Loading judgment…
Facts
The assessee's return for AY 2018-19 was selected for scrutiny. A survey was conducted and the assessee surrendered Rs. 25 lacs. The AO accepted the returned income after issuing notices. The CIT initiated revision proceedings under Section 263, alleging the AO's order was erroneous and prejudicial to revenue due to lack of inquiry regarding stock shortage, cash discrepancy, and digital record issues.
Held
The Tribunal held that the CIT failed to demonstrate how the assessment order was erroneous. The CIT's observation that the AO did not conduct sufficient inquiry was insufficient for invoking Section 263. The CIT should have conducted his own inquiry to establish the error.
Key Issues
Whether the Commissioner correctly invoked Section 263 to revise the assessment order without conducting independent inquiries and demonstrating the erroneous nature of the AO's order.
Sections Cited
263, 143(3), 143(2), 133A, 142(1), 133(6), 68, 69, 69A, 115BBE, 144A, 120, 129
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DIVISION BENCH, ‘A’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI MANOJ KUMAR AGGARWAL
The present appeal is directed at the instance of the assessee against the order of the ld. Commissioner of Income Tax (in short ‘CIT') dated 22.03.2023 passed under Section 263 of the Income Tax Act, 1961 in assessment year 2018-19. 2. The assessee has taken three grounds of appeal, however its grievance revolves around a single issue namely, Α.Υ.2018-19 2 1d. CIT has erred in taking cognizance under Section 263 of the Income Tax Act and thereby setting aside the assessment order dated 10.06.2020 passed under Section 143(3) of the Income Tax Act in assessment year 2018-19. 3. The brief facts of the case are that assessee has filed its return of income on 04.10.2018 declaring taxable income of Rs.30,64,460/-. The case of the assessee was selected for scrutiny assessment and a notice under Section 143(2) was issued and served upon the assessee. A survey under Section 133A of the Income Tax Act was carried out at the business premises of the assessee on 01.11.2017. The assessee has surrendered an income of Rs.25 lacs which was included in the return of income. The ld. AO issued notices under Section 142(1) on 20.01.2020, 18.02.2020 and 18.05.2020. Thereafter, he has passed the assessment order on 10.06.2020. The AO has accepted the returned income after satisfying himself with the replies of the assessee on the queries raised in its notices.
The 1d. CIT perused the assessment record and formed an opinion that assessment order is erroneous as much as it Α.Υ.2018-19 3 has caused prejudice to the interests of Revenue. He issued a Show Cause Notice under Section 263 on 06.03.2024. The copy of the Show Cause Notice has been placed on page No. 19 to 24 of the Paper Book. A perusal of its Show Cause Notice would indicate that 1d. CIT termed the assessment order as suffering from error on account of three issues, namely; a) No enquiry on the alleged shortage of stock found during the course of survey. b) No enquiry on the alleged shortage of cash unearthed during the course of survey. c) The AO did not conduct enquiry on certain discrepancies noticed in digital record maintained by the assessee which has been summarized in the Show Cause Notice from page No. 3 to 6. 5. The assessee has filed a detailed reply qua all the issues and relevant part of the reply has been reproduced by the 1d. CIT on page Nos.6 to 11 of the impugned order. The ld. CIT, thereafter, rejected the explanation of the assessee and set aside the assessment order by recording following findings : Α.Υ.2018-19 4 “4. I have considered the reply of the assessee to the Show Cause Notice under Section 263 of the Act and the assessment records. (a). In his reply to the Show cause notice u/s 263 reproduced in pare 2 above, the assessee has furnished only a general reply. No reply has been filed to specific issues raised at points (iii), (iv), (v), (v), (vi) and (vii) of the SCN. It is, therefore, held that the assessee has nothing to show that these issues were in any manner examined by the AO during assessment proceedings or that these were explained by the assessee at his own end. (b). A reference to the ITR, Trading Account, P & L account, Computation of Total Income and the Audit report filed by the assessee does not shows where the surrender amount of Rs.25,00,000/- has been credited by it/ entered in the books of accounts and what is the corresponding double entry of the same. Survey u/s 133A of the Act was carried out by the DDIT (lnv.),Ambala on 01/11/2017.No surrender was made at the time of survey. Subsequently, a surrender of Rs 25,00,000/-was made through a letter dated 14.12.2017 stating that it was being made to avoid harassment of vendors and customers and to buy peace. In the surrender letter, the assessee undertook to increase income of the current financial year 2017-18 relevant to Asstt. Year 2018-19 by Rs.25 Lakh by increasing G.P./N.P. rate and over and above the regular business income. However, the assessee has not specified as to how much of the surrender amount was on account of discrepancy in stock, how much of it was on account of discrepancy in cash, or on any other account. Accordingly, it is not clear as to where the double entries have been made in the books of accounts which will have a bearing upon the book results of the succeeding year as well. The assessment order has been