Delhi High Court
Commissioner Of Income-Tax vs Hindustan Marketing & Advertising Co. ... on 21 September, 2010
Author: A.K. Sikri
Bench: A.K. Sikri, Reva Khetrapal
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITR Nos.22 and 23 of 1991
% Date of Hearing: 03.08.2010
Decision of Decision: 21. 09.2010
Commissioner of Income-Tax .....Appellant
through: Ms.Prem Lala Bansal
Advocate
VERSUS
Hindustan Marketing & Advertising Co. Ltd. .....Respondent
Through: Mr.Ajay Vohra with
Ms.Kavita Jha,
Ms.Akansha Aggarwal
Advocates
CORAM :-
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MS. JUSTICE REVA KHETRAPAL
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J.
1. These two references are in respect of two assessment years, i.e., 1983-84 and 1984-85 and pertain to the same assessee. Even the question referred to this Court by the Tribunal on the direction issued by this Court vide order dated 13.8.1990 is common and reads as under:-
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the order passed by the CIT under sec. 263 of I.T. Act, 1961 and in holding that the assessment made by the Income-tax Officer was in accordance with law and not erroneous so as to be prejudicial to the interest of revenue?"
ITR No.22 & 23/12007 Page 1
2. As is clear from the reading of the question itself, assessment orders passed by the AO in respect of these two years were cancelled and set aside by the Commissioner in exercise of his powers under Section 263 of the Income-Tax Act, 1961 (hereinafter referred to as the „Act‟).
However, the Tribunal has upset and quashed those orders in appeal. The factual background in which the assessment orders were made which were revised by the CIT under Section 263 of the Act is mentioned in the statement of case and is recapitulated below.
3. The assessee company was incorporated on 4.4.1981 with the object of carrying on the business of marketing agents and to render marketing services etc. The proceedings relate to assessment years 1983-84 and 1984-85, for which the relevant accounting periods ended on the 30th September, 1982 and 30th September, 1983 respectively. During the accounting period relevant to assessment year 1983-84 the assessee entered into agreements with the wholesale dealers of M/s. Godfrey Phillips India Ltd., a manufacturer of different brands of cigarettes.
According to the agreements the wholesale purchasers of cigarettes from M/s. Godfrey Phillips India Ltd. were to pay certain amounts to the assessee company and the assessee company was obliged to spend at least 90% of such amounts on advertising of cigarettes and other related services in such areas and in such manner and on such brand of cigarettes as the assessee company deemed fit. The balance of 10% of the contribution was to be retained by the assessee to cover its administrative ITR No.22 & 23/12007 Page 2 cost and the margin of profit. During the accounting period relevant to assessment year 1983-84 the assessee received Rs.3,19,46,018/- from the wholesale dealers, out of which it disclosed Rs.31,94,606/- being 10% of the sum of Rs.3,19,46,018/- as its service charges. The return of income for assessment year 1983-84 was filed on 14.10.1983 disclosing an income of Rs.2,92,860/- and assessment was framed vide order dated 18.6.1985.
4. The Commissioner of Income Tax considered the assessment order to be erroneous and prejudicial to the interests of revenue, as in his view, the Income-tax Officer had not made adequate and detailed investigation/enquiries in respect of a major area of the company‟s operation and source of income; the Income-tax Officer had acted in a hurry and did not examine carefully the assessee‟s receipts and payments pertaining to the advertising work done by company.
5. For assessment year 1984-85 the assessee had filed the return declaring a loss of Rs.1,72,012/- and assessment was made vide order dated 30.12.1986 at an income of Rs.6,230/-. The Commissioner of Income-tax considered this assessment too to be erroneous and prejudicial to the interest of revenue for the same reasons as mentioned above for the assessment year 1983-84. On 21.1.1986 a search was conducted at the premises of the assessee and certain documents and account books were seized. According to the Commissioner while making the assessment for assessment year 1984-85 the assessing officer did not make any use of the ITR No.22 & 23/12007 Page 3 seized material to check up whether the working results as shown to the department were in accordance with the information available in the seized papers. The Commissioner also noted that the assessing officer had not looked into the compliance of provisions of Chapter XXII, Section B relating to deduction of tax at source.
