SH. BRAHAM DEV GUPTA,NEW DELHI vs. PR. CIT, NEW DELHI

PER BENCH :

In this appeal by the assessee, the following grounds are raised:- “ 1. That the learned Principal Commissioner of Income Tax has erred in invoking the jurisdiction u/s 263 of the Act in the instant case and has also erred in holding that the assessment order passed by the Assessing Officer in this case is erroneous in so far as it is prejudicial to the interest of Revenue.

2 ITA No. 2102/Del/2016 Assessment year: 2011-12 2. That the learned Principal CIT has erred in holding that the Assessing Officer failed to make inquiries while framing the assessment order dated 31.1.14.

at length. He stated that the assessee is an individual who derives income from

export of various items like readymade garments, woollen garments, leather goods,

handicraft goods etc. in the name and style of M/s DSM International. During the

year under consideration, there was survey at the business premises of the assessee on 22nd September, 2010. In this survey, the assessee made a surrender of Rs.

18,25,22,250/- as additional income on account of excess stock found in his

premises. The assessee declared the income surrendered at the time of survey and

included the same in his returned income filed on 28.9.2011 declaring taxable

income of Rs. 21,58,62,170/- which was inclusive of the sum of Rs. 18.25 crores

declared at the time of survey. The assessment proceedings had commenced by

issue of notice u/s 143(2) and after several hearings, the AO completed the

assessment u/s 143(3) at Rs. 21,60,55,880/-. That the CIT issued show cause notice u/s 263 on 1st October, 2015 in response to which the assessee filed the

3 ITA No. 2102/Del/2016 Assessment year: 2011-12 detailed written submissions in which each and every point was explained. The ld.

CIT(A) alleged that the Assessing Officer did not make the inquiry on various

points and he set aside the matter back to the file of Assessing Officer to make

fresh assessment. Ld. Counsel explained in respect of each and every point raised

by the CIT(A) and claimed that proper inquiry was made by the Assessing Officer

in respect of each and every point and the allegation of CIT is factually as well as

legally untenable. He has also furnished the written submissions, the relevant

portion of which is reproduced below for ready reference:-

“8) SUBMISSIONS BEFORE ITAT

It is respectfully submitted that the assessment in this case was framed after making all inquiries and verification which were required to be made and that the assessment order in this case is neither erroneous nor prejudicial to the interest of the Revenue.lt is further submitted that the Ld. CIT has erred in assuming jurisdiction u/s 263 of the Act and passing the impugned order u/s 263 of the Act as would be evident from the following submissions on each of the points raised by the ld. CIT in his notice u/s 263:

i. That the loss of Rs.38.62 crores calculated by the CIT in his show cause notice is factually incorrect (emphasis supplied) and unjustified and that the same has been arrived at without including the export incentive of Rs.42,39,41,070/- and the fluctuation in exchange rate of Rs.3,42,08,969/- which are inextricably linked to the business of exports that the assessee has in fact earned a gross profit of Rs.7,19,11,426/- and a net profit of Rs.3,33,31,484/- and had not incurred any loss on goods sold by him.(Page 59 paperbook).

4 ITA No. 2102/Del/2016 Assessment year: 2011-12

ii. That the assessee did not have any trading transaction with Sehdev Gupta during the instant year (Page 509 of paper book) and therefore there is no valid basis for the Ld. CIT to draw any adverse inference against the assessee on the basis of investigation in the case of Sehdev Gupta by DRI. Even otherwise Sh. Sehdev Gupta is an independent assessee of income tax and no adverse inference can be drawn only on the basis of surmises and conjectures. During the course of hearing, the ld. CIT never confronted the assessee regarding the allegations about Sehdev Gupta and it is only in his order that he has drawn adverse inference against the assessee and that too without bringing any material on record . iii. That the A.O. had duly examined the capital account of the assessee and that all withdrawals from the capital account were made out of its own funds as the opening capital of the assessee was Rs.6.41 crores and the closing capital of the assessee was Rs. 14.86 crores. It was further explained that the entire income earned by the assessee during the instant year was duly declared in the return of income and that there is no other income accruing to the assessee during the instant year.(page 7 paperbook)

iv. That the details of loans given to other parties by the assessee at Rs.7,52,87,000/- stood duly disclosed in the audited Balance Sheet filed by the assessee and that all such loans were given by the assessee out of interest free funds available to the assessee which included his capital which was Rs.6.41 crores as on 1.04.10 and Rs. 14.86 crores as on 31st March 2011. It was further explained that the capital of the assessee as also interest free loans available to the assessee of Rs.3.16 crores and other interest free funds in the form of sundry creditors etc. were far in excess of the interest free loans advanced by the assessee at Rs.7.52 crores. It was further explained that the A.O. has taken note of all this information when he had examined the Balance Sheet of the assessee, statement of affairs of the assessee, bank statements of the assessee as also the details of debtors, creditors and unsecured loans which were duly asked for vide notice dated 23.07.13. (page no.38 of paperbook)

v. The assessee further submitted that the details of all unsecured

5 ITA No. 2102/Del/2016 Assessment year: 2011-12 loans along with confirmations of each of the transactions, bank account of each of the persons and income tax acknowledgment return of each of the persons from whom unsecured loans were received, were duly furnished before the Assessing Officer and were examined by him during the course of assessment proceedings. It was further explained that out of 11 persons whose loans were outstanding, fresh loans have been received only from three persons and that there were only brought forward balances in respect of rest of them. It was also explained that the three persons from whom fresh loans were received were also closely related to the assessee being the brothers of the assessee and wife of the brother of the assessee. The loans from all these three persons in the earlier years stood duly accepted and no adverse inference was drawn.(page 41 paper book) vi. The allegation that the A.O. did not carry out any enquiry about sundry creditors is also factually wrong. The A.O. had in fact duly made enquiry about the sundry creditors in his show cause notice (page 38 of paper book). The details asked for were duly filed by the assessee. Out of 80 sundry creditors for supplies, confirmed copies of accounts of 22 parties were duly submitted to the Assessing Officer who had raised a specific query regarding the creditors and had asked the assessee to submit a detail giving name, PAN numbers and amount of each of the sundry creditors (page 38 paperbook). The assessee has duly submitted the details before the A.O. and has also furnished confirmations in respect of 22 parties to the Assessing Officer (page no.43 paperbook) and it is only after examination of all the details and confirmations that the A.O. has completed the assessment. It was further explained to the CIT that the assessee could not furnish PAN numbers of those parties in whose case there were no further transactions at the time of assessment proceedings and that the accounts of 13 parties out of 17 of such parties stood squared off in subsequent years and details were filed before Pr. CIT. vii. That the factory premises and the godown at Mehrauli were ancestral properties owned by the family of the assessee for more than 50 years and that no rent was required to be paid.

viii. That the assessment was framed by the Assessing Officer after taking note that the assessee has duly submitted quantitative details of all items exported by him during the instant year in the tax audit

6 ITA No. 2102/Del/2016 Assessment year: 2011-12 report. It was further explained that there were nearly 67 different items exported by the assessee during the instant year and it is neither feasible nor required by the Act for the profitability of each of the items separately.

