TaxTMI 
TaxTMI 
TaxTMI 
2014 (12) TMI 434
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....ts of the Revenue. 3 The Commissioner of Income-tax had failed to appreciate that the view taken by the Assessing Officer in the order under revision was sustainable in law and a plausible view under the law and thus, the said order cannot be treated as erroneous and prejudicial to the interest of Revenue. 4. In the facts and circumstance of the case, the Learned Commissioner of Income Tax has no jurisdiction and is not entitled under section 263 of the Income Tax Act 1961, to revise as erroneous or prejudicial to the interest of Revenue, the order u/s 143(3) dated 17/12/2012 passed after inquiry, without the Learned Commissioner of Income Tax himself embarking on any further inquiry. 5 The impugned order of the Learned Commissioner of Income Tax is opposed to law and facts of the case." 3. The short facts of the case are that the assessee is a scrap dealer. During the assessment proceeding the assessee was asked to file the reconciliation statement for the income disclose during the survey proceedings u/s. 133A and their ledger extract for month wise sales. The AR produce the ledger extract of the month wise sale. In his reconciliation statement, A.R. has shown that income of ....
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....the interest of revenue, therefore, he has restored the assessment for 2009-10 passed by AO and restore to the issue AO for passing the fresh order after examining the relevant facts and give adequate opportunity of assessee being heard. The AO was directed to verify the stock register, books of account and he was directed to pass a fresh order. Against this order the assessee has come up before Tribunal. 4. The assessee has argued the matter as well as filed the written submission which read as under: "The AR submitted that the CIT himself was in error for having estimated the stock by extrapolation, that too on the basis of last years GP at 10%, while this full year's overall GP was 14.69% on the basis of audited books which were duly verified and accepted by the AO. He challenged the correctness of the CIT's action of estimating stock while the stock declared by the assessee was as per the books of account and also as per physical stock found during survey. He submitted that the Revenue is generally found obsessed with a fallacious notion that the closing stock worked backwards, as is done by the CIT, is the stock as per books. He submitted that the stock worked backw....
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....ng survey in February was available, there is no scope for ignoring the actual stock and estimating stock to a astronomical figure, for coming to a conclusion that the assessment order is erroneous or prejudicial to the interest of revenue. The AR took us through the order of the CIT and submitted that the only point on the basis of which the CIT had held the assessment order to be erroneous and prejudicial to the interest of the Revenue is that in the opinion of the CIT, the AO had failed, to resort to estimating closing stock and income, by extrapolation based on monthly purchases and sales adopting a fixed GP ratio of the earlier year. He thus submitted that the only issue involved is whether there was any error in the AO's order for not having resorted to estimate which, in the opinion of the CIT, was required. The AR stated that in the circumstance of the case it was neither required nor possible nor permissible for the AO to resort to estimate. Hence the AO was not required and did not attempt estimation by backward working, as contemplated by the CIT. This abstinence by the AO is a mandate of law and not an error. The AR brought to our notice, by relying on ACIT vs R....
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.... submitted that, in a hypothetical case, if the AO himself, after specifically examining and accepting the books of account and without rejecting the same, had resorted to estimating closing stock; this higher authority would have found fault with the AO's action; as has been done in plethora of cases. Hence the CIT is not entitled to find fault with the AO's order, simply because the AO did not resort to estimate after accepting the books. The AR submitted that the AO had obtained, examined and gone through all the necessary evidence; which included the audited books of account, vouchers and various other details. He stated that the CIT's case cannot be that there was no inquiry, but only that in the opinion of CIT there was no sufficient inquiry. The CIT is not entitled to set aside the order as erroneous, on the count of insufficiency of inquiry unless the CIT himself, undertakes further inquiry, as held in DIRECTOR OF INCOME TAX vs. JYOTI FOUNDATION (2013) 357 ITR 388 (Delhi) and INCOME TAX OFFICER vs. DG HOUSING PROJECTS LTD. (2012) 343 ITR 329 (Delhi). He submitted that there is a clear distinction between lack of inquiry and insufficient inquiry. If the CIT is o....
