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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
PER SHRI VIKRAM SINGH YADAV, A.M.
This is an appeal filed by the assessee against the order of ld. Pr. CIT, Alwar u/s 263 of the IT Act, 1961 dated 14.03.2016 wherein the assessee has taken following grounds of appeal:
(1) Under the facts and circumstances of the case, the order passed by the Ld. Commissioner of Income Tax, u/s 263 is illegal & bad in law and the same be quashed. (2) The ld. CIT has erred on facts and in law in holding that assessment order passed by the AO is without making enquiries or verification which he
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar should have made without specifying the enquiry or verification which the AO failed to make or should have made. (3) The ld. CIT has erred on facts and in law in failed to appreciate that on the three issues raised u/s 263, AO has made the necessary enquiry and after having been satisfied with the same passed the order which can’t be held as erroneous and prejudicial to the interest of revenue only on surmises and conjectures. 2. The brief facts of the case are that the assessee had filed its return on 19.09.2011 declaring income of Rs.10,66,290/- and the assessment u/s 143(3) was completed on 29.01.2014 at total income of Rs. 11,42,520/-. The ld. CIT thereafter issued notice u/s 263 dated 12.02.2016 on the following issues:
(a) During the year, there was increase in turnover but G.P. had declined substantially which is accepted by the AO without carrying out any verification of the explanation furnished by the assessee and simply accepted the same without any cogent reasons.
(b) The AO as per query letter dated 28.02.2013 and 16.12.2013 required assessee to furnish copies of capital account of partners and the explanation towards source of addition to the capital account. The assessee filed detailed capital account but no details regarding source of addition to the capital account is furnished and therefore the same remained unverified and not properly enquired by the AO.
(c) The AO as per query letter dated 16.12.2013 required assessee to furnish details of unsecured loans (whether squarred up or not) along with complete details and explanation towards the identity, genuinity and credit- worthiness of these parties. In response, the assessee only furnished copies of ledger accounts and no details as to the genuineness and credit-worthiness
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar were furnished. Thus, the unsecured loan remains unverified and not properly enquired by AO.
In response to the above show-cause notice, the assessee filed its detailed submission before the ld. CIT which is reproduced at page 2 to 10 of the CIT’s order whereby the assessee has explained as to how on all the three issues, the AO has conducted necessary enquiry and also the various case laws on the power of the CIT for passing order u/s 263. The ld. CIT however, after considering the assessee’s submissions, held that on all the three issues raised by him in his show-cause notice, the AO has not made the enquiries by giving following findings:
“(1) Trading results: A perusal of assessment record reveals that during the period relevant to the assessment year under consideration though there was an increase in the turnover but the gross profit had declined substantially which was accepted by the AO without carrying any verification of the explanation furnished by you during the assessment proceedings. The AO has thus failed to inquire/verify the explanation furnished and has simply accepted the same without any cogent reasons. Reply filed in this regard has been considered and it is found that the claim of the assessee was accepted without any inquiry/verification by the Assessing Officer by simply relying on the reply furnished during course of assessment proceedings without inquiring into the factors which could have impacted the decrease on the rate of gross profit and net profit as compared to earlier assessment years.”
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar (2) Accretion/addition to partners capital accounts:
Perusal of assessment record reveals that as per query letter dated 28.02.2013 and 16.12.2013, the AO had required the assessee to furnish copies of capital accounts of the partners along with explanation towards the source of case of accretion/addition to such capital accounts in respect of the capital brought in during the year. In response to the same, only the detailed capital accounts are found to have been furnished by the assessee, as available on record, but no details regarding the explanation on the source in case of accretion/addition to capital are found to have been furnished and the AO proceeded to complete the assessment proceedings on the basis of such incomplete details filed before him. As per record, it reveals that out of the seven partners there was accretion/addition to capital in the case of six partners, as per their capital accounts. Under such circumstances the source of accretion/addition to partners capital account during the year under consideration has remained unverified and not properly inquired by the AO.
