M/S. NARESH PHARMACEUTICAL AGENCIES,CUTTACK vs. PRINCIPAL CIT, CUTTACK

IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK

BEFORE S/SHRI N.S SAINI, ACCOUNTANT MEMBER AND KULDIP SINGH JUDICIAL MEMBER

ITA No.180/CTK/2016 Assessment Year : 2011-12

Vs. Pr. CIT, Cuttack, M/s. Naresh Pharmaceutical Agencies, At: Naya Sarak, PO: Chandini Chowk, Cuttack PAN/GIR No. AACFA 3162 B (Appellant) .. ( Respondent)

Assessee by : Shri P.K.Mishra, AR Revenue by : Shri Kunal Singh, CIT, DR

Date of Hearing : 24/04/ 2017 Date of Pronouncement : /04/ 2017

O R D E R Per N.S.Saini, AM

This is an appeal filed by the assessee against the order u/s.263

of the I.T.Act, 1961 of the Pr. Commissioner of Income Tax Cuttack,

dated 15.3.2016, for the assessment year 2011-12.

“1. That, on the facts and circumstances of the case the order passed by the Learned Pr. Commissioner of Income Tax is illegal, bad in Law and without jurisdiction.

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`2) That, having regard to the facts and circumstances of the case Ld. Pr. Commissioner has erred in revising Order U/s 263 without complying with the mandatory statutory conditions prescribed U/s 263 of the I.Tax Act, 1961 since neither the order of Learned Assessing Officer is erroneous either of the fact or of Law nor prejudicial to the interest of revenue to the income tax Administration as a whole.

3) That, Ld. Pr. Commissioner erred in Law as well as in fact in not accepting that when Net Profit is estimated by the Assessing Officer by rejecting the book result U/s 145(3) of the Act, no separate addition can be made.

4) That, on the facts and circumstances of the case the Learned Pr. Commissioner erred in Fact & in law to held that there was escaped verification by Learned Assessing Officer & aspect needs to be reexamined.

5) That, the Ld. Pr. Commissioner erred in law in not accepting that section 263 does not visualize a case of substitution of judgment merely because the commissioner does not feel satisfied with the conclusions reached by a subordinate authority who performs quasi judicial function, applies his mind judiciously.

6) That, Learned Pr. Commissioner should have applied his mind and logic & accept the Explanations & Evidences submitted before mechanically set aside the order to the Assessing Officer for fresh adjudication.”

income from distributorship in medicine products. It filed the return of

income on 30.9.2011 showing total income of Rs.1,94,167/-. The

Assessing Officer completed the assessment u/s.143(3) of the Act on

19.3.2014 determining the total income at Rs.3,87,000/-.

10.12.2015 to the assessee by observing as under:

“On verification of the Assessment record, it appears that assessee has shown sundry creditor in the balance sheet of Rs.26,63,783/-. In the regular assessment the AO had called for ledger copies U/s 133(6) of the IT Act 1961 from the different creditors. But the AO was only able to obtain ledger copies of B S Agencies and Vikash & Company amounting to Rs. 4, 62,723/- leaving balance unverifiable creditors of Rs.22,1,065/- appears to be treated as unverified liability and treated as income. This aspect needs to be re-examined.

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From the audited balance sheet, it appears that assessee has a net addition of capital to the tune of Rs.12,16,290/- in the year under consideration. The AO did not examine the source of this investment and did not obtain copy of the capital account. Further, it is found from the assessment record that assessee had made an investment of Rs.4,51,033/- in a Motor car with Bank Finance. The AO did not examine at the time of regular assessment whether the car was put to use in the business purposes and also did not obtain the copy of the RC book of such motor car. These aspect needs to be examined.

In short the failure on the part of the AO to properly examine the aforesaid issues in the assessment proceedings before passing the assessment order u/s.143(3) dated 19.3.2014 for the A.Y. 2011- 12 has rendered the assessment order erroneous in so far as it is prejudicial to the interest of revenue.”