passed without making the requisite enquiries from the assessee in this regard as were called for in the facts and circumstances of the case. The AO has failed to examine this aspect of the matter which makes the order erroneous and prejudicial to revenue. (c). It is evident from the assessment records that the AO has failed to examine the books of accounts/impounded material during assessment proceedings. Digital data was also impounded during survey which was on a hard disk in image format which was never opened and examined. As mentioned in the Survey Report, no stock register was maintained by the assessee. In the absence of Stock Register, the books of account could not be relied upon without carrying out third party verifications. The AO has failed to make any such enquiries or verification. Notices u/s 133(6) were issued by the Assessing Officer in 10 cases. However, as per assessment record, information was received in only 4 cases. The AO has completed the assessment without receipt of the replies to the notices issued u/s 133(6).Some of the notices were received back undelivered due to wrong address. In these cases, onus lay upon the assessee to provide correct addresses of the parties/to produce these parties/to file confirmations from these parties. However, Assessing Officer did not ask the assessee to discharge this primary onus. Thus it cannot be said that proper enquiry or verification has been done in this regard as well. Α.Υ.2018-19 5 The AO has passed a non-speaking cryptic order. (d) The discrepancies found in cash, stock etc. could not have been unearthed without survey action and are in the nature of undisclosed income under Section 68/69/69A of the Act. In the absence of any explanation, tax was liable to be paid as per the provisions of section 115BBE of the Income Tax Act, 1961. The Assessing Officer has erred in accepting the payment of tax at normal rates.
In view of the foregoing, it is held that the assessment order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue as per Clause (a) of Explanation 2 to Section 263 of the Act.
The assessment order dated 10.06.2020 is held to be erroneous insofar as it is prejudicial to the interests of revenue The assessment order is set aside with the directions to the assessing officer to pass a fresh assessment order after making the requisite enquiries and applying the correct provisions of the Income Tax Act and after giving due opportunity of hearing to the assessee.”
The ld. Counsel for the assessee while impugning the order of ld. CIT submitted that basically there was no shortage in the stock. The ld. AO has appreciated this issue during the course of assessment proceedings but ld. First Appellate Authority failed to take note of its reply. He submitted that CIT has worked out the shortage of stock in terms of value at Rs.84,52,771/-. It is pertinent to note that Survey Team was unable to recognize stock having value of Rs.1,01,96,466/-. Out of those stock amounting to Rs.82,13,740/- relates to assessee i.e. Hemant Fabrics Pvt. Ltd. and Rs.19,82,726/- relates to M/s Hemant Sarees. If this figure is taken into consideration, then there is no shortage in the stock. The 1d. Counsel for the assessee further emphasized the manner adopted by the Survey Team Α.Υ.2018-19 6 in taking note of the stock position. It is taken in terms of value and not in terms of quantity. The each and every item was not taken into consideration by the Survey Team, rather they have taken lumpsum in an estimated manner.
The 1d. Counsel for the assessee further contended that as far as shortage of cash as worked out by the ld. CIT is concerned, there was no shortage and the working has been given to the AO as well as to the CIT which is available on page 71 of the Paper Book. According to this working, no shortage in cash was available and this has been accepted by the AO. Similarly, assessee has explained each and every document to whom discrepancy has been alleged by the ld. CIT.
The 1d. CIT DR on the other hand relied upon the order of the CIT. He emphasized that perusal of the order of the AO would reveal that he has not discussed any of the issue in the assessment order.
We have duly considered the rival contentions and gone through the record carefully. Before we embark upon an enquiry on the facts and issues agitated before us to find out whether the action u/s 263 of the Act Α.Υ.2018-19 7 deserves to be taken against the assessee or not, it is pertinent to take note of this Section. It reads as under:- “263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee 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 purposes of this sub-section,- (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 or 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 Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; Α.Υ.2018-19 8 (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 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 June, 1988, the powers of the 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 sub-section (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 purposes 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." Α.Υ.2018-19 9
A bare perusal of the sub section-1 would reveal that powers of revision granted by Section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show-cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on Α.Υ.2018-19 10 a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order.
