Income Tax Appellate Tribunal - Cochin
Shri N.P. Santhosh Kumar vs The Asstt. Commissioner Of Income-Tax on 23 November, 2007
ORDER
Riyaz S. Padvekar, Judicial Member
1. This appeal by the assessee is directed against the order of the Commissioner of Income-tax, Central, Cochin dated 1-2-2007 passed Under Section 263 of the Income-tax Act.
2. The assessee has taken the following effective grounds:
2. The CIT (Central) went wrong in initiating proceedings Under Section 263 and canceling the assessment order in respect of the block assessment Under Section 158BC dated 18/3/2005, alleging that the said order was erroneous and prejudicial to the revenue.
3. It is submitted that the direction given by the CIT (Central) to the Assessing Officer "to take suitable action to re-compute the undisclosed income earned by the assessee from "suppression of income from Soda Sales" after verifying the genuineness of the various claims put forward by the assessee before the undersigned vide his written reply dated 10/01/2007", is illegal and unsustainable.
4. The direction of CIT (Central) contained in the order Under Section 263, is to make a roving enquiry which indicates that there is no material for passing the order Under Section 263.
5. The appellant respectfully submits that there is no basis or material before the CIT (Central) to assume that the order Block Assessment Under Section 158BC dt 18.3.2005 was erroneous and prejudicial to the revenue. In the absence of the basic requirements under 263 for initiating action, the present order is without jurisdiction. The impugned order is erroneous, illegal and unsustainable.
3. From the grounds taken by the assessee, the sole issue which arises for our consideration is whether the ld. CIT is justified in setting aside the block assessment by invoking Section 263 and directing the Assessing Officer to redo the assessment.
4. The briefly stated facts are as under: The assessee is engaged in the business engaged in the business of trading in Indian Made Foreign Liquor (IMFL). In addition to that, he also runs fast food centre, aqua fast food and also bakery business. There was a search action Under Section 132 of the Income-tax Act at the residential premises of the assessee at Mysore and Kannur and also in the business premises situated on the Mysore-Bangalore road on 27-3-2003. In addition to the search action, survey action Under Section 133A of the Act was also carried on at the business premises of the assessee. On the basis of the incriminating documents found during the course of search action, notice Under Section 158BC of the Act was issued to the assessee and in response to the said notice, the assessee filed his return of income in Form No. 2D declaring the undisclosed income at Rs. 1,54,53,960/-. After elaborately dealing with the documentary as well as oral evidence determined the total income of the assessee at Rs. 1,61,42,970/-.
5. After completion of the assessment of the assessee, the CIT examined the income-tax record and he was not happy in respect of the undisclosed income determined by the AO from soda sales which was at Rs. 17,71,528/- as admitted by the assessee. The CIT has noted as under:
...During the course of action Under Section 132 it was found that the assessee was showing purchases of Soda from outside agency whereas the Soda was actually manufactured "in house" since 1994 by one Shri P.K. Abdul Latheef, an employee of the assessee. On the basis of sworn statement recorded and other evidences obtained during the course of search, the Assessing Officer came to the conclusion that the Soda for the assessee's bar was being manufactured "in house" by the assessee and that the purchases of Soda debited in the Trading account were bogus. However the assessee vide his letter dt. 12.3.2005 admitted that he has earned an undisclosed income of Rs. 17,71,528 on account of suppression of income from Soda sales as under:
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Financial year Purchases Sales Difference(a/ctd
Rs. Rs. income)
Rs.
