GANGA ACROWOOLS LIMITED,LUDHIANA vs. PR,CIT-1, LUDHIANA

आदेश/Order

Per Sudhanshu Srivastava, Judicial Member:

This appeal is preferred by the assessee against the order passed u/s 263

of the Income Tax Act, 1961 (hereinafter called ‘the Act’) vide order dated

31.03.2021 passed by the Ld. Principal Commissioner of Income Tax,

Ludhiana-1, (in short ‘PCIT’) and pertains assessment year 2015-16.

2.0 The brief facts of the case are that the assessee is into the

business of manufacturing and sale of yarn. During the year under

consideration, return of income was filed by the assessee declaring an income of

Rs. 11,03,15,850/- and this return of income was subject to scrutiny by the

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 2 Assessing Officer (AO) and income was finally assessed at an income of Rs.

11,04,84,478/- vide order dated 27.04.2017. The record also reveals that there

was a survey operation at the business premises of the assessee company on

13.11.2014 and which continued up to 14.11.2014 and during the course of such

survey, the assessee disclosed an amount of Rs. 3.25 crore as additional

“business income” in the case of the company under the following heads:

I. Increase in the stock valuation Rs. 2.45 crore

II. Unexplained receivables Rs. 0.80 crore

2.1 Subsequently, after, the completion of assessment, the Ld. PCIT

proceeded to issue a show cause notice in terms of provision of section 263 of

the Act to which the assessee objected. However, the Ld. PCIT did not find the

objections of the assessee worth any merit and proceeded to hold that the

assessment order was erroneous and prejudicial to the interest of revenue within

the meaning of section 263 of the Act read with explanation 2 below section

matter of the impugned order and directed the AO to pass a fresh assessment

order in line with the observations made by the Ld. PCIT.

2.2 Aggrieved, the assessee has now approached this Tribunal

challenging the exercise of powers u/s 263 of the Act by raising the following

grounds of appeal:

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 3 Tax Act 1961 and, thereby, setting aside the assessment already completed u/s 143(3) of the Income Tax Act, 1961. 2. That the PCIT has failed to appreciate the fact that the earlier assessment, which was framed u/s 143(3) have been completed after due application of mind and by taking into consideration all the facts and, thus, the setting aside of already completed assessment is against the facts and circumstances of the case. 3. That the PCIT has erred in invoking the provisions of explanation-2 to section 263 as the Assessing Officer had made due enquiries during the course of assessment proceedings and applied his mind to the issue and, thus, setting aside the assessment is not in order. 4. That the Appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.

3.0 It has been informed by the Registry that the appeal is barred by time by 83 days and the assessee by way of letter dated 30th of August, 2021 has

explained the reasons for the delay of 83 days by contending that the second

wave of COVID-19 had started in the month of April 2021 and was in full

swing in the month of May and June, 2021 and, therefore, there was a valid

reason for not being able to file the appeal within time. The assessee has relied

on Circular no. 10/2021 of CBDT with regard to the ‘limitation period’ for

filing of appeal and also the order of the Hon’ble Apex Court in suo moto Writ

Petition dated 27.05.2021, that on account of COVID-19, relaxation was to be

given for filing the appeal before the Appellate Authorities. Further, an affidavit

of Shri Inderjit Singh Bhatia, Director of the company, has also been filed

which is duly attested, contending the above said facts.

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 4 3.1 The Ld. CIT DR could not controvert the binding nature of the

CBDT Circular as well as the order of the Hon’ble Apex Court as

aforementioned.

3.2 In view of the order of the Hon’ble Apex Court as referred to

above, the delay of 83 days is condoned and the appeal is admitted to be heard

on merits.

4.0 The Ld. AR submitted that the main argument in the captioned

appeal would be centering around the plea that requisite enquiries and also due

application of mind was made by the Assessing Officer during the course of

assessment proceedings. It was submitted that the assessee is into the business

of manufacturing and sale of yarn and the basic raw material for the

manufacturing of yarn is ‘Acrylic Fibre/ Tow’. It was submitted that the

assessee is duly maintaining day-to-day quantitative records of the raw material

purchased, work-in-progress, finished goods, etc. which was evident from the

copy of the ‘Tax Audit Report’ placed at pages 142 to 159 of Paper Book-II and

wherein complete stock details of various types of raw material, consumption,

production, sales and closing stock in quantity during the year had been given

and no adverse view had been drawn by the Assessing Officer in this regard,

while framing the assessment.

