SEHORSE MERCANTILE CO. P LTD.,MUMBAI vs. PR.CIT-6, MUMBAI

This appeal by the assessee is directed against the order of learned CIT passed under section 263 of the I.T. Act dated 30.3.2021 pertains to A.Y. 2016-17.

2. The grounds of appeal read as under :

1. The Ld. Pr, Commissioner of Income-tax has erred in law and in facts in issuing notice u/s. 263 of the Act and passing revision order without satisfying the conditions laid down u/s. 263 of the Act and without appreciating that the assessment order was neither erroneous nor prejudicial to the interest of revenue.

2. The Ld. Pr. Commissioner of Income-tax has erred in law and in facts in directing the assessing officer to assess the income of the appellant afresh after making enquiries into genuineness of the business conducted by the appellant.

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3. The Ld. Pr. Commissioner of Income-tax ought to have appreciated that nature of business and transactions in PMS/DMS products was genuine and is fully explained with evidences and hence cannot be doubted.

3. In this case in the order passed under section 263 of the I.T. Act learned CIT noted that return of income was filed on 30.11.2017 declaring loss at Rs. 1,823/-. That thereafter assessment was completed under section 143(3) of the Act on 28.12.2018 assessing total income of Rs. 1,48,27,610/-. Thereafter learned CIT observed that :

“On a reference the following issue is noticed:

1. Assessee claims to be engaged in the business of share trading as well as trading in DMS/PMS products. There are certain facts which are emanating from the reference which indicates that the business of the assessee in DMS/PMS products is not genuine and is only a transfer funds from one entity to another so as to layer the transaction at multiple levels and conceal the true nature of receipt of money and its ultimate application.”

4. Thereafter learned CIT observed that considering the reference the assessment record was called for and examined. That from the perusal of the record it is confirmed that AO had not examined following aspects. Learned CIT held that the AO failed to make enquiries on following issues: 1. During the course of assessment proceedings assessee could not explain the nature of its business or provide supporting documents for the business carried out by it for A.Y.2011-12-. Further, during the course of assessment proceedings for A.Y. 2016-17, details regarding Sales parties were not submitted by the assessee.

2. Further, during the course of assessment proceedings for AYs 2012-13 to 2013-14 and 2017-18 the assessee submitted the details of the sales and purchase for all the different assessment years. On perusal of those details it is observed that there was an exponential growth in the DMS/PMA business of the assess, to the extent that turnover increased to about Rs. 900 Crores for A.Y. 2015-16 from Rs.261.33 Crores in A.Y. 2014-15, while at the same time it did not result in any significant profits for the assessee. Assessee never explained the prevalence of low profit rationale or sustenance of loss over the years and why it continued with the business when there is persistent loss from this business.

3. Further, on perusal of details of Trading in shares, it is seen that Assessee has primarily invested in shares of Vakrangee Holding Pvt. Ltd. Further, in all the years, unlike the trading in DMS products the amount of Sales is more than Purchases giving rise to Profits which is however set-off

3 Sehorse Mercantile Company Pvt. Ltd. against the losses from DMS business. Thus, the Taxable Profits on trading of shares are adjusted against the loss created in DMS/PMA business. In all the years fictitious losses were booked in DMS trade business which achieved twin objectives of both layering of money transfers and reducing taxable income for the assessee against the profit earned in trading of Shares.

4. There are only a few buyers and sellers in the business of the assessee. For A.Y. 2013-14 and A.Y. 2014-15 there is only one buyer, namely, M/s. Abhirathi Trading Company Private Ltd. and the seller being M/s Mindtree Exports Pvt. Ltd. It is also seen that both buyer and seller is same entity, like for A.Y. 2017-18 M/s Newtree Trading Company Pvt. Ltd. and M/s Bluepearl Trading Co. Pvt. Ltd. had bought and sold goods to & from the assessee. Similarly, Highpoint Trading Company Pvt. Ltd. bought goods worth Rs. 233.82 Crores in A.Y. 2012-13 while in A.Y. 2016-17 it sold goods worth Rs. 186 Crores to the assessee, apart from providing business advance of Rs 110.55 crore in A.Y. 2015-16.

