CARTIER LEAFIN P.LTD,MUMBAI vs. ITO 1(1)(2), MUMBAI

This appeal has been filed by the assessee against the order passed u/s 263 by the Principal Commissioner of Income-tax-9, Mumbai [hereinafter called Ld. PCIT] dt 20-03-2015 for A.Y. 2011-12 on the following grounds: “YOUR APPELLANT CRAVES LEAVE TO RAISE FOLLOWING GROUNDS OF APPEAL WITHOUT PREJUDICE TO ONE ANOTHER & THEREFORE, YOUR APPELLANT PRAYS THAT THEY MAY BE DECIDED INDEPENDENTLY. 1] Order u/s. 263 of Income Tax Act, 1961 On the facts and in the circumstances and in law and in the interest of natural justice, the learned PrCIT erred in setting aside u/ s. 263 of the Income Tax Act the order passed by Learned Assessing Officer u/s. 143(3) of the Income Tax Act, 1961 dated 28/03/2014. 2] On the facts and in the circumstances and in law and in the interest of natural justice, the learned Pri. CIT further erred of stating reasons in the order that Learned Assessing Officer has passed order without making ,proper inquiry and verification of various financial and documentary evidence furnished during assessment assessment proceedings by the appellant. 3] PRAYERS (i) On the facts and circumstances of the case the appellant submits that the order passed by the Learned Pri. CIT is bad in law as the said order is passed against the principles of natural justice.”

During the course of hearing, it has been submitted by the Ld. Counsel that detailed enquiries were made by the Assessing Officer for which exhaustive replies were submitted to the Assessing Officer from time to time. It appears that Ld. PCIT has not examined the assessment record before issuing show cause notice u/s 263. It was submitted that the show cause notice was issued challenging the allowance of operational expenses of Rs.8.79 crores and interest debited in the Profit & Loss Account of Rs.3.96 crores by the Assessing Officer without examining these claims. After the assessee filed reply, Ld. PCIT dropped allegation regarding interest expenses but held the assessment order as erroneous on the first issue raised in the show cause notice. It was submitted that in the show cause notice various allegations have been made which are factually incorrect and prima facie contrary to the documentary evidence held on record. It was submitted that at many places it has been mentioned in the show cause notice that no enquiry was made by the Assessing Officer and no details were called for whereas the fact is that detailed enquiries were made, replies were submitted and details and documentary evidences were submitted which were duly examined by the Assessing Officer before passing the impugned assessment order. Our attention has been drawn on the exhaustive paper book filed by the assessee containing various documentary evidences submitted before the AO during the course of assessment proceedings which were indeed omitted to be examined by the Ld. PCIT while passing the order u/s 263. It was lastly submitted that in any case, before passing the order u/s 263 and holding the assessment order as erroneous, Ld. PCIT has nowhere given a finding that the impugned operational loss of Rsa.8.79 crores was not allowable. Therefore, it was requested that the order passed u/s 263 is bad in law and deserves to be quashed.

Per contra, the Ld. CIT-DR supported the order passed by the Ld. PCIT. However, he could not rebut the arguments made by the Ld. Counsel of the assessee that various evidences were already held on the record which appear to have skipped the attention of the Ld. PCIT while issuing show cause notice u/s 263. He thus concluded his arguments by supporting the order of Ld. PCIT.

We have gone through the order passed by the Ld. PCIT as well as details and documentary evidences shown to us by both parties. It is noted that show cause notice u/s 263 was issued on two grounds, one of the grounds was with regard to allowing the interest expenses of Rs.3.96 crores debited in the P&L Account on the ground that the same was allowed by the Assessing Officer without any verification of the loans / funds on which interest was paid was whether utilized entirely for the purposes of business of the assessee or not. The assessee submitted detailed reply which was examined by the Ld. PCIT and he accepted the arguments of the assessee and dropped this ground. But with respect to the other ground, i.e. challenging the allowability of operational loss of Rs.8.79 crores by the Assessing Officer without making proper verification, though the assessee made exhaustive reply before the Ld. PCIT demonstrating that overwhelming details and evidences were furnished before the Assessing Officer and Assessing Officer had duly examined the same and applied his mind before allowing the same while framing the assessment order, but the Ld. PCIT was not satisfied and he held the assessment order as erroneous and prejudicial to the interest of the revenue. Before examining the various reasoning’s given by the Ld. PCIT we find it appropriate to reproduce the show cause notice issued u/s 263 dt 24-2-2014 to the assessee by the Ld. PCIT as under :- "Kindly refer to the assessment order u/s 143(3) dated 28.3.2014 in your case passed by the ITO 1(1) (2), Mumbai. On perusal thereof, it is noticed that the AO has failed to make proper enquiries so as to assess the correct income with regard to the following points: 2) The computation of total income filed along with the return of income you have shown net loss from Business/Profession of Rs. 11,21,87,728/- taken from the profit and loss account for the relevant accounting year. Further, on perusal of the profit and loss account for the relevant assessment year to arrive at the said loss of Rs.11,21,87,728 you have shown operational expenses of Rs. 8,79,80,969/- (sch.6) and further perusal of the said schedule the same is found to be as under: 1) Depository charges Rs. 534 2) Other operational losses Rs. 8,79,80,162 Total Rs. 8,79,80,696 This figure of Rs. 8,79,80,162/- shown under other operating losses seems to be a trading loss incurred by the company out of its business of financial and capital market activities as reported by the Tax Auditors in Col. No.8 of form 3 CD, being its main business activity. However, on perusal of the assessment records it is noticed that neither any details nor any explanation to arrive at the said loss of Rs. 8,79,80,162/- is either filed by the assessee or called for by the Assessing Officer. No examination of the books of account, transaction accounts of the share trading activity carried out by the assessee viz-a-viz the D-mat accounts of the assessee is carried out by the Assessing Officer during the course of assessment proceedings. In other words, the entire operating loss as mentioned above is accepted by the Assessing Officer without any verification or proper application of mind. It is not known, how the assessee has debited the net other operating loss in its P & L account without specifying the details of opening stock, purchases, sales and closing stock and the Assessing Officer has accepted the same without seeking any further details and making enquires thereof. Therefore, to this extent the assessment order passed by the Assessing Officer is prima- fade appear to be erroneous and prejudicial to the interest of revenue within the meaning of the provisions of section 263 of the Act. ii) It is further noticed that you have claimed interest or financial expenses of Rs. 3,96,78,563/- as per sch.8 of the profit and loss account which is also accordingly allowed by the Assessing Officer without any verification so as to ascertain whether the loan / funds raised on which interest paid is utilized entirely for the purpose of business or not.