(3) Unsecured loans/cash credits:
Perusal of assessment record reveals that as per query letter dated 16.12.2013, the AO had required the assessee to furnish details in respect of the unsecured loans (whether squared up or not) along with complete details and explanation towards the identity, genuinity and credit-worthiness of these parties. In response to the same, only copies of ledger accounts are found to have been furnished by the assessee, as available on record, but no details regarding the detailed query raised by the AO on the genuinity and credit- worthiness of these transactions are found to have been furnished and the AO proceeded to complete the assessment proceedings on the basis of such
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar incomplete details filed before him. Under such circumstances and as per details/information available on record the genuinity and credit-worthiness in respect of the unsecured loans has remained unverified and not inquired by the AO.
(4) It is well established that credits allegedly based on loan from parties, who are not possessed of sufficient means cannot be accepted as genuine. The AO was required to make proper investigation to determine whether the money was really lent by the partners/third party or it has come out of the resources of the assessee himself. The source of the apparent source is a relevant enquiry. That, the AO has failed to apply his mind to all aspects of the case is therefore self-evident. Such non-application of mind constituted passing of an erroneous order which is also prejudicial to the interest of revenue.
(5.1) That credit worthiness of the alleged lenders was not enquired into. Mere examination of the ITR and confirmation of the creditors is not enough. When the requisite enquiry was not made, the order is bound to be erroneous and prejudicial to the interest of the revenue. If the relevant enquiry was not made it may in appropriate cases amount to no enquiry and may also be a case of non-application of mind.
(5.2) Where the relevant enquiry was not undertaken, as in this case, the order is erroneous and prejudicial too and therefore revisable. Investigation should always be faithful and fruitful. Unless all fruitful areas of enquiry are pursued the enquiry cannot be said to have been faithfully conducted.
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar (5.6) In this regard, it is relevant to discuss here that the earlier provisions of section 263 of the IT Act, 1961 have been amended with effect from 01.06.2015 since the same had been a contentious issue before the various judicial platforms. Based on the amendment to section 263 of the Act, reliance is placed on the following extract of the CBDT’s Circular No. 19 of 2015 dated 27.11.2015 i.e. Explanatory Notes to the provisions of the Finance Act, 2015.
(53.) Revision of order that is erroneous in so far as it is prejudicial to the interest of revenue. 53.1 The provisions contained in sub-section (1) of section 263 of the Income Tax Act, provided that if the Pr. Commissioner or Commissioner considers that any order passed 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 an enquiry pass an order modifying the assessment made by the AO or cancelling the assessment and directing fresh assessment. 53.2 The interpretation of expression “ërronerous in so far as it is prejudicial to the interest of the revenue” has been a contentious one. In order to provide clarity on the issue, section 263 of the Income Tax Act has been amended to provide that an order passed by the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if, in the opinion of the Principal Commissioner or Commissioner (a) the order is passed without making inquiries or verification which, should have been made (b) the order is passed allowing any relief without inquiring into the claim (c) the order has not been made in accordance with any order direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any jurisdictional High court or Supreme Court in the case of the assessee or any other person. 53.3 Applicability: This amendment has taken effect from 1st day of June, 2015.
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar In the present case, no enquiry/verification haw been conducted by the AO on the issues covered by the notice issued u/s 263 of the Act. In view of the above, the order passed by the AO for the assessment year 2011-12 dated 29.01.2014 is deemed to be erroneous in so far it is prejudicial to the interest of revenue, as I am of the opinion that the order has been passed without making enquiries or verification which should have been made. I therefore, cancel the assessment order passed by the AO u/s 143(3) on 29.01.2014 with the direction to the AO to pass the assessment order after considering the above mentioned issues and also the issues which may subsequently come into the notice of the AO during the set-aside assessment proceedings u/s 143(3)/263 of the Act 1961. Consequently, the order passed u/s 143(3) of the Act is set aside u/s 263 of the Act with the direction that the AO should properly examine all the issues raised in the foregoing paras and pass the assessment order afresh after making proper enquiries and after affording adequate opportunity to the assessee.”