5. The above discussed transactions prove that there is no definite chain or order in value addition. At the same time how closely these companies are connected will become evident from the table below which shows clearly list of companies with which assessee has had transaction in the course of its trade in DMS products:

S.No Company Name Director/s Address

1 Seahorse Mercantile Sanjeev Tarachand Flat No.408, B-Wing, Sneha, Company Pvt. Ltd. Vohra Apna Ghar, Unit No. 11 , Sunil Challia Tandon Road, Andheri(W), Mumbai City MH 400053. 2 Highpoint Trading Vimal Kumar Bohar Flat No. 18, Ground Floor, Company Pvt. Ltd. Bhimrao Balku Samikaran Apartment, Sant Retharekar Janabai Marg, Vile Parle(E),Mumbai Mumbai City MH 400057. 3 Newtree Trading Sudam Kanu Kathe 407, A Wing, Bhaveshwar Company Pvt Ltd. Sunil Mohan Arya Acade Premises Co. Op. Soc.Ltd, LBS Marg Ghatkopar (W),Mumbai Mumbai City MH 400086. 4 Tenacity Anil Vallabhdas The Kailas Esplanade Soc Ltd. Technologies Pvt. Agarwal C-Wing, Unit No.507 LBS Ltd. Ramchandra Sharma Marg, Ghatkopar(W), Mumbai City MH 400086. 5 Bluepearl Trading Ramchandra Sharma Gala No.401, 4thFloor,Kaveri Company t. Ltd. Sunil Ramkrishan Commercial CHS Jagannath Bohra Mandir Road, Sakinaka Mumbai City MH 400072. 6 Abhirathi Trading Rajiv Rajendra Sharma A 4, c-10, Jai Vidyadani CHS Company Pvt. Ltd. Nirmal Laxminarayan Ltd, Om Nagar, Sahar Pipe Bohra Line Road, Andheri(E), Mumabai Mumbai City MH 400099.

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7 Hitanshi Properties Rajiv Rajendra A 4, C-10, Jai Vidyadani CHS Pvt. Ltd. Sharma, Nirmal Ltd, Om Nagar, Sahar Pipe Laxminarayan Bohra Line Road, Andheri (E), Mumbai City MH 400099. 8 Mindtree Export Pvt. Ashok Kumar Gautam Base No.B-16, Basement Ltd. Shulajah Sharma Marol Naka, Hind Saurashtra Ind. Estate, Andheri(E) vlumbai Mumbai City MH 400059. 9 Westlink Trading Kuldeep Singh, 3-15, Basement, Hind Pvt. Ltd. Kapiz Dhwaj Singh Saurashtra Industrial Estate Abhishek Kumar Singh Marol Nak, Andheri(E), Seeraj Singh Dhawaj Mumbai City MH 400059. 10 Cybernetix Mahendra Amar Singh Unit No.138, Raj Industrial Automation Pvt. Ltd. Gaur Complex A-Wing, Military Radhey Shyam Tnanvi Road, Marol, Andheri (E), Mumbai City MH400059.

5. Thereafter learned CIT mentioned that statements of people associated with both M/s Highpoint Trading Company Pvt. Ltd .and M/s Cybernetix Automation Company Pvt. Ltd were recorded by ITO 14(2)(1), Mumbai during the course of assessment proceedings of M/s Highpoint Trading Company Pvt. Ltd (HTCPL) for A.Y. 2011-12 and also by & DDIT (Inv) Unit 4(1), Mumbai. Thereafter learned CIT mentioned that statement of certain other persons associated by of Highpoint Trading Company Pvt. Ltd. as well as director of assessee company were also recorded. He observed that statement recorded on oath lead to the conclusion that in the aforementioned entities, no business of trading in DMS goods was carried out in these entities. That the assessee is well aware about these facts as these statements have already been provided to the assessee during the course of assessment proceedings. Thereafter learned

