M/S. AMIRA ENTERPRISES LTD.,NEW DELHI vs. PR. CIT (C), GURGAON

PER B.P. JAIN, ACCOUNTANT MEMBER,

This appeal filed by the assessee is directed against the order dated

17.02.2017 passed by the CIT(A) - Central, Gurgaon, for the A.Y. 2014-15

u/s 263 of the Income Tax Act, 1961 (hereinafter, referred to as ‘the Act’

for short).

under consideration, i.e. A.Y. 2014-15, the assessee filed return of

income on 25.11.2014 declaring income of Rs. 32,21,460/-. The case was

selected for scrutiny under CASS and a notice u/s 143(2) dated

18.09.2015 was issued. Thereafter notice u/s 142(1) alongwith

questionnaire was issued on 05.04.2016. The appellant appeared on

various dates and filed the required details from time to time.

Assessment order dated 29.06.2016 was passed u/s 143(3) accepting the

returned income of Rs. 32,21,460/-. The books of account and vouchers

were produced and examined by the Assessing officer.

Gurgaon, issued notice u/s 263 dated 21.10.2016, seeking to revise the

assessment order passed u/s 143(3). The PCIT was of the view that the

assessment order was passed without making proper inquiries/

verification/investigations which should have been made before

accepting the trading results/other issues and therefore, the order is

erroneous and prejudicial to the interest of revenue. The PCIT issued

show cause notice u/s 263 in respect to the following issues:

i. Trading results accepted without making thorough inquiry/investigation and genuineness of sales/purchases accepted without enquiring or investigating independently ii. AO has not examined disallowance u/s 14A iii. Allowability of foreign travel expenses not examined by the AO iv. Genuineness of godown rent not examined.

cheques. Valuation of stocks fully supported with documentary evidences

and day to day stock records were filed before by the assessee before the

PCIT and it was submitted that these were produced before AO.

that the stocks in question were under financed from bank and were

under pledge with the banks. In support of the same, the assessee filed

confirmation certificates regarding funds availed against the pledged

stocks. Regarding the alleged discrepancy in sales made during the year,

the assessee submitted that sales were made only during the period when

rates were favourable. The assessee submitted complete party wise

detail of purchases and sales made during the year under consideration

with confirmed copy of account of the parties giving detail of each and

every invoice. The assessee submitted that these documents were also

furnished before the AO.

submitted disallowance u/s 14A is not applicable to the company. With

respect to the allowability of foreign travel expense and godown rent,

the assessee submitted complete details of expenses were furnished

during the assessment proceedings. The ld. PCIT held that the assessment

order has been passed without making proper inquiries/ verification

/investigations which should have been made before accepting the

trading results and other issues and the same is therefore erroneous and

prejudicial to the interest of revenue. Accordingly, vide order u/s 263 of

the Act dated 17.02.2017 the ld. CIT(A) set aside the assessment order

and directed the AO to redo the assessment de novo, after making

necessary inquiries/verification/ investigations. Against the order of the

ld. PCIT u/s 263 of the Act, the assessee has preferred this appeal before

us on the following grounds:

“1. The notice issued under section 263 by the Principal Commissioner of Income Tax (Central) (hereinafter referred to as “Pr CIT”) and the order passed under section 263 are illegal, bad in law and without jurisdiction.

on the ground that ‘no detailed investigations’ have been carried out by the Assessing Officer.

issued U/s 263 and the order passed u/s 263 is illegal, bad in law and without jurisdiction.