4.1 It was further submitted that there was a survey operation at the

business premises of the company on 13.11.2014 and 14.11.2014 and during the

course of such survey, the assessee disclosed an amount of Rs. 3.25 crore as

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 5 additional “business income” in the case of the company in respect of increase

in the stock valuation amounting to Rs. 2.45 crore; and unexplained receivables

amounting to Rs. 0.80 crore. Our attention was drawn to the letter of surrender

placed at page 160 of the paper book, which reads as under:

“Sub: Discloser of income during survey in the case of M/s. Ganga Acrowools Ltd.

With reference to captioned matter it is submitted that a survey operation under section 133A of the Income Tax Act 1961 was conducted on 13.11.2014 at the business premises at village Kot Sekhon, G. T. Road, Tehsil Khanna and also at other business premises of M/s. Ganga Acrowool Ltd. During the course of survey, certain discrepancies with regard to stock valuation and unexplained receivables were noticed. Since I am unable to explain the above mentioned discrepancies, In order to buy peace of mind and to avoid unnecessary litigation, I admit to voluntarily disclose additional business income of Rs.3.25 cr., in the case of M/s. Ganga Acrowools Ltd. over and above its normal business income for the F. Y. 2014-15 relevant to A.Y. 2015-16 under the following heads. • Increase in Stock valuation 2.45 crores • Unexplained receivables 0.80 crores Total 3.25 crores

I admit to pay requisite taxes on the above mentioned undisclosed income. I hereby give three cheques of Rs. 37.00 lac (Thirty Seven Lac Only) each against the tax due on the above undisclosed income.

The above mentioned disclosure is being made by me voluntarily and without any threat, coercion or undue influence and subject to no penalty or penal action under the Income Tax Act, 1961.” 4.2 It has was further submitted by the Ld. AR that while filing the return of income, the assessee disclosed a sum of Rs. 0.80 crore in the statement

of Profit/Loss account as is evident from the annexure of “other operating

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 6 revenue” referred to at page 38 of the paper book and, for which, there is a

detail at page no. 46 of the ‘paper book’ which is note on the financial statement

for the year ending on 31.03.2015.

4.3 It was further submitted that the assessment proceedings

commenced by way of notice u/s 143(2) of the Act issued on 14.09.2016 and

the assessment proceedings finally concluded on 27.04.2017 and, thus, here was

a complete application of mind by the Assessing Officer. It was submitted that

the first questionnaire was issued by the Assessing Officer vide dated

17.01.2017 and the same queried the assessee about the stock tally. It was

further submitted that the assessee had duly replied thereto by drawing reference

to the Tax Audit Report which contained the quantitative details of stock.

4.4 It was further submitted that based on certain queries raised by the

AO during the course of assessment proceedings, another reply dated

15.02.2017 was filed by the assessee wherein the AO’s query regarding the

surrender of Rs. 2.45 crores on account of valuation of stock was replied to. For

ready reference, this reply of the assessee is also being reproduced herein under:

“Sub: Assessment Proceeding for AY 2015-16 (PAN AAACG8869Q)

During the year under review survey has been conducted by the Income Tax department and in order to have our peace of mind we have surrender Rs. 79.96 lac and the same is shown as other income under the head Non Operation Income.

We are maintaining quantities records (on day to day basis) for our Raw Material, WIP and Finished goods and quantity of various stocks were reconciled with physical

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 7 verification conducted by the department however there was surrender of Rs. 2.45 cr. on account of valuation of closing stock.

We are following method of valuation of stock “COST or MARKET VALUE” whichever is lower and the same method have been followed by us for valuation of stock as on 31.03.2015.

Hope you will find the same in order and proceeds accordingly.”

4.5 It was further submitted by the Ld. AR that, subsequently, another

query by the AO was responded to by the assessee vide reply dated 30.03.2017

wherein the comparison of the gross profit and the net profit for the year under

consideration vis a vis earlier two assessment years had been made in

compliance to the directions of the AO and also the fall in the Net Profit had

been explained.

4.6 The Ld. AR also submitted that in order to substantiate the

contention that the assessee had been following a consistent method of

valuation of stock i.e. cost or market value whichever is less, closing stock list

of all the items as on 31.03.2014, 12.11.2014 (date of survey) and 31.03.2015,

both in quantity and value, along with the sample supporting bills had been filed

during the course of assessment proceedings (copies of the same placed at pages

73 to 109 of the ‘paper book’), It was further submitted that the reason for

decline in gross profit rate was duly explained before the AO vide reply dated

07.04.2017 to the Assessing Officer.

