Judgment:
1. This appeal is directed against the order dated January 31, 1986, passed by the Commissioner of Income-tax Delhi-X, New Delhi (Shri A.N.Gupta), and the ground raised is against legality of the order under Section 263 of the Income-tax Act, 1961.
2. In this case while completing the assessment, the Assessing Officer made the following observations : " Books of account were produced which have been examined on test check basis. Sales and purchases have been found fully vouched and so are the expenses debited to the profit and loss account. As in the past, the firm derives income from sale of pencils, ball pens and refills of 'Geeflo' mark manufactured by Lions Pencils (P.) Ltd., Bombay. Stock inventory has been filed. On total sales of Rs. 88,66,011 gross profit has been shown at Rs. 9,48,460 giving gross profit rate of 10.69 per cent, as against corresponding figures of Rs. 64,82,283, Rs. 6,39,971 and 9.87% respectively in the immediately preceding assessment year.
According to the original agreement with the principal -- Lion Pencils (P.) Ltd., Bombay, filed during the course of assessment proceedings for the assessment year 1981-82, the expenses on advertisement and publicity were reimbursable to the assessee by the principal. Now during the account year relevant to the assessment year 1983-84, the clause of reimbursable of said (sic) has been withdrawn by the principal, vide copy of their letter dated July 4, 1980, filed by the assessee. The assessee has charged expenses of Rs. 70,122.60 to the profit and loss account on account of advertisement and publicity which have been found to be properly vouched. In view of the assessee's contention that by incurring the above expenses the sales have increased and gross profit has also been increased over the last year by about 1 per cent., the expenses on advertisement will be allowed. Necessary details of expenses have been placed on records." 3. On September 11, 1985, the Commissioner of Income-tax issued a show-cause notice on the following basis stated in the notice : "On a scrutiny of your assessment record for the assessment year 1983-84, it has been found that, during the accounting period relevant to the assessment year 1983-84, you have sold 57 1/2 cases of the so called damaged goods for a consideration of Rs. 67,620 at the rate of Rs. 1,176 per case whereas the cost of these goods was Rs. 2,13,037 at the rate of Rs. 3,705 per case and the market value of these goods was Rs. 2,56,593 at the rate of Rs. 4,462.50 per case and you have thus suppressed your income by an amount of Rs. 1,88,973.
Since you had not filed evidence for your claim of goods being damaged, your claim of goods being damaged had not been examined by the Income-tax Officer properly at the time of assessment." (i) The assessee had produced all the books of account, vouchers, etc., and the same were verified.
(ii) In the assessment, details were submitted as were asked for from time to time.
(iii) Stock inventory was duly verified by the Assessing Officer and the point of damaged/defective goods was duly examined during the proceedings.
(iv) The ball point refills become defective for various reasons and dry up and sometimes get damaged in transit.
(v) Doubt regarding defective and damaged refills was also raised during assessment proceedings for the assessment year 1984-85 and certain addition was made by the Assessing Officer but the same was deleted by the Commissioner of Income-tax (Appeals), vide appellate order dated April 11, 1985. A copy of the order was enclosed.
(vi) The defective goods during the year were sold to recover maximum price and the same were reflected in the sales.
5. The Commissioner of Income-tax, however, set aside the assessment order for being made afresh after making necessary inquiries in respect of the assessee's claim of damaged goods. In the order, he mentions in paragraph 1 that, subsequent to the assessment, the assessee had furnished during the assessment for the assessment year 1984-85 information from which it was gathered that the assessee sold during the assessment year 1983-84 certain cases of refills for a consideration of certain amount whereas the market value of those goods was higher. The information indicated that sales during the year had prima facie been suppressed. Besides, no information and evidence regarding these 57 1/2 cases had been filed and the claim of the goods having been damaged had not been examined by the Assessing Officer.
6. At the time of hearing, on behalf of the assessee, a grievance was raised primarily on the aspect that, in the notice issued to the assessee, nothing was mentioned regarding the source of information, but only in the final order, the Commissioner of Income-tax made mention of it and this is against the principle of natural justice.
