M/S. P.K. COTTON MILLS PVT. LTD.,MEERUT vs. CIT, MEERUT

ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 18/03/2013 passed by the learned Commissioner of Income Tax, Meerut under section 263 of the Income-tax Act, 1961(in short “the Act”) revising the assessment order under section 143(3) of the Act for assessment year 2008-09. The assessee revised its grounds of appeal

2. That Ld. CIT, Meerut has not justified in making addition of Rs. 49,46,196/- claimed by the assessee as loss on account of machinery, which is after due consideration accepted by the Ld. A.O.. This addition is against law and facts of the case.

3. That the Ld. CIT has given direction to the A.O. to inquire following: (i) Correctness of the claim towards Financial Charges. (ii) Correctness of the Unsecured Loan and Sundry Creditors. (iii)Fright debited Rs. 6,93,000/- to examine the provision of TDS and disallow U/s 40A(ia). These issues are already considered by the A.O. and after going through the books of account, bills and vouchers, the A.O. was satisfied and not made any addition in the total income of the assessee. The view taken by the A.O. one of the best, while he framing assessment U/s 143(3) of I.T. Act, to set aside these issues for further inquiry is nothing but duplicacy of work, which not permitted U/s 263 of I.T. Act 4. That penalty proceeding initiated by the CIT is arbitrary, unjust and routine & mechanical manner, which is against the law. 5. That the assessee has right to add, delete or modify any grounds during the appeal proceeding.”

5. However, the learned Commissioner of Income Tax held that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of Revenue. On the issue of loss from sale of machinery, the addition of Rs.49,46,196/- was quantified and on other issues, directions for making enquiries were given as under: a. the Assessing Officer did not enquire into the loss of the magnitude, which is even higher than the entire turnover; b. the AO is directed to look into and verify the relevant accounts properly before ascertaining and determining the actual profit/loss, after examining books of accounts which were not produced during the course of 263 proceedings; c. the loss on sale of machinery amounting to Rs.49,46,196/- was claimed wrongly because the same was to be taken to the balance sheet in the fixed asset as block of asset existed there. The Assessing Officer also failed to look into whether the transaction was collusive one or whether the sales were made to parties covered under section 40A(2)(b) of the Act; d. the AO is directed to inquire into correctness of the claim towards financial charges which claimed it more than double of the previous year; e. the Assessing Officer did not enquire into unsecured loan and sundry creditors and the assessee failed to explain the same; f. the AO is further directed to inquire into correctness of applicability of TDS and disallowance under section 40(a)(ia) of the Act in respect of freight expenses debited to the tune of Rs.6.93 Lacs.

4. Against the above order under section 263 of the Act passed by the learned Commissioner of Income Tax, the assessee is in appeal before the Tribunal raising grounds as reproduced above.

5. The ground No. 1 was not pressed by the learned Authorized Representative of the assessee and therefore dismissed as infructuous.

6. In ground No. 2, the assessee has challenged in making addition of Rs.49,46,196/- claimed by the assessee for loss on account of machinery. It was contended by the learned Authorized Representative that loss was accepted by the Assessing Officer after due consideration. It was submitted by the learned Authorized Representative that the assessee debited the loss on sale of machinery, which was an accounting entry made in accordance with Companies Act, 1956 and guidelines issued by the Institute of Chartered Accountants of India, and which is further supported by clause (1) of section 50 of the Act. He further submitted that the assessee sold a capital asset, which was part of block of asset and the assessee deducted the sale consideration of machinery from the written down value and the resultant figure being the loss was rightly debited to the profit and loss account. This loss was disclosed truly and correctly and which was checked by the Assessing Officer and accordingly accepted the same. It was further explained that sale of machinery was made to registered unrelated parties and copy of entire sale bills along with ‘C’ forms applicable in sales tax were Assessing Officer. The Auditor has also not made any adverse reporting in tax audit in respect of the sale of machinery. The learned Authorized Representative further submitted that the Assessing Officer had made enough inquiry on the issue of acquisition of asset, loss on sale of machinery as well as depreciation claimed and, therefore, it was not of the case of lack of enquiry warranting invoking of jurisdiction by the learned Commissioner of Income Tax under Section 263 of the Act.