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 8 4.7 The Ld. AR submitted that the Assessing Officer was very much

conscious of the fact that a survey had been carried out in the premises of the

assessee and that he had duly verified all the impounded documents and had

queried the assessee on the same to which the assessee again had duly

responded vide reply at page 111 to 113 of the ‘paper book,’

4.8 It was further submitted by the Ld. AR that there was no difference

in the quantity of raw material, work in progress, finished goods or any other

stock and the surrender was extracted from the assessee in respect of increase in

valuation of stock in an ad hoc manner, without any details or basis and the

same was clarified before the Assessing Officer by way of letter dated

15.02.2017 (reproduced above) that the surrender of Rs. 2.45 crore on account

of the increase in the valuation of stock as on 12.11.2014 got subsumed while

preparing financial results as on 31.03.2015 on the basis of consistent method of

accounting, being followed by the assessee and that no defects had been pointed

out by the Assessing Officer during the course of assessment proceedings.

4.9 Our attention was further drawn to the copies of the ‘order sheet’

entries placed at pages 114 to 117 of the paper book to demonstrate that the AO

had asked for a copy of the surrender letter, then had verified the bills and

vouchers, which were examined from time to time and further clarifications and

explanations were sought by the AO from time to time on various issues

emerging from the impounded material. It was submitted that complete

verification was made by the Assessing Officer during the course of assessment

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 9 proceedings and that he was satisfied about the correctness of the results

declared by the assessee and, therefore, under such circumstances, the

assessment cannot be held to be erroneous and prejudicial to the interest of the

revenue.

4.10 It was further submitted that after the assessment had been framed

by the Assessing Officer vide order dated 27.04.2017 an ‘audit objection’ was

raised by the audit wing of the department and a reply to the said objection was

also filed by the assessee vide reply dated 29.11.2019. It was pointed out that

the objection again related to the increase in the valuation of the stock. Our

attention was drawn to the reply to the audit objection and the same is being

reproduced herein under for a ready reference:

“Sub: - Our Assessment Proceeding for AY 2015-16 (PAN No AAACG8869Q)

This is with reference to Survey Conducted at our premises on 13-14thNovember 2014 & during the survey our entire stock in all premises was physical verified by department & result of physical verification was tallied with our records. There was not any difference with respect to quantity & purchase value of our raw material, consumable, packing etc. However for our piece of mind we have surrender the following: - During the year under review survey has been conducted by the Income Tax department and Assessee Company has surrender Rs. 79.96 lac and the same is shown as other income under the head Non-Operating Income. - We are maintaining quantities records for our Raw Material, WIP and Finished goods and as far as quantity of various stocks were reconciled with physical verification conducted by the department however there

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 10 was surrender of Rs. 2.40 cr. under valuation of closing stock.

We are following method of valuation of stock "COST or NET REALISABLE VALUE" whichever is lower and same method has been followed by us for valuation of stock as on 31.03.2015.

While finalizing our result for the year ending March 31, 2015 we prepared a valuation chart of our stock as on 31.03.2015 & have applied rate for valuation as per our accounting policy i.e. lower of COST or NET REALISABLE VALUE& same value was taken as value of closing stock in our audited result.

Thus impact of any variation in valuation (if any) of stock as on 13-14 November 2014 becomes integral part of our audited result as on 31.03.2015 and duly reflected in our profit as shown in our audited result.

Hope you will find the same in order and proceeds accordingly.”

4.11 The Ld. AR submitted that this letter filed on 29.11.2019 should be

treated as part of the assessment record as per clause (b) to Explanation 1 to

Section 263.

4.12 Our attention was also drawn to the notice issued u/s 263 of the Act

dated 06.03.2020 wherein it has been alleged by the Ld. PCIT, that the increase

in the stock valuation had not been disclosed by the assessee and also had not

been enquired into by the Assessing Officer. Our attention was, thereafter drawn

to the reply of the assessee furnished before the Ld. PCIT wherein the trading

and manufacturing accounts from 01.04.2014 to 12.11.2014 and from

13.11.2014 to 31.03.2015 were also submitted as annexure. The said reply is

being reproduced herein under for a ready reference:

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 11 “Sub: Show Cause Notice u/s 263 of the Income Tax Act 1961 AY 2015-16 (AAACG8869Q)

With reference to above it is submitted that Survey was conducted at our premises on 13- 14th November2014 & during the survey, entire stocks in all premises was physically verified by department & same was tallied with our records. There was no difference with respect to quantity & purchase value of our raw material, consumables, packing etc. However we have surrendered the following: - During the year under review survey has been conducted by the Income Tax department and Assessee Company has surrendered Rs. 0.80 cr. and the same was shown as other income under the head Non-Operating Income. - We are maintaining quantities records for our Raw Material, WIP and Finished goods and there was 100% physically reconciliation of stocks & was matching with our records. However we have agreed for increase in valuation of stocks as on 13.01.2014 by Rs. 2.45 cr.