Delhi High Court - 1TO vs. D.G. Housing Projects Limited ii) 343 ITR 329

In this case the Hon’ble Delhi High Court has held as under:- “A distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order erroneous and prejudicial to the interests of the Revenue and cases where the Assessing Officer conducts an enquiry but the finding recorded is erroneous and which is also prejudicial to the interests of the Revenue. In the latter cases, the Commissioner has to examine the order or the decision taken by the Assessing Officer on the merits and

7 ITA No. 2102/Del/2016 Assessment year: 2011-12 then form an opinion on the merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. In the second set of cases, the Commissioner cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not.” Allahabad High Court - CIT vs. Kashi Nath & Company 170 iii) ITR 28

In this case the Hon’ble High Court has held as under:- “That the order of the Commissioner revealed that the Commissioner himself did not examine the various cash credits said to be appearing in the names of different ladies which were said to have escaped the attention of the Income-tax Officer for not examining the details of the credits appearing in various names, but what those details were had not been set out. The Commissioner did not apply his mind to the relevant material on record and did not give reasons for his conclusions that the assessment order was prejudicial to the interests of the Revenue. Therefore, the Tribunal was justified in reversing the order of the Commissioner.”

Delhi High Court - CIT vs. DLF Limited 350 ITR 555 iv) In this case the Hon’ble Delhi High Court has held that it is not mere prejudice to the Revenue or a mere erroneous view which can be revised u/s 263 of the Income Tax Act, 1961 and that there should be the added element of unsustainability in the order of the Assessing Officer, which clothes the Commissioner with jurisdiction to issue notice, and proceed to make appropriate orders.

Bombay High Court-CIT vs. Nirav Modi 138 DTR81 v)

In this case the Hon’ble Bombay High Court has held as under:-

“It is a settled position in law that powers under s. 263 can be exercised by the CIT on satisfaction of twin conditions viz. the assessment order should be erroneous and prejudicial to the Revenue. By erroneous is meant contrary to law. Thus, this power cannot be

8 ITA No. 2102/Del/2016 Assessment year: 2011-12 exercised unless the CIT is able to establish that the order of the AO is erroneous and prejudicial to the Revenue. Thus where there are two possible views and the AO has taken one of the possible views, no occasion to exercise powers of revision can arise. Nor can revisional power be exercised for directing a fuller inquiry to find out if the view taken is erroneous, when a view has already been taken after inquiry. The power of revision can be exercised only where no inquiry as required under the law is done. It is not open to enquire in cases of inadequate inquiry.”

In this case the Hon’ble High court has further held as under: “Enquiry of a source of source is not the requirement of law. Once the A.O. is satisfied with the explanation offered on inquiry, it is not open to the CIT in exercise of his revisional powers to direct that further enquiry has to be done. At the very highest, the case of the Revenue is that this is a case of inadequate inquiry and not of “no enquiry”. It is well-settled that the jurisdiction u/s 263 can be exercised by the CIT only when it is a case of lack of enquiry and not one of inadequate enquiry. It is very important to note that the CIT in his order under s.263 has recorded the fact that there has been no adequate inquiry. Thus this is not a case of no inquiry, warranting an order under s.263.” vi) Supreme Court of India — Malabar Industrial Company Limited vs. CIT 243 1TR 83 The Hon’ble Supreme Court has held in this case that an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. It has further been held that an order passed without applying the principles of natural justice or without application of mind will also be erroneous. The Hon’ble Supreme Court has further held that the phrase “prejudicial to the interest of Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer and where the Income Tax Officer adopted one of the course permissible in law and it has resulted in loss of Revenue or where two views are possible and the Income Tax Officer has taken one view with which the

9 ITA No. 2102/Del/2016 Assessment year: 2011-12 Commissioner does not agree, it cannot be treated as erroneous order “prejudicial to the interest of Revenue” unless the view taken by the Income Tax Officer is unsustainable in law.

Gujarat High Court - CIT vs. Arvind Jewellers 259 ITR502 vii)

In this case the Hon’ble Gujarat High Court has held as under:- “That the finding of fact by the Tribunal was that the assessee had produced relevant material and offered explanations in pursuance of the notices issued under section 142(1) as well as section 143(2) of the Act and after considering the material and explanations, the Income Tax Officer had come to a definite conclusion. Since the material was there on record and the said material was considered by the Income- tax Officer and a particular view was taken, the mere fact that different view can be taken should not be the basis for an action under section 263. The order of revision was not justified.”

Supreme Court of India - CIT vs. Amitabh Bachchan 384 viii) 1TR200 It was held in this case that even though a notice to show cause is not the condition precedent for the CIT to hold that an order is erroneous and prejudicial to revenue, still an opportunity to be heard on all issues is mandatory. It was held as under:-

“What is contemplated by section 263, is an opportunity of hearing to be afforded to the assessee. Failure to give such an opportunity would render the revisional order legally fragile not on the ground of lack of jurisdiction but on the ground of violation of principles of natural justice. While the Commissioner is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controvert them and to explain the circumstances surrounding such facts, as may be considered relevant by the assessee, must be afforded to him by the Commissioner prior to the finalization of the decision.”

In the instant case, a perusal of the impugned order would show that the CIT has drawn adverse inference against the assessee on the basis

10 ITA No. 2102/Del/2016 Assessment year: 2011-12 of alleged information regarding DRI action in the case of the brother of the assessee namely Sehdev Gupta, with whom the assessee did not have any trading transaction . There was no material on record to support such allegations and the CIT neither issued any show cause to the assessee in this regard nor confronted the assessee on this issue during the course of s.263 proceedings.”

by the Assessing Officer was, in effect, no inquiry at all because the Assessing

Officer has to discharge twin functions of adjudicator as well as investigator.

Merely obtaining certain details or papers from the assessee and keeping it on

record cannot amount to making a proper inquiry expected from an Assessing

Officer. He has also furnished two written submissions. Both are reproduced

below for ready reference:-

“ Gr. No. 1 and 4: These are general in nature and need not be specifically replied. Gr. No. 2: Reliance is placed on the ratio of Hon'ble Supreme Court laid 1.1 down in case of Malabar Industrial Co. Ltd. vs. Commissioner of Income- tax [2000] 243 ITR 83 (SC) [2000] 109 Taxman 66 (SC). Hon'ble SC has ruled that the phrase 'prejudicial to the interests of the revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. It has also been held that an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. Reliance is placed on the ratio of Hon'ble jurisdictional High 1.2 Court laid down in case of CIT Vs Nagesh Knitwears Pvt. Ltd. 345 ITR 135