4. In ground No. 3, the assessee has raised the issue that enquiries were made by the Assessing Officer in respect of the issues of correctness of the claim towards financial charges, correctness of unsecured loan and sundry creditors and provisions of TDS and disallowance under section 40(a)(ia) of the Act in respect of the freight expenses of Rs.6.93 lacs.

5. Before us, the learned Authorized Representative of the assessee referred to pages no. 14 and 15 of the assessee’s paper book, which is a copy of notice under section 142(1) of the Act calling for information in respect of the assessment year and submitted that the Assessing Officer called for confirmation of sundry creditors & unsecured loan creditors and examined TDS liability. He submitted that the assessee also duly complied with the queries asked by the Assessing Officer and the assessment has been completed after considering all the submission of the assessee and, therefore, on those issues there is no lack of enquiry by the Assessing Officer. He further submitted that the view taken by the Assessing Officer was one of the best, while framing the assessment under section 143(3) of the Act and setting aside those issues for further Inquiry was nothing but duplication of work, which was not permitted under section 263 of the Act.

4.1 He further submitted that learned Commissioner of Income Tax has not carried out enquiries in the respect of the above issues himself and arrived at whether the order was erroneous as well as prejudicial to the interest of the Revenue. 4.2 In response to this, the learned Commissioner of Income Tax (Departmental Representative) submitted that the Assessing Officer did not call for any information in respect of loss claimed on sale of machinery and, therefore, this is the case of total lack of enquiry by the Assessing Officer, which rightly warranted invoking of jurisdiction by the learned Commissioner of Income Tax, under Section 263 of the Act. Further, in respect of the other issues, also he submitted that the Assessing Officer, though called for information in respect of sundry creditors and unsecured loans but no confirmations were filed in respect of sundry creditors and no banks and other details were filed in respect of unsecured loan. He further submitted that the Assessing Officer has not examined the liability of deducting TDS on freight expenses. He also submitted that it is evident from the questionnaire issued by the Assessing Officer, which has been submitted by the assessee in the paper book before the Tribunal, no query was raised in respect of claim of expenses toward finance charges. In view of the above facts, the case of the assessee falls under the category of the lack of enquiry. He further submitted that even single error found in the order of Assessing Officer, the Commissioner of Income Tax can revise that order. In support of the contention that the Commissioner of Income Tax could remand the matter to the Assessing Officer as the Assessing Officer had not conducted proper enquiry to verify cash credits and trade creditors etc, he relied on the judgment of the Jurisdictional High Court of Allahabad in the case of Meerut Roller Flour Mills Ltd Vs. Commissioner of Income-tax (2013) reported in 35 taxmann.com 183 (Allahabad). In support of the Commissioner of Income Tax to come to a firm conclusion that the order of the Assessing Officer was erroneous, insofar as, it is prejudicial to the interest of Revenue and the Commissioner of Income Tax can remand the matter to the Assessing Officer to make fresh assessment after giving an opportunity of hearing to the assessee, he relied on the judgement of the Hon’ble Gujarat High Court in the case of Additional Commissioner of Income Tax Vs. Mukur Corporation reported in 111 ITR 312 (Guj). 4.3 We have heard the rival submissions of the parties and perused the relevant material on record including the paper book containing 32 pages filed by the assessee. The mandate of section 263 of the Act is attracted only when the assessment order is found to be erroneous insofar as to be prejudicial to the interest of the Revenue. These twin conditions have to be cumulatively satisfied for obtaining a valid jurisdiction under this section. If the assessment order is only prejudicial to the interest of the Revenue, it is not sufficient to invoke the jurisdiction under section 263, unless it is shown that it is erroneous also. An assessment order may be termed as erroneous in various circumstances. Not making enquiry on the relevant issues, which