We are following method of valuation of stocks "COST or NET REALISABLE VALUE" whichever is lower and the same method had been followed by us for valuation of our stocks as on 31.03.2015.

While finalizing our audited results for the year ending March 31, 2015, we prepared a valuation chart of our stock as on 31.03.2015 & have applied rate for valuation as per our accounting policy i.e. lower of COST or NET REALISABLE VALUE & same value was taken as value of closing stock in our audited result.

Thus impact of any variation in valuation (if any) of stock as on 13-14November 2014 becomes integral part of our audited results as on 31.03.2015 and duly reflected in our profit as shown in our audited results. We are submitting herewith Trading and Manufacturing Account from 01.04.2014 to 12.11.2014, 13.11.2014 to 31.03.2015 and for the whole year from 01.04.2014 to 31.03.2015.

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 12 We hereby bring to your kind notice that during our assessment proceeding the question about surrender (Receivable as well as increase in valuation of stocks) was raised by assessing officer and we have submit our reply (in personal hearing) vide letter dated 15.02.2017 (Copy enclosed). During discussion on our reply assessing officer was satisfied and no further question was raised by AO.

We are ready to provide any other information/data (if required) & request for suitable order be passed in our favour.” 4.13 It was further submitted by the Ld. AR that this submission of the

assessee was further clarified by way of two other letters and our attention was

drawn to the copy of those letters placed in the paper book. For a ready

reference, reply dated 20.03.2020 is being reproduced below:

“Sub: Show Cause Notice u/s 263 of the Income Tax Act 1961 AY 2015-16 (AAACG8869Q)

This is in continuation of our earlier letter dated 18.03.2020

During survey on 13.11.2014 our physically stocks were found exactly matching with our books of accounts. However we agreed to increase valuation in stocks by Rs. 2.45cr. Such a notional increase in value of stocks has no impact on profitability of the company for whole year-as stock lying on 13.11.2014 was sold and whatever profit or loss on this stock along with other incomes becomes integral part of our audited results and duly reflected in our profit for the year ending 31.03.2015. As such no book entry was required on the date of survey.

It is submitted that as per accounting practice, we record and valued closing stock in our books of accounts on the date of finalization of our accounts for any given period. At the time of finalization of our audited results as on 31.03.2015 we valued our closing stock at lower of Cost or Net Realizable Value & same value was taken for closing stock in our audited results. However upon being asked to provide manufacturing account (with increased in value of stocks) for pre-survey period and

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 13 post-survey period, we have provided the same vide our letter dated 18.03.2020.

The only implication of increased in valuation of stocks on the date of survey is notional increase in profit (for the period up to the date of survey and notional decrease in profit after the date of survey. On detail analysis of manufacturing account for pre-survey period and post- survey period it is clear that such notional profit (in 'between financial year) has increased our gross profit in pre-survey period and decreased our profit in post-survey period and has no impact on the profits of company for whole year. As any increase in stocks valuation(without having increase in physical stocks) as on13.11.2014 becomes part of opening stocks on 14.11.2014 & same being sold at prevailing market price and duly reflected in our audited result for the whole year.

Hope you will find the same in order.” 4.14 The Ld. AR submitted that in spite of the submissions made by the

assessee, the Ld. PCIT set aside the assessment as framed by the Assessing

Officer by holding that the AO had passed the assessment order without making

due enquiries and on the ground that there was no application of mind by him

on surrender of additional income on account of increase in the valuation of

stock which ought to have been reflected in the return of income.

4.15 The Ld. AR argued vehemently that the finding of the Ld. PCIT

was not correct in light of the various replies and evidences which had duly

been filed before the AO as well as the Ld. PCIT. It was reiterated that there

was a complete application of mind by the Assessing Officer on the issue of

increase in the valuation of stock and each and every point, as raised by the Ld.

