DCIT RG 8(2), MUMBAI vs. JAYANT AGRO ORGANICS LTD, MUMBAI

The facts of the case are that the assessee is engaged in the business of manufacturing and export of agro projects, filed its return of income for A.Y. 2005- 06 on 31.10.2005, declaring total income of ` 1,32,92,005/-. The assessment has been completed u/s. 143(3) on 19.12.2007 determining total income at ` 5,26,67,630/-. Subsequently, the assessment has been revised u/s. 263 of the Income Tax Act, 1961 by CIT, Mumbai and accordingly, the AO has completed assessment u/s. 143(3) r.w.s. 263 of the Income Tax Act, 1961 on 14.12.2010 determining total income of ` 12,31,55,300/- inter alia, making additions towards loss on account of misappropriation of goods, disallowance foreign commission paid on export sales and disallowance out of work assortment charges. The assessee challenged order passed u/s. 263 before the Hon’ble ITAT. The ITAT vide its order dated 13.04.2018 in has set aside the revisionary order passed u/s. 263 of the I.T.Act and restored the assessment order passed u/s. 143(3) of the Act.

The learned AR for the assessee, at the time of hearing submitted that the ITAT has quashed the order passed u/s. 263 by the Assessing Officer, consequently, the order passed by him u/s. 143(3) r.w.s. 263 does not survive. The learned DR present for the Revenue fairly accepted that ITAT has quashed the order passed u/s. 263 by the Assessing Officer hence, the order passed by the Assessing Officer u/s. 143(3) r.w.s 263 has no legs to stand and becomes infructuous.

We have heard both the parties and perused the material available on record. We find that ITAT, Mumbai Bench ‘C’, in vide order dated 13.04.2018 quashed the order passed by the AO u/s. 263 for the detailed reasons recorded in its order in para 8 to 12. The relevant portion of the order is extracted below:

We have heard both the parties and perused the materials available on record. The CIT revised assessment order passed by the AO u/s 143(3) on two issues. The CIT questioned allowability of loss of stock due to misappropriation and payment of export commission. According to the CIT, the AO did not conduct necessary enquiries about allowability of loss of stock and payment of export commission. The CIT was of the opinion that the AO allowed both items without conducting necessary enquiries which caused prejudice to the interest of the revenue and hence opine| that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue.

The CIT has power to revise assessment order, if the assessment by the AO is erroneous Insofar as it is prejudicial- to the interest of the revenue. To assume jurisdiction u/s 263 of the Act the CIT has to demonstrate that the assessment order passed by the AO is erroneous as well as prejudicial to the interest of the revenue. Unless order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue, the CIT does not have power to revise the assessment order. In this case, the CIT alleges that the AO has not conducted necessary enquiries in respect of loss of stock due to misappropriation and payment of commission. The CIT did not explain how the loss of stock due to misappropriation and payment of export commission is caused prejudice to the interest of the revenue. The CIT is only on the point that the AO has not conducted required enquiries which resulted prejudice to the interest of the revenue.

To decide whether assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue, one has to understand the issues questioned by the CIT. The CIT questioned the issue of allowability of loss of stock due to misappropriation. The assessee has claimed loss due to misappropriation of stock by one of the processors. The assessee has lodged police complaint and also recovered a property which covers portion of loss caused by the processor. The remaining amount has been claimed as loss due to misappropriation and debited to P&L Account. The assessee has given detailed note in its financial statements about the loss. The assessee claims that such details has been examined by the AO during assessment proceedings and on being satisfied with the explanation has chosen to accept the loss claimed by the assessee. We find merits in the arguments of the assessee for the reason that any loss caused due to theft or embezzlement or misappropriation is deductible expenditure. This legal proposition is supported by the decision of the Hon'ble Bombay High Court in the case of CIT vs Bombay Forgings Pvt Ltd 206 ITR 562 (Bom), wherein it was held that loss caused to the assessee for embezzlement during the relevant previous year was allowable as deduction in computation of the total income. We further observe that the AO has caused necessary enquiries at the time of assessment proceedings. Therefore, we are of the considered view that the assessment order passed by the AO is not erroneous insofar as it is prejudicial to the interest of the revenue in respect of the first issue questioned by the CIT.

Coming to the second issue questioned by the CIT, the CIT questioned about the payment of export commission in the light of TDS provisions and also questioned the genuineness of such payments in the light of the fact that the assessee has engaged in export of diamonds for the first time; According to the CIT, the AO has not questioned the issue of payment of export commission and also relevance of payment of such commission. The CIT also questioned the applicability of TDS commission. According to the CIT, the AO did not conduct necessary enquiries which caused prejudice to the interest of the revenue. It is the contention of the assessee that export commission is paid to a non resident for rendering services outside India for which the provisions of TDS has no application. The assessee further contended that the AO has called for necessary details about payment of export commission and also details of compliance to TDS provisions. The assessee has filed necessary details of TDS and also explained TDS provisions are not applicable to export commission in the light of circular No.786 dated 07-02-2000 issued by CBDT. We find force in the arguments of the assessee for the reason that first of all, the AO has caused enquiries with regard to the payment of export commission during assessment proceedings which is evident from the fact that the assessee has disclosed details of payment of export commission in its financial statements. The assessee also furnished copies of tax audit report wherein the tax auditor has not reported any adverse remarks on compliance with TDS provisions. We further notice that the assessee has give complete details of diamond trading business in its emails filed with financial statements. The AO, on being explanations furnished by the assessee has completed assessment. Therefore, we are of the considered view that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue on second issue questioned by the CIT.

The CIT, revised the assessment order only on the ground that although the AO has caused necessary enquiries, such enquiries are inadequate in the light of facts of assessee's case. Therefore, he opined that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue. The CIT did not point out how the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue in respect of those two items. The CIT questioned the enquiries conducted by the AO and opined that such enquiries are inadequate which cause prejudice to the interest of the revenue. An order of assessment cannot be termed as erroneous insofar as it is prejudicial to the interest of the revenue unless it is not in accordance with law. An assessing officer going in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him, the order should have been written more elaborately. This section does not visualise a case substitution of judgement of the Commissioner far that of the Assessing Officer, who passed the order unless the decision is held to be erroneous. If the made enquiries in regard to the nature of the expenditure incurred by the assessee by calling for necessary evidences and the assessee had given detailed explanations in that regard, then merely because the AO has not recorded the findings in his assessment order, the assessment order passed by the AO cannot be termed as erroneous. This legal proposition is supported by the decision of Hon'ble Bombay High Court in the case of CIT vs Gabriel India Ltd (supra), wherein it was held that in order to exercise jurisdiction u/s 263, the Commissioner must have material to prima facie come to a conclusion that the order of AO is erroneous and also prejudicial to the interest of the revenue. In this case, on perusal of facts available on record, we find that the assessee has demonstrated with evidences that the AO has conducted necessary enquiries insofar as two issues questioned by the CIT. The assessee also demonstrated with evidence that there is no prejudice caused to the interest of the revenue for allowing deductions towards loss of stock due to misappropriation and payment of export commission as the loss on account of misappropriation is allowable deduction while computing income from business. As regards export commission, the provisions of TDS has no application. Therefore, we are of the considered view that the CIT was erred in revising the assessment order passed by the AO u/s 143(3). Hence, we set aside the order passed by the CIT u/s 263 of the Income-tax Act, 1961 and restore the assessment order passed by the AO u/s 143(3) of the Act.”

Since, the ITAT has set aside the order passed u/s. 263, the consequential order passed by the AO u/s. 143(3) r.w.s. 263 has no legs to stand and hence same is dismissed as infructuous.

In the result, the appeal filed by the Revenue is dismissed.