During the course of hearing, the ld. AR submitted that on all the above three issues, the AO had made detailed enquiry and verification in course of assessment proceedings and after considering the reply and the details submitted accepted the same. Hence the order of AO cannot be held to be erroneous or prejudicial to the interest of the revenue. The details submitted in respect of each of the above three issues is explained in the following paragraphs.
4.1 In respect of the trading addition, the assessee furnished the comparative g.p. and n.p. rate chart for A.Y.2009-10 to 2011-12. The reasons for fall in GP rate was explained to be on account of proportionate more
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar increase in the prices of the raw material vis-a-vis the sale price. It was explained that all purchases and sales are fully vouched, day to day stock register is maintained, the basis of valuation of closing stock is furnished, name and addresses of the suppliers and the creditors filed, quantitative and qualitative details of stock in trade were given. The GP rate is more than A.Y.2009-10 but declined as compared to AY 2010-11 and the reasons for the same was filed vide letter dated 12.12.2013. The AO after examining all these details accepted the trading results and therefore on this issue it cannot be held that AO has not enquired into the factors which impacted the decline in GP/NP rate.
4.2 In respect of addition to the capital account, assessee filed copy of the capital account of the partners. In reply dated 12.12.2013, assessee filed detailed copies of the partners capital account with their PAN and postal address and submitted that all the partners are assessed to tax, the source of deposit made by them can be examined in their individual hand and not in the hands of the firm. In reply dated 20.01.2014 copies of the return of the partners were enclosed and it was submitted that in view of the same there is no need to file the copy of the partners bank account. In proceedings u/s 263, the specific explanations to the source of deposit is submitted in which no discrepancy is found by the CIT. Thus it is evident that AO made the necessary enquiry in respect of addition in the partners capital account and therefore his order on this issue cannot be held to be erroneous or prejudicial to the interest of revenue.
4.3 In respect of unsecured loans, assessee filed confirmed copy of the account of the cash creditors giving all the details required in the query letter.
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar It was explained that all unsecured loans are existing assesses, amount is accepted by account payee cheque, PAN No. and postal address as provided. Therefore, it is incorrect on part of CIT to held that assessee has not found details as to the genuineness and creditworthiness of these transactions. Hence, on this issue also, order of the AO cannot be held to be passed without enquiry/verification so as to make it erroneous or prejudicial to the interest of the revenue.
4.4 From the above discussion it can be noted that AO made necessary enquiry/verification in respect of all the three issues raised by the CIT in his order. It is not a case that AO has not make any enquiry. There is a distinction between inadequacy of enquiry and lack of enquiry. Powers u/s 263 cannot be exercised by CIT for inadequacy of enquiry for which reliance is placed in case of Cit vs. Sunbeam Auto Ltd., 332 ITR 167 (Del.), Malabar Industries Co. Ltd. v. CIT 243 ITR 83 (SC), Gabril India Ltd. 203 ITR 108 (Bom.) and other decisions as mentioned at page 7 to 9 of the CIT order. In view of the above, the order passed by the CIT u/s 263 be quashed.
4.5 In the context of Explanation 2 to section 263 of the Act inserted by the Finance Act, 2015 and the decision of ITAT Mumbai Bench in case of Anuj Jayendra Shah Vs. PCIT 67 taxmann.com 38, the Ld. AR further submitted as under:-
Clause (a) to Explanation 2 to section 263 inserted by FA, 2015 w.e.f. 01.06.2015 provides that order passed by AO shall be deemed to be erroneous and prejudicial to the interest of the revenue where the order is passed without making enquiries or verification which should have been made.
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar
On the basis of this explanation, an issue is raised as to whether this Explanation has retrospective effect or not and whether the CIT could pass order u/s 263 in each and every case where according to him the AO has passed the order without making enquiries or verification which, according to him, he should have made. In this connection a reference is also made to the decision of ITAT Mumbai Bench, supra.