PCIT in his order, has been dealt with by way of tabular charts which are being

reproduced as under for the sake of clarity:

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 14

PARA 4.0

ISSUES OUR REPLY RAISED BY THE Ld. PCIT The PCIT has I). In our Tax Audit Report, in item No.35 page mentioned that 152 to 153 of Paper Book-II, where the detail additional income on of stock have been given, coupled with the account of valuation reply, dated 15.02.2017 to the DCIT at pages of stock has not been 71 and 72 of Paper Book-I and that stock incorporated in the valuation giving the quantity, value and return of income and amount as on 12.11.2014, with sample copies this issue was of the bills, placed at pages 73 to 83 of the required to be paper book-I, clearly proves that verification examined. was made by the Assessing Officer.

ii). The stock valuation as on 31.03.2014 along with copies of bills placed at pages 84 to 88 and stock valuation as on 31.03.2015, along with copies of the bills, clearly demonstrate the contention of the assessee, that each and everything as to how this offer of Rs. 2.45 crores had ‘subsumed’ as on 31.03.2015, was very clearly understood by the Assessing Officer. This is further supported by the fact that the assessee have been following consistent method of account, which method has not been challenged by the Assessing Officer and our books of accounts have been accepted and not rejected u/s 145(3) at all.

iii). Further, the comparison of ‘Gross profit’ and ‘Net Profit’ as explained at page 72 read with page 71, which again proves beyond any iota of doubt and order sheet entries, where the bills and vouchers have been examined, fall in the gross profit details have been asked, impounded material, has been verified and, thus, the contention of the PCIT is not correct.

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 15

PARA 4.1

ISSUES OUR REPLY RAISED BY THE Ld. PCIT It has been stated in i). It is submitted that each and everything para 4.1 that how cannot be mentioned in the assessment order the entries has been and then one has to gauze from the replies and passed in the information furnished before the Assessing account and there is Officer and though, the Assessing Officer has no such enquiries. rightly understood that the offer of Rs. 2.45 crores, how, it is ‘subsumed’ in the trading results as on 31.03.2015, but it is again very much clear from the trading accounts furnished to the PCIT, which is placed at page 125 & 125A of the paper book and the Ld. PCIT should have looked into that which is part of stock as per lists furnished to The Assessing Officer.

ii). The figure of opening stock as on 1.4.2014, 12.11.2014 and 31.03.2015 tally as per the information given to the Assessing Officer in respect of stock list, with copies of the bills as per pages 73 to 83, 84 to 88 as on 31.03.2014 and 89-98 for the period of 31.3.2015, not doubted.

Thus, no further verification was required by the Assessing Officer having already verified each and everything.

PARA 4.2

ISSUES OUR REPLY RAISED BY THE Ld. PCIT The Ld. PCIT has It is submitted that our GP and NP has amply mentioned that the been proved as per our letter at page 72 of the assessee has now Paper Book-I and page 110 read with page 71 stated that it was and, finally at page 118 of the letter filed on notional entry, and 29.11.2019, where again, it has clearly been

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 16 this he has explained about the impact of Rs. 2.45 crores mentioned, while as offered in respect of valuation of stock and discussing the issue is absolutely clear. Besides, that for the variation of the G.P. sake of argument, it may be stated that even rate between two the PCIT’s attention was drawn to the two period. separate trading accounts at pages 125 & 125A from where, it is absolutely clear that the same figure and facts have been mentioned, before the Assessing Officer and another different representation was made with some figures as per Trading Accounts, to bring home the point and nothing remained to be verified. It is submitted that all such facts are already there in the information submitted to the Assessing Officer and, thus, nothing further remained to be verified.

PARA 4.3

ISSUES OUR REPLY RAISED BY THE Ld. PCIT The PCIT has stated i).It is submitted that the copies of the bills that the Assessing had already been furnished to the Assessing Officer was Officer concerned, alongwith stock list as on required to verify 31.03.2014, 12.11.2014 and 31.03.2015, the particulars, which are placed in the paper book-I at pages already furnished to 84 to 109 and which have been verified, since him, which required the Assessing Officer has mentioned in two verification. order sheet entries, dated 15.03.2017 that the bills and vouchers were examined and returned back and then again he has stated at page 115 & 116 vide order sheet entry, dated 16.04.2017. ii). Thus, the contention of the PCIT about this further verification is of no consequences and even the paper furnished to PCIT clearly proves that offer of Rs. 2.45 crores has subsumed in the trading account as on 31.03.2015 on the basis of consistent method of accounting followed by assessee, not disputed by the Assessing Officer/PCIT and book results accepted and not rejected u/s 145(6).