"That, Your Honour has been pleased to serve upon the Petitioner Firm the above mentioned notices and thereby called upon the petitioner firm to show cause as to why the assessment order framed U/s. 143(3] of the I.T Act, 196! on dated 19/03/2014 for the Assessment Year 20)1-12 shall not be suitably modified in the proposed order to be passed U/s.263 of the l.T.Act 1 961 .

3 That, in this regard the Petitioner firm humbly begs to submit before Your Honour that the allegation as made by Your Honour is completely baseless & unjustified as there is no such non- compliance on the Part of the Petitioner firm on 28/12/2015. In fact the Petitioner firm had filed Petition praying for adjournment on 28/12/2015 since the Chartered Accountant of the Petitioner firm was out of station for Audit.

[ Copy of time Petition filed on 28/12/2015 is enclosed herewith for Your Honour's kind reference & record]

That, with regard to Your Honour's show cause notice vide no. CIT/CTC/263/2015-16/3933 dated 10th December 2015, the Petitioner firm humbly begs to submit before Your Honour as follows:-

(a) That, the Learned Income Tax Officer, Ward-2(3), Cuttack had been pleased to pass the Assessment order U/S.143(3) of the I.T. Act, 1961 for the Assessment year 201 1-12 on 19/03/2014 by Increasing the Net Taxable Income from Rs. 1,94,167/-as declared by the petitioner Firm in its return .of income to total Assessed Income of Rs.3,87,000.00 by rejecting the books of account & invoking the provisions as laid down in section 145(3) of the I Jax Act, 1 961 .

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(b) That, while passing Order U/s 143(3) of the I Tax Act,1961 the Learned Assessing Officer had been pleased to raise the Additional tax demand amounting to Rs. 81,870/- which the petitioner firm had paid vide challan serial No. 2 dated 10/09/2014 without preferring an Appeal before the Higher Forum as the Partners of the firm wanted to buy peace of mind without going further into litigation.

(c) That, it is worthwhile here to mention before Your Honour that the Petitioner Firm maintains Books of Account on day to day basis & the Accounts were audited by a Chartered Accountant on or before the due date of Tax Audit relevant for the Asst. Year 2011-12 and the auditor had not pointed out any single defects/short comings in the Books of Account maintained by the Assessed Firm but due to corruption of computer software Printout of Hard copies of cash book & ledger could not be produced before the Assessing Officer during the course of Assessment Proceedings.

(d) That, for the aforesaid reason, the Learned Assessing Officer had not been pleased to consider the Audit Report & other records as called for during the course of Assessment Proceedings & estimated the Net profit before interest to Partners @ 1.25% as against @ 1.05% declared by the Petitioner Firm vide Audited Trading & Profit & Loss Account for the Financial year 201 0-1 I relevant for the Asst. year 2011-12.

(e) That, the Assessing Officer performs quasi judicial function, applies his mind judiciously based on facts and circumstances of the case for the purpose of protecting the interest of revenue and accordingly the Learned Assessing Officer applied his mind judiciously in faking decision to reject the Books of Account & estimate the Net Profit of the Petitioner Firm while Passing order U/s 143(3) of the 1. Tax Act, 1961 with well acquaintance to the Order of Jurisdictional Hon'ble ITAT, cuttack Bench, Cuttack in this regard. f) That, the grounds on which Your Honour alleged the order U/s 143(3] passed by Learned Income Tax Officer, Ward-2(3j, Cuttack for the Assessment year 2011-12 to be erroneous and prejudicial to the interest of revenue are serially dealt as below.

I. Re-examination of balance of creditors alleged to have escaped verification.

• During the course of Assessment proceedings the Learned Assessing Officer had been pleased to serve upon the petitioner Firm notice U/s 142( 1) of the 1. Tax Act 1961 dated 16/08/2013 along with Annexure containing Questionnaire for the Purposes of Assessment of Income of the Petitioner Firm. At Point No. 5 of the said Questionnaire dated 1 6/08/2013, the Learned Assessing Officer had been pleased to ask the petitioner Firm to produce certain details with regards to sub Creditors.

