M/S MEERUT ROLLER FLOUR MILLS PVT. LTD.,MEERUT vs. CIT, MEERUT

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCHES, NEW DELHI (CIRCUIT BENCH AT MEERUT) BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 3350/Del./2013 (A.Y.:2008-09) ITA No. 3459/Del./2015 (A.Y.: 2008-09) Meerut Roller Flour Mills (P) ACIT, Ltd, Circle-1, Vs. 214-A, Ganj Bazar, Sadar, Meerut Meerut PAN:AAACM9399K (Appellant) (Respondent) Date of hearing 16/12/2015 Date of pronouncement 15/03/2016 Assessee by: Sh.O. P. Sapra, Adv, Sh. A.S. Jindhal, CA Sh. Rajiv Gupta, Adv Revenue by: Sh. Rajarshi Dwivedy, CIT DR Sh. Sheodan Singh Bhaddoria, Sr. DR O R D E R PER PRASHANT MAHARISHI, A. M. ITA No. 3350/Del./2013 (A. Y. :2008-09) Against order u/s 263

Page 2 of 13 3. That without prejudice to ground no 1&2 above, the Ld CIT has erred in holding that the books of accounts of the assesse are liable to be rejected under section 145(3). 4. That without prejudice to other grounds, the enhancement of assessment by making an addition of Rs 1,57,79,481/- towards trading results by rejecting accounts U/s 145(3) and determining the taxable income by applying a N.P rate on estimated turnover is erroneous and untenable in law and under the facts and circumstances of the case. Even the working of net income is incorrect. The addition of Rs 1,57,79,481/- being erroneous, unwarranted and arbitrary be kindly deleted. 5. That the notice of demand U/sl56 referred to in the revision order has not been received by the appellant till date. However tax demand as created and penal interest U/s 234-B and 234-C determined/levied as per departmental records in pursuance of revision order are erroneous and incorrect. In any case, since it is not a case of regular assessment, penal interest U/s 234-B and 234-C are not livable. 6. That the impugned revision order U/s 263 has been passed on incorrect facts and assumptions and by ignoring/overlooking assessee's substantive contentions, explanations and evidence, such as:- A. Contentions and Evidence ignored/overlooked by Ld CIT a) Assessee's written submissions dt25-02-2013 and enclosed documentary evidence filed by assesse to prove that al! the issues for which revision was proposed have been considered in depth by the AO in course of the assessment proceedings. b) Assessee's written submissions dt 07-03-2013 and enclosed documentary evidence and details, containing reply, explanations and evidence on each and every query raised by the Ld CIT in course of revision proceedings as per order sheet entries dt 28-02-2013. c) As regards trading results:- (i) That sales, purchases and expenses were vouched and verifiable. (ii) That trading results were supported by day to day quantitative stock records for raw material and finished products (which were also produced before the Ld CIT). (iii) That trading result of this year compare favourably and were better in relation to other assessment year, (iv) That trading result have been accepted in all other years, even by the Ld CIT herself in course of revision proceedings for the preceding year i.e A.Y :2007-08.

Page 3 of 13 (v) That there was no shortage/wastage during production process and the quantity of output obtained was 100% of the quantity of input material d) That the trading account was inbuilt in the P&L a/c itself which was drawn in consonance with provision of Companies Act, 1956 and the GP rate was calculated and reported by the auditor himself in the Tax Audit report. e) That the rules of Mandi Samiti had no relevance and did not apply to assesse as it was not member of any Mandi Samiti. B. Incorrect Facts/inferences a) That the assesse has not maintained quantitative stock records. b) That there is a shortage/wastage of 5.65% during the production process. c) Inferences/assumptions drawn on the basis of Mandi Samiti's rulesfwhicn have not even provided to the assesse despite it's request). d) That no separate trading account has been drawn and hence G.P rate is not verifiable.”

