NALLAMILLI SATYANARAYANA REDDY & OTHERS vs. THE DY. CIT, KAKINADA

आदेश / O R D E R

PER D.S. SUNDER SINGH, Accountant Member:

This appeal filed by the assessee against order of the Principal

Commissioner of Income Tax-2 (PCIT), Visakhapatnam vide F.No.Pr.CIT-

2/VSP/263/10/2015-16 dated 1.1.2016 for the assessment year

2011-12.

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi 2. All the grounds of appeal are related to the order passed by the

Ld. Principal Commissioner of Income Tax-2, (‘PCIT’ in short)

Visakhapatnam u/s 263 of the Income Tax Act, 1961 (hereinafter called

as 'the Act'). In this case, the assessment order was completed u/s

143(3) of the Act by an order dated 31.12.2013 on total income of `

13,30,125/- against the returned income of ` 9,23,003/-. Later on, the

Ld. Principal Commissioner of Income Tax has taken up the case for

revision and found that the order passed by the Assessing Officer (A.O.)

was erroneous and prejudicial to the interest of the revenue due to

following reasons:

(i) There were current liabilities to the extent of ` 6.06 crores and Reserves & Surplus of ` 4.38 lakhs which were not examined by the A.O. (ii) The claim of the assessee of ` 1.01 crores interest was not examined by the A.O. (iii) There was no proof of examination of claims and liabilities and no cross verification was made by the A.O. with corresponding parties. (iv) As per the audit report, the unsecured loans, vouchers for expenditure, etc. were subject to verification. An amount of ` 15.66 lakhs was shown in the balance sheet as unsecured loans and ` 5.6 crores of expenses were claimed in the P&L account under various heads leaving meager net profit of ` 4.74 lakhs. (v)The A.O. has not verified the addition to fixed assets for which the assessee has claimed the depreciation. (vi)There was a current asset in the name of T. Neelima and the A.O. has not obtained any information in respect of the above asset. 2

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi (vii) There was an introduction of capital in the capital accounts. The A.O. has not examined the source for increase in capital. (viii)The A.O. has not verified the payments made in violation of section 40A(3) of the Act even though audit report was given with a remark of subject to verification. (ix) The assessee had debited various expenses to the P&L account. The genuineness of the expenses was not verified by the A.O. and no evidence was placed on record. 3. Due to the above deficiencies, the Ld. Principal Commissioner of

Income Tax was of the view that the order passed by the A.O. was

erroneous and prejudicial to the interest of the revenue and accordingly

set aside the assessment order directing the A.O. to redo the

assessment after conducting enquiries and to take decision as per law.

before this Tribunal. During the appeal hearing, the Ld. Counsel of the

assessee argued that the Ld. Principal Commissioner of Income Tax has

taken up the case for revision and set aside the assessment order for

insufficiency of enquiry but not for lack of enquiry and argued that the

Ld. PCIT is not permitted to invoke the jurisdiction under section 263 for

inadequate enquiry. In the assessee’s case, it is submitted by the Ld.

A.R. that the A.O. has called for the books of accounts and the relevant

information and verified all the issues raised by the Ld. Principal

Commissioner of Income Tax in the show cause notice and the revision

order. The A.O. after due verification of all the aspects passed the 3

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi assessment order. The A.R further submitted that with regard to the

verification of expenses, low profit, additions to assets, violations u/s

40A(3), qualified remarks of audit report, increase in capital and the

current assets and liabilities the A.O. has verified with the books of

accounts and vouchers during the assessment proceedings. The same

books of accounts were also produced before the Ld. Principal

Commissioner of Income Tax at the time of revision proceedings and no

defect was found by the revenue. With regard to the lorries, tanker and

tractor, it was explained by the Ld. A.R. that the lorries, tanker and

tractor were used by the assessee for it’s business purpose, hence there

were no receipts and the same was explained during the assessment

proceedings. With regard to the additions to capital assets, the

assessee has produced all the relevant vouchers at the time of

assessment and supported by the entries in the books of accounts,

which were duly verified by the A.O. In respect of Smt. Neelima, the

debtor, which was appearing as an asset, the Ld. A.R. submitted that

she is a partner in the firm and at the time of assessment, the assessee

had produced the books of accounts, which was verified by the A.O.