6. It was on this basis the Commissioner, therefore, initiated action under section 263 in respect of the assessment orders for assessment years 1983- 84 and 1984-85 and ultimately after hearing the assessee set aside the assessment vide order dated 11.3.1987 directing the Income-tax Officer to re-frame the assessments and proceed afresh from the stage of the filing of the Income-tax returns.
7. Aggrieved by this order of the Commissioner, the assessee filed appeals in the Income-Tax Appellate Tribunal (hereinafter referred to as the „Tribunal‟). The Tribunal cancelled the order passed by the Commissioner holding that the AO had made proper enquiries for the years under consideration and the assessments were in accordance with law and were not erroneous so as to be prejudicial to the interest of the Revenue. The Tribunal observed that vide letter dated 27.12.1984 the Assessing Officer had asked the assessee to furnish various details and the assessee had furnished the necessary details vide letter dated 12.2.1985.
The Tribunal also noted that certain other details were filed vide letters dated 19.4.1985 and 11.6.1985. The Tribunal also referred to the letter of the assessing officer dated 24.12.1984 for the assessment year 1983-84 ITR No.22 & 23/12007 Page 4 and the assessee‟s reply dated 12.2.1985. The Tribunal came to the conclusion that the assessing officer made reasonably detailed enquiries and after processing the material, utilized the same for completion of the assessments.
8. Before we revert back to the question formulated for opinion of this Court, we feel it apposite to narrate in brief the ingredients of Section 263 of the Act which are to be satisfied and to be kept in mind by the Commissioner while exercising suo motu power of revision. In a judgment dated 14.09.2010 pronounced few days ago in the case of Commissioner of Income Tax, Delhi-II Vs. Leisure Wear Exports Limited (ITA No.1165 of 2007), the legal position is summarized as under:
"6....In so far as the law relating to powers of the Commissioner of Income-Tax under Section 263 of the Income-Tax Act are concerned, legal position has been sufficiently crystallised by various pronouncements of the apex court. It goes without saying that pre-requisite to the exercise of suo motu jurisdiction under this provision by the Commissioner is that the order of the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. Two conditions are to be satisfied, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) the error committed by the AO in the order is prejudicial to the Revenue. Both these conditions are to be satisfied simultaneously and the connotation of both these expressions was explained by the Supreme Court in Malabar Industrial Co. Ltd. vs. Commissioner of Income-Tax (supra) in the following manner:-
"The phrase "prejudicial to the interest 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 interest of the Revenue. For ITR No.22 & 23/12007 Page 5 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 as 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 [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC).
In the instant case, the Commissioner noted that the Income-tax Officer passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by him was erroneous. If appears that the resolution passed by the board of the appellate-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 of 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 Income-tax Officer was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner under Section 263(1) was justified."
7. It is also well-settled principle that provisions of Section 263 of the Act would not be invoked merely to correct a mistake or error committed by the AO unless it has caused prejudice to the interest of the Revenue. If an order is based on incorrect assumption of facts or on incorrect application of ITR No.22 & 23/12007 Page 6 law or without applying the principle of natural justice and without application of mind, it would be treated as erroneous. Likewise, the expression "prejudicial to the interest of the Revenue" is of wide import and is not confined to loss of tax. If due to an erroneous order of the AO the Revenue is losing tax lawfully payable by a person, it would be certainly prejudicial to the interest of the Revenue.
At the same time, as held in Malabar Industrial Co. Ltd. vs. Commissioner of Income-Tax (supra) where two views are possible and the AO has taken one view with which the Commissioner does not agree, that cannot be treated as erroneous order prejudicial to the interest of the Revenue. It has to be shown that the order of the AO was not in accordance with law, to term it as erroneous. It is also the principle of law, now well accepted, that an order passed by the AO cannot be set aside for making roving inquiry without pointing out any error in his order. The Commissioner has to specifically demonstrate that the order of the AO is erroneous.
The power of revision is not meant to be exercised for the purpose of directing the AO to hold another investigation without describing as to how the order of the AO is erroneous. From this it also follows that where the assessment order has been passed by the AO after taking into account the assessee‟s submissions and documents furnished by him and no material whatsoever has been brought on record by the Commissioner which showed that there was any discrepancy or falsity in evidences furnished by the assessee, the order of the AO cannot be set aside for making deep inquiry only on the presumption and assumption that something new may come out.
