Income Tax Appellate Tribunal - Delhi
Fazal Frozen Foods Pvt. Ltd.,, Meerut vs Assessee on 11 January, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'B' : NEW DELHI)
BEFORE SHRI A.T. VARKEY, JUDICIAL MEMBER
and
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No.2837/Del./2013
(ASSESSMENT YEAR : 2008-09)
M/s. Fazal Frozen Foods (Pvt.) Ltd., vs. Commissioner of Income-tax,
31, Ismail Nagar, Meerut.
Meerut.
(PAN : AAACF7364F)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri K. Sampath, Advocate
REVENUE BY : Ms. Nandita Kanchan, CIT DR
ORDER
PER A.T. VARKEY, JUDICIAL MEMBER :
This appeal, at the instance of the assessee, is directed against the order of the Commissioner of Income-tax, Meerut dated 15.03.2013 for the assessment year 2008-09.
2. The assessee has taken the following grounds of appeal :-
1. That the Worthy Commissioner of Income Tax has erred in law as well as facts of the case in invoking provisions of section 263 of the Income Tax Act, 1961 and the order U/S 263 as passed, is arbitrary, unjust and illegal on various legal and factual grounds including the following:-
(1) The L'd Assessing Officer has duly applied his mind to all the issues raised in the notice U/S 263 and after having been satisfied on the same, 2 ITA NO.2837/Del/2013 took a possible view based on the facts of the case and thereby passed the impugned assessment order.
(2) That the assessment order U/S 143(3) dated 16-12-2010 as passed by the L'd Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue.
(3) Observations made, inferences drawn and findings recorded by the Worthy Commissioner of Income Tax in her order passed U/S 263 are incorrect, unreasonable or are untenable in law.
(4) Directions issued in section 263 order to restore back/ set aside the issue of four sundry creditors to the file of the L'd Assessing Officer for verification is unjust, uncalled for and illegal.
(5) The Worthy Commissioner of Income Tax has made a departure from the accepted past history of the issue of purchases account, which is akin to the specific nature of the trade and resorted to applying percentage on the turnover and thereby, making an addition of Rs.7,98.553/-, which is illegal and at any rate is highly excessive .
2. That the impugned order U/S 263 of the Worthy Commissioner of Income Tax being illegal deserves to be cancelled / annulled."
3. The assessee company is engaged in the business of processing and trading of buffalo meat. The return of income was filed on 27.09.2008 declaring nil income. The return was processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter 'the Act'). The case was selected for scrutiny through CASS and statutory notice u/s 143(2) was issued on 20.08.2009, which was duly served upon the assessee. From the details of trading results for the last three years, the AO observed that there was decrease in turnover during the year but there was slight improvement in the GP and NP rate. The AO examined the trading results on test check basis from the books of accounts produced and other details and documents furnished by the assessee. The AO noticed from the details of PF deducted and deposited that the assessee had deducted 3 ITA NO.2837/Del/2013 employees share for PF regularly for the month of April, 2007 to March, 2008 but had deposited the employees' share of PF of Rs.9397/- for the month of February, 2008 on 24.03.2008 which was late i.e. deposited after the due date as specified in the concerned Act. Therefore, in view of the provisions of section 36(l)(va) read with section 2(24)(x) of the Act, the AO disallowed the said amount of Rs.9,397/- on account of PF deposited late after due date and added to the total income of the assessee. Accordingly, the assessment was completed u/s 143(3) on the total income at Nil.
4. The CIT, Meerut, after examining the records, found that the assessment was done without proper enquiry and accordingly, notice u/s 263 of the Act was issued on the following points :-
(i) In the preceding year and subsequent year, addition on account of bogus liabilities under the head of Sundry Creditors was made as follows:-
AY 2007-08 Rs. 2,65,50,214/-
AY 2009-10 Rs.1,90,65,636/-
(ii) However, no exercise has been done by the A.O. to establish the genuineness of liability on account of sundry creditors amounting to Rs.1,90,65,636 + Rs.42,08,090 advance from customers in the year under consideration. AO has accepted the same without any enquiry or verification.4
ITA NO.2837/Del/2013
(iii) During the AY 2009-10, purchases amounting to Rs.1,39,00,180/-
have been disallowed on account of cash payments. In the year under consideration, all the payments towards purchase and expenses have been made in cash. AO has not given any finding in this regard and accordingly has not made any addition or disallowance.
