M/S. ENFIELD GEMS & JEWELLERY LTD.,KOLKATA vs CIT, KOLKATA-I, KOLKATA, KOLKATA

Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA

Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the assessee is against the order passed by Ld. Commissioner of Income Tax (CIT for short) under the provision of Sec. 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide M.No. CIT(C-I)/263/Enfield Gems & Jewellery/Tech/12-13/Kol dated 21.11.2014. Assessment was framed by DCIT CC-VII, Kolkata u/s143(3) dated 28.03.2014 for Assessment Year 2012-13.

The only inter-connected issue in this appeal of assessee is against the revision order passed u/s 263 of the Act for revising the assessment order framed by Assessing Officer u/s 143(3) of the Act. For this, assessee has raised following grounds of its appeal:- A.Y.2012-13 M/s Enfield Gems & Jewellery Ltd. v. CIT-Centrl-I Kol. Page 2

1. The order passed by the Commissioner of Income Tax u/s 263 of the Income-tax Act, 1961, is arbitrary, erroneous, void, invalid and bad in law.

2. On the facts and in the circumstances of the case, the learned CIT erred in holding that while disclosing the sum of Rs.18.10 crores being written back liability, as undisclosed income, the appellant had submitted the application of the undisclosed income without specifying the manner in which such undisclosed income has been derived.

3. On the facts and in the circumstances of the case, the learned CIT erred in holding that it was mandatory on the part of the AO to initiate penalty proceeding u/s. 271AAA of the Act.

4. On the facts and in the circumstances of the case, the learned CIT erred in holding that the appellant company had not co-operated with the Department during the course of the assessment proceedings.

5. On the facts and in the circumstances of the case, the learned CIT erred in holding that it cannot be a fact that the AO had examined the issue of disclosure made by the appellant as nowhere in the order, the AO had discussed the same, and furthermore, in holding that the AO had not applied his mind on the issue.

On the facts and in the circumstances of the case, the learned CIT erred in holding that by not initiating penalty proceedings u/s. 271AAA of the Act, the order passed by the AO had been erroneous as the same did not follow the provisions of the Act and also that by causing potential loss of revenue, it was also prejudicial to the interest of revenue.

On the facts and in the circumstances of the case, the learned CIT erred in passing the impugned order u/s. 263 of the Act directing the Assessing Officer to initiate penalty proceedings u/s. 271AAA of the Act neglecting to take into account that such initiation had already been barred by limitation under the law.”

Shri S.K.Tulsiyan, L’d Authorized Representative appeared on behalf of assessee and Shri S.Srivastava, L’d Departmental Representative appeared on behalf of Revenue.

The facts in brief are that assessee in the present case is a Private Limited Company and deriving its income from business and other sources. A A.Y.2012-13 M/s Enfield Gems & Jewellery Ltd. v. CIT-Centrl-I Kol. Page 3 search and seizure operation u/s. 132 of the Act was conducted on 20.10.2011 at various places of assessee’s residence, office, factories and other business premises. During the course of search and seizure operation, assessee has made a disclosure of undisclosed income of Rs.18.10 crores by writing off the advance u/s. 41(1) of the Act. The undisclosed income was duly offered to tax in the Income Tax Return. Accordingly the assessment for the year under consideration was completed by AO u/s 143(3) of the Act after including the undisclosed income of ₹ 18.10 crores but AO did not initiate penalty proceedings u/s 271AAA of the Act. Accordingly, L’d CIT u/s 263 of the Act initiated proceedings by stating that order passed by AO is erroneous and prejudicial to the interest of Revenue on the ground that penalty proceedings u/s. 271AAA had not been initiated in the assessment order. In compliance to the notice the assessee submitted that the manner of deriving such income was duly verified by the AO at the time of assessment. The conditions for giving the immunity from the penalty under section 271AAA were duly fulfilled. The AO had not initiated the penalty proceedings under section 271AAA because he was of the view that no such penalty was leviable in the hands of the assessee. The issue of initiating the penalty is the subject matter of AO’s satisfaction and therefore it cannot be disputed by the CIT under section 263 of the Act. Therefore the allegation of the CIT that the order is erroneous and prejudicial to the interest of Revenue, is not correct. However the ld. CIT disagreed with the submission of the assessee and observed that the assessee has submitted the application of undisclosed income but the manner in which it was derived was not submitted. So the conditions as enumerated in section 271AAA of the Act has not been fulfilled. The power of the AO under section 271AAA for the levy of the penalty is not discretionary. There was no noting made by the AO that penalty is not leviable. The ld. CIT has made reference and considered the following Judgments to arrive at the conclusion that the order is erroneous and prejudicial to the interest of Revenue, the case laws are reproduced below:- 1) CIT v. Surendra Praszad Agarwal 275 ITR 113 (All) A.Y.2012-13 M/s Enfield Gems & Jewellery Ltd. v. CIT-Centrl-I Kol. Page 4 2) ACIT vs. Saraya Distillery (1978) CTR 382 (All) 3) ACIT vs. Indian Pharmaceuticals (1980) 19 CTR 302 (MP) 4) CIT vs. Cochin Malabar Estates Ltd (1974) 97 ITR 466 (Ker) 5) Singho Mica mining Co. Ltd. vs. CIT (1978) 111 ITR 231 (Cal) 6) C.A Abrham vs. ITO (1961) 41 ITR 425 (SC) Hence, it was mandatory for the AO initiate the penalty proceedings in terms of the provisions of section 271AAA of the Act. So the order passed by the AO is erroneous and prejudicial to the interest of Revenue.

