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Income Tax Appellate Tribunal, DELHI ‘A’ BENCH,
Before: SHRI B.P. JAIN, & SHRI SUDHANSHU SRIVASTAVA
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).
The assessee is in the business of trading of rice. During the year 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.
The Principal Commissioner of Income Tax(Central) [PCIT], 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.
In response to the show cause notice, the assessee submitted that the assessment order is not erroneous and prejudicial to the interest of revenue and also the assessment has been made after making inquiries or verification on all the facts as have been alleged in the show cause notice. The assessee filed detailed response to the show cause notice issued u/s 263 of the Act.
As regards the trading results and sales/purchases, the assessee contended that explanation for the fall in gross profit and net profit and complete quantitative detail along with value of opening stocks, purchases and sales made during the year and closing stocks at the end of year both in quantity and value were furnished during the assessment proceedings and all the sales and purchases are fully vouched and supported by invoices and all the payments are through account payee 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.
As regards the genuineness of opening stock, the assessee submitted 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.
As regards the disallowance u/s 14A of the Act, the assessee 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.
2. That having regard to the facts and circumstances of the case, Pr. CIT has erred in law and on facts in assuming jurisdiction in passing the order u/s 263, more so when the assessment order passed under section 143(3) is neither erroneous nor prejudicial to the interest of Revenue.
3. That having regard to the facts and circumstances of the case, Pr. CIT has erred in setting aside the assessment order passed under section 143(3) of the Act by the Assessing Officer
on the ground that ‘no detailed investigations’ have been carried out by the Assessing Officer.
4. That PCIT has erred on fact and in law in not appreciating that the reply in specific reference to fall in Gross Profit and Net Profit as compared to earlier years, was inquired during the assessment proceeding and also confirmed by PCIT while issuing show cause notice U/s 263 of the Act.
5. That the PCIT has failed to consider that the assessment as framed by the Assessing Officer was after due application of mind and after considering the detailed replies on various dates as filed before him during the course of assessment proceedings.
6. That the PCIT has failed to appreciate that details of expenses were filed as required by the AO and the assessment order has been passed after due application of mind.
7. That having regard to the facts and circumstances of the case, Pr. CIT has erred in invoking the provision of Section 263 in reference to disallowance u/s 14A of the Act without appreciating that Assessee did not earn any exempt income during the relevant AY, hence no disallowance was warranted u/s 14A of the Act.
That the assessment order passed after detailed enquiries does not become erroneous merely because CIT feels that further enquiries should have been made. Hence the notice
issued U/s 263 and the order passed u/s 263 is illegal, bad in law and without jurisdiction.
9. That without prejudice, the PCIT has wrongly and illegally held that the order passed by AO is erroneous and prejudicial to the interest when no independent enquiry has been made by PCIT. Hence the notice issued U/s 263 and the order passed u/s 263 is illegal and bad in law.
The without prejudice, the PCIT has exceeded his jurisdiction in setting aside the assessment order and directing the AO to make de novo assessment when his notice and the order passed is limited to certain issues only. Hence the order passed u/s 263 is illegal and bad in law.
11. That the evidence filed and materials available on record have not been properly construed and judiciously interpreted, hence the addition/ disallowance made is uncalled for.
12. The Appellant craves leave to add, to alter to amend the above Ground of Appeal at the time of hearing.”
8. The ld. counsel for the assessee submitted that the order passed by 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.
The appellant had filed replies before the ld. PCIT dated 03.02.2017 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.
10. It is further argued that the order is passed after making inquiries 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.
Relying on the decision of Apex Court in the case of Malabar 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.
It is submitted that under the jurisdiction u/s 263 of the Act, the ld. 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.
In the instant case, the ld. PCIT, unmindful of the enquiries 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.
It is submitted that even though there has been an amendment in 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.
It is argued that the impugned order u/s 263 seeks to revise the 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)
On the other hand, the ld. DR strongly relied upon the order of PCIT 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.
The Ld. DR heavily placed reliance on the Explanation 2 to section
She argued that the ld. PCIT has passed the order u/s 263 by 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).
We have considered the arguments from both sides and perused the 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.
The assessee had filed various replies to the ld. PCIT in response to 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.”
The ld. PCIT has not referred to Explanation 2 of section 263 which 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.
Since the appeal has been decided hereinabove, the stay application filed by the assessee has become infructuous and accordingly dismissed as having become infructuous.
In the result, the stay application filed by the assessee is dismissed and the appeal of the assessee is allowed.
The order is pronounced in the open court on 29.11.2017.