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Income Tax Appellate Tribunal, DELHI BENCH ‘G’ : NEW DELHI
Before: SHRI G.D. AGRAWAL & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
Appellant, M/s. Shanti Sarup & Sons Pvt. Ltd. (hereinafter referred to as ‘the assessee’), by filing the present appeal sought to set aside the impugned order dated 12.03.2013 passed by the Commissioner of Income-tax, Meerut qua the assessment year 2008-09 on the grounds inter alia that :-
“1. That the impugned order as passed by the Id. CIT u/s 263 of the Income Tax Act, 1961 is arbitrary, unjust & illegal on various factual and legal grounds including the followings:-
(a) The asstt. Order dated 06.12.2010 as passed by the AO. was neither erroneous nor prejudicial to the interest of revenue.
(b) The ld. CIT had no jurisdiction to invoke section 263 of the I.T. Act, 1961.
(c) The ld. AO. has passed the order dt. 06.12.2010 u/s 143(3) after proper application of mind.
(d) Various Observations and directions made by the ld. CIT in his section 263 order are either incorrect or are untenable in law and various case laws relied upon by the Id. CIT are not applicable to the appellant's case, being distinguishable on facts.
2. That, without prejudice to ground no.1 above the direction of Id. CIT to AO vide Para 8 to disallow proportionate interest paid by the assessee on advances are also illegal, unjust and untenable.
That without prejudice to above, grounds, the ld. CIT has grossly erred in law by making additions of Rs.21,25,298/- and Rs.28,30,711/- u/s 68 of the I.T. Act,1961 holding that the total amount of sundry creditors including expenses payable and total unsecured loans outstanding as on the last date of the previous year (including opening balance thereof brought over from earlier years) remained unexplained and unproved and the action of ld. CIT is perverse and has caused gross & great injustice to the appellant and that the proper opportunity of being heard on the issues has not been allowed and the order under appeal cannot be termed as a speaking order and is based on incomplete and inadequate appreciation of facts of the case and the various case laws relied upon by the ld. CIT are not applicable to the appellant's case being distinguishable on facts.
4. That the impugned order of the CIT u/s 263 deserves to be cancelled/ annulled.
5. The appellant craves leave to add, delete and / or modify any grounds of appeal.”
Briefly stated the facts of this case are : the return of income filed by the assessee declaring net loss of Rs.18,47,748/- qua the assessment year 2008-09 was subjected to scrutiny and consequently, notices u/s 143(2) and 142 (1) of the Income-tax Act, 1961 (hereinafter ‘the Act’) along with questionnaire were served upon the assessee and in response thereto, Shri Ravindra Agarwal, CA attended proceedings from time to time, filed written submissions, audited copy of balance sheet and trading and profit & loss account. Assessee is a private company into the trading of tyres, tubes, flaps, batteries and lubricating oil.
3. From the scrutiny of profit & loss account, it is noticed that assessee has debited a sum of Rs.2,87,949/- towards other expenses, found to be incurred by the assessee in cash and as such, their verification was not done and to cover up the possible leakage of revenue, the Assessing Officer disallowed the amount of Rs.35,000/- and added the same to the income of the assessee on estimate basis. The AO, in the light of the income/loss of the assessee company, recomputed the total income of the assessee at (-) Rs.18,12,748/-.
The ld. CIT reviewed the assessment made by the AO u/s 263 with the direction to pass a fresh order. Feeling aggrieved, assessee has come up before the Tribunal by filing the present appeal.
However, none has preferred to argue the case on behalf of the assessee but we are proceeding to decide the present appeal on the basis of documents brought on record by the parties. We have heard the ld. Departmental Representative of the Revenue, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUND NO.1
A bare perusal of the impugned order passed by the ld. CIT u/s 263 goes to prove that the issue as to the tax audit report and as to the quantitative details etc. has never been raised by the ld. CIT in the show-cause notice dated 12.12.2013 issued u/s 263 of the Act and as such, the impugned order is not sustainable on account of denial of opportunity of being heard.
Ld. CIT in order to review the assessment order passed by the AO issued a notice u/s 263 of the Act, which is reproduced for ready reference as under :-
“(a) Huge loss of Rs.19,15,618/- on sales of Rs.1,68,40,824/- and other income of Rs.1,64,947/- claimed and allowed without enquiring into the correctness of the same.
(b) Assessee has paid the interest on unsecured loans, but he has not charged the interest on advances. Therefore, the interest shall be disallowed on proportionate basis. (c) Sundry creditors of Rs.21,25,298/- have not been enquired into properly before accepting the same. (d) Similarly, unsecured loans of Rs.28,30,711/- have not been enquired into properly before accepting the same.”