11 ITA No. 2102/Del/2016 Assessment year: 2011-12 (Del) where it has been held that it is incumbent upon the AO investigate facts required to be examined and verified to compute the taxable income. If the AO fail to conduct the said investigation, he commits an error and the word 'erroneous' includes failure to make enquiry. Reliance is placed on the ratio of Hon'ble jurisdictional High 1.3 Court laid down in case of Gee Vee Enterprises Vs Additional CIT 99 ITR 375(Del) where it has been held that AO is having role of an investigator and it is Duty of the AO to ascertain the truth of the facts stated in the Return when circumstances would make such an enquiry prudent. It has clearly held that the order becomes 'erroneous' because such an enquiry has not been made. While deciding the case of NIIT Vs Commissioner of Income-tax 1.4 (Central-ll) [2015] 60 taxmann.com 313 (Delhi - Trib ), Hon’ble E bench ITAT Delhi has analysed plethora of judgments on the issue and through order dated 27.03.2015, gave a ratio that the AO is required to conduct the inquiry in a manner whereby he places on record the material enough to reach the satisfaction, which a rational person, being informed of the nuances of tax laws would reach after due appreciation of such material. If this component is missing, it will always be a case of lack of inquiry and not inadequate inquiry. The relevant portion of the order of Hon'ble ITAT is reproduced below:- "28.1 Ld. Special counsel has rightly pointed out that the expression, 'inquiry1, 'lack of inquiry' and 'inadequate inquiry', have not been defined and, therefore, when the action of the AO would be suggestive of lack of inquiry or inadequate inquiry, will depend upon the facts obtaining in a particular case. What emerges as a broad principle from the various decisions is that where the AO has reached a rational conclusion, based on his inquiries and material on record, the Commissioner should not start the matter afresh in a way as to question the manner of his conducting inquiries. It is not the province of the Commissioner to enter into the merits of evidence; it has only to see whether the requirements of essential inquires and of law have been duly and properly complied with by AO or not.

12 ITA No. 2102/Del/2016 Assessment year: 2011-12 28.2 It is well settled that before the Commissioner can invoke his powers u/s 263, he has to arrive at a conclusion that the assessment order is erroneous in so far as it was prejudicial to the interests of the revenue. Then only the powers u/s 263 can be invoked. Therefore, if AO accepts or rejects any claim of the assessee without due application of mind and if such failure causes prejudice to revenue, the Commissioner would be well within his powers u/s 263 to intervene in the matter. An inquiry which is just farce or mere pretence of inquiry, cannot be said to be an inquiry at all, much less an inquiry needed to reach the level of satisfaction of the AO on the given issue. The level of satisfaction would obviously mean that he has conducted the inquiry in a manner whereby he places on record the material enough to reach the satisfaction, which a rational person, being informed of the nuances of tax laws would reach after due appreciation of such material. If this component is missing, it will always be a case of lack of inquiry and not inadequate inquiry..." (emphasis supplied). 2.1 In the light of the above ratio having a loss of Rs. 38.62 Cr. is certainly matter of enquiry. A normal person, leave alone ITO who is conversant with nuances of Income tax law, would be inquisitor in such situation. Also, as per the statement during the survey, the assessee is 2.2 dealing in diamonds for which no separate trading account or P& L account is submitted. In these circumstances, any prudent person, leave alone ITO who is conversant with nuances of Income tax law, would like to see separate trading accounts of garment trade as well as diamond trade.

13 ITA No. 2102/Del/2016 Assessment year: 2011-12 tax law, and he would like to make further enquiry as to whether such payments are being for Business purposes or not and how much deduction u/s 36(l)(iii) is actually allowable.

In light of ratio of Hon'ble Calcutta High Court in case of CIT Vs. 5. Maithan International [2015] 56 taxmann.com 283(Calcutta), enquiry made by the AO in respect of unsecured loan would be in the category of 'no enquiry'.

It is undisputed fact that AO had asked for PANs of sundry 6. creditors but in various cases these were neither provided during the assessment proceedings nor during proceedings u/s 263. Accepting such creditors as on the face of it (without making any further enquiry) is no application of mind as well as 'lack of enquiry' as per above stated ratio.

It is not disputed that there is investment of Rs. 5,52,00,000/- which 7.1 makes it incumbent upon AO to investigate from angle of excluding expenditure which are made in relation to earning of exempt income or made not wholly and exclusively for earning the taxable income.

7.2 It is a fact that AO did not make any enquiry in this regard.

7.3 The case law of Holcim is not applicable to expenditure which are made not wholly and exclusively for earning the taxable income. 7.4 The case of Holcim does not lay down any ratio because it did not decide any question of Law. 7.5 The so called ratio of Holcim, assumed by the assessee that if no exempt income is there no addition could be made u/s 14A is in direct confrontation of following two ratios laid down by Hon'ble SC.

i) Rajendra Prasad Moody Vs CIT [1978] 115 ITR 00519(SC) and

Distributors (Baroda) (P.) Ltd. Vs. Union of India [1985] 22 ii) Taxman 49 (SC) [1985] 155 ITR 120 (SC).

7.6 It is against basic logic that by making expenditure income may or may not be there.

14 ITA No. 2102/Del/2016 Assessment year: 2011-12 8. Having the fact of surrender of Rs.18 Cr during survey, loss in trading account on record, statement during survey that the assessee is also dealing in diamonds but having no separate trading and P&L account, coupled with knowledge of investigation by DRI in sister concerns would prompt a normal person, leave alone ITO who is conversant with nuances of Income tax law, to make further enquiry form DRI and other places to collect the relevant material and also to understand modus operandi of the assessee to earn surrendered income of Rs. 18 Crore.

Gr. No. 3: 1. During the course of proceedings u/s 263, this issue was considered and after considering the relevant material on record and giving due opportunity of being heard to the assessee, the CIT came to a logical and judicious conclusion that this issue was not considered by the AO.

15 ITA No. 2102/Del/2016 Assessment year: 2011-12 the order is passed allowing any relief without inquiring into the (b) claim; the order has not been made in accordance with any order, (c) direction or instruction issued by the Board under section 119; or the order has not been passed in accordance with any decision (d) which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. The Pr. CIT has given his opinion that no enquiry or investigation 4.1 was made by the AO on the above discussed issues.

The opinion is bound to have a certain amount of subjectivity. The 4.2 opinion certainly requires much lesser degree of material/evidence as compared to 'satisfaction' which in turn requires much lesser degree of material/evidence as compared to 'reason to believe'. It has been laid down by Hon'ble SC in case of Raymond Woollen Mills Ltd. that sufficiency of material cannot be challenged in case of 'reason to believe'. Therefore, the same cannot be done in case of 'opinion', also. 40.3 The assessee has not submitted any cogent material to show that this opinion is perverse.”