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1996-97 9,11,855.20 10,82,629.50 1,70,774.30
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1997-98 10,38,884.00 11,74,560 1,35,676
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1998-99 11,02,873.10 12,50,954.00 148,080.90
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1999-2000 10,62,399.90 11,33,334.00 70,934.10
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2000-01 11,15,642.50 11,92,349.00 76,706.50
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2001-02 12,98,343.45 12,78,982.50 (-)19,360.95
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Total 65,29,998.15 71,12,809.00 5,82,811.00
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Income estimated @ 33.1 % on sale of Rs. 23,54,339 71,12,809 (being the average gross profit margin over the above period on liquor sales
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Less: Accounted income 5,82,811
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Undisclosed income 17,71,528
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From the above computation it can be seen that on a total sales turn over of Rs. 71,12,809 the assessee has admitted an Income of Rs. 23,54,340/-(being 33.1% of the total turnover on soda sales) taking into account the average gross profit on liquor sales for the concerned period. Since the assessee himself has accounted an income of Rs. 5,82,811/-, the balance amount of Rs. 17,71,528 was offered for taxation for the block period as undisclosed income from Soda sales. As mentioned in the immediately preceding para, the assessee himself has admitted that he was manufacturing Soda "in house" for the use at Bar and that the amount shown as purchases of soda and debited in the Trading account were bogus. Moreover the soda was manufactured by Shri P.K. Abdul Latheef an employee of the assessee'. In his sworn statement he has furnished all the details viz. supply of bottles, number of Gas Cylinders used etc. etc.... The assessee, who is having an in house facility for manufacturing soda by installing a plant and by buying ail the inputs would have debited all the expenses required for manufacturing soda in the Trading account/P&L ale regularly maintained by him. Again, no evidence whatsoever is seen examined by the Assessing Officer for ascertaining the manufacturing cost of soda amounting to Rs. 71,12,809. I am therefore, of the view that the order passed by the Assessing Officer Under Section 158BC read with Section 143(3) of the I.T. Act, 1961 on 18.3.2005 is erroneous and prejudicial to the interest of the revenue to this extent, warranting initiation of action Under Section 263 of the I.T. Act.! Accordingly, a notice Under Section 263 of the I.T. Act.
6. The Id. CIT therefore, issued a notice Under Section 263 of the Act to the assessee on 18-12-2006 calling for the assessee's objection. The assessee resisted the action proposed by the CIT. The CIT rejected all the objections of the assessee and held that the block assessment order passed by the AO Under Section 158BC dated 18-3-2005 determining the undisclosed income relating to suppression of soda sales at Rs. 17,71,528/- on total sales turnover of Rs. 71,12,809/- is erroneous and also prejudicial to the interests of the revenue. The CIT directed the AO to recompute the undisclosed income in respect of soda sales. Now, the assessee has challenged the order of the CIT passed Under Section 263 of the Act before us.
7. We have heard the rival submissions of the parties. We have also carefully considered the facts of this case. We have also carefully considered the precedents relied on by the learned counsel. There was a search action against the assessee Under Section 132 of the Act. The assessee is engaged in hotel business and also IMFL. After the search action, the assessment of the assessee was completed Under Section 158BC read with Section 143(3) of the Act vide assessment order dated 18-3-2005. After examining the assessment record of the assessee, the CIT was not happy in respect of the undisclosed income accepted by the AO, more particularly relating to the soda sales. During the course of search, it was found that the assessee was showing purchase of soda for his bar from outside agency but in fact, the soda was actually being manufactured "in house" by the assessee himself. The search party recorded the statement of one Shri P.K. Abdul Latheef who deposed that he was engaged for preparing soda for assessee's hotel and bar and he was employed on monthly salary. As per the statement of Shri Latheef, he was preparing on an average 1300 soda bottles. The required gas cylinder and other expenses for soda manufacturing were handled by the manager. In respect of the utilization of the cylinder Shri Latheef deposed that approximately 5000 bottles of 300 ml. can be manufactured from one cylinder. The assessee admitted the undisclosed income of Rs. 17,71,528/- on account of suppression of income from soda sales which details are given by the AO on page 6 of the assessment order. The AO estimated 33.1% profit on the determined sales of Rs. 71,12,809/- and worked out the total income from soda sales at Rs. 23,54,339/-. The AO reduced the declared income by the assessee from soda which was of Rs. 5,82,811/- determining the undisclosed income from soda sales at Rs. 17,71,528/-.
