2014 (12) TMI 434 - AT - Income Tax

Assessing Officer's Order Upheld, Commissioner's Section 263 Invocation Rejected

Mr. KN. Ramchandra Naidu, Prop. M/s Shakti Sales Corporation Versus The Commissioner of Income Tax

The Tribunal held that the Assessing Officer's order was not erroneous or prejudicial to the Revenue's interests. The Commissioner of Income Tax's ... Invocation of section 263 by CIT – Revision of order – Erroneous and prejudicial to the interests of the Revenue or not - Held that:- In order to invoking the provisions of Section 263, both the conditions that order passed by AO is erroneous and it is prejudice to the interest of revenue must be satisfied - If one of them is absent, it may be held that provisions of Section 263 were not lawfully invoked - the AO has given clear findings that the assessee has produced books of account consisting of cash book, ledger etc. which were test checked - The information/evidence regarding the various cash credits introduced by the assessee as well as the details of expenditure debited in P&L a/c furnished by the assessee have been examined - The AO did not reject the books of account of the assessee but made addition merely by relying on the Departmental valuation report which only gives the estimated cost of construction and not the actual cost of construction incurred by the assessee - in absence of rejection of books of account, the AO is not authorised to reject the cost of construction shown by the assessee in his books of account - in the absence of rejection of books of account by the AO, allow the appeal of the assessee and delete the addition made by the AO on the basis of departmental valuation report. Relying upon DIRECTOR OF INCOME TAX vs. JYOTI FOUNDATION [2013 (7) TMI 483 - DELHI HIGH COURT] wherein it has been held that an order cannot be termed as erroneous unless it is not in accordance with law - in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue - It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste - an order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realized - when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. The Income-tax Officer 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 - 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 - inquiry and/or fresh determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interests 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 did not approve his action and set aside his order - the course adopted by the AO of not resorting to or attempting estimate, after first accepting the books as correct and complete, is the mandate of law - Thus the course adopted by the AO was fully justified in the facts and circumstances of the case - the AO would have been in error, if he had resorted to estimate, while the books were found correct - the view adopted by the AO was the only view sustainable in law – thus, the order passed by the AO was not erroneous or prejudicial to the interest of revenue in any way – hence, the CIT had no jurisdiction to take action u/s 263 – Decided in favour of assessee. Issues Involved:1. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961.2. Determination of whether the order of the Assessing Officer (AO) was erroneous and prejudicial to the interests of the Revenue.3. Validity of the CIT's estimation of stock and gross profit (GP) ratio.4. Adequacy of the AO's inquiry and acceptance of the assessee's books of account.5. Legal principles regarding rejection of books of account and estimation of income.Issue-Wise Detailed Analysis:1. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961:The assessee argued that the CIT had no jurisdiction under Section 263 to revise the AO's order, which had accepted the audited books of account after appropriate inquiry. The Tribunal noted that for invoking Section 263, both conditions-that the order is erroneous and prejudicial to the interests of the Revenue-must be satisfied. The Tribunal cited Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 SC, emphasizing that every loss of revenue does not automatically justify revision unless the AO's view is unsustainable in law.2. Determination of whether the order of the Assessing Officer (AO) was erroneous and prejudicial to the interests of the Revenue:The CIT considered the AO's order erroneous and prejudicial because the AO did not estimate the closing stock and income by extrapolation based on a fixed GP ratio. The Tribunal, however, held that if the AO, after inquiry, adopts one of the possible views, the order cannot be termed erroneous. The Tribunal referenced CIT vs. Gabriel India 114 CTR 81 (Bom), where it was held that an AO's decision cannot be erroneous simply because it lacks elaborate discussion.3. Validity of the CIT's estimation of stock and gross profit (GP) ratio:The AR contended that the CIT erroneously estimated the stock by extrapolation using a fixed GP ratio, while the actual GP ratio was 14.69% based on audited books. The Tribunal agreed, noting that the CIT's method of estimating stock was flawed and not permissible when physical stock and book stock were available and verified. The Tribunal cited ACIT vs. Ravi Agricultural Industries 117 ITD 338 AGRA and Malani Ranjivan Jagannath v/s ACIT 316 ITR 120 RAJ, stressing that estimation is only valid if books are rejected.4. Adequacy of the AO's inquiry and acceptance of the assessee's books of account:The Tribunal found that the AO had conducted sufficient inquiry, verified the books, and accepted the stock as per accounts. The Tribunal emphasized that the AO's acceptance of books precludes estimation of income or closing stock. The Tribunal cited YOG RAJ SONI vs. ACIT 108 TTJ 912 DEL and ACIT v/s Intermedia Cable Communication Pvt Ltd 145 TTJ 476 Pune, asserting that books cannot be rejected without specific defects.5. Legal principles regarding rejection of books of account and estimation of income:The Tribunal reiterated that rejection of books and estimation of income can only occur if books are found incorrect or incomplete. The Tribunal referenced multiple judgments, including CIT vs. Balaji Wire (P) Ltd. (2007) 212 CTR (Del) 35 and CIT vs. Utkal Alloys Ltd 319 ITR 339 ORI, underscoring that accounts maintained in the regular course of business should be relied upon unless there are strong reasons to disbelieve them.Conclusion:The Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the interests of the Revenue. The CIT's invocation of Section 263 was deemed unjustified as the AO had conducted adequate inquiry and correctly accepted the books of account. The appeal of the assessee was allowed, and the order of the CIT was set aside.Order Pronounced:The appeal filed by the assessee is allowed.