TWARA DIAM,BHAVNAGAR vs. PCIT AHMEDABAD-1, AHMEDABAD

The captioned appeal has been filed at the instance of the assessee against the order of the Learned Principal Commissioner of Income Tax-1, (in short “Ld. PCIT”), Ahmedabad order dated 15.03.2022 for A.Y. 2017-18.

The only issue raised by the assessee is that the learned PCIT under section 263 of the Act erred in revising the assessment framed under section 143(3) of the Act by holding the same as erroneous in so far prejudicial to the interest of Revenue.

The facts in brief are that the assessee, a partnership firm, is engaged in the business of diamonds. The assessee firm was subject to survey proceedings under section 133A of the Act dated 20th September2016. During the course of survey proceedings, the excess stock of cut and polished diamonds worth of Rs. 79,99,894/- only was found. Subsequently, the assessee in the return of income filed for the year under consideration declared total income of Rs. 34,50,800/-only which was accepted by the AO in the assessment framed under section 143(3) of the Act.

The learned PCIT on verification of the assessment records found that the assessee firm in the survey proceeding was found with undisclosed income of Rs. 79,99,894/-on account of excess stock of cut and polished diamonds. Therefore, such undisclosed income was required to be treated as income under section 69A of the Act, and accordingly tax on the same was required to be computed as per the provisions of section 115BBE of the Act. However, the AO accepted the income offered by the assessee as per normal provision of the Act which makes the assessment order erroneous and prejudicial to the interest of the revenue. Therefore, the learned PCIT issued notice under section 263 of the Act proposing to revise the assessment order.

The assessee, in response to the notice issued under section 263 of the Act, submitted that a reply was furnished before the AO dated 23-12-2019 explaining the difference in stock found during the survey. As such, the assessee firm before the AO has explained that the difference in cut and polished diamond on the date of survey was found due to sale made to one party namely RS Exports vide Invoice no. 095/2016-17 dated 09-09-2016 for 293.99 crt. of diamond which was returned for tempered of seal problems. Such sales returns of cut and polished diamonds of 293.99 crt. were received but not recorded in the books on the date of survey proceedings (20-09-2016). The difference was reconciled after survey proceedings by accounting the impugned sales return in the books. The profit declared in the return was inclusive of such sales return. In the said submission filed before the AO, the assessee firm has also raised contention regarding the non-application of the provisions of section 69A of the Act. The assessee firm based on the above contended that the AO, after verification of difference in stock and considering the possibility of applicability of the provision of section 69A of the Act, accepted the return income. Hence, there is no error in the assessment order, causing prejudice to the interest of the revenue.

However, the learned PCIT disagreed with the contention of the assessee by observing that the assessee firm at the time of survey accepted the excess stock found as undisclosed income. The assessee firm vide letter dated 14-09- 2018 stated that excess stock found was accounted as inward stock in the books and sold thereafter. As per the supporting document submitted along with letter dated 14-09-2018, stock of 383.10 crt diamond as inward stock as on 21-09-2016 and outward stock was recorded on the same day. Thereafter, the assessee vide letter dated 23-12-2019 changed the stand stating that the excess diamond found represents sales return. As such, the AO failed to verify the acquisition of the impugned stock originally, selling of the same to party namely RS Export along with the proof of delivery of goods to the party and delivery of goods on return. The AO also failed to verify the details of resale of such stock either to the same party or other party along with payment detail etc. Further, as per the invoice provided by the assessee firm for the sale of the diamond of 293.99 crt to the impugned party stands at Rs. 72,51,580/- whereas at the time of survey excess diamond of 383.10 crt worth of Rs. 79,99,894/- was found. The AO failed to verify this fact. The AO also failed to verify the genuineness of the retraction from the fact of having admitted the income at time of survey. Accordingly, the learned PCIT held that assessment order passed by the AO suffers from errorswhich is prejudicial to the interest of the revenue and set aside the same for fresh assessment with following direction:

Being aggrieved by the order of the learned PCIT, the assessee is in appeal before us.

The learned AR before us filed a paper book running from pages 1 to 235 and contended that the assessment has been framed by the AO after necessary verification and application of mind. The learned counsel of the assessee has also filed a detailed written note running from pages 1 to 12 demonstrating that the provisions of section 263 of the Act cannot be invoked in the given facts and circumstances.

On the other hand, the learned DR before us vehemently supported the order of the ld. PCIT.

