SHRI SANJAY KUMAR TYAGI,MEERUT vs. ACIT, MEERUT

This is an appeal by the assessee against the order dated 30.10.2007 passed by the ld. CIT, Meerut, u/s 263 of the Income Tax Act, 1961 2 ITA Nos. 4979 & 5235/Del/2015 Sanjay Kumar & Sanjay Kumar Tyagi (hereinafter referred to as the Act) and the Cross Appeals by the assessee and the Department are directed against the order dated 9/6/2015 of the CIT(A), Meerut.

In following grounds have been raised by the assessee:

That, without prejudice to ground no.1, there is no evidence and / or material on record on the basis of which the Id. CIT has arrived at the conclusion that the Ld. A.O has accepted the expenses on consumables and labour wages and the net profit of the appellant, without making any enquiry or verification and as such the directions of the Id. CIT, to make further enquiry or verification of expenses and to arrive at reasonable profit say at least 8% of contract receipt plus other receipts i.e. interest income etc, are totally unjust, unlawful, and unwarranted as the Id. A.O had passed the assessment order after proper application of mind considering all relevant material and therefore the impugned order passed by the Id. CIT needs to be set aside.

That the impugned order of the CIT u/s 263 deserves to be cancelled/ annulled.

Facts of the case in brief are that, the assessee field the return of income on 30/09/2008 declaring an income of Rs.5,64,250/- which was processed u/s 143(1) of the Act. Later on, the case was selected for scrutiny. The A.O framed the assessment u/s 143(3) of the Act by making the addition of Rs.1,60,000/- on account of scrap sales and Rs.44,544/- on account of labour of hutments and accordingly the income was assessed at Rs.7,68,794/-. Thereafter, the Ld. CIT, Meerut exercised his powers u/s 263 of the Act and observed that the assessee had shown gross receipts of Rs.3,24,60,558/- against which the expenditure shown were of Rs.1,06,72,293/- on account of consumable consumed and Rs.1,84,57,209/- on account of labour wages which had been accepted by the AO without making any enquiry or 4 ITA Nos. 4979 & 5235/Del/2015 Sanjay Kumar & Sanjay Kumar Tyagi verification. He also pointed out that as per the TDS certificate, there were following receipts during the year under consideration:- “1. Kumbhi Chini Mills Rs.2,30,53,030/- 2. Akbarpur Chini Mills Rs. 3,42,928/- 3. Nanglamal Sugar Complex Rs.20,34,471/- 4. Bajaj Hindustan Sugar Rs.35,98,890/- 5. Shriram Engineering Works Rs.1,60,79,974/-” Total Rs.4,51,09,293/- 6. As against the same only receipt of Rs.3,24,60,558/- were returned leaving a sum of Rs.1,26,48,735/- where as credit of entire TDS had been given. He also pointed out that the assessee had not shown interest income on the bank balances and that the creditors of Rs. 2,34,75,799/- and unsecured loans of Rs.8,10,850/- had not been enquired into properly before accepting the same. In view of the above, the Ld. CIT was of the view that the order passed by the A.O was found to be erroneous and prejudicial to the interest of the Revenue since at the time of the assessment, the A.O was duty bound to call for such details and examined them. Reliance was placed on the following case laws:- � Malabar Ind. Co. Ltd. Vs. CIT(A) (2000) 243 ITR 83 (S.C) � CIT Vs. V. N. M.A Rathinasabapathy Nadar, (1995) 215 ITR 309 (Mad) � Swarup Vegetable Products Industries Ltd. Vs. CIT, (1991) 187 ITR 412 (All.) � Umashankar Rice Mill Vs. CIT (1991) 187 ITR 638-39 (Ori) � Jadgish Kumar Gulati Vs. CIT, 269 ITR 71 (All) � Gee Vee Enterprises Vs. Addl. CIT, 99 ITR 375 (Del) � Rampyari Devi Saraogi Vs. CIT (1968) 67 ITR 84 (S.C) � Tara Devi Aggarwal Vs. CIT (1973) 88 ITR 323 (S.C) 7. The Ld. CIT further observed that the A.O accepted the version of the assessee without making any enquiry or verification where as it is very well settled that mere failure to make enquiries makes an order erroneous and that the Commissioner may consider an order of the AO to be erroneous. He further observed that for the purposes of Section 263, the error of law may not be apparent on the facts of the order and the Commissioner may consider an 5 ITA Nos. 4979 & 5235/Del/2015 Sanjay Kumar & Sanjay Kumar Tyagi order of the A.O to be erroneous not only if it contains some apparent error of reasoning or of law or of fact on the face of it but also because it is a stereo typed order which simply accepts what the assessee has stated in his return and fails to make enquiries which are called for in the circumstances of the case. He further observed that it was incumbent on the officer to investigate the facts stated in the return when circumstances would make such an enquiry prudent and the word erroneous in Section 263 includes the failure to make such an enquiry and that the order becomes erroneous because such an enquiry has not been made and not because there is anything wrong with the order, if all the facts stated there in are assumed to be correct. The reliance was placed on the following case laws: � Duggal & Co. vs. CIT (1996) 220 ITR 456 (Del.) � CIT vs. Pushpa Devi (1987) 164 ITR 639 (Pat) � CIT vs. Smt. Rambha Devi (1987) 164 ITR 658 (Pat) � CIT Vs. Belal Nisa (1998) 171 ITR 643 (Pat) � CIT vs. Smt. Kattshalya Devi (1988) 171 ITR 686 (Pat) � CIT vs.Bibi Khodaija Khatoon, (1988) 171 ITR 11 (Pat) � CIT vs. Smt. Chandrawati Devi, (1988) 171 ITR 111 (Pat) � CIT vs. Smt. Devi (1987) 59 CTR (Pat) 3 � CIT vs. Bhagwant Kaur (1987) 63 CTR (Pat) 326 � CIT vs. Pushpa Devi (1988) 173 ITR 445 (Pat).