For making a valid order under Section 263 it is essential that the Commissioner has to record an express finding to the effect that order passed by the AO is erroneous which has caused loss to the Revenue. Furthermore, where acting in accordance with law the AO frames certain assessment order, same cannot be branded as erroneous simply because according to the Commissioner, the order should be written more elaborately. All these principles are highlighted in the judgments noted hereinafter."
ITR No.22 & 23/12007 Page 7
9. We now proceed to answer the question keeping in view the aforesaid principles. As is clear from the facts of the case, the assessee company had been receiving contributions from certain wholesale dealers. These dealers/wholesale purchasers were having dealership of cigarettes manufactured by Godfrey Phillips India Ltd. Instead of spending themselves on advertisement and promotion of various brands of cigarettes individually, they decided to pool their resources together and engaged assessee for this purpose. Agreements were signed between the assessee and these dealers. All these dealers were to contribute specified amounts. Ninety per cent of the money received by means of these contributions was to be spent by the assessee company on advertising as well as promotional and other related services in respect of specified brands of cigarettes. Balance of 10% of the contribution was to be earmarked to cover the assessee‟s personnel and administrative expenditure etc., including profit margin.
10. As per clause 10 of the agreements, which were identical in nature, the assessee was obliged to ascertain the total expenditure incurred on advertising, promotional and other related services and in case the same was less than 90% of the contribution for that year, the shortfall was to be carried forward to next year for being expended within the period of six months following. The facts further reveal that for the assessment year 1983-84, the assessee had received contributions from the dealers in the sum of ` 3,19,46,018/- and 10% thereof, i.e., ` 31,94,606/- was disclosed ITR No.22 & 23/12007 Page 8 as service charges. The assessee had also explained before the AO that 90% of this contribution, namely, ` 2.87 crores, which were to be spent on advertisement and promotion etc. was not wholly spent. A sum of ` 94.61 lacs was worked out as shortfall in terms of clause 10, which was taken over to the balance sheet as liability to be expended within the period of six months following. This was accepted by the AO. However, basic reason for issuing show cause notice under Section 263 of the Act was that, according to the Commissioner, the ITO had not made adequate detailed investigation/enquiries before completing the assessments. The AO had acted in hurry and did not carefully examined the assessee‟s receipts and payment pertaining to the advertising work done by the assessee. After eliciting the reply to the show cause notice and hearing the assessee the Commissioner set aside the assessment. The relevant portion of the order of the Commissioner is quoted below:-
"11. In the case under consideration detailed enquiries have not been made by the ITO regarding the receipts and expenditure pertaining to advertising business in respect of products of Godfrey Phillips India Ltd. Some statements of accounts had been filed and on the basis of these without any external enquiries or without calling anybody the ITO has accepted the returns and treated the expenditure as having actually been incurred. The assessment made in this regard is in the nature of an assessment made u/s 143(1) and the Karnataka High Court has gone even to the extent of saying that even in an assessment made u/s 143(1) a) can be revised by the Commissioner u/s 263 of the I.T. Act, 1961.
12. xxxxx
13. xxxxx ITR No.22 & 23/12007 Page 9
14. xxxxx
15. If this logic is extended in the assessee‟s case before me, it would be noticed that there is nothing to indicate or support that expenditure to the extent of nearly Rs. 1.93 crores in this year, 1983-84 and Rs.3.47 crores in the year 1984-85 (which in two years as per agreement, should work out to 90% of the total receipts barring that which is to be carried forward for the assessment year 1984-85) has actually been incurred for the purposes for which it has been shown in the break up filed before the ITO. It was the assessing officer‟s duty to make a checking in this regard, and his failure to do so, prima facie, shows that he has accepted the claims without proper scrutiny or enquiry."
11. After referring to various case law and extensively quoting therefrom the Commissioner highlighted the nature of enquiries etc. which were required by the AO and was not done, in the following manner:-
"23. With the above background, the position regarding the two years‟ assessment can be examined to show that the ITO has not made any enquiries, examination and investigations in respect of some very important aspects that relate to the company‟s purported advertisement business.
