Income Tax Appellate Tribunal - Indore
Rakesh Khandelwal, Indore vs Pr. Cit-Ii, Indore on 29 January, 2020
Rakesh Khandelwal 1
ITA No.204 of 2019
आयकर अपील य अ धकरण, इ दौर यायपीठ, इ दौर
IN THE INCOME TAX APPELLATE TRIBUNAL
INDORE BENCH, INDORE
BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER
AND
SHRI MANISH BORAD, ACCOUNTANT MEMBER
ITA No.204/Ind/2019
Assessment Year: 2015-16
Rakesh Khandelwal Pr. CIT
Afree Square, 43/1, बनाम/ Indore
Jawahar Marg
Vs.
Indore
(Appellant) (Revenue )
P.A. No.ALMPK9458P
Appellant by Shri Girish Agrawal &
Shri Vijay Bansal, A.Rs
Respondent by Shri Lalchand, D.R.
Date of Hearing: 10.12.2019
Date of Pronouncement: 29.01.2020
आदे श / O R D E R
PER KUL BHARAT, J.M:
Rakesh Khandelwal 2 ITA No.204 of 2019 This appeal by the assessee is directed against order of the PCIT - 2, Indore dated 19.11.2018 for the A.Y. 2015-
16. The assessee has raised following grounds of appeal:
1. On the fact and circumstances of the case and in law, Ld. Pr. CIT-2, Indore erred in passing the order under section 263 of the Income Tax Act, 1961 (the Act) which in contrary to the material on record and provisions of the Act unjust and bad in law.
2. On the fact and circumstances of the case and in law, Ld. Pr. CIT-2, Indore erred in holding that Assessing Officer (AO) passed the order dated 29.9.2017 under section 143(3) of the Act for the impugned assessment year 2015-16 without making required enquiries/investigations.
3. On the fact and circumstances of the case and in law, Ld. Pr. CIT-2, Indore erred in giving contradictory observations that A.O. did not make any inquiries at all about the issue and at the same time observing that A.O. made half hearted investigations and inquiries about the issue of receipt of gifts by the appellant from various family members in cash.
4. On the fact and circumstances of the case and in law, Ld. Pr. CIT-2, Indore erred intreating the gifts received by the appellant from his family members and close relatives as loans and also directing the A.O. to refer the matter to Jt. CIT Range-4, Indore for initiating penalty proceedings under section 271D of the Act.
5. On the fact and circumstances of the case and in law, Ld. Pr. CIT-2, Indore erred in holding that assessment order passed by the A.O. is erroneous in so far as it is also prejudicial to the interest of revenue, thereby setting aside the said assessment order to the file of the A.O. to re-examine the issue of cash deposited by the appellant after making necessary verification, inquiries and investigations.
6. The appellant craves leave to add, amend alter or otherwise raise any other ground of appeal.
2. Briefly stated facts are that in this case assessment for A.Y. 2015-16 was completed by the A.O. u/s 143(3) of the Income Tax Act, 1961 (hereinafter called as 'the Act') on 29.9.2017, assessing the income at Rs.7,79,990/- against the returned income of Rakesh Khandelwal 3 ITA No.204 of 2019 Rs.6,79,990/-. Subsequently, Ld. CIT(A) after examining the records issued a notice u/s 263 of the Act to show cause the assessee as to why the assessment so framed should not be set aside. In response to the notice, the assessee filed a reply. The submissions made by the assessee were not found acceptable by the Ld. Pr. CIT and therefore, he set aside the assessment order to examine the issue of source of cash deposit by the assessee and for initiating the penalty u/s 271D of the Act.
3. Before us, learned counsel for the assessee reiterated the submission made before revenue authorities and filed the following written submission:
"Following contentions are being made by the assessee for the impugned appeal. Submissions for the same are also being made.
Sr. No. Contentions of the assessee challenging the order u/s 263 A Provisions of section 263 can be invoked only when twin conditions are satisfied i.e. order should be both erroneous and prejudicial to the interest of the Revenue B Lack of enquiry versus inadequate enquiry conducted by Ld. AO C Application of mind by Ld. AO Rakesh Khandelwal 4 ITA No.204 of 2019 D Enquiry to be conducted by Pr.CIT before making an order under section 263 of the Income Tax Act, 1961 - "Opinion Vs. Direction"
Facts of the case:
1. Assessee is engaged in the wholesale business of furniture run under the name and style of M/s. Rakesh Steel Furniture. In addition to this, assessee incurred loss on account of commodity transaction (Rs.
25,69,459), derivatives (Rs. 2,17,857) and security transactions (Rs. 943) totalling to Rs. 27,88,259. This loss was not claimed by assessee in his return.[PB 97]
2. Notice u/s 143(2) was issued on 19.09.2016 and case of assessee was selected for 'limited scrutiny' to examine the following issues - [PB 01] a. Commodity transaction b. Derivative (futures) transaction c. Sales turnover mismatch d. Securities transaction
3. A detailed questionnaire was issued u/s 142(1) which required assessee to give details of transactions with stock exchange, investment portfolio and trading portfolio in addition to other details. In response this questionnaire, assessee submitted copies of statement of Swastika Investmart Limited - NSE Capital, MCX Futures and derivatives for AY 2015-16. Copy of bank statements were also submitted.[PB 115-119, 106-114]
4. Assessee submitted that he has incurred loss from the said NSE, MCX and futures transactions as mentioned above at point no.1. Ld.AO further enquired as to how this loss was mitigated by assessee. In response to which assessee submitted that to mitigate this loss gifts were received from his relatives, from sale of jewellery and out of his personal savings. Assessee submitted copy of bank statements, acknowledgment of income tax returns and confirmation for the gifts from donors before Ld. AO. Source of source has also been explained by assessee before Ld. AO.
Rakesh Khandelwal 5 ITA No.204 of 2019
5. Ld. AO examined these evidences and proceeded to make addition of Rs. 50,000 each received from Jyoti Khandelwal (wife of assessee) and Kailashchandra Khandelwal (father of assessee). [PB 231 backside]
6. Show cause notice u/s 263 was issued on 06.07.2018 by Ld. Pr.CIT -II, Indore by stating that - [PB 232] "3. As per the information available on records, it is noted that the assessee has incurred loss in sharing trading. The assessee has received gifts from various family members in cash for mitigating loss in share trading which was deposited in saving bank A/c. The assessee had deposited total cash of Rs. 31.90 lacs in his saving bank A/c out of which Rs. 4,25,000/- were out of his own source. Instead of making through inquiries into the above transactions, the AO made lump-sum addition of Rs. 1 lac on account of gift received from father and wife.
4. The AO has not examined this factor and no enquiry/investigation has been made. Therefore, the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue...................."
7. In response to the show cause notice assessee submitted that his case was selected for scrutiny to examine the commodity transaction. All the required details were submitted before Ld. AO. On the query from Ld. AO as to how did assessee mitigate loss incurred he submitted that gifts were received from relatives, sale of jewellery and out of personal savings. Bank statements, confirmation letter for the gifts given and ITR acknowledgment from all the relatives who gave gifts were also submitted. Ld. AO examined these documents and proceeded to make addition of Rs. 1,00,000 for the gift received from Jyoti Khandelwal (wife of assessee) of Rs. 50,000 and Kailashchandra Khandelwal (father of assessee) of Rs. 50,000.
Assessee submitted that Ld. AO has passed the assessment order u/s 143(3) after examining all the documents submitted. Thus, the said order is not erroneous and prejudicial to the interest of revenue.
Rakesh Khandelwal 6 ITA No.204 of 2019
8. Ld. Pr. CIT-II, Indore proceeded to pass an order u/s 263 on 19.11.2018 by stating that order passed by AO is erroneous and prejudicial to interest of revenue on account of passing of the order without making required enquiries/investigations. Ld. Pr.CIT -II, Indore set aside the order passed by Ld. AO u/s 143(3) dated 29.09.2017 to re-examine issue of source of the case deposited by assessee and passing an order. [Order u/s 263 page 11]
9. Aggrieved assessee is in appeal before your Honors.
Submission:
A. Provisions of section 263 can be invoked only when the twin conditions are satisfied i.e. order should be both erroneous and prejudicial to the interest of the Revenue.
1. Provisions of section 263 reads -
"(1) The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue................"
2. To invoke the provisions of section 263 the order of assessing officer should be both erroneous and prejudicial to the interest of the Revenue. Order passed by an Assessing Officer can be said to be 'erroneous' only if it is contrary to law. This power of revision can be exercised by Ld. Pr.CIT only when no enquiry as required under the law is done by Ld. AO.
3. Assessee has suffered loss from the commodity, derivatives and securities transactions which has not been claimed in the return filed. No tax advantage/benefit has been claimed by the assessee on this actual and real loss sustained. There is no prejudice caused to the interest of the Revenue on this loss. [PB 07] Rakesh Khandelwal 7 ITA No.204 of 2019
4. Term "erroneous" used in the section 263 is to be read relating to jurisdictional error on the part of the Assessing Officer in exercise of his powers vested under the law. Error committed by the Assessing Officer must be an error of jurisdiction.
5. Case of assessee was selected for 'limited scrutiny' for which notice u/s 143(2) was issued on 19.09.2016 to examine following issues -
a. Commodity transaction b. Derivative (futures) transaction c. Sales turnover mismatch d. Securities transaction
6. In response to which assessee submitted that he is engaged in wholesale business of furniture run under the name and style of M/s. Rakesh Steel Furniture. It was also submitted that he incurred loss during the year on account of commodity trading (MCX, NSE F&O and NSE) amounting to Rs. 27,88,255.
7. To substantiate his claim of loss incurred from the commodity trading statement of the assessee from two brokers namely, Swastika Investmart Limited (NSE), Swastika Commodities Private Limited (MCX Futures). The loss from commodity trading was not claimed in return. [PB 99-105, 115-119]
8. Ld. AO being satisfied with the submission made by assessee on the commodity and derivatives transaction further enquired as to how this loss was mitigated by assessee.[AO page 1 4th para] In response to this, assessee submitted that to mitigate this loss gifts were received from relatives, sale of jewellery and out of his personal savings. Gifts were received from following persons - [PB 98] Sr. Name Relation PAN Source Amount of No. gift given to assessee (Rs.) 1 Jyoti Khandelwal Spouse ALSPK2131K Sale of 4,20,000 Rakesh Khandelwal 8 ITA No.204 of 2019 jewellery Out of savings [PB 136-159, 83] 2 Kailashchandra Father AZEPK8797K Sale of 2,50,000 Khandelwal jewellery Out of savings [PB 160-170] 3 Lakshmibai Mother BORPK8451H Sale of 3,00,000 Khandelwal jewellery [PB 171-193] 4 Babulal Father ACTPK0073C Out of 2,25,000 Khandelwal in law withdrawal from his partnership business [PB 194-200] 5 Manorama Mother ACTPK0074F Out of 2,25,000 Khandelwal in law withdrawal from her partnership business [PB 226-229] 6 Ram Khandelwal Brother ADNPK8118M Out of 3,45,000 in law withdrawal from his partnership business [PB 201-208, 230] Assessee submitted copy of ITR acknowledgement, bank statements, bills of sale of jewellery and confirmation of gifts given by them. [PB 25,83, 120-193, 220]
9. Ld. AO examined these documents submitted to establish how he mitigated the loss incurred from trading activities proceeded to make addition of gift received from Jyoti Khandelwal (wife of assessee) of Rs. 50,000 and Kailashchandra Khandelwal (father of assessee) of Rs. 50,000 as unexplained income.
Rakesh Khandelwal 9 ITA No.204 of 2019
10.All the necessary documents were already before Ld. AO for the loss incurred from commodity and derivatives transactions and also how this loss was mitigated. Ld. AO took one of the plausible view by making addition of Rs. 1,00,000 to the returned income. Ld. AO conducted all the necessary enquiries in relation to the 'limited scrutiny' for which the case of assessee was selected for assessment.
11.It is a well settled law that to invoke the provisions of section 263 both the conditions that the order must be erroneous and prejudicial to the interest of Revenue must be satisfied. Reliance is placed on the following judicial precedents -
a. Hon'ble Jurisdictional High Court of Madhya Pradesh in the case of H.H. Maharaja Raja Pawer Dewas- [1983] 15 Taxman 363 - order pronounced on 13.11.1981 - Para 10 - "However, the first argument, viz., that an assessment order without compliance with the procedure laid down in section 144B is erroneous but not prejudicial to the interests of the revenue conferring revisional jurisdiction on the Commissioner under section 263(1), has force. Under section 263(1) two pre-requisites must be present before the Commissioner can exercise the revisional jurisdiction conferred on him. First is that the order passed by the ITO must be erroneous. Second is that the error must be such that it is prejudicial to the interests of the revenue. If the order is erroneous but it is not prejudicial to the interests of the revenue, the Commissioner can not exercise the revisional jurisdiction under section 263(1)....................There cannot be any prejudice to the revenue on account of the ITO's failure to follow the procedure prescribed under section 144B, and unless the prejudice to the interests of the revenue is shown, the jurisdiction under section 263(1) cannot be exercised by the Commissioner, even though the order is erroneous. The argument that such an order may possibly be challenged in appeal by the assessee, and for this reason it is prejudicial to the interests of the revenue, has no merit. Section 263(1) clearly contemplates that the order of assessment itself should be prejudicial to the interests of the revenue and this prejudice has to be proved by reference to the assessment order only. It cannot be Rakesh Khandelwal 10 ITA No.204 of 2019 argued that there is some possibility of the assessment order being challenged or revised in appeal and, therefore, on account of this contingency, the order becomes prejudicial to the interests of the revenue."[emphasis supplied] b. Hon'ble Jurisdictional Bench of Indore ITAT in the case of Manish Kumar - [2011] 16 taxmann.com 212 - order pronounced on 19.08.2011 - Para 8- ".......There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interest of the Revenue' has to be read in connection with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the ITO is unsustainable in law."