The CIT, in view of the above, found the order passed by the AO to be erroneous and prejudicial to the interest of revenue since at the time of the assessment, according to CIT the AO was duty bound to call for such details and examine them. For this proposition, the CIT relied on various judicial pronouncements which, for the sake of clarity, are reproduced as under :-
"4. .........In the case of M/s. Malabar Industries, the Hon'ble Apex court has held that incorrect assumption of facts or incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall order passed without applying the principles of natural justice or without application of mind.
5. The fundamental principles emerged from the Hon'ble Apex Court judgement in Malabar Ind Co. Ltd Vs. CIT (2000) 243 ITR 83 (SC) include as follows:
i. An incorrect assumption of facts or incorrect application of law will suffice the requirement of the order being erroneous.
ii. If the order is passed without application of mind, such order will fall under the category of erroneous order.
5.1. Further, it has been held in CIT vs. V.N.M.A. Rathinasabapathy Nadar, (1995) 215 ITR 309, 315 (Mad.), that if an order is passed in ignorance without taking into consideration of the relevant facts or is affected by the presence of any irrelevant fact into consideration, the same is erroneous.
5
ITA NO.2837/Del/2013 5.2. It is beyond dispute that, under section 263, the Commissioner does have the power to set aside the assessment order and send the matter for a fresh assessment if he is satisfied that further enquiry is necessary, and that the order of the AO is prejudicial to the interest of the Revenue [Swarup Vegetable Products Industries Ltd. vs. CIT, (1991) 187 ITR 412, 415- 416(All.)]. In that case, refund of excise duty was received by the assessee and the same was placed in the suspense account and not in the P&L A/c. Such amount of refund was claimed not to be included in the income of the assessee because, apart from the above fact, a large part of that amount was claimed by a third party by filing a suit and also a writ petition and the same were pending. The officer accepted the claim of the assessee and did not include any part of the amount so refunded in the income of the assessee. In exercise of its power under section 263, the Commissioner set aside the assessment order as the same was erroneous and prejudicial to the interests of the revenue because the claim of the assessee was accepted without proper enquiries. The action of the Commissioner was upheld by the High Court. In the facts of Umashankar Rice Mill vs. CIT (1991) 187 ITR 638-39 (Ori), the Tribunal was held justified in upholding the revisional order of the Commissioner which was passed by the Commissioner who felt that there should be a further enquiry. Reliance is further placed on the following:
i. Jagdish Kumar Gulati vs. CIT, 269 ITR 71 (All.) in which it is held that while framing the assessment under section 143(3), it is expected from the AO that he will make a detailed inquiry to find out correct income of the assessee and not to facts placed by the assessee on their face value. Where the AO complete the assessment proceedings under section 143(3) and admitted that he could not make proper inquiries as assessment was becoming time barred, there was valid assumption of jurisdiction under section 263 by Commissioner and the Tribunal, in such a situation, did not commit any error in law in confirming the order of CITC for setting aside the assessment and directing the AO to make an order of assessment.
ii. Gee Vee Enterprises vs. Addl.CIT, 99 ITR 375 (Del.) in which it is held that the Commissioner can regard the order as erroneous on the ground that in the circumstances of the case, ITO should have made further inquiries before accepting the statements made by the assessee in his return and it was observed that reason is obvious. The position and functions of the ITO are very different from that of civil court.
5.3. On the facts of the present case, it is evident that the AO accepted the version of the assessee without making any inquiry or verification, whereas it is very well settled that mere failure to make inquiries makes an order erroneous. In order that the Commissioner may consider an order to be "erroneous" for the purposes of section 263, the error of law may not be apparent on the fact of the order. The Commissioner may consider an order of the AO to be erroneous not only if it contains some apparent error of reasoning or of law or of fact on the face of it but also because it is a stereo-
typed order which simply accepts what the assessee has stated in his return an fails to make enquiries which are called for in the circumstances of the 6 ITA NO.2837/Del/2013 case [Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal vs. CIT, (1973), 88 ITR 323 (SC).
5.4. It is not necessary for the Commissioner to make further enquiries before cancelling the assessment orders of the AD. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the AO should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral to give decision on the basis of evidence produced before it, e AD is not only an adjudicator but is also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. 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 inquiry. The meaning to be given to the word "erroneous" in section 263 of the Act emerges out of this context. The word "erroneous" in that section includes cases where there has been a failure to make the necessary inquiries [Gee Vee Enterprises vs. Addl.CIT, (1975) 99 ITR 375, 386 (Del.)].
