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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’: NEW DELHI
Before: SH. H.S. SIDHU & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against the order dated 25/03/2013 passed by the learner Commissioner of Income-tax, Meerut, under section 263 of the Income- tax Act,1961 (in short ‘the Act’) in relation to assessment year 2008-09 raising following grounds: “1. The impugned order dated 25.03.2013 as passed by the Ld. CIT u/s 263 of the Income Tax Act, 1961 is arbitrary, unjust and illegal on various factual and legal grounds including the following a. The assessment order dated 22.12.2010 passed by the Ld.Assessing Officer was neither erroneous nor prejudicial to the interest of revenue. b. The Ld. Assessing Officer had passed the order dated 22.12.2010 u/s 143 (3) after proper inquiry and after proper application of mind. c. The Ld. CIT had no jurisdiction to invoke the provisions of section 263 of the Income Tax Act, 1961 under the facts and circumstances of the case. d. The various observations made by the Ld. CIT in her order u/s 263 are either factually incorrect or are untenable in Law and the various case laws relied upon by her are not applicable to the facts of the case of the appellant.
2. That without prejudice to the ground 1 above, the Ld. CIT grossly erred in law and on facts in rejecting the books of accounts of the appellant u/s 145(3) of the IT Act, 1961 and estimating the income of the appellant by applying a net profit rate of 5% to the Gross turnover including other income aggregating Rs. 19,37,55,643/- and arriving at and making an addition of Rs. 80,46,447/- to the income of the appellant. In view of the material on record, the rejection of the books of accounts u/s 145(3) of the Income Tax Act ,1961, estimate of net profit @5% of the turnover and receipts and addition of Rs. 80,46,447/- to the income of the appellant are most arbitrary, without any basis whatsoever and uncalled for in the facts and circumstances of the case.
3. That without prejudice to the above, the ld. CIT had no jurisdiction to reject the Books of Accounts and make the estimated addition of Rs. 80,46,447/- during the proceedings u/s 263 of the Income Tax Act, 1961 just on the basis of assumptions and wild estimation without any enquiry on the facts of the case and without providing reasonable opportunity to the appellant and properly appreciating the material on record. The action of the ld. CIT is totally unjust and not tenable in law. The addition deserves to be deleted. 4. That the observations and finding of the Ld. CIT in para 8 of her order u/s 263 as regards point (b) regarding applicability of provisions of section 40(a)(ia) of the IT Act , 1961 on gross rent of Rs.5,55,400/-, as per details of rent paid filed before the Assessing Officer and also the ld. CIT in the proceedings u/s 263 no payment having exceeded Rs. 1,20,000/-, the finding of the CIT that the issue was not looked into or examined by the AO is erroneous and uncalled-for under the facts and circumstances of the case . The partly setting aside of the assessment on this issue by the Ld. CIT is bad in law and uncalled for on facts. 5. That impugned order of the learned Commissioner of Income Tax u/. 263 of the Income Tax Act, 1961 deserves to be cancelled/annulled. 6. That appellant craves leave to modify/add/or delete any ground(s) of appeal before or at the time of hearing of the appeal.”
The facts in brief of the case are that the assessee, a partnership firm, during the relevant year was a distributor of M/s Haldiram Manufacturing Co. Private Limited for the state of Uttaranchal as well as engaged in normal trading activity of different food items. Original assessment in the case was completed under section 143(3) of the Act on 22/12/2010 on total income of Rs. 16,41,336/- after making addition of Rs. 10 lakh on lump sum basis towards disallowance against travelling, labour expenses, freight expenses etc. over and above the income declared by the assessee. The learned Commissioner of Income Tax (in short ‘the CIT’) considered following points for exercising her jurisdiction under section 263 of the Act: (i) The net profit shown by the assessee on turnover of Rs. 18,76,26,647.72/- was very less and the commission/other income was grossly set off against the expenses like travelling, salary, bonus, labour expenses, freight charges etc, which the Assessing Officer did not enquire and accepted without any reason or justification; (ii) Applicability of the TDS on the rent payment of Rs. 5,55,400/- was not verified by the Assessing Officer; (iii) The expenses incurred by the assessee and lower profit rate was not examined by the Assessing Officer.