The Ld. CIT pointed out that gross receipts in the contract account for the year ended on 31/3/2007 as per TDS certificate were at Rs.4,51,09,293/- while the assessee had shown at Rs.3,24,60,558/- against which the huge expenses of Rs.2,91,29,504/- were shown and the only explanation given was the comparison with the preceding year stating that due to increase in labour expenses and due to less turnover during the Financial Year under consideration, the percentage of two viz. labour charges and consumable increased where as the percentage of NP-as such very low at 2.51% of declared gross profit. He also pointed out that the books of accounts were not reliable and results not acceptable as the tax audit report states in Para 28 (a) that “it was not possible to provide quantitative details of goods traded as the items 6 ITA Nos. 4979 & 5235/Del/2015 Sanjay Kumar & Sanjay Kumar Tyagi were of numerous quality and sizes”. According to the Ld. CIT, the A.O accepted the books as such after making an ad-hoc petty addition. He, therefore, set aside the matter to the A.O with specific directions to verify the claim of the expenses and allow only such expenses which were verifiable having supporting material or evidence to have incurred the same exclusively for the business purposes. The Ld. CIT also stated that the assessee had claimed TDS on the entire receipts of Rs.4,51,09,293/-, on which credit of TDS had also been given by the AO where as the contract receipt shown were of Rs.3,24,60,558/-. Therefore, the receipts to the magnitude of Rs. 1,26,48,735/- were included in this year’s income as suppressed gross receipts. He directed the A.O to obtain the books of account, work out the interest income and bring the same to the purview of tax on mercantile basis. He also directed the A.O to enquire into the Sundry Creditors of Rs.2,34,79,799/- and unsecured loans of Rs.8,10,850/- and verify from the records if proper confirmations were filed by the assessee and asked for the same if not so. The Ld. CIT partly revised and partly set aside the assessment order to the A.O with the direction that a fresh order after examining the issues properly and considering all evidences and affording reasonable opportunity to the assessee be passed expeditiously.

Now the assessee is in appeal. The Ld. Counsel for the assessee submitted that the Ld.CIT directed the A.O to verify the following expenses:- (i) Consumable Consumed Rs.1,06,72,293/- (ii) Labour Wages Rs.1,84,57,209/- Total Rs.2,91,29,502/- It was stated that the above said expenses were allowed after proper verification by the A.O and the assessee vide letter dated 27/8/2010 furnished the list of Sundry Creditors along with their confirmation. The reference was made to Page Nos. 3 to 19 of the assessee’s paper book. It was further stated that the A.O vide order sheet entry dated 29/10/2010 sought justification of 7 ITA Nos. 4979 & 5235/Del/2015 Sanjay Kumar & Sanjay Kumar Tyagi consumable consumed and labour charges paid. Reference was made to Page Nos. 212 to 214 of the assessee’ s paper book which is the copy of order sheet entry. It was submitted that the assessee explained vide letter dated 16/11/2010, copy of which is placed at page nos. 43 & 44, stating therein as under:- “We do fabricate and erection of machinery used by sugar mills. Our main consumables are Electrodes, Gas Cylinders, Welding Materials, Wires, pipes, Clips, Nozzles, black glass, gloves etc. This is our main expenditure which comes around 30 to 35% of gross receipts. Our total is depending on labour. We have to engage labour as per requirement. All work from fabrication to installation is done by labour only. The total cost of labour comes around 55% to 60%. Other expenses are nominal. These two expenditure costs us nearly 90%. Rest of gross receipts are our other expenses and profit”.

