BISWABRATA MAITY,HOOGHLY vs. CIT, -XX, KOLKATA, KOLKATA

This appeal has been filed by the assessee relating to Assessment Year (AY) 2009-10. The appeal is against the order passed by Commissioner of Income Tax - XX, Kolkata vide No. CIT-XX/Kol/Rev u/s 263/2013-14/5120-5123 dated 21.02.2014 u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). Assessment was framed by ITO Ward-1(3), Hooghly u/s 143(3) vide his order dated 20.05.2011.

The assessee has filed modified grounds of appeal

Only inter-connected sole issue raised by assessee are that Ld. CIT erred in considering the order of Assessing Officer as erroneous and prejudicial to the interest of Revenue.

Facts in brief are that assessee in the present case is an individual and engaged in wholesale trading of eggs under the name and style of “Ma Kali Enterprise”. In the assessment year under dispute, assessee has filed his return income on 25.06.2009 declaring total income of ₹2,55,500/-. Thereafter case was selected under scrutiny under CASS module and accordingly notice was issued u/s. 143(2) of the Act and assessment was framed by Assessing Officer after disallowing 1% of the purchase amount. However, Ld. CIT found the order of AO as erroneous and prejudicial to the interest of Revenue on account of following;- a) Assessee, during the course of assessment has submitted statement of total purchase with supplier-wise break-up and accordingly purchase figure was A.Y.2009-10 Biswabrta Maity v. CIT-XX, Kol Page 3 arrived at ₹5,94,11,150/-. However assessee in his trading account has shown purchase for Rs.4,20,83,015/-. b) So there was a difference of amount of ₹1,73,28,135- of the excess purchase which were not shown to Department. Accordingly, AO applied 1% to this difference amount of purchase value to arive at the undisclosed profit made out of the undisclosed purchases. However, Ld. CIT u/s 263 treated the entire amount of difference of purchases as unexplained investment within the meaning of Sec. 69 of the Act. Ld. CIT accordingly issued notice to assessee for seeking the explanation in this regard. In compliance to the notice, assessee submitted that the difference in the amount of purchase is arising due to unintentional error i.e it was omitted to mention in income tax return as the bank statement of March quarter of the relevant financial year came late. However, ld. CIT disregarded the plea of assessee that assessee’s books of account was duly audited on the basis of document produced before Chartered Accountant. The assessee submitted that purchase figure was recorded on the basis of ledger and purchase register and not on the basis of bank statement. The Ld. CIT u/s. 263 also asked the assessee to produce his books of account alongwith other relevant documentary evidence but assessee failed to produce the same. In view of above findings, Ld. CIT u/s. 263 of the Act held that the order passed by AO is erroneous and prejudicial to the interest of Revenue and accordingly he directed the AO to add back the difference in purchase amount of ₹1,73,28,135/- u/s 69C of the Act to the total income of assessee.

