GLORISHINE IMPEX P.LTD,MUMBAI vs. CIT -9, MUMBAI

This appeal filed by the assessee on 27.1.2014 is against the order of the CIT (A)-9, Mumbai dated 28.11.2013 for the assessment year 2009-2010.

In this appeal, assessee raised 9 grounds in toto (1.1 to 1.9), which are argumentative, and the core issue raised in the grounds relates to the correctness of the order passed u/s 263 of the Act and the same is passed based on the suspicion, conjecture and surmises. 3. Briefly stated relevant facts of the case are that the assessee filed the return of income declaring the total loss of Rs. 24,38,59,983/- on 29.9.2009. After scrutinizing the said return of income u/s 143(3) of the Act, the loss was recomputed downwards after making disallowance of Rs. 2,96,000/-. Subsequently, CIT examined the records and set aside the order of the AO. CIT directed the AO to make the de novo assessment after affording a reasonable opportunity of being heard to the assessee. CIT passed order u/s 263 of the Act on 28.11.2013 wherein he opined that the AO did not apply his mind to the claim of loss furnished in the return of income apart from the fact relating to the discrepancy in sales amounting to Rs. 1.08 Crs (rounded of). CIT alleges the under assessment of the total income of the assessee for the year under consideration. Aggrieved with the said revision order of the CIT, assessee is in appeal before the Tribunal.

Before us, Ld Counsel for the assessee read out the grounds no. 1.1 to 1.8 and explained that the CIT did not appreciate the fact of detailed inquiry conducted by the AO into the said claim of loss. Further, on the issue of alleged discrepancy regarding under assessment of total income to the extent of Rs. 1.08 Crs, Ld Counsel for the assessee mentioned that in the reassessment, made consequent to the revision order of the CIT, no addition was made in this regard as the said discrepancy was explained.

Explaining the existence of application of mind by the AO in the regular assessment on the issue of claim of loss, Ld Counsel for the assessee brought our attention to various letters and written submissions made to the AO (Addl. CIT-9(1), Mumbai) at the relevant point of time. To start with, Ld Counsel for the assessee brought our attention to page 7, letter dated 4.7.2011, and submitted that AO called for list of purchase and sales transactions which yielded business loss. AO also called for the details of assessee’s business ie trading in crud oil and edible oil on high seas. Pages 8 to 15 of the paper book deals with the relevant details furnished by the assessee in response to the above letter. Referring to page 16 of the PB, Ld Counsel for the assessee demonstrated that loss earned in the above transactions held in high seas (purchase and sale) is the subject matter and Q.No.1 and 2 of the letter dated 8.11.2011 is directly on the issue of loss. Pages 17 and 18 provided the list of transactions yielding the party wise loss. Page 19, letter dated 6.10.2011, relates to the high seas purchase and sales. Page 20, letter dated 18.11.2011, deals with purchase and sales, which are done involving unrelated parties. Another letter dated 18.11.2011 elaborates the fact that the transactions in question do not attract the provisions of section 40A(2)(b) of the Act. Page 24, letter dated 9.12.2011, justified the relevant transactions of high seas purchase and sales and justified the claim of loss by stating that “the profit / loss earned by the assessee company depends on the difference between the pre-determined price and the prevailing market price which is very volatile due to the market conditions including the demand and supply position in local as well as international market, fluctuation in commodity market (MCX) and exchange rates...” Further, it is the submission of the assessee before the AO vide his submission dated 9.12.2011 that the above transactions were entered into with a profit motive but the circumstances in this case of forward trade did not help the assessee and therefore, the company had to suffer losses and the same should be allowed as business loss. But, assessee also furnished the complete details of the parties involved with regard to the purchase and sale details of bank transactions, PANs, TDS deducted details etc in support. Considering the above details submissions of the assessee, during the regular assessment proceedings, as per the assessee’s Counsel, it cannot be stated by the CIT that the AO did not apply his mind to the issue of claim of losses. Further, referring to the CIT’s finding involving M/s. Adept Agencies Pvt Ltd., Ld Counsel for the assessee demonstrated that the additions made in the said company were deleted by the CIT (A) and the Department did not file any further appeal to the Tribunal against the said order of the CIT (A). In view of this position, Ld Counsel for the assessee argued by stating that the CIT invalidly assumed jurisdiction u/s 263 of the Act.

Per contra, Ld DR for the Revenue relied on the order of the CIT. Filing a written submission dated 17.6.2016, Ld DR submitted that the AO has not called for sufficient details which he should have been normally called and did not conduct deep inquiries into the transactions invoking the provisions of section 133(6) of the Act. Otherwise, the Ld DR relied on the amended provisions of Explanation 2 to section 263 of the Act, which was inserted by the Finance Act 2015.