It was further submitted that the A.O vide order dated 16/11/2010 asked the assessee to explain as to why no scraps sale on consumable consumed was shown and as to why 2.5% of the total amount be not treated as scrap sale and added to the income of the assessee. In response the assessee vide letter dated 23/11/2010 furnished the list of Sundry Creditors with addressees, PAN Nos. and their copies of ledger accounts in the assessee’s books of account, month wise details of labour charges and details of consumable consumed. Reference was made to Page No. 56 to 158 of the assessee paper book. It was also submitted that the assessee during the course of assessment proceedings furnished the books of account which had been examined by the A.O. A reference was made to the assessment order dated 22/12/2010 wherein the A.O mentioned that the assessee furnished required details and the case was discussed with Shri Manoj Jain, C.A and that the books of accounts were produced which had been examined on test check basis. It was contended that the A.O added 1.5% of the total consumable consumed and made the addition of Rs.1,60,094/- on account of scrap sales.

Therefore, the observations of the Ld. CIT were factually incorrect and legally untenable. The Ld. Counsel for the assessee submitted that the ld. CIT referred to para 28(1) of the tax audit report, wherein it was stated that:

It was further submitted that interest on the income tax refund amounting to Rs.47,649/- had been credited to the contract account. A reference was made to Page No. 193 of the assessee’s paper book. It was stated that the interest on income tax refund was duly accounted for in the books of accounts, therefore, the Ld. CIT was not justified in directing the A.O to make the verification again, when the A.O himself applied his mind and framed the assessment u/s 143(3) of the Act after proper verification. As regards to the observation of the Ld. CIT that the assessee had shown net profit of Rs.8,14,254/- on the total contract receipts of Rs.3,24,60,558/-, the ld. Counsel for the assessee submitted that the GP rate shown by the assessee in the year under consideration was better than the earlier years wherein the GP rate was 1.70% while for the year under consideration, it was 2.51%. As regards to the observation of the Ld. CIT that a sum of Rs.1,26,48,735/- was suppressed contract receipts. The Ld. Counsel for the assessee submitted that during the course of assessment proceedings, the A.O raised a specific query and mentioned in the assessment order as under:

As regards to the non charging of the interest on the bank balances, the Ld. Counsel for the assessee submitted that all the bank accounts mentioned by the Ld. CIT were the “current accounts” which do not provide any interest, therefore, the question of earning any interest did not arise. As regards to the verification of the Sundry Creditors and the unsecured loans, the Ld. Counsel for the assessee submitted that during the course of assessment proceedings, the A.O vide order sheet entry dated 16/11/2010 asked the assessee to furnish the PAN Nos. of the Sundry Creditors and in response, the assessee furnished the PAN Nos., copies of ledger accounts of all the Sundry Creditors in the books of the assessee. The reference was made to Page No. 54 to 74 of the assessee’s paper book. It was stated that the A.O accepted the creditors after proper application of mind and verification of books of accounts, therefore, the revision on such issue u/s 263 was not justified. As regards to the unsecured loans, the Ld. Counsel for the assessee submitted that those were the opening balances and the assessee furnished the copies of confirmations from all the parties. A reference was made to Page no. 49 to 53 of the assessee’s paper book. It was also stated that submissions were made before the Ld. CIT but 12 ITA Nos. 4979 & 5235/Del/2015 Sanjay Kumar & Sanjay Kumar Tyagi the same were totally ignored. A reference was made to Page No. 159 to 161 of the assessee’s paper book. It was accordingly submitted that when the A.O after proper verification and application of mind framed the assessment u/s 143(3) of the Act. The direction of the Ld. CIT to re-examine and verify the same again while invoking the provisions of Section 263 of the Act was not justified. The reliance was placed on the following case laws:-