Para 9 - ".......An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualize a case of substitution of judgment of the Rakesh Khandelwal 11 ITA No.204 of 2019 Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous." [emphasis supplied] c. Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. - [2000] 243 ITR 83 - order pronounced on 10.02.2000 - HEAD NOTE -
"Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interests of revenue - Assessment year 1983-84 - Whether in order to invoke section 263 Assessing Officer's order must be erroneous and also prejudicial to revenue and if one of them is absent, i.e., if order of Income-tax Officer is erroneous but is not prejudicial to revenue or if it is not erroneous but is prejudicial to revenue, recourse cannot be had to section 263(1) - Held, yes - Whether if due to an erroneous order of ITO, revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to interests of revenue - Held, yes - Assessee-company entered into agreement for sale of estate of rubber plantation - As purchaser could not pay instalments as scheduled in agreement, extension of time for payment of instalments was given on condition of vendee paying damages for loss of agricultural income and assessee passed resolution to that effect - Assessee showed this receipt as agricultural income - Resolution passed by assessee was not placed before Assessing Officer - Assessing Officer accepted entry in statement of account filed by assessee and accepted same - Commissioner under section 263 held that said amount was not connected with agricultural activities and was liable to be taxed under head 'Income from other sources' - Whether, where Assessing Officer had accepted entry in statement of account filed by assessee, in absence of any supporting material without making any enquiry, exercise of jurisdiction by Commissioner under section 263(1) was justified - Held, yes d. Hon'ble Gujarat High Court in the case of Smt. Minalben S. Parikh - [1995] 215 ITR 81 - order pronounced on 17.10.1994 - Para 12 - "From the aforesaid, it can well be said that the well-settled principle in considering the question as to whether an order is prejudicial to the interests of the revenue or not is to address oneself to the question whether the legitimate revenue due to the exchequer has Rakesh Khandelwal 12 ITA No.204 of 2019 been realised or not or can be realised or not if his orders under consideration are allowed to stand. For arriving at this conclusion, it becomes necessary and relevant to consider whether the income in respect of which tax is to be realised, has been subjected to tax or not or if it is subjected to tax, whether it has been subjected to tax at a rate at which it could yield the maximum revenue in accordance with law or not.If income in question has been taxed and legitimate revenue due in respect of that income had been realised, though as a result of erroneous order having been made in that respect, in our opinion, the Commissioner cannot exercise powers for revising the order under section 263 merely on the basis that the order under consideration is erroneous. If the material in that regard is available on the record of the assessee concerned, the Commissioner cannot exercise his powers by ignoring that material which links the income concerned with the tax realization made thereon. The two questions are inter-linked and the authority exercising powers under section 263 is under an obligation to consider the entire material about the existence of income and the tax which is realizable in accordance with law and further what tax has in fact been realised under the alleged assessment orders.[emphasis supplied] e. Hon'ble Karnataka High Court in the case of V. G. Krishnamurthy - [1985] 20 Taxman 65 - order pronounced on 19.03.1984 - Para 10 - "Section 263 can be invoked by the Commissioner only when he prima facie finds that the order made by the ITO was erroneous and was prejudicial to the interests of the revenue.Both these factors must simultaneously exist. An order that is erroneous must also have resulted in loss of revenue or prejudicial to the interests of the revenue. Unless both these factors co-exist or exist simultaneously, the Commissioner cannot invoke or resort to section 263. It cannot be exercised to correct every conceivable error committed by an ITO. Before the suo moto power of revision can be exercised, the Commissioner must at least prima facie find both the requirements of section 263, namely, that the order sought to be revised is prima facieerroneous and prejudicial to the interests of the revenue. If one of the other factor was absent, the Rakesh Khandelwal 13 ITA No.204 of 2019 Commissioner cannot exercise the suo moto power of revision under section 263." [emphasis supplied] B. Lack of enquiry versus inadequate enquiry conducted by Ld. AO
1. It is an undisputed fact that case of assessee was selected for 'limited scrutiny' to examine following issues - [PB 01] a. Commodity transaction b. Derivative (futures) transaction c. Sales turnover mismatch d. Securities transaction
2. Ld.AO vide questionnaire issued u/s 142(1) dated 15.02.2017 required assessee to submit statement of the transactions entered into in respect of NSE, BSE, commodity and derivatives through the stock exchange/brokers, copy of demat account. The required information was submitted by assessee before Ld. AO and submitted that he had incurred loss of Rs. 27,88,255. [PB 03, 99-105, 115-119] Further Ld. AO enquired how this loss was mitigated by assessee. In response to which assessee submitted that the loss was mitigated by gifts received from relatives, sale of jewellery and out of his personal savings. Copy of ITR acknowledgement, bank statements, bills of sale of jewellery and confirmation letters for the gift given along with PAN numbers were submitted before Ld. AO.
3. Ld. AO after considering all these documents proceeded to make addition of gift received from Jyoti Khandelwal (wife of assessee) of Rs. 50,000 and Kailashchandra Khandelwal (father of assessee) of Rs. 50,000.
4. Ld. AO allowed the claim on being satisfied with the explanation of assessee, on an enquiry made during the course of assessment proceedings. Thus, the decision of Ld. AO cannot be held to be erroneous.
Rakesh Khandelwal 14 ITA No.204 of 2019
5. Distinction is to be appreciated between lack of enquiry and inadequate enquiry. If there was any enquiry, even inadequate that would not by itself give occasion to Ld. Pr. CIT to pass orders u/s 263, merely because he has different opinion in the matter. It is only in cases of "lack of enquiry" that such a course of action would be open for the Ld. Pr. CIT.
6. Reliance is placed on following judicial precedents -
a. Hon'ble Allahabad High Court in the case of Krishna Capbox (P) Ltd - [2015] 60 taxmann.com 243 - order pronounced on 23.02.2015 - HEAD NOTE - "Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue (erroneous order) - Assessment year 2008-09 - Assessee filed its return - Case was selected for scrutiny and statutory notice was issued - Assessing Officer made certain queries, which were replied by assessee and after inquiry, being satisfied in respect to queries replied by assessee, Assessing Officer accepted declared income and passed assessment order - Commissioner, however, issued a notice under section 263 on ground that Assessing Officer had not made inquiry on certain aspects and accepted version of assessee without making any inquiry or verification, which was substantially prejudicial to revenue - Accordingly, he partly set aside assessment - Tribunal held that once inquiry was made, a mere non-discussion or non-mention thereof in assessment order could not lead to assumption that Assessing Officer did not apply his mind or that he had not made inquiry on subject and this would not justify interference by Commissioner by issuing notice under section 263 - Whether since department could not place anything to show that findings recorded by Tribunal were perverse or contrary to record, invoking of revision proceedings was unjustified - Held, yes [Para 13] [In favour of assessee]" [emphasis supplied] b. Hon'ble Delhi High Court in the case of Vikas Polymers - [2010] 194 Taxman 57 - order pronounced on 16.08.2010 - HEAD NOTE - "Section 263of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interests of revenue - Assessment year 1982-83 - Whether for exercising power under section 263, it is a prerequisite Rakesh Khandelwal 15 ITA No.204 of 2019 that Commissioner must give reasons to justify exercise of suo motu revisional powers by him to reopen a concluded assessment and exercise of power being quasi-judicial in nature, reasons must be such as to show that enhancement or modification of assessment or cancellation of assessment or directions issued for a fresh assessment were called for, and must irresistibly lead to conclusion that order of Assessing Officer was not only erroneous but was also prejudicial to interest of revenue - Held, yes - Whether before exercising revisional powers, assessee must be called, his explanation sought for and examined by Commissioner, and thereafter, if Commissioner still feels that order is erroneous and prejudicial to interest of revenue, Commissioner may pass revisional orders - Held, yes - Whether if a query was raised during course of scrutiny by Assessing Officer, which was answered to satisfaction of Assessing Officer, but neither query nor answer was reflected in assessment order, that would not, by itself, lead to conclusion that order of Assessing Officer called for interference and revision - Held, yes" [emphasis supplied] c. Hon'ble Delhi High Court in the case of Ashish Rajpal - [2009] 320 ITR 674 - order pronounced on 14.05.2009 - HEAD NOTE - "Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue - Assessment year 2002-03 - Whether merely because an assessment order does not refer to queries raised by Assessing Officer during course of scrutiny and response of assessee thereto, it can be said that there has been no enquiry and, hence, assessment is erroneous and prejudicial to interest of revenue - Held, no - Whether it is requirement of section 263 that assessee must have an opportunity of being heard in respect of those errors which Commissioner proposes to revise - Held, yes - Whether to accord such an opportunity after setting aside assessment order would meet mandate of section 263 - Held, no - Whether where notice issued by Commissioner before commencing proceedings under section 263 referred to four issues and final order passed referred to nine issues, revisional proceedings were vitiated as a result of breach of principles of natural justice - Held, yes" [emphasis supplied] Rakesh Khandelwal 16 ITA No.204 of 2019 d. Hon'ble Mumbai Bench of ITAT in the case of Anil Shah - [2007] 162 Taxman 39 - order pronounced on 21.01.2006 - HEAD NOTE - "Section 263, read with section 80HHC, of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue - Assessment year 2000-01 - Whether if all relevant details have been filed by assessee and Assessing Officer allows assessee's claim, decision of Assessing Officer cannot be held to be erroneous simply because in his order he does not make any elaborate discussion in that regard - Held, yes" [emphasis supplied]
7. Ld. Pr. CIT has invoked the provisions of section 263 mainly for the reason that AO failed to make necessary enquiries. But considering the facts of instant case this allegation is not correct.
8. Reliance is placed on following judicial precedent -
a. Hon'ble Jurisdictional Bench of Indore ITAT in the case of Narottam Mishra - [2015] 25 ITJ 206 - "Even this is not the case of the Ld. CIT that certain evidences were overlooked which were very much on record or in the knowledge of the AO. Even this is not the case of Ld. CIT that certain new facts or evidences were brought to the notice of the Revenue Department which were having a direct impact on the income assessed by the AO. Neither there was an escapement of evidence nor there was any evidence now brought to the notice of the revenue department, therefore if that was not the position, then we are not inclined to give our approval to such directions."
"It is well settled that if the same inquiry by the Assessing Officer in all original proceedings even if it inadequate that cannot flout the Commissioner with jurisdiction u/s 263 merely because he can form another opinion." [emphasis supplied] C. Application of mind by Ld. AO
1. In the instant case, Ld. AO during the assessment proceedings has made enquiries related to commodity and derivative transactions entered into Rakesh Khandelwal 17 ITA No.204 of 2019 by assessee and also how the loss incurred from these transactions was mitigated. All the necessary documentary evidences were placed on record before Ld. AO including those related to how the loss was mitigated. PAN numbers, copy of bank statements, ITR acknowledgement and confirmation letters from the donors were submitted before Ld. AO. Ld. AO had made enquiries and examined the documents submitted. Addition of Rs. 1,00,000 made on account of gift received from Jyoti Khandelwal (wife of assessee) Rs. 50,000) and Kailashchandra Khandelwal (father of assessee) Rs. 50,000 clearly depicts application of mind by Ld. AO on partly rejecting the submission made. Thus, it is not a case of non-application of mind. Invoking provisions of section 263 is not in accordance with the law.
Assessee has also explained source of source which is not warranted as held by Hon'ble Jurisdictional High Court of Madhya Pradesh in the case of Metachem Industries [2000] 245 ITR 160.