“ WS-II on behalf of the Revenue: May it Please your honour: The ratios of various judicial pronouncements including NUT Vs 1.1 Commissioner of Income-tax (Central-II) [2015] 60 taxmann.com 313 (Delhi - Trib.), Subhlakshmi Vanijya (P.) Ltd. Vs CIT [2015] 60 taxmann.com 60 (Kolkata - Trib.) and CIT Vs Maithan International [2015] 56 taxmann.com 283 (Calcutta) are that the AO( functioning as an investigator) is required to conduct the inquiry in a manner whereby he places on record the material enough to reach the satisfaction, which a rational person, being informed of the nuances of tax laws would reach after due appreciation of such material. If this component is missing, it will always be a case of lack of inquiry and not inadequate inquiry. The right question to be asked is as to whether a normal person, 1.2

16 ITA No. 2102/Del/2016 Assessment year: 2011-12 leave alone ITO who is conversant with nuances of Income tax law, would be inquisitor in a given situation. During the course of proceedings u/s 263, this issue was 2.1 considered and after considering the relevant material on record and giving due opportunity of being heard to the assessee, the Pr. CIT returned his opinion that AO (as an investigator) should have been an inquisitor in the given situations. Presumption is in the favour of the revenue by virtue of sub-section (e) of 114 of Evidence Act, 1872. The opinion is bound to have a certain amount of subjectivity. The 2.2 opinion certainly requires much lesser degree of material/evidence as compared to ’satisfaction' which in turn requires much lesser degree of material/evidence as compared to 'reason to believe'. It has been laid down by Hon'ble SC in case of Raymond Woollen Mills Ltd. that sufficiency of material cannot be challenged in case of 'reason to believe'. Therefore, the same cannot be done in case of 'opinion', also.

2.3 Therefore, the presumption is in favour of the revenue because the revenue is saying that apparent is real and if the assessee wants to show otherwise, the law casts onus upon the assessee to prove with cogent material (that the apparent is not real). Reliance is placed upon the ratio laid down by the Hon’ble SC in case of CIT Vs Daulat Ram Rawatmull [1973] 87 ITR 349 (SC). However, the assessee has not submitted any cogent material to rebut this presumption. 2.4 The court can only see if this opinion is logical as per the material before the Pr. CIT during proceedings u/s 263. 3.1 During proceedings u/s 263, the assessee was required to show cause as to why the AO was not required to become inquisitor in the situations mentioned in the SCN dated 01.10.2015( page #46-48 of PB) . The main reply is as per letter dated 10.11.2015(page #5073).

3.2 A perusal of the reply dated 10.11.2015 shows that the assessee failed to show cause as to why the AO was not required to become inquisitor in the given situations. The specific situations are discussed in subsequent paragraphs.

17 ITA No. 2102/Del/2016 Assessment year: 2011-12 4.1 The fact that the sale proceeds were less by Rs.38.62 crores as compared to purchase cost is undisputed. The reply of the assessee doesn’t not show any cause qua investigator. The reply of the assessee( para 10(i) of the reply dated 10.11.2015) is basically address the query as to whether an adjudicator in such a situation would make an addition or not. 4.2 The fact that the assessee did withdraw heavy amounts running into crores of Rs. is undisputed. The very fact that during the proceedings u/s 263, the assessee submitted a chart showing detailed utilization of such heavy withdrawals shows that The reply of the assessee doesn’t not show any cause qua investigator. { ref. para 10(ii) of the reply dated 10.11.2015} 4.3 The fact that assessee borrowed interest bearing loans of above Rs. 19 Crores and extended interest free loans of about Rs. 7.52 Crores is undisputed. The reply admits that in such situation enquiry was required to be made. The assessee also admits that neither any written query was raised nor any documents were submitted nor any written reply was submitted. The contention of the assessee is that AO looked at the list of the parties to whom these loans have been given and the AR orally explained that these loans were out of interest free funds available to the assessee and the Role of the AO as investigator was over. First of all there is no supporting to say that such oral query was at all made. More a cursory look at the list of parties shows that these include schools which, prima facie, has nothing to do with the business of the assessee. Therefore, in such a situation AO would certainly been an inquisitor and called for further details to scrutinize the transactions and surrounding circumstances. { ref para 10(iii) of the reply dated 10.1 1.2015}

The finding of the fact by the Pr. CIT (as a result of perusal of 4.4 record) that bank statements of all the persons from whom unsecured loans have been procured have not been kept on record, was rebutted only by a bald statement. Whereas letter submitted before the AO ( in Nov. 2013-date not given-page # 41-43) shows that confirmation, ITR-V and bank statements of eight persons were submitted whereas the unsecured loans were obtained from 11 persons. Regarding suspicious pattern of entries in the bank account of Sh. Abhishek Gupta, the assessee did not furnish any cause as to why the AO should not become inquisitor. The emphasis of the assessee is that it has discharged it’s onus. However, as stated above, the

18 ITA No. 2102/Del/2016 Assessment year: 2011-12 question here is of the AO becoming inquisitor. { ref. para 10(iv) of the reply dated 10.11.2015}

It is undisputed fact that AO had asked for PANs of sundry 4.5 creditors but in various cases these were neither provided during the assessment proceedings nor during proceedings u/s 263. It is obvious that the role of AO as investigator starts from this point which he failed to carry out. The reply of the assessee does not make out a case that the AO should have become inquisitor in the situation. ) ref. para 10(v) of the reply dated 10.11.2015}

It is admitted that no rent has been paid for the office as well as 4.6 go-down premises. It has been argued that these are ancestral properties and no rent is required to be paid. The assessee is not addressing the question qua investigator. The reply of the assessee does not make out a case that the AO should have become inquisitor in the situation. { ref. para 10(vi) of the reply dated 10.11.2015)

It is undisputed that the assessee dealt in readymade garment as 4.7 well as diamonds. The assessee has not disputed the fact that profitability of diamond would not be same as that of readymade garment. The assessee has also not disputed the fact that only one (consolidated) trading account was before the AO. Therefore, it is apparent the AO as an investigator would have become inquisitor in such situation. The assessee is submitting that the act does not require such bifurcation or such examination. This plea is without any force because actual steps of investigation depends on a given situation and it is not the domain of the act. { ref para 10(ii) of the reply dated 10.1 1.2015)

4.8 The fact that the investment of Rs.5.52 crores has been made is undisputed. It is not the case of the assessee that the material on record sufficient to indicate that there is no question of incurring any expense towards activity related to generation of exempt income. The reply of the assessee doesn’t not show any cause qua investigator. The reply of the assessee (para 10(viii) of the reply dated 10 11.2015) is basically address the query as to whether an adjudicator in such a situation would make an addition or not.”

19 ITA No. 2102/Del/2016 Assessment year: 2011-12 4. We have carefully considered the arguments of both the sides and perused

the material placed before us. Both the parties have relied upon large number of

judicial pronouncements which include decisions of the ITAT, Hon’ble High Court

including Jurisdictional High Courts as well as Apex Court. We have gone

through all the decisions relied upon by both the parties. The decisions relied upon

include decisions relating to interpretation of section 263 which is under

consideration in appeal before us and also the decisions wherein section 263 was

not an issue in dispute. The parties have relied upon those decisions to draw an

analogy or support for interpreting section 263. In our opinion, when the direct

decision of Hon’ble Jurisdictional High Court as well as Apex Court interpreting

section 263 is available, it would not be necessary to look into the other decisions.