Ld. CIT, pursuant to the show cause notice, referred to above, returned the findings as to tax audit report qua the quantitative details in para 7 of the impugned order to the following effect :-
“……The tax audit report and the observations of the tax auditor's there upon show that quantitative details etc. as stated to have been given and certified by the tax auditors cannot be taken as given the correct picture nor are those certifying the quantitative details of items etc. The assessee has not kept separate figures of the purchases and sales of tyres, tubes and flaps. The tax auditors in the Schedule forming part of P&L A/c while giving information in pursuance of provisions of part 2 of schedule VI of the Company Act 1956 have categorically stated as follows: "Separate figures of purchases and sales of tyres, tubes and flaps cannot be given as the same are generally purchased and sold in sets of one tyre, one tube and one flap set." In the tax auditor's report, the auditors have reported that "that the company has not followed AS2 valuation of inventories as issued by the Institute of Chartered Accountants of India as the valuation of closing stock is made at cost basis on latest purchase bill instead of FIFO or average cost. As the cost of closing stock based on FIFO or average cost has not been worked out we are unable to quantify the deviation." Tax auditors have also observed that the balances of some debtors and creditors are also subject to confirmations. Even during the course of assessment proceedings these confirmation have not been given by the assessee. There is nothing in the assessment record so as to suggest if any kind of verification was made before accepting such unreasonable and unsupported loss. The inventories of stock are not available in the assessment records and there is absolutely nothing on record to suggest if any such scrutiny was made. As has been stated above, it is not ascertainable as to how from the final accounts, the true profit could be deduced, ascertained or verified. It is reiterated at the cost of repetition that the losses on the turnover of trading in the items dealt with by the assessee or on other income as credited to the P&L A/c was as such not acceptable unless and until the same was duly verified from the books of account and records which also needed to be correct and comple and maintained in such a manner from which true profits could be deduced, ascertained or verified. The issue is, therefore, set aside with the specific directions to the AO to inquire into the actual profits earned by the assessee, reject the books of account in case the same are incorrect and incomplete so as to ascertain correct profits and apply the reasonable rate of profit on the turnover to be arrived at by the AO after considering the relevant accounts properly. While doing so, the assessee may be provided reasonable opportunity of being heard and furnishing, producing the evidence, if any, and explaining about the correctness of the books of account.”
Ld. CIT raised the first query, “in the show cause notice as to huge loss of Rs.19,15,618/- on sales of Rs.1,68,40,824/- and other income of Rs.1,64,947/- claimed and allowed without enquiring into the correctness of the same” and proceeded to decide the same on the basis of findings returned in the tax audit report.
In the judgments cited as Commissioner of Customs vs. 10.
Toyo Engineering India Ltd. – (2006) 7 SCC 592 and Commissioner of Income-tax vs. Ashish Rajpal – (2010) 320 ITR 674 (Del.). Hon’ble Supreme Court and High Court have thrashed the identical issue. Ratio of the judgments i.e. Toyo Engineering India Ltd. and Ashish Rajpal (supra) is that Commissioner while exercising a revisional power u/s 263 is not empowered to travel beyond the show cause notice and in case order passed by Commissioner u/s 263, refer to any other issue than referred in the show-cause notice, it would amount to violation of rule of natural justice.
A bare perusal of the show-cause notice issued u/s 263 raising four issues goes to prove that the issue as to the tax audit report and the observation of the tax auditors as to quantitative details has never been raised in the show cause notice. So, the findings returned by the ld. CIT entirely on the basis of observations made by tax auditors in the tax audit report are without giving any opportunity of being heard to the assessee, otherwise assessee would have brought on record the entire facts in the submissions dated 05.03.2013 filed before ld. CIT, Meerut during the proceedings u/s 263. So, following the law laid down by the Hon’ble Apex Court and the Hon’ble jurisdictional High Court, referred to above, the impugned order has failed to withstand judicial scrutiny and as such, is liable to be set aside on this score only.
Even otherwise, on merits, the assessee has duly filed quantitative and amount-wise details of the opening stock, purchases, sales and closing stock along with written submissions, audited copies of balance sheet, trading and profit & loss account, books of account, bills/vouchers before the AO, now lying at page 115B of the paper book, who has examined the same after applying his mind. Merely because of non-availability of separate figures of tyres, tubes and flaps, profitability is not affected.
From the documents on record, it is apparently clear that the assessee has been following the valuation of closing stock at cost in earlier years which have been duly accepted by the revenue and relied upon the judgment cited as CIT vs. Dewan Steels Ltd. – 311 ITR 161 (Del.). Ratio of the judgment (supra) is that when the assessee had been consistently following the cost method for valuation of closing stock and same had been accepted by the revenue on earlier occasion being in accordance with the well- accepted principles, the same cannot be faulted with in the subsequent assessment year. The ratio of the judgment (supra) is duly applicable to the facts and circumstances of the case. 14. Ld. CIT further returned the findings that it is not ascertainable as to how from the final accounts the true profit could be deduced, ascertained or verified. It is reiterated at the cost of repetition that the losses on the turnover of trading in the items dealt with by the assessee or on other income as credited to the profit & loss account was as such not acceptable unless and until the same was duly verified form the books of accounts and records which also needed to be correct and complete and maintained in such a manner from which true profits could be deduced, ascertain or verified.