2. Reliance is placed on following judicial precedents -
a. Hon'ble Jurisdictional High Court of Madhya Pradesh in the case of Ratlam Coal Ash Co. - [1987] 34 taxman 443 - order pronounced on 17.08.1987 - HELD - "It is well settled that where the ITO made the assessment in undue hurry, accepting what the assessee states in the return without making any enquiries in the circumstances of the case, the Commissioner would be justified in holding the order of the ITO to the erroneous. However, in the instant case, the Tribunal had found that the assessee had furnished all the requisite information and that the ITO considering all the facts had completed the assessment. It was further held that in the circumstances of the case it could not be held that the ITO had made assessment without making proper enquiries. Accordingly, the Tribunal was justified in reversing the order passed by the Commissioner." [emphasis supplied] b. Hon'ble Delhi High Court in the case of Anil Kumar Sharma - [2010] 194 Taxman 504 - order pronounced on 24.04.2010 - Para 7 - "In view of the above discussion, it is apparent that the Tribunal arrived Rakesh Khandelwal 18 ITA No.204 of 2019 at a conclusive finding that, though the assessment order does not patently indicate that the issue in question had been considered by the Assessing Officer, the record showed that the Assessing Officer had applied his mind. Once such application of mind is discernible from the record, the proceedings under section 263 would fell into the area of the Commissioner having a different opinion. We are of the view that the findings of facts arrived at by the Tribunal do not warrant interference of this Court. That being the position, the present case would not be one of 'lack of inquiry' and, even if the inquiry was termed as inadequate, following the decision in Sunbeam Auto Ltd.'s case (supra), "that would not by itself give occasion to the Commissioner to pass orders under section 263 of the said Act, merely because he has a different opinion in the matter". No substantial question of law arises for our consideration. Consequently, the appeal is dismissed." [emphasis supplied] c. Hon'ble Jurisdictional High Court of Madhya Pradesh in the case of Mehrotra Brothers - [2004] 270 ITR 157 - "Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue - Commissioner invoked provision of section 263 against assessment order passed in case of assessee-firm on ground that Assessing Officer did not make proper enquiry regarding genuineness of certain cash credits found in books of firm - However, Tribunal held that since assessee had explained satisfactorily cash credit in books of account and discharged burden and Department had not brought out material or evidence to rebut same, cash credits were not income of assessee-firm and, accordingly, set aside order of Commissioner passed under section 263 - Whether in view of finding of fact recorded by Tribunal, no substantial question of law arose out of impugned order - Held, yes - Whether, therefore, instant appeal was to be dismissed - Held, yes"
[emphasis supplied] d. Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. - [2000] 243 ITR 83 - order pronounced on 10.02.2000 - HEAD NOTE -
"Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interests of revenue - Assessment year 1983-84 -
Rakesh Khandelwal 19 ITA No.204 of 2019 Whether in order to invoke section 263 Assessing Officer's order must be erroneous and also prejudicial to revenue and if one of them is absent, i.e., if order of Income-tax Officer is erroneous but is not prejudicial to revenue or if it is not erroneous but is prejudicial to revenue, recourse cannot be had to section 263(1) - Held, yes - Whether if due to an erroneous order of ITO, revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to interests of revenue - Held, yes - Assessee-company entered into agreement for sale of estate of rubber plantation - As purchaser could not pay instalments as scheduled in agreement, extension of time for payment of instalments was given on condition of vendee paying damages for loss of agricultural income and assessee passed resolution to that effect - Assessee showed this receipt as agricultural income - Resolution passed by assessee was not placed before Assessing Officer - Assessing Officer accepted entry in statement of account filed by assessee and accepted same - Commissioner under section 263 held that said amount was not connected with agricultural activities and was liable to be taxed under head 'Income from other sources' - Whether, where Assessing Officer had accepted entry in statement of account filed by assessee, in absence of any supporting material without making any enquiry, exercise of jurisdiction by Commissioner under section 263(1) was justified - Held, yes" [emphasis supplied] e. Hon'ble Delhi High Court in the case of Sunbeam Auto Limited- [2010] 189 Taxman 436 - order pronounced on 11.09.2009 - HEAD NOTE - "Section 263 of the Income-tax Act, 1961 - Revision - Of order prejudicial to interest of revenue - Assessment year 2001-02 - Whether if while making assessment, Assessing Officer has made an inadequate enquiry , that would not, by itself, give occasion to Commissioner to pass order under section 263, merely because he has different opinion in matter, it is only in cases of 'lack of inquiry' that such a course of action would be open - Held, yes - Assessee- company was engaged in business of manufacturing and supplying auto parts - In assessment for relevant assessment year, it had been allowed deduction of expenditure incurred on tools and dyes as revenue expenditure - Commissioner, however, set aside assessment Rakesh Khandelwal 20 ITA No.204 of 2019 order in exercise of his powers under section 263 on ground that Assessing Officer had allowed aforesaid expenditure without making proper enquiry - He, accordingly, remitted matter back to Assessing Officer to re-examine issue - Whether when facts clearly showed that Assessing Officer had undertaken exercise of examining as to whether expenditure incurred by assessee in replacement of dyes and tools was to be treated as revenue expenditure or not and on being satisfied with assessee's explanation, he accepted same, it could be said to be a case of lack of inquiry - Held, no - Whether further, on facts and law, view taken by Assessing Officer was one of possible views and, therefore, assessment order passed by Assessing Officer could not be held to be prejudicial to interest of revenue - Held, yes - Whether, therefore, Tribunal was justified in setting aside order of Commissioner - Held, yes" [emphasis supplied] f. Hon'ble Delhi High Court in the case of Hindustan Marketing & Advertising Co. Limited - [2011] 196 Taxman 368 - order pronounced on 21.09.2010 - HEAD NOTE - "Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue - Assessment years 1983-84 and 1984-85 - Assessee- company was incorporated with an object of carrying on business of marketing agents and to render marketing services, etc. - For relevant assessment years, assessee filed its returns and assessments were framed - Commissioner set aside assessment orders holding that ITO had not made adequate and detailed investigations/enquiries in respect of a major area of assessee-company's operation and source of its income - Tribunal quashed revisional order passed by Commissioner - Whether in view of fact that ITO had made reasonably detailed enquiries, had collected relevant material and discussed various facets of case with assessee, order of Commissioner to direct fresh assessment by going deeper into matter would not form a valid or legal basis to exercise jurisdiction under section 263 - Held, yes - Whether, therefore, impugned order of Tribunal was to be upheld - Held, yes" [emphasis supplied] g. Hon'ble Delhi High Court in the case of D.G. Housing Projects Ltd - [2012] 20 taxmann.com 587 - order pronounced on 01.03.2012 -
Rakesh Khandelwal 21 ITA No.204 of 2019 HEAD NOTE - "Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interests of revenue - Assessment year 2004-05 - Assessee sold an immovable property and claimed capital loss after indexation - Commissioner had doubts about valuation and sale consideration received but he had not examined said aspect himself and had merely given a finding that order passed by Assessing Officer was erroneous as Assessing Officer had not properly examined consideration receivables - Whether Commissioner could not direct Assessing Officer to conduct further enquiry to verify and find out whether order passed was erroneous or not - Held, yes [In favour of assessee] h. Hon'ble Jurisdictional Bench of Indore ITAT in the case of Flexituff International Limited - ITA No. 282/Ind/2017 - order pronounced on 14.05.2019 - Para 18 - "..........assessee made correct claim by firstly taking the benefit of Section 10A of the Act for the profits earned from SEZ units and remaining profits of other units including SEZ unit were utilised for setoff of current and brought forward losses. It remains an undisputed fact that the Assessing Officer had made adequate enquires as noted herein above adopting one of permissible view for allowing the assessee's claim for exemption u/s 10A of the Act before the claim of set off of brought forward and current year loss. The Ld. Pr. CIT took a different view of the matter. However that would not be sufficient to permit Ld. Pr. CIT to exercise the power u/s 263 of the Act because when two views are possible and Ld. Pr.CIT does not agree with the view taken by the Assessing Officer, assessment order cannot be treated as erroneous and prejudicial to the interest of the revenue unless the view taken by the Assessing Officer not unacceptable in law.....................this action of the Ld. A.O cannot be held as erroneous and prejudicial to the interest of revenue. We therefore set aside the finding of Pr. Commissioner of Income Tax on this issue as it was a mere change of opinion which would not enable Ld. Pr. Commissioner of Income Tax to exercise jurisdiction u/s 263 of the Act as the Ld. A.O had considered the details and the explanation offered by the assessee before accepting the claim. We therefore reinstate the action of the Ld. A.O allowing the assessee's claim of exemption u/s 10A of the Act Rakesh Khandelwal 22 ITA No.204 of 2019 at Rs.12,51,79,200/- against the profits earned from SEZ units."
[emphasis supplied] i. Hon'ble Bombay High Court in the case of Reliance Communication Limited - [2016] 69 taxmann.com 103 - order pronounced on 28.03.2016 - HEAD NOTE - "Section 68, read with section 263, of the Income-tax Act, 1961 - Cash credits (FCCBs) - Assessee raised funds by way of FCCBs during year under consideration - Assessing Officer completed assessment accepting income declared by assessee - Commissioner noticed that no investigation was carried out by Assessing Officer to establish name and address, genuineness and creditworthiness of actual subscribers to FCCBs in terms of section 68 - He thus passed a revisional order setting aside assessment - Tribunal noted that Assessing Officer had made detailed enquiries about aforesaid aspect and mere fact that he did not make any reference to said issue in assessment order, could not make said order erroneous and prejudicial to interest of revenues - Accordingly, Tribunal set aside revisional order - Whether finding recorded by Tribunal being a finding of fact, no substantial question of law arose therefrom - Held, yes [Para 11] [In favour of assessee]"
[emphasis supplied] j. Hon'ble Andhra Pradesh High Court in the case of Dr. Kodela Siva Prasada Rao - [2013] 29 taxmann.com 18 - order pronounced on 20.11.2012 - Para 12 - "From the above facts it is clear that the assessee had received a gift of Rs. 22,76,750/-in U.S. dollars from an NRI, N.Mohan and the assessee had filed two confirmation letters, one in December 2006 and another on 10-07-2007 given by the donor stating that he had gifted the above amount to the assessee, that the assessee is his close relative, that he is a man of means owning a software company of a net worth of US $ 25 million, that he had gifted during the year 2002-03 Rs. 2.00 crores to rebuild a government school, and got constructed a guest house for Sri Sitaramachandra Swami temple at Bhadrachalam. Copies of the income tax returns filed by the donor in USA were also filed by the assessee. Even though the assessee informed the department that the donor was available in India in December 2006 on account of Rakesh Khandelwal 23 ITA No.204 of 2019 the death of his mother-in-law and the contact details of the donor in India (address and mobile numbers), the department did not bother to contact him and verify the above facts. In this view of the matter,we are of the view that the assessee had discharged the burden cast on him to prove the identity of the creditor, the creditworthiness of the creditor and the genuineness of the transaction. Therefore, the contention of the Revenue that the said sum ought to be added to the income of the assessee cannot be accepted. The finding recorded by the Tribunal is based on appreciation of the material on record and cannot be said to be perverse. In our view, no question of law, much less a substantive question of law arises for consideration in this appeal.
D. Enquiry to be conducted by Pr.CIT before making an order under section 263 of the Income Tax Act, 1961 - "Opinion Vs. Direction"
1. Section 263(1) -
"The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act,.....................after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify..............."
To invoke provisions of section 263, Pr. CIT is required to examine the record of any proceeding under this Act and conduct such enquiries as he deems to be necessary.
2. The term 'record' has been explained in Explanation 1(b) as "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Commissioner or Commissioner Record shall include all the documentary evidences which were submitted before Ld. AO and also those submitted before Ld. Pr.CIT. To Rakesh Khandelwal 24 ITA No.204 of 2019 invoke the provisions of section 263, Ld. Pr.CIT is required to examine all the documentary evidences including those which were before Ld. AO.
3. Ld. Pr.CIT issued show cause notice u/s 263 dated 06.07.2018 stating - [PB 232] "2. The entire records were gone through by me and on perusal and examination of records it is found that the order dated 29.09.2017 for A.Y. 2015-16 is erroneous as also prejudicial to the interest of revenue on account of passing of the order without making proper enquiries/ investigations.
3. As per the information available on records, it is noted that the assessee has incurred loss in share trading. The assessee has received gifts from various family members in cash for mitigating loss in share trading which was deposited in saving bank a/c. The assessee had deposited total cash of Rs. 31.90 lacs in his saving bank A/c out of which Rs. 4,25,000/- were out of his own source. Instead of making through inquiries into the above transactions, the AO made lump-sum addition of Rs. 1 lac on account of gift received from father and wife.
4. The AO has not examined this factor and no enquiry/investigation has been made. Therefore, the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue...................."
From the above it is evident that show cause notice was issued for following -
a. Assessment order was passed without making proper enquiries/investigations.
b. Instead of making thorough enquiry on the gift received, Ld. AO made lumpsum addition of Rs. 1,00,000 .
c. Ld. AO has not examined the gift received by assessee and no enquiry/investigation has been made.
Rakesh Khandelwal 25 ITA No.204 of 2019
4. Ld. Pr.CIT erred in not considering all the documentary evidences including those which were submitted before Ld. AO.
5. Section 263 confers a power to the Ld. Pr. CIT to make further enquiry before passing the final order. This power of further enquiry is to enable to reach a conclusion that the order of the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the revenue. Ld. Pr. CIT ought to have made the necessary enquiry. He has failed to do so. Instead he has directed the Ld. AO to re-examine the issue of source of deposit of cash by the assessee.