the ld. PCIT is not valid and not maintainable in law as the same has been

passed without considering the submissions of the assessee filed in

response to the show cause notice u/s 263. It is submitted that the order

passed is in violation of principle of natural justice because the

objections to proceedings u/s 263 of the Act and the submissions made in

response to notice u/s 263 of the Act have not been considered at all by

the PCIT. It is submitted that the purpose of a show cause notice is to

enable the person, against whom action is sought to be taken, to defend

his case and the same rests on the principles of natural justice. Serving a

show cause notice is not an empty formality and therefore, the principles

of natural justice are not met by merely issuing a show cause notice. The

PCIT has to apply his mind to the submissions made by the assessee in

response thereof and has to dispose off the objections raised by the

assessee before arriving at a finding that the order is erroneous and

prejudicial to the interest of the justice. Therefore, the PCIT has himself

erred by not adhering to the principles of natural justice and it is trite

law that any order passed in violation of principles of natural justice is

invalid and liable to be quashed.

along with supporting documents, which are placed at Page 71 to Page

420 of the paper book, in response to the show cause notice dated

21.10.2016 issued by ld. PCIT u/s 263. However, a perusal of the

impugned order u/s 263 of the Act shows that the PCIT has nowhere

considered the submissions of the assessee made in response to the show

cause notice u/s 263. This itself makes the order passed u/s 263 of the

Act as illegal and bad in law. Opportunity of being heard is little more

than serving a notice on assessee. It is not an empty formality. The PCIT

has nowhere in its order u/s 263 of the Act recorded the explanations

given by the assessee in response to the 263 of the Act show cause

notice. PCIT has not even looked at the replies filed by the Appellant in

response to notice u/s 263 of the Act and has passed the order U/ 263 of

the Act. Therefore, the order of the ld. PCIT is patently illegal, bad in

law and the same is liable to be quashed.

or verification which should have been made. The AO, exercising its

quasi-judicial power, had issued a detailed questionnaire u/s 142(1) of

the Act which was duly answered by way various details, explanations and

letters. Complete books of account, details of sales/purchases, supported

with documentary evidences were produced and examined by the AO

during the assessment proceedings. The appellant had appeared before

the AO and filed replies, however, the ld. PCIT has completely ignored

the detailed enquiry conducted by the AO and has, therefore, erred in

exercising jurisdiction u/s 263 of the Act in respect of the issues which

were already examined by the AO.

Industrial Co. Ltd. V. CIT [(2000) 243 ITR 83], it is submitted that the

power of CIT u/s 263 can only be exercised by the PCIT when the twin

conditions of the order being erroneous as well as prejudicial to the

interest of revenue, are satisfied and the same cannot be exercised to

substitute its own finding in place of the AO and therefore, the PCIT

cannot re-examine the issues already inquired into by the AO. Reliance is

also placed on the Bombay High Court’s decision in the case of CIT v.

Gabriel India Ltd. [(1993) 203 ITR 108]. The power u/s 263 is to be

exercised in the case of “no inquiry” and not in the case of “inadequate

inquiry” or “lack of inquiry” whereas the case of the assessee is not even

a case of lack of inquiry.

PCIT has initiated revision proceedings in order to carry out fishing and

roving enquiries in the matters which are already concluded by the AO

and therefore the exercise of jurisdiction u/s 263 of the Act is bad in law.

The ld. PCIT has erred in exercising jurisdiction u/s 263 of the Act when

the issues raised therein were already enquired into by the AO during the

assessment proceedings. The AO had passed the assessment order only

after conducting detailed enquiry on various issues including trading

results, allowability of expense and disallowance u/s 14A of the Act. The

assessment order is passed after due application of mind, therefore the

impugned notice and order u/s 263 of the Act alleging that proper and

adequate enquiry was not made, rendering the Assessment Order

erroneous and prejudicial to the interest of revenue, is arbitrary based on

conjecture and surmises. The ld. PCIT has not given any finding as to

how and in what manner the order of the AO on the various issues noted

in its order u/s 263 of the Act was erroneous and prejudicial to the

interest of the Revenue. The ld. PCIT has not made any enquiry on his

own but simply directed the AO to make further verification and

examination therefore, the order of the ld. CIT u/s 263 of the Act

deserves to be set aside. Recently, the Delhi High Court in the case of

PCIT v. Delhi Airport Metro Express Pvt. Ltd. [ITA No. 705/2017] has

categorically held that for the purpose of exercising jurisdiction u/s 263

and reaching a conclusion that the order is erroneous and prejudicial to

the interest of revenue, the ld. PCIT has to undertake some minimal

inquiry and in fact where the ld. PCIT is of the view that AO had not

undertaken any inquiry, it becomes incumbent on the PCIT to conduct

such enquiry. Further in PCIT v. Modicare Limited [ITA No. 759/2017]