Page 4 of 13 3. In response to that show cause notice the assessee filed its reply dated 25.02.2013 submitting that the assessee has furnished requisite details before the AO and who after making inquiry has passed assessment order u/s 143(3) of the act and therefore notice u/s 263 of the act is not valid. To demonstrate his point that the assessee submitted what are the queries raised by the AO during the assessment proceedings and how they have been replied by the assessee and while framing assessment order all these points have been taken care of by AO and therefore the proceedings u/s 263 may be dropped. On merits also the assessee submitted that the reason for selection of the case of the assessee was lower gross profit shown by the assessee and for this the assessee has submitted that the first paragraph of the assessment order itself suggests that the case of the assessee was selected under CASS and second paragraph of the assessment order speaks about the authenticity of gross profit disclosed by the assessee. For reasonableness of the profit despite being show cause notice issued u/s 263 of the act for earlier year i.e. A.Y. 2007-08 , it was dropped and book results were accepted. The assessee further submitted complete details along with audited accounts including quantitative stock records and month- wise details of purchase and sales was submitted before AO and therefore it is not the case of absence of inquiry by the AO. Regarding unsecured loan and trade creditors it was submitted that vide letter dated 09.11.2010 confirmation of trade creditors were submitted. Similarly with respect to the loan credits confirmation of loans along with computation of income, their income tax return and bank account of those lenders were submitted. Regarding the details of expenses on which tax should have been deducted the assessee stated that complete details of quarterly TDS return filed by the assessee was submitted before the AO and therefore it is not the case of absence of enquiry conducted by the AO and hence the order is neither erroneous and nor being prejudicial to the interest of the revenue. The ld CIT rejected submission of the assessee . According to the ld CIT the assessee has not drawn manufacturing account

Page 5 of 13 properly hence she estimated the sale of Rs.60 crores against the sales shown by the assessee of Rs.59,54,20,216/- and estimated net profit of Rs.2% thereon. However while working out the addition ld CIT has taken sales of Rs. 60,40,00,000/- and estimated net profit @ 3% at Rs.1,81,20,000/- and therefore an addition of Rs.15779481/- was made to the total income of the assessee on this count. Regarding trade creditors and loan creditors of the assessee she set aside the issue for verification to the file of AO holding that unsecured loan and sundry creditors appear to be totally unexplained and liable to be added u/s 68 of the Act. Regarding disallowance of expenses she set aside the issue with a direction to AO to examine and consider and disallow those expanses where provision of section 40a(ia) are applicable on account of non deduction of TDS. Against this order the assessee is in appeal before us. 4. It was the contention of the ld AR that at the initial stage the AO has made complete enquiry and therefore it is not the case of lack of enquiry and on this ground the order passed u/s 263 of the Act is not sustainable. Further it was also argued that on the date of revision u/s 263 the assessment order made u/s 143(3) dated 14.12.2010 was in appeal before ld CIT(A) , Meerut and therefore the order cannot be revised u/s 263 of the Act. For this he took us to the order dated 28th June 2013 passed by ld CIT(A) , Meerut. On the merit he stated that In absence of any latent, patent and glaring defect in the books of accounts the provisions of section 145(3) of the act were wrongly invoked by CIT (A) as purchase, sales and expenses are completely verifiable and vouched therefore trading results should be accepted. He further stated that trading results of this year are better in comparison to earlier years where assessments u/s 143(3) of the Act are framed accepting the books results. For this he relied on a compilation filed by the assessee containing assessment orders from Assessment Year 2006-07 to Assessment Year 2012-13 passed u/s 143(3) of the Act. He further referred to order u/s 263 dated 09.02.2012 for A.Y. 2007-08 where ld CIT has herself initiated 263 proceedings on lower profitability but

Page 6 of 13 later issue was dropped. He further submitted that finding of ld CIT is vague and did not conform with the views of ld. CIT herself. He referred to the error in determination of turnover as well as the percentage adopted without any basis and comparable cases. On issue of verification of creditors he submitted that complete details of trade creditors and loan accounts were submitted before the AO. Therefore in view of this ld. CIT is not right in setting aside the order u/s 263 of the Act to the file of AO for fresh verification. Regarding the verification of tax deduction at source on various expenses he submitted that the assessee submitted before the AO complete details of quarterly tax deduction at source returns and thereafter he has passed the assessment order u/s 143(3) after examining the same. To show this that there is no error by the AO while framing the assessment order u/s 143(3) originally he took us to the order passed u/s 143(3) read with section 263 of the Act dated 28.02.2014 where no addition has been made by the AO with respect to the loan creditor and disallowance of expenses on account of applicability of provision of section 40a (ia) of the Act. Therefore the main argument was assumption of power u/s 263 of the act by ld CIT and setting aside it to the file of AO and AO after verification has accepted the version of the assessee and no disallowance / addition has been made on this count proves that order to that extent is not erroneous. Further regarding the small addition made by the AO of Rs.36756/- being difference in account of the trade creditors, it was contended that this addition has been made after receiving confirmation of the various parties u/s 133(6) of the Act. In view of this he submitted that impugned order u/s 263 of the Act is not sustainable. For this he relied upon a plethora of decision including the decision of Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd Vs. CIT 243 ITR 83. His main contention was that original assessment order was passed after enquiry and therefore there is no reason to hold that no enquiry has been made by the AO.

