1. In this case, the appeal filed by the assessee was heard by the Division Bench of this Tribunal. As a result of difference of opinion between the Accountant Member and the Judicial Member in regard to the following question, the issue was referred to a Third Member by the Hon'ble President, ITAT, Under Section 255(4) of the Act: Whether on the facts and circumstances of the case. Commissioner of Income- tax. Nashik is justified in setting aside the assessment for assessment year 1999-2000 with certain directions under Section 263 of the Income-tax Act. 1961? 2. With regard to the above question referred to, the Id Accountant Member of the Bench came to the conclusion that the CIT was not justified in setting aside the matter because there was no prejudice caused to the Revenue and the order was not erroneous either. On the other hand, the Id Judicial Member hold that setting aside by the CIT of the order of the AO was justified because the AO failed to conduct an enquiry which in the normal course he would have conducted.
4. The Hon'ble Vice-President (MZ), Shri K P T Thangal, as a Third Member, vide his order dt 30.6.2006, agreed with the view of the Id Accountant Member holding that there was no failure on the part of the AO and, therefore, the order passed by the CIT was without jurisdiction.
5. Thus, by majority view, we hold that there was no failure on the part of the AO to make proper enquiry and, therefore, the order passed by the CIT Under Section 263 is without jurisdiction.
1. As there arose a difference of opinion between the Members, the Hon'ble President referred the following question under Section 255(4) of the Income-tax Act, 1961 for my opinion as Third Member: Whether on the facts and circumstances of the case, Commissioner of Income-tax, Nashik is justified in setting aside the assessment for assessment year 1999- 2000 with certain directions under Section 263 of the Income-tax Act, 1961? 2. The assessee is a limited company belonging to Bagaria Group of Aurangabad/Mumbai. There was an action under Section 132 on this Group between 29.6.1998 to 2.7.1998. The assessee is also covered by this search and seizure action. No incriminating documents were seized or found during the course of search. The assessee filed block return on 11.4.2000 showing Rs NIL income. The assessment was completed on 12.6.2000 computing the block income at Rs NIL. Though there was no incriminating material found, there was a minor difference of 400 Kgs of oil and no account books were seized. The regular returns were filed upto assessment year 1998-99 at Mumbai. After verification, the AO came to the conclusion that undisclosed income of the assessee was Rs NIL.
For the purpose of block assessment, the block period was starting from the assessment year 1988-89 to 1998-99 plus a broken period from 1.4.98 to 2.7.98. For this broken period of 3 months, the assessee had shown income of Rs 13,05,103/-. This was also reflected in the books of account. However, this was not assessed as undisclosed income, since it was reflected in the books of account.
3. The assessee filed regular return for the assessment year 1999-2000 on 16.12.1999 showing total income at Rs 2,92,869/-. This period of 12 months also covers the broken period from 1.4.98 to 2.7.98. The return was accompanied by audited balance sheet, tax audit report. The auditors had reported that full quantitative details were maintained by the assessee for their entire manufacturing done. The raw materials, finished goods, packing material and consumable stores are valued at market price, which is also reflected vide page 13 of the paper book.
The Tax audit report is at pages 57 to 72 of the paper book. The method of valuation is certified as market price and it is also stated that there is no deviation in the method of valuation.
4. On perusal of records, the CIT formed the opinion that the assessment order passed by the AO is erroneous and prejudicial to the interests of Revenue as the AO had not conducted sufficient enquiry/scrutiny/verification and accepted the return filed by the assessee as such. This is so because for the fall of income in the business for the period 1.7.98 to 31.3.99 as compared to the income of the first quarter of the accounting year was Rs 13,05,103/- shown in the block return. If the income for the period of 12 months falling in the accounting year relevant to assessment year 99-2000 is taken on the basis of Rs 13,05,103/- for the first quarter, the assessee's income for the entire block of the assessment year under consideration should have been at Rs 52 lakh instead of Rs 2,02,869/-. The CIT further noted that the AO has not verified the method of valuation of the stock nor any details of such valuation were filed by the assessee, that is to say, no enquiry was made on this point. The case was once adjourned for verification of this fact, but when the matter was taken, the assessee furnished some letters, which were claimed to have been filed before the AO. The next hearing could not be conducted at the appointed date as there were certain difficulties and this was intimated to the assessee by the CIT and when the matter was again taken up, the assessee did not attend nor made any request for adjournment.
5. In the written submissions, the assessee claimed that assessee was following the method of valuation of stock at the end, at market value prevailing on that date. Based on the market value of the stock, the company declared Rs 13,05,103/- for the broken period ended. Further, it was claimed that the reason for difference in profit is due to the price difference in the valuation of stock. The contention of the assessee was rejected by the CIT. So far as the enquiry conducted by the AO is concerned, he noted that the AO only states that the books of account has been verified upto the date of raid. The CIT held, therefore, that it is clear that for the entire period there was no verification of books of account.
6. Hence, the CIT held that there was a failure on the part of the AO with regard to the aforesaid vital issue, which has close and significance bearing on the determination of the correct total income.
