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Income Tax Appellate Tribunal, RAJKOT
Before: SHRI RAJPAL YADAV & SHRI PRADIPKUMAR KEDIA
PER RAJPAL YADAV, JUDICIAL MEMBER : Assessee is in appeal before the Tribunal against order of the ld.CIT-2, Rajkot dated 29.3.2017 passed for the Asstt.Year 2012-13.
Though the assessee has taken four grounds, but her grievance revolves around a single issue viz. The ld.CIT(A) has erred in taking cognizance under section 263 of the Income tax Act, and holding that assessment order is erroneous and prejudicial to the interest of the Revenue, therefore, it deserves to be set aside for de novo assessment proceedings.
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Brief facts of the case are that the assessee has filed her return of income electronically on 29.9.2012 declaring NIL income. The assessment order was passed under section 143(3) on 10.6.2014 determining NIL income. A perusal of the assessment order would reveal that the ld.AO did not make elaborate discussion about the nature of business activities of the assessee. He simply observed that ITP as well as husband of the assessee appeared before him, and case was discussed with him, thereafter he proceeded to compute the income. Assessment order is running in just half a page, if we exclude calculation part of income. On perusal of this assessment order, the ld.Commissioner formed an opinion that the AO has not made any inquiry, therefore the assessment order is erroneous which has caused prejudice to the interest of Revenue. He recorded reason and confronted the assessee to explain as to why the assessment order be not set aside. Copy of the show cause notice issued to the assessee is placed on page nos.20 to 23 of the paper book, which reads asunder: “Smt. Illaben Jayantkumar Doshi, “Illa Villa", Ashapura Road, Rajkot. And /or 206, Vaniya Bhavan, Dhebar Road, Rajkot.
Madam, Sub: Show Cause notice u/s. 263 of the Act in the case of Smt. Illaben Jayantkumar Doshi for A.Y. 2012-13 - reg.
Please refer to the above subject.
A perusal of the records shows an order u/s. 143(3) of the Act was passed by the A.O. on 10/06/2014 determining NIL total income
ITA No.124/Rjt/2017 - 3 - as returned by you. The reason for selection of the case for scrutiny under CASS was "Large interest income relatable to exempt income(u/s. 14A)”. 3.1. On going through the assessment records, it is noticed that balance in your capital account as opening balance was Rs.1,59,40,712/- and as closing balance was Rs.1,57,39,034/-. You had procured interest bearing funds as secured loans of Rs.1,69,37,158/-and as unsecured loans of Rs. 5,73,24,900/-. It is also noticed that you have allowed loans and advances totaling to Rs.2,91,73,941/-. However, you had charged interest of Rs.5,35,493/- only from Parul J Doshi, whom loan of Rs.55,23,730/- was given. No interest had been charged from remaining loans and advances allowed. It is observed that no explanation had been offered for non-charging of interest as well as purpose of loans and advances given. The A.O. did not allow corresponding interest paid on the loans used for non-business purpose. It is also noticed that you had FDRs of 1,43,61,183/- earning interest at lower rates than the interest paid YOU on loans. Since the investment in FDRs was not your business, excessive interest paid on the relevant loans was liable to be disallowed u/s. 36(l)(iii)of the Act.
3.2. It is further noticed that you had earned exempt income in the form of dividend from shares and mutual funds. As discussed above, you had negative capital during the entire previous year and the investment was made from the interest bearing funds. Accordingly A.O. should have examined applicability of provisions of the section 14A of the Act, before allowing interest and other incidental expenses. Though the case was selected for scrutiny to examine as to whether expenses claimed were liable to be disallowed u/s.14A of the Act, the A.O. did not verify this aspect during the assessment proceedings.
3.3. Moreover, it is seen that you have shown labour income of Rs.30,72,400/- and claimed administrative expenses of Rs.26,90,945/-including interest expenses of Rs.26,62,199/-. It is pertinent to mention here that majority of labour income receipts shown as received in cash. On going through your bank account, it is observed that the cash income has been shown in the cash book as
ITA No.124/Rjt/2017 - 4 - and when there was shortage of funds in the bank account. The assessment records show that no evidence was produced to substantiate the labour income. Further it is not clear from the records that as to how interest expenses claimed as expenses was related to your labour income.
3.4 Besides it is also noticed that you have claimed setoff of brought forwarded loss of Rs.5,96,197/- from house property and brought forwarded unabsorbed depreciation of Rs.7,119/- against income from business and income from other sources respectively. As per the provisions of the Act, no setoff of such brought forwarded losses and depreciation is allowable against the income from business and income from other sources. Perusal of the records shows that the A.O. allowed your aforesaid your claim for setoff without further verification. 4. The AO has made assessment in the manner as discussed above without making any inquiry or verification regarding nature of labour income, interest expenses and applicability of section 14A of the Act before finalizing the assessment. This resulted in assessment on lower side as well as charging of lesser tax. Thus, the assessment by the AO was made without proper inquiry and investigation and therefore, it is not only erroneous but also prejudice to the interest of the revenue as prescribed in section 263 of the Act. 5. Explanation 2 appended below Sec. 263(1) of the Act as inserted shall the finance Act, 2015 declares the conditions under which an order shall deemed be considered as erroneous. The relevant provisions are reproduced hereunder.
