CIT-II vs. M/S ASSAM TEA HOUSE

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ITA/32/2010HC Punjab & HaryanaPHHC01093241201028 September 2010Author: MR. JUSTICE AJAY KUMAR MITTAL,MR. JUSTICE ADARSH KUMAR GOEL12 pages
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What did the High Court hold?

The High Court held that the Tribunal erred in interfering with the Commissioner's order. The Court found that the Commissioner had valid reasons to exercise powers under Section 263, including the discrepancy regarding the production of books of accounts, lack of verification of closing stock and purchases, non-deduction of TDS on commission paid to partners, and the incorrect basis for examining interest on loans to family members under Section 40A(2)(b). The Court referred to the Supreme Court's decision in Malabar Industrial Corporation Ltd. Vs. CIT and this Court's decision in CIT Vs. Kanda Rice Mills, emphasizing that the Commissioner could proceed if the AO's order was passed without application of mind and was erroneous and prejudicial to the revenue. The Court clarified that the Commissioner is not bound to record final conclusions in all cases under Section 263, especially when directing a fresh assessment. The question raised was answered in favour of the revenue.

What were the facts?

The Revenue (Commissioner of Income Tax-II, Chandigarh) appealed against an order of the Income Tax Appellate Tribunal (ITAT) dated August 1, 2009, which had set aside an order passed by the Commissioner under Section 263 of the Income Tax Act, 1961. The assessment year in question was 2004-05. The Commissioner had invoked Section 263 powers due to perceived deficiencies in the Assessing Officer's (AO) order, including the alleged non-production of books of accounts, lack of verification of purchases and closing stock, non-deduction of TDS on commission paid to partners, and failure to examine interest on loans to family members under Section 40A(2)(b). The ITAT, however, found that the Commissioner had not reached a firm conclusion about tax evasion, which it considered a prerequisite for exercising Section 263 powers.

What were the issues?

1. Whether, in the facts and circumstances of the case and in law, the ITAT was justified in setting aside the order passed by the Commissioner under Section 263 of the Act, holding that it did not contain any firm decision that the order passed by the Assessing Officer under Section 143(3) was erroneous and prejudicial to the interest of revenue? Assessee's argument: The assessee supported the view taken by the Tribunal, implying that the Commissioner's order was not justified as it lacked a firm conclusion on tax evasion. Revenue's argument: The Revenue contended that the Tribunal erred in law by interpreting Section 263 as requiring a final conclusion on tax evasion. The Revenue argued that the provision is met if the AO's order is erroneous and prejudicial to the revenue's interest, and a final conclusion on evasion was not a mandatory prerequisite.

Which sections of the Income-tax Act were involved?

Section 263,Section 143(3),Section 194H,Section 40A(2)(b),Section 40(b),Section 260A

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of 2010

-1- *** IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH of 2010

Date of decision: 28.9.2010 Commissioner of Income Tax-II, Chandigarh ...Petitioner Versus M/s Assam Tea House ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Ms. Urvashi Dhugga, Advocate for the appellant. Mr. Akshay Bhan, Advocate for the respondent. **** ADARSH KUMAR GOEL, J (

Oral)

.

1.

This appeal has been preferred under Section 260A of Income Tax Act, 1961 (hereinafter referred to as “the Act”) proposing following substantial question of law arising out of the order dated 1.8.2009 of the Income Tax Appellate Tribunal, Chandigarh Bench 'B' Chandigarh (hereinafter referred to as “the Tribunal”) passed in ITA No.327/Chandi/2009 in respect of assessment year 2004-05:- “(i). Whether in the facts and circumstances of the case and in law the ITAT was justified in setting-aside the order passed by the Commissioner under Section 263 of the Act, holding that it does not contain any firm decision that the order passed by the Assessing Officer u/s 143 (3)

of 2010

-2- *** was erroneous and prejudicial to the interest of revenue?

2.

After the Assessing Officer made assessment, the Commissioner exercising the powers under Section 263 of the Act called for record for examination and set aside the order with the observations (i) that the books of accounts were not produced as per order sheet of the Assessing Officer. (ii) The order recorded that Assessing Officer had seen the books of accounts but the order did not reflect any checking or verification of books of accounts. (iii) The correctness or genuineness of the closing stocks, details of purchases and verification of transportation was not carried out. (iv) The assessee had paid commission to its partners but did not deduct tax at source under Section 194H of the Act. (v) The rate of interest at which loan was advanced to family members was not examined with reference to Section 40A(2)(b).

3.

On appeal of the assessee, the Tribunal set aside the order passed under Section 263 of the Act holding that after criticism of the order of the Assessing Officer, the Commissioner did not reach any firm conclusion about evasion of tax which was condition precedent for exercise of power as per law laid down by Hon'ble Mills 178 ITR 446 (P&H).

4.

We have heard learned counsel for the parties.

5.