the Assessing Officer is required to look into, makes the assessment order erroneous. Similarly, after making investigation but thereafter taking the patently erroneous view, also makes an order erroneous. But, however, if there are two possible view on the point of issue, then order cannot be said to be erroneous. In other words, if issue is debatable and the Assessing Officer has taken one possible and legally sustainable view, then the Commissioner of Income Tax, cannot be allowed to substitute his view holding the order as erroneous. In another situation, any order may be erroneous due to lack of enquiry on the issue. When the investigation was made by the Assessing Officer, but the circumstances Assessing Officer failed to carry out such enquiry, this would also make the assessment order erroneous. However, if the Assessing Officer carried out proper investigation and gets satisfied during the course of hearing after proper examination, the assessment order cannot be characterized as erroneous simply because there is no discussion in the assessment order on such aspects. In this regard, as long as there is material to suggest that enquiry was conducted by the Assessing Officer and the assessee filed complete information on that aspect, the assessment order cannot be held as erroneous, until it is shown that circumstances required the Assessing Officer to conduct further enquiries on that aspect. 4.4 Coming to the facts of the instant case, we find that the main issue into first five objections raised by the Commissioner of Income Tax was of no enquiry in respect of purchase and sales of assets, depreciation thereof and the loss claimed on sale of Machinery. We have perused the questionnaire issued by the Assessing Officer, which is available on pages 14-15 of the assessee’s paper book. Before us, the assessee has not submitted copy of any other questionnaire issued or query raised by the Assessing Officer in order sheet other than questionnaire available on pages 14-15 of the paper book. It is evident that this notice was issued on 13/05/2010. According to the notice, the hearing was fixed on 20/05/2010 and the assessee was asked to furnish various details listed at serial Nos. 1 to 10, inter alia, business activity, audit report, bank accounts, Director/Shareholders, confirmation of sundry creditors, proof of payment under section 43B, confirmation of unsecured loans and details in table format, gross profit/net profit rate, liability of TDS etc. A further reminder/notice under section 142(1) of the Act was issued on 23/06/2010 calling for the reply in respect of the information as called for 142(1) of the Act dated 13/05/2010. In response to the said queries raised by the Assessing Officer, the reply submitted by the assessee is placed on pages 11 to 12 of the paper book. Before us, the assessee has also submitted a copy of reply dated 15/11/2010 claimed as submitted to the Assessing Officer on his verbal queries. This reply contains computation of loss on sale of machinery. One more reply of the assessee, which is signed by the counsel of the assessee on 25/11/2010, is available on page 9 of the paper book, which contains justifications of the loss and sale of machinery to M/s Apin Tax. Both the reply dated 15/11/2010 and 22/11/2010 are not bearing any stamp of acknowledgement either by the Assessing Officer or by the Income Tax Department. A perusal of the questionnaire issued by the Assessing Officer manifest that no query in respect of acquisition and sale of assets including machinery was raised by the Assessing Officer. It is also clear that no query in respect of sale of machinery was made by the Assessing Officer. In absence of any stamp of acknowledgement by the Department on the letter dated 15/11/2010 and 25/11/2010, it cannot be treated that same were filed before the Assessing Officer. Even if it is considered that the assessee filed reply dated 15/11/2010 and 25/11/2010 before the Assessing Officer, the Assessing Officer was required to carry out Inquiry in respect of the claim of loss on sale of machinery, however, no such enquiry was made by the Assessing Officer, and, therefore, the case of the assessee falls in the category of complete lack of Inquiry on the issue of loss from sale of machinery. In view of above, we are of considered opinion that the assessment order on the issue is erroneous insofar as prejudicial to the interest of the Revenue and the learned Commissioner of Income Tax is right in assuming jurisdiction under section 263 of the Act.