She has over drawn the amounts, hence it was shown as an asset and

interest was also charged. With regard to the increase in capital

account, there was introduction of capital in the case of one of the

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi partners Mr. T.Venkata Reddy, whose source was explained to the A.O.

and also furnished the PAN Number of the partner and stated that Mr.

T.Venkata Reddy was also assessed to tax. With regard to the remarks

in the audit report in form No.3CD, the remarks made by the accountant

were of routine nature and the same were verified from the books of

accounts at the time of assessment. The Ld. A.R. referred our attention

to page No.25 of the paper book, wherein the A.O. has issued the

questionnaire on various issues including the details of current assets

and provisions, details of reserves, details with regard to deposits

exceeding ` 20,000/-, various expenses, copies of bank accounts, etc.

and submitted that all the details as per the questionnaire were

furnished to the A.O. during the course of assessment. The Ld. A.R.

also invited our attention to page Nos.130 to 139 of the paper book

referring various details filed by the assessee before the A.O. The Ld.

A.R. further submitted that the A.O. has passed the consequential order

u/s 143(3) r.w.s. 263 of the Act giving effect to the order of the Ld.

Principal Commissioner of Income Tax u/s 263 of the Act, and the A.O.

has not made any specific addition in respect of the issues raised by the

Ld. PCIT, except estimated additions of ` 2,59,654/- for vehicle

maintenance and ` 2,99,157/- for salaries on estimation basis. The Ld.

A.R. argued that the Ld. PCIT has invoked the revision u/s 263 of the

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi Act on the surmises and conjectures, which is not sustainable in law.

The Ld. Principal Commissioner of Income Tax has not brought on

record any issue relating to the under assessment or suppression of

income and it is not the case of the Ld. Principal Commissioner of

Income Tax that the A.O. has not conducted the enquiries. It is a case

of the Ld. Principal Commissioner of Income Tax that the A.O. has made

inadequate enquiries and not placed the necessary copies of evidences

furnished during the assessment. The Ld. A.R. further argued that the

Ld. Principal Commissioner of Income Tax is not permitted to make

revision u/s 263 of the Act unless the assessment made by the A.O. is

found to be erroneous and prejudicial to the interest of the revenue. In

this case, the Ld. Principal Commissioner of Income Tax has not made

out any case of error, which is prejudicial to the interest of the revenue.

Therefore, the Ld. A.R. of the assessee argued that the revision order

made by the Ld. Principal Commissioner of Income Tax required to be

quashed. Per contra the Ld. D.R. supported the order of the Ld. PCIT.

on record and gone through the orders of the authorities below. The

assessee is engaged in the business of trading in paddy milling,

purchase and sale of paddy rice and it’s by products. The Ld. Principal

Commissioner of Income Tax has taken up the case for revision u/s 263 6

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi of the Act for not conducting enquiries and investigations in respect of

the expenses as per para 3.1 of the show cause notice with regard to

rice cutting, salaries, bank interest, FCI cuttings, HPCL expenses, low

profit, additions to assets, introduction of fresh capital, qualified remarks

of the audit report, sales tax, current liabilities and current assets etc..

The Ld. PCIT also observed that the no evidence has been placed on

record by the AO. The Ld A.R. submitted that the details called for by

the AO were furnished at the time of assessment and the same were

verified by the AO before completing the assessment.

