AC CONSTRUCTION,KOLKATA vs. ITO, KOLKATA

After hearing the rival contentions and perusing the material on record and evidences filed in the form of bills , vouchers and payment details in respect of labour charges paid by the assessee during the year, we note that these payments were made

A bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO,Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon’ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263. (i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law. (vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. (vii) The AO exercises quasi- judicial power vested in his and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion. (viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction. (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be Assessment Year: 2007-08 AC Construction erroneous simply because in his order he does not make an elaborate discussion in that regard.11. Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto reported in 227 CTR 113 and Gee Vee Enterprises Ltd vs. Addl. Commissioner of Income Tax (99 ITR 375). In the case of Sun Beam Auto, the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. If there is a lack of enquiry, then the assessment order can be branded as erroneous. The following observations of the Hon'ble Delhi High Court are worth to note: “12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open”.

In the case of Gee Vee Enterprise vs. Commissioner of Income Tax reported in 99 ITR page 375, the Hon’ble court has expounded the approach of ld. Assessing Officer while passing assessment order. The observation of the Hon’ble court on pages 386 of journal read as under:- “…it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer 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 Income-tax Officer is very diffident from that of a civil court. The statement 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 Income-tax Officer is not only on adjudicator but also an investigator. He cannot remain passive in the face of the return which is apparently in order but called 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 Income-tax Officer to further investigate the facts stated in the return when circumstances would made such an inquiry prudent that the word ‘erroneous’ in section 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.”

In the light of above, let us examine the facts of the present case. We have taken cognizance of the show-cause notice, we deem it appropriate to take note of the assessee’s submission dated 28.11.2007 filed before the ld. Assessing Officer, which reads as under:- “Before The Addl. Commissioner of Income Tax, Range-28, Kolkata. 2, Gariahat Road (South) Kolkata-700 068. Re : In the matter of M/S. Kinnar Kinnaree, 98,

Query : Why TPS Not deducted on commission paid against card sales of Rs.70,90,580/- REPLY :That we have not paid any commission against credit card sale and it is not applicable and there is no question to deduct TDS on credit card sale. ITEM L/F AMOUNT(Rs.) Panjabi & Pajama Credit card sale 102 46,10,527.00 Silk Saree Credit Card Sale 121 14,23,003.00 Cotton Saree Credit Card Sale 112 10.57.050.00 Total Credit card sale 70,90,580.00 Total bank Credit Card Received 70.23.726.86 The said amount relates to sales proceeding through credit card to different customers and the above amount relate to sale, therefore, no TDS is liable to be deducted against such credit card sales. In the audited balance sheet there is no expenses has been shown as commission paid as no TDS was deducted. Our total credit card sales for above said goods of Rs.70,90,580/-, copy of ledger account is enclosing herewith. It would be pertinent amply clear that while effecting such sales against use of credit card crediting such amount against sales use to deduct “Discount” from gross sale proceeds and the balance is being credited to our amount. In the process during the material period an amount of Rs.66,853.14 was deducted by our banker and the same was accounted for under the head of Commission paid . Therefore, your goodself is requested Rs.70,90,580/- should not be added and allow the same. We are enclosing Statement of credit card sale, ledger account, Citi Bank & Standard Chartered Bank account wherein reflected the card sale. Query : Why TDS Not deducted on payment of labour charges amounting to Rs.785,900/- REPLY : Rahman Tailors Rs.4,10,272/- Rima Tailors Rs.3.75.628/- Rs.7.85,900/- The payments of Rs.785,900/- to the labourers/karigars are made through Sardars and for this there was no contract between the Sardars and the assessee. It is only done for better administrative convenience and smooth functioning of the business as and when required to engage the karigars, therefore, the provision of section 194C/40(a)(ia) was not attracted in respect of the said payments. That provisions of section 194C(2) would not be applicable in its case as there was no contract between it and two Labour Sardars; that the Labour Sardars could not be termed as labour contractors for the purposes of section 194C as they worked along with fellow labourers and they received the payment by virtue of the muster roll as placed on record. That the payments were made to each and every individual labourer with the assistance of Labour Sardars whom the labourers of a particular area chose to act as their leader (sardar) for purposes of identification andsafeguarding their interest. It was explained that it for the benefit of both the assessee and the labourers that the Labour Sardar act as a confirming party to the payments made to the individual labourers. That I am producing all the details of vouchers where name of all the labourers are there for test check. The amendment made in section 40(a)(ia) by the Finance Act No. 2 dated 10th September, 2004, the payments to contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work) will be deductible only if tax is deducted therefrom, at source under Chapter XVII-B and such tax has been paid during the previous year or in the subsequent year before expiry of the time prescribed under section 200 of the Act. The provision was made effective from 1 -42005 by the provision of section 11 of the Finance (No. 2) Act, 2004 which is relevant to assessment year 2006- 07. But in the instant case, the assessment year under dispute is 2005-06 and the relevant previous year is 1-4- 2004 to 31-3-2005 and during this year, the provision of section 40(a)(ia) of the Act was non-existent and the same was not applicable in the instant case. Therefore,your goodself is requested Rs.7,85,900/- should not be added and allow the same. We are enclosing Bills. Voucher, Ledger account for your kind perusal.

In the result, the appeal of the assessee is allowed.” Accordingly the order of the ld CIT(A) is set aside and AO is directed to delete the addition. Consequently the ground nos 5 to 7 are allowed.

Second issue raised by the assessee in ground no 8 is against the confirmation of disallowance of Rs. 52,188/- by the Ld. CIT(A) as has been made by the AO @ 20% of expenses of Rs. 2,60,943/-.

In the appellate proceedings, the Ld. CIT(A) affirmed the order of AO on this issue by just stating that the assessee has failed to prove documentary evidences.

In the result, the appeal of the assessee is allowed.