• The Petitioner Firm vide Hazira filed dated 07/01/2014 submitted the List of S.creditors along with name & addresses having outstanding balances exceeding one Lakh as called for by the Learned Income Tax Officer.

.. During the course of the Assessment Proceedings the Learned Assessing Officer had been pleased to send the direct letters to the Creditors for their confirmation. Since the Petitioner Firm expressed inability to produce printed Hard copies of the Ledger & Cash Book due to corruption of software, the Learned Assessing Officer taken judicious view to Reject the Books of Account as per provision contained in section 145(3) of the I. Tax Act, 1961.

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The Learned Assessing Officer after application of mind judiciously as per Law had been pleased to pass an order U/S.143(3) of the I.T.Act, 1961 which can never in a stretch of Imagination be considered as erroneous and/or prejudicial to the interest of Revenue.

The Hon'ble ITAT, Jaipur relying on the decision of Hon'ble Rajasthan High Court in the case of CIT Vs. G.K.Contractor 19 DTR 305 (Raj) held that when the Net Profit is estimated by the Assessing Officer by rejecting the book result U/s 145(3) of the Act, no separate Addition can be made.

[ Brahamanand Agarwal, Thekhedar Vs DCIT (STAT Jaipur) ITA No. 338/JP/2013 Date of Decision 1 1 .08.2015] Other Cases Relied Upon :- [CIT Vs. Banwari La] Bansidhar 229 ITR 229(A]]) [CIT Vs. Aggarwal Engg. Company 302 ITR 246(P&H)] [Dy. CIT Vs. M/s Ram Pa] Singh, Contractor (ITAT Agra) ITA No. 65/Agr/2009 Date of Decision 24.06.2010]

• Further the Hon'ble Jurisdictional ITAT, Cuttack Bench, Cuttack had reiterate that once the Assessing Officer has resorted to estimate the net Profit by rejecting Books of Account other disallowances have been considered having taken care of by the estimation of Income.

[ACIT, Circle-2(1), Cuttack Vs. M/s S.N. Kanungo & Associates, ITA No. 100/CTK/2012 date of Pronouncement 25/05/2012]

• Your Honour has not been pleased to mention in the show cause notice served on the petitioner Firm that in what respect Your Honour has reason to believe that the Order passed by the Learned AO is erroneous and prejudicial to the Interest to Revenue. Merely stating in the Show cause notice that S. Creditors requires re-examination does not presume jurisdiction U/s 263. In the grab of exercising power U/s 263, the Commissioner cannot initiate proceedings with a view to starting fishing & roving enquiries in matters or orders which are already concluded.

• It was held that where essential twin conditions for invoking revisionary jurisdiction U/s263, namely, impugned assessment being erroneous as well as prejudicial to interest of revenue, were not satisfied, mere alleged insufficiency of enquiry by assessing authority could not be permitted for invoking revisionary jurisdiction. If was also held that where assessing authority rejected books of account of the assessee on defects being same as pointed out by Commissioner and passed best judgment assessment making additions to declared total income, there was no occasion of revising said order on ground that no proper verification was done by assessing authority.

[Commissioner of Income Tax Vs. Jain Construction Co. (2013) 34 taxmann.corn84(Rajasthan HC)

ii. ALLEGED NON- EXAMINATION OF NET ADDITION & NON SUBMISSION OF CAPITAL ACCOUNTS –

• it is true that the partners of the petitioner Firm had made Addition of Capital amounting to Rs. 8,00,000/-& not Rs. 12,16,290/- as alleged by Your Honour during the Financial year 201 0-1 I relevant for the Asst. year 201 1- 12.

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• During the course of Assessment Proceedings before the Learned Income Tax Officer, Ward -2(3], Cuttack, the Petitioner Firm Submitted the Audited statement of Accounts vide Hazira filed dated 29/1 0/2013 which were examined by the Assessing Officer.

