Section 143(3) of the Income Tax Act, 1961?"

2. In order to appreciate as to under what circumstances, the question of law has arisen for our consideration, it would be necessary to take stock of the facts as they appear on the records of the case.

3. The respondent (hereinafter referred to as 'the assessee') IS a company engaged in the business of manufacturing certain auto parts and has been supplying the same to various car manufactures in India. It has filed its return for the Assessment Year 2001-02 declaring an income of Rs.9,57,53,430/-. The return was taken up for scrutiny and ultimately assessed under provisions of Section 143(3) of the Income Tax Act (hereinafter referred to as 'the Act'). On that basis, the assessment order was framed on 06.02.2003.

4. The Commissioner of Income Tax-III, New Delhi examined this file and felt that the assessment order was perfunctory and erroneous and it was prejudicial to the interest of the Revenue. According to the CIT no detailed investigation had been carried out by the Assessing Officer while making the assessment. Solitary objection of the Commissioner related to the expenditure on tools and dyes aggregating to Rs.10,56,69,367/-, which was claimed as revenue expenditure and was allowed as such. According to the Commissioner, he noticed that otherwise substantial expenditure during the year and details of the expenditure filed before the Assessing Officer also showed that the cost of some of the dyes exceeded Crores of rupees. The CIT accordingly issued notice on 03.11.2004 to the assessee to show-cause why appropriate order under Section 263 be not passed by him with a view to correct the lapse committed by the AO.

5. The assessee responded to the said show-cause notice and gave its explanation. The assessee also contended that the show-cause notice was required to be dropped for the following reasons:

i) The assessee has been consistently following the practice of debiting the cost of tools and dyes f the profit and loss account since 1986;

ii) Amount is otherwise also allowable;

iii) The items in question do not have a long life;

iv) Number of dyes are consumed for the same product to meet the production level in a year;

v) The company had to maintain the accuracy of the parts being in the buyer's market;

vi) Reimbursement cost of the dyes is embedded in the sale rate of the component and to have the matching theory the expenditure must be debited;

vii) No part of dye developed/purchased or items products out of these can be disposed of by the company in the market as per the restriction clause;

viii) During the process of manufacturing the inserts of dyes get consumed and become a part of final product and therefore represents consumables;

ix) Recording of dyes in the store record as of consumable items.

6. Pursuant to the information sought by the CIT in respect of those dyes' cost whereof exceeded Rs.10 lakhs, following details were furnished:

i) One set dye for Cover Cylinder Head Rs.1,62,56,175/-

ii) Two set dyes of Crank Case Left Rs.72,12,109/-

iii) One set of dye lower and upper transmission case Rs.4,33,43,245/-

iv) One set of dye for case transmission Axle Rs.1,30,10,013/-

v) Five dyes for pistons Rs.84,55,804/-

7. The assessee also gave further details and supporting documents to prove as the purchase of dyes by the assessee and the date of replacement of old dyes by new one showed that it needed replacement. Some such purchases made from the outside parties including Maruti Udyog Limited, a major buyer of the assessee's products and some dyes had been produced in house as well. After considering all these materials, the CIT took the view that the accounting practice followed by the assessee to debit the entire cost of tools and dyes in th