Only during the appellate proceedings for the assessment year 1984-85, the Commissioner of Income-tax (Appeals) asked for comparative details in respect of the variation in certain data and that the necessary details in respect of the lower realisation on account of damaged goods in both the years were furnished for the purpose of comparison. Such information could only be called outside the records examined by the Assessing Officer for which reliance was placed on the case of Ganga Properties v. ITO [1979] 118 ITR 447 (Cal). All the requisites of the assessment were complied with and, therefore, no revision could take place for which reliance was placed on the case of CIT v. Ratlam Coal Ash Co. [1988] 171 ITR 141 (MP). No doubt to sustain a revision, there should be an error of fact or of law but the same could not be sustained on the basis of guess work as observed in CIT v. Trustees Anupam Charitable Trust [1987] 167 ITR 129 (Raj). Again, no prejudice was caused to the Revenue because in the assessment year 1984-85, such addition was deleted by the Commissioner of Income-tax (Appeals) and no further appeal was filed by the Revenue before the Tribunal. Here again, a grievance was raised on the basis that, in spite of the copy of the appellate order having been submitted to the Commissioner of Income-tax, he has not made any mention of this order.
7. The Departmental Representative submitted that there was a contradiction in the assessment order in the sense that when there was test check resorted to, the sales and purchases could not be said to have been fully verified. Besides, no separate information was given in respect of the damaged goods. Placing reliance on the case of Gee Vee Enterprises v. Addl CIT [1975] 99 ITR 375 (Delhi), it was stated that since the inquiry was not made the order of the Commissioner of Income-tax was right.
8. In reply, the representative of the assessee states that the facts in the case of Gee Vee Enterprises [1975] 99 ITR 375 (Delhi) were altogether different because, considering the nature of the issue, the Assessing Officer did make inquiries.
9. On going through the material, we find that there is no justification for any revision. Firstly, it is an admitted position that the information sought to be made the basis for action under Section 263 did come on the record subsequent to the assessment under consideration. Therefore, the reliance placed by the assessee on the decision in Ganga Properties [1979] 118 ITR 447 (Cal) is correct. The Departmental Representative could not controvert the application of this decision. Since the information gathered was subsequent to the assessment, the same could not be considered as part of the records examined by the Assessing Officer at the time of making the assessment.
In such circumstances, assumption of jurisdiction under Section 263 is illegal.
10. We fail to understand what sort of inquiry the Commissioner had in mind which was not carried out by the Assessing Officer. As could be seen from the assessment order indicated above, the Assessing Officer was fully satisfied with the percentage of gross profit reflected by the assessee. The sales in respect of the damaged goods disposed of during the relevant accounting year gets reflected in the total turnover of sales. This again has reflection on the amount of gross profits and the percentage of the gross profits reflected. This aspect has been duly considered by the Assessing Officer. There is no question of the assessee disclosing to the Assessing Officer that, on certain sales, the assessee realised a lesser margin of gross profit or even incurred losses. There is no question of any separate claim required to be made by the assessee, as stated in the direction by the Commissioner of Income-tax that the claim in respect of the damaged goods should be examined. In fact, there is no such claim made by the assessee. Again, we fail to appreciate what information is required to be given by the assessee suo motu as contended by the Departmental Representative.
There is no requirement of law in respect of details to be furnished in the return of income describing such information to be separately indicated by the assessee. Therefore, it cannot be said that the Assessing Officer has failed to make inquiries in respect of certain claims made by the assessee. Again, we find that the grievance is justifiably raised by the assessee that no mention of the appellate order for the assessment year 1984-85 is made by the Commissioner of Income-tax while passing the order in spite of the fact that the appellate order was accepted by the Commissioner of Income-tax. Then, what useful purpose would be served by making such inquiries even if it is directed to be made. The decision in the case of Gee Vee Enterprises [1975] 99 ITR 375 (Delhi), merely lays down a ratio that, if necessary and when the circumstances of the case are such as to provoke an inquiry, the Assessing Officer cannot remain passive in the face of a return which is apparently in order. But, in this case, we are unable to find the existence of such circumstances which should have provoked an inquiry which is not made. It is stated in writing before the Commissioner of Income-tax that stock inventory was maintained by the assessee and the same was also verified by the Assessing Officer. It would, therefore, be futile to come to the conclusion merely on the basis of certain comparable data furnished in the appellate proceedings of the subsequent year that inquiry was necessary and the same was not made. In our opinion, there was no error in the assessment order. We, therefore, set aside the order passed by the Commissioner of Income-tax and restore that passed by the Assessing Officer.