24.ASSESSMENT YEAR 1983-84 :
For the first time, vide letter dated 12.3.1985 information regarding agreements with various whole sale purchasers of Godfrey Phillips India Ltd., was given clarifying that as per Clause 9 of the agreement, the assessee company is liable to spend at least 90% of the total contributions accrued during the year on advertising, promotion and other related services in such areas and in such a manner on such brand of cigarettes, as the assessee company may deem fit. The balance of the 10% of the contribution is claimed to be earmarked to cover the administrative cost under the other heads including the profit margin.
ITR No.22 & 23/12007 Page 10
25.Prior to this, only figures relating to amount of contributions received, the expenditure claimed to have been made under various broad head and the short fall in expenditure which was to be incurred upto 31.3.1983 were filed. The details regarding these have already been given in the enclosed copy of the notice, issued to the company.
How a sum of Rs.1.92 croes has been received and from whom has this amount come and in what manner, is not clear from the letter of 12th March, referred to above. Nothing is available in the file to indicate as to what scrutiny the Income tax Officer made regarding these receipts and expenditure and about the unspent amount. All that has been stated in the assessment order about such receipts and expenditure reads as under:-
".....In their letter dated 12.3.1983 the company has drawn a reference to clause 10 of the Agreement with the WPS) where in it has been laid down that the assessee company is obligated to ascertain the total expenditure incurred on advertising, promotion and other related services and in case the same was sought to be lower than 90% of the total contribution for the year, that short fall was to be carried over to the next year for being expended within the period of six months following"
"It has been contended that out of the total contribution of Rs.2.87 crores, after adjustment of service charges, a sum of Rs.94.61 lakhs was worked out as the short fall in terms of clause 10 of the Agreement mentioned herein and the said fall has been taken over to the balance sheet as liability to be expended during the following year."
26.The above observations in the ITO‟s order clearly bring out the position that he has, in a mechanical and parrot like manner, repeated what the assessee has stated before him without making enquiries or investigations regarding the assessee‟s claim and without expressing any opinion of his own and this one fact alone is sufficient to prove that the order passed by the ITO for this year is erroneous and prejudicial to the interest of revenue as it has not been passed after due enquiries, investigation scrutiny of the problem under consideration.
27.Even the peculiar nature of agreement entered into with the whole sale purchasers, of cigarettes, by the coy, did ITR No.22 & 23/12007 Page 11 not arouse the ITC‟s curiosity to impel him to go into greater details for knowing the co. act state of affairs regarding the arrangements made. The earlier discussion would indicate that the persons who provided the fund, namely, the wholesale purchasers who had the contributions had no control over the same and had not even a say as to how the money provided by them should be spent. A situation cannot be ruled out when some of them may be required to provide money even when the cigarettes sold by them are not advertised at all.
28.Further, according to the company‟s agreement with wholesale purchasers, the company had no control over the contributions to be received as that depended on the supplies made by the manufacturer to the wholesalers. How could company plan its expenditures in the presence of such an uncertainty. Definitely such aspects needed the ITO‟s attention for investigation to find out whether the arrangement made is at all genuine and is not a device for evading rightful tax liabilities on the part of the interested parties.
29.Even the assessee in his written reply filed on 5th March, 1986 had accepted the position that the ITO did not call nor a list of the persons from whom the payments to the extent of Rs.2.88 crores (in round figures) were received the and about its working and thus no such lists were filed by the company.
In the written reply, the assessee company has not said that it has produced all the relevant vouchers and evidence in support of the expenditure of Rs.1.93 crores. All that has been stated is that expenditure is fully supported with evidence of having been incurred and there is no doubt about the same. The reply filed shows that it is not the assessee‟s case before me that the entire expenditure has been spent for business purposed. Emphasis has been laid only on the fact that the company is having evidence of having incurred the expenditure which (if at all it is there) was not looked into and examined by the ITO.
30.There are a number of other aspects which have been discussed in the enclosed notice which go to show that the ITO did not make adequate, proper and detailed enquiries regarding the various aspects that required consideration in the matter of computation of correct income from ITR No.22 & 23/12007 Page 12 advertising business carried on by the assessee company. I need not repeat the same again in this order.