Before us Ld. AR filed paper book which is running from pages 1 to 106 and submitted that it is not in dispute that the Ld. CIT initiated the proceeding u/s.263(1) of the Income Tax Act, 1961 on the only issue of applying the provisions of s. 69C of the Act to the unaccounted purchases found in the course of assessment proceedings by the Assessing Officer wherein he had applied the net profit rate on such unaccounted purchases which according to the Ld. Commissioner had rendered the assessment erroneous in so far as it was prejudicial to the interest of revenue. A.Y.2009-10 Biswabrta Maity v. CIT-XX, Kol Page 4 According to the Commissioner the Assessing Officer should have applied the provisions of s. 69C of the Act on the unaccounted purchases. The impugned invocation of the provisions of s. 69C of the Act is conditioned with the precedent that where an expenditure is found to have been incurred by an assessee in the financial year and the assessee fails to explain the source of such expenditure or any part thereof, to the satisfaction of the Revenue only, then the question of the addition of the entire difference amount can at all be considered. In the instant case however, the provision of s, 69C of the Act is far from applicable. The payments made on account of purchases passed through the corridors of the banking channel. The deposits made in the bank account are on account of sale proceeds and the payments made are on account of discharge of Sundry Creditors. The nature and source of the payments are explained by the appellant with the names and addresses of the parties from whom purchases were made by him. The payments were made to those parties which are clearly depicted in the bank statements. Therefore the entire conspectus for application of s. 69C of the Act fails. It is settled that if from the documents it appears that there was expenditure then unless its Source is satisfactorily explained it could be deemed to be the income of the assessee for the financial year. The question of addition depends on the satisfactory explanation of the source. It cannot be negated simply because the expenditure was actually incurred. Only on the failure to explain the source of expenditure it is liable to be added u/s. 69C of the Act [CIT. -Vs- Bhagwati Developers (P.) LTD (2003) 261 ITR 658 (CAL). In absence of any compliance with the requirements of the statute, the mischief of such enactment will not be attracted. In fact, even though there is a provision u/s. 69C of the Act in the statute book for conceiving addition of unexplained expenditure incurred, however, there is no leave or licence granted for conceiving an addition on account of an expenditure wherein the nature and source of which were explicitly explained. Since the Assessing Officer found that the expenditure incurred by the appellant were duly identifiable, he opted to resort to the provisions of Section 69 of the Act by estimating the net profit from the unaccounted purchases. As the AO had specifically examined the matter in the proper perspective after due application of mind, the assumption of jurisdiction u/s. 263(1) of the Act by the Ld. CIT rested on a wrong premises in order to set aside the assessment A.Y.2009-10 Biswabrta Maity v. CIT-XX, Kol Page 5 order passed u/s. 143(3) of the Act as being erroneous in so far as it was deemed to be prejudicial to the interest of revenue resulted in misconstruction of the provision which is not in consonance with the legal position in this respect. The Ld. CIT based on his findings on the issue that the AO has erroneously accepted the application of extracting the net profit on the unaccounted purchases found in course of assessment proceedings. It is further not in dispute that the AO found that the difference of purchases at Rs. 4,20,83,015/- as reported by the appellant vis-a-vis the ₹6,30,06,706/- found by him on perusal of the bank statement. On such admitted facts he concluded that since both purchase and sale are both made out of books, he took the only possible view that net profit realised on such purchase can come into reckoning for determination of undisclosed income. There is no dispute that the appellant is engaged in the business of wholesale dealing of eggs and the admitted net profit in such business is 1% of the total turnover. The AO thus applied 1% on such undisclosed purchases and came to the conclusion that an amount of ₹1,73,281/- was the net profit on the undisclosed trading activity. There is no dispute that such payments on account of purchases were made in the actual course of the business of the appellant and is therefore inextricably linked to his business operations. The approach of the AO therefore does not leave an iota of doubt that purchases of eggs made to the extent of ₹1,73,28,135/- was not disclosed by the appellant, he rightfully concluded that the net profit element embedded in the corresponding sales which can be the only compelling justifiable conclusion from the analysis of the peculiar facts and circumstances in the instant case. It is not in dispute that the purchases aggregating to ₹1,73,28,135/- are not reported in the books and accordingly, not disclosed in the return filed by the appellant. However, such purchases cannot be subjected to addition in their entirety. It is an accepted position that any sale proceeds received from such activity is available with the appellant for subsequent payments on account of purchases and, therefore, for any sale proceeds received from such undisclosed activity corresponding profit is to be estimated thereon from such transactions. Therefore, the net profit from such operation is to be estimated for the purpose of finding out the income from such activity. The net profit of the appellant disclosed in the assessment year under dispute is 1% which has been accepted and applied by the AO. Under such circumstances, the A.Y.2009-10 Biswabrta Maity v. CIT-XX, Kol Page 6 AO took the correct approach by applying the same net profit rate on such purchases. Where it is found that even though the purchases are bogus, the entire purchases cannot be added because corresponding sales is also there only net profit rate can be applied [Seema Chatterjee -Vs- ITO. (I.T.A NO. 2174/KOL/2010 Dated 17-07-2014)]. Where the AO has already taxed the profit on such undisclosed purchases and considering the fact that the revenue has not brought on record that investment remained in purchases or the additional investment is required over and above the capital employed by the assessee for such unaccounted purchase the addition made by the AO and sustained by the Ld. CIT(A) is not justified and accordingly the same is directed to be deleted [The Variety Stores - Vs- ITO. (ITA NO. 2635/KOL/2005 dated 26-05-2006). Thus, the amount of Rs. 1.73.281/- was correctly determined by the AO and added to the total income of the assessee towards the profit element embedded in the alleged undisclosed purchase through corresponding sale. It is settled that the entire amount invested for the raw materials could not be added as income inasmuch as for the purpose of earning this income the assessee had made certain expenditure CIT vs. S.M. Omer (1993) 201 ITR 608(Cal), where the Assessing Officer made addition towards profit of assessee on account of credit sales made by him outside account books, it was held that total sales could not be regarded as profit of assessee and net profit rate had to be adopted on those sales as an immutable proposition while making addition [CIT Vs- Balchand Ajit Kumar (2003) 263 ITR 610 (MP)]. Thus, the AO took the most reasonable and possible view that income from undisclosed trading activity is to be confined to the net profit earned in such activity. It is precisely settled in this respect that an order of assessment passed by an ITO. Therefore, should not be interfered with only because another view is possible [CIT - Vs- Greenworld Corporation (2009) 314 ITR 81 (SC)]. It is settled that if the Assessing Officer adopts one of the possible courses available in the scheme of Income Tax which results in any loss of revenue or when two views are possible and the AO adopted one of the aforesaid re courses available in law with which the Ld. CIT does not agree. It would not be an order prejudicial to the interest of revenue for invoking jurisdiction u/s 263 of the Act. In such case, the provision of s. 263 of the Act would be inapplicable unless it is specifically found that the course followed by A.Y.2009-10 Biswabrta Maity v. CIT-XX, Kol Page 7 the AO is ultra vires the scope on the provision of law [Malabar Industrial Co. Ltd. - Vs- CIT (2000) 243 ITR 83 (SC)]. Thus, an order can be revised only and only if twin conditions of 'error in the order’ and 'prejudice caused to the revenue' co-exist. If any of these pre-conditions are absent the Ld. CIT cannot seek recourse to this provision. The provision of s. 263( 1) of the Act cannot be invoked to correct each and every type of mistake or error committed by the AO and it is only when an order is erroneous, that the provision will be attracted. If the order is passed with due application of mind, such order will not fall under the category of erroneous order. However, every loss of revenue cannot be treated as prejudicial to the interest of the revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the Ld. CIT does not agree, it cannot be treated as an erroneous order unless the view taken by the AO is unsustainable under the law. In the instant case, the AO has made enquiries during the course of assessment proceedings on the relevant issue and the appellant has given a detailed explanation on the issue and the AO accepted such stance of the appellant by construing the net profit on such undisclosed purchases as the undisclosed income which is tune with the settled position; such decision cannot be erroneous. In the above circumstances, the view taken by the AO was one of the possible views which is in tune with the settled position in law and accordingly. the assessment order passed by him could not be considered to be erroneous in so far as it is not prejudicial to the interests of revenue and the action of the Commissioner of assuming jurisdiction u/s. 263 of the Act and directing the AO to add the entire unaccounted purchase u/s 69C of the Act without considering the factual matrix of the instant case is wholly contrary to the statutory position in this respect.

