M/S. EMBOZA GRANITO PVT. LTD. ,MORBI vs. THE PR. CIT-3 , RAJKOT

आदेश/O R D E R PER BENCH:

The captioned appeal has been filed at the instance of the Assessee against the order of the Principal Learned Commissioner of Income tax-3, Rajkot, dated 29/08/2019 arising in the matter of assessment order passed under s. 263 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2016-17.

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4.1 The assessee company had issued 1,85,00,000 equity shares at Rs. 10 each to 42 different parties. The Ld. PCIT noted that these parties also made investment in the assessee company in form of loans. In some cases, the amount of loan and share capital were credited in the assessee book which was more than 100 time of the income declared by the investors/creditors. Likewise, the Ld. PCIT also found

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that the investors/creditors have also shown unsecured loan in their books which were utilized for making investment/advancing loan in the assessee company. However on verification of assessment record it was found that assessee has merely furnished copy of balance sheet and no other enquiry and verification was conducted by the AO as prescribed under section 68 of the Act.

5.1 Thus, the Ld. Principal Commissioner of Income initiated proceedings u/s 263 of the Act in respect of the captioned assessment year, in response to which the assessee filed written submissions. The ld. Pr. CIT-3 after considering the written submissions of the assessee held that the twin conditions, firstly that the order of the Assessing Officer sought to be revised is erroneous and secondly, order passed is prejudicial to the interests of the Revenue are satisfied in the instant set of facts and accordingly, the ld. Pr. CIT-3 set aside the assessment order passed u/s 143(3) for making proper enquiries/verification in terms of provisions of section 68 of the Act in respect of share capital & unsecured loan introduced/raised during the year and the claim of depreciation and additional depreciation. The Pr. CIT-3 made the following observations while passing the Order:-

In view of the above, since the twin conditions namely, (i) the order of the Assessing Officer sought to be revised is erroneous: and (ii) it is prejudicial to the interests of the Revenue are satisfied, the assessment order passed u/s 143(3) dtd. 21/12/2018 is set aside with the direction to make proper enquiries/verification in respect of share capital introduced during the year under consideration, unsecured loans (squared up or not) raised during the year and the claim of depreciation allowance and investment allowance. He should carry out inquiries about the various layers through which "the money has been rotated and landed as share capital to the assessee-company. The A.O. is also directed to summon the share applicants and examine them. The source of the money in their hands either through cash

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or through cheque needs to be examined. Subsequent to the inquiries & verification of all relevant aspects of the case, the A.O. shall pass a speaking order, after affording proper opportunity of being heard to the assessee.

7.1 The ld. AR with regard to claim of depreciation and investment allowances under section 32AC of the Act submitted that in response to notice under section 142(1) of the Act, the assessee vide annexure -13 furnished complete details of assets purchased. The AO after verification of the same and considering the voluminous of data and being first year of e-assessment allowed the claim of the assessee.

7.2 The ld. AR in this regard drawn our attention to page no. 30 to 51 of the paper book where notices under section 142(1) of the Act dated 18-07-2018 and 11-09-2018 and their replies dated 11-09-2018 and 06-12-2018 are placed. The ld. Authorized Representative submitted that since all details were filed with the ld. Assessing Officer and assessment order was passed after consideration of all the materials, it cannot be said that the enquiries made were insufficient so as to justify initiation of the proceedings under section 263 of the Act. The Ld. AR submitted

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that the assessment order was passed after due application of mind and since the Ld. AO has made enquiries during the course of assessment proceedings, it would not be open to the Ld Pr. CIT to initiate proceedings u/s 263 of the Act. The said proceedings are thus liable to be set aside.

9.1 An inquiry made by the Assessing Officer, considered inadequate by the Pr. 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 a number of judgments by various High Courts in this regard.

9.2 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. 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 on the ground of inadequate inquiry.

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“12. ….. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a 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 the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer 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 estimate 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 figure higher than the one determined by the Income-tax Officer. 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 Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. 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. 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.”

9.3 In Gabriel India Ltd. [1993] 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113) “The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time

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must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.

9.4 The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:- “20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provison shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis- à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.”

9.5 Before deciding the issue, it would be useful to refer to some Supreme Court decisions on this subject which would throw useful light on the scope of enquiry under Explanation (a) to section 263 of the Act.

9.6 Recently the Supreme Court of India in the case of Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd.[2021] 130 taxmann.com 294 (SC) dismissed SLP filed by the assessee against order passed by High Court holding that where assessee-company had received unsecured loans from two different companies and Assessing Officer had made inquires in detail and accepted genuineness of same, such view of Assessing Officer being a plausible view could not be considered erroneous or prejudicial to interest of revenue. The facts of this case were that respondent assessee has filed its return of income showing total income of Rs. 62,55,900/- which was assessed under section 143(3) of the Act, 1961 by an assessment order dated 14th March 2016. The respondent company received unsecured loans from M/s. Georgett Tradecom