Hence, invoking the jurisdiction invested in him Under Section 263, he set aside the order and directed the AO to reframe the assessment after proper enquiries allowing the assessee a reasonable opportunity.
7. When the matter was carried before the Tribunal, the Id Accountant Member held that the CIT was not justified in setting aside the matter because there was no prejudice caused to the Revenue and the order was not erroneous either. The Id Accountant Member held that though the CIT started with the premise that profit of the period for three months was Rs 13 lakh, he has not pointed out any material which caused prejudice to the Revenue because of non enquiry. Since the assessee is a Limited Company, whose accounts were duly audited under the Companies Act, and tax audit was also attached and they were fully supported with quantitative details, the Id Accountant Member formed an opinion that there was no necessity of a further enquiry and by not conducting any enquiry no prejudice was caused to the Revenue. He got support from the decision of the jurisdictional high Court in the case of CIT v. Gabriel India Ltd. reported in 203 ITR 108. The Id Accountant Member held that merely because the AO wrote a cryptic order after conducting an enquiry, the order cannot be treated as erroneous for lack of enquiry and this cannot be a ground for setting aside the order passed Under Section 143(3) of the Act. Coming to the finding of the CIT that books account were not verified, the Id Accountant Member held that this is unfounded. Particularly, he noted that the books of account upto the end of 2.7.1998 were verified in the block assessment and for the further period it was covered by the audit report. Hence, he held that the action Under Section 263 was taken on one point and direction was given on some other point. He held that it is not permissible for the CIT to give such a direction for verification on a point not taken in the notice itself. He relied on the decision of the Hon'ble Calcutta High Court in the case of CIT v. General Trade Agencies (1973) ILR 1383 (Cal) as also the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Jagadhri Electric Supply & Industrial Co (140 ITR 490). Further considering the explanation given before the AO, the Id Accountant Member came to the conclusion that there was sufficient justification for the fall in gross profit and the argument to the contrary by the Id DR was not on the basis of record. Coming to the next point of the CIT wherein he held that there was no sufficient justification for the fall of gross profit for the subsequent period of the very same year, the Id Accountant Member found that in fact there was sufficient justification for the fall in gross profit. The Id Accountant Member further found that the Id DR cannot support the order of the CIT on the grounds, which were not taken in the order itself. He held for that matter, that the Tribunal also cannot do that because same thing, it will amount to sharing the exclusive jurisdiction vested in the Commissioner, which is not warranted under the Act (140 ITR 490).
8. On the other hand, the Id Judicial Member held that setting aside by the CIT of the order of the AO was justified because the AO failed to conduct an enquiry which in the normal course he would have conducted.
The Id Judicial Member found that for the first three months the assessee was declaring about Rs 13 lakh whereas for the 12 months from 1.4.98 to the end of the financial year, the total amount declared was much less, i.e. Rs 2,92,869/-. This was an abnormal situation where the enquiry would have been conducted, particularly because the AO had not verified the method of valuation of the closing stock nor any details, as details recorded in the impugned order were furnished by the assessee. The AO had conducted no enquiry on these points and even as per the assessment order itself, he verified the books only upto the date of the end of the block period. He held that a similar situation arose before the Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT reported in 99 ITR 375 wherein their Lordships held that the position and function of the ITO is very different from that of a Civil court. The ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further inquiry. He has to ascertain the truth of the facts stated in the return. The order becomes erroneous because such an inquiry where it was necessary on the facts and circumstances of the case had not been made, not because there is anything wrong with the order. The Id Judicial Member also relied on the decision of the Hon'ble Delhi High Court in the case of Duggal & Co v. CIT reported in 220 ITR 456, where the same view was taken. The Id Judicial Member also relied on the Hon'ble Madras High Court decision in the case of CIT v. South India Shipping Corporation Ltd. reported in 233 ITR 546. He also relied on the decision of the Hon'ble Gujarat High Court in the case of Addl. CIT v. Mukur Corporation reported in 111 ITR 312. The Id Judicial Member held that the AO neither conducted proper verification as warranted for ascertaining the correct value of the stock, nor relevant records for the entire year was looked into. Hence, he upheld the order of the CIT.9. The Id counsel for the assessee submitted that consequential order has already been passed by the AO giving effect to the order of the CIT and has taken the income of the assessee as it was taken in the original assessment by the then Jt. CIT, SR II, Aurangabad at Rs 2,92,869/- and as far as the assessee is concerned, it is only academic now.