Page 7 of 13 5. Against this the ld DR relied upon the order of ld CIT and submitted that original order which is subject of revision u/s 263 has been passed by the AO without conducting proper enquiry which he should have conducted and therefore order u/s 263 has been correctly passed as it is erroneous and prejudicial to the interest of revenue. 6. We have carefully considered the rival contentions. We have also considered the Paper Book filed by the assessee and written synopsis placed before us which was relied by him. We also perused the gist of various case laws which have been relied upon by the assessee before us. The provision of section 263 of the Act provides that CIT on examination of record of any proceedings under this act if he considers that order passed by the AO is erroneous and it is prejudicial to the interest of the revenue then after giving the assessee a proper opportunity of hearing and making such enquiry as he deems necessary passes such order justified under the circumstances of the case. He has been empowered to enhance or modify the assessment or cancel the assessment and directing for fresh assessment. However one of the constrains made on this powers is to the orders of the AO which had been the subject matter of any appeal then the powers of Commissioner shall only be restricted to the matters which are not considered and decided in such appeal order. In a nutshell if an issue has been considered and decided by appellate authority then to that extent the power do not vest with CIT for revision. In light of the above provisions it is require to be verified whether the ld CIT has properly exercised her powers vested in terms of section 263 of the Act or not. On two issues, one on the verification of the trade creditors and second on the issue of allowability of expenditure u/s 40a (ia) of the Act It is apparent that subsequent orders passed by the AO dated 28.02.2014 has accepted that all loan creditors are correct and there is a minor difference in case of only three trade creditors amounting to Rs.36756 only which has arisen only on account of difference in accounts of those parties called for u/s 133(6) of the act by AO.. Therefore on these two

Page 8 of 13 counts subsequent orders speaks itself that there is no error in the original order made by the AO. Secondly during the original assessment proceedings on both these issues the AO has raised specific queries and they have been replied by the assessee therefore it may be a case of “inadequate enquiry” but it cannot be said to be a case of “lack of enquiry”. It may be possible that AO has not made an enquiry on these two aspects as expected by ld CIT. However even if that be the case, it does not give any power to ld. CIT to revise the assessment by invoking the provision of section 263 of the Act. On the issue of verification of gross profit and net profit disclosed by the assessee it is apparent that in the first two paragraph of assessment order itself it is mentioned by AO that he has made query on this issue. Further the gross profit chart and net profit chart produced by the assessee itself shows that the gross profit of the assessee in Assessment Year 2007-08 was 4.72%, whereas in Assessment Year 2008-09 it is 4.86%. Therefore the gross profit declared by the assessee is better than earlier year. It is also to be noted that earlier years assessment for Assessment Year 2007-08 was passed u/s 143(3) of the Act and later on the ld CIT attempted to revise by invoking provision of section 263 of the Act however later on the gross profit of the assessee was accepted. It is also noted that for Assessment Year 2009-10 the assessee has shows gross profit of 4.73% which is less than gross profit declared by the assessee for Assessment Year 2008-09 of 4.86%. Similarly gross profit for Assessment Year 2010-11 shown by the assessee is 4.16% which is less than gross profit disclosed by the assessee of 4.86% for Assessment Year 2008-09. It is interesting to note that for all Assessment Years 2007-08 to 2010-11 assessment orders have been passed u/s 143(3) of the Act after conducting enquiries on the adequacy of profitability of the assessee and it is interesting to note that assessment year 2008-09 as shown higher gross profit rate in all these four years even then Assessment Year 2008-09 is subjected to revision by ld CIT and addition of Rs.15779481 has been made. This action of the ld CIT cannot be accepted in view of the past