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CIT observed that while concluding the assessment for A.Y. 2016-17, the aspect of the sales and purchases themselves being entries were not examined. No opinion was formed on the genuineness of the business of the assessee. The facts of the case, that the so called trade in DMS/PMS products (electoral voter list) is a mere facade for layering of transaction, emerged after the assessment for A.Y 2016-17 was concluded. In light of the facts that emerged later as discussed earlier, the assessment order for A.Y. 2016-17 is both erroneous and prejudicial to the interest of the revenue. There is no possibility of two or more valid views on the very genuineness of the business of the assessee. The true income of the assessee as per the Income Tax Act 1961 can be determined only after accounting for the sales proceeds of trade in DMS products as unexplained credits. All these aspects remained unexamined by the Assessing Officer at the time of assessment thereby rendering it liable for revision under section 263 of the Act. Accordingly, learned CIT noted that show-cause notice under section 263 of the Act was issued to the assessee on 5.3.2021 fixing the date of hearing on 15.3.2021. Thereafter learned CIT referred to assessee’s submission in this regard. He reproduced the submission running into several pages. However learned CIT held that the same is not tenable. Learned CIT observed that on perusal of the case records it is seen that during the year under consideration i.e F.Y. 2016-17 relevant to the A.Y. 2017-18 assessee credited its P&L Account on various items from sales of Rs.697 crores, it also received exempt income in the form of dividend. The only major item of expenditure was purchase of Rs. 786.43 Crore. Inventories increased from Rs.58.11 Crore to Rs.149.64 Crore, thereby achieving a rough parity between sales and purchase. Apart from purchases there were certain minor items of expenditure like audit fees, filling fees, finance cost etc. Thereafter he referred a sketch of the P&L Account. He further observed that during the year there was sale of DMS products worth Rs. 390 crores and purchase of the same worth Rs. 473 crores. He further observed that the balancing figure for the year was the huge increase in trade payables. He further referred to a summary of the sales and purchase. Thereafter he

6 Sehorse Mercantile Company Pvt. Ltd. observed that on perusal of the records following facts emanates which indicate that the business of the assessee in DMS/PMS products was not genuine and was only a means to transfer funds from one entity to another so as to layer the transaction at multiple levels and conceal the true nature. In this regard he summarized as under : The assessee could not explain the nature of its business or provide supporting documents for the business carried out by it for A.Y.2011-12 for A.Y. 2016-17. That neither details regarding the sales party were asked for the by Assessing Officer during course of scrutiny proceeding nor the same were submitted by the assessee. However he noted that that during the assessment proceedings for A.Y. 2012-13 to 2013-14 & 2017-18 the assessee submitted the details of the sales and purchase for all the different assessment years. He summarized credits and debits on account of DMS/PMS. Thereafter he observed that it can be seen from the above table that there was an exponential growth in the DMS/PMA business of the assessee. Learned CIT observed that the assessee never explained the prevalence of low profit rations or sustained loss over the years and why it continued with the business. He observed that the explanation given by the assessee in its submission dated 15.3.2021 is frivolous and cannot be accepted in view of the above discussion.

Thereafter learned CIT observed that while trading in shares, the assessee almost exclusively invested in shares of Vakrangee Holding Pvt. Ltd. He observed that in all the years unlike the trading in DMS products the amount of sales is more than the purchase giving rise to taxable profits which is however set off against the losses from DMS business.

He observed that there are only few buyers and sellers in the business of the assessee. For A.Y. 2013-14 and 2014-15 the only buyer of assessee’s product was M/s. Abhirathi Trading Company Pvt. Ltd. and the seller to the assessee was M/s. Mindtree Exports Pvt. Ltd. He observed that these transactions give rise to the suspicion that there is no definite chain or order in value addition. He further observed that how closely the companies are connected will become evident from the table below. Thereafter learned CIT referred the names and address, directors and list of companies with which assessee has had transaction in the course of its trade in DMS products.

He referred to assessee’s transaction with both M/s. Highpoint Trading Company Pvt. Ltd. and M/s. Cybernetrix Automation Company Pvt. Ltd. and referred to the statement of people associated with both these company. That the statements of people associated show that these entities had no genuine business in DMS/PMS. He further observed that how the products trade by the assessee reached the final customers/consumer were also not explained by the assessee. That how the assessee brought about any value addition to DMS product it traded was also not satisfactorily explained. He referred that in 7 Sehorse Mercantile Company Pvt. Ltd. assessment proceedings of M/s. Highpoint Trading Company Pvt. Ltd., all the losses incurred from trade in DMS products were not allowed to set off against income from share trading. He referred to a copy of these statements was received in his office on 2nd July, 2019. He further referred statements of director of the assessee company which was received in the office of the DDIT (Inv) on 28.3.2019. That these statements recorded under oath lead to the conclusion that in the aforementioned firms there were no actual business. Then he referred to the statement of office boy of M/s. Highpoint Trading Co. Pvt. Ltd. He further referred to several other statements and held that the so- called transaction in DMS products is not genuine and is a mere instrument to receive and transfer funds. Accordingly, learned CIT concluded as under :-

“6. While concluding the assessment for A.Y. 2016-17, the aspect of the sales and purchases themselves being entries could not be examined. No opinion was formed on the genuineness of the business of the assessee. The facts of the case, that the so called trade in DMS/PMS products (electoral voter list) is a mere facade for layering of transaction, emerged after the assessment for A.Y. 2016-17 was concluded. In light of the facts that emerged later, the assessment order for A.Y. 2016-17 is both erroneous and prejudicial to the interest of the revenue.