31.In the reply filed considerable emphasis has been placed on the fact that the ITO did make some enquiries here and there in respect of some matters. This by itself, is not sufficient. The Hon‟ble Delhi High Corut in the case of Gee Vee Enterprises (Supra) has said that an Income-tax Officer cannot remain passive in the fact of the return, which is apparently in order but calls for further enquiries. The ITO has failed in regard to various enquiries required to be made, if I may use a strong word, „miserably‟....."
12. Observations in respect of assessment year 1984-85 are almost similar in nature. In addition, one other aspect which is highlighted during this year is that on 20th January, 1986 search was conducted by the Income-tax Department at the premises of the assessee where a number of documents and papers were found. However, the AO had not made any use of the seized matter consisting of books of accounts and various documents to check up whether the working results as shown to the department were in accordance with the information available in the seized papers.
13. In this scenario when the matter reached the Tribunal, the Tribunal posed the question as to whether it could be said that the assessment orders made in the case of the assessee were erroneous so as to be prejudicial to the interest of the Revenue. The Tribunal examined and discussed the orders passed by the Assessing Officer as well as the view of the Commissioner thereupon. After taking note of the exercise done by the Assessing Officer, the Tribunal came to the conclusion that the Commissioner was not factually correct in holding that the Assessing Officers had not made ITR No.22 & 23/12007 Page 13 any queries or called for the required information or discussed the same. The order of the Tribunal shows that from paras 2 to 12 it has discussed the exercise done by the Assessing Officers while making assessments in respect of these two assessment years. It is, inter alia, noted as under:-
"3. It appears that on 27.12.1984 the ITO, while dealing with the assessment for the assessment years 1982-83/1983-84/1984-85 asked the assessee to file/to produce the following information/documents:-
i) Name of business activity this years;
ii) Details of unsecured loans of Rs.4,10,463/-
alongwith the confirmations;
iii) Details of balance of banks with certificates
from the banks concerned;
iv) Details of current liabilities;
v) Details of sundry creditors and sundry
debtors;
vi) Details of loans and advances;
vii) Copies of Directors accounts with P.A.
numbers and ward where assessed.
4. The ITO also asked for details of additions to assets along with the description, date of receipts on balance sheet, bill No. and date of delivery challan and freight, bill, if any. The assessee was required to file the name of the traders from whom purchasers were made and the date of installation of the machinery and the date on which, it was brought into use.
5. With regard to the profit and loss account, the ITO inter alia asked for details of purchases and sales tradewise. This letter, which was dated 27.12.84 was replied to by the assessee by letter dated 12th Feb., 1985. In this letter, the assessee gave the necessary details required with a brief history alongwith the details of the various items in the balance sheet required by the ITO, such as, that of unsecured loans, balances with banks details of current liabilities, details of current assets and loans and advance, list of additions to fixed assets and details with regard to profit and loss account on staff welfare expenses, rent miscellaneous expenses, salaries, legal expenses etc."
ITR No.22 & 23/12007 Page 14
14. The Tribunal also took note of the fact that thereafter letter dated 12.3.1985 was filed by the assessee in continuation of its earlier letter dated 12.2.1985. Matter was also discussed with the chartered accountants of the assessee who had explained the nature of agreements entered into between the assessee and various dealers and in this letter implications of the stipulations contained in clauses 9 and 10 of the agreement are dealt with extensively. The assessee had also filed details of expenses incurred on behalf of clients towards advertisement, promotional and other related services for a sum of ` 1.92 crores. In addition to this, details of repairing and maintenance expenses were also enclosed. Further details and information as required by the Assessing Officer relating to incentive bonus, fixed assets purchased, miscellaneous expenditure incurred, conference expenses, details of unsecured loans and details of expenses incurred on behalf of the clients were filed. The Tribunal observed that from this it was apparent that not only the Assessing Officers asked for the required details, but those details were supplied as well, and thereafter there was discussion on these details filed by the assessee, with the representative of the assessee. Apart from the aforesaid details relating to supply of information and discussion thereupon, the Tribunal also took note of the fact that in the assessment orders passed by the Assessing Officers, these facts were recorded as is clear from the following:-
"11. The ITO in his assessment order for the asstt. Year 1983-84 made on 18.6.1985 has recorded that the Chartered Accountants of the assessee attended before him and produced cash book, ledger, vouchers etc., ITR No.22 & 23/12007 Page 15 which were examined by the test check and the case was discussed with him. In the impugned assessment order, the ITO also records and indicates that printed annual report of the company was filed before him and was examined. Thereafter, the ITO records that from the profit and loss account at page 10 and 11 of the annual report, there was a net profit declared. He has also recorded that the assessee had entered into identical agreements with the wholesale purchase copies of which have been filed and thereafter, he had made observations about clause (X) of the agreement, under which the assessee company was liable to spend at least 90% of the total contribution accrued during the year on advertising and promotion expenses and other services on behalf of the clients. There is also discussion with regard to other items of expenditure in the assessment order.
