JUHIS IDEA MERCANTILE P LTD,MUMBAI vs. PR CIT 6, MUMBAI

The present appeal has been preferred by the assessee against the order dated 05.03.2015 of the Commissioner of Income Tax [hereinafter referred to as the CIT] relevant to assessment year 2010-11.

The assessee has challenged the very validity of the revision order passed by the CIT under section 263 of the Act contending that the Ld. CIT has wrongly and illegally exercised his revision jurisdiction in the facts and circumstances of the case.

The brief facts relating to the issue under consideration are that the original assessment order was passed by the Assessing Officer (hereinafter referred to as the AO) on 26.03.13 in scrutiny assessment proceedings under section 143(3) of the Income Tax Act. The AO made certain additions into the income of the assessee not accepting the diminution in the value of stock of 2 M/s. Juhi’s Idea Mercantile Pvt. Ltd. shares of M/s. Sankalp Retail Value Stores P. Ltd. adopted by the assessee for the calculation of notional loss at the end of the year. He estimated the value of the shares at a higher rate and accordingly made corresponding additions to the income of the assessee.

The Ld. CIT, thereafter passed an order under section 263 of the Act setting aside the assessment order dated 26.03.13 observing that the AO had only made inquiries in respect of the diminution in the value of the shares held as stock in trade of M/s. Sankalp Retail Value Stores P. Ltd. but he had not inquired about the purchase price of the said shares. The Ld. CIT observed that M/s. Sankalp Retail Value Stores P. Ltd. at the time of the purchase transaction was a loss making company and that the assessee had purchased the shares at a much higher rate than its market value. The value of the shares had drastically fallen down within 2 months and the assessee valued the shares at a very low value and thus claimed the loss of Rs.25.20 crore so as to introduce the profit of Rs.26.97 crores shown by the assessee from the sale of shares of M/s. Pantaloon Retail (India) Ltd. In the view of the Ld. CIT, the entire exercise was done by the assessee to reduce the profit of shares and thus to avoid the due payment of taxes. Apart from that, the Ld. CIT also observed that the AO had not made relevant and meaningful inquiries regarding the purchase and sale of shares of M/s. Pantaloon Retail (India) Ltd. He observed that the number of shares purchased and sold of M/s. Pantaloon Retail (India) Ltd. by the assessee were not properly inquired by the AO. He observed that there was certain defects in the bills relating to the sale of shares of M/s. Pantaloon Retail (India) Ltd. and that the AO did not carry out proper verification regarding the purchase and sale claims of the assessee of the above stated shares of M/s. Pantaloon Retail (India) Ltd. The Ld. CIT further observed that likewise the assessee had claimed diminution in the value of the 5 M/s. Juhi’s Idea Mercantile Pvt. Ltd. stock of shares of other listed companies. The Ld. CIT also observed that the AO did not raise any queries relating to the claim of trading and fabrics, the business from which the assessee had shown a profit of Rs.97,930/-. He further observed that in the object clause of the memorandum and articles of association of the assessee company, the trading in shares was not mentioned as its business and therefore the assessee was not authorized to carrying on the business of trading in shares. He accordingly issued notice under section 263 of the Act to the assesse. The assessee raised certain preliminary objections such as that the relevant queries were duly raised by the AO and that all the transactions were duly explained before the AO and that the AO had duly applied his mind during the assessment proceedings under section 143(3) of the Act and in consequence to such enquiries the Ld. AO had made certain additions against which the assessee had already filed an appeal before the CIT(A). The assessee also agitated the invocation of jurisdiction under section 263 by the CIT on merits and pleaded that all the transactions were duly explained and were carried out at arm’s length price; That the decision of the assessee to purchase the shares of the M/s. Sankalp Retail Value Stores P. Ltd. was a well thought business decision as M/s. Sankalp Retail Value Stores P. Ltd. in the past had shown very fast and dynamic growth. That it established 42 stores spread across 23 cities in India within a short span of three years only. It established fixed price stores popularly known as Dollar Stores in the development markets and became the master franchisee of my Dollar Store Inc./Dollar Store International, USA for India (DSI). That the company had diversified supply base across the countries such as USA, UK, Portugal, South Africa, Thailand and China. That due to these circumstances, it had become a very attractive target for private equity players. Since M/s. Sankalp Retail Value Stores P. Ltd. was planning to go public and hence it was expected to deliver hand some returns. The investment committee of the assessee, considering the above circumstances and accepting good business opportunities, acquired shares of M/s. Sankalp Retail Value Stores P. Ltd. with 6 M/s. Juhi’s Idea Mercantile Pvt. Ltd. a plan to off load the same at much higher price in future. Assessee negotiated with M/s. Sankalp Retail Value Stores P. Ltd. and after negotiations, the purchase consideration of shares was fixed and 4980000 shares were purchased for a sum of Rs.30 crores which were shown as stock in trade. However, at the end of the year, due to certain problems there occurred serious setback to the said company and the value of its shares fallen down drastically. A valuation report was obtained and on the basis of the said valuation report, the valuation of the closing stock was done and the resultant loss was offered/claimed in the return of income. It was also explained that the details of purchase and sale of shares of M/s. Pantaloon Retail (India) Ltd. were duly provided and that all the sale transactions were carried out at arm’s length price. The purchases of the M/s. Pantaloon Retail (India) Ltd. were done in the earlier year and the same were sold during the year and resultant profits were offered for taxation. With respect to the profit earned in trading in fabric the assessee explained that the assessee had started the venture of trading in fabric for the first time during the financial year under consideration and that all the transactions were directly at arm’s length and through proper banking channel for which proper bills/invoices were maintained and produced at the time of assessment. The AO after duly verifying the said details had accepted the profits returned by the assessee from this activity. Regarding the valuation of shares of other illustrated companies, it was explained that the transactions were carried out at market rate and valuation as on the closing date was also at the market rate. That the assessee had no control over the market rates and therefore there was no question of doubting the said transactions. So far as the object clause was concerned, it was explained that it was not decisive of the business activity of the assessee so far as assessment of income was concerned. Under Income Tax Act, the assessee was supposed to return profit or loss on the business activity carried out. Whether the business activity was carried out as per the object clause or not was not relevant so far as the taxation of income was concerned. However, it was explained that in the return of income as well