It has been submitted on behalf of the appellant that the Tribunal erred in law in interpreting Section 263 of the Act as of 2010

-3- *** requiring final conclusion to be reached by the Commissioner on the issue of order of AO being prejudicial to the interest of revenue. Requirement of the said provision is met if the order of the Assessing Officer is erroneous and prejudicial to the interest of revenue. For holding the order to be prejudicial to the interest of revenue, final conclusion on evasion of tax was not a must.

6.

Learned counsel for the assessee supported the view taken by the Tribunal.

7.

Before we consider the rival submissions, it will be appropriate to notice the reasons given in the order of Commissioner and order of the Tribunal.

8.

The Commissioner, inter-alia, observed:- “From the record it was observed that:- i) The assessee has not produced the books of accounts and stock register. Even in the reply dated 24.5.2006 furnished by the assessee before the A.O., though it was mentioned of producing of books of account, the A.O. Has given a remark that books of account, are not produced. This shows that the assessment has been framed by the A.O. in the absence of books of accounts. However, while passing the order, the Assessing Officer has mentioned that books of accounts were produced and test checked. ii) During the course of assessment proceedings the A.O. has obtained the details of party wise purchases, but not verification has been carried out from the parties. The of 2010

-4- *** verification was essential, as the balance sheet shows no creditor, whereas you have debited purchases of Rs.79,38,749/- during the month of March. Even the copies of accounts of these parties have not been called for by the Assessing Officer. iii) Further, you have shown interest of Rs.4,53,249/- on FDRs and debited a sum of Rs.2,60,778/- on account of interest on unsecured loans to family members. The same has been allowed without verification i.e. at which rate the interest has been paid and what was the rate of interest of FDRs. The issue should have been examined u/s 40A(2)(b) of the I.T. Act, 1961. xxx xxx xxx .....The points on which the assessee could not offer any satisfactory explanation are discussed as below:- (i) Non-production of books of accounts: From the perusal of assessment record it was observed that on 24.5.06 the assessing officer had made a noting that the books of accounts of the assessee have not been produced. However, the assessment order mentions that the books of accounts were produced and examined and the expenses debited to P & L account have been test checked with reference to evidences maintained. However, the order sheet entry on 10.8.06 does not mention whether the books of accounts were produced or not. Thus, the assessing officer has failed to of 2010

-5- *** check the books of account at the time of assessment and the order passed by him is not only erroneous but also prejudicial to the interest of revenue. (ii) Closing stock details not verified During the proceedings u/s 263 of the I.T.Act, 1961 the counsel for the assessee was asked to produce the stock register. From the details filed by the assessee and 'Bilty Register' it was noticed that there were number of instances where orders of tea were given in November, 2003 and its payments were made in first part of December, 2003 but goods (tea) was received on 30th March, 2004. The assessee was asked to explain this unusual observation. However, the assessee could not offer any convincing explanation for this inordinate delay in giving order in November, 2003 making payments for these purchases of tea in December, 2003 and its actual delivery (receipt by the party). On 30.3.2004, here it may be mentioned that in usual course goods ordered in January, 2004, have been received in January, 2004 in February, 2004 and so on. This issue has not been examined by the assessing officer in detail. The assessing officer should have verified the purchases and their actual receipt by making enquiries from the concerned transporters and whether these purchases stand reflected in sale or closing stock. In fact as notied in para (i) it is cledar that the assessing officer has not of 2010

-6- *** seen the books of accounts and thus he could not test check the details and carry out requisite requisite enquiry and verification. The order passed by assessing officer is not only erroneous but also prejudicial to the interest of revenue. (iii) Non deduction of TDS on commission paid to partner: From the perusal of the return of income filed by the assessee it was noticed that the assessee has paid commission of Rs.16,66,815/- each to three partners and has not deducted tax on it. This fact was confronted to the assesseee vide order sheet entry dated 19.2.2009. The counsel of the assessee filed reply in this regard vide letter dated 6.3.2009 and 16.3.2009. In these replies the counsel of the assessee submitted that as per section 40(b) of the I.T. Act, remuneration to any partner includes, salary, loans, commission or remuneration by whatever name called and there is no principal and agent relationship between the partner and the firm and hence provision of section 194H are not applicable. The argument given by the counsel of the assessee is not convincing. Whenever a firm/party pays commission to any person (including partner of a firm) the relationship of principal and agent comes into places. The firm in this case was required to deduct TDS on commission paid to partners. In any case this issue has of 2010

-7- *** not been examined by the assessing officer and thus the order is not only erroneous but also prejudicial to the interest of revenue. (iv) The A.O. has failed to examine the issue u/s 40A (2)(b) of the I.T.Act regarding rate of interest at which interest has been given on unsecured loan to family members vis-a-vis the interest income on FDRs and thus the order passed by him is not only erroneous but also prejudicial to the interest of revenue.