10. The Id DR, on the other hand, strongly relied on the order the Id Judicial Member. He submitted that it was incumbent upon the AO to conduot proper enquiry before finalizing the order and he had failed to do so and even as far as the very assessment order, the Id DR submitted, the AO has not verified the method of valuation nor any details of such valuation were called for. Secondly, the Id DR submitted that the AO clearly records that he had verified the books of account upto the date of raid. Hence, he submitted that the order of the Id Judicial Member has to be upheld.11. I have heard rival submissions and have gone through the orders of the revenue authorities and the decisions cited before him and also the relevant orders of both the Members. I find that on facts the observations of the Id Judicial Member is not entirely correct. At page 2 of the assessment order, the AO observed: The sale shown has marginally increased so as to the GP. The accounts are quantitatively supported. These very book has been verified upto the date of raid. Further tax audit report is on record. The tax audit report has also considered certain credits like refund, central excise and also debit in respect of interest on certain bank account. These are explained in the tax audit report by way of remark against Col. 22b.
From the above, it is clear that the A.O has not only gone through the books of account which was verified upto the date of raid, as rightly noted by the Id Accountant Member, he had also taken into consideration the tax audit report. The Tax audit report can only be upto the end of the assessment year. The AO has noted that the accounts are quantitatively supported. Therefore, the observation of the CIT that the books of account had been verified only upto the date of raid is not correct. Another reason for invoking the jurisdiction invested in him Under Section 263 was the method valuation of the stock nor any details of such valuation were filed by the assessee. This observation also appears to be incorrect. As rightly noted by the Id Accountant Member that the audit report was before the AO and he specifically observes that he had gone through the audited accounts. Pages 57 to 72 of the paper book is Tax audit report for the assessment year 1990-91.
It is specifically mentioned at page 59 that no deviation in the method of valuation and the method of valuation of closing stock is market price. In view of this, the observation of the CIT that the AO has not considered this point appears to be incorrect.
12. The Id DR relied on the decision of the Delhi Bench in the case of Shyam Telelink Ltd. v. ITO, Wd 8(3) reported in (2006) 99 ITD 576 (Del), wherein the Tribunal held that failure on the part of the AO to make necessary enquiries on certain important points connected with the assessment would make the assessment order passed Under Section 143 as erroneous as well as prejudicial to the interests of revenue. The Id DR also relied on the decision of the Tribunal in the case of Ambika Agro Suppliers v. ITO Wd 2(6) Jalgaon reported in (2005) 95 ITD 326 (Pune) and also the decision in the case of Jewel of India v. ACIT reported in (2003) 87 ITD 527 (Mum).
13. There is no quarrel that if the AO fails to make necessary enquiry which was necessary to be made to reach the truth, the CIT is definitely empowered Under Section 263 to deal with the order in accordance with law. However, in the instant case, the fact as divulged from record does not indicate that there is a clear failure on the part of the AO. The method of accounting was before the AO as per record.
The books of account, according to the CIT, was verified only upto the last date of the block period. But it is also clear that audited accounts were before the AO with supporting evidences for the subsequent period of the assessment year as well. In these circumstances, I am of the view that the order of the Id Accountant Member where he held that there was no failure on the part of the AO and, therefore, the order passed was without jurisdiction, is the right conclusion supported by evidences.
14. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
1. As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire: Whether on the facts and circumstances of the case, Commissioner of Income Tax, Nashik is justified in setting aside the assessment for assessment year 1999-2000 with certain directions Under Section 263 of the I.T. Act 1961? 1. This appeal by the assessee is directed against the order of the learned C.I.T, Nashik Under Section 263 setting aside the assessment for the assessment year 1999-2000 with certain directions.
2. The assessee is a limited company belonging to Bagaria Group of Aurangabad/Bombay. There was an action Under Section 132 on this Group between 29.6.1998 to 2.7.1998. The assessee Company was also covered in the raid. But there were no incriminating document's etc. found during the course of search. The assessee filed Block return on 11.4.2000 showing undisclosed income at Rs NIL. The Block assessment was completed on 12.6.2000 computing the Block income at Rs NIL. Copy of the assessment order is to be found on pages 54 to 56 of the paper book. In para 7 of the said Block assessment, the A.O has noted that there was no incriminating material found. There was a minor difference of 400 Kgs. oil, no account books were seized. Regular returns of the assessee company were filed upto 1998-99 in Bombay. After verification, the A.O came to the conclusion that undisclosed income of the assessee was Rs. NIL. It may be pointed out that for the purpose of Block assessment, the period of Block was starting from the assessment years 1988-89 to 1998-99 plus a broken period from 1.4.1998 to 2.7.1998. For this broken period, the assessee had shown income at Rs. 13,03,103/-.
Since this income as reflected in the books of account, this was not assessed as undisclosed income. The Income is to be found on page 52 of the paper book, which is part of the Block return filed by the assessee.
3. The assessee a Company filed regular return for the assessment year 1999-2000 on 16.12.1999 showing total income at Rs. 2,92,869/-. This period of 12 months covered the broken period from 1.4.98 to 2.7.98 considered earlier in the Block assessment. The return was accompanied by audited balance sheet. as well tax audit report. Copy of this return and its accompaniments are placed on pages 1 to 26 of the paper book and the tax Audit report is given on pages 57 to 72 of the paper book.