Delhi High Court has followed its decision in Income Tax Officer v. DG

Housing Projects Limited [343 ITR 329], DIT v. Jyoti Foundation [357 ITR

388] and PCIT v. Delhi Airport Metro Express Pvt. Ltd. (supra) to hold that

the exercise of jurisdiction u/s 263 of the Act cannot be outsourced by

the CIT to the AO and therefore, the CIT cannot direct the AO to provide

details of the facts on the basis of which the proceedings u/s 263 could

have been initiated.

conducted by the AO during the assessment proceedings and submissions

made by the assessee in response to notice u/s 263, has merely observed

that the assessment order was passed without making proper enquiries

and it is a matter of record that PCIT has himself not undertaken any

enquiry to reach a conclusion that the order is erroneous and prejudicial

to the interest of revenue. Therefore, in the absence of any justification

for exercise of jurisdiction u/s 263, the order of PCIT passed u/s 263 is

liable to be set aside. There is difference between ‘Lack of enquiry’ and

‘inadequate enquiry’. It is for the AO to decide the extent of enquiry to

be made as it is his satisfaction as what is required under law. Reliance is

placed on the decision of CIT v. Sunbeam Auto Ltd. [(2010) 332 ITR 167],

wherein Hon’ble Delhi High Court has held that if there was any inquiry,

even inadequate, that would not by itself, give occasion to the

Commissioner to pass order u/s 263 of the Act, merely because the

Commissioner has a different opinion in the matter and that only in cases

where there is no enquiry, the power u/s 263 can be exercised. The ld.

PCIT cannot pass the order u/s 263 of the Act on the ground that

further/thorough enquiry should have been made by AO.

the provisions of section 263 of the Act by which Explanation 2 is

inserted, w.e.f. 01.06.2015 but the same does not give unfettered powers

to the Commissioner to assume jurisdiction u/s 263 to revise every order

of the AO to re-examine the issues already examined during the course of

assessment proceedings. The Hon’ble Mumbai ITAT has dealt with

Explanation 2 as inserted by the Finance Act, 2015 in the case of Narayan

Tatu Rane v. Income Tax Officer [(2016) 70 taxmann.com 227] to hold

that the said Explanation cannot be said to have overridden the law as

interpreted by the Hon’ble Delhi High Court, according to which the

Commissioner has to conduct an enquiry and verification to establish and

show that the assessment order is unsustainable in law. The Tribunal has

further held that the intention of the legislature could not have been to

enable the PCIT to 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, since such an

interpretation will lead to unending litigation and there would not be any

point of finality in the legal proceedings. The opinion of the

Commissioner referred to in section 263 has to be understood as legal and

judicious opinion and not arbitrary opinion.

assessment order in respect of the issues which were already examined

by the AO during assessment proceedings. The appellant also filed a

detailed chart to support his arguments

i. Alleged non-verification of purchase and sales and trading results

of the assessee; Genuineness of Sales/purchases made by the

assessee

• It is submitted that during the course of assessment

proceedings, specific query w.r.t. sales and purchases/trading

results was made vide questionnaire dated 05.04.2016 issued

u/s 142(1) [relevant question being 11, 20, 22, 25] and the

assessee had furnished categorical reply to the same along

with all the required details of purchase/sales. Confirmed

copies of accounts with PAN numbers from whom sales and

purchases were made, were filed before the AO. The said

details are part of the assessment record and it was only after

examining the said details, the AO had passed the assessment

order.

ii. Fall in G.P. and N.P.