It is submitted that the law is well settled that legislations which modify accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect. The Supreme Court in case of CIT vs. Vatika Township Pvt Ltd (2014) 367 ITR 466 in Para nos. 31 & 32 of its order has laid down the law relating to retrospective legislation which is reproduced as under:
“31. Of the various rules guiding how legislation has to be interpreted, one established rule is that unless a contrary intention appears, legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar backward. As was observed in Phillips vs. Eyre, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law.
The obvious basis of the principle against retrospectivity is the principle of ‘fairness’, which must be the basis of every legal rule as was observed in the decision reported in L’Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co.Ltd. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing these dicta, a little later”.
The ITAT, Mumbai Bench (referred supra) after reproducing at para 9 of the order, the newly inserted Explanation 2 to section 263, Memorandum to Finance Bill, 2015 and Notes on Clauses to Finance Bill, 2015 held that the Explanation 2 to section 263 being declarative in nature and is inserted to provide clarity on the issue as to which orders passed by the AO shall constitute erroneous and prejudicial to the interest of revenue concluded that
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar it would be applicable even in cases where order u/s 263 is passed before 01.06.2015. At the same time it also held that Explanation 2 to section 263 is not for making fishing or roving enquiries in the matter which are concluded but would apply where AO has merely accepted the submission made by the assessee without any enquiry or verification. Therefore, the ratio laid down in this case has to be applied on case to case basis to ascertain whether or not the order passed by AO is without making enquiries or verification which should have been made.
It is submitted that the statue does not provide as to what enquiries or verification the AO should made before passing an assessment order. Therefore, it is left to the wisdom of AO to make necessary enquiry or verification before he passes an assessment order. Only because according to the CIT, the enquiry or verification made is not adequate, cannot authorise him u/s 263 to level the order passed by AO as erroneous and prejudicial to the interest of revenue. In this connection, reference is made to the decision of ITAT Mumbai Bench in case of Narayan Tatu Rane Vs. ITO dt. 06.05.2016 47 CCH 309 which is subsequent to the decision in case of Anuj Jayendra Shah where in para 19 & 20 of the order, the insertion of Explanation 2 to section 263 by FA, 2015 is explained as under:-
“19. The law interpreted by the High Courts makes it clear that the Ld Pr. CIT, before holding an order to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the assessing officer is erroneous, the Ld Pr. CIT should have shown that the view taken by the AO is unsustainable in law. In the instant case, the Ld Pr. CIT has failed to do so and has simply expressed the view that
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar the assessing officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the Ld Pr. CIT is not in accordance with the mandate of the provisions of sec. 263 of the Act. The Ld Pr. CIT has taken support of the newly inserted Explanation 2(a) to sec. 263 of the Act. Even though there is a doubt as to whether the said explanation, which was inserted by Finance Act 2015 w.e.f. 1.4.2015, would be applicable to the year under consideration, yet we are of the view that the said Explanation cannot be said to have over ridden the law interpreted by Hon’ble Delhi High Court, referred above. If that be the case, then the Ld Pr. CIT can find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law and order for revision. He can also force the AO to conduct the enquiries in the manner preferred by Ld Pr. CIT, thus prejudicing the independent application of mind of the AO. Definitely, that could not be the intention of the legislature in inserting Explanation 2 to sec. 263 of the Act, since it would lead to unending litigations and there would not be any point of finality in the legal proceedings. The Hon’ble Supreme Court has held in the case of Parashuram Pottery Works Co. Ltd Vs. ITO (1977)(106 ITR 1) that there must be a point of finality in all legal proceedings and the stale issues should not be reactivitated beyond a particular stage and the 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.
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,
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar this provision 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 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 enquires 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.”