It will be seen from the Company's Auditor's report that full quantitative date is were maintained for the manufacturing done by the assessee. This is reflected on page 20 of the paper book. Page 18 of the said Company's report shows remark of the Auditor that inventories, i.e. raw Material, finished goods, packing material and consumable stores are valued at Market price. Page 13 of the paper book gives the valuation of the invantories. The Tax Audit Report is to be found on pages 57 to 72 of the paper book. On page 59 in the column against 'Method of Valuation against closing stock' the remark of the Auditor is that the same is valued at market price and it has been further stated that there is no deviation in the method of valuation.
4. Copy of the assessment order is to be found on page 27 of the paper book. The order shows that the date of hearing was 6.62000, 12.6.2000 and 14.6.2000. Though the order of the A.O is short, he has stated that the assessee had filed before him certain data regarding sales, G.P.etc. as requested. He further noted that sales were marginally increased and so also G.P. He has noted that the accounts are quantitatively supported and these very books are verified upto the date of raid and that further the Tax report is on record. At the end, the A.O has observed that on discussion with Shri Anchalia and on the basis of material available, income returned has been accepted at Rs. 2,92861/-.
5. Later on, the C.I.T issued a notice Under Section 263 by his letter dt. 17.11.2000 received by the assessee on 25.11.2000 (page 73 of the paper book). In this notice, the learned CIT has pointed out that for the first three months of the previous year the assessee had shown income of Rs 13,05,103/- and on that basis, the assessee's income for the whole year should have been nearly Rs 52 lakhs. It is noted that on examination of the records it is found that regular assessment was completed without sufficient scrutiny/verification/enquries For the fall of income in the period subsequent to 1.7.1998. This is only basis on which action Under Section 263 was initiated.
6. The assesses sent its reply by letter dt. 7.12.2000 (pages 72 to 77 of the paper book). In this letter, the assessee pointed out that clarification for the fall in income had a already been given before the A.O and also comparative position of G.P. was also shown. Copies of both these statements were given to the C.I.T by way of Annexure 'A' and Annexure 'B'. It was further pointed out that the fall in G.P. was on account of the fact that there was substantial variation in the market price and the details of stock and its valuation on different dates was given (page 77 of the paper book).Legal submissions were also made that there being no error or prejudice to the Revenue, the action Under Section 263 should be dropped.
7. The learned CIT considered these submissions. On page 2 of his order, the CIT has referred to the lettters which were claimed by the assessee to have been furnished before the A.O According to the CIT, these letters were not found in the case file of the assessee and hence for verification of the genuineness of these documents, the case was adjourned to 15.2.2001, but it appears that subsequently the assessee did not attend. Thereafter, the CIT noted the written submissions of the assessee. It is the contention of the assessee that the entire letter of the assessee has not been considered by the A.O which grievance had been brought in ground No. 3.
8. In the decision part, the learned CIT has nowhere mentioned that the papers and clarifications filed by the assessee were not genuine or were not files. He has, however, observed as under: 1) As far as valuation of stock is concerned, the A.O had not verified the method of valuation of stock nor any details were filed by the assessee and, 2) further that the A.O has verified the books only upto the date of search. From this, he has concluded that for the subsequent period the books were not verified.
On these two points alone, the CIT has set aside the assessment on the aforesaid issue with a further direction that the A.O should make enquiries and give opportunity to the assessee. It is this order of the learned CIT which is challenged before this Tribunal.
9. Shri R.A Sathe, the learned Counsel for the assessee, referred to the actual position and submitted that the facts of the case show that there was nothing untoward found during the search warranting any suspicion or doubts about the reliability of the assessee's accounts.
He further submitted that the assessee's accounts are quantitative, method of valuation of stock has already been indicated by the Auditors and duly verified, details of quantity account had also been duly noted in the Audit report of the assessee. He further submitted that the hearing took place on three occasions and the assessee had already explained the reasons for the fall in the income in the period subsequent to July, 1998 and according to the assessee, the accounts, the accounts of the assessee were fully verified by the A.O and only because the A.O has shown to pass a very brief order on which the assessee has no control, it cannot be presumed that there was no enquiry made by the A.O. The learned Counsel further submitted that notice Under Section 263 was issued only on one ground, viz. that on the basis of first three month's income, the income should have been Rs 52 lakhs as against Rs. 2,02,869/- shown by the assessee, Obviously, this reason has not been given in the ultimate decision of the CIT. The CIT has merely said that the method of valuation of stock is not verified. According to the learned Counsel, actually inspite of the so-called admission of the assessee, the records themselves have clearly pointed out that the method of valuation of stock has come on record in the Company audit as well as tax audit with necessary details. The details of valuation of stock were also given by the assessee in its reply to notice Under Section 263 and enquiry on this point was not called for at all. The learned Counsel further submitted that the CIT has not pointed out how, according to him, there was any prejudice to the Revenue. He rolled upon the decision of the Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd. 203 ITR 108 where the High Court has held that the decision of the ITO cannot be held to be erroneous similarly because in this order he did not make any elaborate discussion in regard to the enquiries made. The learned Counsel accordingly conclude that the CIT was not justified in invoking his jurisdiction Under Section 263 and accordingly, his order setting aside the assessment of the A.O is void ab initio.