• Further, the Partner's capital Account was annexed as Schedule-I of the said Audit Report which can be verifiable in Audited balance sheet produced before the Assessing Authorities.

• Further during the course of Assessment Proceedings the Learned Assessing Officer had been pleased to ask the petitioner jimi the Source of Addition to Partner's capital A/c in which the petitioner firm had submitted the Bank's CC Accounts where SmT Geeta Divi Goenka had transferred capital Fund of Rs. 5,00,000/- on 03/04/2010 through proper Banking- Channel. Further Sri Naresh Kumar Goenka had Transferred Cash of Rs. 3,00,000/- as introduction of Capital during the Financial year 2010-11 relevant for the Asst. year 2011- 12.

The above fact was disclosed before the Learned Assessing officer during the course of Assessment Proceedings and accordingly the Learned Assessing Officer had verified the Bank Statement produced by the Petitioner Firm on 18/12/2013. Further since both the Partners were also Assessed to the Same Assessing authority as that of the Petitioner Firm, the Learned Income tax Officer had verified the same from their own Records & did not feel to ask the Petitioner Firm to Produce 1. Tax Records of the Partners.

Further both the Partners having source of Income from House Property & Interest Income apart from being partner in the Firm. Acer being satisfied fully with the details as explained by the petitioner firm, the Learned Assessing officer had been pleased to pass an Assessment order U/s 143(3) of the l.Tax Act,1961.

[ The Partner's Capital Account marked as Schedue-1] in Audit Report along with Statement of Income & I Tax Receipt of Partners for the Asst. year 201 1- 12 are again enclosed along with this petition for your Honour's kind reference and record.]

Where the enquiry had been conducted and the A.O had reached a particular conclusion, though reference to such enquiries had not been made in the order of Assessment, it was apparent from the record, without anything to show how and why the enquiry conducted by the A.O was not in accordance with the Law, the invocation of jurisdiction by the Commissioner was unsustainable. CIT Vs Ganpat Ram Bishnoi 296 ITR 292 (Ra])]

The Orders of the A.O may be brief and Cryptic, but that by itself is not sufficient reason to brand the Assessment orders as erroneous and prejudicial to the Interest of Revenue. Writing an Order in detail may be a legal requirement, but the Order not fulfilling this requirement can not be said to be erroneous and prejudicial to the interest of the revenue. Zamirun Bibi Vs. CIT, ITA No. 661/ko 1/2011 dated 01/09/201 {Biswanath Parasi Vs. ACIT, ITA No. 1099/K/2009 Dated 27.05.2011}

NON EXAMINATION OF INVESTMENT IN MOTOR CAR AND ITS PUT TO USE IN BUSINESS ACTIVITIES.

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• During the course of Assessment proceedings the Learned Assessing Officer had been pleased to serve upon the petitioner Firm notice U/s 142(1) of the 1. Tax Act, 1961 dated 16/08/2013 along with Annexure containing Questionnaire for the Purposes of Assessment of Income of the Petitioner Firm. At Point No. 4 of the said Questionnaire dated 16/08/2013, the Learned Assessing Officer had been pleased to ask the petitioner firm to produce the details of Additions to fixed Assets along with copies of Bills/Invoices evidencing the date of Purchase & the cost.

• The Petitioner Firm vide Hazira filed dated 07/02/2014 submitted Memo that there is no such addition in Fixed Asset during the Financial year 2010-1 I relevant for the Asst. year 2011-12.