If the principal laid down in case of Narayan Tatu Rani is applied to the facts of the case of the assessee it can be noted that on the issue of trading addition, AO raised specific query requiring the assessee to explain the reasons in the variation of g.p./n.p. rate. This is replied by the assessee which is verified by the AO with reference to the books of accounts and the quantitative and qualitative details furnished by the assessee. On the issue of addition to the partner’s capital account, AO raised query vide letter dt. 28.02.2013 and 16.12.2013 in response to which the assessee furnished copy of partner’s
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar capital account, copy of their return and its own bank account in support of the amount received from the partner and thereafter AO after verification accepted the credit in the partner’s capital account. On the issue of unsecured loans, AO raised the query and in response thereto, the assessee filed the confirmed ledger account of the creditors along with their PAN No. & the postal address and the AO accepted the same after necessary verification. Therefore, in case of the assessee, it cannot be said that AO has not made the enquiry or the verification which he should have made. Hence, the case of the assessee is even not covered by Explanation 2 to section 263 inserted by FA, 2015 w.e.f. 01.06.2015.
It is also submitted that in the above decision, the Mumbai ITAT Bench has held that there is a doubt as to whether the Explanation 2 to section 263 would be applicable to the years under consideration which in that case are AY 2007-08 & 2008-09 when this explanation was not in the statue. Thus, whether this Explanation would apply to earlier AYs or not involves a debate. It is a settled law that where two views are possible, the view in favour of the assessee should be adopted. The Hon’ble Supreme Court in case of CIT Vs. Vatika Township Pvt. Ltd. 367 ITR 466 at para 39(c) has held that there cannot be imposition of any tax without the authority of law. Such a law has to be unambiguous and should prescribe the liability to pay taxes in clear terms. If the concerned provision of the taxing statute is ambiguous and vague and is susceptible to two interpretations, the interpretation which favours the subjects, as against there the revenue, has to be preferred. The Memorandum of Finance Bill, 2015 and Notes on Clauses specifically provides that Explanation 2 to section 263 will take effect from 01.06.2015. Therefore, there is a cleavage of opinion whether this amendment is prospective or
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar retrospective and in that view of matter, the view favourable to the assessee needs to be adopted.
In view of above, the order passed by CIT u/s 263, on the facts of the present case, is illegal and bad in law both on merit and on the legal proposition and therefore the same is liable to be quashed.
The ld CIT DR is heard who has vehemently argued the matter and supported the order passed by the ld CIT u/s 263 of the Act.
We have heard the rival contentions and perused the material available on record. The ld. CIT has held that the order u/s 143(3) has been passed by the AO without making enquiries or verification which should have been made and he has accordingly set-aside the assessment order passed by the AO with the direction to pass order afresh after examining all the issues and making proper enquiries. There are three issues on which the ld. CIT has held that the order passed by the AO u/s 143(3) is erroneous in so far as it is prejudicial to the interest of Revenue. It would be relevant to examine each of the three issues raised by the ld. CIT to see whether the matter falls within the revisionary jurisdiction of ld CIT.