Aggrieved by this order of L’d CIT under section 263 of the Act the assessee preferred an appeal before the Tribunal.

Before us L’d AR filed a paper book which is running pages from 1 to 21 and submitted that the assessee has received advances from M/s Enfield Gems & Jewellery Pvt. Ltd. through banking channel for ₹ 18.10 crores. The ld. AR in this regard drew our attention on page 10 of the paper book where the ledger copy of the sundry creditors M/s Enfield Industries Ltd. was placed. Ld. AR further explained that the income which has been offered for tax was duly recorded in its books of account and the manner in which it was derived was duly explained before Authorities Below. The L’d AR further submitted that AO was convinced with the submission of assessee therefore AO did not initiate the penalty proceedings u/s. 271AAA of the Act.

On the other hand, L’d DR submitted that assessee in its statement facts filed with the appeal to Hon’ble ITAT has admitted that during the course of search operation the assessee-company made disclosure on a amount of ₹ 18.10 crores by way of advance from the customers written back u/s 41(1) of the Act and the said undisclosed income was duly reflected in its returned income filed by assessee for the relevant year. He further stated that as per the provision of the Act even the entry found in the books of account can amount to undisclosed income of the assessee. L’d DR further submitted that by A.Y.2012-13 M/s Enfield Gems & Jewellery Ltd. v. CIT-Centrl-I Kol. Page 5 writing off the liability u/s 41(1) of the Act, the assessee has specified the application of income which does not disclose the manner for deriving the undisclosed income as contemplated u/s. 271AAA of the Act. The DR vehemently relied on the order passed by L’d CIT.

We have heard the rival contentions and perused the materials available on record. From the facts of the case, we find that AO has not initiated the penalty proceedings u/s 271AAA of the Act in his assessment order which completed u/s. 143(3) of the Act. Therefore the L’d CIT passed order u/s 263 of the Act by holding that order passed by AO is erroneous and prejudicial to the interest of Revenue. At this juncture Let us understand the provision of Sec. 271AAA of the Act which reads as under:- 271AAA.(1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1std day of June, 2007 [but before the 1std day of July, 2012], the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year.

(2) Nothing contained in sub-section (1) shall apply if the assessee,- (i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) pays the tax, together with interest, if any, in respect of the undisclosed income.”