12. I have had the benefit of perusing the detailed and comprehensive order framed by my learned brother allowing the appeal. My inability to concur with the conclusion arrived at is, however, regretted. The issue picked up by the learned Commissioner of Income-tax pertained to absence of any enquiry by the learned Income-tax Officer about sale of 57 1/2 cases of refills for a consideration of Rs. 67,620, whereas the market value of those goods was Rs. 2,56,593. In search of best of both the worlds, the assessee mentioned this aspect for the assessment year 1984-85 only and obviously there could be no mention of this fact in the return and the assessment order. About this aspect, the learned Income-tax Officer is seen to have made no inquiries as is clear from the perusal of the assessment order dated February 8, 1984. According to the assessee before us all details about this transaction had been placed before the learned Income-tax Officer. If so, then it was the duty of the learned Assessing Officer to have investigated with reference to evidence and details. This was seen to have not been done.
And, therefore, the assessment order, on examination, was considered erroneous and prejudicial to the interests of the Revenue. This conclusion arrived at by the learned Commissioner of Income tax is supported by the ratio in the case of Gee Vee Enterprises [1975] 99 ITR 375 (Delhi) decided by the Hon'ble jurisdictional High Court.
13. In the light of the above discussion, in my view, the order under challenge is required to be confirmed so that the learned Income-tax Officer, after verification, may frame a correct assessment order. I hold accordingly.
15. Consequent upon the difference of opinion having occurred between us, the file is being placed before the worthy President for proceeding in the matter in accordance with law. The point of difference is as under : "Whether, on the facts and in the circumstances of the case, the order under Section 263 of the Act is required to be quashed or maintained ?" 16. The short point on which the difference of opinion arose between the learned Members of Delhi Bench 'Dl who heard this appeal is : "Whether, on the facts and in the circumstances of the case, the order under Section 263 of the Act is required to be quashed or maintained ?" 17. While the learned Accountant Member held the view that the Commissioner of Income-tax had not properly and justifiably acquired the jurisdiction under Section 263 to set aside the order passed by the Assessing Officer as erroneous and prejudicial to the interests of the Revenue, the learned Judicial Member held to the contrary but without much of discussion or reasoning.
18. In this case, the assessee is a distributor of Lion Pencils P.Ltd., Bombay, which manufactured ball point pens in the trade name of Gee-Flow for the entire Northern India. A return was filed disclosing an income of Rs. 6,85,630. In response to the notice issued under Section 143(2), the assessee entered appearance along with the books of account through its accountant and along with his representative, Shri P. P. Bahl, chartered accountant. The Assessing Officer examined the books of account on test check basis because the turnover involved is as high as Rs. 88.66 lakhs. On examination of the accounts, the Assessing Officer recorded a finding that sales and purchases were fully vouched and also the expenditure debited to the profit and loss account. He also observed that the stock inventory was filed and the gross profit shown at 10.69% on a turnover of Rs. 88.66 lakhs was reasonable, as it was higher than the turnover and the rate of gross profit shown in the last year. Making some disallowances out of car expenses, telephone, etc., the Assessing Officer determined the total income of the firm at Rs. 7,04,236. Subsequently, the Commissioner of Income-tax, acting under Section 263 of the Income-tax Act, held that the Assessing Officer did not make a proper enquiry and, as a consequence thereof, the assessment resulted in prejudice to the interests of the Revenue. He observed that, during the assessment proceedings for the next assessment year 1984-85, it came to light that the assessee had sold 57 1/2 cases of refills in the assessment year under reference, namely, 1983-84, for a consideration of Rs. 67,620 as against the market value of Rs. 2,56,593 and, as a consequence, there was a suppression of income to the extent of Rs. 1,88,973 and this has resulted because of the inaction of the Assessing Officer in not properly scrutinising the accounts with care and caution. He, therefore, gave notice to the assessee to let him know the reasons as to why the assessment made should not be set aside in response to which the assessee submitted that it was only after examining the books of account and vouchers thoroughly that the Assessing Officer had computed the income. There was, therefore, no inaction on the part of the Assessing Officer to make a thorough enquiry into the accounts nor any dereliction on the part of the assessee to produce relevant evidence.