6.1 The first issue is regarding decline in GP rate from 5.19% in AY 2010-11 to 3.17% in the impugned assessment year. In this regard, the AO has made the necessary enquiry vide his letter dated 28.02.2013 asking the assessee to file head wise chart showing amount of total sales, GP rate, NP rate for the relevant and preceding two years along with reasons for the variation and the contemporary verifiable evidences. In reply, the assesee vide its letter dated 12.12.2013 has submitted a comparative chart showing the sales, GP rate and
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar the NP rate for the relevant and preceding 2 years for the reasons of fall in the GP rate. The assessee submitted that during the year under consideration, the prices of raw material have increased in more proportion than the sale prices with a result that the gross profit has fallen down. It was further submitted that the ratio of cost of raw material to the cost of production was 90.4% in the earlier year which have gone up to 93.4% during the year under consideration which has result in fall in the GP rate. It was further submitted that the assessee firm maintains all the books of accounts, all the purchases and sales are fully vouched, day to day stock register and production register is being maintained and therefore the trading results of the assessee firm deserves to be accepted. Further, details of suppliers and purchasers along with their copy of accounts, quantitative and qualitative details of stock in trades were also submitted during the course of assessment proceedings. Taking into consideration the submissions and explanation offered by the assessee, the AO accepted the trading results of the assessee. As per Ld. CIT, the claim of the assessee was accepted without any enquiry/verification by the AO by simply relying on the reply furnished during the course of assessment proceedings without enquiring into the factors which could have impacted the decrease in the GP rate as compared to earlier assessment years. In our view, the AO has made relevant enquiries and after being satisfied has accepted the the fall in the GP rate and trading results. The reasons for the fall in GP rate has been explained by the assessee and duly considered by the AO in terms of increase of prices of the raw material. Once the necessary enquiries have been made and the explanation furnished by the assessee explaining its position, it is the discretion of the AO to accept the explanation of the assessee or where he is not satisfied with the assessee’s explanation, to carry out further
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar enquiries in the matter. In the instant case, the necessary enquiries have been made by the AO and accordingly we do not see a reason for the ld. CIT to exercise his revisionary powers u/s 263 of the IT Act.
6.2 Now coming to the second issue regarding accretion/addition to Partners capital account, the AO as per query letter dated 28.02.2013 has asked the assessee to furnish details/ copies of capital account of the partners alongwith explanation towards the deposits as well as withdrawals. In response, the details of capital account of the partners and copies of their return of income were furnished by the assessee during the course of assessment proceedings. However, copies of the partner’s individual bank accounts were not furnished by the asessee. Further, it is noted that during the revision proceedings before the ld CIT, the assessee submitted its explanation as to the source of deposit in the individual’s capital account. It was submitted by the assessee that the partners have introduced the capital out of the withdrawals made by them from their capital account on the earlier occasions and it is not the case where the partners have introduced fresh capital from other source of income. It was therefore submitted that the capital account of the partners maintained with the asessee is itself the sources of the amount credited in the capital account. As per ld. CIT, no details regarding the explanation on the sources in the capital accounts were furnished by the assessee and the AO proceeded to complete the assessment proceedings on the basis of such incomplete details filed before him. The ld. CIT further stated that as per records, it revealed that out of the seven partners, there were accretion/addition to capital in the case of 6 partners as per their capital account and under such circumstances, the same remains unverified and not properly enquired by the AO. The ld. CIT further stated that
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar during the course of assessment proceedings, the assessee choose not to furnish the complete details as requisitioned by the AO and AO proceeded to complete the assessment in the absence of the necessary details having been filed which has resulted in incorrect assumption of facts while completing the assessment proceedings. We have given a careful consideration to the whole factual matrix. In our view, the AO has raised a specific enquiry asking for the assessee’s explanation towards the sources of accretion/addition to the individual partners capital account, the assessee furnished the capital accounts however, failed to explain the source of accretion in each of the individual capital account and it is only during the course of revision proceedings u/s 263 of the Act, the assessee offered necessary explanation regarding source of the deposit which is claimed to be made out of the earlier withdrawals from capital account and not in terms of fresh infusion from other source of income. Merely filing the copies of the capital account of the partners and not furnishing the necessary explanation regarding source of deposit (inspite of the specific query raised by the AO) and blindly accepting the part submission of the assessee is clearly a case of incorrect assumption of facts and therefore, a clear case of non-application of mind by the AO and erroneous in nature. It is a case where initially the AO raised specific enquiry, however, the assessee furnished only part reply and AO blindly accepting the same. In our view, the ld. CIT is correct where he is of the opinion that the AO has failed to examine basic requirements to examine the source of accretion/ addition to the capital account. Merely raising a query is not sufficient enough to dislodge the revisionary jurisdiction under section 263 of the Act. What is essential is that relevant questions are asked and enquiries are made to examine about a particular transaction, explanation of the assessee is sought and then a final
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar view is formed by the AO taking into consideration all the relevant facts and circumstances of the case. Now given that the assessee has furnished its explanation regarding the source of deposits in the partner’s capital account and having considered the said explanation, the ld. CIT is correct in remanding the matter back to the AO to examine the said explanation of the asessee. Had the assessee furnished the said explanation before the AO, the ld. CIT may not have the occasion to exercise his revisionary powers u/s 263 of the Act. In our view, these are the basic and the relevant enquiries in terms of examining the source of accretion to the capital account which the AO should have been made at the first place and the AO having been failed to do, the ld. CIT was correct in exercising his revisionary powers u/s 263 of the Act.