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 17

PARA 4.4

ISSUES RAISED BY THE OUR REPLY Ld. PCIT The PCIT has mentioned that the This contention is not correct as Assessing Officer has not made all such stock lists on different any enquiry about the method of dates have been verified during valuation by calling the detail of the course of assessment opening and closing stocks as proceedings. well as value. 4.16 It was submitted by the Ld. AR that the Ld. PCIT had completely

chosen to ignore the fact that the AO had made proper and adequate enquiries

and the assessee had given proper responses which were duly supported by

evidences and that it was only after considering these evidences and responses

that the AO had completed the assessment. It was argued that the Ld. PCIT had

merely acted on surmises and conjectures and had completely ignored the

record before him and, therefore, the proceedings u/s 263 of the Act were bad in

law and were liable to be quashed. It was argued by the Ld. AR that where the

Assessing Officer has specifically raised queries during the assessment

proceedings, which proves the application of mind, then, such assessment

proceedings cannot be held to be erroneous and prejudicial to the interest of

revenue in terms of section 263 of the Act. Reliance was placed on the order of

the Chandigarh Bench of this Tribunal in the case of Shri Surinder Pal Singh in

ITA No. 57/Chd/2021, vide order dated 31.01.2022, wherein after examining

the various case laws and the latest judgments, the order as passed by the PCIT

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 18 u/s 263 was set aside. The Ld. AR also placed reliance on the following judicial

precedents:

(i) Venkatesh Technokraft Pvt. Ltd., in ITA No. 1464/Chd/2018 (ii) Manisha Ajay Shah in ITA No. 3001/MUM/2019 (iii) Pramod Kasharichand Shah in ITA No. 43/SRT/2018 (iv) CIT vs. Anil Kumar Sharma reported in 335 ITR 83 Delhi-HC (v) CIT vs. Hindustan Marketing & Advertising Co. Ltd. reported in 341 ITR 180 Delhi-HC (vi) CIT Vs Late Shri Vijay Kumar Koganti reported in 195 DTR 428 Madras High Court. (vii) M/s DTE Exports Pvt. Ltd. Vs Pr. CIT (ITAT Visakhapatnam).

4.17 Reliance was placed on numerous other judicial precedents copies

of which have been enclosed in the paper book and the same have been taken on

record.

4.18 It was also argued by the Ld. AR that without prejudice to the

above arguments on due enquiry and due application of mind by the AO, the

proceedings were bad in law also for the reason that the proceedings u/s 263

were initiated on the basis of an audit objection for which a reply was submitted

on 29.11.2019. It was argued that merely on the basis of the audit objection,

proceedings u/s 263 could not have been initiated. For this proposition, reliance

was placed on the judgment of the Hon’ble jurisdictional High Court in the case

of CIT vs. Sohana Woollen Mills reported in 296 ITR 338 which has

subsequently been followed by the Chandigarh Bench of ITAT in the case of

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 19 Kirti Anand vs. CIT in ITA No. 540/Chd/2013 and also followed in the case of

Surinder Pal Singh of the Chandigarh Bench of ITAT in ITA No. 57/Chd/2021,

wherein in both the cases, both on merits as well as by holding that 263

proceedings could not have been initiated on the basis of audit objection, the

respective orders u/s 263 were set aside.

5.0 Per contra, the Ld. CIT DR supported the observations of the Ld.

PCIT and submitted that the AO had not made due enquiries and also that there

was no application of mind by the AO on the issue of the increase in the

valuation of stock. It was argued that although the assessee, while filing the

return of income, had failed to honour the surrender made on this issue but no

specific enquiries were made by the AO on this issue during the course of the

assessment proceedings. It was further argued that by not disclosing the amount

of Rs. 2.45 crore on account of increase in the valuation of stock, the gross

profit had been reduced but the AO had failed to take note of the same. The Ld.

CIT (DR) further argued that the Ld. PCIT has only set aside the issue and that

the assessee would have ample opportunity again before the AO to demonstrate

the veracity of its contentions in this regard. The Ld. CIT DR also placed

reliance on numerous judicial precedents which have been filed in form of a

separate paper book and have been taken on record.

6.0 We have heard the rival submissions and have also perused the

record. We have also given a thoughtful consideration to the various judicial

precedents which have been cited by both the parties in their favour. We have

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 20 also gone through the paper book filed by the assessee wherein the assessee has

sought to demonstrate with evidence that the AO had already made requisite

enquiries on the issues raised by the Ld. PCIT during the course of assessment

proceedings and also the assessee had duly complied with the enquiries made

made by the AO by replying in details and by furnishing various documents and

evidences in support of its claim. We have also gone through the surrender

letter, as submitted by the assessee during the course of survey conducted on it

on 13.11.2014 and 14.11.2014. We have also gone through the reply dated

29.11.2019 given by the assessee with respect to the audit objection.

6.1 We note that it is a fact borne out from the record that as to how

and in what manner the figure of Rs. 2.45 crore was arrived at on account of

‘increase in the valuation of stock’ as on the date of survey is not on record.

