SHETH COMMERCIAL CO.,KOLKATA vs. CIT-14 KOLKATA, KOLKATA

- This assessee’s appeal for assessment year 2012-13 arises against the Principal Commissioner of Income Tax-14, Kolkata’s order dated 20.03.2017 directing the Assessing Officer to frame afresh assessment after setting aside the regular one framed dated 23.03.2015 in exercising revision jurisdiction vested u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). We have heard Shri Miraj D Shah learned authorized representative for assessee and Shri P.K.Srihari, CIT/DR appearing at Revenue’s behest. Case file perused.

It transpires during the course of hearing that the assessee’s pleading challenge correctness of the PCIT’s order revising the regular assessment in issue framed by the Assessing Officer on 06.07.2016 with directions to frame Sheth Commercial Co. Vs. Pr. citi-14,Kol. Page 2 the same afresh whilst exercising revision jurisdiction vested u/s 263 of the Act. We start with the basic relevant facts. This assessee is a firm / exporter and trader of jute / jute products and hedging in US dollar, commodities. It filed its return for the impugned assessment year on 25.09.2012 declaring total income of ₹81,49,930/-. The Assessing Officer initiated u/s.1 48 proceedings by issuing his notice dated 26.02.2016. He then framed the assessment / re-assessment in the issue on 06.07.2016 accepting the taxpayer’s revised return seeking the withdraw sec. 35(1)(c) deduction of donation made to M/s Herbicure Healthcare Bio-herbal Research Foundation, Kolkata to the tune of ₹60 lac.

Case file suggests that the PCIT then termed the above assessment / re-assessment to be erroneous causing prejudice to interest of the Revenue exigible to exercise of revision jurisdiction u/s 263 of the Act. He issued his show-cause notice dated 15.02.2017 to the following effect:- “(i) It appears from the record that during the financial year 2011-12 relevant to the assessment year 2012-13 the assessee was engaged in the business of Exporter and Trader of Jute/Jute Products and hedging US dollar, commodities. It also appears from the record that “loss in US $ trading” amounting to Rs.35,59,347/- was claimed as business expenses by debiting the same in the Profit & Loss A/c and the same has been allowed in the assessment. The assessee had incurred loss on foreign exchange derivatives transactions due to extreme volatility in the foreign exchange market. The loss incurred by the assessee of Rs.35,59,347/- on forward foreign exchange contracts being not incidental to jute export business requires to be treated as inadmissible deduction for allowing to be set off with income of the regular business as loss in foreign exchange was speculative in nature. (ii) “Loss on dealing commodities” of Rs.60,98,446/- was claimed as business expenses by debiting the same in the Profit & Loss A/c. No separate accounts in respect of this business have been furnished by the assessee. Hence, no purchase and sales of commodities were passed through the Profit & Loss A/c. So, transaction in commodities were made by the assessee without delivery basis. since, the transactions of commodities was made ‘without delivery’ basis, loss on dealing commodities is nothing but ‘speculation loss’. Loss from speculative transactions can only be set off against speculative income. (iii) Donation of Rs.60,00,000/-had been given to Herbicure Healthcare Bio-herbal Research Foundation, Kolkata and it was allowed in the assessment. During the curse of assessment proceeding, no enquiry or verification in this regard have been made by the AO. Moreover, the approval granted to the foundation has been retrospectively withdrawn by CBDT.”

The assessee filed its reply dated 08.03.2017. The PCIT has then directed the Assessing Officer to frame afresh assessment as follows:-

I have carefully examined the assessment record and submissions made by the assessee. The impugned assessment order dated 23.03.2015 has been passed Sheth Commercial Co. Vs. Pr. citi-14,Kol. Page 4 without making relevant enquiry or verification regarding the foreign exchange loss of Rs.35,59,347/- and loss on dealing commodities of Rs.60,98,446/-. The claim of the assessee is that the foreign exchange loss is due to hedging transactions done in order to cover the risk of US dollar movement to protect the export business of the assessee. Similarly, the loss of Rs.60,98,446/- is also attributed to hedging in jute produce. However, these details have not been called for or examined by the assessing officer. The validity of the claim of the assessee has not been examined by the AO and no enquiry has been made. Since the AO failed to make necessary enquiries and allowed the claim without examination, the assessment order is erroneous and prejudicial to the interest of the revenue. Having regard to the facts and circumstances of the case the impugned assessment order for AY 2012-13 u/s 143(3) dated 23.03.2015 is deemed to be erroneous in so far as it is prejudicial to the interest of the revenue.

Hon'ble Delhi High Court in the case of GEE VEE Enterprise Vs. Addl. CIT reported in 99 ITR 375, 386 (Del) has held that the CIT may consider the order of the Assessing Officer to be erroneous not only if it contain some apparent error of reasoning or of law or of fact on the face of it but also because the Assessing Officer has failed to make enquiries which are called for in the circumstances of the case and it is an order which simply accepted what the assessee has stated in his return of income on the said issue. It is not necessary for the CIT to make further enquiries before cancelling the assessment order. The Commissioner can regard the order erroneous son the ground that the Assessing Officer should have made further enquiries.

Hon'ble Karnataka High Court in the case of Thalibai F Jain Vs. ITO 101 ITR 1, 6 (Karn) has held that where no enquiries made by the Assessing Officer on the relevant issue, assessment must be held to be prejudicial to the interest of the revenue and what is prejudicial to the interest of the revenue must be held to be erroneous though the converse may not always be true.