7. We have heard both the parties and perused the records. Learned counsel submitted that the power exercised by learned CIT is not sustainable. He submitted that at the outset learned CIT is referring that “on a reference following issues were noticed”. In this regard learned Counsel of the assessee submitted that there is no whisper from where reference was received by learned CIT. Hence, he submitted that it is not clear whether the jurisdiction exercised by learned CIT is on his own or on the direction of somebody else. Hence, he submitted that learned CIT’s order is not sustainable. He further made following submissions in this regard :

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“The details of purchase and sales were already verified by the Ld. A.O. and therefore it is not a case of order being erroneous and prejudicial to the interest of revenue.

9 Sehorse Mercantile Company Pvt. Ltd. a. Notice dated 23.08.2018 u/s. 142(1) of the Act calling upon the details of purchases and sundry creditors along with the details of loans, share capital, etc. b. Letter dated 21.09.2018 filed in response to the notice u/s. 142(1) of the Act dated 23.08.2018 giving details of party-wise purchases, creditors, etc. c. Letter dated 10.10.2018 in response to the notice u/s. 142(1) of the Act dated 23.08.2018 submitting the copies of confirmation, nature of the purchase, confirmation/ledger of trade payable/sundry creditors, confirmation/ledger of the party from whom loans accepted during the year and the explanation to the reconciliation with AIR details. d. Letter dated 24.12.2018 submitting therein the party-wise details of trade receivables as on 31.03.2016 as well as details of trade receivables as on 30.09.2018.

Copy of the aforesaid letters along with the relevant attachments are enclosed herewith.

8. Thereafter learned counsel for the assessee has relied upon the following decisions :-

• MOIL Ltd. Vs. CIT (396 ITR 244) • CIT Vs. Nirav Modi (390 ITR 292)

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PCIT is solely based on inference from the assessment order without any support of independent enquiry or evidence. .

Without prejudice, we submit that the Ld. PCIT has also not exercised the powers conferred upon him in accordance with the provisions of the Act. A perusal of S. 263 of the Act clearly shows that the Ld. PCIT is required to establish that an order passed by the Ld. A.O. was an erroneous in so far as it is prejudicial to the interest of revenue. The legal position in this regard is very clear that it is upon the Ld. PCIT to conduct necessary enquiries and come to a conclusion that the assessment order passed by the Ld. A.O. was erroneous and prejudicial to the interest of revenue. In the present case, the assessee apprehends that the said revision has been resorted pursuant to audit objection.

In the present case, the perusal of the order u/s. 263 of the Act shows that the Ld. PCIT has merely relied upon the financial statements of the Appellant reflecting exponential sales growth in the business of the Appellant over the years, the low profit margin and limited customer/supplier base to come to conclusion that the business activity of the Appellant was not genuine. There is no material or evidence brought on record to prove the alleged inference drawn him. The Appellant submits that in order to prove that the assessment order passed was prejudicial to the interest of revenue, the Ld. PCIT ought to have brought on record some evidence to prove that the appropriate income has not been assessed by the Ld. A.O. and that the Appellant was liable to tax on an income which was higher than the income offered and assessed by the Ld. A.O. in the assessment order. In the revision order, except making certain allegations based on the inference from the financial statements of the Appellant and the enquiries made in case of the other entities pertaining to other years, Ld. PCIT has not explained as to how the income shown by the Appellant ought to have been more than the income assessed by the Ld. A.O. It is therefore submitted that unless any evidence to prove any amount has been under assessed, the Ld. PCIT cannot be said to have complied with the condition of "prejudicial to the interest of revenue.”

assessee was genuine and the inference drawn buy learned PCIT were without any basis. In this regard learned counsel has made following submissions :-

“We submit that the purchase and sales made by the Appellant are genuine and the same are fully supported by cogent documentary evidences. The Appellant submits that the trading activity involves purchase and sale of the Electoral Voter's List and therefore the same is relevant during the period when elections are likely to be conducted in any of the state or cities during the year. Further, with the increase in the population and awareness, as well as with the increase in the political parties over the period, the need for such voter list has increased resulting into increase in purchase and sale of the same. Under these circumstances, merely because the turnover of the Appellant has increased over a period, it cannot be presumed that the trading activity of the Appellant is not genuine. It is further submitted that since the DMS/PMS product of the Appellant is relevant to people from different states and cities depending upon the forthcoming elections at that relevant point of time, the Appellant trades with only few companies who are dealing in the said product in the relevant state or city during the year. Hence, merely because the trading activity of the Appellant is restricted with few parties, it cannot be presumed that such activities of the Appellant are not genuine.