10. Shri K. Srinivasan, the learned D.R. strongly supported the order of the learned CIT. He submitted that the fall in the income of the assessee for the period subsequent to the raid is significant and such fall prima facie indicated that further enquiry was necessary. This fact was not verified by the A.O. Further submitted that the explanations given by the assessee were not found on record and that is why the CIT had called for the assessee, but the assessee chose to remain absent. It is not known therefore whether these letters were on record or not. The learned D.R made submissions to indicate doubts whether these letters were really on record or not. He further submitted that various explanations might have been given by the assessee, but unless they are verified, they could not be accepted. In any case, all that the CIT has done was to set aside the assessment and he had not directed any enhancement and the assessee need not feel shy of facing such re-assessment. In support of his contentions, he relied upon the following decisions:Addl. CIT v. Mukur Corporation 11. We have considered the rival submissions and perused the facts on record. A perusal of the order of the CIT reveals that the CIT has not pointed out how, according to him, there was any prejudice to the Revenue. Even though he started with the premise that profit of the first 3 months was Rs. 13 lakhs in view of the explanations which were already before the A.O and which were also given to him, in the course of 263 proceedings, he has not pointed out any material which would warrant that there was any prejudice caused to the Revenue because of non-enquiry. In the face of the fact that the accounts are of a limited company which are duly audited for Companies Act and Tax Audit in view of the fact that they are fully supported and quantitative details are mentioned, it is not understood as to what further enquiry was called for and how any prejudice was caused to the Revenue. In this behalf, we take support from the decision of the Hon'ble Bombay High Court in the case of Gabrial India Ltd. (supra). It has been held by the Hon'ble Bombay High Court that the decision of the ITO cannot be held to be erroneous simply because in his order he did not make any elaborate discussion in regard to the enquiries made. As in the case of Gabriel India Ltd. in the present case also, even after initiating proceedings for revision and hearing the assesses, the learned CIT has not pointed out any material to show the results shown by the assessee were erroneous. His asking the A.O to re-examine the matter was not permissible. Reference is invited to the following observations of the Bombay High court at page 117 of the Judgment in 203 ITR 108: Further inquiry and/or fresh determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the ITO was erroneous and prejudicial to the interests of the Revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and It is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.
12. Similarly, merely because the A.O wrote a cryptic order though after due enquiry could not be the reason for setting aside the order and to make enquiries on a point which has been already brought on record and which does not, on the face of it, show any prejudice caused to the Revenue, as held by the Bombay High Court in Gabriel India Ltd. (supra), and the Gujarat High Court in the case of Rayon Silk Mills v.CIT 221 ITR 155.
13. A further perusal of the impugned order shows that the case of the ld. CIT is that the books for subsequent period are not verified. Such contention is not warranted, because the A.O has already noted that the books upto the end of 2.7.1998 were verified and further period covered by the audit report. Thus, action Under Section 263 was taken on one point and direction is issued on some other point. It is not permissible for the CIT to give a direction for verification on a point not taken in the notice Under Section 263. For this purpose, reliance is placed on the decision of the Calcutta High Court in the case of CIT v. General Trade Agencies (1973) TLR 1383 (Cal). Reference is further invited to the judgment of the Punjab & Haryana High Court in the case of CIT v. Jagadhri Electric Supply & Industrial Co. 140 ITR 490 where the Hon'ble High Court has held as under: The Commissioner has the exclusive jurisdiction Under Section 263(1) of the Act to revise the order of the ITO. The order of the Commissioner passed under Section 263(1) will contain the grounds for holding the order of the ITO to be erroneous, as contempoated by the section. In the appeal against an order Under Section 263(1), the assessee is to attack the order of the Commissioner and to challenge the grounds of decision given by him in his order. If the assessee can satisfy the Tribunal that the grounds for the decision given in the order by the Commissioner are wrong on facts or are not tenable in law, the Tribunal has no option, but to accept the appeal and to set aside the order of the Commissioner on any other ground which, in its opinion, was available to the Commissioner as well. If the Tribunal is allowed to find out the ground available to the Commissioner to pass an order Under Section 263(1), then it will amount to a sharing of the exclusive jurisdiction vested in the Commissioner which is not warranted under the Act.
14. Coming to the arguments of the learned D.R. we have to state that though the notice was issued for the reason that there was a variation in the income in the period subsequent to the raid, such stand was abandoned, as is clear from the decision portion of the CIT's order.