Reliance is placed on the decision of Raghav Chandra ITA No. 425/Ind/2014 (Indore Trib) dated 04.08.2015.
6. Order passed u/s 263 dated 19.11.2018 page 11 -
"...........I am of the considered opinion that the order dated 29.09.2017 for A.Y. 2015-16 is erroneous in so far as it is also prejudicial to the interest of revenue on account of passing of the order without making required enquiries/investigations......................Therefore, the assessment for A.Y. 2015-16 framed on 29.09.2017 is hereby set-aside to the file of AO to re-examine issue of source of the cash deposited by the assessee, indicated in the preceding discussion..............It would be not out of place to mention that the AO shall re-examine only the issues which have been indicated for further investigation in the preceding discussion."
[emphasis supplied] From the above following is evident -
a. Ld. Pr.CIT erred in not passing an order and instead stating that he is of 'considered opinion'. Ld. Pr.CIT is required to pass an order and not form an opinion. Order is different from forming an opinion.
b. Ld. Pr.CIT has stated that assessment order was passed without making required enquiries/investigations. Explanation 2 to section 263 cannot be invoked in case of 'inadequate enquiry. The provision Rakesh Khandelwal 26 ITA No.204 of 2019 cannot be invoked to correct each and every type of mistake or error committed by assessing officer. It is only when an order is erroneous that the provisions of section 263 will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of order being erroneous.
In the instant case, the fact that case of assessee was selected for 'limited scrutiny' to examine the commodity and derivatives transactions is not under dispute. Also the fact that assessee has incurred loss from commodity and derivative transactions is not under dispute. Ld. AO further enquired as to how this loss was mitigated by assessee. Though Ld. AO travelled beyond the scope of 'limited scrutiny', assessee submitted that the loss was mitigated from the gifts received from relatives, sale of jewellery and out of personal savings. All the documentary evidences of how the loss was mitigated were also submitted before Ld. AO. Ld. Pr.CIT erred in invoking the provisions of section 263 as neither there is assumption of incorrect facts nor is there any incorrect application of law.
c. Ld. Pr.CIT erred in setting aside the assessment order to re-examine the issue of source of deposit of cash in the bank account though all the documentary evidences in support of claim of how the loss was mitigated were before Ld. AO. Ld. AO considered all the documentary evidences and proceeded to make addition of Rs. 50,000 each for the gifts received from Jyoti Khandelwal (wife of assessee) and Kailashchandra Khandelwal (father of assessee). Thus, before proceeding to make addition Ld. AO has examined all the documentary evidences available on record.
d. Ld. Pr.CIT erred in not bringing on record any material to rebut the view adopted by Ld. AO and the issue has been set aside to the file of Ld. AO to further investigate and re-examine the issue of deposit of cash.
7. Reliance is placed on the following judicial precedents -
Rakesh Khandelwal 27 ITA No.204 of 2019 a. Hon'ble Jurisdictional Bench of Indore ITAT in the case of Dipti Gupta - ITA No. 511/Ind/2019 - order pronounced on 29.11.2019 - Para 10 - ".........Ld. Pr.CIT should have brought some material rebutting the view adopted by the A.O., which has not been done. The issue is simply restored to the A.O. for making enquiry. For this reason, action of the Ld. CIT cannot be sustained. Hence the grounds raised in the appeal are allowed. The impugned order is quashed." [emphasis supplied] Considering the above facts and circumstances of the case, submissions made, judicial precedents and documents on record appeal of the assessee be allowed."
4. Ld. CIT/D.R. opposed these submissions and supported the orders of the authorities below. In reply, the ld. CIT/DR, relying upon judicial pronouncements, filed the following submission:
"The gist of decision in favour of revenue on section 263 of IT Act 1961 A number of decisions of Hon'ble Apex Court, High Court, and Tribunals have been relied upon and the copies of decisions have been filed with the Hon'ble bench, which support the view of the department that lack of inquiry, inadequate inquiry, admission of claim without supporting material and no discussion in the assessment order are sufficient and good reasons for invoking section 263 of IT Act 1961 by the CIT. The list of cases along with the gist of decisions replied upon are hereby filed.
S. Reported
CASE LAW
No.
Rakesh Khandelwal 28
ITA No.204 of 2019
Malabar Industrial Co. Ltd. V/s Commissioner of 243 ITR 83 (SC)
1
Income Tax
Smt. Taradevi Aggrawal V/s Commissioner of Income 88 ITR 323 (SC)
2.
Tax
Rampyaridevi Saraogi V/s Commissioner of Income 67 ITR 84
3
Tax (SC)
Commissioner of Income Tax V/s Nagesh Knitwears 345 ITR 135
4
Pvt. Ltd (Delhi HC)
Gee Vee Enterprises V/s Addl. Commissioner of Income 99 ITR 375 (Delhi HC)
5
Tax
Bhushan Steel Ltd. V/s Asstt. Commissioner of Income ITAT A Bench Delhi
6
Tax
Commissioner of Income-tax v.Deepak Kumar Garg 299 ITR 435 (Madhya
7.
Pradesh)
Commissioner of Income-tax v. Mahavar Traders 220 ITR 167 (Madhya
8.
Pradesh)
9. Smt. Renu Gupta v. Commissioner of Income-tax 301 ITR 45 (Rajasthan)
10. PT. Lashkari Ram v. Commissioner of Income-tax 272 ITR 309 (Allahabad)
Commissioner of Income-tax, Patiala v. Himachal 186 Taxman 105
11.
Pradesh Financial Corpn. (Himachal Pradesh)
Commissioner of income tax V/s Prafulla C.Pant And 176 Taxman 184
12
Dharam Veer JJ (Uttrakhand)
Mofussil Warehouse & Trading Co.Ltd.V/s 238 ITR 867 (Madras)
13
Commissioner Of Income tax
14 Durgalal & Co. V/s Commissioner Of Income tax 220 ITR 456(Delhi)
Commissioner Of Income tax V/s Active Traders (P) 214 ITR583 (Calcutta)
15
Ltd.
Addl .Commissioner Of Income tax V/s Mukur 111 ITR 312 (Gujarat)
16
Corporation
2. Further reliance is here by placed or following decisions of Supreme Court, High Courts and Tribunal, the list and gist of decisions are submitted now.
1 CIT V/s Amitabh Bachan Civil Appeal No. 5009 of 2016 2 CIT V/s Bhagwan Das 272 ITR 367 (Allahabad) 3 Shubhlakshmi Vanijya (P) Ltd. V/s CIT-1 172 TTJ 721 (Kalkata) 4 Jublee Commotrade 5 Novapan India Ltd. vs Collector of Central 3556 of 1984 (SC) Excise 6 Rajmandir Esates Pvt. Ltd. vs PCIT-III GA No 509 of 2016 (HC) Rakesh Khandelwal 29 ITA No.204 of 2019 Kalkata 7 (1)P.G. Infrastructure & Service Pvt. Ltd. ITA No 607 to 609 (2) S.N. Vijaywargiya (Indore) (3) People's Internationsl Service P. Ltd. Bhopal 8 M/s Crompton Greaves V/s CIT-6 Mumbai ITAT C Bench Mumbai Note: The case laws at serial no. 5 and 8 have been relied upon for invoking exception/exemption and retrospective application of Explanation 2 to section 263 of IT Act 1961.
3. In the case of Malbar Industrial Co. Ltd., Hon'ble Supreme Court (243 ITR 83- SC) held that where A.O. had accepted the entry in the statement of account in the absence of supporting material, without making any inquiry, the exercise of jurisdiction by CIT under section 263(1) was justified. In this case the damages received by the appellate in lieu of agricultural income was wrongly allowed by the A.O. as agricultural income when the same was finally treated as income from other source. The operative part of decision is as under.
In the instant case, the Commissioner noted that the ITO passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the ITO failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appeared that the resolution passed by the board of the appellant- company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the ITO was erroneous was irresistible. Therefore, the High Court had rightly held that the exercise of the jurisdiction by the Commissioner under section 263(1) was justified.
It was shown at any stage of the proceedings that the amount in question was fixed or quantified as loss of agricultural income and, admittedly, it was not so found by the Tribunal. The further question whether it would be agricultural income within the meaning of section 2 Rakesh Khandelwal 30 ITA No.204 of 2019 (1A) did not arise for consideration. It was evident from the order of the High Court that the findings recorded by the Tribunal that the appellant stopped agricultural operation in November 1982 and the receipt under consideration did not relate to any agricultural operation carried on by the appellant, were not questioned before it. Thought the High Court was not correct in holding that the amount was paid for breach of contract as indeed it was paid in modification/relaxation of the terms of the contract, it was to be held that the High Court was justified in concluding that the said amount was a taxable receipt under the head 'Income from other sources'.
4. In a recent decision of Hon'ble Apex court in the case Shri Amitabh Bacchan, (CIVIL APPEAL NO.5009 OF 2016 [Arising out of S.L.P.(C) No.11621 of 2009]) while dealing with issue of requirement of issuing specific notice u/s 263 of I.T. Act, The Hon'ble Apex court has comprehensively dealt with this issue of "lack of inquiry" and "inadequate inquiry" by the A.O. and held that CIT was perfectly justified in invoking section 263 of Income Tax Act when A.O. had dropped the inquiries once the additional expenses claimed in the revised ROI were withdrawn despite issue of notice u/s 69C of Income Tax Act. It was contended on behalf of Mr. Bachchan that the A.O. had taken the possible view and CIT was not supposed to substitute his view particularly in view of the facts that the additional expenses claimed through revised ROI were withdrawn. It was held by the Hon'ble/Apex Court that making claim and subsequently withdrawing the same gives rise to necessity of further inquiry. In the instant case under consideration, the A.O. has omitted to take note of vital facts like abnormal increase in sell price of land, agriculture activity, agricultural Income, nature of business and legality of maintaining two portfolios and allowed the exemption claimed by the appellant without application of mind. The gist of decision of Hon'ble Supreme court in the case of Shri Amitabh Bacchan is as under:-
Rakesh Khandelwal 31 ITA No.204 of 2019 There can be no doubt that so long as the view taken by the Assessing Officer is a possible view the same ought not to be interfered with by the Commissioner under Section 263 of the Act merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority. This is a course of action that must be desisted from. However, the above is not the situation in the present case in view of the reasons stated by the learned C.I.T. on the 3 (2000) 243 ITR 83 (SC) 4 (2007) 295 ITR 282 (SC) 22 basis of which the said authority felt that the matter needed further investigation, a view with which we wholly agree.
Making a claim which would prima facie disclose that the expenses in respect of which deduction has been claimed has been incurred and thereafter abandoning/withdrawing the same gives rise to the necessity of further enquiry in the interest of the Revenue. The notice issued under Section 69-C of the Act could not have been simply dropped on the ground that the claim has been withdrawn. We, therefore, are of the opinion that the learned C.I.T. was perfectly justified in coming to his conclusions insofar as the issue No.(iii) is concerned and in passing the impugned order on that basis. The learned Tribunal as well as the High Court, therefore, ought not to have interfered with the said conclusion.
In the light of the discussions that have preceded and for the reasons alluded we are of the opinion that the present is a fit case for exercise of the suo motu revisional powers of the learned C.I.T. under Section 263 of the Act. The order of the learned C.I.T., therefore, is restored and those of the learned Tribunal dated 28th August, 2007 and the High 23 Court dated 7th August, 2008 are set aside. The appeal of the Revenue is allowed.
Rakesh Khandelwal 32 ITA No.204 of 2019
5. In the case of Rampyari Devi Saraogi, Hon'ble Supreme court, (67 ITR 84 SC) held that CIT was justified in invoking section 263 of I.T. Act 1961 as the ITO had accepted the initial capital. Ornaments and presents received at the time of marriage and other gifts from father-in-law without making any inquiry. Further it was held that it was not necessary to further detail the reasons given by the CIT because on the facts of record, the orders were prejudicial to the interest of revenue. The decision of Hon'ble High Court dismissing the WP filed by the assessee against the order of CIT was dismissed. The relevant part of decision is as under:-
The High Court was right in overruling the contention of the assessee. The order of the Commissioner was a detailed order. There was no doubt that he did mention some facts which were not indicated or communicated to the assessee and which the assessee had had no opportunity of meeting.
The High Court was right in holding that all this material was supporting material and did not constitute the basis grounds on which the orders under section 33B were passed by the Commissioner. There was ample material to show that the ITO made the assessments in undue hurry. The assessee was a new assessee and filed voluntary returns in respect of a number of years, i.e. , from assessment years 1952-53 to 1960-61. The return for the assessment year 1953-54 was undated. The returns for the assessment years 1952-53 and 1957-58 was dated 21.03.1961 , and those for the assessment years 1958-59 to 1960-61, were dated 26.04.1961. On 21.03.1961, the assessee made a declaration giving the facts regarding initial capital, the ornaments and presents received at the time of marriage, other gifts received from her father-in-law, etc., which should have any ITO on his guard. But the ITO without making any enquiries to satisfy himself passed the assessment order on30.03.1961, for assessment years 1952-53 to 1957-58, and on 26.04.1961, for the assessment years 1958-59 to 1960-61. No bank account or any proper books of account were maintained by the assessee or produced before the ITO. A short stereotyped assessment order was made for each assessment year. Profit from speculation was shown as Rs.