The Ld. CIT, however, did not accept the contentions of the assessee and observed that the AO had failed to make relevant and meaningful enquiries and that the assessment order tantamount to being erroneous and prejudicial to the interest of Revenue. He accordingly exercising his revision powers under section 263 of the Act, set aside the assessment order dated 26.03.13 and directed the AO to re-do the assessment afresh.

At this stage, we deem it fit to mention an important fact of the case that pursuant to the notice issued under section 263 by the CIT, the assessee had requested, not only to the AO and the CIT (A) but to the Ld. CIT also, for inspection of records and retrieve the copies of the assessment records so as to enable it to properly reply and contest the said notice u/263 because, at the relevant time, the said record, due to certain unavoidable circumstances, was not available with the assessee. The AO and the CIT(A) did not allow the inspection as the Ld. CIT was seized of the matter. Ld. CIT, however, declined the said request of the assessee observing that the findings of the CIT were based upon the details filed by the assessee itself and that giving further inspection during the currency of revision proceedings might affect inquiries/investigations and revision proceedings as the assessee would get opportunity to tailor its books of accounts or documents to tally mirror copy with material likely to be brought on record. Another point that is relevant to mention here that pursuant to the receipt of remand report from the AO by the Ld. CIT, the Ld. CIT did not forward the said remand report to the CIT (A) but, in fact, informed him that he was contemplating revision proceedings and thus prevented the CIT(A) from passing an order in the pending appeal of the assessee before him.

Before proceeding further, it is also pertinent to mention here that the AO passed fresh assessment order dated 31.03 2016 as per directions of the CIT given under section 263 of the Act. He, however, did not doubt or make any addition in respect of the purchase value of the shares of M/s. Sankalp Retail Value Stores P. Ltd. He, however, made certain additions re- determining the value of the closing stock of the shares of M/s. Sankalp Retail Value Stores P. Ltd. at its purchase cost of Rs.30 crores and thus rejected the claim of the diminution in the value of the shares. He also took the cost price as the value of the closing stock of the shares of other listed companies and made corresponding additions. He also observed that the object of clause of the assessee did not mention that the assessee company was in the business of trading in fabrics, he, therefore, held that the assessee was not involved in the business activity of fabrics and disallowed the claim of expenses of Rs.36,84,323/- relevant to the said business activity of fabrics. He, accordingly, assessed the total income of the assessee at Rs.268844853/- as against the total income of Rs.18535479/- assessed during the original assessment proceedings under section 143(3) of the Act.