Considering the explanations given before the A.O and brought to the notice of the CIT, there was sufficient justification for the fall in G.P. and in fact yearly pro it has shown improvement over earlier year's G.P. The argument made by the learned D.R. that the letters which were claimed by the assessee to have been filed before the A.O were not found on record etc. is not justified, in view of the fact that in the decision part of the order the CIT has nowhere observed that these letters were not on record or that they were not genuine etc. In fact, what the learned D.R is trying to do is supporting the order of the CIT on the grounds which are not taken in the order Under Section 263. This is not permissible in view of the decision of the Punjab & Haryana High court in the case of Jagdhri Electric Supply & Industrial Co. (Supra. As regards the argument of the learned D.R that the assessee need not feel shy of re-assessnent, we make reference to the decision of the Chandigarh Bench of the Tribunal in the case of N.S. Icchopani v. ACIT 55 ITD 88-chd. where the Bench has observed as under: Setting aside an assessment is no ordinary matter. In fact, in tax laws as in other laws, certainty and finality are the pre-requiries of a good tax administration. The orders of the subordinate authorities should, therefore, not be cancelled or set aside on mere which and fancies; there must be very compelling reasons for interference by the Commissioner Under Section 263.
In our opinion, the CIT has to come to a definite conclusion that the order passed by the A.O was erroneous and prejudicial to the interest of Revenue. The CIT cannot sit in judgment over the discretion exercised by the A.O. As regards the decision cited by the learned D.R.the decision of the Supreme Court has in terms approved the decision or the Bombay High Court in Gabriel India Ltd. on which the assessee has relied and to which reference has been made supra. Moreover, the decision of the Supreme Court went on the facts of the case where it was found as a fact that no enquiries were in fact carried out by the A.O. in the said case and thus the case of the assessee in the resent case can be distinguised on facts, but on principles laid down by the Supreme Court itself in the present case the order of the CIT cannot be sustained. As regards the decision of the Madras High Court in 233 ITR 546 and Madhya Pradesh High Court in 171 ITR 141, theses are distinguishable on facts as they do not apply to the facts of the case.
The decision of the Gujarat High Court in 111 ITR 212 is regarding the powers of the CIT in passing such orders as he deem fit, but in doing so, he must show that there is a prima facie prejudice caused to the Revenue before directing any set aside of the order.
15. In the light of above discussion, we hold that the learned CIT is not justified in setting aside the order of the A.O by exercising his jurisdiction Under Section 263. The impugned order is accordingly quashed.
1. I have had an occasion to go through the proposed order of the learned Accountant Member, but despite persuasion to myself, I have not been able to agree with his findings and conclusions and I write my reasons for the same as under.
2. The assessee is a limited company. There was an action Under Section 132 on 29.6.1998 to 2.7.1998 with other cases of the same group, but no incriminating documents was found during the course of search. The assessee filed Block return on 11.4.2000 showing undisclosed income at Rs Nil, The Block assessment was completed on 12.6.2000 computing the block income at Rs Nil. In para 7 of the said block assessment the A.O had noted that there was no incriminating material found. There was a difference of 400 Kgs. oil, no account books were seized. Regular returns of the assassee company were filed upto 1998-99 in Bombay.
After verification, the a.C came to the conclusion that undisclosed income of the assessee was Rs Nil. The period of block was starting from assessment years 1988-89 to 1998-99 plus a broken period of 1.4.1998 to 2.7.1998. For this broken period, the assessee had shown income at Rs 13,05,103/-. Since this income was reflected in the books of account, this was not assessed as undisclosed income.
3. The assessee company filed regular return for the assessment year 1999-2000 on 16.12.1999 showing total income at Rs 2,92,869/-. This period of 12 months covered the broken period from 1.4.1993 to 2.7.1998 considered earlier in the Block assessment. The return was accompanied by audited balance sheet, as well as tax audit report. The case of the assessee was taken up for scrutiny and after due opportunity to the assessee, following assessment order was passed on 20.6.2000: The return of income has been filed on 16.12.99 (in time) before the AC, Mumbai where this group of cases was assessed to tax. As there was action Under Section 132 in June 1998 later these cases were assigned to this Range. The cases in this group were physically received on transfer between November 1999 to March 2000. 158BBC proceedings in respect of this company is already over and during the course of block assessment proceeding the assessment for AY 99-2000 were also taken up and Shri Anchalia has been present voluntarily to explain the case. He has also filed certain data regarding sales, GP etc. as requested. It is explained by him that the depreciation calculation is as in the earlier year as per income tax proceedings. The sale shown has marginally increased so also the GP. The accounts are quantitatively supported. These very book has been verified upto the date of raid. Further tax audit report is on record. The tax audit report has also considered certain credits like sales-tax refund, central excise and also debit in respect of interest on certain bank account. Those are explained in the tax audit report by way of remark against col. 22b. On discussion with Shri Anchalia and on the basis of the material available on record the income returned is accepted.
