SHARMANJI YARNS PRIVATE LIMITED,LUDHIANA vs. PRINCIPAL COMMISSIONER OF INCOME TAX-1, LUDHIANA, LUDHIANA

Subsequently, Ld. Pr. CIT, upon perusal of case records, alleged that the assessment was completed without making in-depth enquiries. For the same, a show-cause notice was issued to the assessee in 15- 02-2025 alleging difference in expenses claimed under the head fees for technical services (FTS) and commission expenditure. Subsequently, another show-cause notice was issued on 18-03-2025 identifying various issues viz. (i) no verification of stock register was done; (ii) issue of ICDS valuation of stock not verified properly; (iii) Addition to building, Plant & Machinery and furniture was not examined; (iv) Expenses claimed for Rs.543.53 Lacs were not verified. The assessee refuted the allegations of Ld. Pr. CIT by stating that completed quantitative stock details and valuation was already furnished to Ld. AO. The valuation in terms of ICDS was also verified. The assessee also filed reconciliation of difference of Rs.42.15 Lacs as noted under the head FTS & Commission expenditure. The assessee had also furnished section-wise TDS report (194H & 194J). Regarding Commission or Brokerage, the assessee had submitted that amount of commission or brokerage was transferred to the respective accounts.

However, Ld. Pr. CIT observed that Ld. AO did not examine the issue of difference of Rs.42.15 Lacs and the assessee also did not file any submissions in this regard. In other words, Ld. AO failed to examine and verify this issue during the course of regular assessment proceedings. On the other issues, it was observed that the case was selected under ‘complete scrutiny’ as against assessee’s claim that the case was selected for ‘limited scrutiny’. On specific issue of stock valuation, the assessee had submitted copies of balance sheet, bank account statement and invoices in respect of purchase of cotton. However, Ld. AO did not call for the stock register, quantitative tally of stock and valuation of the same for examination. Further, stock register had not been tallied with the purchase and sales made during the year. The Ld. AO thus failed to verify this issue. Regarding ICDS compliance and adjustment, apparently Ld. AO made complete verification and examination of the data submitted during the assessment proceedings. The method adopted for valuation of closing stock as well as spares was already been mentioned in the Tax Audit report. However, the assessee had submitted that there was no increase/decrease in the profit as per ICDS-II of Inventories and also there was no effect on profiteven if inclusive method would have been adopted. The assessee had tabulated the effect of each of the items but Ld. AO failed to call for documentary evidences for verification in this regard. On the issue of addition to building, Plant & Machinery and furniture as well as on the issue of expenses of Rs.543.53 Lacs as debited in the Profit & Loss Account, the assessee stated that the case was selected for ‘limited scrutiny’ and these issues were beyond the ambit of ‘limited scrutiny’. As against this, the case was selected for ‘complete scrutiny’ and therefore, the said plea could not be accepted. The Ld. AO failed to verify and examine these issues which make the order erroneous and prejudicial to revenue in terms of Explanation 2(a) to Sec.

As per said provisions, the order would be amenable to revision if the order was passed without making inquiries or verification which should have been made. Referring to various judicial decisions, the order was held to beerroneous and prejudicial to the interest of the revenue. Accordingly, the assessment was set aside and Ld. AO was directed to redo the assessment on all the identified issues. So aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 6. It emerges that the assessee’s return of income for this was subjected to complete scrutiny under CASS. During the course of regular assessment proceedings, various notices were issued to the assessee u/s 142(1) along with detailed questionnaire calling for various details from the assessee. From the face of the assessment order itself, it is quite clear that necessary details as requisitioned from time to time vide detailed questionnaire was duly furnished by the assessee. The assessee complied with various notices as issued u/s 142(1) on 01-12-2022. 10-02-2022, 03-03-2022 and 03-08-2022. The same has already been detailed by Ld. AO at Page No.2 of the assessment order. After due consideration of all these replies, Ld. AO specifically concluded that no variation was required on account of non- compliance with Income Computation & Disclosure Standards (ICDS) and large difference in opening stock of current year and closing stock of previous year.In other words, the issues as identified during the course of regular assessment proceedings were duly been examined / verified by Ld. AO and Ld. AO chose not to make any additions / disallowances in those aspects. The only variation as proposed was on account of purchase of raw material wherein Ld. AO made huge additions and framed the assessment order. It is quite evident that the assessee’ financial statements as well as Tax Audit Report and other details were duly available with Ld. AO and the same were certainly looked into by Ld. AO.

In notice u/s 142(1) dated 01-12-2021 (as kept on Page Nos.49 to 51 of the paper-book), the assessee was required to furnish various details. The same include query on difference in opening and closing stock and non-compliance of ICDS Standards with respect to inventories. The assessee was required to furnish the details of expenses along with details of Tax Deduction at source. The assessee was specifically required to reconcile the difference of figures of closing stock of previous year vis-à-vis opening stock of this year. In notice u/s 142(1) dated 10-02-2022, the assessee was again required to file details of various expenses along with supporting documents. In notice u/s 142(1) dated 03-08-2022, the assessee was again required to file details of various business expenditure along with documentary evidences. The assessee was also required to explain the additions made to various block of assets viz. building, plant and machinery.

From assessee’s various replies as placed on record, it is quite evident that all the above notices were duly been complied with by the assessee and the requisite details as called for by Ld. AO were duly furnished by the assessee during the course of regular assessment proceedings itself. After due consideration thereof, Ld. AO felt satisfied and chose not to make any additions in all these respects except for addition of alleged bogus purchases.

Thereafter, again in response to revisionary show-cause notice dated 15-02-2025, the assessee furnished reply on 24-02-2025 (Page Nos. 23 to 25 of the paper-book) wherein the assessee furnished details of FTS payments along with details of deduction of tax at source. Similardetails were provided for commission payments. The head under which these expenses were debited was also tabulated by the assessee.