4.5 Insofar as objections raised in ground No.3, in respect of correctness of the claim toward financial charges, correctness of unsecured loan in sundry creditors, to examine the provisions of TDS on freight debited of Rs.6,93,000/-and disallow under section 40(a)(ia) of the Act, we find from the questionnaire dated 13/05/10 that following queries were made in respect of sundry creditors, unsecured loans and TDS. “Query No. 5: Confirmation of sundry creditors alongwith there PAN and complete address and copy of return of income to prove their identity, genuineness of transaction and creditworthiness. Query No. 7: Confirmation of unsecured loans with the copy of the relevant page of bank passbook of the loan creditor, their PAN, profit of money availability as on the day of advancement of loan, assessment jurisdiction and copy of Return of Income. Query No. 9: Please furnish whether you were liable to deduct TDS and if yes the evidence of deduction of the same.” 4.6 In response to the above queries, the assessee replied vide letter dated 21/10/10, which is available on pages 11 of the assesses paper book, as under: “Answer No. 4: The details of sundry creditors are enclosed. We are trying to get their confirmation. Answer No. 6: The confirmation of Unsecured Loan of following with PAN are enclosed:-

1. 1. Sanjay Bharadwaj 70,00,000.00 2. Yash Pal Singh 10,00,000.00 (Copy of his Kisan Bahi having agriculture land 4.290 hectare at village Rajpura is also enclosed.).

4. Kamal Singh 50,00,00.00 (Copy of his Kisan Bahi of agriculture land 1.292 hectare at Villate Rajpura is enclosed.)

5. Brajpal Singh 80,00,00.00 (Copy of his Kishan Bahi of agriculture land 2.2560 hectare at Village Rajpura is enclosed.) Answer No. 9: That TDS was not deductible on any of the expenses. 4.7 In reply dated 15/11/2010, which is placed on page 18 of the assessee’s paper book, reply in respect of creditors was as under: Answer No. 2: Copy of a/c of following creditors in our books of a/c: (a) M/s. ABN Enterprises Hissar (b) M/s. Apin Textiles. 4.8 Thus, it is evident from the submission of the assessee that no confirmation were filed in respect of the sundry creditors. Similarly, it is clear from the queries raised by the Assessing Officer that no details in respect of deduction of TDS on freight charges was examined by the Assessing Officer. Similarly, neither detail in respect of financial charges was also asked by the Assessing Officer nor any information was filed by the assessee. In view of the above, the learned Commissioner of Income Tax is correct in holding that further enquiry was necessary to examine the sundry creditors, financial charges, liability of TDS on freight charges. 4.9 The Hon’ble jurisdictional High Court in the case of Meerut Roller Flour Mills Ltd (supra) held the assessment order as erroneous and prejudicial to the interest of the Revenue when the Assessing Officer had not conducted a proper Inquiry to verify cash credits and trade creditors and the matter remanded to the Assessing Officer under section 263 of the Act. The relevant finding of the Hon’ble High Court is reproduced as under: “16. It was incumbent upon the Assessing Officer to have examined the cash credit entries appearing in the accounts of the petitioner assessee in detail keeping in view the explanation furnished by the petitioner. Having failed to do so, it is but obvious that the assessment order is erroneous and prejudicial to the interest of the Revenue. Mere filing of the reply by the assessee to which the attention of the Court was invited is not sufficient. We find that with regard to the trade creditors, copies of their account books were filed vide letter dated 9th of November, 2010, ; that is all. There is no application of mind by the Assessing Authority with regard to the genuineness of the credit entries including that of trade creditors. Reference was made by the learned counsel for the respondents to the assessment order for the assessment year which is enclosed in the connected writ petition ( has been dismissed on 15th of May, 2013 on the ground of availability of statutory remedy) wherein on examination, it was found by the Assessing Authority that the assessee was not able to prove the genuineness of certain cash credits. Be that as it may, in view of the order which we are proposing to pass, it is not necessary to dwell upon the merits of the case. Prima facie findings have been recorded by us just to meet the argument of the petitioner.” 4.10 The Hon’ble Gujarat High Court in the case of Mukur Corporation (supra) has upheld the action of the Commissioner of Income Tax in order under section 263 of the Act, remanding the matter to the Assessing Officer for fresh examination. The relevant finding of the Hon’ble High Court is reproduced as under:

“15. The third step is as regards an inquiry as the CIT "deems necessary

. It is with regard to this step that Shri Patel vehemently contended that the CIT had committed an error in not allowing the assessee to cross-examine Dr. Vyas, whose affidavit dt. 10th March, 1971, was very material. Now, after reading the relevant portion of sub-s. (1) of s. 263, we do not find any justification for the view that in every case the CIT is expected to make an inquiry before passing the final order. The concluding portion of this sub-s. (1) of s. 263 shows that the CIT can pass various orders such as enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. If the CIT in this case had enhanced or modified the assessment, then looking to the facts of the present case, Shri Patel would have been justified in contending that, before passing the final order of enhancement or modification of the assessment, the assessee ought to have been given an opportunity to cross-examine Dr. Vyas. But here the CIT has not himself passed any final order as regards the assessment. What he has done is to cancel the original assessment and to direct a fresh assessment by the ITO with a further direction to the ITO to give proper opportunity to the assessee to substantiate its pleas as well as to cross-examine Dr. Vyas. Therefore, the question is whether it is obligatory on the CIT acting under s. 263 to enter into a regular inquiry in all cases before the original assessment order is cancelled and the ITO is directed to make a fresh assessment. There is nothing in the section itself which would justify such a view, because, on the question of inquiry, the section specifically says that that inquiry should be as deemed necessary" by the CIT. In this connection, we may profitably refer to some of the observations of the Supreme Court in Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC) : TC57R.202. In that case, the order which was passed by the CIT mentioned some facts which were not indicated or intimated to the assessee and which the assessee had no opportunity of meeting. The assessee made a grievance of this but the Supreme Court disposed CIT had relied upon, was supporting material and did not constitute the basic ground on which the order under s. 33B (of the Act of 1922) was passed. The Supreme Court further observed that even if the facts, which the CIT introduced regarding the inquiries made by him, had been indicated to the assessee, the result would have been the same, because the assessee had not in any way suffered from the failure of the CIT to indicate the results of the inquiries. The Supreme Court ultimately held that in such a case the assessee would have full opportunity of showing to the ITO whether the income assessed in the assessment orders which were originally passed was correct or not, and, therefore, the assessee could not be said to have been denied an opportunity of showing cause against the grounds and materials and the rules of natural justice were not violated. In CIT vs. Panna Devi Saraogi (1970) 78 ITR 728 (Cal) : TC57R.142, the High Court of Calcutta held that there was no violation of the principles of natural justice on the question of opportunity being given to the assessee. That opportunity was reasonably given, by stating the basic grounds on which the CIT thought that the ITO's order was erroneous and giving a reasonable opportunity to the assessee even to produce evidence along with facts of that case, the High Court further observed that all that the CIT did was to cancel the assessment and ask the ITO to make a fresh assessment according law after making proper enquiries and investigations with regard to the jurisdiction, carrying on the business, possession of initial capital and the sources of moneys invested in the name of the assessee and, therefore, the assessee would again get full opportunity to produce evidence, if any, in support of her case.

ITO did not apply his mind to the claim of the assessee as contained in part D of the return. The Court found that the CIT himself did not apply his mind to the merits of claim and, in fact, he specifically refrained from going into the merits. In view of this, the Court held that the finding that the order of the ITO was erroneous, was by itself not enough to give jurisdiction to the CIT, because it was necessary to be shown further that the order was prejudicial to the interests of the Revenue. Since, in the opinion of the High Court, the CIT failed in finding that the erroneous order passed by the ITO was against the interest of the Revenue, the High Court concluded that the order passed by the CIT in setting aside the original assessment was wrong. This case is easily distinguishable on facts because, so far as the case under consideration is concerned, it is evident that the failure of the ITO to make proper inquiry with regard to both the deductions during the course of his original assessment was clearly prejudicial to the Revenue, because the deductions in question were quite substantial in nature. In our opinion, therefore, the decision relied upon by Shri Patel is of no help to the respondent-assessee.