• In fact the Motor car was purchased for the business purposes in the name of the Petitioner's Firm during the Financial year 2009-10 relevant for the Asst. year 2010-11 & thus Your may verify from the Depreciation schedule annexed to the Audit Report produced during the course of Assessment proceedings that Motor Car value has been brought forward as WDV as on 01/04/2010 amounting to Rs. 6,83,920.03 and closing WDV as on 3 1/03/2011 was Rs. 5,81,332/- after allowing Depreciation of Rs. 1,02,588/-

• Further during the course of Assessment proceedings the Learned Assessing Officer had been pleased to ask the Petitioner Fiml to Produce Car Loan statement for verification of Interest claimed as expenses. The petitioner Firm submitted the Car Loan Bank statement for verification, the closing outstanding as on 3 1/03/201I being Rs.4,51 ,033/- reflected in Liabilities side of the Balance sheet.

• That, Your Honour's observation in show cause notice dated 10/12/2015 that the Petitioner Firm had made investment of Rs. 4,51,033/- in Motor car is completely arbitrary and purely based on unfounded suspicion.

• Further, once the Assessing Officer applied his mind judiciously in taking view of rejecting the Books of Account & estimated the net Profit of the Petitioner's Firm, the other disallowances have been considered having taken care of by the estimation of Income. [ Copy of Bills/invoices for addition of car during the Financial year 2009-10 relevant for the Asst. year 2010-11 is enclosed along with this petition for Your Honour's satisfaction & Record]

g. That, the Assessing officer while passing an order of assessment, performs quasi judicial function, applies his mind judiciously based on facts and circumstances of the case for the purpose of protecting the interest of revenue. In the present case the Learned Assessing officer after verifying Audited Statement of accounts as well as after calling for details as required for his satisfaction and applying his mind judiciously only passed an order U/S,143(3) of the I.T.Act, 1961 ,

h. That, since the order passed by the Leaned Assessing Officer is after application of mind, acting in accordance with Law, issue of show cause notice U/S.263 of the I.T.Act, 1 961, is unwarranted and may be uncalled for.

i. That, Section 263 of the 1. Tax Act, 1961 does not visualize, a case of substitution of the judgment of the commissioner for that of the subordinate authority who passed the order which is sought to be revised. The order passed by a subordinate authority in exercise of its quasi judicial power vested in him in accordance with Law, cannot termed erroneous merely because the

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commissioner does not feel satisfied with the conclusions reached. In this regard reference may be made to the decision of the Bombay High Court in CIT VRS Gabriel India Ltd] 1993] 203 ITR 108.

j. That, further the Apex Court has held that the pre-requisite to exercise of jurisdiction by the commissioner suo moto under it, is that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interest of revenue. The commissioner has to be satisfied with twin conditions, namely

(i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interest of Revenue. ;

If one of them is absent - if the order of the AO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue- recourse can not be had to section 263(1).

[Malabar Industrial Co. Ltd VRS CIT (2000) 243 ITR83.]

k. That, in the present case of the petitioner firm, neither the order of the Assessing officer is erroneous either of fact or of Law nor prejudicial to the interest of revenue to the income tax administration as a whole and as such revision proceedings as initiated by your Honour U/s 263 of the I.Tax Act, 196lis illegal& without jurisdiction.

5 That, under the above mentioned facts and circumstances and for the sake of justice the petitioner firm prays honour to examine the aforesaid matter and further be pleased to drop the proceeding initiated u/s 263 of the Act. "

Act, observing as under:

“I have gone through the facts of the case and the submission made by the A/R of the assessee. After going through assessment order and the assessment record, I am of the considered view that though the AO had called for certain documents and details during the course of the assessment proceeding, the same were not examined properly especially in respect of the issues relating to points raised vide this office show cause letter dated 10.12.2015

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the AO during the assessment proceeding, he was justified in invoking the provision of section 263 in respect of the order passed by the AO. Even Income tax Act has been amended and explanation 2 has been inserted u/s 263(1) wherein it is clarified that an order passed by the AO shall be deemed to be erroneous in so far as it is prejudicial to --e interest of revenue, if, in the opinion of the Principal Commissioner/ Commissioner, the order is passed without making enquiries or verification which should have been made.

