SACHCHADE FOOD PVT. LTD.,AHMEDABAD vs. THE PR. CIT-3, AHMEDABAD

आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Principal Commissioner of Income Tax, Ahmedabad-3, dated 31/03/2021 arising in the matter of revision order passed under s. 263 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2016-2017.

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income shown in revised return is less than the taxable income shown in original return” and the AO vide order, under section 143(3) of the Act, dated 05-12-2018 accepted the income as per revised return.

5.1 Likewise, there was one of the reasons for selection of scrutiny that there was huge current liability against the assets. The short term borrowing was also increased by Rs. 1,68,75,934/-. Similarly assessee has shown trade advance of Rs. 38,55,973/-. But no enquiry and verification was conducted by the AO in this regard.

5.2 Thus, the Ld. Principal Commissioner of Income in view of the above initiated proceedings u/s 263 of the Act in respect of the captioned assessment year vide show cause notice dated 20-03-2021.

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change except being change in depreciation as per The Companies Act 2013. The assessee in support of the triple shift working furnished copy of electricity bills showing consumption of electricity at day and night time separately. The assessee in view of the above contended that there was no prejudice caused to the Revenue as there was no change in depreciation as per the Income Tax Act.

6.1 Likewise, the current liability increased in the year largely due to cash credit facility availed from the bank. There was also increase in trade payable but there were also corresponding increase in trade receivable and turn over. With regard to advance from customer, the assessee filed necessary details in the annexure-4 containing the name and the amount.

6.2 Without prejudice to the above, the assessee also contended that during the assessment proceeding specific query with regard to change in taxable income as compared to original return was raised which was duly explained. Similarly, detail of large current liabilities in comparison to assets was called by the AO which was duly complied with. Therefore, the assessment was framed after due verification and application of mind and thus the same cannot be held as erroneous insofar prejudicial to the interest of Revenue.

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whether this was the first year in which the triple shift was claimed or whether it was a practice by the assessee to claim such triple shift, no comparison of sales expenses, labour and wages expenses with the preceding year was furnished to show that there was proportionate increase in such expenses during the year under consideration. In view of all the facts discussed above, it is evident that the claim of the assessee is neither legally tenable nor factually supported by satisfactory documentary evidences. The excess depreciation claimed in the revised return was therefore required to be deleted. The A.O. had failed to examine this issue during the course of assessment and as such order passed by the A.O. was erroneous and prejudicial to the interest of revenue on his account. 8. During the course of proceedings u/s. 263, the assessee was also asked to explain the amount of Rs.38,55,973/- shown under the head "advance from customers" and to produce supporting evidences with regard to this liability. The assessee vide reply dated 25-03-2021 submitted that the liability on account of advance from customers was advance received during the course of business activity. The assessee is this regard furnished the details of advances from customers as under:-

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

Perusal of the above said reply, it is relevant that the advance shown in the name of various persons ranges from as low as Rs. 144/-, to Rs. 10,16,910/-. It is hardly possible that a customer would give an advance of Rs. 144/- or Rs.221/- or Rs. 444/- in the line of business of the assessee. No confirmation from these customers were filed neither copy of their account was filed as such the advance remains unexplained and unverified. The A.O. is directed to examine this aspect. The order passed by the A.O. was erroneous and prejudicial to the interest of revenue.

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11.1 An inquiry made by the Assessing Officer, considered inadequate by the Pr. Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgments by various High Courts in this regard.

11.2 Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 on the ground of inadequate inquiry. “12. ….. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. ——— From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer

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while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re- examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.”

11.3 In Gabriel India Ltd. [1993] 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113) “The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already 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.

11.4 The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:- “20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provison shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis- à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not

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authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.”

11.5 Before deciding the issue, it would be useful to refer to some Supreme Court decisions on this subject which would throw useful light on the scope of enquiry under Explanation (a) to section 263 of the Act.