5.5. It is incumbent on the officer to investigate the facts stated in the return, when circumstances would make such an enquiry prudent and the word 'erroneous' in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.
Duggal & Co. vs. CIT, (1996) 220 ITR 456,459 (Del.) CIT vs. Pushpa Devi, (1987) 164 ITR 639 (Pat);
CIT vs. Smt. Rambha Devi, (1987) 164 ITR 658 (Pat);
CIT vs. Belal Nisa, (1988) 171 ITR 643 (Pat);
CIT vs. Smt. Kaushalya Devi, (1988) 171 ITR 686 (Pat); CIT vs. Bibi Khodaija Khatoon, (1988) 171 ITR (Sh.N.) ii (Pat); CIT vs. Smt. Chandrawati Devi, (1988) 171 ITR (Sh.N.) III (Pat); CIT vs. Smt. Devi, (1987) 59 CTR (Pat) 3;
CIT vs. Bhagwant Kaur, (1987) 63 CTR (Pat) 326;
CIT vs. Pushpa Devi, (1988) 173 ITR 445 (Pat).
5.6 The Hon'ble Jurisdictional ITAT Delhi Bench In the case of Shri Virendra Kumar Gupta Vs CIT in ITA No.2595/D/2009 dated 21/01/2011 relying upon aforesaid judgments has held that the facts of the case were in pari-materia with above judgments. Further, on consideration of these cases the Hon'ble IT AT viewed that the ld. CIT was right in exercising the revisionary jurisdiction dismissing the appeal filed by the assessee. 5.7. In view of the foregoing, it is evident that the order passed by the AO is erroneous as well as prejudicial to the interests of revenue for the reasons as stated above.
7
ITA NO.2837/Del/2013 Further, the CIT, after going through the written submissions filed by the ld. AR for the assessee, observed/held as under :-
"As regards grounds against 263 proceedings, a detailed discussion as already being made in proceeding paras which makes it abundantly clear that the order passed by the A.O was erroneous and prejudicial to the interest to the revenue the same is not being repeated here for the sake of brevity.
8. As regards the issue relating to sundry creditors, the contentions of the ld. counsel are reproduced above, which are not being repeated here for the sake of brevity. I have considered the contention of the ld. counsel that there were running accounts of the creditors from whom purchases were being made on regular basis. Further contention of the ld. counsel that the payments during the year made at Rs.2.57 crores against the creditors which far exceeded the purchases during the year which were to the magnitude of Rs.l.83 crores only has also been considered. It was argued that this show that, on the one hand, the creditors were having running accounts where payments and purchases against the same were regularly being made in due course of business and proves that the genuineness of the creditors was established and no adverse inference is called for on this account. It was also argued that a large number of confirmations and all the copies of account of all the creditors along with the details thereof were already filed during the course of assessment proceedings. After considering the entire facts and circumstances relating to the issue as well as the contentions taken by the ld. counsel, as briefly stated above, I hold that following major creditors were required to be examined by the AO properly before accepting the creditors as such.
Shri Abdul Karim Khan, S/o Abdul Haiee Rs.14,21,915/- Shri Abdul Wahid, S/o Shri Abdullah Rs.11,33,030/-
Shri Abrar Khan, S/o Ishaque Ali Rs.16,84,855/-
Shri Mohd. Rafeeque S/o Ibraheem Rs.10,86,970/-
TOTAL Rs.53,26,770/-
The AO is directed to examine the same now properly for which this issue is partly set aside for proper verification.
9. As regards the inflated nature of purchases on account of cash payment, it was argued by the ld. counsel that purchases in cash are due to the nature of purchased item i.e. meat where transactions are made in cash only. Moreover, the purchases are essential for effecting sales and, hence, the same cannot be discarded merely because those were made in cash. After considering the arguments of ld. counsel, I hold that the business results of the assessee were not acceptable and the books of account with cash purchases remained unproved were not reliable for ascertaining true profits earned by the assessee. After rejecting the books of account under section 145 of the Income-tax Act, I hold that it would be reasonable to 8 ITA NO.2837/Del/2013 ascertain the reasonable NP rate to the turnover on the basis of past three years' results of the assessee and accordingly the business income is determined as follows:
A.Y. G.P.% N.P.%
2005-06 11.630 0.090
2006-07 -- Loss
2007-08 6.425 0.099
Avg. GP 9.02%
Less GP shown -7.04%
1.98%
Applying this rate on turnover 40330989 X 1.98% = Rs.7,98,553/-
This will mean an addition of Rs.7,989,553/-. A.O. is directed to issue fresh demand notice and challan."
