Income Tax Appellate Tribunal - Ahmedabad
Shaileshbhai Shah vs Assistant Commissioner Of Income Tax ... on 15 June, 2005
Equivalent citations: (2005)98TTJ(AHD)154
ORDER
A.L. Gehlot, A.M.
1. Both these appeals are filed by different appeals (assessees) but related to each other. The assessment involved in these appeals is 2001-02 and instituted against the order of the CIT-II, Baroda, dt. 25th Feb., 2005.
2. The common ground raised in both these appeals are having identical set of facts, therefore, these appeals are being disposed of by this consolidated order. The common ground raised in these appeals is that the CIT has erred in passing an order under Section 263 of the IT Act. The assessments in the cases of Shri Shaileshbhai Shah and Shri Deepakbhai S. Shah completed under Section 143(3) of the IT Act, determining total income at Rs. 14,40,950 and Rs. 5,27,940, respectively. On examination of the records of the income-tax assessment proceedings, the CIT found that the assessment orders were erroneous insofar as were prejudicial to the interest of Revenue. Brief facts of these cases are that the assessees are individuals engaged in the business of sale of sarees and dress materials on retail basis. During the course of survey under Section 133A of the Act on 5th March, 2001, excess unaccounted stock of Rs. 15,12,290 and Rs. 5,04,579 was found in the cases of Shaileshbhai Shah and Shri Deepakbhai S. Shah, respectively. The assessees in their statements recorded during the course of survey, declared the above amounts as unaccounted income of the current year and agreed to pay the taxes. Subsequently, while filing the return, the assessees have disclosed GP rate for pre-survey period at 10.16 per cent and 14.87 per cent and for the post-survey period shown loss at the rate of 24.32 per cent and 29.97 per cent, respectively, by the above assessees. The CIT found that the AO without verifying and making proper investigation and inquiry in this regard has made the assessment and almost accepted the book results by making petty additions. The unusual loss shown in trading results for the post-survey period has neither been properly investigated by the AO. After considering the submission of the assessees, the CIT found that the objection raised by the assessees are not acceptable. The AO has failed to make proper inquiry/verification of the trading results disclosed by the assessees for the pre and post-survey period and were especially in the context of unaccounted stock found at the time of survey and admitted by the assessees. The loss shown by the assessee in the post-survey period also needed a deeper investigation in the context of the findings of the survey. The AO has not consulted the quantity and quality-wise stock position as found at the time of survey and not required as to how it has been accounted for in the post-survey period. The applicability of provisions of Section 69Calso required to be looked into. All these aspects have not at all been considered by the AO. Hence, the CIT is satisfied that the order passed by the AO is erroneous inasmuch as it is prejudicial to the interest of Revenue. The assessments made under Section 143(3) by AO are accordingly set aside and restored to the file of the AO for passing a de novo order after properly analysing the facts and circumstances of the case. The learned Departmental Representative drew our attention on the assessment order made by the AO under Section 143(3) and submitted that the AO has made the proper investigation and examination as evident from paras 2, 2.1 and 2.2 of the assessment order. He further submitted that the facts regarding GP for pre-survey and post-survey had been examined by the AO after considering the submission of the assessees. The learned Authorised Representative pointed out that the submissions considered by the AO in the case of Shaileshbhai S. Shah are as under, which have also been reproduced by the AO in his order.
"Your honour has asked to furnish explanations regarding the reasons of fall of GP compared to the previous year to the date of survey from 10.16 per cent to (-) 24.32 per cent. There is gross loss in post-period result of survey Rs. 2,55,365 instead of GP of Rs. 1,06,654 @ 10.16 per cent on the post-period sales of Rs. 10,49,744.
The main reasons for fall in GP are as under:
(1) The margin of profit in price structure of the sales value tag is variable from saree to saree, i.e., from 15 per cent to 25 per cent, i.e., average margin including normal discount is 25 per cent. After normal discount, actual margin vary from 8 per cent to 15 per cent, i.e., average GP of earlier period shows 10.16 per cent GP. However, GP cannot be constant because of product mix of sarees and rate of discount vary from customer to customer. This is a seasonal business and March is considered off-season due to liquidity problems in general market due to March ending.
(2) The main reason of loss during the second prior, i.e., after survey, was we have offered genuine stock clearance sale. There was 'sale' of sarees wherein heavy discount has been offered to dispose of defective sarees as well as out of fashion and old sarees. The discount offered during the sale is between 15 per cent to 50 per cent. The main purpose of sale is as under:
(a) To dispose of defective sarees and out of fashion sarees, which in normal circumstances, are difficult to sale as per our business expediency.
(b) To generate more cash sales through stock clearance sale to pay off Government liabilities, i.e., income-tax liabilities within time allowed to cooperate with Government Department.
(c) To pay off the creditors which are due and pressured for their payment before March ending.
(d) Due to March ending, we are unable to generate cash balances from general debt market and bank finance is also not possible to get within short time allowed.
(e) It was difficult to get more sale because it was out of season time. And due to general economic depression and more competition, margins were under pressure, whereas fixed expenses cannot be avoided.
(3) The rate of purchase of saree is also dependent on the terms of payment, which affect the GP rate.
(4) Moreover, the quantity of defective sarees as well as sarees which are out of date also affect the GP rate.
(5) The turnover has been increased by 17.92 per cent compared to last year. In circumstances, the margins cannot be maintained constant.