On verification of the assessment order, it is observed that

the assessee had produced the books of accounts, which was verified by

the assessing officer. With regard to the net profit, the expenses

incurred, addition to fixed assets and loans given to the partner, nature

of current liabilities, reserves and surplus, all these issues and the

remarks made by the accountant required to be verified from the books

of accounts and there is no dispute that the assessee had produced the

books of accounts, before the A.O. and verified the same. This fact is

evidenced by the assessment order. Whether the A.O. has placed any

evidences in the assessment record or not is discretion of the AO and is

not the case for revision u/s 263 of the Act. With regard to the lorries,

tanker and tractor, the assessee had explained that they were used in 7

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi the assessee’s own business, hence, no receipts were admitted. The Ld.

PCIT has not made out a case of suppression of the receipts or inflation

of expenditure. With regard to the qualified audit report made by the

accountant in the form 3CD, the books of accounts were examined by

the AO no defect was found by the AO and the Ld. PCIT. With regard to

the sales tax penalty, the same was disallowed by the A.O., hence no

case for revision and no violation. The Ld. Principal Commissioner of

Income Tax is empowered to take up the revision u/s 263 of the Act, if

the A.O. has not made any enquiries but not for inadequate enquiries.

Inadequate enquiry cannot be a reason for revision u/s 263 of the Act.

In the instant case the Ld. PCIT is of the view that the AO has not

conducted the enquiries as per his expectations. For revision of the

assessment order, the assessment order passed by the A.O. should be

erroneous and prejudicial to the interest of the revenue. Once the

assessee furnishes the required information which is being verified by

the A.O., there is no case for revision. Once A.O. has conducted enquiry

and he is satisfied with the reply given on the queries raised, the Ld.

Principal Commissioner of Income Tax cannot intervene through revision

to come to a conclusion that assessment order passed by the A.O. was

erroneous and prejudicial to the interest of the revenue for lack of or

inadequate enquiry. This view is supported by the decision of ITAT,

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi Kolkata ‘B’ Bench in the case of Vinod Aggarwal Vs. Principal CIT

(Central) Kolkata (2018) 80 Taxmann.com 171. For ready reference and

clarity we extract the relevant parts of the Hon’ble ITAT’s order supra

which reads as under:

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi 32. Since the AO conducted enquiry the question is whether there can be no revision because the power u/s 263 can be invoked only in cases of lack of inquiry and not conducting inadequate inquiry. We are of the view that where an enquiry is conducted by the AO and he is satisfied with a reply given on a query raised, then the CIT cannot intervene through revision for coming to a conclusion that the assessment order passed by the AO was erroneous and prejudicial to the interests of the Revenue for lack of or inadequate enquiry. In the instant case, the assessee has provided the entire information

to A.O. at the time of assessment, which was being verified by the A.O.

before completing assessment. This is evidenced by the questionnaire

issued by the A.O. as well as the information furnished by the assessee

at the time of assessment. Further, in the consequential order passed

u/s 143(3) r.w.s 263 of the Act, the A.O. has not made any specific

disallowance in respect of the issues raised by the Ld. Principal

Commissioner of Income Tax u/s 263 of the Act except the estimated

additions. The Ld. PCIT has not made out a case of not conducting the

enquiry on any of the issues, hence, we are unable to sustain the

order of the Ld. Principal Commissioner of Income Tax and we do not

find any reason to hold the assessment order passed by the A.O. was

erroneous and prejudicial to the interest of the revenue. Accordingly,

we set aside the order of Ld. Principal Commissioner of Income Tax and

allow the appeal of the assessee.

ITA No.33/Vizag/2016 Nallamilli Satyanarayana Reddy & Others, Turangi 6. In the result, the appeal filed by the assessee is allowed.

The above order was pronounced in the open court on 9th Feb’18.

Sd/- Sd/- (वी. दुगा�राव) ( ड.एस. सु�दर "संह) (V. DURGA RAO) (D.S. SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER #वशाखापटणम /Visakhapatnam: 'दनांक /Dated : 09.02.2018 VG/SPS आदेश क� ��त)ल#प अ*े#षत/Copy of the order forwarded to:-