12. Similarly, in the assessment order for the asstt. Year 1984-85, the ITO has recorded that the Chartered Accountants of the assessee appeared before him and despite the fact that the books of account of the assessee were seized by the Deptt. u/s. 132 of the Income-tax Act, 1961 yet the vouches which were in possession of the assessee company were produced before the ITO and were examined on test check basis. In this order, which is made u/s. 143 3) on 30th December, 1986, the ITO has again recorded that the assessee company is carrying on advertisement and sales promotion business for M/s. Godfrey Phillips India Ltd. and for this purpose it had entered into agreements with wholesale dealers of Godfrey India Ltd. to handle all the advertising activities. The ITO has then recorded that the dealer would pay 35 of the printed price of the filter cigarettes and 2% of the printed price of the plain cigarettes purchased by the dealer from M/s. Godfrey Phillips Pvt. Ltd. The ITO appears to have examined this account in detail because he has observed that out of the total receipts on the basis of cigarettes sold by M/s. Godfrey Phillips India Ltd. 90% of the amount was required to be spent by the assessee company and balance 10% was to be retained by it on account of service charges. He further records that certain wholesale dealers gave contributions to the assessee for carrying out additional advertisement in their issues areas of operation on similar terms because no separate agreements were ITR No.22 & 23/12007 Page 16 existing for additional advertisement. The ITO found that total contribution on account of normal sale on cigarettes made by M/s. Godfrey Phillips India Ltd. and the additional advertisement on the basis during the year amounting to Rupees 34,08,099/-. According to the ITO, on the basis of agreement, the assessee company‟s share of service charges should come to Rs.34,08,099/- against total service charges declared by the assessee at Rs.33,92,847/-. The ITO was of the opinion after examination of this account in complete detail that there was understatement of service charges, in fact, amounted to 9.09% on the basis of arrangement made as mentioned supra but the ITO did not accept this argument as seend and correct because the assessee was not declaring service charges on the total amount of contribution received during the year but was working out such charges on due basis. He, therefore, made the addition of Rs.15,252/- out of this account."
15. It is on the basis of the above that the Tribunal concluded that the two assessment orders made by the two different Assessing Officers show that these Assessing Officers were conscious of their responsibilities and made enquiries from the assessee on the various facets of the assessment in each year as was apparent from the correspondence between the Assessing Officers and the assessee. Thus, opined the Tribunal, that the ITOs collected evidence, sifted it, discussed the points with the representatives of the assessee, got clarification from them and thereafter drew certain conclusions to make the impugned assessments. Therefore, it was not a case where the enquiry was not made at all and the returns were accepted as it is without probing the same. On the contrary, it was a case where enquiries were made, the material gathered was examined and only then the assessment orders were framed.
ITR No.22 & 23/12007 Page 17
16. When we examine the order of the Tribunal juxtaposition and comparing the orders of the Assessing Officers with those of the Commissioner under Section 263 of the Act, we find that the Tribunal has rightly held that present case is not a case where the enquiries were not made by the Assessing Officer or the relevant material was not collected before framing assessment orders. Observation of the Commissioner that the income-tax officers did not make sufficient enquiries is totally subjective. It was not a case of lack of enquiry. The Commissioner judged the "sufficiency of enquiry" by subjective standards. It appears that according to the Commissioner, more enquiries should have been made. The observations of the Commissioner were general in nature, namely, there was lack of proper enquiries or investigation or cosmetic treatment was given by the ITOs.