Page 9 of 13 and subsequent years’ accepted assessment history of the assessee. Further on the merits of the addition of Rs.15779481/- made by the ld CIT cannot be sustained for the following reasons:- a. No defects have been pointed out in the books of account of the assessee. Books of assessee are audited and supported by the quantitative details of raw material and finished goods. b. Further during the course of assessment proceedings as well before the ld CIT no instances or error in purchase, sales, quantitative details and closing stock was noticed. c. Net profit rate adopted by the ld CIT is at the 3% of the total turnover of the AO. In the order passed by the ld CIT she herself mentioned that 2 % net profit rate in the case of the assessee is proper. d. Ld. CIT has adopted 3% of turnover as net profit without giving any basis or without any reason whereas past records of assessee shows that it has earned net profit ratio between 0.40% to 0.62%. Therefore adoption of such a high net profit ratio without citing any comparable cases cannot be accepted. e. Ld. CIT further discarded the actual recorded turnover of the assessee and has estimated the turnover of the assessee at Rs. 60 crores however while making an addition she has further enhanced the turnover to 60.54 crs. There is no justification given by CIT in her order for rejecting turnover recorded by the assessee. 7. On the basis of above reasons it is apparent that ld. CIT has gross erred in rejecting the books of accounts by applying provision of section 145 ( 3) of the act and making addition to the declared book result of the assessee. Therefore it is apparent that the original order u/s 143(3) of the act did not contain any error in accepting the book results declared by the assessee as the profitability disclosed by the assessee was in tune with past and subsequent assessment history of the assessee duly accepted by revenue after conducting scrutiny

Page 10 of 13 assessments. The power under section 263 of the Income-tax Act, 1961, cannot be invoked to correct a mere error of an Assessing Officer, based upon an incorrect assumption of fact. There has to be something more to hold that the determination is both erroneous and prejudicial to the interests of the Revenue. That it was also clear from the order passed by the Commissioner under section 263 that the issue relating to appropriateness of profitability, veracity of trade and loan creditors, allowability of expenditure had been specifically gone into and examined by the Assessing Officer, who was fully satisfied with the correctness of claim of the assessee. Thus, it was not a case of “no” inquiry but specific and pointed enquiries were made by the Assessing Officer. Therefore merely the statement of ld. CIT that order is erroneous does not give the powers to CIT to set aside the matter to the file of AO for fresh verification. In fact The Commissioner should have examined and gone into the question of verification of trade creditors and loan creditors and allowability of expenses as she has gone to made an addition to the book results of the assessee. Revisionary power under section 263 of the Income-tax Act, 1961, is conferred by the Act on the Commissioner/Director of Income-tax when an order passed by the lower authority is erroneous and prejudicial to the interests of the Revenue. Orders which are passed without inquiry or investigation are treated as erroneous and prejudicial to the interests of the Revenue, but orders which are passed after inquiry/investigation on the question/issue are not per se or normally treated as erroneous and prejudicial to the interests of the Revenue because the revisionary authority feels and opines that further inquiry/investigation was required or deeper or further scrutiny should be undertaken. In cases where there is inadequate enquiry but not lack of enquiry, the Commissioner must record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the Commissioner and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in law. Here CIT

Page 11 of 13 has passed an order of remit to ask the Assessing Officer to decide whether the order was erroneous and on such examination in assessment order u/s 143(3) pursuant to section 263 AO himself has proved by accepting the version of assessee and not making any addition/ disallowance that original order was not erroneous. On consideration of above facts we are of the view that on all four counts the order passed by Ld. AO which is subjected to revision by ld. CIT was neither erroneous nor much less prejudicial to the interest of revenue. In the result ground no 1 of the appeal of the assessee is allowed. 8. As we have already held that order passed u/s 263 is invalid, we do not proceed to adjudicate on other grounds of appeal of the assessee, hence they are treated as dismissed. 9. In the result appeal of the assessee is partly allowed.

ITA No. 3459/Del./2015 (A. Y.: 2008-09) Against order u/s 143(3) pursuant to order u/s 263

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-Sd/- -Sd/- (I.C. SUDHIR) (PRASHANT MAHARISHI) Judicial Member Accountant Member Dated:15.03.2016 *Ajay Kumar Keot Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT (A) (5) Departmental Representative (6) Guard File By order Assistant. Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi

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