As regard to first point of 263 proceedings, the learned CIT observed that the assessee had shown a very small amount of net profit of Rs. 6,41,335/-on the turnover of the 18.76 crore. According to ld. CIT, the Assessing Officer did not make an enquiry as how the commission of Rs. 52,51,858/- and other income of Rs. 8,77,137/- was set off against the several expenses in the profit and loss account. He further observed that no vouchers, bills or supporting evidence were produced before the Assessing Officer. In her view, the ad-hoc addition of Rs. 10 lakh made was negligible looking to the high turnover and despite being the other income/commission income of Rs. 61,28,995/-. She also noticed that no books of accounts were produced before her. She, therefore, rejected the books of accounts under section 145(3) of the Act and applying net profit rate of 5% on the total turnover including the other income computed the net profit of the assessee at Rs. 96,87,782/- and after reducing the returned income of Rs. 6,41,335/-, the amount of addition was determined at Rs. 90,46,447/-. As regard to applicability of TDS provisions on rent of Rs. 5,55,400/-, she directed the Assessing Officer to examine the issue for disallowance under section 40(a)(ia) of the Act. Aggrieved with the findings of the learned CIT, the assessee is in appeal before the Tribunal.
Before us, the ld. Authorized Representative of the assessee submitted that issue in dispute was whether proper enquiry or no inquiry were made by the Assessing Officer on the issues raised by the learned CIT and according to her enquiries were duly conducted by the Assessing Officer on both the issues as was evident from the copy of order-sheet entries of the assessment records available at pages 225 to 226 of the assessee’s paper book. She also referred to page 24 and 25 of the assessee’s paper book which contained a copy of detailed query letter issued alongwith notice under section 142(1) of the Act by the Assessing Officer in the course of scrutiny proceedings. Further, she also submitted that the proceedings under 263 of the Act were initiated in the case of Sh. Sunil Arora for assessment year 2008-09, who is relative of the partners of the firm and was engaged in the similar activity of distributor of M/s. Haldiram Manufacturing Co. Ltd. and the learned CIT also observed issues identical to the issues raised in the case of the assessee, however the Tribunal in order dated 08/04/2015 in set aside the order of the learned CIT, accordingly she requested for setting aside of the impugned order. 5. On the other hand, the learned CIT(DR) relying on the order of the CIT submitted that the Assessing Officer should have rejected the books of accounts of the assessee in view of the observations in the tax audit report. She further submitted that no enquiries were conducted by the Assessing Officer to examine the low profit rate of the assessee. In support of her contention, she relied on the judgments of the Hon’ble Delhi High Court in the case of Gee Vee Enterprises Vs. Additional Commissioner of Income Tax (1975) 99 ITR 375 (Delhi) and Duggal & Co. Vs. Commissioner of Income Tax (1996) 220 ITR 456 (Delhi) and the judgment of the Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd. Vs. Commissioner of Income Tax (2000) 243 ITR 83 (SC). The learned CIT (DR) also relied on the decisions of the Tribunal Delhi bench in the case of Kavadi Narsimha Vs. Commissioner of Income Tax, Central-II, New Delhi in ITA number 953 to 958 & 960/Del/ 2011 and Sh. Virender Kumar Gupta versus CIT, Meerut in ITA No. 2595/Del/2009.
We have heard the rival submission and perused the relevant material on record. We find that ratios of the various judicial decisions on the issue in dispute including the decisions cited by the ld. CIT (DR) have been summarized by the Tribunal in the case of Sunil Arora (supra) and the relevant part of the decision is reproduced as under: “4. We have heard the rival submissions and perused the relevant material on record. We want to clarify that the mandate of section 263 is attracted only when the assessment order is found to be erroneous and prejudicial to the interest of the Revenue. These twin conditions have to be cumulatively satisfied for obtaining a valid jurisdiction under this section. Merely because an assessment order is prejudicial to the interest of the revenue is not enough, unless it is shown that the same is erroneous too. An assessment order can be termed as erroneous in several circumstances. Non-investigation by the AO on the relevant issues, which are required to be properly looked into, makes an assessment order erroneous. However, non-examination of the trivial or insignificant issues cannot lead to making an assessment order erroneous. Making due investigation but thereafter taking a patently erroneous view, also makes an assessment order erroneous. A line of distinction should be drawn between patently erroneous view accepting one of the possible views. Only the former makes an assessment order erroneous and not the later. In other words, if there is a debatable issue and the AO has taken one of the possible and legally sustainable views, then that aspect goes outside the realm of revision. Another situation of an erroneous order may be when investigation was made by the AO, but the circumstances suggest that further investigation was warranted, which the AO failed to make. This would also make the assessment order erroneous. But the mere fact that the AO chooses not to incorporate certain issues in the assessment order on which he gets satisfied during the course of hearing after proper examination, cannot be lead to the passing of an erroneous assessment order. If material on record suggests that the AO did embark upon the investigation and got satisfied and further there is nothing to prompt further investigation, then the assessment order cannot be characterized as erroneous simply because there is no discussion in the assessment order on such aspects. If a view is taken that non-discussion of an issue in the assessment order on which the AO is satisfied, means the absence of application of mind by the AO, then probably all the assessment orders would become erroneous. It is so for the reason that the AO cannot be expected to discuss each and every, significant or insignificant aspect of assessment, in his order. The essence of the matter is that on the non-discussed relevant issues in the assessment order, so long as there is material to suggest that the AO conducted inquiry and the assessee did file reply on them, the assessment order cannot be held as erroneous, until it is shown that the circumstances required the AO to conduct further inquiry on such issues.”