Hon'ble Supreme Court in the case of Malabar Industrial Co. (P) Ltd. Vs. CIT reported in (2000) 243 ITR 83, 87-88 (SC) affirming the Hon'ble Kerala High Court decision (198 ITR 611) has held that the phrase “prejudicial to the interests of the revenue” is of wide import and is not confined to only loss of taxes. If the AO has accepted the claim of the assessee without any enquiries then such assessment order passed by the AO was held to be erroneous.

The Assessing Officer failed to make relevant enquiry in this case. He has failed to examine the documents and papers relating to the assessment year 2012-13.

In this regard it is mentioned that mere non-enquiry would also render a particular order passed by lower authority as erroneous and prejudicial to the interest of revenue. This position has been clearly confirmed by Hon'ble Supreme Court in the case of Rampyari Devi Sarogi v. CIT (1968) 67 ITR 84 & Smt. Tara Devi Aggarwal v. CIT (1973) 88 ITR 323 (SC). The reasoning for this proposition has been explained by Hon'ble Delhi High Court in the case of GEE VEE Enterprise Vs. Addl.CIT (1975) 99 ITR 375 in the following para: ‘It is not necessary for the Commissioner to make further inquires before cancelling the assessment order of the Income Tax Officer. The Commissioner can regard the order as erroneous on the ground that tin the circumstances of the case the Income Tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reasons is obvious. The position and function of the Income Tax Officer is very different from that of civil court. The statements made in the pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neut5ral. It simply gives decision on the basis of the pleading and evidences which come before it. The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but A.Y.2012-13 Sheth Commercial Co. Vs. Pr. citi-14,Kol. Page 5 calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income Tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word “erroneous” in sec. 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not be made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.’ 11. Further to this it is noticed that there is no appeal right available to the Revenue from the order of assessment passed by Assessing Officer and i.e. why revisionary powers haves been given to the Commissioner and such power were held to be of wide amplitude by the Hon'ble Supreme Court in the case of CIT Vs. Shree Manjunathesware packing Products & Camphor Works (1998) 231 ITR 53/96 Taxman 1. Therefore, normally when Assessing Officer has not made any enquiry on a particular issue, then such order in view of the above detailed discussion has to be construed as erroneous and prejudicial to the interest of revenue and therefore, the impugned assessment order is erroneous and prejudicial to the interest of revenue as Assessing Officer has failed to make any enquiry.

In view of the above, the assessment order u/s. 143(3) dated 23.03.2015 for the assessment year 2012-13 in this case is considered as erroneous in so far as it is prejudicial to the interest of revenue with reference to the specific issues. The Assessment order u/s. 143(3) dated 23,.03.2015 made by the AO is accordingly set aside with the direction to make fresh assessment after considering the facts and submissions made by the A/R of the assessee in respect of the above specific issues raised after giving opportunity to the assessee and in accordance with law.” All this leaves the assessee aggrieved.

The Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required to be examined and verified to compute the taxable income. If the Assessing Officer fails to conduct the said investigation, he commits an error and the word “erroneous” includes failure to make the enquiry. In such cases, the order becomes erroneous because enquiry or verification has not been made and not because a wrong order has been passed on merits.

Delhi High Court in Gee Vee Enterprises vs. Additional Commission of Income- Tax, Delhi-I & Ors. (1975) 99 ITR 375, has observed as under:- ‘The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He ITA Nos. 139 to 141/Rjt/16 [M/s Panchnath Enterprise vs. Pr. CIT] A.Y 2006- 07 to 2008-09 – 10 – cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word “erroneous” in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word “erroneous” in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.”

In the said judgment, Delhi High Court had referred to earlier decisions of the Supreme Court in Rampyari Devi Sarogi vs. CIT (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal vs. CIT (1973) 88 ITR, wherein it has been held that where Assessing Officer has accepted a particular contention/issue without any enquiry or evidence whatsoever, the order is erroneous and prejudicial to the interest of the Revenue. After reference to these two decisions, the Delhi High Court observed:- ‘These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income- tax Officer. The Commissioner can regard the order as erroneous son the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return.’ 14. The aforesaid observations haves to be understood in the factual background and matrix involved in the said two cases before the Supreme Court. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification. These cases have to be distinguished from other cases (i) where there is enquiry but the findings are incorrect/erroneous’; and (ii) where there is failure to make proper or full verification or enquiry.

Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. IN cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the ITA No.1406/Kol/2017 A.Y.2012-13 Sheth Commercial Co. Vs. Pr. citi-14,Kol. Page 10 Assessing Officer to conduct further enquiries without a finding that the order is erroneous/. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.

This distinction must be kept in mind by the CIT while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged “inadequate investigation”, it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time ITA Nos. 139 to 141/Rjt/16 [M/s Panchnath Enterprise vs. Pr. CIT] A.Y. 2006-07 to 2008-08 -13 – When the order in question was passed by the Assessing Officer but also the recorded as it stands at the time of examination by the CIT [see CIT Vs. Shree Manjunathesware Packing Products, 231 ITR 53 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous.

It is init hi context that the Supreme Court in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax, (2000) 243 ITR 83 (SC), had observed that the phrase “Prejudicial to the interest of Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue.

In the present case, the findings recorded by the Tribunal are correct at the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that “order passed by the Assessing Officer may be erroneous”. The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order passed by the Assessing Officer was erroneous. He