4. The C.I.T, Nashik noted that verification of the case records revealed that the assessment order passed by the Jt. CIT, Spl. Range 2, Aurangabad Under Section 143(3) on 20.6.2000 for the assessment year 1999-2000 is erroneous insofar as it is prejudicial to the interest of Revenue for the following reasons: The A.O has failed to make necessary verifications/enquiries as to why the total income for the a.Y. was only Rs 2,92,869/- as against the income for the first 3 months of the same year being Rs 13,05,103/- i.e. if the income for first three months was Rs 13,05,103/- the income of the whole year should have been nearly Rs 52,00,000/-. Examination of case records further revealed that the regular assessment has been completed by the A.O. accepting the return filed by the assessee without sufficient enquiry/scrutiny/verification etc. for the fall of income in the business for the period 1.7.98 to 31.3.99 as compared to the income of the first quarter of the accounting year of Rs 13,05,103/- shown in the block return filed by the assesses. If the income for the period of 12 months falling in the accounting year 98-99 is estimated on the basis of Rs 13,03,103/- for the period of 3 months i.e. first quarter of the same asstt. year, then it should be at over Rs 52,00,000/- instead of Rs 2,02,869/- shown by the assessee.
Records indicate that the AO has failed to conduct necessary verification/enquiries to ascertain the reason for fall in the returned income to Rs 13,05,103/- for the 1st quarter itself and has rendered the assessment erroneous for the reasons mentioned above.
As the A.O failed to consider the above aspects during the course of assessment Under Section 143(3) of the I.T.Act, a show cause notice was issued Under Section 263 on dt. 17.11.2000 fixing the hearing on 3,12.2000 in compliance with the same Shri Ramesh Kumar Bagdia the Director of Company and Shri M.B. Agarwal, C.A attended and furnished written submission. The case records were examined in the presence of Shri Bagdia and Shri Agarwal and it is found that the A.O has not verified the method of valuation of stock nor any details for such valuation were filed by the assessee i.e. no enquiry was made on this point vide order sheet entry dt. 8.12.2000 page No. 2. The case was adjourned to 13.1.2001 for further verification. Again on dt. 18.1.2001 Shri Ramesh Bagdia again attended and furnished some letters which he claimed to have furnished before the A.O during the course of scrutiny Under Section 143(3). These letters were not found in the case file of the assessee hence for the examination of genuineness of these documents case was again adjourned to 15.2.2001. Due to some urgent official work it was not possible to conduct the hearing on 15.2.2001 hence the assessee was requested on his telephone No. 334438 at 11.30 a.m.
of 13.2.2000 that the case has been adjourned to 26.2.2001. The information of adjournment was given 2 days in advance and assessee also agreed to attend on 26.2.2001, nevertheless assessee did not attend on 26.2.2001 nor any application of adjournment was submitted.
The sum and substance of the written submissions of the assessee were noted as under: 1) Vide para 4 of the letter of the assessee it is said that the company is following the method of valuation of stock at end, at market value prevailing on that date. Based on the market value of the stock, the company has declared the income of Rs 13,05,103/- for the period ended 29.6.93. This was disclosed in Form 2B for the block period.
2) Vide para 5 of the letter it is said that the ld. A.O has considered various submissions made by the company and the order was passed after considering the submissions.
3) vide para 12 of the letter it is said that the main reason for the difference in profit is due to the price difference in the valuation of the stock. The company has valued its stock at the market value.
The above mentioned issue has been carefully considered with reference to the material available on record, the written submission filed by the assessee during the proceedings and the discussion in the matters with the assessee and his Chartered Accountant. After considering the same it is found that (i) So far as the valuation of stock is concerned, the Director of the assessee himself admitted on 8.12.2000 that the A.O. had not verified the method of valuation of stock nor any details were filed by the assessee i.e. no enquiry was made on this point (vide order sheet entry dt. 8.12.2000 page No. 2).
(ii) So far as the enquiry by the A.O is concerned, the A.O in the assessment order on page No. 2 has written as follows: These very book has been verified upto the date of raid," From this sentence, it is clear that the AO had verified the books of a/c of the assessee upto this date of search and from the date of search to 31.3.99 the A.O could not verify the books of a/cs.
Since there has boon a failure on the part of the A.O with regard to aforesaid vital issue which has a close and significant bearings on the determination of correct total income of the assessee, the asstt. order passed by the JCIT SR 2 Aurangabad is rendered as erroneous in so far as it is prejudicial to the interest of revenue.
Therefore, in exercise of power conferred upon by the Section 263 of the I.T.Act 1961, the above referred assessment order is set aside on the aforesaid issue with directions that the assessment order should be re-framed by the A.O after proper enquiries and allowing reasonable opportunity of being heard to the assessee.