Therefore, for the sake of brevity, we would discuss herein below the decisions

relied upon by both the sides wherein interpretation of section 263 is involved.

Similarly, we also propose to not deal with the decisions of ITAT relied upon by

both the parties for the same reason i.e. when the decision of Hon’ble Jurisdictional

High Court as well as Apex Court is available, it would be prudent to apply the

ratio of those decisions to the facts of the assessee’s case rather than going into the

facts/interpretation of section 263 gone into by the ITAT. With this background,

we first deal with the decisions relied upon by the ld. CIT DR:-

20 ITA No. 2102/Del/2016 Assessment year: 2011-12 i) G.V. Enterprises vs Addl. CIT 99 ITR 375 “ 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 on 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. 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 adopted 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 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. 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 enquiry. 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.”

ii) CIT vs Maithan International 56 taxmann.com 283 (Calcutta) “In the instant case, the Commissioner had reasons to hold that creditworthiness of the alleged lenders was not enquired into. Mere examination of the bank pass book, profit and loss account and balance sheet of the creditors is not enough. When the requisite enquiry was not made, the order is bound to be erroneous and prejudicial to the interest of the revenue. The Tribunal proceeded on the theory that it was not a case of no enquiry; that no doubt is true, but that is not enough. If the relevant enquiry was not made, it may in appropriate cases amount to no enquiry and may also be a case of non-application of mind.

21 ITA No. 2102/Del/2016 Assessment year: 2011-12

The power under section 263 can be exercised where the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. When an order is erroneous, then the order is also deficient and in order to remedy the situation, power under section 263 has been given. Therefore, the view that the powder could not have been exercised to allow the Assessing Officer to make up the deficiency is altogether an incorrect impression of the law.

It is not the law that the Assessing Officer occupying the position of an investigator and adjudicator can discharge his functions by perfunctory or inadequate investigation. Such a course is bound to result in erroneous and prejudicial orders. Where the relevant enquiry was not undertaken, as in this case, the order is erroneous and prejudicial too and therefore revisable. Investigation should always be faithful and fruitful. Unless all truthful areas of enquiry are pursued the enquiry cannot be said to have been faithfully conducted.”

iii) Malabar Industrial Co. Ltd. vs CIT 243 ITR 83 (SC)

“ The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, total income will certainly be prejudicial to the interests of the Revenue. The phrase “prejudicial to the interests of the Revenue “ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss 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 interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests

22 ITA No. 2102/Del/2016 Assessment year: 2011-12 of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law.” The decisions relied upon by the learned counsel are as under:- i) Director of Income Tax vs Jyoti Foundation 357 ITR 388 (Del.)

“Revisionary power under section 263 of the Income Tax Act, 1961 is conferred by the Act on the Commissioner/Director of Income tax when an order passed by the lower authority is erroneous and prejudicial to the interests of the Revenue. Orders which are passed without inquiry or investigation are treated as erroneous and prejudicial to the interests of the Revenue, but orders which passed after inquiry/investigation on the question/issue are not per se or normally treated as erroneous and prejudicial to the interests of the Revenue because the revisionary authority feels and opines that further inquiry/investigation was required or deeper or further scrutiny should be undertaken. In cases where there is inadequate inquiry but not lack of enquiry, the Commissioner must record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the Commissioner and he is able to establish and show the error or mistake made by the AO, making the order unsustainable in law. An order of remit cannot be passed by the Commissioner to ask the Assessing Officer to decide whether the order was erroneous.”

ii) Income Tax Officer vs DG Housing Projects Ltd. (2012) 343 ITR 329 (Delhi) “ A distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order erroneous and prejudicial to the interests of the Revenue and cases where the Assessing Officer conducts an enquiry but the finding recorded is erroneous and which is also prejudicial to the interests of the Revenue. In the latter cases, the Commissioner has to examine the order or the decision

23 ITA No. 2102/Del/2016 Assessment year: 2011-12 taken by the Assessing Officer on the merits and then form an opinion on the merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. In the second set of cases, the Commissioner cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not.”

iii) CIT vs DLF Ltd. (2013) 350 ITR 555 (Delhi)

“It is not mere prejudice to the Revenue, or a mere erroneous view which can be revised, under section 263 of the Income Tax Act, 1961. There should be the added element of “unsustainability” in the order of the Assessing Officer, which clothes the Commissioner with jurisdiction to issue notice, and proceed to make appropriate orders.”

iv) CIT vs Nirrav Modi 138 DTR 81

“It is a settled position in law that powers under s. 263 can be exercised by the CIT on satisfaction of twin conditions viz. the assessment order should be erroneous and prejudicial to the Revenue. By erroneous is meant contrary to law. Thus, this power cannot be exercised unless the CIT is able to establish the order of the Assessing Officer is erroneous and prejudicial to the Revenue. Thus where there are two possible views and the Assessing Officer has taken one of the possible views, no occasion to exercise powers of revision, can arise. Nor can revisional power be exercised for directing a fuller inquiry to find out if the view taken is erroneous, when a view has already been taken after inquiry. The power of revision can be exercised only where no inquiry as required under the law is done. It is not open to enquiry in cases of inadequate inquiry.”

24 ITA No. 2102/Del/2016 Assessment year: 2011-12 v) CIT vs Arvind Jewellers 259 ITR 502

“The provisions of section 263 of the Income Tax Act, 1961, cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. It is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase “prejudicial to the interests of the Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer and every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. When an Assessing Officer adopts one of courses permissible in law and it has resulted in loss of Revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.”

CIT on the grounds inter alia that the order passed by AO is neither erroneous nor

prejudicial to the interest of the Revenue; that the figure of loss of Rs.38.62 crores

calculated by CIT is incorrect being without including the export incentive to the

tune of Rs.42,39,41,070/- and the fluctuation in exchange rate of Rs.3,42,08,969/-

and while including the aforesaid amount, the assessee has earned gross profit of

Rs.7,19,11,426/- and a net profit of Rs.3,33,31,484/- meaning thereby the assessee

has not incurred any loss on goods sold by him; that the assessee did not have any

25 ITA No. 2102/Del/2016 Assessment year: 2011-12 trading transaction with Sahdev Gupta during the year under assessment and as

such, no adverse inference can be drawn against the assessee on the basis of

investigation in the case of Sahdev Gupta by DRI; that the ld. CIT never

confronted the assessee regarding the allegation about the Sahdev; that the assessee

has withdrawn its net funds from the capital account having opening capital of

Rs.6.41 crores and closing capital of Rs.14.86 crores and the entire income earned

by the assessee during the year under assessment has been duly declared in the

return of income; that the assessee has duly disclosed the detail of loans lent to

other parties to the tune of Rs.7,52,87,000/- in the audited balance sheet and all the

said loans have been lent by the assessee out of interest free funds available with

him including his capital which was Rs.6.41 crores as on 01.04.2010 and Rs.14.86

crores as on 31.03.2011; that the AO had made discreet enquiry about the sundry

creditors mentioned in the show cause notice and detail thereof was duly filed by

the assessee; that the factory premises and goddown at Mehrauli is the ancestral

property of the assessee for which no rent is required to be paid; that the AO has

framed the assessment on the basis of quantitative details of all items exported

during the year under assessment in the tax audit report.