However, it is evident from record that the the AO had raised numerous queries

during the course of assessment proceedings and the assessee too had given

detailed replies along with requisite evidences and documents. Thus, it is quite

evident that the Assessing Officer had duly applied his mind and had made

adequate enquiries with regard to the non-inclusion of Rs.2.45 crore on account

of increase in valuation of stock as on 12.11.2014. The same is borne out from

the letter dated 15.02.2017 filed by the assessee and is further substantiated by

the replies on account of slight fall in the ‘Gross Profit Rate’ and ‘Net Profit

Rate’ by way of letters dated 30.03.2017 and 07.04.2017. The order sheet

entries bear testimony to the fact that bills and vouchers were examined from

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 21 time to time and the impounded material was subject matter of due verification

by the AO, as indicated in the order sheet entries dated 15.03.2017, 07.04.2017,

18.04.2017, 20.04.2017 and, finally, vide order sheet entry dated 27.04.2017. A

finding of fact has been recorded by the AO that the replies had been submitted

by the assessee with regard to the clarifications sought by the AO on various

issues.

6.2 It is also an undisputed fact emerging from the record that the

assessee is maintaining day to day quantitative stock of raw material, work-in-

progress and finished goods and that the assessee has been following consistent

method of accounting year after year and even the stock lists as on 31.03.2014,

12.11.2014 and 31.03.2015, both quantity-wise and value-wise had been

submitted, along with the copies of the bills, before the AO and no defects were

found by the Assessing Officer during the course of assessment proceedings.

We also note that the books of accounts of the assessee have not been rejected

u/s 145(3) of the Act and, therefore, under such circumstances, when no adverse

view has been taken by the AO on the voluminous details submitted by the

assessee before the AO, we find it difficult to accept the finding of the Ld. PCIT

that the Assessing Officer had not applied his mind to the issue of ‘increase in

the stock valuation’ of Rs. 2.45 crore which had not been reflected while filing

the return of income. It is also worth our observation that the Assessing Officer

was conscious of the fact that non-declaration of Rs. 2.45 crore would result in

the fall in the gross profit/net profit and the same was enquired into by the AO

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 22 by requiring the assessee to explain the reason for the fall in gross profit/net

profit. Apparently, based on the submissions made by the assessee in this

regard, the AO agreed with the claim of the assessee that the offer of increase in

the valuation of stock amounting to Rs. 2.45 crore made on 14.11.2014 got

subsumed while preparing the financial result for the year ending 31.03.2015.

Although, the AO might not have recorded his satisfaction in as many words but

looking into the record before us, we can safely conclude that the AO had given

a thoughtful consideration to the issue and had accepted the assessee’s

contention only after adequate enquiry and due application of mind.

6.3 We also gone through the order of the Ld. PCIT, especially, the

finding given by him in Para 4 to 4.6 of his order and from a perusal of the

‘tabular chart’ reproduced above (as filed by the Ld. AR in his brief synopsis),

we find that there is no change in stand by the assessee before the Assessing

Officer or before the Ld. PCIT and, thus, the contention of the Ld. PCIT that

matter requires further verification is of no consequence as, undisputedly, the

assessee has been following a consistent system of accounting and the AO had

required the assessee to produce stock details, both in quantity and in value,

along with supporting bills and the assessee had duly complied with the said

direction of the AO. The same is also evident from the copy order sheet entries

which have been produced before us.

6.4 We have also gone through the ‘audit objection’, copy of which

was furnished before us and for which there is a reply furnished by the assessee

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 23 on 29.11.2019 and it has been rightly contended by the Ld. AR that the same

has to be considered for the purposes of the record as per clause (b) to

Explanation 1 of Section 263 which is being reproduced as under:

“(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 of by the [Principal [Chief Commissioner of Chief Commissioner or Principal] Commissioner or] Commissioner;]”

6.5 Thus, in view of the above explanation, the said letter is being

considered as part and parcel of the record, wherein the issue of increase in

valuation of stock amounting to Rs. 2.45 crores has again been explained in

detail. Therefore, we have no hesitation in holding that the Assessing Officer

had applied his mind to the issue as raised by the Ld. PCIT.

6.6 At this juncture, it would be relevant to make a reference to the

judgment of the Hon’ble Delhi High Court in the case of CIT Vs. Sunbeam

Auto Ltd reported in [2011] 332 ITR 167 (Del.) wherein the Hon’ble Delhi

High Court has ruled that one has to keep in mind the distinction between ‘lack

of inquiry’ and ‘inadequate inquiry’ and further if there was any inquiry, even

inadequate, that would not by itself give occasion to the Commissioner to pass

orders u/s 263 of the Act, merely because he has a different opinion in the

matter. It was further held by the Hon'ble Delhi High Court that if any

Assessing officer, acting in accordance with law, makes a certain assessment,

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 24 the same cannot be branded as erroneous by the Commissioner simply because,

according to him, the order should have been written more elaborately.