11.6 Recently the Supreme Court of India in the case of Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd.[2021] 130 taxmann.com 294 (SC) dismissed SLP filed by the assessee against order passed by High Court holding that where assessee-company had received unsecured loans from two different companies and Assessing Officer had made inquires in detail and accepted genuineness of same, such view of Assessing Officer being a plausible view could not be considered erroneous or prejudicial to interest of revenue. The facts of this case were that respondent assessee has filed its return of income showing total income of Rs. 62,55,900/- which was assessed under section 143(3) of the Act, 1961 by an assessment order dated 14th March 2016. The respondent company received unsecured loans from M/s. Georgett Tradecom Pvt Ltd and M/s. Purba Agro Food Pvt Ltd amounting to Rs. 2.49 Crore and the Assessing Officer allowed these unsecured loans. The Principal Commissioner of Income-tax invoked section 263 of the Act, 1961 for revising the assessed income of the respondent assessee. It was noticed by the PCIT that the unsecured loans obtained by the respondent assessee are shown as investment in the name of the assessee in the share application as well as in the balance sheet of the respective companies. The PCIT passed an order under section 263 of the Act directing the Assessing Officer to pass fresh assessment order under section 143(3) of the Act, 1961 on the aspect of unsecured loans shown by the respondent assessee. The

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Hon’ble Supreme Court made the following observation while deciding in favour of the assessee:- “Thus, the Tribunal has considered in detail the aspect of revisional power to be exercised by the PCIT in the facts of the case and has given a finding of facts that the Assessing Officer has made inquiries in detail and after applying mind, accepted the genuineness of loans received by the respondent assessee from the aforesaid two companies and such view of the Assessing Officer is a plausible view, and therefore, the same cannot be said to be erroneous or prejudicial to the interest of the Revenue.”

11.7 The Supreme Court in another recent case of Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates*[2019] 106 taxmann.com 31 (SC), held that where Pr. CIT passed a revisional order making addition to assessee's income under section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee's income. The Principal Commissioner passed a revisional order under section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee's on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee's on-money transactions and Tribunal thus set aside revisional order passed by Commissioner. The Hon’ble High Court upheld Tribunal's order. The Hon’ble Supreme Court while dismissing the SLP filed by the Department held as under:- “We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee's on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed”

11.8 The Supreme Court in the recent case of Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd[2020] 114

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taxmann.com 545 (SC), dismissed the Revenue’s SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law, with the following observations: “Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere with the view of the Tribunal. The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ought to have so held in the order of revision. There was simply no necessity to remand the proceedings to the Assessing Officer when no further inquiries were called for or directed”

11.9 The Supreme Court in the case of Principal Commissioner of Income- tax- -8 Mumbai v. Sumatichand Tolamal Gouti [2019] 111 taxmann.com 287 (SC) held that where High Court upheld Tribunal's order holding that AO had made detailed enquiries while allowing assessee's claim for deduction of business expenditure and, thus, revisional order passed by Commissioner was not sustainable, SLP filed against High Court's order was liable to be dismissed. The facts of this case were that in course of assessment, Assessing Officer allowed assessee's claim for deduction of certain expenditure on purchase of CDs on Jain Religion by expending an amount of Rs. 10.4 crores, after due examination. The Commissioner passed revisional order holding that Assessing Officer had not carried out any enquiries as to nature of expenditure being capital or not. The Tribunal, however, allowed assessee's appeal holding that Assessing Officer had carried out detailed enquiries and taken a view which was a plausible view. Accordingly, Tribunal set aside revisional order passed by Commissioner. The Hon’ble High Court upheld the order passed by the Tribunal. The Hon’ble Supreme Court on consideration of above facts held that SLP filed against High Court's order was liable to be dismissed. The Supreme Court made the following observations, while passing the order:- “It is by now well settled that, the Commissioner can exercise revisional powers under Section 263 of the Act only when it is found that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of Revenue. In the present case, the Tribunal noted the observations of the Assessing Officer in the order of remand to the effect that Jain munis do not advocate spread of religion through use of computers, source of electronic media is usually shunned, very small section of the community uses computer technology for religious purposes as plenty of printed literature is available in the market. All these

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factors led to the market value of the CDs declining dramatically. It was on account of these reasons, that the assessee had incurred substantial loss arising out of reduction in the value of stock lying at the end of the year. The Tribunal, therefore noted that the Assessing Officer had carried out detailed enquiries and taken a plausible view.”