addressed by the ld. AR contended inter alia that the AO as an investigator is

26 ITA No. 2102/Del/2016 Assessment year: 2011-12 required to be an inquisitor and presumption lies in favour of the Revenue u/s 114

of the Indian Evidence Act; that the opinion of CIT is to be based upon certain

amount of subjectivity which requires much lesser degree or material / evidence as

compared to the satisfaction; that since the presumption is in favour of the

Revenue, the onus shifts on the assessee to prove otherwise with cogent material

that the assessee has failed to show cause as to why the AO was not required to

become inquisitor in the given circumstances; that the assessee borrowed interest

bearing loans of about Rs.19 crores but extended interest free loans about Rs.7.52

crores about which neither any query was raised nor any document / reply was

submitted by the assessee and as such, the contention of the assessee that the has

orally explained these loans were out of interest free funds available with him is

not tenable.

show-cause notice to the assessee which is reproduced for ready reference as

under:-

“Dated : 01.10.2015 Sub : Show cause notice u/s 263 of the Income Tax, 1961 for the A.Y. 2011- 12 reg. The assessment records of Sh. Braham Dev Gupta proprietor of M/s. D.S.M. International (PAN – AAFPB5907Q) were called for and examined. On perusal of records I consider that the order passed by the Assessing Officer u/s

27 ITA No. 2102/Del/2016 Assessment year: 2011-12

143 (3) of the I.T. Act, 1961 on 31.01.2014 is erroneous in so far as its prejudicial to the interests of the revenue for the following reasons :

i) Disallowance of Conveyance, Telephone, Electricity, Staff welfare, Sale promotion, Vehicle running and maintenance and Depreciation on vehicle @ 10% i.e. Rs.1,93,709/-.

The assessee is engaged in the business of Sale of readymade garments. The perusal of P & L Account shows that the assessee is selling the good on loss which is evident from the trading account given as below :-

PARTICULARS AMOUNT PARTICULARS AMOUNT To Opening 25,89,57,872.58 By Sales 531,37,67,9430.43 Stock To Purchases 571,14,67,958.00 By Closing 30,60,78,558.90 Stock To Stitching & 68,60,215.00 Embroidery To Vat Expenses 1,75,586.00 To Labour 2,86,23,470.00 Charges Loss 38,62,38,612.25 600,60,85,101.58 600,60,85,101.58

The Assessing officer PEs failed to make any enquiry as regards the incurrence of trading loss by the assessee.

28 ITA No. 2102/Del/2016 Assessment year: 2011-12

Mere submission of documents does not lead to the genuineness of the transactions, particularly where nature of entries appear to be doubtful.

29 ITA No. 2102/Del/2016 Assessment year: 2011-12 prejudicial to the interests of the revenue. You are given an opportunity to being heard and show cause as to why the impugned order be not enhanced/modified or set-aside for fresh assessment u/s 263 of the I.T. Act, 1961. Your case is fixed for hearing on 12.10.2015. Sd/- (RAMAN KUMAR GOYAL) Pr. Commissioner of Income, Delhi – 11, New Delhi”

enquiries qua the issue show caused in the notice reproduced above whereas the

assessee raised objection that all the enquiries now sought to be conducted by CIT

have been duly conducted by the AO.

arguments advanced by the ld. Representatives of the parties and order passed by

the authorities below, the first question arises for determination in this case is :-

“as to whether the assessment order passed by the AO suffers

from inadequate enquiry or lack of enquiry?”

is as per P&L account, the assessee is selling the goods on loss and the loss

determined by the assessee in the recasted trading account of Rs.38,62,38,612/-

and the CIT came to the conclusion that the AO has not made any enquiry qua

incurrence of trading loss.

30 ITA No. 2102/Del/2016 Assessment year: 2011-12

available at page 38 of the paper book, which is reproduced as under for ready

perusal :-

“NOTICE UNDER SUB-SECTION OF SECTION 142 OF INCOME TAX ACT 1961 Office of the Asstt. Commissioner of Income-Tax, Room No.1305, 13th Floor, E-2 Block, Dr. S.P.Mukherjee Civic Centre, New Delhi Phone: 011-23216825, Fax - 011-23216829 F.No.Pr.ACIT/Cir-24/2013-14/142/462 Dated: 23.07.2013 PAN : AAFPB5907Q To, BRAHAM DEV 6/842, MAIN BAZAR, MEHRAULI, DELHI – 110 030. In connection with the assessment for the assessment year 2011-2012 you are required to : (a) ** prepare a true and correct return of your income/the firm’s income/family’s income / the local authority’s income/ the company’s income / income o the A.O.P. / income of the body individual / income of ______________ in respect of which you are assessable under the Income Tax Act, 1961 during the previous year relevant to assessment year mentioned above. (b) ** produce or cause to be produced before me at my office at Room No.1305, 13th Floor, E-2, Block Dr. S.P. Mukherjee Civic Centre, New Delhi on 30.07.2013 at 11.30 AM/PM the account and accounts and/or documents specified below / overleaf. (c) ** furnish in writing and verified in the prescribed manner information called for as per annexure and on the points or matter specified therein before me at my office at Room NO.1305, 13th Floor, E-2, Block Dr. S.P. Mukherjee Civic Centre, New Delhi on 30.07.2013 at 11.30 AM. Particulars of Accounts and / or documents required : 1. Please file Brief Note on your Nature of Business

31 ITA No. 2102/Del/2016 Assessment year: 2011-12 2. Please furnish previous three years computation of income & Return, B/S, P/L Tax Audit Report with all annexure 3. Bank Statement with narration 4. Statement of affairs 5. List of Debtors, Creditors and Unsecured Loan Providers (if any) as per proforma below : Name PAN Address Amount 6. Justification of expenditure claimed in P&L A/c. Yours faithfully, Sd/- (Dr. Monisha) Asstt. Commissioner of Income Tax, Circle 24 (1), New Delhi.”

evidence vide letters August 2013, November 2013, December 2013 and

13.01.2014, available at pages 40 to 45 of the paper book. Undisputedly, assessee

has declared taxable income of Rs.21,58,62,170/- inclusive of amount of

Rs.18,25,22,250/- as additional income declared during the course of survey on

22.09.2010 on account of alleged excess stock found in the assessee’s premises

and consequently, the assessment was completed u/s 143 (3) on 31.01.2014.

out by the ld. CIT in selling the goods on loss is concerned, the ld. CIT observed

that the AO has failed to make any enquiry qua incurrence of trading loss by the

assessee. However, we are of the considered view that when the assessee has

brought on record audited profit & loss account, balance sheet, statement of affairs

32 ITA No. 2102/Del/2016 Assessment year: 2011-12 and capital account of the assessee which have been duly examined and the AO

has also verified the books of account, vouchers, etc., there is no question of lack

of enquiry on the part of the AO qua loss of trading account of Rs.38,62,38,612/-.

