M/S. PYROTECH ELECTRONICS PVT. LTD.,UDAIPUR vs. PR. CIT, UDAIPUR

O R D E R PER: SANDEEP GOSAIN, JM The assessee has filed an appeal against the order of the ld. Pr,CIT, Udaipur for the assessment year 2017-18 in the matter of Section 263 of the Act. The grounds of appeal raised by the assessee are as under:-

2 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR 1. That the Impugned order u/s 263 of the Act dated 18.02.2020 and notice u/s 263 are bad in law and on facts of the case and hence the same may kindly be quashed.

2. That the ld. Pr. CIT Udaipur is grossly erred in law as well as on the facts of the case in invoking S. u/s 263 of the Act. The same is being purely contrary to the provisions of law, therefore the impugned order u/s 263 as well as notice u/s 263 of the Act may kindly be quashed.

(f). that during the year, the assessee has obtained loans and advances from various persons and also have advanced loans to various persons as per details as given as per column No. 31 of the Audit Report u/s 44AB of the Act. However, it is seen that creditworthiness and identities of the lenders from whom loans and advances are taken and also the genuineness of transactions of loans are not verified by way of calling relevant details and evidences which are contrary to the facts and such a finding being perverse, the impugned action is bad in law without jurisdiction and being void ab initio, the impugned order u/s 263 may kindly be quashed.

3 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR 2.1 Apropos Ground No. 1 to 3 of the assessee, brief facts of the case are that the assessee is a Pvt. Ltd Company incorporated in the year 1988. Assessee company has three manufacturing units located at Mewar and main source of income is from business. The company is engaged in manufacturing and trading of the LED lights, Drivers and process control Instruments -Indicator, Controllers, Transmitters, Transducers, Scanners, Power Supply and PLC , Control Panels, Control Desks, Local Instruments Enclosure and Local Instruments Racks (LIE & LIR), Junction boxes, Cubicles, Test Benches, MCC Panels etc. The assessee filed its ROI for the year under consideration on 31.10.2017 showing the total income of Rs.3,48,31,230/-. The assessee is also being assessed under scrutiny regularly as per earlier years assessment order filed by the assessee before us which are available in the Paper Book pages 113 to 136. The AO has completed the scrutiny assessment u/s 143(3) on 30.03.2019 at the returned income. Thereafter the ld. Pr. CIT, Udaipur initiated the proceedings by issuing notice u/s 263 of the Act on 16.12.2020 wherein he has raised the following issues.

“(i). There is fall in G.P. during the year A.Y. 2017-18 which is 18.87% as compared to preceding years as in A.Y. 2016-17 at 19.12% and in A.Y. 2015-16 at 19.34%.

(ii). The correctness of the valuation of raw materials, semi-finished goods and finished goods have not been verified by the AO at the time of assessment proceedings. In absence of proper verification of stock the assessment order u/s 143(3) passed by the AO is erroneous in so far as it is prejudicial to the interest of revenue. (iii). It is seen that genuineness and reasonableness of payments made by the assessee company to the persons covered u/s 40A(2)(b) of the I.T. Act have not been verified by the AO. Similarly, the assessee company has made purchases of raw material, intermediaries and finished goods from the companies which are under control of the Directors of the assessee company. The genuineness and reasonableness of these transactions are also not verified by the AO.

4 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR (iv). The assessee company has claimed some major expenses in the profit and loss account and the A.R. has filed copy of ledger accounts in respect of some of the expenses and it is seen that some major expenses are not verified by the AO by calling for, relevant details and evidences. (v). There have been additions to fixed assets during the year under consideration and it is seen that this aspect of the case has also not been verified by the AO by way of obtaining evidences i.e. purchase bill etc. for the assets purchased. The AO has also not verified as to when and how there have been additions to the fixed assets and how and at what rate depreciation has been claimed on such assets. (vi). During the year, the assessee has obtained loans and advances from various persons and also have advanced loans to various persons as per details as given as per column No. 31 of the Audit Report u/s 44AB of the Act. However, it is seen that creditworthiness and identities of the lenders from whom loans and advances are taken and also the genuineness of transactions of loans are not verified by way of calling relevant details and evidences. It is also noted from the record that ld. AR of the assessee filed his reply dated 02.02.2021 which are available at PB 13 to 17 with details. The ld. Pr. CIT discussed the reply of the ld. AR of the assessee by giving finding at Page 4 to 10 of in his order. From the order the of Pr. CIT, it is observed that for all the issues he has stated that these issues require thorough verification, examination by the AO, especially in view of the fact that the case has been selected for complete scrutiny, the ld. Pr. CIT has also directed to the ld. AO to obtained the necessary or more documents. The ld. Pr. CIT has also held that these issues remained unverified and required detailed examination and on these basis the ld. Pr. CIT has passed the impugned order and directed to the AO to pass the fresh assessment order.