• The PCIT has assailed the assessment order on the ground that

there is fall in G.P. as well as N.P. It is submitted that the AO

vide questionnaire u/s 142(1) had examined the said issue by a

specific query [relevant question being 16] and the assessee

had furnished its reply thereto wherein he categorically

submitted that the decline is on account of recession in export

price of rice/global market.

iii. Disallowance u/s 14A

• In the notice issued u/s 263, the PCIT stated that the AO has not examined disallowance u/s 14A. It is submitted that during

the course of assessment proceedings, the assessee had stated

it not received any dividend/exempt income during the

relevant previous year. The Hon’ble jurisdictional Punjab &

Haryana High Court in the case of CIT v. Winsome Textile

Industries Ltd. [(2009) 319 ITR 204] has held that u/s 14A can

be made when no exempt income has been earned by the

assessee during the relevant previous year. Hence there has

been no error committed by the AO by not making any

disallowance u/s 14A.

• Also, during the course of assessment proceedings, the

assessee had vide its order dated 29.06.2016 categorically

submitted that there is no claim of any exempt income u/s

14A, hence there are no interest expense relating to exempt

income. This clearly shows that the AO had conducted an

enquiry regarding the issue of disallowance u/s 14A and the

same was duly replied by the assessee. Therefore, it is not a

case of ‘no enquiry’ where the PCIT can exercise its

jurisdiction u/s 263, hence the order u/s 263 is illegal, bad in

law and without jurisdiction.

iv. Foreign Travel Expense/Godown Rent under Administrative and

other expenses

• It is argued that the AO vide questionnaire u/s 142(1) had

sought the justification of all the expenses which were debited

in the Profit & Loss Account [relevant question being 15] and

in response to this, the assessee had furnished complete

details of various expenses along with the ledger account

wherein all the requisite details were given. Books of account

and vouchers were produced and examined by the AO. The

details have been asked by the AO and as such it cannot be

said that no enquiry was made. The expenses have been

allowed after due examination. Reliance was placed on this

Hon’ble Tribunal’s decision in Vodafone Essar South Ltd. v. CIT

([2011) 12 taxmann.com 233), which is further affirmed by the

Hon’ble Delhi High Court in CIT v. Vodafone Essar South Ltd.

([2012] 28 taxmann.com 273)

and submitted that the ld. PCIT has rightly exercised the jurisdiction u/s

263 of the Act setting aside the assessment order. The Ld. DR submitted

that even though the PCIT in its order u/s 263 has not expressly noted the

submissions of the assessee made in response to the show cause notice

u/s 263, yet it cannot be said that the submissions of the assessee were

not considered by the PCIT. The Ld. DR contended that the order u/s 263

has been passed after duly considering the submissions made by the PCIT

in this behalf.

invoking Explanation 2 to section 263, even though the same is not

expressly written in the order. The DR also stated that issue of

disallowance u/s 14A of the Act has also not been examined by the AO

and no disallowance was made by him. During rebuttal the counsel for

the appellant argued that admittedly the ld. PCIT, while passing the

impugned order u/s 263, has not invoked Explanation 2 to section 263 and

therefore, the Ld. DR cannot take support of the same to justify the

exercise of jurisdiction by the PCIT u/s 263. It is submitted that in an

appeal against the order u/s 263, the ITAT cannot uphold the impugned

order u/s 263 of the Act on the grounds other than those taken by the

Commissioner in his order and therefore, the argument of the ld. DR that

Explanation 2 has been invoked by the ld PCIT is not tenable as the same

is nowhere noted to have been invoked by the ld. PCIT in its order.

Reliance is placed on the decision of the jurisdictional Punjab & Haryana

High Court in the case of CIT v. Jagadhari Electric Supply & Industrial Co.