The Assessing Officer examined all the copies of the agreements with the principals also. The assessee at the same time furnished to the Commissioner of Income-tax proof to demonstrate that some of the ball point pens and refills in which the assessee was dealing got damaged in the year of account and its efforts to get reimbursement from the principals for the damage had not been fruitful.
19. But the Commissioner of Income-tax was not convinced with the explanation offered by the assessee. He observed that the assessee had shown in the closing stock damaged goods amounting to Rs. 4,774 but they happened to be the same damaged goods as appeared in the closing stock for the assessment year 1982-83 and that there was nothing on record to indicate that any goods relating to the year under appeal had got damaged and had been sold at prices, which were below the cost price. He observed that the Assessing Officer had failed to make enquiries regarding this aspect. To quote precisely, the following are the observations made by the Commissioner of Income-tax in this behalf : " It is thus clear that, although the details of the goods damaged during the assessment year 1982-83 and lying with the assessee at the end of that year being available on files may have been considered, the Income-tax Officer did not enquire into the damaged goods relating to the assessment year 1983-84 ; nor did the ITO enquire into the extent and nature of such damaged goods. In other words, the Income-tax Officer has accepted the trading results, and passed the order without proper scrutiny. That being so, it must be held in view of the Delhi High Court decision in Gee Vee Enterprises v. Addl CIT [1975] 99 ITR 375, that the assessment order made by the Income-tax Officer in this case on February, 8, 1984, is erroneous in so far as it is prejudicial to the interests of the Revenue." 20. He, therefore, set aside the assessment directing the Assessing Officer to make enquiries into the claim for damaged goods and make a reassessment. Aggrieved by this, the assessee came up in appeal before the Tribunal.
21. Now, the point for consideration is whether the Commissioner of Income-tax was right in invoking his jurisdiction under Section 263 of the Act. From the operative portion of the order of the Commissioner of Income-tax quoted above, it would be seen that the only point that the Commissioner of Income-tax relied on to say that the Assessing Officer did not make enquiries into the damaged goods was lack of evidence to show whether any goods relating to the year under appeal were damaged or not. Relying upon the Delhi High Court decision, he held that the assessment made by the Assessing Officer was erroneous in so far as it was prejudicial to the interests of the Revenue. But the point for consideration is the reply to the show-cause notice issued by the Commissioner of Income-tax which clearly pointed out the various circumstances under which the goods got damaged and the efforts made by the assessee to get reimbursement or replacement or proper compensation for the damaged goods from the principals and how the principals had rejected the claim. In the letter that was written to the principals in January, 1986, the assessee had positively stated that 57 1/2 cases of refills had got damaged on account of storage and transit and requested the principals to make good the loss but the principals had rejected the claim. It is also pointed out to him that, during the assessment year 1982-83, they received back defective goods of the value of Rs. 27,195 and returned the goods to the principals which showed that the damage to the goods that the assessee had been trading in was a normal incident of business. It was also pointed out to him that, in the assessment year 1984-85, when a similar addition was made by the Inspecting Assistant Commissioner (Assessment), the same was examined in depth by the Commissioner (Appeals), and the entire addition was deleted. A copy of the order of the Commissioner (Appeals) was also given to the Commissioner of Income-tax. Even though this evidence was before the Commissioner of Income-tax, he still held, as seen from the order, that the assessee had not produced any proof to show that there was any damage to the goods in the accounting year under reference.
This is factually an incorrect statement made in disregard of the evidence produced before him. When the Assessing Officer observed in his order that he has examined the books of account and examined the stock particulars and when the stock particulars showed the damaged goods, it must be held that the Assessing Officer had examined all the aspects and did not leave any aspect untouched or unexamined.
22. Another important aspect is that the rate of gross profit this year was far higher than the rate of gross profit shown in the earlier year.
This would prima facie prove that all the sales were properly accounted for and the closing stock had been properly valued and that there was no inflation in purchases, i.e., even with the sales of damaged goods at Rs. 67,620 when the gross profit rate was higher than that in the previous year, a presumption cannot be made that the assessee had not disclosed the full turnover and had suppressed the turnover to the extent of Rs. 1,88,973, as held by the Commissioner of Income-tax. If as held by the Commissioner of Income-tax turnover to the extent of Rs. 1,88,973 was really suppressed and if that amount was added to the trading account, the gross profit would jump by leaps and bounds which is not a normal incident. Such a high rate of gross profit was impossible to achieve in this trade nor was ever shown by the assessee either in the past or in the future. Therefore, there cannot be any presumption that turnover of Rs. 1,88,973 was suppressed. This is only a suspicion without any basis to support it. When the assessee had produced evidence before the Commissioner of Income tax to prove that there was no suppression of income causing prejudice to the interests of the Revenue, it is expected of the Commissioner of income-tax to examine this aspect or get it examined. That was the power given to him in section 263. That is also the safeguard provided to an assessee from arbitrary exercise of this power by the Commissioner of Income-tax because this has the effect of unsettling the finality of assessments.