lower authorities and materials available on record. We find that the

Hon’ble Kerala High Court in the case of M. Appukutty vs Sales Tax

Officer, Spl. Circle I, AIR 1966 Ker 55, 1966 17 STC 380 (Ker)

has held that the judicial process does not end by making known to a

person the proposal against him and giving him a chance to explain but

extends further to a judicial consideration of his representations and the

materials and a fair determination of the question involved. In the

instant case, we find that the assessee had filed explanation on the three

points on which the Pr. CIT proposed to revise the order u/s.263 of the

Act, namely; (i) unverified sundry creditors of Rs.2,21,065/-(ii)

investment in a Motor car with Bank Finance of Rs.4,51,033/- and (iii)

addition to the capital of Rs.12,16,290/-. The Pr. CIT while setting aside

the issue to the file of the Assessing Officer for re-adjudication of above

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three issues has not stated the reasons for not accepting the explanation

submitted by the assessee. Therefore, the order passed u/s.263 of the

Act by the Pr. CIT is not sustainable in law.

books of account of the assessee u/s.145(3) of the Act and estimated

the income by applying rate of 1.25% on the gross sales of

Rs.5,90,12,912.03. Thus, where the Assessing Officer has not

considered the books of account while making the assessment on that

ground, the Pr CIT cannot pass the revision order u/s.263 of the Act.

The Ld Pr CIT has not point out how the assessment order passed by

the Assessing Officer after rejection of books of account of the assessee

and estimating the income by applying the rate of 1.25% on the gross

sales of Rs.5,90,12,912.03 was erroneous and prejudicial to the

interests of the revenue. Still further, the first reason for which the ld

Pr. CIT considered the order of assessment passed by the Assessing

Officer as erroneous as well as prejudicial to the interest of the revenue

was that the sundry creditors could not be fully verified by the Assessing

Officer even after issuing notice u/s.133(6) of the Act. We find that in

the instant case as the details desired by the Assessing Officer for

verifying the books of account were not forthcoming, therefore, the

Assessing Officer rejected the book results and made the assessment

u/s.144 of the Act by estimating the net profit of the assessee. In these

circumstances, the action of the Assessing Officer was one of the

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possible view and, therefore, the said order of assessment cannot be

held as erroneous as well as prejudicial to the interest of the revenue

without bringing on record any positive material to show that the

assessee actually earned income during the year of an amount more

than what was estimated by the Assessing Officer.

Rs.12,16,290/-, the assessee has explained that the partners were

assessed with the same Assessing Officer and their PAN Nos. and other

details were with the Assessing Officer. Therefore, all the materials were

with the Assessing Officer and he had verified the same from the return

of income of the partners. Ld Pr. CIT could not point out any specific

error in the above submission of the assessee. The assessee claimed

before the Ld Pr. CIT that the partners who contributed further capital

in the assessee firm had independent and separate source of income

also from where the fresh additional capitals were contributed and the

partners were assessed to tax by the same Assessing Officer, who

assessed the assessee firm. In our considered view, without

controverting the explanation and submission of the assessee, it was not

open to the ld Pr. CIT to still consider the impugned assessment as

erroneous on this count.

order of assessment as erroneous was that the Assessing Officer has not

examined when the Car which was purchased during the year under

consideration by the assessee was put to use. The assessee in his reply

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to the Ld Pr. CIT submitted that the car was not purchased during the

year under consideration but was purchased in the immediately

preceding previous year and during the year under consideration. W.D.V

was brought forward. We find that the Ld Pr. CIT could not point out

any error in the explanation of the assessee. In view of this

uncontroverted submission of the assessee, we do not find there was

any error in the order of assessment much less an error which was

prejudicial to the interest of revenue in respect of this issue also. In

view of the above discussion, in our considered view, the impugned

order passed u/s.263 by the Ld PR. CIT is not sustainable. We,

therefore, cancel the same and allow this ground of appeal of the

assessee.

BY ORDER,

SR.PRIVATE SECRETARY ITAT, Cuttack