3,085 and interest Rs. 600, and Rs. 500 was added for want of books of account and evidence. No evidence whatsoever was produced in respect of the money-tending business done and interest income shown to have been Rakesh Khandelwal 33 ITA No.204 of 2019 received by the assessee. No names were given as to the parties to whom the loans were advanced, with amounts and rate of interest and as to when the interest income was received.
It was not necessary to further detail the reasons given by the Commissioner because on the face of the record the orders were prejudicial to interest of the revenue, and even if the facts which the Commissioner introduced regarding the enquiries made by him had been indicated to the assessee, the result would have been the same. The assessee, had not in any way suffered from the failure of the Commissioner to indicate the results of the enquiries. Moreover, the assessee would have full opportunity of showing to the ITO whether he had jurisdiction or not and whether the income assessed in the assessment orders which were originally passed was correct or not.
The appeal was liable to be dismissed and decision of High Court was to be affirmed.
6. The jurisdictional MP High Court, in the case of Mahaver Trader, (220 ITR 167 Madhya Pradesh) while setting aside the order of ITAT held that ITO had not examined the issue of allowability of deduction us 80HH and 80J in the light of conditions laid down for grant of relief under said sections. Further, it was observed by the Hon'ble court that the Tribunal instead of approaching the matter in the proper perspective had on their own started making enquiries and found that order passed by A.O. was correct which was not warranted at all. The operative part of decision is reproduced here under:-
Tribunal, instead of approaching the matter in the proper perspective, have on their own started making enquiries and found that the order passed by the Income-tax Officer is correct. This approach of the Tribunal was not warranted at all, After going through the order of the Income-tax Officer, it appears that the Income-tax Officer has not examined the matter in the light of the conditions laid down for grant of relief under sections 80HH and 80J. Certain conditions have been laid down in both the sections and the Income-tax Officer should have examined the assessee on the basis of the conditions and thereafter Rakesh Khandelwal 34 ITA No.204 of 2019 recorded the finding whether they are entitled to the benefit of section 80HH or 80J. But, instead of this, the Income-tax Officer only proceeded to assess the liability of the assessee and that was not the correct approach. The Income-tax Officer should have examined the matter in the light of the conditions mentioned in both the sections before granting relief. We are of the opinion that the Commissioner of Income-tax has not given any finding, but only remanded the case back to the Income-tax Officer for reassessment after complying with the conditions laid down for grant of benefit under sections 80HH and 80J. Therefore, the finding recorded by the Tribunal appears to be not correct because all the materials which ought to have been utilised by the Income-tax Officer were not there and it is not understandable that how the Tribunal have on their own, assessed the situation. Therefore, we are of the opinion that the view taken by the Tribunal is not correct and we answer the aforesaid question in favour of the Revenue and against the assessee. The Income- tax Officer may examine the matter afresh in the light of the decision of the Commissioner of Income-tax without taking notice of any adverse observations, if any, made by the Commissioner of Income-tax.
7. Similarly, Hon'ble jurisdictional MP High Court in the case of Deepak Kumar Garg (299 ITR 435 Madhya Pradesh) upheld the order of CIT passed under section 263 of Income Tax Act, 1961, for the reasons that the A.O. had done semblance of inquiry that too in snap-shod manner and accepted the version of assessee without proper inquiry causing loss of substantial taxable income. The gist of decision is reproduced as under:-
In the case in hand, after hearing the authorised representative, the Commissioner has recorded a clear finding that the order of the Assessing Officer was erroneous as well as prejudicial to the interests of the Revenue. From the order of the Assessing Officer, it is clear that for want of time, the Assessing Officer had done only a semblance of enquiry and that too, in a very slipshod manner, as is clear from the post script in the order of the Assessing Officer. The Assessing Officer accepted the version of the assessee without proper enquiry and as a result a substantial amount of taxable income was not brought to tax. In such a case the assessment order would be erroneous and prejudicial to Rakesh Khandelwal 35 ITA No.204 of 2019 the interests of the Revenue because law enjoins upon the Assessing Officer to make the assessment order bringing all taxable income to tax. The enquiry held in a perfunctory manner could not be said to be a proper enquiry before passing the assessment order. This cannot be a ground to shut out the jurisdiction of the Commissioner of Income-tax that an adequate enquiry was conducted by the Assessing Officer. We may clarify that the order of the Commissioner of Income-tax is in two parts. Part one consists of reasons for issuing the show-cause notice, and the later part deals with findings recorded by the Commissioner after affording opportunity of hearing to the assessee. As stated above, the Commissioner of Income-tax has recorded a categorical finding that the order of the Assessing Officer for want of adequate enquiry, was erroneous and prejudicial to the interests of the Revenue and after setting aside the assessment order, remanded the matter to the Assessing Officer for fresh assessment on the merits. The Commissioner of Income-tax also directed the Assessing Officer to observe rules of natural justice and to provide opportunity of hearing to the assessee before making fresh assessment order on the merits. This adequately safeguards the interest of the assessee and would cause no prejudice. It seems that the Income-tax Appellate Tribunal was carried away by the first part of the order of the Commissioner of Income-tax as a result the later part of the order escaped from the notice of the Tribunal and the Income-tax Appellate Tribunal branded the order of the Commissioner of Income-tax as based upon probabilities, surmises and conjectures.
8. In a recent decision, in the case of Rajmandir Estate Pvt. Ltd., Hon'ble Kolkata High Court, (GA No. 509 of 2016 with ITAT No. 113 of 2016) had upheld the order of CIT passed u/s 263 of Income tax Act. In this case, the AO had passed the assessment order u/s 143(3) read with section 148 of income tax Act 1961. There was a huge increase in share capital by way of share premium. The AO had called for various details pertaining to increase in share capital and reserve and surpluses on account of issue of 7,92,737 shares of Rs. 10 each at a premium of Rs. 390/-. The AO had also conducted the enquiries from share subscribers u/s 133(6) of Income tax Act 1961 and most of the 39 applicants responded and the appellant had even filed complete details and sources of these Rakesh Khandelwal 36 ITA No.204 of 2019 companies for making share subscription. However the CIT had invoked the section 263 of Income Tax Act 1961 for the reasons that the AO had not conducted the requisite enquiry and had not applied mind. Therefore the order of AO was considered as erroneous and prejudicial to the interest of revenue. The Hon'ble Tribunal confirmed the view of CIT in setting aside the order of AO. The appellant preferred in appeal before Hon'ble Kolkata High Court wherein the following question were found arising in the appeal.
(a) Whether in the light of the views expressed in the case of Lovely Exports (supra) & Steller Investment (supra) the order under section 263 directing further investigation is legal?
(b) Whether the order passed by the assessing officer under section 143(3) /147 of the Income Tax Act is erroneous and also prejudicial to the interest of the revenue?
Both the above mentioned question were answered in affirmative by Hon'ble Court and held as under:-
" The assessee with an authorised share capital of Rs.1.36 crores raised nearly a sum of Rs.32 crores on account of premium and chose not to go in for increase of authorised share capital merely to avoid payment of statutory fees is an important pointer necessitating investigation. Money allegedly received on account of share application can be roped in under Section 68 of the Income Tax Act if the source of the receipt is not satisfactorily established by the assessee. Reference in this regard may be made to the judgement in the case of Sumati Dayal - Vs- CIT (supra) wherein Their Lordships held that any sum "found credited in the books of the assessee for any previous year, the same may be charged to income tax....". We are unable to accept the submission that any further investigation is futile because the money was received on capital account. The Special Bench in the case of Sophia Finance Ltd. (supra) opined that "the use of the words "any sum found credited in the books" in Section 68 indicates that the said section is very widely worded and an Income-tax Officer is not precluded from making an enquiry as to the true nature and source thereof even if the same is credited as receipt of share application money. Mere fact that the payment was received by cheque or that the applicants were companies, borne on the file of Registrar of Companies were held to be neutral facts and did not prove that the transaction was genuine as was held in the case of CIT -Vs- Nova Rakesh Khandelwal 37 ITA No.204 of 2019 Promoters and Finlease (P) Ltd. (supra). Similar views were expressed by this Court in the case of CIT -Vs- Precision Finance Pvt. Ltd. (supra). We need not decide in this case as to whether the proviso to Section 68 of the Income Tax Act is retrospective in nature. To that extent the question is kept open. We may however point out that the Special Bench of Delhi High Court in the case of Sophia Finance Ltd. (supra) held that "the ITO may even be justified in trying to ascertain the source of depositor".
Therefore, the submission that the source of source is not a relevant enquiry does not appear to be correct. We find no substance in the submission that the exercise of power under Section 263 by the Commissioner was an act of reactivating stale issues. In the case of Gabriel India Ltd. (supra) the CIT was unable to point out any error in the explanation furnished by the assessee. Whereas in the present case we have tabulated the evidence which was before the assessing officer which should have provoked him to make further investigation. The assessing officer did not attach any importance to that aspect of the matter as discussed above by us. The judgement in the case of Leisure Wear Exports Pvt. Ltd. (supra) relied upon by Mr. Poddar has no applicability because the evidence furnished by the assessee in this case does suggest a cover up. We also have held prima facie that neither the transaction appears to be genuine nor are the applicants of share are creditworthy.
The judgement in the case of Omar Salay Mohamed Sait (supra) cited by Mr. Poddar has no application for reasons already discussed. It is not true that the Commissioner in this case has merely on the basis of suspicion held that this was or could be a case of money laundering. We as a matter of fact have discussed this issue in great detail and need not reiterate the same. The order passed by the Commissioner is by no means an act of substituting his own views to that of the assessing officer. It is true that the assessing officer had requisitioned the necessary details by his notice u/s.142(1) but he thereafter did not apply his mind thereto. The judgement in the case of J. L. Morrison (India) Ltd. has no manner of application because in that case the question essentially was whether the receipt was of a capital or revenue nature. The facts and circumstances were not in dispute. Moreover the view taken by the assessing officer was not shown nor was held by the Court to be an erroneous view. Whereas in this case we have demonstrated in some detail as to why is the order of the assessing officer erroneous and prejudicial to the revenue."
9. The High Court of Allahabad, in the case of Bhagwan Das (272 ITR 367- Allahabad) has held that where the Rakesh Khandelwal 38 ITA No.204 of 2019 A.O. has not examined the agricultural income and its exemption, the order has been passed without application of mind and when there was no discussion of relevant issue in the assessment order, the CIT was held justified in setting aside the order of A.O. for granting exemption to the assessee without application of mind. It was held as under:-
Having heard the learned counsel for the revenue, we find that in the assessment order, there is no discussion regarding the question as to whether the amount of income shown by the assessee which is being claimed to be exempt has actually been earned by him or not and, further, whether the entire amount of income from Agriculture and Poultry farming is exempt from tax. The Commissioner of Income-tax has rightly initiated proceedings under section 263 of the Act as exemption has been granted without any application of mind. The Apex Court in the case of Malabar Indus trial Co. Ltd. (supra) while interpreting section 263 of the Act held as follows :--
"A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue recourse cannot be had to section 263(1) of the Act.
There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the Rakesh Khandelwal 39 ITA No.204 of 2019 principles of natural justice or without application of mind." [Emphasis supplied] (p. 87) Thus an order, which has been passed without application of mind, will also fall under the expression erroneous and prejudicial to the interest of Revenue. Since the Income-tax Officer has granted exemption to the assessee in respect of income from agriculture and poultry farming without any discussion and with out any application of mind, respectfully following the aforesaid decision, we are of the opinion that the Tribunal had committed error in holding that the assessment ordering so far as it grant ed exemption to income from Agriculture and Poultry farming was not erroneous or prejudicial to the interest of Revenue. We, therefore, answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee. Since nobody has put in appearance on behalf of the assessee, there shall be no order as to costs.
10. In case of Bhushan Steel, Hon'ble ITAT A Bench Delhi, (ITA No 1641 to 1646/Del/2014) observed that CIT was within his powers to set aside the order of A.O. where, the A.O. had allowed the expenses debited to P & L account without proper inquiries although during the course of search in Bhushan group and survey in other cases, it was noticed that Bhushan group has been inflating expenses and various parties were used for the said purpose. It has been held as under:-
In view of foregoing discussions, we are inclined to hold that the present case is squarely covered in favour of the revenue by the decisions of Hon'ble Jurisdictional High Court of Delhi in the case of Gee Vee Enterprises vs ACIT (supra) and CIT vs Nagesh Knitwears P. Ltd. (supra) as in the present case, the AO did not raise any query or make any inquiry pertaining to the claim of expenses submitted by the assessee in its books and statements of accounts submitted along with return and this is a clear case of "lack of inquiry". We may also point out that if the AO fails to conduct the said investigation, he commits the error and the word "erroneous" includes failure to make inquiry. In such Rakesh Khandelwal 40 ITA No.204 of 2019 cases, the order becomes erroneous because necessary inquiry or verification has not been made and not because a wrong order has been passed on merits. We further hold that if from the detailed investigation conducted by ITA No. 1641 to 1646/Del/2014 AY: 2006-07 to 2010-11 the Investigation Wing of the department, it is revealed that the bogus expenses have been claimed by the assessee with the intention to reduce its tax liability, then the order is also prejudicial to the interest of revenue. The argument of the ld. Counsel of the assessee about revenue neutrality is not applicable to the facts and circumstances of the present case.