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Pvt Ltd and M/s. Purba Agro Food Pvt Ltd amounting to Rs. 2.49 Crore and the Assessing Officer allowed these unsecured loans. The Principal Commissioner of Income-tax invoked section 263 of the Act, 1961 for revising the assessed income of the respondent assessee. It was noticed by the PCIT that the unsecured loans obtained by the respondent assessee are shown as investment in the name of the assessee in the share application as well as in the balance sheet of the respective companies. The PCIT passed an order under section 263 of the Act directing the Assessing Officer to pass fresh assessment order under section 143(3) of the Act, 1961 on the aspect of unsecured loans shown by the respondent assessee. The Hon’ble Supreme Court made the following observation while deciding in favour of the assessee:-

“Thus, the Tribunal has considered in detail the aspect of revisional power to be exercised by the PCIT in the facts of the case and has given a finding of facts that the Assessing Officer has made inquiries in detail and after applying mind, accepted the genuineness of loans received by the respondent assessee from the aforesaid two companies and such view of the Assessing Officer is a plausible view, and therefore, the same cannot be said to be erroneous or prejudicial to the interest of the Revenue.”

9.7 The Supreme Court in another 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 revisional order 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 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 revisional 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

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revisional 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:-

“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”

9.8 The Supreme Court in the 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: “Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere with the view of the Tribunal. The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ought to have so held in the order of revision. There was simply no necessity to remand the proceedings to the Assessing Officer when no further inquiries were called for or directed”

9.9 The Supreme Court in the case of Principal Commissioner of Income- tax- -8 Mumbai v. Sumatichand Tolamal Gouti [2019] 111 taxmann.com 287 (SC) held that where High Court upheld Tribunal's order holding that AO had made detailed enquiries while allowing assessee's claim for deduction of business expenditure and, thus, revisional order passed by Commissioner was not sustainable, SLP filed against High Court's order was liable to be dismissed. The facts of this case were that in course of assessment, Assessing Officer allowed assessee's claim for deduction of certain expenditure on purchase of CDs on Jain Religion by expending an amount of Rs. 10.4 crores, after due examination. The Commissioner passed revisional order holding that Assessing Officer had not carried out any enquiries as to nature of expenditure being capital or not. The Tribunal,

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however, allowed assessee's appeal holding that Assessing Officer had carried out detailed enquiries and taken a view which was a plausible view. Accordingly, Tribunal set aside revisional order passed by Commissioner. The Hon’ble High Court upheld the order passed by the Tribunal. The Hon’ble Supreme Court on consideration of above facts held that SLP filed against High Court's order was liable to be dismissed. The Supreme Court made the following observations, while passing the order:- “It is by now well settled that, the Commissioner can exercise revisional powers under Section 263 of the Act only when it is found that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of Revenue. In the present case, the Tribunal noted the observations of the Assessing Officer in the order of remand to the effect that Jain munis do not advocate spread of religion through use of computers, source of electronic media is usually shunned, very small section of the community uses computer technology for religious purposes as plenty of printed literature is available in the market. All these factors led to the market value of the CDs declining dramatically. It was on account of these reasons, that the assessee had incurred substantial loss arising out of reduction in the value of stock lying at the end of the year. The Tribunal, therefore noted that the Assessing Officer had carried out detailed enquiries and taken a plausible view.”

9.10 The coordinate bench of this Tribunal in the case of Torrent Pharmaceuticals Ltd. v Deputy Commissioner of Income-tax, Circle-4(1)(2), Ahmedabad [2018] 97 taxmann.com 671 (Ahmedabad - Trib.) during the course of arguments. In this case the Ahmedabad Tribunal held that where during scrutiny assessment, Assessing Officer disallowed a part of business advancement expenses after verifying bills and vouchers, notice for revision for further disallowance was unjustified. The facts of this case were that the Assessee, a pharmaceutical company, for assessment year 2014-15, claimed business advancement expenses incurred on gift articles distributed by it to various persons. During scrutiny, assessee provided detailed breakup of such expenditure to Assessing Officer in pursuance of specific query raised by him. Assessing Officer rejected substantial amount from claim of expenditure after verifying bills and vouchers. However, accounts of assessee were subjected to multiple audits by expert professionals. Further, in the context of a turnover and scale of operation of this magnitude, the expenditure incurred on business advancement of such amount do not indicate any visible abnormality. On consideration of these facts, the Tribunal

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held that since there was sufficient verification by Assessing Officer, revision under section 263 was unjustified. The Hon’ble ITAT made the following observations:

“The assessment is also carried out on year-to-year basis. In such a scenario, where the AO has rejected substantial amount from the claim of expenditure after reasonably verifying bills and vouchers, the allegation of the Pr.CIT appears misconceived. Ordinarily, it is only in a very gross case of inadequacy in inquiry and lack of application of mind that the order of AO is open to attack as erroneous. In the context of a turnover and scale of operation of this magnitude, the expenditure incurred on business advancement of such amount does not indicate any visible abnormality. This apart, the AO did take cognizance of the issue and made substantial disallowance. Thus, it cannot be outrightly alleged that the AO has omitted to apply its mind to the issue. The allegation thus appears unintelligible. The AO, in our view, has not committed any error in not chasing will of the wisp in the absence of any brazen circumstances. The action of the Pr.CIT on this issue of business advancement expenses appears to be guided by the considerations of Revenue alone and thus cannot be viewed with favour.”