More so, during the enquiry conducted by the CIT, no concrete findings have come

on record that the assessee has suffered trading loss during the year under

assessment.

incorrect because export incentive of Rs.42,39,41,070/- and fluctuation in

exchange rate of Rs.3,42,08,969/- linked to the business of export needs to be

included in the same and consequently, assessee earned a gross profit of

Rs.7,19,11,426/- and net profit of Rs.3,33,31,484/-. So, the CIT has factually

arrived at the wrong decision that the assessee has incurred loss on goods to the

tune of Rs.38,62,38,612/-. This fact has been duly explained by the assessee

before the ld. CIT vide letter dated 10.11.2015, available at pages 50 to 73 of the

paper book (relevant page 59).

business profits only and reliance in this regard may be placed on the decisions

rendered by Hon’ble Apex Court in case cited as Topman Exports vs. CIT – 342

ITR 49. So when the assessment has been completed after scrutinizing all the

33 ITA No. 2102/Del/2016 Assessment year: 2011-12 details and explanation supported with the documentary evidences filed by the

assessee in response to the issue noticed by the AO, the question of lack of inquiry

on the part of the AO does not arise.

opening capital of assessee at Rs.6.41 crores and closing capital at Rs.14.86 crores.

So, again when the entire capital account of the assessee has been examined by the

AO and nothing has been brought on record by ld. CIT that there is any

escapement of income by making withdrawal from the capital account as its

closing balance was Rs.14.86 crores during the year under assessment. Again,

there is no question of lack of enquiry.

263 is that the assessee claimed interest in the P&L account of Rs.1,73,34,136/- +

Rs.7,98,853/- and in the balance sheet, the assessee has shown secured loan of

Rs.15.05 crores and unsecured loan of Rs.4.04 crores and the assessee has given

loan to the various parties and has shown as assets under the heads loan to the

parties and the AO has failed to make any enquiry as to the business purpose of

making any such loans or advances.

AO placed on record the bank statement of few persons from whom the assessee

34 ITA No. 2102/Del/2016 Assessment year: 2011-12 has received loans but failed to examine the genuineness of the transactions”

and came to the conclusion that no enquiry has been made as to the nature of

source of credit in the bank accounts of the persons who have given the loan to the

assessee. CIT further recorded that “in case of Abhishek Gupta his income is

shown at Rs.6,06,619/- for AY 2011-12 whereas in the bank statement there are a

number of credits even in crores and immediately a cheque was issued either on

the same day or within 2 – 3 days to some persons which shows that Abhishek

Gupta is perhaps indulging into providing accommodation entries”. Assessee

proved on record the fact that the loan amounting to Rs.7,52,87,000/- is duly

disclosed in the audited balance sheet, from which it is apparently clear that all the

loans given by the assessee out of interest free funds available with him which

included his capital to the tune of Rs.6.41 crores as on 01.04.2010 and Rs.14.86

crores on 31.03.2011, assessee further explained that the capital of the assessee as

also interest free loans available to the assessee of Rs.3.16 crores and other interest

free funds in the form of sundry creditors etc. were in excess of the interest free

loans advanced by the assessee at Rs.7.52 crores.

with confirmation of each of the transaction, bank account of each of the person

and income-tax acknowledgement return of each lenders from whom unsecured

35 ITA No. 2102/Del/2016 Assessment year: 2011-12 loans were availed to the AO who has duly examined the same during the course of

assessment, it cannot be a case of lack of enquiry.

fresh loans were taken, were closely related to the assessee being brothers of the

assessee and brother’s wife of the assessee and the loans from all the aforesaid

three persons in the earlier years have been duly accepted by the AO, as is evident

from the letter available at pages 41 to 43 of the paper book. It appears that the

CIT without bringing on record any substantive piece of evidence to dispute the

genuineness of the transactions proceeded on the basis of surmises to hold that the

AO has not conducted any enquiry. The observation of CIT in the notice/order u/s

263 clearly shows that enquiries with regard to loan creditor/sundry creditor was

made by the Assessing Officer. However, in the opinion of CIT, the Assessing

Officer should have made further inquiry. Thus, at best, case made out by CIT is

of inadequate inquiry and not no inquiry.

of 80 sundry creditors to the AO vide letter dated November 2013, available at

pages 41 to 43 of the paper book, who has raised specific queries qua the creditors

vide letter dated 23.07.2013, available at page 38 of the paper book. The ld. AR

for the assessee argued that the assessee could not furnish PAN of only those

36 ITA No. 2102/Del/2016 Assessment year: 2011-12 parties in whose case there was no further transactions at the time of assessment

proceedings and that the account of the 13 parties out of 17 parties stood squared

off in subsequent years and details thereof was filed before ld. CIT. This fact goes

to prove that a discreet enquiry has been conducted by the AO qua all the sundry

creditors and the findings of the ld. CIT that the AO did not make any enquiry even

on sample basis to find out the genuineness of the sundry creditors is based upon

surmises. At the most, it can be a case of inadequate enquiry, in which ld. CIT has

no power to intervene u/s 263 of the Act.

any enquiry as to the ownership of the premises / factory located at 6 / 848-849,

Main Bazar, Mehrauli, New Delhi and goddown located at T-117, Ward No.6,

Mehrauli, New Delhi and as to how the assessee is operating from these premises.

Assessee brought on record the fact that the factory premises and goddown at

Mehrauli is the ancestral property of the assessee for more than last 50 years and

no rent was required to be paid. In the face of facts brought on record by the

assessee, there is not an iota of doubt on the file to dispute the fact that the factory

premises and goddown is ancestral property of assessee’s family. Moreover, when

no rent has been claimed in the balance sheet qua the property in question it would

not affect the tax liability of the assessee in any manner.

37 ITA No. 2102/Del/2016 Assessment year: 2011-12 23. Next ground taken by the CIT to invoke the provisions contained u/s 263 is

the assessee has made investment of Rs.5,52,00,000/- for the year ending

31.03.2011 but AO has not made any enquiry regarding disallowance u/s 14A /

Rule 8D. Strangely enough, when the assessee has categorically submitted before

the ld. CIT that the assessee has earned no exempt income on investment during

the year under assessment and relied upon the decision rendered by Hon’ble High

Court of Delhi in case of Cheminvest Ltd. vs. CIT – 387 ITR 33 (Del.), ld. CIT

instead of examining the issue in the light of the settled principle of law, directed

the AO to examine the case law and decide accordingly and this fact shows the

casual approach adopted by the CIT. So again, in these circumstances, we are

unable to hold that no enquiry has been conducted by the AO to complete the

assessment u/s 143(3).

inference on the basis of non-existent facts by holding that there was lack of

enquiry on the part of the AO as to the modus operandi of the assessee by making

observation regarding the enquiries of the DRI against brother of the assessee,

Sahdev Gupta. Since the assessee has no trading transaction with Sahdev Gupta,

the question of drawing adverse inference does not arise and further investigation

into the same as directed by the CIT is not warranted. The contention of ld. AR is

38 ITA No. 2102/Del/2016 Assessment year: 2011-12 apparently tenable because from the copy of account of Sahdev Gupta in the books

of M/s. RSM International, available at page 509 of the paper book, it is made out

that the assessee has no transaction whatsoever with Sahdev Gupta and by merely

proceeding on the basis of enquiry conducted by DRI against Sahdev Gupta do not

confer any power on CIT to proceed against the assessee u/s 263.