Now coming to the merits of the appeal before us. The Ld. A.R. of the assessee has vehemently contended that the Ld. CIT has wrongly and illegally invoked the revision jurisdiction under section 263 of the Act with a predetermined approach to stall the continuation of appellate proceedings before the Ld. CIT(A). He has further contended that even the principles of natural justice have been violated by not affording the assessee an opportunity to inspect the record. He has further submitted that even on merits, since, the AO during the assessment proceedings had made thorough enquiries and even had made certain additions regarding the valuation of the closing stock and all the details evidences and explanations were duly furnished before the AO, under these circumstances, the action of the CIT in revising the order under section 263 of the Act was not justified. That the order of the AO was neither erroneous nor prejudicial to the interest of Revenue. He has further submitted

On the other hand, the Ld. D.R. has contended that the Ld. CIT is a supervisory authority and he played his administrative role in directing the AO to send the remand report through his office in all the cases in which the CIT(A) had called a remand report from the AO. He has further contended that the AO had only investigated about the value of the closing stock and that no investigations were carried out by the AO regarding the value of the shares of the M/s. Sankalp Retail Value Stores P. Ltd. at the time of purchase and that within a short span of two months, the value of the shares had fallen down drastically which showed that the assessee had manipulated the purchase and sale transactions to neutralize the profits earned from the sale of shares from M/s. Pantaloon Retail (India) Ltd. and thus the Ld. CIT had rightly held that the AO did not carry out relevant and meaningful enquiries and therefore the order passed by the AO was erroneous and prejudicial to the interest of the Revenue.

We have considered the rival contentions. The first and foremost point for adjudication before us is as to whether, in the facts and circumstances of the case, the CIT can be said to be having jurisdiction to exercise his revision powers u/s 263 of the Act?

He while inviting our attention to the above provisions of section 263 of the Act has submitted that under sub section (1) of section 263, the Commissioner is empowered to call for and examine the record of any proceeding under the Act. He, while inviting our attention to clause (b) to explanation 1, has stated that it includes all records relating to any proceeding under this Act available at the time of examination by the Commissioner. He has further invited our attention to clause (c) to said explanation and has vehemently contended that where any order referred to in the sub clause (1) and passed by the AO had been subject matter of any appeal, the powers of the CIT are extended to such matters as had been not been considered and decided in such appeal. He has further invited our attention to newly inserted explanation 2 to contend that the order can be said to be erroneous in so far as its prejudicial to the interest of the Revenue if in the opinion of the Commissioner, the order is passed without making inquiries or verifications which should have been made or that the order has been passed by the AO allowing any relief without inquiring into the claim. He in this respect has contended that the said explanation 2 is explanatory and clarificatory in nature and that the same can be applied retrospectively to the case of the assessee.

We have considered the submissions of the Ld. D.R. in this respect. A careful perusal of the provisions of section 263 reveals that the CIT may call for and examine the record of any proceeding under the Act and if, he is of the view that the order passed by the AO therein is erroneous or prejudicial to the interest of the Revenue, he, after making enquiries in this respect and giving opportunity of hearing to the assessee, may pass such orders thereon including an order enhancing or modifying the assessment or cancelling the assessment or directing a fresh assessment. So what is revealed from the said provisions that there must be an order of the AO in the proceedings, the record of which has been called upon by the Ld. CIT, in relation to which the CIT can exercise his revision jurisdiction under section 263 of the Act.