8. The learned counsel for the assessee vehemently argued that while completing the assessment, the AO has taken into consideration the entire seized material and arrived at the total profit from the sale of soda which was prepared "in house" and served to the customers of the assessee in the hotel and bar. It is further argued that merely because in the opinion of the CIT there is a loss of revenue, it cannot be said that the order of the AO is erroneous. The learned counsel referred to the assessment order where the AO has made the computation as well as given reasons for determining the undisclosed income from soda sales. The learned counsel also relied on the following precedents:
(i) CIT v. Gabriel India Ltd. 203 ITR 108 (Bom)
(ii) Malabar Industrial Co. Ltd. v. CIT 243 ITR 83 (SC)
9. Per contra, the ld. Sr. DR supported the order of the CIT and vehemently submitted that the CIT has directed the AO only after examining the evidence on record and the assessee should not have any grievance as the CIT has rightly exercised his powers Under Section 263 of the Act.
10. Section 263 of the Act reads as under:
263. (1) The 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, 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.--For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-
(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 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 Chief Commissioner or Director General 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 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 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.
(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.
11. There is no dispute about the proposition that the powers vested in the CIT Under Section 263 of the Act are supervisory in nature. Two conditions are required to be fulfilled for exercising the said powers. They are:
(i) The order is erroneous
(ii) By virtue of the order being erroneous, prejudice has been caused to the interests of the revenue.
Time and again Section 263 has undergone judicial scrutiny by the Hon'ble Supreme Court and different High Courts.
12. In the case of Malabar Industrial Co. Ltd. (supra), Their Lordships of the Hon'ble Supreme Court have examined the scope of Section 263 and held as under:
The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. Rampyari Devi Saraogi v. CIT and in Smt. Tara Devi Aggarwal v. CIT .
13. In the case of Gabriel India Ltd. (supra) ...We, therefore, hold that in order to exercise power under Sub-section (1) of Section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority....
14. In the present case, it is necessary to reproduce the relevant part of the assessment order where the AO has determined the undisclosed income from soda sales which is as under:
It would be clear from the above that soda for the assessee's Bar was being manufactured 'in house' and purchases of soda debited in the Trading account were bogus. The assessee's counsel was asked to give clarifications on this point. The assessee vide letter dated 12.3.2005 admitted undisclosed income of Rs. 17,71,528 on account of suppression of income from soda sales as follows:
Details of soda sales:
Financial Year Purchases (Rs.) Sales (Rs.)
1996-97 9,11,855.20 10,82,629.50
1997-98 10,38,884.00 11,74,560.00
1998-99 11,02,873.10 12,50,954.00
1999-2000 10,62,399.90 11,33,334,00
2000-2001 11,15,642.50 11,92,349.00
2001-2002 12,98,343.45 12,78,982.50
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Total 65,29,998.15 71,12,809.00
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Accounted Income = Sales - Purchase = Rs. 5,82,811.00
Income estimated @ 33.1% on sale of Rs. 71,12,809 =
(being the average gross profit margin over the
above period on Liquor sales
32.82 + 32.74 + 32.07 + 34.37 + 32.81 + 33.83/6
= 33.1%)
Less: Accounted Income Rs. 5,82,811.00
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Undisclosed Income Rs. 5,82,811.00
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Considering the fact that the GP shown by the assessee in the returns of income for the block period from sale of soda was less than 9% and the' assessee has now surrendered income from soda sales by estimating GP an sale of soda at the rate of 33.13% the claim made by the assessee is found to be acceptable and undisclosed income of Rs. 17,71,528 as admitted by the assessee is brought to tax as undisclosed income from the sale of soda for the period from 1.4.1996 to 31.3.2002.
15. As far as the determination of income from sale of soda is concerned, the AO has taken a possible view which in his opinion was a reasonable view considering the material available before him. Merely because the view taken by the AO is not liked by the CIT, the order of the AO cannot be treated as erroneous order and revenue loss is not the sole criteria for exercising the powers Under Section 263 of the Act.
16. In bur opinion, the CIT has exceeded his powers as order passed by the AO is not erroneous. We, therefore, cancel the order passed by the CIT Under Section 263 of the Act.
17. In the result, the assessee's appeal is allowed.