2.2 Before us the ld AR filed the detailed written submission and paper book and argued the case at length. The ld. A/R has stated that the Assessing Officer has already verified and examined all the issues as raised by the ld. Pr. CIT in proceedings u/s 263, as the ld. Assessing Officer has already raised many query in the notice u/s 5 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR 142(1) and thereafter also raised other queries during the course of assessment proceedings and the assessee had filed the replies with annexure of all the issue, he has also stated many issues are covered in one another query as on G.P. rate issue covers the issue of valuation of closing stocks and purchases as all are the part of trading results. The ld. A/R also stated that the AO has taken a possible view after considering all the material, details and application of mind and passed assessment order. The ld A/R has also stated that the ld. AO has only see the G.P rate and expenses and other side the ld. Pr. CIT has ignored the N.P rate of 2.85% declared by the assessee for the years which is very higher side in comparison to earlier years which was only 1.15% whereas the fall in G.P. rate was only 0.25%. The ld. AR has also stated mainly followings

3. Only G.P. rate and expenses issue seen by the Pr. CIT not N.P. rate: The ld. Pr. CIT has alleged regarding the lower G.P. rate, expenses etc. and according to him the assessee has concealed the income and the income should be more than to the declared. In this regard it is submitted that the ld. Pr. CIT has only see the G.P. rate. However Pr. CIT has ignored the very vital facts that the N.P. rate is very higher side in comparison to last year. The Fall in the G.P. only 0.25% and at the same time the N.P. rate is increased by 1.70% as the assessee has declared 2.85% N.P. rate as against 1.15% in the previous years. The assessee has declared more net profit of Rs. 3,17,18,921/- and paid more tax. As per the Pr. CIT the Net Profit of the assessee should be 1.15% as per last years. Thus in the business the GP rate, NP rate expenses cannot be same these may be increase or decrease.

6 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR Hence the conclusion of the Pr. CIT that the order is prejudicial to the interest of the Revenue is not a matter of subjective satisfaction of the Pr. CIT. He, therefore ought to have found out this on the basis of Objective material after assessing the contention raised by the assessee in its reply to the show cause notice. He, however failed to do so and reached a conclusion that the order was prejudicial with a view that the present AO shall undertake that exercise after the assessment has been setaside for his consideration. Such a view or action is not well founded in the law or by various Hon’ble courts. 6.1 No fix formula or limit or extent of Inquiry: Thus, here it is wrong or incorrect case of the Pr. CIT that no inquiry or examine has been made by the AO on these issues. The AO has made the inquiry on the above issues. On perusal of the query letter and replies and when the accounts of the assessee, cash book, bank book books of accounts all the transaction has been shown there and explained and the AO made inquiry and assessee filed all the details related thereto. No one (AO) can read the mind of other person (Pr. CIT) while doing the work on its sprite and cannot guess the expectation or manner of his superior authority. Here the meaning is that non making of an enquiry may render the subject assessment erroneous, however the process of making enquiries may be endless. For someone, some enquiries may be sufficient (here AO), however, the same may be insufficient for the other (here Pr. CIT). There is no definition of proper inquiry in the act. There is no straight jacket formula or parameter to make inquiry in the assessment proceedings. What is required is that the AO should frame the assessment in accordance with the provisions of the Act, as interpreted and in the light of the relevant judicial pronouncements, as available on the date of framing the assessment or material available before him. The AO being a quasi-judicial authority can also take support from one set of the decisions, if there, in case is a diversions of opinion. He can’t be directed to make an assessment in a particular manner, as specifically prohibited by S. 119. 8.1 No requirement of deep investigation: Thus, on the perusal of the order of the Pr. CIT it is very clear that he was of the view that the AO must have made deep investigation or inquiry and in the case of Arvind Bhartiya Vidhyalaya Samiti v/s ITO 94 TTJ 614(Jp). Where in held that Deep investigation is outside of the preview of assessment procedure”. And also held there is no case laws which say for deep investigations Because there is no limit of deep investigation. In the Act also no reference of the Deep inquiry or investigation. Also refer Gaberial India Ltd. 203 ITR 108 (Bom). That is why Hon’ble SC held in Malabar Fisheries Industries Ltd. 243 ITR 82 (SC) that in each and every type of mistake/ error cannot be made a basis to invoke Sec.263. The case laws available on the subject on this aspect, are distinguishable in as much as those were the cases where no inquiries at all (or very minor reflecting from a short assessment order), which is not at all a case here. Also refer Gyan Chand Gupta V/s PR. CIT 135 TTJ 01(Jp), M/s. Om Rudra Priya Holiday Resort Pvt. Ltd. vs. Pr. CIT (2018) 54 CCH 0597 JaipurTrib There apart he has also made various submissions available before us and has also stated that in the earlier years the regular assessments under scrutiny were completed where the 7 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR G.P. rate was also less then to 18.87% which were accepted under the scrutiny assessment and filed the copies those assessment orders before us at PB 113- to 136 and also no additions on those other issues have been made and there is no change in the method etc, the books of accounts are duly audited u/s Income Tax as well as Company Act. In support, the ld A/R has also drawn our attention towards the following judgments.