However, from the bare perusal of the assessment order, it is apparently clear that the AO, after duly examining written submissions, audited copies of balance sheet, trading and profit & loss account, books of account, bills and vouchers, applied his mind and proceeded to make the disallowance of Rs.35,000/- out of expenses. Whereas, on the other hand, ld. CIT, without examining the books of accounts and bills/vouchers, during the proceedings u/s 263, returned the findings on the basis of assumptions. It is un-understandable that from the cash book, ledger, day book, stock register, audited balance sheet, profit & loss account and details of all schedules mentioned therein, it is not ascertainable as to how from the final account, the true profit could be deduced, ascertained or verified, when the position would have been otherwise had the ld. CIT herself examined the aforesaid documents to reach at the logical conclusion.
Not only this, ld. CIT, on the other hand, has directed the AO to enquire into the actual profits earned by the assessee and on the other hand, asked him to reject the books of accounts in case the same are incorrect or incomplete so as to ascertain the correct profits and applied the reasonable rate of profit on the turnover.
When the books of accounts have initially been examined by the AO on the test check basis and then have been duly produced before ld. CIT during proceedings u/s 263 who got an opportunity to scrutinize the same, it would not be fair to put the assessee in the initial stage of assessment again and again without any of his fault.
So, we are of the considered opinion that on merits, order u/s 263 is also not sustainable. So, ground no.1 is determined in favour of the assessee.
GROUND NO.2 17. Ld. CIT, while returning the findings on the issue of advances made by the assessee to the other parties to work out the interest rate, directed the AO to ascertain the amount of advances in any form given to the other parties and worked out the interest rate on which the interest had been paid by the assessee and disallowed proportionate interest on the same, on the ground that when the money was available with the assessee, the same could have been used for its own business instead of raising unsecured loan. However, vide written submission dated 05.03.2013 filed before the ld. CIT, during proceedings u/s 263 of the Act, now lying at page 124 of the paper book, when the assessee has categorically claimed to have not paid any interest on any of his unsecured loan during the assessment year under consideration, no disallowance needs to be made on this issue. So, we are of the considered view that ld. CIT has hurriedly decided this issue without controverting submissions made by the assessee during proceedings u/s 263 of the Act nor has conducted any independent enquiry. So ground no.2 is determined in favour of the assessee.
GROUND NO.3 18. Ld. CIT made an addition of Rs.21,25,298/- and Rs.28,30,711/- on account of sundry creditors and unexplained unsecured loans respectively being totally unexplained u/s 68 of the Act.
It is also clear from the documents on record that during assessment proceedings, the assessee has placed on record vide letter dated 20.05.2010 list of sundry creditors, copies of accounts of various sundry creditors in the books of assessee’s accounts along with confirmation copy of accounts of assessee and vide letter dated 24.11.2010, assessee explained/reconciled minor discrepancies in the books of four sundry creditors which have been accepted by the AO.
20. Moreover, when the assessee had already paid balance due to the various sundry creditors in the subsequent year which has been duly accepted by the revenue, an addition of Rs.21,25,298/- u/s 68 of the Act is not sustainable. Moreover, on the one hand, ld. CIT has directed the AO to reject the books of account in case the same are incorrect and incomplete and on the other hand, made an addition u/s 68 of the Act. It is settled principle of law that in case, books of accounts were rejected, no addition can be made u/s 68 of the Act. Even otherwise, when the assessee has duly discharged the onus to prove the sundry creditors, the impugned addition made by the ld. CIT without conducting any enquiry is not sustainable.
So far as question of making addition on account of unsecured loan amounting to Rs.28,30,711/- by the ld. CIT by impugned order is concerned, it is categoric case of the assessee that it has raised fresh loan of only Rs.1,10,500/- from Mohit and Rs.50,000/- from Rahul during the year under assessment and the balance unsecured loans were old loans raised in the earlier years.
It is proved from Schedule - 3 of the audited balance sheet explaining break-up of the unsecured loans lying at page 108 of the paper book.
Hon’ble Rajasthan High Court in the judgment cited as CIT 19. vs. Parmeshwar Bohra – 301 ITR 404 while deciding the identical issue held that carry forward amount of the previous years did not become an investment or cash credit generated from the relevant assessment year and as such, advantage of carry forward unsecured loan cannot be made u/s 68 of the Act. So, ground no.3 is also determined in favour of the assessee.
In view of what has been discussed above, the present appeal filed by the assessee is allowed. Order pronounced in open court on this 7th day of April, 2016.