5. So far as the arguments of both sides are concerned, those are found to have been appropriately recorded in the proposed order and hence not repeated and adopted as such, except the citations given by the ld.D.R. So in addition to the citations recorded, reliance was also placed on the decision of Hon'ble Delhi High Court in Gee Vee Enterprises v.Addl. CIT 99 ITR 375 - Del, Hon'ble Madhya Pradesh High Court in CIT v.Ratlam Coal Ash Co. 171 ITR 141 - M.P.; Hon'ble Delhi High Court in Duggal & Co. v. CIT 220 ITR 456 - Del; and Hon'ble Madras High Court in CIT v. South India Shipping Corporation Ltd. 6. After hearing both the sides and considering the material on record and Case law cited by rival sides, I find that the action of the ld.C.I.T is justified, because even as per admission of the Director of the assessee. company, the A.O had not verified the method of valuation of closing stock nor any details, as details recorded in impugned order, were furnished by the assessee, i.e. no enquiry was made on this point and even as per the assessment order the A.O has verified the books upto the date of raid and not thereafter. So, there was a failure on the part of the A.O with regard to vital issue which has a close and direct bearing on the determination of the correct total income of the assessee, as even alleged reply furnished is not found on record of A.O and when it was confronted to the assessee's counsel, despite seeking time he did not come to reply it on next date of hearing. Therefore, the assessment order passed by the A.O has rightly been found to be erroneous in-so-far as it is prejudicial to the interests of Revenue and appropriately set aside to be made afresh when assessee will get further opportunity. Similar situation arose before the Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT 99 ITR 375 in which it was held: It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the ITO. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the ITO should have made further inquiries before accepting the statements made by the assessee in his return.
The reason is obvious. The position and function of the ITO is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry.
It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word 'erroneous' in sec, 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.
To the same effect is another decision of Hon'ble Delhi High Court in the case of Duggal & Co. (supra) wherein, while explaining the meaning of 'erroneous' and 'failure' of the ITO to investigate facts has been held to be revisable. The relevant observations of the Hon'ble Delhi High Court are; The ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is incumbent on the ITO to further investigate the facts stated in the return, when circumstances would make such an inquiry prudent and the word 'erroneous' in Section 263 of the I.T.Act, 1961, includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.CIT v. South India Shipping Corporation Ltd. Revision - Powers of Commissioner - Commissioner finding that ITO allowing claim for weighted deduction without verifying nature of expenses and under what sub-clause of Section 35B(1)(b) claim would fall - Commissioner coming to prima facie conclusion that order of ITO Prejudicial to interests of Revenue-Commissioner not debarred from exercising his revisional jurisdiction i the absence of his final conclusion in matter- Income-tax Act, 1961 Section 263.In Addl. CIT v. Mukur Corporation 111 ITR 312, the Hon'ble Gujarat High Court held: Held, that the words 'prejudicial to the interests of the revenue in sec, 263 have not been defined but they must mean that the orders of assessment challenged arc such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. In the present case, it was obvious that the ITO had committed an error in not making enquiry into the details as regards both the deductions and also that want of such enquiry had resulted in prejudice to the interests of the revenue.
To this extent, the initiation of action Under Section 263 by the Commissioner was quite proper.
There is nothing in Section 263(1) to show that before passing the final order under that section, the Commissioner must necessarily and in all cases record final conclusions about the points in controversy before him. Since the Commissioner did not settle the assessment finally, but preferred to direct the ITO to make an order for fresh assessment, the only proper course for the Commissioner was not to express any final opinion as regards the controversial points.
Sec.263 also requires such enquiry as the Commissioner "deems necessary". It was contended for the assessee that the Commissioner had committed an error in not allowing the assessee to cross-examine Dr Vyas. It is not in every case that the Commissioner is expected to make an enquiry before the original assessment order is cancelled and the ITO is directed to make a fresh assessment. The section specifically says that that enquiry should be as 'deemed necessary' by the Commissioner. Here, the Commissioner has given direction to the ITO to give proper opportunity to the assessee to substantiate its pleas as well as to cross examine Dr Vyas. Therefore, on the facts of this case, the Commissioner was not bound to make any enquiry before passing the final order and in substance no prejudice was caused to the assessee by failure of the Commissioner to give it an opportunity to cross examine Dr. Vyas.
In Malabar Industrial Co. Ltd. v. CIT 243 ITU 33 the Hon'ble Supreme Court held: Held, dismissing the appeal, (i) that in the instant case, the Commissioner noted that the ITO passed the order of 'nil' assessment without application of mind. Indeed, the High Court recorded the finding that the ITO failed to apply his mind to the case in all perspective and the order passed by him was erroneous. The resolution passed by the board of the appellant company was not placed before the A.C. 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 ITO was erroneous was irresistible. The High Court had rightly held that the exercise of jurisdiction by the Commissioner Under Section 263(1) was justified.
7. Considering the ratio of the above-noted decisions and adverting to the facts of the present case, the action of the ld. CIT cannot be held to be improper and unjustified, because neither proper verification as warranted for ascertaining correct value of stock has been found to have been done by the A.C nor relevant record for the entire year has been looked into and considered before passing the order of assessment.
As such, the order of the CIT passed Under Section 263 is confirmed and the appeal of the assessee gets dismissed.
8. So far as the case of Gabriel India Ltd. (supra) is concerned, the same is distinguishable on facts, because there is dis-agreement with respect to conclusion by the A.O, whereas facts of present case are entirely different and this case-law cannot be applied. Similarly, other cases on which reliance has been placed by the assessee are distinguishable on facts in as much as the Gujarat High Court decision is with regard to writing cryptic order and not on the point that proper query or investigation was not conducted.