8 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR 2.3 On the other hand, the ld. DR has supported the order of the ld. Pr. CIT and stated that the AO has not done proper and detailed inquiry, verification and examination which was necessary and there is lack of inquiry.

2.4 After going through the assessment details, replies, written submission, paper book filed by the assesse and arguments of the ld. DR , we found that in the present case the Assessing Officer has issued notice u/s 142(1) on 19.03.2019 available at PB 1-2, wherein he raised 16 queries as under

1. Brief description about nature of business.

9 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR 15. Furnish details of deduction claimed on account scientific research. All necessary details/evidences should be furnished in support of such claim made. What claim was made in the preceding year on this account. 16. Furnish details of custom duty paid by you during the year. If such payment has been made, why it is not appearing in the P&L account of the ITR.”

In response thereto, assessee filed the reply dt. 27.03.2019 which are available at PB 3-6. On perusal of the reply, it is also found that the assessee has also filed the supporting documents and details with this reply. And also filed reply dt.28.03.2019 which are available at PB 7 to 9. On perusal of both the replies, it is revealed that the Assessing Officer has also raised the query regarding the deduction claimed u/s 80IA and disallowance of PF and ESI. On the above details, records and facts it is found that the Assessing Officer has already made examination and verification of the details and documents on the issues raised by the Pr. CIT and all the issues raised by the ld. Pr. CIT are already covered by the Assessing Officer in the query letter dt.19.03.2019 and queries raised by him and some of query may be connected to in one another. Thus after proper examination, verification and application of mind the Assessing Officer has passed the assessment order by taking a plausible view. Further on perusal of the issue raised by the ld. Pr. CIT it is also observed that all the issue are related to the addition and disallowance on various accounts, which may result in the trading additions, net income and in net profit. When the ld. Pr. CIT has already raised the issue regarding the fall in G.P. rate and if G.P. rate, if any, is applied, then in the trading result all the other issues are covered i.e closing stock or valuation of closing stock, purchases, trading result etc also include or Net profit rate is applied if any after rejecting the books of accounts, then there is no requirement of making various 10 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR separate disallowances and additions is also the settled law. Further as the G.P. rate slightly down by 0.25% in comparison to last year but at the same time the N.P. rate is on very higher side i.e 2.85% as against the last year 1.15% which have also been ignored by the ld. Pr. CIT. For the sake of convenience and brevity in the matter, the Bench feels to note down the provisions of Section 263 of the I.T. Act “263. (1) The Pr. Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the [Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.” [Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.]’’ It is noteworthy to mention that the above Explanation is not applicable in the present case looking to above facts and record because it cannot be said that :-

(a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; As we have already stated above regarding the inquiries or verification and relief allowed by the Assessing Officer after making proper inquires, verification and 11 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR application of mind. As regards the condition (c ) and (d) of the explanation 2,it is noted that ld. Pr, CIT has stated nothing. Hence, if all the above conditions are absent then it cannot be termed that the order of the Assessing Officer is as erroneous and Prejudicial in the interest of revenue. , It may be case of the insufficient inquiry in the opinion of the ld. Pr. CIT but it can be the case of sufficient inquiry in the opinion of . AO who has made the assessment after going through the details, replies filed by the assessee and past history of the assessee. Thus View taken by the AO is one of the possible views and the order of the AO cannot be termed as erroneous. There are various judicial pronouncements wherein it has been held that if the AO has taken one of the possible views then it cannot be said that the order of the AO as erroneous and Prejudicial in the interest of revenue. To this effect, the decision in the case of Dorabji Tata Trust vs. DCIT (EXEMPTION) 28th December, 2020 (2021) 209 TTJ 0409 (Mumbai) delivered by the honble President and vice president held as under:

“20. Undoubtedly, the expression used in Explanation 2 to Section 263 is “when Commissioner is of the view,” but that does not mean that the view so formed by the Commissioner is not subject to any judicial scrutiny or that such a view being formed is at the unfettered discretion of the Commissioner. The formation of his view has to be in a reasonable manner, it must stand the test of judicial scrutiny, and it must have, at its foundation, the inquiries, and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant- that an Assessing Officer is expected to be. If we are to proceed on the basis, as is being urged by the learned Departmental Representative and as is canvassed in the impugned order, that once Commissioner records his view that the order is passed without making inquiries or verifications which should have been made, we cannot question such a view and we must uphold the validity of revision order, for the recording of that view alone, it would result in a situation that the Commissioner can de facto exercise unfettered powers to subject any order to revision proceedings. To exercise such a revision power, if that proposition is to be upheld, will mean that virtually any order can be subjected to revision proceedings; all that will be necessary is the recording of the Commissioner’s view that “the order is passed without making 12 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR inquiries or verification which should have been made”. Such an approach will be clearly incongruous. The legal position is fairly well settled that when a public authority has the power to do something in aid of enforcement of a right of a citizen, it is imperative upon him to exercise such powers when circumstances so justify or warrant. Even if the words used in the statute are prima facie enabling, the courts will readily infer a duty to exercise a power which is invested in aid of enforcement of a right—public or private—of a citizen. [L Hirday Naran Vs Income Tax Officer [(1970) 78 ITR 26 (SC)]. As a corollary to this legal position, when a public authority has the powers to do something against any person, such an authority cannot exercise that power unless it is demonstrated that the circumstances so justify or warrant. In a democratic welfare state, all the powers vested in the public authorities are for the good of society. A fortiorari, neither can a public authority decline to exercise the powers, to help anyone, when circumstances so justify or warrant, nor can a public authority exercise the powers, to the detriment of anyone, unless circumstances so justify or warrant. What essentially follows is that unless the Assessing Officer does not conduct, at the stage of passing the order which is subjected to revision proceedings, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant- that an Assessing Officer is expected to be, Commissioner cannot legitimately form the view that “the order is passed without making inquiries or verification which should have been made”. The true test for finding out whether Explanation 2(a) has been rightly invoked or not is, therefore, not simply existence of the view, as professed by the Commissioner, about the lack of necessary inquiries and verifications, but an objective finding that the Assessing Officer has not conducted, at the stage of passing the order which is subjected to revision proceedings, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant that the Assessing Officer is expected to be.

14 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR

Further in the case of CIT v/s Ganpat Ram Bishnoi 296 ITR 292 the Honble Raj. High Court held ‘’that the record of proceedings clearly shows that the AO has framed his assessment after due application of mind and holding enquiries into all areas, which, according to the CIT have not been at all enquired into and the AO has acted merely on furnishing evidence on one single date. The Tribunal noticed that as per the record of the proceedings, the AO required the assessee to produce documents or material in relation to 10 different items, which included the details of capital contributed by partners, details of purchases made in excess of Rs. 20,000 with evidence, confirmation of unsecured loans, amongst other matters, which the AO desired to enquire into. The assessee has produced desired information. The AO studied the sundry creditors, unsecured loans and desired to furnish affidavits of unsecured loans and details of interest paid. The AO again required the assessee to furnish the details of partners capital accounts and also to produce voucher for expenses and the matter was adjourned. After that, assessment was completed by passing assessment order. These matters clearly indicate that the AO particularly 15 ITA 3/JODH/2021 PYEROTECH ELECTRONICS PVT LTD VS PR. CIT, UDAIPUR made reference to the matters, which the CIT has opined were not inquired. Thus, according to the Tribunal, the foundation to exercise power under s. 263 was not existing. In the aforesaid circumstances on the finding reached by the AO, no question of law really arises for consideration in this appeal. From the record of the proceedings, no presumption can be drawn that the AO had not applied its mind to the various aspects of the matter. In such circumstances, without even prima facie laying foundation for holding that assessment order is erroneous and prejudicial to interest in any matter merely on spacious ground that the AO was required to make an enquiry, cannot be held to satisfy the test of existing necessary condition for invoking jurisdiction under s.