In the case of ITO vs Ch. Atchaiah (1996) 218 ITR 239(SC), speaking for Hon'ble Apex Court their lordships held as follows:- "In our opinion, the contention urged by Dr. Gauri Shankar merits acceptance. We are of the opinion that under the present Act, the Income Tax Officer has no option like the one he had under the 1922 Act. He can, and he must, tax the right person and the right person alone. By "right person", we mean the person who is liable to be taxed, according to law, with respect to a particular income. The expression "wrong person" is obviously used as the opposite of the expression "right person". Merely because a wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income. This Bhushan Steel Ltd., New Delhi vs Assessee on 30 March, 2015 Indian Kanoon -
http://indiankanoon.org/doc/164679238/ 11 is so irrespective of the fact which course is more beneficial to the Revenue. In our opinion, the language of the relevant provisions of the present Act is quite clear and unambiguous. Section 183 shows that where Parliament intended to provide an option, it provided so expressly. Where a person is taxed wrongfully, he is no doubt entitled to be relieved of it in accordance with law, but that is a different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer (Income Tax Officer) has taxed the said income in the hands of another person contrary to law." ITA No. 1641 to 1646/Del/2014 AY: 2006-07 to 2010-11.
Therefore, it is well-settled principle that the Revenue authorities are duty bound to tax right person and right person alone. By "right person" is meant the person who is liable to be taxed, according to law, with respect to a particular income. The meaning of "wrong person"
Rakesh Khandelwal 41 ITA No.204 of 2019 is obviously used as the opposite of the expression "right person". In our humble understanding, the ratio of this decision clarifies that merely because of a wrong person is taxed with respect to a particular income, the AO is not precluded from taxing the right person with respect to that income. Same is the case here when assessee company made a bogus claim of expenditure then the assessee cannot avail immunity from tax liability by stating that the impugned amount of expenditure claim has been taxed in the hands of respective payee companies
11. In a landmark decision in the case of Subhlakshmi Vanijya (P) Ltd. B Bench of Kalkata ITAT. (60 taxmann.com 60 (Kolkata - Trib.), the decision of CIT in setting aside the order of A.O. was upheld. In this case, the appellant issued fresh share capital of 14.72 Lakhs at a premium of 7.21 crores. The A.O. obtained all the required documents and issued notices to 8 subscribes out of 21parties u/s 133(6) of IT Act 1961 and on the basis of details filed and confirmations received from subscribers, the A.O. proceeded to accept the explanation of assessee and completed the assessment with nominal addition of Rs. 28,049/- . The CIT invoked the section 263 of IT Act 1961 and set aside the order for the reasons that proper enquiry was not carried out by the A.O. and directed the A.O. to make fresh assessment after conducting independent, detailed and complete inquiries of subscription and share premium. The Hon'ble ITAT confirmed the decision of CIT with the observation that "inadequate inquiry" falls in the category of "No inquiry" which results in to making the order us erroneous and prejudicial to the interest of revenue. The relevant part of decision is as under:-
"Whether the enquiry conducted by the Assessing Officer in such cases can be as a proper enquiry?"
Though the Assessing Officer issued notices under section133(6) but it failed to comprehend the rationale or logic behind Rakesh Khandelwal 42 ITA No.204 of 2019 issuing shares at such a high premium, nor to examine any of the directors of the companies which were subscribers to share capital. It is highly improbable for any person having sound mind to purchase at arm's length the shares of a private limited company, hardly having any worth, with face value of Rs.10 at a premium of Rs.190. This mere fact should have been cornerstone for the Assessing Officer to embark upon further enquiry to unearth the truth. The genuineness of transactions of issue of share at such hefty premium in this background of the matter was under dark cloud and it skipped the attention of the Assessing Officer. [Para 17.c.] Upon analysis of the business model of the assessee it was noted that shareholder companies of one company become investee companies of other companies and in turn, such later company, whose shares are purchased, further invest in the shares of other companies, so on and so forth. This is a striking example of circulation of capital from one company to another and the rotation is continuing in all the companies under consideration. It cannot be a sheer coincidence that hundreds of companies brought into existence, having link with each other and none of them doing any worthwhile business activity, come together to issue shares at such a huge premium. At best, this argument could have been taken into consideration if these companies had issued shares to its related companies at premium and invested the proceeds in some other business activity and not purchasing the shares of other related companies through such a circular route. This shows that the transactions of issuing shares at a premium to related companies and then purchasing the shares of other related companies at a huge market price and none of the companies has any worthwhile business activity, when considered on an overall basis, is nothing but a smokescreen. [Para
17.f.] There remains no doubt whatsoever that in the given circumstances, the Assessing Officer conducted half-baked enquiry ignoring vital aspects which were required to be examined. If a company recently incorporated without carrying out any worthwhile business activity issues shares with face value of Rs.10 at a premium of Rs.190, the immediate concern of the Assessing Officer ought to have been to find out as to whether the receipt of such a premium was justified and whether the Rakesh Khandelwal 43 ITA No.204 of 2019 parameters of section 68 stood complied with. In the instant case, the Assessing Officer merely issued notices under section 133(6) to some of the shareholders whose replies, indicating that they overtly purchased the shares at Rs.200 each, were kept on record. Putting a lid at the matter at that stage only, the Assessing Officer did not consider it prudent to examine such shareholders as to their capacity and genuineness of the transactions. Confronted with such peculiar and hair-raising circumstances, the Assessing Officer should have got alerted and dug the matter deep for unearthing the reality of the transaction. Unfortunately, nothing of this sort was done by him. It is a perfect citation for a complete non-application of mind by the Assessing Officer and of passing the assessment order in undue haste. [Para 17.h.] Thus, there can be no escape from an axiomatic conclusion that in all these cases the enquiry conducted by the Assessing Officer's is exceedingly inadequate and hence fall in the category of 'no enquiry' conducted by the Assessing Officer, what to talk of charactering it as an 'inadequate enquiry'. The highly inadequate enquiry conducted by the Assessing Officer resulting in drawing incorrect assumption of facts, makes the orders erroneous and prejudicial to the interests of the revenue. [Para 17.i.] Whether Commissioner can set aside the assessment order and direct the Assessing Officer to conduct a thorough enquiry, thereby interfering with the jurisdiction of the Assessing Officer conferred on him in terms of sections 142(1) and 143(2) of the Act?
A careful perusal of the provisions of section 142(1)/143(2) unveils that it is the prerogative of the Assessing Officer to require the information 'on such points or matters' as he may require. Ordinarily it is not possible for the Assessing Officer to inquire into each and every entry recorded in the books of account of the assessee. He has to exercise his acumen in extracting out the relevant points or matters on which he wants to concentrate. But, what is important in this regard is that the operation of section 142(1)/143(2) comes to an end when an assessment is completed after examining such point or matters which the Assessing Officer feels to inquire before finalizing the assessment. It is only Rakesh Khandelwal 44 ITA No.204 of 2019 thereafter that the revisional powers of the Commissioner under section 263 can come into play for ascertaining if the Assessing Officer examined all the relevant points, which ought to have been examined. If the Commissioner, on examination of records of assessment, comes to the conclusion that the Assessing Officer failed to enquire into certain other relevant aspects which, in fact, necessitated thorough investigation, then he has all the power to revise the assessment order. In the instant case, the assessment already stands finalized and now the Commissioner is examining whether the Assessing Officer properly examined the facts of the case. In such circumstances, it is impermissible to have a recourse to the provisions of sections 142(1) and 143(2) for demolishing the order under section 263. [Para 18.b.] Whether inadequate inquiry conducted by the Assessing Officer empowers the Commissioner to revise the assessment order?
It is imperative for the Assessing Officer to conduct enquiry to satisfy himself about the genuineness of transactions. Scope of the term 'enquiry' can be diverse in different circumstances. There cannot be straitjacket formula to positively conclude as to conducting or non- conducting of 'enquiry' by the Assessing Officer. It depends on the facts and circumstances of each case. Where the facts are just ordinary and prima facie there is nothing untoward the recorded transaction, in such circumstances, the obtaining of the documents and the application of mind thereon, without a further outside enquiry, may mean that the Assessing Officer did conduct enquiry, leaving the question open as to whether it was a proper or an improper enquiry. But, where the factual scenario of a case prima facie indicates abnormalities and cry for looking deep into it, then a mere collection of documents cannot be held as conducting enquiry, leave aside, adequate or inadequate. In such later cases, only when the Assessing Officer, after collection of the initial documents, embarks upon further investigation, that it can be said that he initiated enquiry. Where the facts of a particular transaction cry hoarse about its non-genuineness and even a casual look at such facts, prima facie, divulges foul play, then the alarm bell must ring in the mind of the Assessing Officer for making further examination. Collection of papers on record in such circumstances cannot be construed as conducting a Rakesh Khandelwal 45 ITA No.204 of 2019 proper enquiry. If in such circumstances, the Assessing Officer simply gathers documents and keeps them on record, then such nominal enquiry falls within the overall category of 'no enquiry' because of the inaction on the part of the Assessing Officer to read a writing on the wall. [Para 19.a.] Thus, the instant case is a glaring example of not making relevant enquiry, which amounts to 'no enquiry' and hence it becomes a case of non-application of mind by the Assessing Officer. [Para 19.e.] If the Assessing Officer has taken a possible view, can still the revision be ordered?
Where the Assessing Officer fails to conduct an enquiry or proper enquiry, which is called for in the given circumstances, the Commissioner is empowered to set aside the assessment order by treating it as erroneous and prejudicial to the interests of the revenue. In such circumstances, the Assessing Officer can't be said to have taken a possible view and it is not further required on the part of the Commissioner to expressly show where the assessment order went wrong. The very fact that no enquiry was conducted or no proper enquiry was conducted in the required circumstances, is sufficient in itself to invoke the provisions of section 263. [Para 21.g.] From an overview of the above discussed judgments, it is crystal clear that where the AO fails to conduct an enquiry or proper enquiry, which is called for in the given circumstances, the CIT is empowered to set aside the assessment order by treating it as erroneous and prejudicial to the interests of the revenue. In such circumstances, it is not further required on the part of the CIT to expressly show where the assessment order went wrong. The very fact that no enquiry was conducted or no proper enquiry was conducted in the required circumstances, is sufficient in itself to invoke the provisions of section
263. We, therefore, answer all the five aspects discussed above by holding that : i) the enquiry conducted by the AO in such cases can't be construed as a proper enquiry; ii) CIT u/s 263 can set aside the assessment order and direct the AO to conduct a thorough enquiry, notwithstanding the jurisdiction of the AO in making enquiries on the Rakesh Khandelwal 46 ITA No.204 of 2019 issues or matters as he considers fit in terms of section 142(1) and 143(2) of the Act, which is relevant only up to the completion of assessment ; iii) Inadequate inquiry conducted by the AO in the given circumstances is as good as no enquiry and as such the CIT was empowered to revise the assessment order ; iv) The order of the CIT is not based on irrelevant considerations and further in the present circumstances, he was not obliged to positively indicate the deficiencies in the assessment order on merits on the question of issue of share capital at a huge premium ; v) the AO in the given circumstances can't be said to have taken a possible view as the revision is sought to be done on the premise that the AO did not make enquiry thereby rendering the assessment order erroneous and prejudicial to the interest of the revenue on that score itself.
12. In a recent decision of D. Bench of Hon'ble Kalkata ITAT in the case of Jubilee Commitrade (P) Ltd. Kalkata (ITA No 1179/Kal/2016), The Hon'ble bench has confirmed the order of CIT setting aside the order of A.O. In this case, the Hon'ble Bench has relied upon the order of B-Bench of Kalkata ITAT in the case of Subhlakshmi Vanijya (P) Ltd. The CIT had invoked the section 263 of IT Act-1961 for the reasons that the A.O. had failed to examine the capacity of subscribes of shares capital although most of the details and confirmations were duly called for and filed. It was held by the bench:-
We have considered his submissions and are of the view that as was done in the similar group of cases which was considered by this Tribunal and in which the lead order was passed in the case of Subhlakshimi Vanijay Pvt. Ltd. (supra), the CIT ought to have set aside the order of AO and direct the AO to make fresh enquiry with regard to the receipt of share capital and share premium by the assessee during the previous year. As rightly pointed out by the Ld. Counsel for the assessee, since the proceedings u/s 263 of the Act were concluded ex-parte, the Assessee had no occasion to place material to satisfactorily explain the receipt of share capital and share premium by the Assessee. There was however no material on the basis of which the CIT could have come to the conclusion that the receipt of share capital and share premium was not satisfactorily explained by the assessee. As rightly contended by the Ld. Counsel for the assessee, the CIT ought to have set aside the order of Rakesh Khandelwal 47 ITA No.204 of 2019 the AO and directed the AO to conduct fresh enquiry on the lines indicated in the order of this Tribunal in the case of Subhlakshmi Vanijya Pvt. Ltd. (supra). We therefore modify the order of CIT and direct the AO to make fresh enquiry with regard to the receipt of share capital and share premium during the previous year after affording Assessee opportunity of being heard. With these observations the appeal of the assessee is treated as partly allowed.