In the present case, it is noticed that the Ld. CIT directed the A.O to verify the consumables consumed and labour wages amounting to Rs.1,60,72,293/- and Rs.1,84,57,209/- respectively, so as to arrive at a reasonable rate of profit say at least 8% of the contract receipts. The said expenses were debited in the books of accounts and were verified by the A.O. It is also noticed that the consumable consumed for the year under consideration were 32.88% of the gross receipt while in the earlier year, it was 33.12%, therefore, there was reduction in the consumables. However, the labour charges were at 56.86% in the present year while it was at 50.47%, in the preceding year which shows that there was some increase, the explanation was given by the assessee that it was due to less turnover which increased the percentage of the expenses. In the present case, the net profit of the assessee for the year under consideration was at 2.51% while in the earlier year, it was at 1.70% of the gross receipt, in other words, there was increase in the net profit, so it cannot be said that the A.O had not verified those expenses while framing the assessment u/s 143(3) of the Act particularly when the assessee furnished monthwise details of the labour charges and the consumables which is evident from Page No. 75 to 158 of the assessee’s compilation. As regards to the next objection of the Ld. CIT relating to the difference in the turnover shown in 26AS statement and the audit report, the assessee explained that the difference was on account of closing working in progress which was ignored by the Ld. CIT. It is relevant to point out that the explanation was given by the 15 ITA Nos. 4979 & 5235/Del/2015 Sanjay Kumar & Sanjay Kumar Tyagi assessee on the specific query raised by the A.O during the course of assessment proceeding which is evident from Page No. 212 to 214 of the assessee’s paper book. The assessee explained that there was no difference at all, because the amount was shown as closing work in progress which is evident from Page No. 203 & 204 of the assessee’s paper book. Therefore, the Ld. CIT was not justified in holding that there was a suppressed gross contract receipt. In the instant case, the Ld. CIT also directed the A.O to verify as to why the interests on the bank accounts were not credited by the assessee. However, he ignored this vital fact that the accounts maintained with the banks were current account on which no interest is paid by the bank as is done in the case of the saving bank accounts. The Ld. CIT also directed the A.O to verify the Sundry Creditors and unsecured loans. However, he ignored this fact that unsecured loans were outstanding from the earlier years and those were shown as opening balance. As regards to the Sundry Creditors, the A.O asked the assessee to furnish the confirmation and PAN Nos. and the assessee vide letter dated 23/11/2010 furnished the list of Sundry Creditors, their PAN Nos and copies of ledge accounts which are placed at Page No. 54 to 74 of the assessee’s paper book. Similar submissions were furnished to the Ld.CIT in response to the notice issued by him u/s 263 of the Act. Copy of which is placed at Page NO. 159 to 161 of the assessee’s paper book. Therefore, it cannot be said that the AO has not verified the Sundry Creditors.

By considering the totality of the facts as discussed hereinabove, we are of the view that the Ld. CIT was not justified in holding that the A.O had not properly verified the expenses, Sundry Creditors, unsecured loans and that the order passed by him was erroneous and prejudicial to the interest of the Revenue.

On a similar issue, the Hon’ble Jurisdiction High Court in the case of CIT Vs Rashid Exports Industries and Ors reported at 389 ITR 293 (supra) held as under:-

A similar view has also been taken by the Hon’ble Jurisdiction High Court in the case of CIT, Ghaziabad Vs. M/s Raj Shyama Construction Pvt. Ltd. in ITA No. 40/2011 order dated 4/1/2017 (copy of which was furnished by the Ld. Counsel for the assessee during the course of hearing) wherein it has been held as under:-

As regards to the decision relied by the Ld. DR in the case of Denial Merchants Pvt. Ltd. & Anr. Vs ITO & Anr. (supra), it is noticed that in the said case A.O did not make any proper enquiry while making the assessment and accepted the explanation of the assessee, in so far as receipt of share application money was concerned. However, in the present case, there was no such issue relating to share application money. Moreover, the A.O made the detailed enquiries before finalizing the assessment. Therefore, the said case is of no help to the department. Similarly, in the case of M/s Malabar Industrial Company Ltd. Vs CIT (supra), the A.O had accepted entry in statement of accounts filed by the assessee in the absence of any supporting material without making any enquiry. However, in the present case the facts were altogether different as the A.O made the proper enquiry and the assessee also furnished the requisite details with the supporting material. Therefore, the said case is also no help to the Department. We, therefore, considering the totality of the facts as discussed hereinabove are of the view that the Ld. CIT was not justified in holding the assessment order passed by the A.O as erroneous and prejudicial to the interest of the Revenue. Therefore, the same is set aside and the original assessment order dated 22/12/2010 passed by the A.O u/s 143(3) of the Act is restored.

The another Cross Appeals in and 5235/Del/2015 filed by the assessee and the Department are related to the order passed by the A.O in consequence to the directions given by the Ld. CIT vide order dated 18/3/2018 which we have already set aside and restored the original assessment order passed by the A.O. Therefore, these appeals now become infructuous.