9.11 From an 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 prejudicial to the interests of the revenue unless the 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.

9.12 Now in the facts before us the case of the assessee was selected through "CASS" selection for Complete Scrutiny, where the purpose of assessment was to scrutinize the substantial increase in share capital including creditor in the captioned year. During the course of assessment proceedings, the Ld. AO made detailed enquiries on this issue & on the issue of claim of depreciation on addition of fixed assets and after consideration of time-to-time written submissions filed by the assessee and documents / evidence placed on record, the Ld. AO accepted the

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submission and explanation of the assessee. The relevant query raised by the AO and reply made by the assessee reads as under:

 Vide notice dated 18-07-2018: List of share holders of the company along with details of their share holding. Copy of personal accounts of all the Directors and acknowledgement of returns of income filed by them. Further the source of new capital introduced by Directors, if any? Furnish the details of Authorized Capital, Subscribed and Paid Up Capital. Furnish details of new share capital introduced during the year. Please explain the basis of charging of share premium vis-à-vis the N.A.V. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Please furnish details of the assets purchased during the year on which depreciation has been claimed, along with copies of bills and model and date of payment thereof.

 Vide notice dated 11-09-2018:

Please furnish complete and exhaustive details of unsecured loans. You are Also requested to furnish: Details of unsecured loans remained outstanding at the end of the previous year under consideration. Details of unsecured loan square off during the previous year under consideration. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Copy of account of assets along with the proof regarding purchasing and disposal of any assets during the financial year under consideration. Reconciliation of the depreciation claimed and actually receivable as per the provision of sec.32(1) and income-tax rules.

 Assessee reply dated 11-09-2018:

2 List of share holders of the Company along with Shareholder’s List along with details of their share holding copy of personal the shareholding pattern and accounts of all the Directors and acknowledgment of documents pertaining to returns of income filed by them. Furnish the source Directors are enclosed as per of new capital introduced by Directors, if any? Annexure-2 3 Furnish the details of Authorized Capital, Subscribed Details of Authorized capital and paid up capital furnish details of new share subscribed and paid capital is capital introduced during the year. as per Annexure-3 4 Please explain the basis of charging of share No share Premium was premium vis-à-vis the N.A.V charged over and above the

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Face value of shares and hence the same in not applicable.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

21 Please furnish the details of assets purchased during Details and Documents are as the year on which depreciation has been claimed per along with copies of bills and mode and date of Annexure-13 payment thereof.

 Assessee reply dated 06-12-2018:

During the year under consideration Share capital of Rs.18,50,00,000/- has been introduced. The funds were introduced by the directors and shareholders and the same were in turn converted into share capital. Unsecured loans amounting to Rs.86,19,000/- are just the funds introduced by directors and shareholders which were not converted into share capital In compliance with amended section 68 for domestic companies with regard to source of source we have enclosed Personal balance sheets of all possible shareholders, while proofs relating to identity genuineness and creditworthiness are as per Annexure-1

1 During the year under consideration Share capital of A sheet showing the Rs.18,50,00,000/- has been introduced. You have acceptance, conversion to also claimed to have taken/accepted unsecured share capital and unsecured loans/cash credits from Directors shareholders and loan amount is enclosed other amounting to Rs.86,19,000/- herewith along with the Name, PAN and Address Sheet.

Contra Confirmation of all the possible creditors are enclosed

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herewith along with the Ledger Accounts of Creditors. As the Assessee is unable to contact the transporters, contra confirmation from the cannot be provided. Further all the payment to creditors is rounced through banking channels All bank Statement were also provided in the previous submission. (As per Annexure 8 of previous submission) Name & Address Sheet and Contra Confirmation are as per Annexure-2 2 You have claimed Sundry Creditors for Good at Rs.5,29,81,076/-

Depreciation as per boos Rs.19,81,918/- Depreciation as per rule Rs.6,25,34,641/- 3 You have claimed to have purchased/introduced Both Depreciation charts are Assets worth Rs.39,88,79,139/- during the year and enclosed herewith as per claimed Depreciation on the assets at Rs.19,81,918/- Annexure-3 There is no mismatch in the Sales Turnover reported in Audit Repost and ITR and reconciliation of the same is as per Annexure-4

9.13 The Pr. CIT initiated 263 proceedings on the ground that the AO has not made enquiries or verification which should have been made in respect of share capital introduced, unsecured loan raised during the year under consideration and claim of depreciation & investment allowances under section 32AC of the Act. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the Ld. AO had made detailed enquiries and after consideration of material placed on record, accepted the claim of the assessee. We thus find no error in the order of

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Ld. AO so as to justify initiation of 263 proceedings by the Ld. Pr. CIT. The Ground of appeal raised by the assessee is thus allowed.

Order pronounced in the Court on 03/10/2022 at Ahmedabad.

Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy)

Ahmedabad; Dated 03/10/2022 Manish