M\S. LEXICO CERAMICS,RAJKOT vs. THE PR. CIT-1, RAJKOT, RAJKOT

The only effective issue raised by the assessee is that the learned Pr. CIT erred in holding the assessment order passed under section 143(3) of the Act as erroneous insofar prejudicial to the interest of Revenue.

The brief facts are that the assessee is a partnership firm and engaged in the business of ceramic tiles. The assessee in return filed for the year under consideration declared loss at Rs. 2,19,44,882/- which was selected M/s. Lexico Ceramics Vs. PCIT AY : 2015-16 2 for scrutiny under CASS. Finally, the AO assessed the income at Rs. 91,19,044/- vide order dated 28th December 2017.

Subsequently, the learned Pr. CIT from the assessment records found that during the year the assessee firm received an amount of Rs. 3,22,78,000/- from 11 partners as capital introduction. The AO made addition of Rs. 12,00,000/- as unexplained credit on account of capital contribution from 2 partners only whereas no finding was given regarding remaining amount of Rs. 3,10,78,000/- representing capital received from 9 partners.

Likewise, the ld. PCIT further found that the AO made an addition of 10% of sundry creditor for Rs. 4,29,42,277/- (total) on ad-hoc basis to plug possible revenue leakage. However, as per the ld. PCIT, there is no provision under the Act to allow or disallow sundry creditors on ad-hoc and certain percentage basis. As such, the AO was required to verify the entire sundry creditor and accordingly reached to the logical conclusion.

The ld. PCIT also found that the AO vide paragraph number 9.2 of his order worked the amount of suppressed production at Rs. 2,08,36,851/- but at the time of computing assessed income made an addition of Rs. 2,02,36,851/- only resulting under assessment of income by Rs. 6,00,000.00. 6.1 Thus, the learned PCIT in view of the above was of the opinion that the order of the AO suffers from error which is prejudicial to the interest of the Revenue and accordingly issued notice under section 263 of the Act. The assessee in response to such notice only submitted that original assessment file has been lost, hence it requires time to recollect the data. Thereafter several opportunities of being heard were provided but the assessee failed to avail the same. Hence the learned PCIT in view of the above held that the M/s. Lexico Ceramics Vs. PCIT AY : 2015-16 3 AO framed the assessment order without making proper inquiry or verification which made the assessment order being erroneous insofar prejudicial to the interest of the Revenue. In holding so, the learned PCIT also referred the explanation 2 to section 263(1) of the Act as well as several judicial pronouncements.

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 340 and submitted the AO during the assessment proceedings has carried out necessary verification on all the issues raised by the learned PCIT in his order. The learned AR for this purpose drew our attention on the notices issued under section 142(1) of the Act and show cause notice which are placed on pages 77 to 87 of the paper book. Likewise, the learned AR further contended that the assessee in response to such notices have made detailed reply with the relevant documents which are placed on pages 89 to 324 of the paper book. Accordingly, it was contended by the learned AR that the assessment cannot be held as erroneous insofar prejudicial to the interest of revenue on account of non—verification or non-application of mind by the AO during the assessment proceedings.

On the contrary, the learned DR before us submitted that the AO has made the addition on account of capital contribution from 2 partners only M/s. Lexico Ceramics Vs. PCIT AY : 2015-16 4 whereas the capital was contributed by 11 partners in total. Thus, the stand taken by the AO is contradictory based on the facts available on record. The learned DR further contended that the AO has not carried out the necessary verification which should have been done under explanation 2 to section 263 of the Act. The ld. DR vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the assessment order has been passed by Ld. AO without making inquiries or verification or proper application of mind with respect to capital introduced by the partner of the assessee firm, the outstanding balance of the sundry creditor and alleged suppressed production which is erroneous insofar prejudicial to the interest of the Revenue and thus requiring revision by Pr. CIT u/s 263 of the Act.

An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were number of judgments by various Hon’ble High Courts in this regard.

Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between lack of inquiry and inadequate inquiry. M/s. Lexico Ceramics Vs. PCIT AY : 2015-16 5 The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. The relevant observation of Hon’ble Delhi High Court reads as under:

The Hon’ble Bombay High Court in case of Gabriel India Ltd. [1993] 203 ITR 108 (Bom), discussed the law on this aspect in length in the following manner:

The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:-

The Hon’ble Supreme Court in recent case of Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates*[2019] 106 taxmann.com 31 (SC), held that where Pr. CIT passed a revised order after making addition to assessee's income under section 69A in respect of on- money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of such on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee's income. The Principal Commissioner passed a revised order under section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee's on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee's on-money transactions and Tribunal, thus, set aside the revised order passed by Commissioner. The Hon’ble High Court upheld Tribunal's order. The Hon’ble Supreme Court while dismissing the SLP filed by the Department held as under:- M/s. Lexico Ceramics Vs. PCIT AY : 2015-16 8 “We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee's on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed”

The Supreme Court in the another recent case of Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd[2020] 114 taxmann.com 545 (SC), dismissed the Revenue’s SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law, with the following observations:

From the analysis of the above judicial precedents, the principle which emerges is that the phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Assessing Officer adopts one of the course permissible in law and it has resulted in loss of revenue; or where two views are possible and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order causing prejudice to the interests of the Revenue unless the M/s. Lexico Ceramics Vs. PCIT AY : 2015-16 9 view taken by the Assessing Officer is unsustainable in law, or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind.