17. So much so, some of the observations made by the Commissioner are found to be factually incorrect. As pointed out above, the Commissioner observed that during the assessment year 1984-85 many documents were seized in the search conducted under Section 132 of the Act and those documents were not considered. The Tribunal found that this was against the record, inasmuch as in the assessment order for the assessment year 1984-85, the ITO specifically referred to the books of accounts seized by the department under Section 132 of the Act.
18. Likewise, the view of the Commissioner regarding agreements entered into between the wholesale dealers and the assessee was based on the ITR No.22 & 23/12007 Page 18 surmise that the ITO did not look into them and did not call for the names of the parties. Records reveal that the assessee‟s books of accounts, including the general ledgers were seized and complete details of parties, their addresses and the amounts received were recorded in this general ledger on the basis of which the ITO had made further enquiries. Even the observation of the Commissioner that the agreements were not looked into was contrary as at one stage the Commissioner had himself stated in the impugned order, that these agreements were produced before the ITOs and nature of these agreements was discussed in the assessment orders.
19. We, thus, agree with the conclusion of the Tribunal that the Commissioner had not pointed out any flaw in the assessments made by the Assessing Officer, but was only expecting that the ITO should have gone deeper into the matter. When it has come on record that the ITOs had made reasonably detailed enquiries, collected relevant material and discussed various facets of the case with the assessee, the order of the Commissioner to direct fresh assessment by going deeper into the matter would not form a valid or legal basis to exercise jurisdiction under Section 263 of the Act. Law in this behalf has already been stated above.
20. We fail to understand as to what kind of further enquiry the Commissioner wanted the Assessing Officers to make, keeping in view the nature of the assessee‟s business, more so when no error was pointed out in the assessment orders and it was also not pointed out as to how these assessment orders had caused prejudice to the revenue. At this stage, we ITR No.22 & 23/12007 Page 19 reproduce the following observations of this Court in Commissioner of Income-Tax v. Sunbeam Auto Ltd., (2009) CTR Reports 133:-
"12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income Tax under Section 263 of the Income Tax Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the AO did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as Revenue expenditure. However, that by itself would not be indicative of the fact that the AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO in the assessing order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under Section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabriel India Ltd. (Supra), law on this aspect was discussed in the following manner:
"xxx... From a reading of sub-section (1) of section, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is "erroneous in so far as it is prejudicial to the interests of the Revenue". It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and ITR No.22 & 23/12007 Page 20 without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. (See Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) at page 10).
xxx From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a 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 visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.
xxx There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.
xxx
ITR No.22 & 23/12007 Page 21
We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income- tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard ... xxx"
13. When we examine the matter in the light of the aforesaid principle, we find that the AO had called for explanation on this very item, from the assessee and the assessee had furnished his explanation vide letter dated 26.09.2002. This fact is even taken note of by the Commissioner himself in Para 3 of his order dated 03.11.2004. This order also reproduces the reply of the respondent in Para 3 of the order in the following manner:
"The tools and dies have a very short life and can produce upto maximum 1 lakh permissible shorts and have to be replaced thereafter to retain the accuracy. Most of the parts manufactured are for the automobile industries which have to work on complete accuracy at high speed for a longer period. Since it is an ongoing procedure, a company had produced 10,75,000 sets whose selling rates is inclusive of the reimbursement of the dies cost. The purchase orders indicating the costing includes the reimbursement of dies cost are being produced before your honour. Since the sale rate includes the reimbursement of die cost and to have the matching effect, the cost of the dies has been claimed as a Revenue Expenditure."
14. This clearly shows that the AO had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyes and tools is to be treated as revenue expenditure or not. It appears that since the AO was satisfied with the aforesaid explanation, he accepted the same. The CIT in his impugned order even accepts this in the following word:
"AO accepted the explanation without raising any further questions, and as stated earlier, completed the assessment at the returned income."
ITR No.22 & 23/12007 Page 22
15. Thus, even the Commissioner conceded the position that the AO made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the AO should have made further inquiries rather than accepting the explanation. Therefore, it cannot be said that it is a case of „lack of inquiry‟.
16. The upshot of the aforesaid discussion would be to answer the reference in the affirmative, i.e., in favour of the assessee and against the Revenue.
(A.K. SIKRI) JUDGE (REVA KHETRAPAL) JUDGE SEPTEMBER 21, 2010.
„hp‟ ITR No.22 & 23/12007 Page 23