11.10 The coordinate bench of this Tribunal in the case of Torrent Pharmaceuticals Ltd. v Deputy Commissioner of Income-tax, Circle-4(1)(2), Ahmedabad [2018] 97 taxmann.com 671 (Ahmedabad - Trib.) during the course of arguments. In this case the Ahmedabad Tribunal held that where during scrutiny assessment, Assessing Officer disallowed a part of business advancement expenses after verifying bills and vouchers, notice for revision for further disallowance was unjustified. The facts of this case were that the Assessee, a pharmaceutical company, for assessment year 2014-15, claimed business advancement expenses incurred on gift articles distributed by it to various persons. During scrutiny, assessee provided detailed breakup of such expenditure to Assessing Officer in pursuance of specific query raised by him. Assessing Officer rejected substantial amount from claim of expenditure after verifying bills and vouchers. However, accounts of assessee were subjected to multiple audits by expert professionals. Further, in the context of a turnover and scale of operation of this magnitude, the expenditure incurred on business advancement of such amount do not indicate any visible abnormality. On consideration of these facts, the Tribunal held that since there was sufficient verification by Assessing Officer, revision under section 263 was unjustified. The Hon’ble ITAT made the following observations: “The assessment is also carried out on year-to-year basis. In such a scenario, where the AO has rejected substantial amount from the claim of expenditure after reasonably verifying bills and vouchers, the allegation of the Pr.CIT appears misconceived. Ordinarily, it is only in a very gross case of inadequacy in inquiry and lack of application of mind that the order of AO is open to attack as erroneous. In the context of a turnover and scale of operation of this magnitude, the expenditure incurred on business advancement of such amount does not indicate any visible abnormality. This apart, the AO did take cognizance of the issue and made substantial disallowance. Thus, it cannot be outrightly alleged that the AO has omitted to apply its mind to the issue. The allegation thus appears unintelligible. The AO, in our view, has not committed any error in not chasing will of the wisp in the absence of any brazen circumstances. The action of the Pr.CIT on this issue of business advancement expenses appears to be guided by the considerations of Revenue alone and thus cannot be viewed with favour.”

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11.11 From an analysis of the above judicial precedents, the principle which emerges is 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 a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Assessing Officer adopts one of the course permissible in law and it has resulted in loss of revenue; or where two views are possible and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Assessing Officer is unsustainable in law, or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind.

11.12 Now in the facts before us, the case of the assessee was selected for Complete Scrutiny, where the purpose of assessment was to scrutinize the substantial decrease in taxable income as per revised return of income and high volume of current liabilities against the total assets of the assessee. During the course of assessment proceedings, the Ld. AO raised specific question with regard to change in taxable profit as compared to original return and also required the assessee to furnish detail of current liabilities against the assets. The assessee duly complied with the queries raised by the AO. As such, the AO after considering the explanation furnished by the assessee and documents / evidence placed on record, accepted the income declared as per the revised return of income. The relevant query raised by the AO and reply made by the Assessee reads as under:

 Query vide notice dated 27-07-2018: Please explain the details of difference of income in revised return and original return along with document evidence. Please furnish the details of Large current liability in comparison to total asset in Balance Sheet (Part A-AB of ITR) Document in support of return of Income. Please furnish the copy of e-return of income file along with computation of total income. Trading P & L/A/c, Balance

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Sheet, Capital Sheet, Capital A/c, Audit report, Copy of 26AS statement copy of TDS/TCS Certificate.