“it appears that the assessee is also into same kind of business and duty

drawback is taken from the Government. It needs to be investigated as to

whether the assessee has taken duty drawback on bogus exports and the assessee

has himself voluntarily accepted additional income of Rs.18 crores during survey

and enquire in this regard has not been conducted by the AO” shows that the CIT

has proceeded on the basis of surmises even by ignoring the fact that the assessee

has no trading transaction with Sahdev Gupta. So again, it is not a case of lack of

enquiry.

“there was lack of enquiry as regards the modus operandi of the assessee

particularly when the assessee has declared low income even after getting huge

duty drawback”, which shows that again the CIT without disputing the audited

balance sheet and quantitative details of items exported by assessee during the year

39 ITA No. 2102/Del/2016 Assessment year: 2011-12 under assessment proceeded on the basis of surmises that it is a case of lack of

enquiry as the assessee has declared low income, which is not sustainable in the

eyes of law.

the preceding para 3 of the order, goes to prove that the Revenue has merely relied

upon the case law to clarify the legal position so as to invoke the provisions

contained u/s 263 of the Act but has failed to bring on record that the order passed

by the AO was erroneous and prejudicial to the interest of the Revenue by bringing

on record the evidence as we have discussed in detail in the preceding paras.

Hon’ble Supreme Court in Malabar Industrial Company Limited vs. CIT 28.

(supra)held that the phrase “prejudicial to the interest of the Revenue” has to be

read in conjunction with an erroneous order passed by the AO and where the

Income-tax Officer adopted one course permissible in law and resulted in loss of

revenue or where two views are possible and the Income-tax Officer has taken one

view with which Commissioner does not agree, it cannot be treated as erroneous

order “prejudicial to the interest of the Revenue” unless the view taken by the AO

is unsustainable in law. Not a single fact has been brought on record by the ld. CIT

that the assessment order is prejudicial to the interest of the Revenue. Because the

CIT has calculated loss of Rs.38.62 crores which is factually incorrect have been

40 ITA No. 2102/Del/2016 Assessment year: 2011-12 calculated without including the export incentive of Rs.42,39,41,070/- and the

fluctuation in the exchange rate of Rs.3,42,08,969/- which are part and parcel of

business of export and thereby assessee earned gross profit of Rs.7,19,11,426/- and

net profit of Rs.3,33,31,484/-.

Furthermore, Hon’ble Apex Court in CIT vs. Amitabh Bachchan (supra) 29.

held that though a notice to show cause is not a condition precedent for the CIT to

hold that the order is erroneous and prejudicial to the Revenue still an opportunity

to be heard in all the issue is mandatory to controvert all the relevant facts. In the

instant case, CIT has drawn adverse inference against the assessee merely on the

basis of alleged information regarding action taken by the DRI against Sahdev

Gupta, brother of the assessee with whom the assessee did not have any trading

transaction. First of all, no show-cause notice has been issued by the CIT

regarding this allegation nor confronted the assessee on this issue during

proceedings u/s 263. This issue we have discussed in detail in the preceding paras.

Hon’ble jurisdictional High Court in DLF Limited (supra) case held that it is 30.

not mere prejudice to the Revenue or a mere erroneous view which can be revised

u/s 263 of the Act but there should be an added element of unsustainability of the

assessment order which empowers the Commissioner to issue notice u/s 263. As

41 ITA No. 2102/Del/2016 Assessment year: 2011-12 discussed in the preceding paras, there is not an iota of evidence on the file to

support the element of unsustainability of the assessment order.

but not lack of enquiry, the Commissioner must record a finding that the order

made is erroneous. This is only possible if an enquiry and verification is

conducted by Commissioner and he is able to establish and show the error or

mistake by the AO, making the order unsustainable in law. CIT cannot pass an

order of remit to ask the AO to decide whether the order is erroneous. In the

instant case, CIT has specifically directed the AO to examine the sustainability of

the claim of the assessee u/s 14A in the light of the case laws i.e. Holcim and

Cheminvest Ltd. (supra) relied upon by the assessee during proceedings u/s 263 of

the Act to which the CIT is not empowered. It was for the CIT to decide that the

order was erroneous.

explained the distinction in the cases where the AO does not conduct an enquiry

and in that case, the lack of enquiry itself renders the order erroneous and

prejudicial to the interest of the Revenue and cases where the AO conducts an

enquiry but the finding recorded is an erroneous and which is also prejudicial to

the interest of the Revenue. In the second set of cases, the Commissioner cannot

42 ITA No. 2102/Del/2016 Assessment year: 2011-12 direct the AO to conduct further enquiry to verify and find out whether the order

passed is erroneous or not. This judgment is applicable to the facts and

circumstances of the case because CIT finds the enquiry conducted by AO

inadequate and directed the AO to conduct further enquiry to verify and find out

whether order passed is erroneous or not.

(2015) 60 taxmann.com 313 (Delhi-Trib.) contended that expression “lack of

enquiry” and “inadequate enquiry” have not been defined and, therefore, when

the action of AO would be suggestive of lack of enquiry or inadequate enquiry will

depend upon the facts obtaining in a particular of case. But, in the instant case, no

such facts have been pointed out that the requirement of essential enquiries and of

law has not been properly complied with by the AO. Because, as discussed in the

preceding paras, when the AO has accepted the claim of the assessee by applying

his mind, though the CIT has different opinion on the same it would certainly fall

in the category of inadequate enquiry. So, in case of inadequate enquiry, the

Commissioner is not empowered to invoke the provisions contained u/s 263.

that at the most, this is a case of inadequate enquiry on the part of the AO and not a

case of lack of enquiry by any stretch of imagination, so the decisions of Hon'ble

43 ITA No. 2102/Del/2016 Assessment year: 2011-12 Jurisdictional High Court in the case of Jyoti Foundation (supra), D.G. Housing

Projects Ltd. (supra), DLF Ltd. (supra) and Nirav Modi (supra) would be squarely

applicable. Respectfully following the same, the order passed by CIT u/s 263 is

hereby quashed. Resultantly, the appeal filed by the assessee is allowed.

Order pronounced in open court on this 13th day of April, 2017.

Sd/- sd/- (G.D. AGRAWAL) (KULDIP SINGH) PRESIDENT JUDICIAL MEMBER Dated the 13th day of April, 2017 GS/TS