6.7 In the present case also, the A.O. made the requisite enquiries,

therefore, it is not a case of no enquiry and if the Ld. Pr. CIT was not satisfied

with the enquiries made by the AO, he should have conducted the enquiries

himself to record the findings that the assessment order was erroneous and he

should not have simply set aside the order passed by the AO directing him to

conduct the further enquiries.

6.8 On identical issue, the Hon'ble Jurisdictional High Court in the

case of CIT vs. M/s Unique Autofelts (P) Ltd (2009) 30 DTR 231 (P&H) held

as under:

"5. From the finding of the Tribunal, it is clear that the assessee had given proper explanation by filing the necessary confirmations. In view of such a finding, the Tribunal rightly held that power under Section 263 of the Act could be exercised where view taken by an Assessing Officer was erroneous. While exercising such power, the Commissioner was bound to take into account all relevant facts. If order invoking the said power proceeds on an erroneous assumption, the same could be set aside by the Tribunal. Finding of the Tribunal is not shown to be perverse. No substantial question of law arises."

6.9 Therefore, on the facts of the case, we have no hesitation in

holding that the assumption of jurisdiction u/s 263 of the Act on the ground that

there was no enquiry by the AO and on the ground of non-application of mind

by the AO is bad in law and cannot be upheld.

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 25 6.10 It has further submitted by the Ld. AR that the show cause notice

issued by the Ld. PCIT was based on audit objection. This contention of the Ld.

AR is duly supported by a copy of the same which was placed before us, by

way of letter dated 21.02.2022, furnished on 22.02.2022. We find that this

contention of the assessee also deserves to be taken into consideration. We note

that on an identical issue, the Hon'ble Jurisdictional High Court in the case of

CIT vs. Sohana Woolen Mills (supra) held as under:

“A reference to the provisions of s. 263 shows that jurisdiction there under can be exercised if the CIT finds that the order of the AO was erroneous and prejudicial to the interest of Revenue. Mere audit objection and merely because a different view could be taken, were not enough to say that the order of the AO was erroneous or prejudicial to the interest of the Revenue. The jurisdiction could be exercised if the CIT was satisfied that the basis for exercise of jurisdiction existed. No rigid rule could be laid down about the situation when the jurisdiction can be exercised. Whether satisfaction of the CIT for exercising jurisdiction was called for or has to be decided having regard to a given fact situation.”

6.11 We, therefore, by respectfully following the ratio laid down by the

Hon'ble Jurisdictional High Court in the aforesaid referred to case as well, are of

the view that the Ld. PCIT was not justified in exercising his power to invoke

the provision of Section 263 of the Act on the basis of audit objection raised by

the Audit Wing of the Department. We also note that the above said judgment

of Hon’ble High Court has been followed by the Chandigarh Bench of the ITAT

later on in the case of Kirti Anand vs. CIT in ITA No. 540/Chd/2013 CHD-

TRIB, Sh. Paramjit Singh vs. Pr. CIT in ITA No. 499/Chd/2016 vide order

ITA No. 196-Chd-2021 Ganga Acrowools Limited, Ludhiana 26 dated 09.11.2016 (Chd Bench), Shri Vikram Kaswan vs. CIT in ITA No.

519/Chd/2014 vide order dated 08.03.2016 (CHD Bench), Sh. Jaswinder Singh

vs. CIT-II in ITA no. 690/Chd/2010 (Chandigarh Bench) vide order dated

09.03.2012.

6.12 Therefore, we hold that the impugned action u/s 263 of the Act was

not justified both on the allegation of lack of enquiry by the AO as well as on

the allegation of non-application of mind by the AO. We also hold the

impugned action u/s 263 of the Act to be bad in law as it was initiated on the

bases if audit objection. Accordingly, we quash the impugned order.

7.0 In the final result, the appeal of the assessee stands allowed.

Order pronounced on 31.03.2022

Sd/- Sd/- ( N.K. SAINI) (SUDHANSHU SRIVASTAVA) Vice President Judicial Member Dated : 31.03.2022 “आर.के.”

आदेशक���त+ल,पअ-े,षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकरआयु.त/ CIT 4. आयकरआयु.त (अपील)/ The CIT(A) 5. ,वभागीय��त�न1ध, आयकरअपील$यआ1धकरण, च3डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड�फाईल/ Guard File

आदेशानुसार/ By order, सहायकपंजीकार/ Assistant Registrar