Admittedly, in the case in hand, the Ld. CIT(A) had called for a remand report which was part of the appellate proceedings before the Ld. CIT(A) and was required to be sent by the AO to the Ld. CIT(A) during the course of adjudication of the appeal, proceedings of which were continuing before him. However, by a general order, the Ld. CIT directed the AO to send each and every remand report through his office. Now coming to the relevant provisions, in case of a remand report, neither the AO is authorized to pass any order nor he has otherwise any occasion to pass any order. Hence, the remand report in this case, in our view, was a part of the appellate proceedings which was called upon by the Ld. CIT(A) for appreciation and consideration of the facts before him. Therefore, since no order has been passed by the AO in relation to the remand proceedings/remand report, the record of which was called upon by the CIT, there was no occasion or jurisdiction to the CIT to exercise any revision jurisdiction as there was no order of the AO emanating from the remand report. It has been specifically written by the Ld. CIT in the opening lines of the impugned order passed under section 263 that at the time of forwarding of remand report prepared by the AO to the Ld. CIT(A), he observed that the AO had not considered all the issues at the time of passing of 13 M/s. Juhi’s Idea Mercantile Pvt. Ltd. the assessment order. He accordingly invoked the revision jurisdiction under section 263 of the Act. Further, from the letter dated 09.10.14 addressed by the Ld. CIT to the CCIT, in the very subject of the letter, the CIT has mentioned that the notices have been issued under section 263 of the Act in the case of “Idea Telecom Pvt. Ltd.” and in the case of “Juhi Idea Mercantile Pvt. Ltd.” (assessee) which emanated from the receipt of remand reports from the AO. The above wordings in the opening lines of the impugned order as well as from the letter dated 09.10.14 revealed that the revision jurisdiction under section 263 of the Act has been invoked/emanated from the remand report of the AO. As observed above, neither there was nor there cannot be any order passed by the AO in relation to the remand report called upon by the CIT(A) or any higher authority, hence, under such circumstances, there cannot be any invocation of jurisdiction under section 263of the Act so far as the remand report or the proceedings relating to the remand report are concerned. ‘The proceedings under the Act’, as mentioned in the provision of section 263, in our view, does not include the proceedings before any appellate authority such as CIT(A), ITAT, Hon’ble High Court or the Hon’ble Supreme Court. The proceedings before an appellate authority or any order passed therein by an appellate authority, in our view, cannot be subjected to the revision jurisdiction of the Ld. CIT. If such a proposition is allowed to be accepted, it will have grave consequences and in that event it would mean that the Ld. CIT would have powers not only to interfere but to prevent the higher authorities, including this Tribunal, the Hon’ble High Court or the Hon’ble Supreme Court from adjudicating matters before them and wherever any report or clarification will be sought by any higher authority relating to any factual aspect of a matter being considered by such an higher authority, the Ld. CIT would immediately exercise his jurisdiction under section 263 and would stall the proceedings before the appellate authorities and would revise the order of the AO preventing the appellate authorities from passing any order. The remand report or the remand proceedings carried out by the AO on the directions of the 14 M/s. Juhi’s Idea Mercantile Pvt. Ltd. CIT(A), who is having an independent judicial authority to decide the matters in appeal before him, are the part of the proceedings before such an appellate authority and the AO has no jurisdiction to pass any order in respect of such a remand report but just to carry out certain investigation of facts as required by the appellate authority and submit a report to the Ld. CIT(A) or the higher appellate authority whosoever has directed him to do so. It is under the jurisdiction of the appellate authority to consider such a remand report sent by the AO, accept it or reject it or to pass any order on the basis of such a remand report after considering objections, if any, filed by the assessee against such a remand report. The AO is not authorized to pass any independent order in relation to such a remand proceeding or remand report. In our view, no other authority such as the Ld. CIT has any jurisdiction to interfere, call for or pass any order in relation to such a remand report or remand proceedings except the appellate authority before whom a challenge has been made by way of writ petition or appeal or revision, as the case may be, against the order for calling of remand report etc. having competent jurisdiction over such an authority who has called the remand report. The Ld. CIT neither has got any appellate jurisdiction over the CIT(A) nor on any of the other higher authorities in judicial hierarchy. In view of this, the exercise of the revision jurisdiction in relation to the remand report/remand proceedings by the Ld. CIT is beyond his powers given under the Act.

The next important point to be seen in this case is whether, in this case, the exercise of revision jurisdiction by the Ld. CIT under section 263 of the Act was in regular course of his duties/work or the same was exercised with a predetermined mind that whatever his AO did or was doing, that was wrong, erroneous and prejudicial to the interest of Revenue. As observed above, in the case in hand the Ld. CIT was having a predetermined prejudicial mind even before the invocations of the provisions of section 263 of the Act exercising his revision jurisdiction. As discussed above, the Ld. CIT was of the view that in each and every appeal pending