From a plain reading of the Sec. 271AAA, we find that the penalty will not be attracted under the Section in a case where the assessee fulfills the conditions for claiming immunity from penalty as laid down under sub-clause (2) u/s 271AAA of the Act. The first condition has been fulfilled by assessee for making the disclosure of undisclosed income u/s 132(4) of the Act and by specifying the manner of earning the undisclosed income. The second A.Y.2012-13 M/s Enfield Gems & Jewellery Ltd. v. CIT-Centrl-I Kol. Page 6 condition has also been fulfilled by substantiating the manner in which undisclosed income was derived i.e. the assessee has received advanced of ₹18.10 crores from the company which was written u/s 41() of the Act. In support of claim the assessee has produced the ledger copy of the party where we find that all the transactions were routed through banking channel. After considering the submissions of the both parties and facts of the facts we find that assessee has duly substantiate the manner in which the undisclosed income was derived. The third condition has been made out by assessee by paying the tax along with interest in respect of undisclosed income. In our considered view the AO for not initiating the penalty proceedings has taken a possible view i.e. the penalty is not leviable in the case in hand. Now coming to the case laws relied by the ld. CIT as stated above, we find that those case laws are not relevant in relation to the case in hand. It is because under section 263 of the Act the CIT has to fulfill two conditions - firstly the order is erroneous and secondly it prejudicial to the interest of Revenue. The CIT triggered the provisions of section 263 of the Act on the basis that the order is silent about the initiation of penalty and subsequently the assessee failed to explain the manner of income in which it derived as contemplated in section 271AAA of the Act. However in the instant case in our view the manner has been duly explained for deriving the undisclosed income. We also find the AO being quasi judicial authority has not initiated the penalty proceedings in the assessment order is his jurisdictional authority. The ld. CIT cannot just substitute the authority of the AO with his opinion. In this connection we are putting our reliance in the judgment of High Court of Bombay CIT vs. Gabrial India Ltd. (1993) 114 CTR 0081 : (1993) 203 ITR 0108 : (1993) 71 TAXMAN 0585 Revision—Scope—Order sought to be revised must be erroneous and also by virtue of its being erroneous prejudice must have been caused to interests of the Revenue—Section 263 does not visualise substitution of judgment of Commissioner for that of ITO, unless the decision is held to be erroneous— Order is erroneous when it is not in accordance with law and is prejudicial when it has caused loss of revenue—There must be material before the A.Y.2012-13 M/s Enfield Gems & Jewellery Ltd. v. CIT-Centrl-I Kol. Page 7 Commissioner to satisfy him, prima facie, that the two requisites are present— Power cannot be exercised at the whims and caprice of Commissioner Held :

The power of suo motu revision under sub-s. (1) of s. 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and, left to the Commissioner, he would have estimated the income at a higher figure than the one determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, the order is erroneous, is absent. Similarly if an order is erroneous but not prejudicial to the interest of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. There must be material available on record called for by the Commissioner to satisfy him, prima facie, that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well- settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on records to satisfy it in that regard. If the action of the authority is challenged before the Court, it would be open to the Courts to A.Y.2012-13 M/s Enfield Gems & Jewellery Ltd. v. CIT-Centrl-I Kol. Page 8 examine whether the relevant objective factors were available from the records called for and examined by such authority. Any other view in the matter will amount to giving unbridled and arbitrary power to revising authority to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. It is quasi-judicial power hedged with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly it is an administrative act, but on examination, "to consider", or in other words, to form an opinion that the particular order is erroneous in so far as it is prejudicial to the interest of the Revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of reexamination and reconsideration of an order of assessment, which has already been concluded and controversy about which has been set at rest, is again set in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from records called for by the Commissioner.—Parashuram Pottery Works Co. Ltd. vs. ITO 1977 CTR (SC) 32 : (1977) 106 ITR 1 (SC), Sirpur Paper Mills Ltd. vs. ITO 1977 CTR (AP) 138 : (1978) 114 ITR 404 (AP), Dawjee Dadabhoy & Co. vs. S.P. Jain & Anr. (1957) 31 ITR 872 (Cal) and Russell Properties Pvt. Ltd. vs. A. Chowdhury, Addl. CIT (1977) 109 ITR 229 (Cal) relied on Conclusion :

In order to exercise jurisdiction under s. 263, Commissioner must have material to prima facie come to a conclusion that order of ITO is erroneous as also prejudicial to interest of Revenue.

Revision—Validity—ITO allowing certain expenditure as revenue expenditure after making enquiries—Commissioner initiating proceedings under s. 263, setting aside assessment and directing ITO to re-examine the matter as to whether the expenditure was revenue or capital—Illegal —Before setting aside assessment Commissioner must have come to a conclusion that assessment was erroneous as also prejudicial to interest of Revenue Held :

The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. Such decision of the ITO cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter. That is not permissible. Further, inquiry and/or fresh determination can A.Y.2012-13 M/s Enfield Gems & Jewellery Ltd. v. CIT-Centrl-I Kol. Page 9 be directed by the Commissioner only after coming to a conclusion that the earlier finding of the ITO was erroneous and prejudicial to the interest of the Revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and it is for that reason that the Tribunal disapproved his action and set aside his order. There is no infirmity in the above conclusion of the Tribunal.

From the above discussion, we find that assessee is very much entitled for impounded from the penalty proceedings as specified u/s. 271AAA of the Act sub clause (2) of the Act. Therefore in our considered view, we find the impugned revision order unsustainable in law, and we, therefore, cancel the same. The issue gets the relief accordingly.

M/S. ENFIELD GEMS & JEWELLERY LTD.,KOLKATA vs. CIT, KOLKATA-I, KOLKATA, KOLKATA