Now in the facts before us, the first allegation of the learned PCIT is that the AO has not carried out inquiry and given finding with regard to the capital contribution by 9 remaining partners. In this regard we note that the AO during the course of assessment proceedings, raises specific query on the issue capital contribution by the partners and required the assessee to furnish supporting evidence which can be verified from the notice issued under section 142(1) of the Act dated 14-06-2017 and 17-08-2017 and show cause notice dated 18-12-2017. The relevant question reads as under i. Notice dated 14-06-2017: “…. 14. On perusal of audited accounts, it is seen than the partners have introduced substantial capital during the relevant previous year. Please furnish Copy of Return; Bank Statement; Copy of final/personal accounts of the partner for FY 2013-14 who have introduced new capital firm.” ii. Notice dated 17-08-2017 “…. (3) On perusal of audited accounts, it is seen than the partners have introduced substantial capital during the relevant previous year. Please furnish Copy of Return; Bank Statement; Copy of final/personal accounts of the partner for FY 2013-14 who have introduced new capital firm.

The assessee in response to such notice vide letter dated 22-12-2017 made following reply: “As per above caption notice, capital introduction is considered of Rs.3,22,78,000/- during AY 2015-16 whereas the actual net addition in capital is Rs.2,62,58,000/- which is derived after considering withdrawal of partners during the year, which is explained in below table. While the supportive document of each partner are also annexed herewith.”

From the above, it is revealed it is not the case that the AO has not made any enquiry with regard to capital introduction by the 11 partners, as such the AO carried out adequate inquiry with regard to all the 11 partners who introduced capital in the assessee firm and thereafter made addition under section 68 of the Act on account of capital introduced by the 2 partner only. Thus, the allegation of Pr. CIT for initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification with regard to other partners is factually incorrect. At this juncture we also feel pertinent to refer the judgment of Hon’ble Delhi High Court in case of CIT vs. Vikas Polymers reported in 194 Taxman 57 where it was held that where the AO raised query but such query and reply thereto not reflected in assessment order, then such order cannot made subject to revision under section 263 of the Act. The relevant observation of the Hon’ble High court is extracted as under:

Thus, the order of the AO cannot be held erroneous on account of first allegation made by the learned PCIT i.e. the AO has not carried out inquiry and given finding regarding capital introduction by the remaining 9 partners.

Even on merit of the case, we note that the honourable courts in series of the cases have held that the capital contribution made by the partner of the firm cannot be subject to the addition in the hands of the partnership firm. In this regard, we find support and guidance from the judgment of Hon’ble Gujarat High court in the case of CIT v. Pankaj dyestuff Industries IT Reference No. 241 (Guj.) of 1993, dated 6-7-2005, the relevant extract of the judgement of the order is reproduced as under:

In view of the above we hold that the allegation framed by the learned PCIT cannot be made subject matter of revision under the provisions of section 263 of the Act. In simple words, the order of the M/s. Lexico Ceramics Vs. PCIT AY : 2015-16 12 learned PCIT cannot be held as erroneous for not making any addition in the hands of the partnership firm on account of capital contribution by the partner.

The next allegation of the learned PCIT for holding the assessment order as erroneous insofar prejudicial to interest of revenue is that the AO made addition of outstanding sundry creditor on ad-hoc i.e. certain percentage of outstanding balance without making proper inquiry and reaching to the logical conclusion. Likewise, the third allegation of learned PCIT is that the actual amount worked out for supressed production and amount added while computing assessed income are different. Regarding both the issues, we note that the assessee is in appeal before the learned CIT(A). This fact can be verified from the memo of appeal filed by the assessee before the learned. CIT(A) against the assessment order framed under section 143(3) of the Act. The relevant extract of the memo of appeal is reproduced as below:

As, Clause (c) of Explanation 1 to Section263 of the Act provides that when an appeal is pending before the Commissioner, the exercise of jurisdiction under Section263 of the Act by CIT is barred. Thus, in the present case, the CIT wrongly exercised jurisdiction under Section263 of the Act by remanding back the matter to assessing authority on 25.3.2013, while the appeal was decided by CIT (A) on 5.6.2013. Thus, the order passed by the ITAT does not suffer from any irregularity and needs no interference.

In the result, the appeal of the assessee is partly allowed.