Similarly, at page 66 of the paper book, the assessee has enclosed quantitative stock position for the period 01-04-2010 to 31-03-2011 of all the shares showing scrip-wise opening balance, purchases, sale, Profit / loss and closing balance providing quantitative as well as value. The said table clearly depicts the amount of loss arrived at Rs.8.79 crores. The paper book also contains item-wise details of all the transactions carried out in day-to-day manner providing settlement number, purchase date, number of shares, rate, amount and resultant profit / loss arising on each transaction individually. The assessee vide its reply dated 3-12-2013 provided further explanation to the doubts arising in the mind of the Assessing Officer; relevant part of the said Sir, In the above matter, we have been instructed by our client to state and we enclosed herein following evidences, explanations and submissions as required by your goodself. In continuation of time to time submission, we state as under: We request your honour as the broker gave the broker / contract note just two days back after much representation and on the Assurance of same payment we have attached all he contract notes, tallied and numbered with broker’s ledger account but due to lack of time (i.e. only 2 days). We could not earmarked and highlight every transactions to be matched with AIR details. (Although all details are furnished and the record considering of 3500 plus pages in total 7 sets). We therefore request you to give us opportunity to marked and matched with AIR details in person before your goodself or otherwise give reasonable time to reconcile all AIR details at the earliest opportunity. We hope you will consider our above request by affording one more opportunity before finalizing the said Assessment.”

Further, vide its reply dated 24-1-2014, the assessee again enclosed details of purchases of shares including all opening split shares with sources of funds, borrowed funds, equity shares and DEMAT position of shares during the year. The assessee also submitted detailed break up of all the shares and co-relating the same with the respective source of funding. Further, vide its reply dated 24-1-2014 submitted to the Assessing Officer, the assessee also submitted quantitative stock position, details of sales along with broker’s ledger account with NSE and BSE and also DEMAT settlement account of the assessee held with the broker, viz. M/s Fortune Equity Brokers India Ltd and DEMAT settlement account with M/s Fortune Credit Capital Ltd. In addition to that, the assessee also placed on record before the Assessing Officer its accounts in the books of M/s Fortune Equity Brokers India Ltd (depository participant of Central Depository Services India Ltd) showing excessive details and break up of all the transactions. Further, assessee vide its letter dated 15-3-2014 to the Assessing Officer submitted scrip-wise stock of shares. Further, assessee submitted a letter dated 31-1-2014 to the Addl Commissioner of Income-tax, i.e. supervising authority of the Assessing Officer with a copy to the Assessing Officer wherein the assessee brought on record, in summarized manner, various details and documentary evidences that has been submitted to remove / surpass all the doubts of the Assessing Officer. We find it relevant to reproduce the same below, the relevant part of the letter:- “ The above assessment proceedings are undertaken by the ITO-1(1)(2). The facts of the case are as under: We have last submitted details before your goodself on 24-1-2014 and request your goodself to grant us time for two weeks in order prepare the details required by your goodself as per your Questionnaire dt.27-12-2013. For your information we have submitted details of purchase and sales on our personal appearance on 20-1- 2014 and 24-1-2014 with detail explaining the ownership of shares, source of funds, demat statement and along with complete supporting documents and on going through your Questionnaire we have to reconcile purchase and sales value to the extent of 78-92 crore (refer Point No.6) of your Questionnaire dt.27-12-2013, in your presence.