SHAKTI BASMATI RICE (P) LTD,KARNAL vs. PR. CIT , ROHTAK

The grounds raised by the assessee are as under:

Briefly the facts are, the assessee, a resident company, is stated to be engaged in the business of running rice mill. For the assessment year under dispute, the assessee filed its return of income on 30.09.2015 declaring income of Rs.1,41,12,500/-. The return of income filed by the assessee was picked up for limited scrutiny. In course of assessment proceeding, the Assessing Officer called upon the assessee to furnish the necessary details and ultimately completed the assessment under section 143(3) of the Income-tax Act, 1961 (for short ‘the Act’) vide order dated 22.12.2017 accepting the returned income. Post completion of assessment, learned PCIT, in exercise of jurisdiction under section 263 of the Act, called for and examined the assessment records of the assessee. On such examination, he found that the Assessing Officer has completed the assessment without carrying out proper enquiry which he should have carried out. Thus, prima facie, he was of the view that the assessment order is erroneous and prejudicial to the interest of Revenue. Accordingly, he issued a show-cause notice to the assessee to explain, as to why the assessment order should not be set aside.

As alleged by learned PCIT, in response to the aforesaid show-cause notice issued on 02.03.2021 requiring the assessee to file its reply by 09.03.2021, no such reply was filed by the assessee. Accordingly, he proceeded to complete the proceeding under section 263 of the Act. While doing so, he observed that assessee’s case was selected for limited scrutiny for examining large commission expenses and low net profit rate and mismatch in sales turnover reported in Audit Report and ITR. He observed, the net profit rate shown by the assessee in the impugned assessment year is much less than the net profit rate shown in assessment year 2014-15 at 1.18%. He observed, to verify the low net profit shown by the assessee, the Assessing Officer should have examined the genuineness of expenses shown under the head ‘manufacturing expenses and establishment expenses’ after obtaining documentary evidences from the assessee. However, the Assessing Officer failed to do so. Thus, he held that the Assessing Officer having failed to examine the genuineness of expenses, the assessment order is erroneous and prejudicial to the interest of Revenue. Having held so, he observed, the Assessing Officer should conduct detailed enquiries on the issue of genuineness of expenses by examining documentary evidences. Further, he observed, the Assessing Officer must also examine the cash expenses. Thus, ultimately, he set aside the assessment order with a direction to the Assessing Officer to pass a fresh assessment order keeping in view the observations made in the revision order.

Learned counsel for the assessee submitted, assessee’s case was selected for limited scrutiny for verifying large commission expenses and low net profit and mismatch in sales turnover. He submitted, in course of assessment proceeding, the Assessing Officer had conducted full length enquiry into the issues for which the assessment was selected for limited scrutiny. He submitted, the Assessing Officer issued statutory notices under section 142(1) and 143(3) of the Act requiring the assessee to furnish the details of commission expenses incurred by the assessee, both in India and abroad. He submitted, after verifying the details of overseas commission along with shipping bills furnished by the assessee, the Assessing Officer completed the assessment having been satisfied that the expenses are genuine.

Drawing our attention to the Office Note of the Assessing Officer obtained through Right to Information Act, learned counsel submitted, in the Office Note the Assessing Officer has clearly and categorically observed that he has examined the issues on which limited scrutiny was done by calling for necessary details/evidences and verifying them. Thus, he submitted, the Assessing Officer after having conducted proper enquiry passed the assessment order, it cannot be said that the assessment order is erroneous and prejudicial to the interest of Revenue, only because, he has accepted the income returned by the assessee. In support of his contention, learned counsel relied upon the following decision:

We have considered rival submissions and perused the materials on record. Undisputedly, assessee’s case was selected for limited scrutiny to verify large commission expenses and low net profit and mismatch in sales turnover reported in Audit Report and ITR. From the materials placed before, it is evident, to verify the issues, for which assessee’s case was selected for limited scrutiny, the Assessing Officer, from time to time, had issued statutory notices under section 142(1) and 143(2) of the Act calling upon the assessee to furnish various details with supporting evidences in respect of commission expenses. It is relevant to observe, in reply to the statutory notices issued by the Assessing Officer, the assessee had furnished details of commission/brokerage paid to both domestic as well as overseas agents along with all other relevant documents, including shipping bills. Though, in the body of the assessment order the Assessing Officer has not discussed in detail the nature of enquiry conducted by him and the evidences produced by the assessee, however, he nevertheless has mentioned that in response to statutory notices issued from time to time and various order- sheet entries, the counsel of the assessee has attended and furnished written replies along with supporting documentary evidences. In fact, in the Office Note appended to the assessment order, a copy of which was obtained by the assessee under Right to Information Act, 2005, the Assessing Officer has clearly and categorically mentioned that he has examined both the issues of large commission expenses and low net profit and mismatch in sales turnover reported in Audit Report and ITR by verifying the submissions and supporting evidences furnished by the assessee and has found nothing adverse in them. Thus, the aforesaid observations of the Assessing Officer in the assessment order and the Office Note coupled with submissions made by the assessee and supporting evidences furnished, which forms part of the record, would clearly reveal that the Assessing Officer has not only made proper enquiry on the issues for which the case was selected for limited scrutiny but being satisfied with the genuineness of the expenses which was established through the supporting evidences, accepted the returned income.

Reading of the impugned order of learned PCIT would reveal that he has considered the assessment order to be erroneous and prejudicial to the interest of Revenue only for the reason that the Assessing Officer has not made proper enquiry on the issues, on which, the case was selected for limited scrutiny. However, the facts on record are contrary to the allegation made by learned PCIT. Further, while holding the assessment order to be erroneous and prejudicial to the interest of Revenue, learned PCIT has directed the Assessing Officer to conduct detailed enquiries on the limited scrutiny issues by examining documentary evidences in respect of huge expenses shown by the assessee.

Thus, on overall consideration of facts and materials on record, we are of the view that the Assessing Officer having passed the assessment order after proper enquiry and application of mind, the assessment order cannot be held to be erroneous and prejudicial to the interest of Revenue, so as to, empower learned PCIT to revise it under section 263 of the Act. Thus, in our considered opinion, the exercise of power under section 263 of the Act in the instant case is invalid. Accordingly, we set aside the impugned order of learned PCIT passed under section 263 of the Act and consequently restore the assessment order.

In the result, the appeal is allowed.