On the other hand Ld. DR stated that while the less amount of purchase has been shown in assessee’s books of account, it means corresponding amount of sale has not been recorded in assessee’s books of account also. Therefore, both amount of sale and purchase were not declared y assessee in his return of income and amount shown in the tax audit report is also not reliable. He vehemently relied on the order of Ld. CIT. A.Y.2009-10 Biswabrta Maity v. CIT-XX, Kol Page 8 7. We have heard the rival submissions and perused the materials available on record. From the foregoing discussion, we find that assessee has filed revised computation of income along with revised final account and auditor report which are placed on page 56 of the paper book. Ld. AR further drew our attention on the bank statement which is placed on page 64 of the paper book and demonstrated that all the payments to the creditors were routed through banking channel and therefore it cannot be said that amount of purchase with correspondence sale were shown out of the assessee’s books of account. We have verified the bank statement and found that in most of the cases payments for the purchases were made through banking channel. It is also not in dispute that the relevant bank a/c has not been shown in the return income of assessee. From the facts of the case, we find that it is not in doubt that error has been committed by assessee in filing its return income but we have to see whether it is prejudicial to the interest of Revenue or not. In the instant case, assessee has admitted its mistake and filed its revised computation of income along with final account and audited report. However, we find that Ld. CIT directed the AO to treat the entire difference amount as unexplained income u/s. 69C of the Act and at this juncture, we would like to produce the provision of Sec. 69C of the Act, which is reads as under:- :[69C. Unexplained expenditure, etc. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year:]

We also find that on similar facts and in conformity with the ratio laid down in the case of Seema Chatterjee v. ITO in in AY 05-06 dated 17.07.2014, where the Tribunal has held as under:- “8. We have heard rival submissions and gone through facts and circumstances of the case. At the outset, Ld. counsel for the assessee steed that even though the purchases are bogus the entire purchases cannot be added because corresponding sales is also there. He accordingly agreed that a net profit rte can be applied. On query from the Bench, the Ld. Sr.DR also stated that a reasonable rate can be applied that will suffice the matter. We find that the plea of the Ld. counsel for the assessee is reasonable that the entire purchases cannot be added because corresponding sale is also there.