After summarizing the ratios of the judicial decision on the issue in dispute, the Tribunal in the above case has discussed whether any enquiry was conducted by the Assessing Officer or not and after considering the material on record, the Tribunal in the above case held as under: “5. Coming to the facts of the instant case, we find the first objection of the Id. CIT about non-production of books of account, etc. before the AO and the resultant rejection of such books and the consequential computation of business income at Rs. 65.84 lac, as unsustainable. We have perused a copy of the order sheet entry of the AO, which is available on pages 368 to 370 of the paper book. It is manifest that the first notice was issued by the AO to the assessee on 26.8.2009. On 4.8.2010, the assessee appeared and was called upon to furnish various details listed at sr. nos. a) to o), inter alia, of sundry creditors, various expenses including discounts, commission, etc. On 17.8.2010, the assessee appeared and filed part reply. Again on 20.10.2010, the assessee’s representative appeared and filed part reply. On 25.10.2010, the assessee’s representative appeared and filed part reply. At this stage, the assessee was called upon to produce the books of account on the next date of hearing, namely, 9.11.2010. The order sheet entry of 9.11.2010 divulges that the assessee’s counsel appeared and produced books of account, which were test checked by the AO. Again, on 16.11.2010, the assessee’s C.A. appeared and produced books of account, which were again test checked and the assessment proceedings were 8.12.2010. A bare perusal of the order sheet entry of the AO amply demonstrates that the assessee was called upon to produce books of account, which were duly produced on at least two occasions and the same were also checked by the AO. The observations of the Id. CIT about the non-production of books of account are, therefore, not tenable. It is apparent that initially, the Id. CIT held that books of account were not produced before the AO, and later on he went on to reject such books of account. Further, we are unable to find any rationale of the Id. CIT in applying a net profit rate of 5% on total turnover for computing income of Rs.65.84 lac from business operations. This is again an application of the ad hoc net profit rate, unsubstantiated with any cogent reason.
6. The Id. AR has drawn our attention towards elaborate detail of all the expenses, etc., which were called for and submitted before the AO, whose copies have been made available to us as well. It can be seen from the order sheet entry of the AO dated 4.8.2010 that the AO did ask for details of Discount on sales and Commission etc., along with all other expenses, which were duly filed. Simply because such expenses account for a higher amount, cannot in itself be a reason to hold that the assessment order, allowing deduction for such expenses, is rendered erroneous and prejudicial to the interest of the Revenue.
7. It is vivid from the assessment order itself that some of the expenses claimed as deduction were on the basis of self-made vouchers. The Id. AR contended that these were petty payments on account of freight, carriage, etc. made to rickshawalaas etc., for which there could have been no external evidence. We find that the AO, on appreciation of entire material available before him, made an ad hoc addition of Rs. 1 lac to cover up possible leakage of revenue on account of self-made vouchers. This decision was taken on a holistic consideration of the material before him. It is not a case of no or improper inquiry conducted by the AO. The view point of the Id. CIT that the disallowance of Rs. l lac made by the AO out of expenses is paltry, cannot be a ground to hold the assessment order erroneous. It cannot be characterized as a patent mistake committed by the AO. At the most, it may be a debatable issue as to what amount of expenses should be disallowed. The AO may consider a particular amount as reasonably disallowable, while the CIT may consider another amount. Going by any standard, it is a debatable issue as to the reasonableness of the amount disallowable and as such, the CIT cannot substitute his opinion of the disallowable amount with that of the AO in exercising power u/s 263 of the Act.
As the AO did carry out investigation on all the relevant aspects of the matter, which is evident from the order sheet entry, and the reply of the assessee giving details on several occasions, the assessment order cannot be termed as erroneous. We, therefore, set aside the action of the learned Commissioner of Income Tax in making addition of Rs. 65.84 lac by applying an ad-hoc net profit rate.”