We have heard both the parties on the validity of the order passed u/s 263 of the Act if it is done based on the suspicion, surmises and the conjectures as alleged by the assessee vide ground no.1.1 of the appeal. After perusing the orders of the Revenue Authorities ie revision order of the CIT; regular assessment order of the AO and the fresh assessment order of the AO made u/s 143(3) r.w.s 263 of the Act; order of the CIT (A) in the case of M/s. Adept Agencies Pvt Ltd etc. We have gone through the various lines and contents of inquiries conducted by the AO during the regular assessment proceedings which are narrated in the above preceding paras of this order. From the CIT (A)’s order, we find a couple of reasons for which CIT invoked the said section 263 of the Act ie (i) non application of mind by the AO to the claim of loss earned out of transactions on high seas purchase and sales and (ii) failure to make addition of Rs. 1.08 Crs (rounded of), the unreconciled figures in sales account. Regarding the first issue, relating to the claim of loss incidental to the high seas purchase and sales, we have examined the nature of questions raised by the AO in the regular assessment. This is required to know if the AO has applied his mind to that issue of loss. In this regard, the letters dated 4.7.2011; 11.8.2011; 6.10.2011; 18.11.2011 and 9.12.2011 are relevant. All these letters are directly on the issue of sales and purchase of high seas transactions. AO called for exhaustive list of purchase and sales and also called for the details of transaction wise loss in high seas (pages 17 and 18 of the paper book are relevant). For the sake of example, we extract Q.NO.1 and 2 from the assessee’s reply letter dated 11.8.2011 (page 16) and the same reads as under: “1. Statement showing transaction wise loss in the High Seas purchase and sale is enclosed here with.

The above inquiries of the AO and the replies to the same by the assessee indicate that the AO has gone into the issue of claim of loss in the return and allowed the claim in the assessment. There are number of such questions and answers raised during the assessment proceedings and the letters mentioned above evidence the same. It is the not the case of the Revenue that the said letters are not genuine. There is a written submission by the assessee vide his letter dated 9.12.2011 justifying the claim of the loss. Some of the lines of the said letter were already extracted in the preceding paragraphs of this order. Considering the above, we are of the opinion that the AO applied his mind to the issue relating to the claim of loss incidental to the transactions in high seas. Further, we are of the opinion, the AO’s failure to issue letters u/s 133(6) of the Act cannot provide jurisdiction to the CIT to invoke the provisions of section 263 of the Act when the AO is otherwise taken a possible opinion on the facts gathered through his inquiries. In these circumstances, we are of the opinion that the views of the CIT on this issue are not sustainable considering the scope of revision powers given to the CIT under the statute.

Coming to the second issue about the reconciliation on account of sales amounting to Rs. 1.08 Crs (rounded of), we have considered the fresh assessment order and find there is no addition made by the AO indicating no loss of revenue on this account. The written submissions furnished by the assessee also provide the reconciliation on this account which indicates the correctness of the sales account. Considering the same, we are of the opinion that the order of the CIT cannot be upheld on this second issue also.

Regarding the applicability of the Explanation-2 to section 263 of the Act, we rely on the order of the Tribunal in the case of Instant Holdings vs. Principal CIT, Mumbai vide dated 20.4.2016, wherein one of us (AM) is a party to the said order of the Tribunal. The relevant paras 11 and 12 of the said Tribunal’s order (supra) are extracted as under:- Decision on the relevance of Explanation-2 to section 263(1) of the Act “11. Referring to the amendment to clause (c) to section 263(1) of the Act, Ld AR mentioned the provisions of section 263 of the Act were amended by the Finance Act, 2015 w.e.f. 1.6.2015 whereby Explanation-2 to section 263(1) was inserted. The Principal CIT can validly assume jurisdiction under this section if AO pass an order either without making inquiries or verification which should have been done or allowing any relief without inquire into the claim or not in accordance with any order / direction / instruction issued u/s 119 etc. The case of the Ld DR before us is that the said amendment is clarificatory in nature and should be applied to the orders revised u/s 263 of the Act. In support, ld DR relied on the reference made in the decisions of the Tribunal in the case of Crompton Greaves Ltd (supra). Per contra, Ld Counsel for the assessee’s argument is that the said amendment is prospective in nature and it should be applied to the orders revised prior to the amendment. Regarding the decision of the Tribunal in the case of Crompton Greaves Ltd (supra), Ld Counsel for the assessee submitted that the said decision was passed without considering the order of the Tribunal in the case of M/s. A.V. Industries vs. ACIT in ITA No. 3469/M/2010 (AY 2005-06), dated 6.11.2015. He brought our attention to the contents of para 11 of the said Tribunal’s order (supra), wherein the Tribunal gave a categorical finding that the deemed provisions of Explanation-2 to section 263(1) are not applicable for the AY under consideration. It is obvious that this particular decision of the Coordinate Bench decision of the Tribunal was not considered in the decision of the Tribunal in the case of Crompton Greaves Ltd (supra). It is also the Ld Counsel’s argument that the decision of the Tribunal in the case of Crompton Greaves Ltd (supra) did not deal with the issue ie whether the said amendment is in retrospective or prospective in nature. Ld Counsel for the assessee also mentioned that a favourable decision should be considered when contrary / divergent decisions exist on the issue. 12. On considering the arguments of both the parties as well as the cited decisions on this issue, we find the same is relevant only if the AO passed an order without making inquiries or verification which should have been made. In our view, the adjudication of these arguments becomes irrelevant if the AO’s order is found passed after making due inquiries / verification, which should have been made. Otherwise, our decision on retrospectivity of amendment becomes an academic exercise only.” In the above decision, the Tribunal giving its finding that the applicability of 11. the said amendment to clause (c) to section 263(1) of the Act, whereby Explanation-