It is next submitted that during the course of the revision proceedings, the Appellant had submitted the details of sales to the Ld. PCIT. The complete company profile, business background and the business model comprising of 26 pages indicating the nature of business was also submitted before the Ld. PCIT. In spite of the same, the Ld. PCIT has not been able to find any deficiency or discrepancy in the same.

The Ld. PCIT has referred to certain statements of the persons namely, Mr. Balkrishna Yadav, office boy of the Abhirathi Trading Company Pvt. Ltd., Mr. Mahendra Gaur, Director of Cybernatics Automtion Pvt. Ltd., Mr. Ajay Jangid, Chartered Accountant for Highpoint Trading Co. Ltd. and Mr. Sanjeev Bohra, Director of the Appellant company. However, none of the statements referred to by the Ld. PCIT have any bearing on the purchase and sale of DMS/PMS products by the Appellant for the year under consideration. The discussion in respect of the said statements made by the Ld. PCIT in his order at page 15-16 shows that the statements were recorded in the course of assessment proceedings in the case of Highpoint Trading Co. Ltd. for A.Y. 2011-12 and not in connection with the proceedings of the Appellant for A.Y. 2016-17. Further, the statements nowhere reflect any allegations, much less adverse allegations, with respect to the trading activity of the Appellant. Under these circumstances, it cannot be said that the said statement was instrumental in coming to conclusion that the business for the Appellant was not genuine.

Lastly, the Appellant also submits that the assessment proceedings in case of other parties with whom the Appellant has made purchase and sale transactions has been concluded u/s 143(3) of the Act. In their assessment orders, the transaction of purchase and sale of DMS/PMS products with the 12 Sehorse Mercantile Company Pvt. Ltd.

Assessee have been accepted to be genuine. In such circumstances, it is incorrect to observe that the transactions carried out by appellant with them are not genuine. Copy of the assessment orders of the various parties in similar line of business is enclosed herewith.”

13 Sehorse Mercantile Company Pvt. Ltd. of above case laws we find that in the present case revenue has not been able to bring any material on record to show that the exercise of revisionery power by learned CIT was of his own. As learned Commissioner himself states that he has exercised the power on a reference it follows that the ratio from above said Hon'ble High Court decision follows. In as much as the exercise of revision power by learned CIT is on the reference from an unspecified source the power exercised by learned CIT is vitiated and not sustainable in law.

the revision power under section 263 cannot be exercised in respect of a matter which falls within the power to assess escaped income. That the revising authority should not trench upon the powers which are expressly reserved to the Assessing Officer under section 147. The commissioner in exercising of its revision of jurisdiction should not ignore such a specific power in this regard. We note that Hon'ble Jurisdictional High Court in the case of CIT vs. Gabriel India Ltd. 203 ITR 108 has expounded that there must be material available from the records called for by the Commissioner, so as to bestow upon him the power to exercise jurisdiction. In the present case as noted earlier the records of the assessing officer up to the date of passing of order did not have the statements and other aspects which came into existence subsequent to the order passed by the assessing officer. Moreover, the assessment details of other entities are not marked on record of the assessment of assessee. Hence in the background of aforesaid discussion it amply evident that the information and material on the basis of which learned CIT is exercising his jurisdiction under section 263 came into existence after the assessment order passed by the assessing officer. It is also not the case that they were available to the Assessing Officer in assessment record. These materials can be a source of reopening but on the touchstone of aforesaid case laws learned CIT cannot exercise jurisdiction under section 263 of the I.T Act. It is also noted that it is not the case that there was no time for the assessing officer to reopen the assessment. In such circumstances the Mumbai ITAT decision in the case of Top-Notch Buildcon Vs. versus DCIT (supra) applies fully here. In this case it was held that if the matter was to be a subject matter of reopening that was to be done by way of reopening notice and the same cannot be done indirectly through division order under section 263. Accordingly the jurisdiction exercised by the learned CIT in this case is vitiated in as much as he has stepped into the shoes of Assessing Officer in virtually reopening the assessment and on the touchstone of aforesaid case laws the jurisdiction exercised by the learned CIT is vitiated and not sustainable in law.

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Order pronounced in the open court on 28.04.2022.