We have heard the rival contentions of both the parties and perused the materials available on record. In the present case, the assessment framed by the AO under section 143(3) of the Act has been held as erroneous insofar prejudicial to the interest of revenue for the reasons detailed below:

On perusal of the records available before us, we find that there were inquiries raised by the AO during the assessment proceedings with respect to the difference in the stock as on the date of survey. Those inquiries were duly replied to by the assessee during the assessment proceedings. These facts can be verified from the inquiries raised by the AO and the replies made by the assessee which are available on record. The ld. PCIT also admitted the fact that inquiries were raised by the AO and the replies were also made by the assessee in response to those inquiries. Yet, the allegation of the ld. PCIT is this that the inquiries were raised and the replies were received by the AO but there was no application of mind with respect to certain facts as detailed below:

On perusal of the allegation of the ld. PCIT, we find that there was no proper application of mind. As such, just raising the queries and accepting the replies, does not mean that there was proper application of mind by the AO. The Hon’ble Gujarat High Court in the case of Designmate India Pvt. Ltd vs. CIT reported in 406 ITR 443 has observed as under: “11. Thus, the mere fact that the Assessing Officer carried out inquiries with respect to a certain claim of the assessee by itself would not mean that his order cannot be taken in revision by the Commissioner if it is found that the order passed was erroneous and prejudicial to the interest of revenue.”

Likewise, the Hon’ble Himachal Pradesh High Court in case of Virbhadra Singh HUF vs. PCIT reported in 86 taxmann.com 113/400 ITR 530 has held as under: “69. Perusal of order dated 28.3.2013, passed by the Assessing Officer, reveals that the original return filed by the Assessee was selected for scrutiny assessment through CASS and notice under Section 143(2) of the Act issued and served upon the Assessee on 29.8.2011. On 2.3.2012, in exercise of his right under Section 139(5), Assessee filed a revised return. While assessing the same, notices under Section 142(1) and 143(2) were issued to the Assessee, to which he responded by placing on record Memorandum of Understanding (MoU) dated 15.6.2008, appointing his Agent to manage the orchard. Accounts came to be settled in September, 2011. Whereafter, Assessee filed the revised return. To verify correctness of the transaction, Agent appeared and produced on record (a) his income tax return for the relevant year, (b) copies of bills, and (c) copies of vouchers with regard to sale proceeds. Additionally, information from the Officer, assessing the return of the Agent was called, which revealed that a sum of Rs. 2,65,92,500/- was "payable to the assessee" as agricultural income. Based on the said material, Assessing Officer carried out assessment, accepting the income declared in the revised return from agricultural sources to be Rs. 2,80,92,500/-, in place of Rs. 15,00,000/- as declared in the original return.

Further, this Tribunal in the case of Babulal S. Solanki vs. ITO reported in 104 taxmann.com 155 has taken similar view, the relevant portion is extracted as under: “The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word 'erroneous' in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word 'erroneous' in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.' Of course, if the explanation given by the assessee was of the nature as could possibly satisfy any reasonable person, even if other view was possible, the situation would have been different. The explanation given by the assessee in this case, however, was simply not a legally possible view of the matter. Even in the case of Malabar Industrial Co Ltd. v. CIT [2000] 109 Taxman 66/243 ITR 83, the Supreme Court has observed that 'when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law'. The view canvassed by the assessee, was unsustainable in law. Therefore, even if the matter was examined by the Assessing Officer and it was a conscious call of the Assessing Officer to accept the plea of the assessee, such a situation would not take the matter outside the ambit of section 263 as the view adopted by the Assessing Officer was clearly unsustainable in law. All that the Commissioner has directed is examination of the claim on merits and, for the above reason, there is no infirmity in that direction. In view of these discussions, as also bearing in mind entirety of the case, the impugned revision order is upheld and the matter cannot be interfered with. It is made clear that expression of view on merits of the case is only a prima facie impression, and it must not, therefore, influence the decision of the Assessing Officer on merits. Uninfluenced with these observations, the Assessing Officer will take a call on merits of the matter.”

Besides the above, we find that the AO has not made any cross verification from the party about the sales return to the assessee. It was also to be seen by the AO whether the sales made by the assessee to the party namely RS export is a regular party, or it has just been brought on papers to accommodate the excess stock found during the survey operation. Thus, prima-facie, it appears that there was not proper application of mind by the AO, qua the difference in the stock found during the survey operation which makes the order erroneous insofar prejudicial to the interest of the revenue. Hence, we hereby uphold the finding of the learned PCIT for making the fresh assessment.

In the result, the appeal filed by the assessee is dismissed.