4.

I have carefully considered the fact of the case, submissions made by the assessee and relevant provisions of the I.T.Act, 1961. The assessment made by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. The A.O. has failed to gather the facts and carry out proper investigations. In view of the above, the assessment framed by the Assessing Officer u/s 143(3) on 25.9.2006 is hereby cancelled u/s 263 of the I.T.Act, 1961 as it is not only erroneous but also prejudicial to the interest of revenue and A.O. , is directed to frame fresh assessment after carrying out the proper investigation and after affording reasonable opportunity to the assessee to present its case.”

8.

The Tribunal, inter-alia, observed:- “10. Quite clearly, on none of the issues, any opinion has been furnished by the Commissioner before setting of 2010

-8- *** aside the order of the Assessing Officer to make a fresh assessment. In fact, the error in the assessment framed has not been established by the Commissioner. For instance, the assessee pointed out that the closing stock details were furnished and even the stock registers were examined by the Assessing Officer. The Commissioner of Income-tax too called for and examined the stock register but has not pointed out any infirmity which goes to show that the figure of closing stock accepted by the Assessing Officer was erroneous. There is no error shown in the assessment to prove that any tax lawfully due to the revenue has been lost. Similarly, with regard to the TDS on commission payment to the partners, the assessee made out a detailed case, based on case-laws, as per the written submissions filed before the Commissioner. Inspite of the arguments raised, the Commissioner merely observed that the issue be examined by the Assessing Officer. The error of fact or law, if any, in the assessment made by the Assessing Officer in this context is also not established by the Commissioner. Similarly, is the situation with regard to direction of the Commissioner to examine the applicability of section 40A(2)(b) of the Act regarding the interest paid to family members, In fact, the Commissioner appears to have been guided by the interest earned by the assessee on FDRs to examine the reasonability of interest paid on of 2010

-9- *** loans raised from the family members. In fact, the requirements of section 40A(2)(b) are that the excessiveness or the unreasonableness of an expenditure incurred by way of payment to the specified person have to be evaluated in the context of the market value of such goods or services. In other words, if the interest paid to the family members is required to be disallowed u/s 40A(2)(b) of the Act, the requirement of the law is to compare the same with the interest rates prevailing in the market on unsecured loans. Instead, the Commissioner has referred to the rate of interest earned by the assessee on FDRs with the Bank. Ostensibly the basis adopted by the Commissioner in the context of Section 40A (2)(b) is misconceived. In fact, on this issue, the Commissioner has furnished his opinion as to justification for applying the provisions of section 40A (2) (b) of the Act and has merely directed the Assessing Officer to examine the same.”

9.

A perusal of the reasons given by the Tribunal as also the Commissioner quoted above shows that the Tribunal assumed it to be the requirement that the Commissioner should have recorded final conclusion on taxability. This view is legally erroneous. The Commissioner could have proceeded under Section 263 of the Act if the Assessing Officer had made assessment without application of mind. The Commissioner held that as per order sheet no record was produced while in the order a contrary statement was made. The of 2010

-10- *** order of the Assessing Officer did not show the verification of closing stock, purchases and transportation and other items mentioned above. These reasons were valid reasons for exercise of power under Section 263 of the Act. The Tribunal held that the Assessing Officer was not required to discuss these aspects in its order and that the assessee had explanation to the points made by the Commissioner. This approach of the Tribunal cannot be sustained.

10.

In Malabar's case (supra), it was observed :- “The phrase “prejudicial to the interests of the Revenue” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. xxx xxx xxxx In the instant case, the Commissioner noted that the Income-tax Officer passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant-company was not placed before the Assessing Officer. 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 of 2010

-11- *** any inquiry. In these facts the conclusion that the order of the Income-tax Officer was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the juri iction by the Commissioner under Section 263(1) was justified.”

11.

In Additional Commissioner of Income-Tax, Gujarat Vs. Mukur Corporation (1978) 111 ITR 312, it was observed:- “Next question is whether at the time of passing the final order, the Commissioner was bound to record final conclusions. Now, even on this question, we find that 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. As already noted by us above, we would have expected him to record final conclusions, which he thought proper if he was to settle the assessment finally but since he has not settled the assessment finally, and has preferred to direct the Income-tax Officer to make an order for fresh assessment, it was proper that he did not express any final conclusions and recorded only prima facie conclusions at which he had arrived with reference to the facts of the case. Here it should be noted that, as the assessment was to be freshly made by the Income- tax Officer, the only proper course for the Commissioner was not to express any final opinion as regards the of 2010

-12- *** controversial points.”

12.

In view of the above the Tribunal erred in interfering with the order of the Commissioner. The question raised has to be answered in favour of the revenue.

13.

Accordingly, the appeal is allowed.

(Adarsh Kumar Goel)

Judge September 28,2010 (Ajay Kumar Mittal) Pka

Judge

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