A perusal of sub-clause (c) of the above would contemplate that if any order, which is subject matter for revision under section 263 is challenged in appeal, then, on the items which are subject matter of appeal, no power under section 263 could be exercised by the ld. Commissioner. We may elaborate further, for example- an assessment order was passed, it contains five issues, which were challenged before the ld. CIT(A), but ld. Assessing Officer failed to look into few issues, which may arise from the record, then inspite of the assessment order being challenged before the ld. CIT(A), Α.Υ.2018-19 11 the ld. Commissioner would have juri iction on such items, which are not subject matter of appeal in that assessment order.
At this stage, before considering the multi-fold contentions of the ld. 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 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 Α.Υ.2018-19 12 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 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 him 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 fee stratified with the conclusion. (viii) The CIT, before exercising his juri iction 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.
In the light of above, if we examine the facts, then it would reveal that AO has issued three questionnaires namely 20.01.2020, 18.02.2020 and 18.05.2020. All these questionnaires have been replied by the assessee, copies of Α.Υ.2018-19 14 those replies are available on the record. The assessee has explained position of stock with working and how mistake has crept in the working of Survey Team. The assessee has also explained the position of cash found at the time of survey and how the amounts deposited in the bank account was not given credit in the available cash on that day because that effect was not given in the books. The assessee has explained the third position about various discrepancies alleged by the CIT.
It is pertinent to note that assessee has no control over the AO as to how he would draft his order. It is for the AO to discuss each and everything. Had the relevant
discussion was made, it may not be an ideal position for the assessee but for Revenue also, because in that case, higher authorities would appreciate the reasoning of the AO. But if AO failed to discuss all these issues in the impugned order, then it will not be fault of the assessee and it is to be ascertained whether he has raised queries and assessee has replied them. If he has replied and make the AO to appreciate those factual aspects during discussion in the assessment proceedings, then it would be construed that enquiry has been made. In the present case, the AO has Α.Υ.2018-19 15 raised questions on all these aspects and assessee has filed its reply. Thereafter, AO has accepted the stand of the assessee without making much discussion in the assessment order.
We have reproduced the order of the CIT. A perusal of this order would reveal that even ld. CIT has not recorded any finding as to how the assessment order is erroneous. The 1d. CIT ought to have first demonstrated as to how reply submitted by the assessee is incorrect and how error lies in the assessment order. Hon'ble D3elhi High Court has Projects Ltd. reported in 343 ITR 329. Hon'ble Delhi High Court has propounded that 1d. Commissioner cannot left the issue to the AO to find out where he has committed an error. It is the Commissioner who has to conduct an enquiry and then propound how the assessment order is erroneous. We deem it appropriate to take note of the discussion made by the Hon'ble Delhi High Court on this issue which read as under : "Thus, in cases of wrong opinion or finding on merits, the Commissioner of Income-tax has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. The Commissioner of Income-tax cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the Commissioner of Income-tax must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the Commissioner of Income- tax and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the Commissioner of Income-tax can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of juri iction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the Commissioner of Income- tax has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question. Α.Υ.2018-19 16 This distinction must be kept in mind by the Commissioner of Income-tax while exercising juri iction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of juri iction under the said section is not sustainable. In most cases of alleged "inadequate investigation", it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without the Commissioner of Income-tax conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. The Commissioner of Income-tax cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the Commissioner of Income-tax to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the Commissioner of Income-tax hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore, the Commissioner of Income-tax must after recording reasons hold that the order is erroneous. The juri ictional precondition stipulated is that the Commissioner of Income-tax must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the Commissioner of Income-tax can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the Commissioner of Income- tax [see CIT vs. Shree Manjunathesware Packing Products and Camphor Works [1998] 231 ITR 53 (SC)]. Nothing bars/prohibits the Commissioner of Income-tax from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous." Α.Υ.2018-19 17
In the light of above, if we peruse the impugned order, then it would reveal that 1d. Commissioner has simply observed that AO has not conducted enquiry, therefore, order is erroneous. To our mind, he should first examine whether any shortage in the stock is available or not. If available, then its impact has been taken care by the assessee or not by declaring additional income of Rs.25 lacs. Similarly, he should have recorded the finding on other aspects also. Therefore, we are of the view that by not deciding as to how Α.Υ.2018-19 18 the order is erroneous which has caused prejudice to the interests of the Revenue, ld. Commissioner has himself committed an error. Thus, the impugned order is not sustainable. Accordingly, we quash it.
In result, the appeal of the assessee is allowed. Order pronounced on 25.03.2025. (MANOJ KUMAR AGGARWAL) ACCOUNTANT MEMBER "Poonam" (RAJPAL YADAV) VICE PRESIDENT आदेश की प्रतिलिपि अग्रेषित /