5. The ld. AR reiterated the submissions made before the ld. CIT (A) and for the sake of clarity, the same are reproduced below :-
"7. That for the year under consideration, the assessee has filed a return of income on 07-10-2008 declaring an income of Rs.Nil and the said return was picked up for scrutiny by the ACIT, Circle 1, Meerut.
That however, various queries were raised on several dates and after submission of various replies in compliance of the AO's continued queries, she considered all the documents called for evidences supplied by the assessee and after due consideration of the same and after having applied her mind to the issues involved she took a possible view and thereby passed the impugned assessment order dated 16-12-2010.
That now the assessee is in receipt of notice U/S 263 dated 12-02-2013 and several issues have been raised on the basis of which your honour believes that the assessment is erroneous and prejudicial to the interest of the revenue.
The submissions of the assessee on each of the issues raised are as under:-
AO has accepted confirmations from the alleged sundry creditors without any enquiry or verification:-
That it appears that your honour's satisfaction for initiating proceedings U/S 263 is based on additions for AIY 2007-08 and 2009-10. Under the Income Tax Act, each year is a separate year and has to be assessed on the facts of the particular year in question. e doctrine of res-judicata is inapplicable to tax proceedings and hence whatever has happened in other assessment 9 ITA NO.2837/Del/2013 years, cannot prevent the AO from taking a different view in another independent assessment year.
In the impugned year, the AO has duly called for the confirmation from the sundry creditors and which have been filed by the assessee and after having considered the same and verifying them from die books of accounts, she reached a considered conclusion and thereby accepted the .same, i.e she has adopted one possible view to the entire issue involved. It needs to be appreciated here that all the sundry creditors are actually trade creditors and have been accepted as such year after year by the department. Moreover, if they are believed t~ be untrue than it goes to show that even the sales declared would not have been achieved and after having considered this aspect of the matter, the AO accepted the same.
In view of the above facts and submissions, your honour may kindly appreciate that firstly the AO has not failed in her duty to ask for the confirmations and secondly the assessee has also regularly submitted confirmations at regular intervals as and when the same could be procured. The AO has also test checked the books of accounts and verified the supplies given by these sundry creditors and it is only when the entire issue was put up to her satisfaction that she took a view to accept these creditors. That in respect of A/Y 2007-08, the L'd CIT(A) has already allowed the assessee's appeal vide his order dated 8-9-2010 copy enclosed herewith at annex and in respect of AY 200-10, the same is sub-judice. The AO has not given a finding in respect of accepting the purchases made in cash That in para 2 of the assessment order, the AO has given a finding as under:-
"The assessee company is engaged in the business of processing and trading of buffalo meat. From the details of trading results for the last three years it is seen that there is decrease in turnover during the year but there is slight improvement in GP and NP rate. The trading results have been examined on test check basis from the books of accounts produced and other details and documents furnished by the assessee."
It may be seen that she has given a clear finding about having accepted the trading results after test checking the books of accounts and considering other documents and evidences produced. The issue of purchases therefore, stands covered and hence it wrong to assume that no finding in this regards has been given.
That thus, it would be seen that in respect of each of the issues referred to by your honour, the Assessing Officer has called for full details, and once they were submitted, has either verified them from the books of accounts or 10 ITA NO.2837/Del/2013 through making external enquiries and then formed an opinion and took a possible view, in terms of the latest legal position and thereby accepted the trading results of the assessee.
For the proposition that the power of the commissioner U/S 263 have to be exercised on the basis of the material available to him when he exercises the power, Reliance in this regard is placed on:
CIT Vs G.M Mittal Stainless Steel Pvt Ltd 263 ITR 255 ( SC) Further, as such the impugned order cannot be termed erroneous since one of the possible views has been adopted and the matter has become final.
Reliance in this regard is placed on Bagaria Vegetable Products Ltd Vs JCIT 303 ITR (AT) 278 (Pun e) Ahalya Trading Pvt Ltd Vs CIT 22 SOT 68( Mumbai) CIT Vs Munjal Castings 303 ITR 23 ( P&H) CIT V s RK Construction Co. 313 ITR 65( Guj) Reliance for this proposition is placed on:-
CIT V s Valliammal D. 230 ITR 695 Madras Dhruv N Shah Vs DCIT 273 ITR (AT) 59 Bombay Various courts have held that under the revisionary powers, it is not open for the CIT to prescribe the nature and level of enquiries, if the AO has already considered them and taken a possible view.