In yet another show-cause notice dated 18-03-2025, the assessee again furnished detailed reply on 24-03-2025 which iskept on Page Nos. 28 to 48 of the paper-book. The assessee duly furnished its reply on the issues which were identified by Ld. AO during the course of regular assessment proceedings. It was pointed out that complete quantitative stock tally along with valuation of closing stock and copy of bills was duly furnished which was examined by Ld. AO. Further, Ld. AO examined the issue of deviation from ICDS with respect to valuation of stock. On other aspects, it was stated that the case was selected for ‘limited scrutiny’ and thus, beyond the scope of assessment.

However, these submissions have been rejected by Ld. Pr. CIT and the Ld. AO has been directed to redo the assessment on all these aspects which is the grievance of the assessee.

Upon perusal of assessee’s detailed replies / submissions, it could very well be said that the various issues as flagged in the impugned revisionary order were duly been questioned by Ld. AO and the same were aptly replied by the assessee from time to time. Upon perusal of all these replies and documents, it could very well be said that whatever information was called for by Ld. AO, the same was duly been supplied by the assessee. The Ld. AO considered the replies of the assessee and after having satisfied with aforesaid explanation as furnished by the assessee, he chose to substantially accept the returned income of the assessee. It could thus be seen that Ld. AO had raised a specific query on various issues as flagged in the impugned revisionary order and accepted the claim of the assessee with due application of mind. Therefore, it is a case of acceptance of one of the plausible views which was more on facts and the said view could not be said to be opposed to any law or statutory provisions. The Ld. AO, in our opinion, had taken one of the plausible views in the matter and therefore, Ld. Pr. CIT could not be said to be justified in substituting the view of Ld. AO with that of his own view. Simply because some further verification was required or simply because the verification was not done in a particular manner or some issues were not examined by Ld. AO which ought to have been examined, the same could not justify revision of the order unless it was shown that the view of Ld. AO was erroneous or opposed to any law or non-examination of any aspect was prejudicial to the interest of the revenue. We find that there is no such finding in the impugned revisionary order and therefore, the scope of assessment could not be enhanced by exercising the revisionary power u/s 263 unless the case of error as well as prejudice to revenue is made out by revisionary authority.

Our aforesaid view is as per the ratio of Hon’ble Delhi High Court in the case of ITO vs. DG Housing Projects Ltd. (343 ITR 329). In this decision, it was held by Hon’ble Court that AO is both an investigator and an adjudicator. A distinction has to be drawn between a case where the AO has not conducted any enquiry or examined any evidence whatsoever (“lack of inquiry”) from one (i) where there is enquiry but the findings are erroneous; and (ii) where there is failure to make proper or full verification or enquiry (“inadequate inquiry”). The fact that the assessment order does not give any reasons for allowing the claim is not by itself indicative of the fact that the AO has not applied his mind on the issue. All the circumstances have to be seen. A case of lack of enquiry would by itself render the order being erroneous and prejudicial to the interest of the revenue. In a case where there is inquiry by the AO, even if inadequate, the CIT would not be entitled to revise u/s 263 on the ground that he has a different opinion in the matter. Also, in a case where the AO has formed a wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry before passing the Sec. 263 order. The CIT is entitled to collect new material to show how the order of the AO is erroneous. The CIT cannot remand the matter to the AO for further enquiries or to decide whether the findings recorded are erroneous without a finding that the order is erroneous and how that is so. A mere remand to the AO implies that the CIT has not decided whether the order is erroneous but has directed the AO to decide the aspect which is not permissible. On facts, as the CIT had doubts about the valuation and sale consideration received, he ought to have examined the said aspect himself and given a finding on the merits on how the consideration was understated. The ratio of this decision squarely applies to the facts of present case before us.

The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83) has held that the phrase 'prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. The said principal has been reiterated by Hon’ble Court in its subsequent judgment titled as CIT V/s Max India Ltd. (295 ITR 282). Similar principal has been followed in Grasim Industries Ltd. V/s CIT (321 ITR 92). The ratio of all these decisions is that where two views are possible and AO has preferred one view against another view, order could not be said to be erroneous or prejudicial to the interest of the revenue.

In the case of Gabriel India Ltd. (203 ITR 108), Hon’ble Bombay High Court observed that from a reading of sub-section (1) of section 263, it is clear that the power of suo-motu revision can be exercised by revisionary authority only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is "erroneous in so far as it is prejudicial to the interests of the Revenue". However, this power is not an arbitrary or unchartered power. It could be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of revisionary authority must be based on materials on the record of the proceedings called for by him. The revisionary authority could not initiate proceedings with a view to start fishing and roving enquiries in matters or orders which already stood concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. If Ld. AO, acting in accordance, with law makes a certain assessment, the same could not be branded as erroneous simply because, according to revisionary authority, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the revisionary authority for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. When the assessee filed detailed explanation which are part of the record, it could be said that Ld. AO was satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard. Further inquiry and / or fresh determination can be directed by revisionary authority only after coming to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue.

Applying the ratio of all these decisions, we come to a conclusion that various aspects as identified by Ld. AO during the course of regular assessment proceedings were duly been examined by Ld. AO and one of the possible views was taken in the matter. The assessee duly furnished all the information as called for by Ld. AO on all the identified aspects. On new issues as identified by Ld. Pr. CIT, there is no finding as to how non-examination of these aspects made the order erroneous and prejudicial to the interest of the revenue. In the absence of any such independent findings by Ld. Pr. CIT, the impugned revision of the assessment order could not be sustained in law. We order so. Consequently, the assessment as framed by Ld. AO stand restored back.

The appeal stand allowed in terms of our above order. Order pronounced on 08/10/2025