23. Even if an order passed by the Income-tax Officer is erroneous in the sense the word "erroneous" had been explained by the Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375, still that error must be such as to cause prejudice to the interests of the Revenue. In other words, all errors do not ipso facto or per se vest jurisdiction in the Commissioner of Income-tax to take action under Section 263. It must further be shown that the error is prejudicial to the interests of the Revenue, This is the first safeguard provided in the section itself as an inbuilt safeguard against the arbitrary exercise of this power. Now, once it is established that an error had crept into an order passed by the Income-tax Officer and caused prejudice to the interests of the Revenue, that would be a foundational fact or a jurisdictional fact.
Once the jurisdiction is acquired or assumed by the Commissioner of Income-tax, the further safeguards provided in section 263 are very crucial and important and are based upon the principles of natural justice, namely, providing the assessee an opportunity of being heard and, secondly, making enquiries either by himself or causing them to be made by his subordinates into the facts of the case. When, in the course of that enquiry, the Commissioner of Income-tax finds that there was no prejudice caused to the interests of the Revenue, although an error had been committed in the sense in which the error had been explained by the Delhi High Court, it is still open to him to drop the proceedings. The Delhi High Court explained the expression "erroneous" as an enquiry to be made into the claims made by the assessee or the facts of the case and, if an assessment was made without making a proper enquiry, it would be called "erroneous". If, in a case, the assessment was made without any enquiry as is required to be made or expected to be made, then the order could be said to be erroneous giving jurisdiction to the Commissioner of Income-tax to invoke the provisions of section 263. Now, after assuming jurisdiction, if, during the course of enquiry he is required to hold as a mandate he finds that there was in truth no prejudice caused to the interests of the Revenue, he is not to disturb the assessment at all. That is also expected of him. The law protects the interests of the assessee by making enquiry compulsory. Therefore, if, on enquiry, the Commissioner of Income-tax finds that there is no prejudice caused to the interests of the Revenue, he must drop the proceedings. He should not then let the proceedings be allowed to continue and give the power of dropping the proceedings to the Income-tax Officer.
24. In this case, the only point found out by the Commissioner of Income-tax was that the Assessing Officer did not enquire as to whether the damaged goods related to the year under appeal or not. This may be an error on the part of the Assessing Officer which gave jurisdiction to the Commissioner of Income-tax to invoke the provisions of section 263. But, thereafter in the course of enquiry, the assessee brought to the notice of the Commissioner of Income-tax that there were damaged goods relating to the year of account and his efforts to get compensation from the principals had failed and that damage to the goods dealt in by the assessee was a normal incident of business because the refills get dried up during the course of storage and thus become useless. The Commissioner of Income-tax, though he referred to this point in his order in para 2, did not give a finding about this aspect but still held that the enquiry has to be made as to whether the damaged goods related to the year under appeal or not. This, in my opinion, amounts to by passing the evidence produced before him. Thus the assumption of jurisdiction by the Commissioner of Income-tax, although initially correct, was not properly and fairly exercised in its eventual application. The learned Accountant Member has brought out these aspects very clearly in his order with which I am inclined to agree and there is nothing in the order of the learned Judicial Member to contradict these findings. First, I hold that the Assessing Officer made enough enquiries and, secondly, the assessee has brought evidence before the Commissioner of Income-tax to show that there were damaged goods and they were sold at a much lower price and there was nothing brought on record to show that those goods were sold at a higher price except a mere suspicion and conjecture which is not enough to disturb the finality that the assessment had acquired.
25. I, therefore, agree with the view expressed by the learned Accountant Member and hold that the Commissioner of Income-tax was not right in setting aside the assessment.
26. The matter will now go before the regular Bench for decision according to the majority opinion.