[[1983] 140 ITR 490] wherein the High Court while dealing with a similar

situation. He also submitted that a specific query was raised by the AO in

respect of disallowance U/s 14A and a reply dated 29.06.2016 was filed

stating that the provision is not applicable as there is no exempt income

and the view taken by AO is a possible view. Further reliance is also

placed on the Hon’ble Mumbai ITAT decision in the case of Narayan Rane

Tattu (supra).

documents available on record. We are of the view that the AO had

issued a detailed questionnaire raising various queries. The appellant had

appeared from time to time and filed the detailed replies to all the

queries raised. Books of account were produced along with the supporting

vouchers which were examined by the AO. The confirmed copies of

account with PAN numbers of the parties to whom sales and purchases

were made, were filed before the AO. The explanation regarding fall in

GP rate was duly given. A specific query was raised in respect of

disallowance during the course of assessment proceeding to which reply

was filed by the assessee that there is no exempt income and provisions

of section 14A of the Act will not be applicable. The details of traveling

expense and godown rent expense were duly filed before the AO. Hence

it cannot be said that this is a case of no enquiry made by the AO. Merely

because the ld. PCIT feels that further enquiry should have been made

does not make the order of the AO erroneous.

notice u/s of the Act 263 of the Act stating that all the issues raised by

the PCIT have been examined by the AO during the course of assessment.

The PCIT has ignored the replies of the assessee. He merely states that

the reply has been filed by the assessee but he nowhere discusses the

contentions raised by the assessee and why he does not agree with the

contentions of the assessee. The ld. PCIT has merely remitted the matter

back to the AO without making any enquiry himself. The ld. PCIT has

mentioned that the opening stock has not been verified by the AO,

whereas the total opening stock was pledged with the bank. The ld. PCIT

has not considered the contentions of the assessee. Similarly, the other

replies of the assessee filed during the course of assessment and in

response to notice u/s 263 of the Act have been totally ignored. No

enquiry has been made by the PCIT. It was incumbent for the PCIT to

make some minimum independent enquiry to reach to the conclusion that

the order of the AO is erroneous and prejudicial to the interest of

revenue. The reliance is rightly placed on the decisions of Delhi High

Court in PCIT v. Delhi Airport Metro Express Pvt. Ltd. (supra) and Income

Tax Officer v. DG Housing Projects Limited (supra). The Hon’ble Delhi

High Court in Delhi Airport Metro Express Pvt. Ltd. (supra) e has made the

following observation:

“10. For the purposes of exercising jurisdiction under Section 263 of the Act, the conclusion that the order of the AO is erroneous and prejudicial to the interests of Revenue had to be preceded by some minimal inquiry. In fact, if the PCIT is of the view that the AO did not undertake any inquiry, it becomes incumbent on the PCIT to conduct such inquiry.”

has been inserted with effect from 01.06.2015 however we agree with

the finding of the coordinate bench in the case of Narayan Tatu Rane

(supra), wherein it has been held that Explanation cannot said to have

overridden the law as interpreted by the various High Courts, where the

High Courts have held that before reaching a conclusion that the order of

the AO is erroneous and prejudicial to the interest of revenue, the

Commissioner himself has to undertake some enquiry to establish that the

assessment order is erroneous and prejudicial to the interest of revenue.

In the case of Narayan Rane a doubt is also expressed regarding the

applicability of Explanation 2, which was inserted by Finance Act 2015

w.e.f. 01.06.2015, the bench also observed that if the Explanation is

interpreted to have overridden the law as laid down by various High

Courts, then the same would empower the Pr. CIT to find fault with each

and every assessment order and also to force the AO to conduct enquiries

in the manner preferred by the Pr. CIT, thus prejudicing the mind of the

AO, however, the intention of the legislature behind the explanation

could not have been so as the same would lead to unending litigation and

no finality in the legal proceedings. Accordingly, in view of our detailed

discussion, we allow the grounds of appeal raised by the assessee.

application filed by the assessee has become infructuous and accordingly

dismissed as having become infructuous.

and the appeal of the assessee is allowed.

The order is pronounced in the open court on 29.11.2017.

Sd/- Sd/- [SUDHANSHU SRIVASTAVA] [B.P. JAIN] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 29th November, 2017

VL/