6.3 Now coming to the third issue in respect of unsecured loans, the AO as per his query letter dated 16.12.2013 has asked the assessee to furnish details in respect of unsecured loans alongwith complete details and explanation towards the identity, creditworthiness of these parties and genuineness of the loan transactions. In response to that, the assessee had filed copy of account of the cash creditors duly confirmed by them. During the course of revision proceedings, it was submitted that all the cash creditors are existing assessee and their PAN and postal addresses have been mentioned in their confirmations. It was further submitted that the loans have been accepted through the account payee cheques. As per ld. CIT, only copies of the ledger account are found to have been furnished by the assessee but no details regarding the query raised by the AO on the genuineness and creditworthiness of these transactions are found to have been furnished and the AO proceeded to complete the assessment proceedings on the basis of such incomplete details filed before him. Under such circumstances, the genuineness and
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar creditworthiness in respect of unsecured loans remained unverified and not enquired by the AO which has resulted in passing of an erroneous order which is also prejudicial to the interest of revenue. In our view, the test of examining the identity, creditworthiness of the parties and genuineness of the transaction are basic and at the same time essential and critical test which should have been carried out by the AO. In the instant case, though the AO has raised the initial enquiry about this test but while concluding the assessment, there is nothing on record to suggest that he has carried out the necessary investigation to test these basic requirements. This clearly shows non- application of mind by AO, blindly accepting what is being part- submitted by the assessee, without conducting the necessary enquiry and investigation which are bare minimum to examine the transactions in respect of unsecured loans. As we have stated earlier, merely raising a query is not sufficient enough to dislodge the revisionary jurisdiction under section 263 of the Act. What is essential is that relevant questions are asked and enquiries are made to examine about a particular transaction, explanation of the assessee is sought and then a final view is formed by the AO taking into consideration all the relevant facts and circumstances of the case. We therefore do not see any justifiable reason to interfere with the order of ld CIT in this regard. We accordingly confirm the exercise of the revisionary powers u/s 263 by the Ld. CIT in respect of accretion to the partner’s capital account.
6.4 In light of above discussions, out of three issues raised by the ld CIT, we are of the view that only in respect of the first issue regarding the fall in GP rate, the necessary enquiries have been made by the AO and the ld CIT was not correct while exercising his powers under section 263 and order of ld CIT stand modified to that limited extent. In respect of other two issues regarding
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar accretion to partner capital account and unsecured loan, we confirm the order of the ld CIT whereby he has rightly exercised his revisionary powers under section 263 of the Act.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 02/01/2017.
Sd/- Sd/- (KUL BHARAT) (VIKRAM SINGH YADAV) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Jaipur Dated:- 02/01/2017 Pillai
आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू
vihykFkhZ@The Appellant- M/s Vikas Oil Mill, Alwar
izR;FkhZ@ The Respondent- The Pr. Commissioner of Income Tax, Alwar
vk;dj vk;qDr@ CIT Alwar
vk;dj vk;qDr¼vihy½@The CIT(A)
विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5.
xkMZ QkbZy@ Guard File (ITA No.514/JP/2016) 6.
vkns'kkuqlkj@ By order, सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत.
ITA No. 514/JP/16 M/s Vikas Oil Mill, Alwar vs. Pr. CIT, Alwar