We have not kept quantitative records as submitted in para 20 of notes to the audit report. It is also not possible to maintain day to day quantitative records as the varieties of sarees are in thousands of numbers compared to the value (as per the list of inventory prepared during the survey, it was almost of 1285 numbers). There is not a single variety which has cost exceeding 10 per cent of total sale value.
In this industry, i.e., in retail trading business having numerous of varieties of sarees, it is difficult to maintain stock records. However, we have given justification of value of closing stock as on 31st March, 2001 in absence of exact quantitative details as per Annex. A attached.
In this Annex. A, it can be clearly seen that the value of closing stock as on 31st March, 2001 valued at Rs. 40,23,508 (Rs. 25,11,218 + Rs. 15,12,290) as per the audit report filed is almost the same figure of the value of stock arrived at as per the working based on sales and purchases made after the date of survey. It can be seen that the value placed at closing stock is almost 100 per cent near to the value of stock should be as on last date of year, i.e., 31st March, 2001. We will file the affidavits of the valued customer in due course, if required, for the confirmation regarding the stock clearance sale held and the discount given @ 50 per cent in the cases where the sarees were defective or old, i.e., out of fashion."
3. The learned Authorised Representative further submitted that the main reason for low GP in post-survey was that the assessee had arranged a stock clearance sale after the survey wherein sale was made on discounted rate which was extended to 50 per cent. The learned Authorised Representative further pointed out that the assessee has filed affidavits which are confirmations of two customers to whom the assessee had offered 50 per cent discount and that affidavits were also filed before the AO. The AO has also observed in his order that the assessee has failed to produce some of the parties during the course of assessment proceedings. After examining all the materials, the AO has given categorical finding that after considering the material facts brought on record by the assessee during the course of assessment proceedings, the rate declared by the assessee found to be excessively lower and need to be augmented. Keeping in (view) all these facts, the AO (has) given his finding that disproportionate discount to the customers at the time of sale, which ultimately affected the GP rate to a large extent, therefore, it will be reasonable to disallow a whole, two-third portion of the claim of expenses incurred in respect; of fall-bedding, polishing and packaging and the same was added as GP addition. The AO has also examined shop expenses which were also found extremely exceeded the expenses incurred under the same head in the earlier years. The AO has also disallowed some of the portion of the expenses on this account. The submission of the learned Authorised Representative that in view of the fact the order of the AO is not erroneous and action taken by the CIT under Section 263 is liable to the set aside. The learned Authorised Representative in support of his contention relied upon the following decisions :
(i) Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC)
(ii) CIT v. Smt. Minalben S. Parikh (1995) 215 ITR 81 (Guj)
(iii) CIT v. Gabriel India Ltd.
(iv) Indexco International v. Dy. CIT (2004) 89 TTJ (Mumbai) 56 : (2004) 88 ITD 293 (Mumbai).
4. The learned Departmental Representative, on the other hand, supported the order of the CIT(A), and submitted that the AO has not properly examined all the materials and facts while framing the assessment under Section 143(3). He further submitted that the assessee has filed the return of income from which it appears that the assessee had not effectively disclosed the disclosure made at the time of survey. The learned Departmental Representative accordingly urged that the order of the CIT(A) may be confirmed. The learned Departmental Representative in support of his contention relied upon the following decisions : .
(i) CIT v. Pushpadevi
(ii) Gee Vee Enterprises v. Addl. CIT
5. We have heard the learned representatives of parties and records perused and gone through the decisions cited.
6. To consider the contention, it will be apt to quote Section 263(1) which is relevant for our purpose :
"263. Revision of orders prejudicial to Revenue :-- (1) The CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar 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 : xxxxxxxx."
7. A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO 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 ITO 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.
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, 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 principles of natural justice or without application of mind.
9. The phrase 'prejudicial to the interest of the Revenue' has to be read in conjunction 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 interests of the Revenue unless the view taken by the ITO is unsustainable in law. It has been held by the apex 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 AO accepting the same as such will be erroneous and prejudicial to the interest of the Revenue.-- Rampyari Devi Saraogi v. CIT and Smt. Tara Devi Aggarwal v. CIT .
10. In the light of above background of legal position and discussion, we find that in the cases under consideration, the AO has examined all the materials before giving his finding. The AO has already considered the GP declared by the assessee for pre and post-survey period. The AO has also examined all the facts which have been pointed out by the CIT in his order under Section 263. After considering all the facts, the AO had chosen to disallow certain portion of the expenses and held that will cover the lesser GP shown in the post-survey period. For applying Section 263, there must be some gravies (sic-grievous) error in the order passed by the AO, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the CIT might think to be prejudicial to the interests of Revenue administration. In our view, this interpretation is too narrow to merit acceptance. 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 interest of the Revenue. We find that the assessees have filed return declaring a reasonable income, however, after examining the relevant material, the AO has assessed at a particular income which is income on which the assessee was liable to tax lawfully though the AO has, while determining the total income instead of making GP addition, made some addition by disallowing certain expenses. Under the circumstances, we find that the order passed by the AO is not erroneous. In the cases under consideration, we do not find any view taken by the AO, which is unsustainable in law and facts. In the light of above discussion, we find that these are not fit case where Section 263 can be invoked. We accordingly set aside the orders of the CIT.
11. In the result, both the appeals by the assessees are allowed.