13. The jurisdictional Indore Bench of ITAT, in a recent decision dated 21.11.2016, in the cases of (1) P.G. Infrastructure & Service Pvt. Ltd. Bhopal, (2) S.N. Vijaywargiya, Bhopal, (3) People's International Services P. Ltd., Bhopal, (ITA No. 607 to 609/Ind/2016) has confirmed the order of PCIT, Bhopal passed under section 263 of Income Tax Act. 1961 on the ground that the A.O. has not been in a position to conduct proper inquiry. Although in these cases, the jurisdiction of the cases were transferred to the Assessing Officer at the fag end of the year due to unpleasant event of CBI raid on the earlier Assessing Officer. However the basic principal which has been confirmed by the bench was lack of inquiry and inadequate inquiry conducted by the Assessing Officer. Therefore, These decision are applicable on the present case also. This Hon'ble bench has also placed reliance on almost all the case laws relied upon by us in this case. The operative part of order of this Hon'ble bench is reproduced here under:-
We have carefully heard the rival contentions of the parties. We find that in similar type of cases in ITA Nos. 467/Ind/2016, 275/Ind/2016, 341/Ind/2016 etc. etc. this Bench of the Tribunal vide its order dated 14th July, 2016 has held as under :-
"5. After hearing both the parties and perusing the material available on record and keeping in view the peculiar facts and circumstances of these cases, we are of the considered view that in short time from 29.03.2014 to 30.03.2014, it was practically impossible for the Assessing Officer to have examined the returns of the assessee vis-à-vis the details and particulars filed in support of the returns and form an opinion and frame a detailed assessment order on the issues in the returns of income.
Rakesh Khandelwal 48 ITA No.204 of 2019 Therefore, we have no hesitation in accepting the arguments of the ld. Departmental Representative and upholding the present orders passed u/s 263 of the Income-tax Act, 1961, by the Commissioner of Income-tax. Thus grounds of appeal in all the appeals under consideration are dismissed." Respectfully following the above decisions, we are of the view that there was no occasion for the Assessing Officer to make any inquiry and the Assessing Officer accepted the return without proper inquiry as a result of which substantial amount of taxable income was not brought to tax. We also hold that no rule of universal application can be laid down for exercise of revisional powers u/s 263 of the act. It will depend on the facts of each and every case but the Commissioner of Income Tax must be satisfied of existence of twin conditions that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. We also get support from the following judgments :-
(i) Ram Pyari devi Saraogi vs. CIT; 67 ITR 84(SC)
(ii) CIT vs. Seshasayee Paper & Boards Ltd.; 242 ITR 490 (Mad.)
(iii) CIT vs. Bhagwandas; 272 ITR 367 (All) PG Infrastructure ITA Nos. 607,608 & 609/Ind/2016 15
(iv) Pratap Footwear vs. ACIT; (2003) SOT 638 (Jabalpur)(Tri)
(v) CIT vs. Amitabh Bachan (supra); Civil Appeal No.5009 of 2016 (SC) We further find that the Hon'ble jurisdictional High Court in the case of CIT vs. CIT vs. Deepak Kumar Garg; 299 ITR 435 has categorically held as under :-
"Held, that from the order of the Assessing Officer, it was clear that for want of time, the Assessing Officer had done only a semblance of enquiry and that too, in a very slip-shod manner. The Assessing Officer accepted the version of the assessee without proper enquiry and as a result a substantial amount of taxable income was not brought to tax. The Commissioner of Income tax had recorded a categorical finding that the order of the Assessing Officer for want of adequate enquiry was erroneous and prejudicial to the interests of the Rakesh Khandelwal 49 ITA No.204 of 2019 revenue and after setting aside the assessment order, remanded the matter to the Assessing Officer for fresh assessment on the merits. The learned CIT also directed the Assessing Officer to observe the rules of natural justice and to provide opportunity of hearing to the assessee before making a fresh assessment order on the merits. This would adequately safeguard the interest of the assessee and would cause no prejudice. The order of revision was valid."
Thus, respectfully following the above judgment of the Hon'ble jurisdictional High Court, these appeals of the assessee are dismissed."
14. Reliance if also placed hereby on Explanation-2 to section 263 of IT Act 1961 inserted by finance Act 2015 w.e.f. 01.06.2015 considering the same as having retrospective effect. It is a settled rule of construction that every statue is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. Ordinarily the court are required to gather the intention of the legislature from the overt language of the provision as to whether it has been made prospective or retrospective, and if retrospective, then from which date. However, some times what happens is that the substantive provision, as originally enacted or later amended, fails to clarify the intention of the legislature. In such a situation if subsequently some amendment is carried out to clarify the real intent, such amendment has to be considered as retrospective from the date when the earlier provision was made effective. Such clarificatory or explanatory amendment is declaratory. As the later amendment clarifies the real intent and declares the position as was originally intended, it takes retroactive effect from the date when the original provision was made effective. Normally such clarificatory amendment is made retrospectively effective from the earlier date. It may also happen that the clarificatory or explanatory provision introduced later to depict the real intention of the legislature is not specifically made retrospective by the statute. Notwithstanding the Rakesh Khandelwal 50 ITA No.204 of 2019 fact that such amendment to the substantive provision has been given prospective effect, the judicial or quasi judicial authorities, on a challenge made to it, can justifiably hold such amendment to be retrospective. The justification behind giving retrospective effect to such amendment is to apply the real intention of the legislature from the date such provision was initially introduced. The intention of the legislature while introducing the provision is gathered, inter alia, from the finance bill, Memorandum explaining the provision of the finance bill etc. Reliance is placed on the decision of "B" bench of Hon'ble ITAT Kolkata in the case of Shubhlakshmi Vanijya Pvt. Ltd. 60 taxmann.com 60 wherein Hon'ble ITAT, while examining the retrospective applicability of proviso to section 68 of IT Act 1961 has beautifully analyzed the issue of applicability of amendments and laid down the above principles while examining the issue. Therefore it is imperative to examine the applicability of Explanation 2 to section 263 of IT Act 1961 in the light of principal laid down in the decision as discussed supra. The existing provisions of the Act after the insertion of explanation 2 stands as under:
"E.--Revision by the [Principal Commissioner or] Commissioner (1) The [Principal Commissioner or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the [Assessing] Officer is erroneousin so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
[Explanation 1.]--For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,--
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(a) an order passed [on or before or after the 1st day of June, 1988] by the Assessing Officer shall include--
(i) an order of assessment made by the Assistant Commissioner 2 [or Deputy Commissioner] or the Income-tax Officer on the basis of the directions issued by the [Joint] Commissioner under section 144A;
(ii) an order made by the [Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the [Principal Chief Commissioner or] Chief Commissioner or [Principal Director General or] Director General or [Principal Commissioner or] Commissioner authorised by the Board in this behalf under section 120;
(b) "record" [shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the [Principal Commissioner or] Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal [filed on or before or after the 1st day of June, 1988], the powers of the [Principal Commissioner or] Commissioner under this sub-section shall extend [and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal.] [Explanation 2.--For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,--
(a) the order is passed without making inquiries or verification which should have been made;
Rakesh Khandelwal 52 ITA No.204 of 2019
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. ] [(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.] (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, [National Tax Tribunal,] the High Court or the Supreme Court.
Explanation.--In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded."
The explanation 2 has been inserted in section 263 w.e.f. from 1st June, 2015 by Finance Bill 2015 to declare the law which reads as under:-
" [Explanation 2.--For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,--
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(a) the order is passed without making inquiries or verification which should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. ]"
It is profitable at this stage to refer to the Memorandum to Finance Bill 2015 and notes to clauses to Finance Bill, 2015 which are as under:
Further, it is essential to refer to the memorandum to finance bill 2015 and notes to clause so as to understand the real intention of the legislature in inserting Explanation 2 to section 263 of IT Act 1961 which is reproduced here under for ready reference:
"MEMORANDUM TO FINANCE BILL 2015 "The existing provisions contained in sub-section (1) of section 263 of the Incometax Act provides that if the Principal Commissioner or Commissioner considers that any order passed by the assessing officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making an enquiry pass an order modifying the assessment made by the assessing officer or cancelling the assessment and directing fresh assessment.
The interpretation of expression "erroneous in so far as it is prejudicial to the interests of the revenue" has been a contentious one. In order to provide clarity on the issue it is proposed to provide that an order passed by the Assessing Rakesh Khandelwal 54 ITA No.204 of 2019 Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,--
(a) the order is passed without making inquiries or verification which, should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person."
This amendment will take effect from 1st day of June, 2015."
"NOTES ON CLAUSES FINANCE BILL 2015 Clause 65 of the Bill seeks to amend section 263 of the Income-tax Act relating to revision of orders prejudicial to revenue.
The existing provisions contained in sub-section (1) of section 263 provide that if the Principal Commissioner or Commissioner considers that any order passed by the assessing officer is erroneous in so far as it is prejudicial to the interest of revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made an enquiry, as he deems necessary, pass an order modifying the assessment made by the assessing officer or cancelling the assessment and directing fresh assessment.
It is proposed to amend sub-section (1) of the aforesaid section to insert an Explanation so as to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in Rakesh Khandelwal 55 ITA No.204 of 2019 so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,--
(a) the order is passed without making inquiries or verification which, should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. This amendment will take effect from 1st June, 2015."