"For the purposes of this sections 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,- (c) The order is passed without making inquiries or verification which should have been made;
As discussed above, the assessment order u/s. 143(3) of the Act passed without making required inquiries and verification which should have been made by the AO regarding nature of labour
ITA No.124/Rjt/2017 - 5 - income, interest expenses and applicability of section 14A of the Act. The above facts show that the assessment order passed by the Assessing Officer in respect of A.Y. 2012-13 appears to be erroneous and prejudicial to the interest of the revenue. Therefore, I hereby initiate proceedings u/s. 263 of the I.T. Act with a view to pass a suitable order. Before passing such order, you are hereby given an opportunity of being heard in the matter. In this connection, you are requested to attend this office on 17/03/20017 at 12.30 PM along with your written submission.”
Sd/- Pr.Commissioner, Rajkot-2”
In response to the above show cause notice, the assessee has submitted written submissions, which has been reproduced by the ld.CIT in the impugned order on page no.3 to 5. Thereafter, the ld.Commissioner adjudicated each issue mentioned in the show cause notice, and observed that in none of the issues the AO has conducted any inquiry. Therefore, he was convinced that the assessment order is erroneous which caused a prejudice to the interest of the Revenue. He set aside the assessment order and directed the AO to pass fresh assessment order after providing adequate opportunity of hearing to the assessee. The ld.counsel for the assessee while impugning the order of the ld.CIT contended that though no discussion is available on the assessment order, but it is the prerogative of the AO to pass assessment order and the assessee has no control over him. However, during the course of assessment proceedings, he issued a show cause notice dated 30.1.2014 under section 142(1) and invited explanation of the assessee on 28 items. Copy of the show cause notice is available on page no.13 of the paper book. He took us through this show cause notice. This show cause notice was replied by the assessee vide letter dated 14.2.2014 and copy of the same has been placed on page nos.14 to 16 of the paper
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book. Apart from the above, the ld.counsel for the assessee placed on record copy of the balance sheet, ledger account, showing share dividend, interest amount payable etc. The ld.counsel for the assessee further contended that the ld.Commissioner has not pointed out in his order as to how the assessment order is erroneous. Unless he pointed out a particular error in the order of the AO, he cannot revise the assessment order. The ld.Commissioner cannot remit the issue to the AO for further inquiry unless it is established that by not conducting an inquiry, an error has crept in the order of the AO. For buttressing this contention, he replied on the decision of the ITAT, Mumbai Bench in the case of Jhulelal Land Development Corpn. Vs. DCIT, 56 ITD 345 Mum. He also contended that it is not open to the Commissioner to remit the matter to the AO for the purpose of further investigation. In other words, it is not necessary that investigation conducted by the AO should match to the standard or the thought process of the Commissioner. He made reference to the decision in the following cases:
i) M/s.Rachana Finance & Investments P.Ltd. CIT, ITA No.2795/Mum/2014 ii) Universal Product P.Ltd. Vs. CIT, ITA No.2056/Del/2013 iii) Shri Narayan Tatu Rane Vs. ITO, ITA No.2690 and 2691/Mum/2016 iv) CIT Vs. Vikas Polymers, (Delhi) Unreported ITR 3/1991 dated 16.8.2010 v) CIT Vs. Shree Manjunathesware Packing Products and Camphor Works; 143 CTR (SC) 406 vi) CIT Vs. Seshasayee Paper and Board Ltd., 242 ITR 49 (Mad)
He has placed on record copies of the above decisions.
On the other hand, the ld.DR relied upon the order of the Commissioner and contended that the details placed by the assessee on
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page nos.14 to 16 i.e. reply of the assessee to the show cause received under section 142(1) of the Act is concerned, it is incomplete and these are sketchy. Complete details are not annexed along with these submissions. A specific query was raised with regard to the interest expenses, but reply to this query is that details submitted in respect of expenditure exceeding Rs.2 lakhs were given to the AO.
We have duly considered rival submissions and gone through the record carefully. Before considering the various contentions raised by the learned 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
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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 feel satisfied 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 erroneous simply because in his order he does not make an elaborate discussion in that regard.
As far as decisions referred to by the ld.counsel for the assessee are concerned, proposition canvassed in these decisions have already been culled out by us while taking test propounded by the ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai, (supra). The question is, if accounting entries of the assessee are being accepted by the AO without conducting any inquiry, then the proceedings will be an erroneous proceedings. This has been laid down by the Hon’ble Supreme Court in the case of Malabar Industries. If we consider assessment order along with questionnaire issued under section 142(1)
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and replies of the assessee, then it would reveal that the AO has never applied his mind to any of his details. He simply based the assessment without considering any aspect. Therefore, the ld.Commissioner has rightly harboured a belief that prejudice has been caused to the Revenue for not conducting inquiry, what to talk of proper inquiry. Therefore, ld.Commissioner has rightly taken cognizance under section 263 and no interference from our side is called for. This appeal of the assessee being devoid of any merit is dismissed.
In the result, appeal of the assessee is dismissed. Pronounced in the Open Court on 4th February, 2019.
Sd/- Sd/- (PRADIPKUMAR KEDIA) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER