BOMBAY STOCK EXCHANGE LTD,MUMBAI vs. PR CIT 2, MUMBAI

The appellant has raised various Grounds of appeal, which are as under :-

Though the assessee has raised multiple Grounds of appeal, but essentially the grievance is against the conclusion drawn by the Commissioner that the assessment order dated 15.03.2014 was erroneous and prejudicial to the interests of the Revenue within the meaning of Sec.

Subsequently, the Commissioner called for and examined the record of assessment proceedings and noted that the return of income was revised by the assessee, which had resulted in reduction of returned income by a sum of Rs.4,68,99,957/-. In this context, it was noted by the Commissioner that in the original return of income assessee had drawn up its computation of income by adopting the net profit as per the Profit & Loss Account at Rs.243,09,75,383/-, a copy of which is placed at page 2 of the Paper Book whereas in the revised return of income, it was drawn up by adopting the figure of Rs.238,40,75,426/-, a copy of which has been placed in the Paper Book at page 6. The Commissioner also noted Note 8(b) annexed to the revised computation of income in terms of which assessee had explained the reasons for filing the revised return of income qua the difference of Rs.4,68,99,957/-. In the said Note, assessee explained that it had migrated to a new accounting system of ERP from January, 2011 and the earlier accounting system of Tally was discontinued. The detailed Note explained that various modules of ERP were gradually implemented from 01.04.2010 and the ERP was run parallel with Tally accounting and it was only from January, 2011 that it was adopted on a standalone basis. In the new ERP system of accounting, there were various sub-ledgers as a part of the accounting modules which showed certain un-reconciled differences between such sub-ledgers and the general ledger balances. These balances could be appropriately dealt with only in the audited financial statement ending on 31.12.2012. The reconciliation so made by the assessee showed that there were certain income/expenses which were excess booked in the previous year relevant to the assessment year under consideration also and, therefore, the revised return was filed accounting for such differences amounting to Rs.4,68,99,957/-.

On this basis, the Commissioner was of the view that the Assessing Officer erred in taking into account the revised computation of income while passing the assessment order dated 15.03.2014 (supra). In the show cause notice issued to the assessee dated 02.03.2016, a copy of which has been placed at pages 19 & 20 of the Paper Book, the Commissioner has referred to Sec. 139(5) of the Act dealing with filing of revised return of income, which according to him was not applicable to the assessee as the revision was on account of discrepancy “due to change of method of accounting noticed after lapse of 21 months”.

In response to the show cause notice, assessee resisted the stand of the Commissioner and the detailed submissions made by the assessee have been reproduced by the Commissioner in para 4 of his order. Assessee had raised two-fold pleas; firstly, that the return of income including the revision made was appropriately scrutinised by the Assessing Officer in the course of the assessment proceedings. As per the appellant, the Assessing Officer had made detailed and complete inquiries about each and every aspect of the return of income and, therefore, the completed assessment was in accordance with law; secondly, with regard to the observation of the Commissioner that the revised return was accepted by the Assessing Officer without going into the relevant details, the assessee pointed out that reconciliation resulting into adjustment of Rs.4,68,99,957/- to the originally returned income was very much before the Assessing Officer, which was duly supported by the Auditor’s certificate. Assessee asserted before the Commissioner that the Assessing Officer was duly satisfied with the explanation furnished and after applying his mind to the facts and circumstances of the case, the assessment order was passed. With regard to the Commissioner’s observation that the revision was on account of discrepancy due to “change of method of accounting”, assessee clarified that it was regularly following the mercantile system of accounting and there was no change in the method of accounting, that it was only a change in the accounting software inasmuch as assessee migrated from the use of accounting software Tally to ERP. Justifying the filing of the revised return u/s 139(5) of the Act, it was pointed out that assessee had discovered errors and omissions as a result of migrating from accounting software Tally to ERP and that such an adjustment was duly certified by the internal auditors. It was thus contended that there was no error on the part of the Assessing Officer in relying on the revised return of income filed by the assessee. Apart therefrom, on the point of law also, assessee asserted that the assessment order could not be treated as erroneous and prejudicial to the interests of the Revenue within the meaning of Sec. 263 of the Act inasmuch as the same was in accordance with law and has been passed after making necessary inquiries and after due application of mind as per law. The aforesaid explanations rendered by the assessee were not found satisfactory by the Commissioner and he has ultimately set-aside the assessment order dated 15.03.2014 (supra).

In coming to such a conclusion, the Commissioner noted that the Assessing Officer made the revised return filed by the assessee as the basis for passing the assessment order without examining the relevant details as to why the income has been returned less in the revised return as compared to the original return of income. Though in his conclusion Commissioner accepts that “there is no change in accounting method”, but he was not satisfied that a change in accounting package would result in any difference in the income computed as per the Profit & Loss Account. Nevertheless, the Commissioner accepted the plea of the assessee that the difference was due to prior period items amounting to Rs. 4,68,99,957/-, but according to him, the Assessing Officer had not looked into this aspect at all and, therefore, it was a mistake on the part of the Assessing Officer which has rendered the assessment order dated 15.03.2014 (supra) erroneous and prejudicial to the interests of the Revenue within the meaning of Sec. 263 of the Act. After coming to such conclusion, he has set-aside the assessment order with certain directions, which read as under :-

At the time of hearing, the learned representative for the assessee assailed the order of the Commissioner by contending that the requisite conditions required to invoke Sec. 263 of the Act have not been fulfilled by the Commissioner. The learned representative referred to the detailed written submissions made before the Commissioner, which have been reproduced in his order, and reiterated the same. Apart therefrom, the learned representative also canvassed that Sec. 263 of the Act has been resorted to by the Commissioner merely to verify as to whether there was any error or not in the assessment order, an approach which is impermissible because Sec. 263 of the Act requires the Commissioner to come to a positive finding that the assessment order is erroneous as well as prejudicial to the interests of the Revenue. The learned representative also submitted that it was wrong on the part of the Commissioner to observe that the revised return was not within the purview of Sec. 139(5) of the Act inasmuch as the assessee had discovered an omission in the return originally filed and, therefore, the same was within the scope of Sec. 139(5) of the Act and that it has been filed within the specified period. On the issue of absence of any conclusive finding of the assessment order being erroneous, the learned representative relied upon the decisions of the Mumbai Bench of the Tribunal in the case of Gaurav Mathrawala vs CIT, dated 06.01.2016 as also the case of M/s. A.V Industries vs ACIT, ITA No. 3469/Mum/2010 dated 06.11.2015 and canvassed that the impugned order was bad in law. The learned representative reiterated that it is not a case of no inquiry by the Assessing Officer and rather, the Assessing Officer had examined the details and, in this context, referred to the assertions before the Commissioner wherein assessee had explained that the reconciliation resulting into the impugned adjustment was supported by Auditor’s certificate, which was duly placed before the Assessing Officer, but in the absence of any requirement, the same was not put on record. However, it is pointed out that the said Auditor’s certificate, which is placed in the Paper Book at pages 37 to 41, was very much before the Commissioner. It was also pointed out that the same Auditor’s certificate was also referred to and relied upon in Assessment Year 2012-13 and based on the same, the revised return filed by the assessee, incorporating similar adjustment, has been accepted by the Assessing Officer.

On the other hand, the ld. DR appearing for the Revenue supported the stand of the Commissioner by pointing out that in the course of assessment proceedings, the contents of Note 8(b) annexed to the return of income were not subject to any application of mind by the Assessing Officer inasmuch the assessment order is silent on this issue. Therefore, the Commissioner was justified in setting-aside the assessment order. The ld. DR also pointed out that, in any case, the Auditor’s certificate being referred to by the appellant would be required to be examined by the Assessing Officer in the ensuing assessment as the Commissioner has directed the Assessing Officer to examine the books of account with regard to the difference in the income returned as per the revised return and, therefore, the grievance of the assessee would not remain.

We have carefully considered the rival submissions. Notably, Sec. 263 of the Act empowers the Commissioner to call for and examine the record of any proceedings under the Act and if he considers any order passed therein by the Assessing Officer to be erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Pertinently, the revisionary power vested in the Commissioner u/s 263 of the Act is subject to fulfilment of two conditions, namely, that the order passed by the Assessing Officer is erroneous; and, it is prejudicial to the interests of the Revenue. It is judicially well-settled that the twin conditions prescribed in Sec. 263 of the Act have to be cumulatively fulfilled. In this context, a gainful reference can be made to the judgment of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs CIT, 243 ITR 83 (SC). The Hon'ble Supreme Court opined in the context of Sec. 263 of the Act that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer and that it is only when the order is erroneous that the section would be attracted. In other words, what has been emphasised by the Hon'ble Supreme Court is that every loss of revenue as a consequence of an order of the Assessing Officer cannot be construed to be prejudicial to the interests of the Revenue, unless it can be established that the assessment order is erroneous inasmuch as the same is unsustainable in law. In this background, we may now examine the facts in the instant case.

In the instant case, the basic premise of the Commissioner to invoke Sec. 263 of the Act is the fact that, in his perception, the Assessing Officer wrongly took cognisance of the revised return of income filed by the assessee which, inter-alia, resulted in reduction of returned income by a sum of Rs.4,68,99,957/-. Though in the show cause notice issued by the Commissioner, it is sought to be made out that the revised return was not within the ambit of Sec. 139(5) of the Act, but we find that in the operative part of his order, he has not rendered any finding on the same. Nevertheless, this aspect requires some consideration, as our discussion hereinafter would show. Sec. 139(5) of the Act permits a person having furnished a return u/s 139(1) or in pursuance to a notice issued u/s 142(1) to furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier provided he “discovers any omission or any wrong statement” in the original return of income. It is canvassed before us that the revised return of income was necessitated in the instant case on account of reconciliation exercise carried out consequent to discontinuation of the use of accounting software package. The reconciliation resulted into an adjustment to the originally returned income, and the revised return was filed, which was accompanied by a Note detailing such adjustment, which reads as under :-

The aforesaid Note clearly brings out that the exercise carried out by the assessee required adjustment to the returned income and, in our considered opinion, there was enough justification for the plea of the assessee that it had discovered an “omission” or “wrong” in the original return within the meaning of Sec. 139(5) of the Act. Therefore, even without referring to the merit of the adjustment made in the revised return of income, so far as the cause for assessee to invoke Sec. 139(5) of the Act and file a revised return is concerned, the fact-situation justified the same.

At this stage, we may also refer to another perception of the Commissioner in the show cause notice that there is a change in the method of accounting. In the final order, of course, the Commissioner accepts that there is no change in the method of accounting. The Commissioner thereafter notes that in the mercantile system of accounting, which is adopted by the assessee, prior period adjustments should not be considered for computation of income “unless the prior period items have occurred in the relevant previous year”. There can be no quarrel on the aforesaid premise arrived at by the Commissioner. What the Commissioner has sought to make out is that this aspect has not been looked into by the Assessing Officer. According to the Commissioner, the said mistake renders the assessment order erroneous and prejudicial to the interests of the Revenue. In this context, one thing which clearly emerges is that the erroneous nature of the assessment order is dependent on a finding as to whether the impugned adjustments have occurred in the previous year relevant to the assessment year under consideration or not. Curiously, the Commissioner has not given a finding to the effect that the impugned adjustments have not occurred in the previous year relevant to the assessment year under consideration so as to say that the order is unsustainable in law and erroneous. If we now read the direction of the Commissioner, which we have extracted in the earlier part of this order, it would show that he has required the Assessing Officer to examine the books of account and to see whether it reflects prior period items which have occurred in the instant year or not? The entire approach of the Commissioner shows that without establishing that the assessment order is unsustainable in law, he has set-aside the same, which is evident from the fact that it is only the verification by the Assessing Officer which will show as to whether or not the impugned claim was justified. In a somewhat similar situation, our co-ordinate Bench in the case of Gaurav Mathrawala (supra) noted the absence of a specific finding by the Commissioner as to how the claim of the assessee was wrong on the basis of facts and material on record but the assessment was set-aside and directed to be redone; as per the Tribunal, a specific finding was required from the Commissioner before the assessment order could be set-aside for redoing of assessment. At this stage, we may also examine another allied contention of the assessee to the effect that at the time of assessment proceedings, the said aspect has indeed been examined by the Assessing Officer. Notably, the revised return of income contains Note 8(b), which we have reproduced in the earlier part of this order, and the Assessing Officer having taken cognisance of the revised income, it can definitely be presumed that the impugned adjustment was in the knowledge of the Assessing Officer. Before the Commissioner as well as before us, the learned representative has referred to various written communications made to the Assessing Officer during the assessment proceedings wherein, inter-alia, the revised return has also been adverted to. At this point, an issue was raised by the assessee that the adjustment so made was duly supported by certificate of the Auditor dated 27.09.2013. It was canvassed that the same was not filed before the Assessing Officer, but was discussed/explained to the Assessing Officer. In our considered opinion, this assertion of the assessee does not inspire a finding as to whether the Assessing Officer applied his mind on the certificate; and, in the absence of the certificate being on record of assessment, it cannot be said to have been considered for making the assessment. Be that as it may, it is sought to be pointed out that the same was very much before the Commissioner and that even in the subsequent assessment years of 2012-13 and 2013-14, the said certificate was pressed into service by the assessee before the Assessing Officer and, in the next assessment year, the same was accepted and the adjustment to the income based on such certificate have been made. For Assessment Year 2012-13, the revised return of income based on the Auditor’s certificate dated 27.09.2013 was accepted in an order passed u/s 143(3) of the Act dated 20.03.2015, a copy of the said order has been placed in the Paper Book at pages 106 to 114. Reference has also been made to the revised return of income filed for Assessment Year 2013-14, wherein also an adjustment on the basis of Auditor’s certificate dated 22.05.2013 has been made, copy of which is placed at pages 115 to 120 of the Paper Book. The learned representative pointed out that the efficacy of the said certificate stood established in the assessment proceedings for Assessment Year 2012- 13 and that the said situation prevailed even when the Commissioner took- up the impugned proceedings inasmuch as the assessment for Assessment Year 2012-13 u/s 143(3) of the Act is of an anterior date. In our view, if one is to consider the absence of finding by the Commissioner of an erroneous order in the context of the acceptance of Auditor’s certificate in assessment proceedings for Assessment Year 2012-13, it clearly would show that the Commissioner was wrong in considering the assessment order as erroneous for merely requiring the Assessing Officer to verify the situation and to amend the originally assessed income depending upon the outcome of the verification exercise.

In view of the aforesaid discussion and having regard to the material on record and in law, the invoking of Sec. 263 of the Act by the Commissioner in the instant case is untenable and is hereby set-aside.

In the result, appeal of the assessee is allowed, as above.