The plain reading of existing provisions of section 263 of IT Act 1961, the memorandum to finance bill 2015 and notes on clauses of finance bill 2015 as reproduced above makes it evident beyond doubt that said Explanation 2 to section 263 of IT Act 1961 was brought in just as clarificatory or explanatory to the original intent of section 263 of IT Act 1961. The intention of legislature has been to explain and clarify the originally enacted statue so as to declare the position as was originally intended. The language of the Explanation 2 starts as "for the purpose of this section, it is here by declared that the order by......" which goes to prove that the relevant insertion of explanation has been declaratory. Therefore, taking support from decision of Hon'ble B bench of ITAT Kolkata on the principles of applicability of amendments in the case of Shubhlakshi Vanijya Pvt. Ltd., as discussed supra, the insertion of Explanation 2 to section 263 of IT Act 1961 has to be considered as having retrospective effect. Therefore, it was mandated on the part of Assessing Officer not to pass the assessment order without making inquiries or verification which should have been made and allow the relief without inquiring Rakesh Khandelwal 56 ITA No.204 of 2019 into the claim which in the instant case, the AO has omitted to follow the express provisions of the Act. Further reliance can be placed on the decision of Hon'ble C Bench of ITAT Mumbai in the case of M/s Crompton and Greaves Ltd. in ITA No. 1994/Mum/2013 and ITA No. 2836/Mum/2014 dated 01.02.2016 wherein after examining the issue of applicability of insertion of Explanation 2 to section 263 of IT Act 1961 in detail, it has been held that such insertion of Explanation 2 has been declaratory and clarificatory in nature to provide clarity to the existing provision. Therefore, held that the order passed by AO shall be liable to be revised by the Pr. CIT/CIT if the AO has not followed the terms of Explanation 2 (a) and (b) of section 263(1) of IT Act 1961. The relevant part of decision of Hon'ble Bench is reproduced here under:
Now, as can be seen above , the amendment to section 263 of the Act by insertion of Explanation 2 to Section 263 of the Act is declaratory & clarificatory in nature and is inserted to provide clarity on the issue as to which orders passed by the AO shall constitute erroneous and prejudicial to the interest of Revenue ,it is , inter-alia, provided that if the order is passed without making inquiries or verifications by AO which, should have been made or the order is passed allowing any relief without inquiring into the claim; the order shall be deemed to be erroneous and prejudicial to the interest of Revenue. The Hon'ble Supreme Court in the case of Malabar Industrial Company Limited v. CIT (2000)109 Taxman 66 (SC) held that if the AO has accepted the entry in the statement of account filed by the taxpayer without making enquiry , the said order of the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of the Revenue. In our considered opinion, the facts of the case of the assessee company are similar to the facts in the case of Malabar Industrial Co. Limited(supra) whereby no enquiry/verification is made by the AO whatsoever with respect to claim of deduction of Rs. 17.72 crores with respect to the provisions for warranty, excise duty , sales tax and liquidated damages. Moreover, now Explanation 2 to Section 263 of the Act is inserted in the statute which is declaratory and claraficatory in nature to declare the law and provide clarity on the issue whereby if the A.O. failed to make any enquiry or Rakesh Khandelwal 57 ITA No.204 of 2019 necessary verification which should have been made, the order becomes erroneous in so far as it is prejudicial to the interest of revenue. A proviso added from 01-04-1988 to Section 43B of the Act from 01-04-1984 came up for consideration in Allied Motors Private Limited v. CIT (1997) 91 taxman 205(SC) before Hon'ble Supreme Court and it was given retrospective effect from the inception of the section on the reasoning that the proviso was added to remedy http://www.itatonline.org 18 ITA 1994Mum/13 & ITA 2836/Mum/14 unintended consequences and supply an obvious omission so that the section may be given a reasonable interpretation and that in fact the amendment to insert the proviso would not serve its object unless it is construed as retrospective . In CIT v. Podar Cement Pvt. Limited (1997) 92 Taxman 541(SC) , the Hon'ble Supreme Court held that amendment introduced by the Finance Act,1987 in so far the related to Section 27(iii) ,(iiia) and (iiib) which redefined the expression 'owner of house property', in respect of which there was a sharp divergence of opinion amongst the High Courts, was clarificatory and declaratory in nature and consequently retrospective. Similarly , in Brij Mohan Das Laxman Das v. CIT (1997) 90 Taxman 41(SC), explanation 2 added to section 40 of the Act was held to be declaratory in nature and , therefore , retrospective.(Reference Page 569-570,Principles of Statutory Interpretation by Justice G.P.Singh ,13th Ed.). In our considered view, the CIT has rightly invoked the provisions of section 263 of the Act as the A.O. failed to make proper enquiry, examination and verifications as warranted for the proper completion of the assessment, with respect to claim of deduction of Rs.17.72 crores with respect to the provisions for warranty, excise duy,sales tax and liquidated damages. Regarding the contentions of the assessee company that the CIT should have set aside the orders passed by the AO after giving appeal effect to the orders of the tribunal in the first round has to be rejected as the basic facts remains that the AO has not made any enquiry, examination or verification of the claim of the assessee company with respect to claim of deduction of provision of Rs 17.72 crores with respect to provisions for warranty, sales tax, excise duty and liquidated damages , the order of the Tribunal would have adjudicated issues arising out of the orders of the authorities below whereby the facts still remains that the AO has not made any enquiry, examination or verification of the claim of the assessee company with respect to claim of deduction of provision of Rs Rakesh Khandelwal 58 ITA No.204 of 2019 17.72 crores with respect to provisions for warranty, sales tax, excise duty and liquidated damages. The order of the Tribunal in the first round of litigation has not been incidentally enclosed by the assessee company in the documents/paper book filed with the Tribunal. It is an established principle under the Act that provisions and contingent expenses are not allowed as deduction while computing the income of the assessee. It is only an ascertained liability which has crystallized during the year and which is wholly and exclusively incurred for the purpose of business of the assessee company , is allowed as deduction while computing income under the Act. The A.O. was under duty to make necessary and proper enquiry, examination and verification's with respect to Provisions of Rs. 17.72 crores with respect to the claim of deduction of the assessee company for provisions for liquidity damages, warranty, sales tax and excise duty, while on perusal of the assessment orders u/s 143(3) of the Act dated 28.12.2010 and other documents filed before us, we have observed that the AO has not made any enquiry whatsoever with respect to the claim of deduction of expenses of Rs.17.72 crores towards Provision for Warranty, Sales tax and excise duty and liquidated damages claimed by the assessee company while computing the income of the assessee company and the claim of the assessee company was accepted without any inquiry, examination or verification whatsoever by the AO and In the absence thereof of enquiry, examination and verification of the claim of the asssesee company for deduction of provisions for Warranty, Sales tax and excise duty and liquidated damages amounting to Rs.17.72 crores , we find no infirmity in the order dated 06.02.2013 of the CIT passed u/s 263 of the Act setting aside the assessment order dated 28.12.10 passed u/s 143(3) of the Act as erroneous in so far as prejudicial to the interest of the Revenue and directing the AO to assess the income of the assessee company after making necessary enquiries, examination and verifications , which order of the CIT dated 06.02.2013 , we uphold .
We order accordingly."
5. We have heard rival contentions of both the sides and perused the material on record.
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6. The revenue has not rebutted the fact that the scrutiny was limited to the extent of the issues mentioned in notice u/s 143(2) of the Act dated 19.8.2016. The issues mentioned in the notice are as under:
1) Commodity transactions
2) Derivative (future) transactions.
3) Sales turnover mismatch
4) Security transactions.
7. The Ld. Principal CIT initiated revision proceedings u/s 263 of the Act on the basis that the order was made without making proper enquiries/investigations. It was observed by the Ld. Principal CIT that as per the information available on record, it was noted that the assessee had incurred loss in share trading. The assessee had received gifts from various family members in cash for mitigating loss in share trading, which was deposited in savings bank account. The assessee had deposited total Rakesh Khandelwal 60 ITA No.204 of 2019 cash of Rs.31.90 lakhs in his savings bank account out of which Rs.4,25,000/- were out of his own source. Ld. Principal CIT was of the view instead of making thorough enquiries into the aforesaid transactions, the A.O. made lumpsum addition of Rs.1 lakh on account of gift received from father and wife. It is the contention of the Ld. D.R. that the issue mentioned in the notice for initiating scrutiny proceedings are intertwined with the issue of receipt of gift. Therefore, the A.O. erred in not making thorough enquiry regarding source of gift. Non making of enquiry has caused prejudice to the interest of the revenue.
However, the contention of the assessee is that the A.O. even exceeded his jurisdiction for making enquiry regarding the gifts received. The A.O. has duly mentioned this fact about the receipt of the gifts. Moreover, the A.O. wherever he found he was not satisfied regarding the source of gift has made addition. Hence, it cannot be construed that Rakesh Khandelwal 61 ITA No.204 of 2019 the A.O. has not made any enquiry. We find that the A.O. in the assessment order has observed that it was enquired that how this loss was mitigated by the assessee. In his reply, the assessee submitted that the loss was mitigated from gifts received from relatives, sale of jewellery and out of his personal savings. It was further observed that while going through the evidence produced in this connection, it was stated that Rs.50,000/- from Jyoti Khandelwal and Rs.50,000/- was received from father Shri Kailash Chandra Khandelwal. No concrete evidence was with regard to the source of these receipts could be produced by the assessee.
Hence, he made addition of Rs.1 lakh. Regarding remaining amount, the A.O. accepted the contention of the assessee. So far sale of jewellery is concerned, the assessee has filed invoices of sale of jewellery at paper book page Nos.120 to 193. From page Nos.120 to 143, the jewellery sold by the assessee are enclosed. From page Rakesh Khandelwal 62 ITA No.204 of 2019 Nos.124 to 159, the invoices in the name of Jyoti Khandelwal, wife of the assessee are enclosed and from page Nos.160 to 170, invoices are related to Shri Kailash Chandra Khandelwal, father of the assessee and from page Nos.171 to 192, invoices in the name of mother of the assessee Smt. Lakshmibai Khandelwal is enclosed. The assessee has also furnished copy of the circular issued by the CBDT in Instruction No.7/2014 dated 26.9.2014.
Paras 3 & 4 of the circular reads as under:
"3. The reason(s) for selection of cases under CASS are displayed to the Assessing Officer in AST application and notice u/s 143(2), after generation from AST, is issued to the taxpayer with the remark "Selected under Computer Aided Scrutiny Selection (CASS)". The functionality in AST is being modified suitably to flag the reasons for scrutiny selection in AIR/CIB/26AS cases. This functionality is expected to be operationalised by 15th October, 2014. Further, the Assessing Officer while issuing notice under section 142(1) of the Act which is enclosed with the first questionnaire wouild proceed to verify only the specific aspects requiring examination/verification. In such cases, all efforts would be made to ensure that assessment proceedings are completed expeditiously in minimum possible number of hearings without unnecessarily dragging the case till the time barring date.
4. In case, during the course of assessment proceedings, it is found that there is potential escapement of income exceeding Rs.10 lakhs (for non-metro charges, the monetary limit shall be Rs.5 lakhs) on any other issue(s) apart from the AIR/CIB/26AS information based on which the case was selected under approval of the Pr.
Rakesh Khandelwal 63 ITA No.204 of 2019 CIT/DIT concerned. However, such an approval shall be accorded by the Pr. CIT/DIT in writing after being satisfied about merits of the issue(s) necessitating wider and detailed scrutiny in the case. Cases so taken up for detailed scrutiny shall be monitored by the Jt. CIT/Addl. CIT concerned."
8. Therefore, it is not the case where there was no enquiry at all by the A.O. The assessee had furnished certain evidences, which the assessing officer has gone through. There is no dispute that the Ld. Principal CIT can exercise the revisionary jurisdiction u/s 263 of the Act. If he considers that any order passed by the A.O. is erroneous in so far as it is prejudicial to the interest of the revenue. Explanation (2) to section 263 of the Act further clarifies that an order passed by the A.O. shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of the Principal Commissioner or Commissioner (a) the order is passed without making enquiries or verification which should have been made (b) the order is passed allowing any relief without enquiring into the claim (c) the order has not been Rakesh Khandelwal 64 ITA No.204 of 2019 made in accordance with the order, direction or instruction issued by the Board u/s 119 or (d) order has not been passed in accordance with any decision, which is prejudicial to the assessee rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. In the present case, Principal CIT has revised the order on the ground that the A.O. has failed to make enquiries or verification, which should have been made. Ld. Principal CIT has not specified that what enquiries the A.O. has not made. There is no material suggesting that the Principal CIT has expressed his view about insufficiency of enquiry on the material placed on record. The issue regarding whether the assessment order is erroneous or prejudicial on the ground of insufficiency of enquiry has been dealt by the Hon'ble Delhi High Court in the judgement of ITO Vs. DG Housing Projects Ltd. (2012) 20 Taxmann.com 587, which has been followed by this Rakesh Khandelwal 65 ITA No.204 of 2019 Tribunal in various cases. Hon'ble High Court while adverting to the issue held that in cases of wrong opinion for finding on merit, the CIT has to come to the conclusion and himself decide that order is erroneous, by conducting necessary enquiry, if required and necessary before the order u/s 263 of the Act is passed. In such cases, the order of the A.O. will be erroneous because the order passed is not sustainable in law and the said finding must be recorded CIT cannot remand the matter to the assessing officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/enquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the A.O. making the order unsustainable in law. In some cases, possibly though rarely, the CIT can Rakesh Khandelwal 66 ITA No.204 of 2019 also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the A.O. had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable.
The matter cannot be remitted for a fresh decision to the A.O. who conduct further enquiries without a finding that the order is erroneous finding that order is erroneous the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In such matters, to remand the matter/issue to the A.O. would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the A.O. to decide the aspect/question. The Hon'ble Court further held that this distinction must be kept in mind by the CIT while exercising jurisdiction u/s 263 of the Act and in the absence of the finding that the order is erroneous Rakesh Khandelwal 67 ITA No.204 of 2019 and prejudicial to the interest of revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged "inadequate investigation", it will be difficult to hold that the order of the A.O., who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/enquiry.
The order of the A.O. may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the A.O. to decide whether the order was erroneous. This is not permissible. An order is erroneous, unless the CIT held and records reason why it is erroneous.
An order will become erroneous because on remit, the A.O. may decide that order is erroneous. Therefore, CIT must after recording reasons, hold that order is erroneous the jurisdictional pre-condition stipulated is that CIT must come to the conclusion that the order is erroneous and is Rakesh Khandelwal 68 ITA No.204 of 2019 unsustainable in law. It was further observed that the material, which the CIT can rely includes not only the records as it stands at the time when the order in question was passed by the A.O. but also record as it stands at the time of the examination by the CIT. Nothing appears/prohibits CIT from collecting and relying new/additional material which evidence to show and state that the order of the A.O. is erroneous. We find that Ld. CIT in the present case has not carried out any enquiry of his own has merely set aside the assessment to the file of the A.O. to re-examine issue of source of cash deposited by the assessee. Therefore, it is contrary to the guidelines as mandated in the Hon'ble Delhi High Court in the case of ITO Vs. DG Housing Projects Ltd. (supra) coupled with the fact that the assessee during the assessment proceedings had submitted evidences in support of sale of jewelleries and receipt of gift. Moreover, the issue of examination of Rakesh Khandelwal 69 ITA No.204 of 2019 source of gift was not subject matter of the scrutiny.
Therefore, the decision of the Ld. CIT invoking provisions of section 263 of the Act is not justified and cannot be sustained under the facts and circumstances of the present case. We therefore, set aside the impugned order and allow the grounds raised by the assessee.
9. In the result, the appeal filed by the assessee is ITA No.204/Ind/2019 for the A.Y. 2015-16 is allowed.
Order was pronounced in the open court on 29 .1.2020.
Sd/- Sd/-
(MANISH BORAD) (KUL BHARAT)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Indore; दनांक Dated : 29/1/2020
VG/SPS
Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file. By order Assistant Registrar, Indore