COMMISSIONER OF INCOME TAX vs. PATIDAR SHROFF

O/TAXAP/1318/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1318 of 2006

FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI

and HONOURABLE MR.JUSTICE K.J.THAKER =========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX....Appellant(s) Versus PATIDAR SHROFF....Opponent(s) ================================================================ Appearance: MRS MAUNA M BHATT, ADVOCATE for the Appellant(s) No. 1 NOTICE SERVED for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 01/12/2014 ORAL JUDGMENT Page 1 of 8

O/TAXAP/1318/2006 JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. By way of this appeal, the appellant­revenue has challenged the order dated 06.02.2006 passed by the   Income   Tax   Appellate   Tribunal,   Rajkot   Bench, Rajkot   [for   short   “the   Tribunal”]   in   ITA No.706/Rjt/05,   whereby   the   appeal   preferred   by   the assessee was allowed by the Tribunal. 2. The facts in brief are that the respondent­ assessee is engaged in the business of financing and collection of deposits. On 22.03.2000, a search under Section 133A of the Income Tax Act, was carried out in the premises of the assessee and in the said search two sets of books of accounts were found and on that basis the respondent had disclosed unaccounted income of Rs.27,77,989/­. In the said return the respondent had claimed deduction of Rs.6,49,749/­ under Section 40(b) of the Income Tax Act on remuneration payable to partners.   The   same   was   allowed   by   the   Assessing Officer. 2.1. In appeal, the Commissioner of Income Tax, revised   the   order   under   Section   263   of   the   Act. Against the said order the assessee filed an appeal before the Income Tax Appellate Tribunal. The Tribunal after   hearing   the   parties,   allowed   the   appeal preferred by the assessee. Hence, this appeal is filed at the instance of the revenue. Page 2 of 8

O/TAXAP/1318/2006 JUDGMENT 3. Learned   counsel   for   the   appellant­revenue has submitted that the Tribunal has committed error in passing the impugned order since the Tribunal has not given cogent reasons in allowing the appeal of the assessee. She further submitted that the Tribunal has not appreciated the fact that the income detected by the department is not attracted by any expenses. 3.1. She   further   submitted   that   the   respondent­ assessee had claimed remuneration on book profit which was   worked   out   after   reconstruction   of   books   of account,   considering   unaccounted   income   detected during   search.   She   further   submitted   that   the deductions have to be computed on the basis of the profit   which   have   been   recorded   in   the   books   of account during the normal course of business and not on the basis of entires which have been made as a result of detection during survey. 3.2. By making such submissions, she urged that this Court may allow the present appeal and set aside the order of the Tribunal. 4. We   have   heard   learned   advocate   for   the appellant­revenue and perused the material on record. The Tribunal while allowing the appeal in paragraph No.4 has observed as under:­ “4.   Having   heard   both   the   parties   and looking   to   the   facts   and   circumstances   of the case, we find that no doubt the assessee Page 3 of 8

O/TAXAP/1318/2006 JUDGMENT has   surrendered   unaccounted   income   of Rs.27,77,989 at the time of survey, but at the same time the fact that the assessee has reconstructed the accounts on the basis of unaccounted income and filed its return of income   cannot   be   overlooked.   Further   the Assessing Officer has added this amount as business income. This facts cannot also be overlooked.   The   CIT   was   of   the   view   that since   the   undisclosed   income   which   was detected during the course of survey and not recorded   in   the   books   of   accounts   in   the normal course cannot be treated as part of book   profit   as   understood   in   terms   of Section   40(b).   Since   the   assessee   has reconstructed   its   accounts   including   the surrendered amount and has filed return, we are   of   the   considered   view   that   the   net profit   required   to   be   ascertained   by applying   the   provisions   of   Section   40(B). Explanation   3   of   Section   40(b)   defines “book­profit”   to   mean   the   net   profit   is shown in the profit and loss account for the relevant   previous   year,   computed   in   the manner   laid   down   in   Chapter   IV­D   as increased   by   the   aggregate   amount   of   the remuneration   paid   or   payable   to   all   the partners of the firms, if such amount has been   deducted   while   computing   the   net profit. Therefore, we are of the view that the deduction in question as claimed by the Page 4 of 8

O/TAXAP/1318/2006 JUDGMENT assessee   has   rightly   been   allowed   in   the assessment and we are of the further view that the assessment was not prejudicial to the   interest   of   Revenue   and   therefore, provisions of Section 263 does not apply in the instance case. Considering the facts and circumstances   of   the   case,   we,   therefore, set   aside   the   order   of   the   CIT   and   and restore that of the Assessing Officer.” 5. Looking to the facts of the case, it would be relevant to reproduce Explanation 5 to Section 263 of the Income Tax Act, which reads as under:­ “263(1).

The

Principal

commissioner

or Commissioner   may   call   for   and   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 assesseee 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   For   the   removal   of   doubts,   it   is hereby   declared   that,   for   the   purpose   of   this sub­section­ Page 5 of 8

O/TAXAP/1318/2006 JUDGMENT (a) an order passed on or before or after the 1st  day of June, 1988 by the Assessing Officer shall include­ (i)   an   order   of   assessment   made   by   the Assistant

Commissioner

Deputy Commissioner   or   the   Income   Tax   Officer   on the basis of the directions issued by the Joint Commissioner under Section 144A. (ii) an order made by the Joint Commissioner in   exercise   of   the   powers   or   in   the performance of the functions of an Assessing Officer   conferred   on   or   assigned   to,   him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General   or   Director   General   or   Principal Commissioner   or   Commissioner   authorised   by the Board in this behalf under Section 120. (b) “record”   shall   include   and   shall   be deemed always to have included all records relating   to   any   proceeding   under   this   Act available at the time of examination by the Principal Commissioner or Commissioner; (c) where any order referred to in this sub­ section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st  day of Page 6 of 8

O/TAXAP/1318/2006 JUDGMENT June,   1988,   the   powers   of   the   Principal Commissioner or Commissioner under this sub­ section   shall   extend   and   shall   be   deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub­section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding   anything   contained   in   sub­ section   (2),   an   order   in   revision   under   this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, (National Tax Tribunal,], the High Court or the Supreme Court. Explanation­   In   computing   the   period   of limitation for the purpose of sub section (2), the time taken in giving an opportunity to the assessee   to   be   reheard   under   the   proviso   to section   129   and   any   period   during   which   any proceeding   under   this   section   is   stayed   by   an order   or   injunction   of   any   court   shall   be excluded.” 6. In   view   of   the   aforesaid,   we   are   of   the Page 7 of 8

O/TAXAP/1318/2006 JUDGMENT opinion   that   the   Tribunal   has   given   cogent   and convincing reasons in arriving at the conclusion and we are in complete agreement with the view taken by the Tribunal. The Tribunal has rightly held that the the assessment was not prejudicial to the interest of Revenue and therefore, the provisions of Section 263 does not apply in the instance case. Apart from that, learned advocate for the appellant­revenue is not in a position to show how the findings of the Tribunal are bad in law and on facts or perverse so as to answer the question of law in favour of the revenue. 7. In that view of the matter, we do not find any error in the order of the Tribunal. Hence, the present appeal is dismissed. Accordingly, the question of law raised in this appeal is answered in favour of the assessee and against the revenue. (K.S.JHAVERI, J.) (K.J.THAKER, J)

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