Reliance in this regard is place on :
CIT Vs Arvind Jewellers 259 ITR 502 (Gujrat) Paul Mathews And Sons Vs CIT 263 ITR 101 (Ker) CIT Vs Parmeshwar Bohra 267 ITR 698 (Raj) CIT Vs Mehrotra Brothers 270 ITR 157 (MP) Ashok Kumar Parasramka VS ACIT 65 ITD 1 ( Cal) The Division Bench of Punjab and Haryana High Court in Hari Iron Trading Co Vs CIT 263 ITR 437 observed that an assessee has no control over the way an assessment order is drafted. It was observed that generally, the issues which are accepted by the Assessing Officer do not find mention in the assessment order and only such points are taken note of on which the assessee's explanation are rejected and additions / disallowances are made.
Thus, the impugned order can neither be termed as erroneous nor prejudicial to the interest of the revenue and when an order is not erroneous it could not be deemed to be prejudicial to the interest of the revenue and for the purpose 11 ITA NO.2837/Del/2013 of invoking 263, it is mandatory that both the conditions of the order being 'Erroneous' and 'prejudicial' must coexist.
Reliance in this regard is placed on Malabar Industrial Company Ltd. VS CIT 243 ITR 83 ( SC)"
6. Ld. DR relied on the order of the Commissioner of Income-tax.
7. We have heard both the parties and perused the material on record. The fundamental principles which emerge from the several cases regarding the powers of the CIT u/s 263 of the Act has been summarized by the Coordinate Bench 'C' of the ITAT, Delhi in ITA No.2494/Del/2013 order dated 10.07.2015 as under :-
"(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interests of the Revenue. Both the conditions must be fulfilled.
(ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it is only when an order is erroneous, than the said section will be attracted.
(iii) An incorrect assumption of facts or an incorrect application of law will suffice for the requirement of order being erroneous.
(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.
(v) Every loss of revenue cannot be treated as prejudicial to the interest of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under the law.
(vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the CIT, while exercising his power under Section 263 of the Act, is not permitted to substitute his estimate of income in place of the income estimated by the AO.
(vii) The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrives at a conclusion, 12 ITA NO.2837/Del/2013 such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion.
(viii) The CIT, before exercising his jurisdiction under Section 263 of the Act, must have material on record to arrive at a satisfaction."
We find that the assessee had filed before the AO the copy of the audit report, audited balance sheet along with its annexures for the year ending 31.03.2008 relevant for the assessment year under consideration. The AO has examined the books of accounts on test checked basis and has observed that the assessee company is engaged in the business of processing and trading of buffalo meat. The details of the trading results for the last three years show that there is decrease in the turnover during the year but there is slight improvement in the GP and NP rate. So, from the said fact that the AO had test checked the books of accounts of the assessee and has gone through the audited reports and balance sheet, it cannot be said that the AO has not examined the GP result of the assessee. We also find that in earlier years, the books of account of the assessee were accepted by the AO and so were the trading results. We find in the year under consideration, the assessee has shown GP rate of 7.04% whereas in the previous assessment year it was 6.42%, which has been accepted by the Department. We also find that pursuant to the impugned CIT order, the AO has passed the assessment order in pursuance to the 263 order of the CIT wherein the first direction in respect to verification of four major creditors were carried out and no addition was made by the AO while giving effect to the impugned order of the CIT. The only issue remaining in front of us is whether the 13 ITA NO.2837/Del/2013 rejection of books of account by the CIT can be done by exercising the revisional jurisdiction and make addition of Rs.7,98,553/-. We find that as earlier stated that the audited books and balance sheet has been already test checked by the AO and found to be in order. Therefore, it cannot be called as a lack of enquiry by the AO. In the previous year's also, the department has been accepting books of accounts of the assessee, therefore, without pointing out any defect in the books of accounts just because there are certain inflated nature of purchases on account of cash payment cannot be the basis for rejection of books of accounts u/s 145 of the Act and moreover GP rate was more than the previous year. So, we do find merit in the appeal of the assessee and accordingly, the impugned order passed by the ld. CIT is set aside and the assessment order framed by the AO is restored.
8. In the result, the appeal of the assessee is allowed.
Order pronounced in open court on this day of 11th January, 2016.
Sd/- sd/-
(PRASHANT MAHARISHI) (A.T. VARKEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 11th day of January, 2016/TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT, Meerut.
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.