 Assessee reply Details of difference of income in revised return and original return Disallowance of Income Tax: In original return, the income tax amounting to Rs.24,81,755 was wrongly disallowed. The need for disallowance of income tax will arise only when computation of total income begins with Net Profit after tax. in this case the net profit adopted for computation of total income is net profit before tax. Therefore, this mistake has been corrected in the revised return. Depreciation: In original return, the depreciation as per Companies Act amounting to Rs.1,05,75,922. was calculated based on single shift method. While revised return, the depreciation as per Companies Act amounting to Rs.l,78,97,400 has been calculated based on triple shift method as decided by the Board of Directors on 12.04.2015. It is pertinent to note here that financial statements (P &L and Balance Sheet) reflected in the original return were not approved in the Annual General meeting, in Annual General Meeting dated 02.09.2016, the financial statements adopted by the shareholders are those therein depreciation based on triple shift method has been charged. The copy of AOC-4 submitted to the Registrar of Companies, evidencing the fact that financial statements approved in AGM having depreciation as per triple shift method enclosed herewith. Sample Electricity bills of UGVCL enclosed herewith evidencing triple shift working of the unit. The claim of higher depreciation under Companies Act will not have any impact on total income because depreciation claimed under income tax act amounting to Rs 22,062,999 remained same both in the original and in the revised return. However, the claim of higher depreciation as per companies act resulted into lower book profit of Rs 73,21,478 (Depreciation as per triple shift method -17,897,400 less Depreciation as per single shift method 10,575,922 )

Thus, there is 3 net downward Impact on total income of Rs 24,81,755 which is due to wrong disallowance of income tax in arigir.sl return of income which has been corrected in the revised return.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Explanation on Point No. 7 With regard to large Current liabilities, 1 have already submitted the details of all liabilities of the Company, The reason for large Current liabilities is due to bank borrowings and Trade Payables. The Detailed Summary of Current liability is tabulated as under;

Particulars 2014-15 2015-16 Increase amt Remark for increase Short Term 15,935,336 32,811,270 16,875,934 Only because of Borrowing from increase in CC bank limit Trade Payables 6,657,718 60,029,836 53,372,119 As FY 2014-15 is the first year, company has worked for few months only

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whereas in FY 2015-16 company has worked for whole year,

Other current 13,663,676 20,666,693 7,003,017 Increase in Term Liabilities Loan instalment amount of 12 months due. Short term 742,046 2,013,747 1,271,701 Mainly because provision of tax and other provision Total 36,998,776 115,521,546 78,522,771

I have also submitted all the bank statements including the bank statement for borrowing in the form of Cash Credit.

11.13 The Pr. CIT initiated 263 proceedings on the ground that the AO has not made enquiries or verification which should have been made with respect to change in taxable income as compared to original return and high volume of current liabilities. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the Ld. AO had made detailed enquiries and after consideration of material placed on record, accepted the claim of the assessee.

11.14 At this juncture, it is also important to note that the learned PCIT in his order passed under section 263 of the Act has made reference to the explanation 2 of section 263 of the Act. It was attempted by the learned PCIT to hold that there were certain necessary enquiries which should have been made by the AO during the assessment proceedings but not conducted by him. Therefore, on this reasoning the order of the AO is also erroneous insofar prejudicial to the interest of revenue. In this regard, we make our observation that the learned PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice dated 23-03-2021 about the same. Therefore, the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus, on this count the

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learned PCIT erred in taking the re-course of such provisions while deciding the issue against the assessee. Secondly, the learned PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 of the Act.

11.15 In view of the above and after considering the facts in totality, we hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue. Thus, the revisional order passed by the learned PCIT is not sustainable and therefore we quash the same. Hence the ground of appeal of the assessee is allowed.

Order pronounced in the Court on 07/10/2022 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 07/10/2022 Manish