8. Once we advert to the facts of the case in hand, we find that the issues raised by the CIT in the case in hand are identical to the issue raised in the case of Sunil Arora (supra). We even find that the wordings of the order under section 263 of the Act in the instant case are almost identical to the wordings in the case of Sh. Sunil Arora. In the case in hand also the first objections of the Ld. CIT was that no query was made by the Assessing Officer in respect of low profit results of the assessee and no books of accounts were produced by the assessee. On perusal of the copy of order sheet entries of the Assessing Officer, which are available on page 225 to 226 of the assessee’s paper book, it is evident that the Assessing Officer asked query in letter dated 26/07/2010 about the comparative figures of gross profit, net profit and justification thereof and details of expenses including bills and vouchers alongwith other details. On 07/09/2010, the representative of the assessee attended and filed written submission, the copy of which is available on pages 27 to 33 of the paper book. Again in query dated 20/10/2010 the Assessing Officer asked details of commission receivable, documentary proof for the expenses claimed on wages, salary, staff welfare and labour charges, justification for expenses claimed on conveyance and travelling, freight charges along with other details. Again on 12/11/2010 certain queries were raised. The order sheet entries dated 30/11/2010 divulges that representative of the assessee appeared and produce books of account, which were checked on test check basis and specific observation was made that most of the vouchers were handmade in respect of travelling, labour and freight expenses and the assessee was asked to explain the same. Again on 10/12/2010, the representative of the assessee appeared and filed reply to show Assessing Officer. Thus, the order sheet entries and the query letters issued by the Assessing Officer sufficiently demonstrated that the assessee was called upon to produce books of accounts and which were produced and test checked by the Assessing Officer. The Assessing Officer also has examined the various expenses particularly travelling, labour and freight expenses and after taking into consideration the explanation of the assessee dated 10/12/ 2010, which is available at pages 220 to 221 of the paper book, the Assessing Officer accepted the lump-sum disallowance of Rs. 10 lakh and completed the assessment. Thus, in our view, the observations of the learned CIT about non-production of books of accounts and non-examination of low profit and other expenses claimed are, therefore, not tenable. In our opinion, it is not a case where no enquiry has been conducted by the Assessing Officer on the issue involved, whereas we find that the Assessing Officer has even examined the bills and vouchers and asked for the explanation of the assessee and after considering the ratio of the expenses and profits as compared to the preceding years, he accepted the disallowance of Rs. 10 lakh. As observed by the Tribunal in the case of Sh. Sunil Arora (supra), we also don’t find any justification in the case in hand for applying the net profit rate of 5% on the total turnover including other income, without substantiated with any cogent reason. The Assessing Officer has observed that some of the vouchers of expenses were self-made and the ld. AR contended that those were small payments on account of freight, carriage etc. paid to rickshawalas etc. for which there could have been no external evidence. We find that the Assessing Officer after considering the material available before him and explanation of the assessee, made an ad-hoc addition of Rs. 10 lakh possibly to cover of the revenue leakage, if any, on account of self-made vouchers. We do not find that it is case of no proper or improper enquiry conducted by the Assessing Officer. In the facts and circumstances of the case the Assessing Officer has considered the disallowance of Rs. 10 lakh as reasonable, which in the view of the CIT may not be sufficient, in such a situation the issue becomes debatable as to the reasonability of the amounts disallowed, but that cannot become the ground for substitution of her opinion of the disallowable amount with that of the AO exercising power under 263 of the Act.
In our considered opinion, the Assessing Officer carried out the enquiries and investigation on the relevant aspect of the matter, which is clear from the order sheet entries, query raised and submission of the assessee filed in the course of assessment proceeding and thus the assessment order cannot be termed as erroneous or prejudicial to the interest of Revenue on the issue of low net profit shown by the assessee. We, therefore, set aside the action of the learned CIT in making an addition of Rs. 90,46,447/- by applying net profit rate of 5% in ad-hoc manner.
As regard to the point that whether the TDS applicability on the rent payment of Rs. 5,55,400/- in profit and loss account was not verified by the Assessing Officer in the scrutiny proceedings, we find that the details in respect of rent account was filed by the assessee in its reply dated 07/09/2010, which are available on page 34 to 36 of the paper book. We find that each rent payment made is less than the statutory limit provided in the provisions of the Act related to the TDS. This fact has also been verified by the Assessing Officer in proceedings consequent to 263 proceedings, and amount of the rent paid to single person was below Rs. 1,20,000/- and, therefore, not liable for TDS. Therefore, the findings of the learned CIT on the issue was without proper appreciation of the facts available on record. In our view, there is no error on the part of the Assessing Officer on this issue.
In the case of Kavadi Narshimha (supra) cited by the learned CIT (DR), neither any query was made by the Assessing Officer in respect of the agricultural income, nor any reply was submitted by the assessee regarding the earning of agriculture income, whereas in the case in hand sufficient enquiry was made by the Assessing Officer in respect of the expenses claimed by the Kavadi Narshimha (supra) are distinguishable. Similarly the facts, in the case of Virender Kumar Gupta (supra) are also distinguishable as no enquiry on the issue involved was made by the Assessing Officer in that case.
In the background of the reasons discussed above and following the precedent in the case of Sunil Arora(supra), we hold that the learned CIT was not justified in setting aside the assessment order by terming the same as erroneous and prejudicial to the interests of the Revenue and, therefore, the impugned order of the CIT is set aside.
In the result, the appeal of the assessee is allowed. The decision is pronounced in the open court on 22nd June, 2016.