The AO, however, further observed that the assessee had undervalued the closing stock. This remand report sent by the AO to the office of the CIT was not further forwarded by the Ld. CIT to the file of the Ld. CIT(A) and this fact has been specifically recorded by the Ld. CIT in the impugned order. He, in fact, informed the Ld. CIT(A) that he had exercised his jurisdiction under section 263 of the Act. He, therefore, prevented the Ld. CIT(A) from passing the appellate order. In his letter to the CCIT, the Ld. CIT has categorically observed that the Ld. CIT(A) was giving relief to the assessees on the basis of wishi-washy reports of the AO. He, therefore, directed the AO to send in all the cases the remand reports through his office, wherein, the Ld. CIT(A) has called for such remand reports from the AO. In our view, this very action of the Ld. CIT is a gross and blatant illegal interference in the appellate jurisdiction of the Ld. CIT(A). As observed above, the Ld. CIT(A) and the Ld. CIT are of the equal rank and can exercise their jurisdictions in their respective fields without interfering in the jurisdiction and work of each other. In this case, the Ld. CIT’s action, by observing that since the Ld. CIT(A) is giving relief to the assessees on the basis of the remand reports of the AO, of adopting

The another aspect, which cannot be ignored is that the Ld. CIT, in this case, has failed to comply with the principles of natural justice as he rejected the application of the assessee for inspection of the record on flimsy grounds. Such an application was moved by the assessee before the AO also. However, the AO refused to allow the inspection of the record saying that the Ld. CIT was seized of the matter. On the one hand, the Ld. CIT has categorically written that the record on the basis of which he had decided to invoke the revision jurisdiction under section 263 of the Act was nothing but the own record/ documents submitted by the assessee. Then, under such circumstances, what prevented the Ld. CIT from allowing the assessee to examine it’s own

The another peculiar fact in this case is that the AO already had made enquiries regarding the source of funds for the purchase of shares, the purchase value of the shares, the value of the closing stock etc. not only once but thrice i.e. firstly during the original assessment proceedings, secondly during the remand proceedings and thirdly in the course of fresh assessment proceedings done while giving effect to the order of the CIT passed under section 263 of the Act and the AO could not find any defect or any exaggerated purchase value of the shares of ‘M/s. Sankalp Retail Value Stores P. Ltd’. We further find from the perusal of the impugned order passed under section 263 of the Act that the Ld. CIT to find fault with the assessment order has gone into such aspects which had no relevancy so far as the taxation of the income of the assessee was concerned. He, in the impugned order, has observed that the object clause of the memorandum and articles of association of the assessee did not suggest that the assessee was engaged in trading in fabrics and trading in shares. However, a perusal of the original assessment order itself, reveals that the assessee had duly mentioned not only in the audit report, return of income but also in the proceedings before the AO that he was engaged in share trading and fabric business. The assessee had returned a very good profit from the sale of M/s. Pantaloon Retail (India) Ltd. which has been accepted by the AO. The assessee has also returned positive profit in respect of fabric trading business. Only because, the assessee had returned loss on account of diminution in the value of the stock of M/s. Sankalp Retail Value Stores P. Ltd. shares, that itself, cannot be a ground to hold that the assessee had not carried out any such transactions. If the view point of the Ld. CIT is to be accepted,

The Ld. CIT, not only in the opening lines of the impugned order but also while concluding, has observed that the AO had not made relevant and meaningful enquiries while passing the assessment order. This terminology of relevant and meaningful inquiries does not find mention under the provisions of the Act. It is apparent from the record that the AO had made enquiries in respect of the matter and it is not a case of lack of inquiry. Even, as observed above, in the fresh assessment order passed in pursuance to the directions issued by the Ld. CIT vide his impugned order passed under section 263 of the Act, the AO had again made inquiries and no new fact or detail has come into his knowledge. Under such circumstances, it cannot be said that the AO had not made inquiries or verifications which should not have been made or the AO had granted any relief without inquiring into the claim.

So far as the finding of the Ld. CIT that the AO had not inquired regarding the diminution in the value of the shares of the listed companies is concerned, the assessee has explained that the same was adopted as per the market value which can be verified from the stock exchange and under such circumstances, the invocation of jurisdiction u/s 263 merely on the basis of 20 M/s. Juhi’s Idea Mercantile Pvt. Ltd. doubt but without any evidence on the file that the same has been wrongly stated, is not justified and the same is not sufficient to hold that the order of the AO was erroneous or prejudicial to the interest of the Revenue.

In view of the above circumstances, in our view, the Ld. CIT has crossed his jurisdiction while invoking provisions of section 263 of the Act. Thus, the order passed by the Ld. CIT under section 263 of the Act is set aside and the consequential assessment order passed by the AO while giving effect to the order of the CIT passed under section 263 of the Act has no legs to stand and the same is also set aside.

In the result, the appeal of the assessee is hereby allowed. Order pronounced in the open court on 24.06.2016.