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.... an examining the record taken one of the possible view, it cannot be said that the order passed by AO was erroneous, the record of evidence produced before us. During the course of hearing it clearly reflect that inquiry in the impugned case has been carried out by AO on both relating issues of GP as well as the pick closing stock. 6.1 The AO has discussed the inquiry carried and it has also mentioned in the assessment order. We find that the AO has made an inquiry and assessee has replied all queries raised by the AO. We find that Hon'ble Bombay High Court in case of CIT vs. Gabriel India 114 CTR 81(Bom) has held that the ITO in this regard had made an inquiry in regard to the nature of expenditure incurred by the assessee. The assessee had given detailed explanation in this regard by letter in writing, they were part of the records of the case. Evidently, the claim was allowed by ITO on being satisfied with the explanation of the assessee. This decision of ITO cannot be held to be "erroneously" simply because in his order he did not make elaborate discuss in this regard. Moreover, in this instant case the CIT himself, even after initiating the proceedings for revision and heari....
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.... case of COMMISSIONER OF INCOME TAX vs. UTKAL ALLOYS LTD. (2009) 319 ITR 339 wherein it has held that admittedly, in course of search, the search party did not find any incriminating document or duplicate books of account involving the respondent-assessee in any clandestine business activity like effecting any sale or purchase outside the regular books of accounts on the basis of which returns were filed. The Department could not find out any omission of important purchase/sale from the assessee's books of account or any entry in the books of account not supported by voucher. The addition has been made on the basis of discrepancy worked out on estimation of the stock. 6.5. In Vijaya Traders case (supra), the question before the Mysore High Court was whether the Tribunal was right in law in holding that the ITO could act on the proviso to s. 13 of the IT Act, 1922, for completing the assessment for the asst. yr. 1961-62 and on the proviso to sub-s. (1) of s. 145 of the IT Act, 1961, for completing the assessment for the asst. yr. 1962-63. The High Court held that the Tribunal was not right in law in holding that the ITO could act on the proviso to s. 13 of the Act of 1922 or the pr....
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....referred to by the learned Authorised Representative and Departmental Representative with respect to rejection of book results and estimation of profit on contract receipts. From the record, we found that assessee was engaged in business of construction since 1984, mainly undertaking work of Central Public Works Department (CPWD) and Department of Telecommunication (DOT) as class one contractor. During the year under consideration, the assessee firm had undertaken various civil projects. The proprietor of firm is a qualified civil engineer and looked after business with the help of a son who was also qualified engineer. Undisputedly, the turnover of the assessee exceeded beyond the limit prescribed for the audit under Section 44AB of the IT Act, 1961. The books of account regularly maintained were got audited and there was no adverse comment of the auditor with regard to the system of accounting being followed by the assessee or with regard to the true and fair picture of the profit disclosed by the assessee and the state of affairs being shown by the assessee as at the end of the year. Since asst. yr. 1994-95 till 1998-99, the turnover was varying between Rs. 72 lacs to Rs. 3.65 c....
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....Therefore, the CIT(A) accepted the assessee's contention and deleted the addition made by the AO on account of such difference. During the course of scrutiny assessment under Section 143(3), the assessee produced books of account and which were also examined by the AO. The point which disturbed the AO relates to the labour payment for months of January, February and March, 1998. The AO found that labour payment for the month of January was actually paid in March, 1998 and labour payment of February was paid in the next month of March. Labour payment for March, 1998 was paid by the end of March, 1998 itself. The AO however, did not accept the assessee's version that delay in payment of labour wages was on account of financial difficulty. From the record, we found that assessee got the payment in respect of work executed in the month of March, therefore, immediately on receipt of payment he paid the labour charges for January, 1998. Otherwise also, the labour payment for any month was also paid in the immediately next month, no fault can be found for payment to labourers of February, 1998, in the month of March, 1998. Similarly, labour payment for March was paid by the end of....
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...., 29 to 54, and do not find any mistake therein. After production of books of account and submission of explanation by the assessee, if any, asked for, with respect to the contents of the return and books of account, the Revenue may accept the same or after pointing out the specific defect may reject the books of account and proceed to determine the assessee's income as per the provisions of Section 145. Income-tax provisions nowhere either authorize the AO or cast an obligation on the assessee to prove the negative result, i.e., to prove as to why he failed to make a profit at a particular rate. Before rejecting the books of account, the Department has to prove that accounts are unreliable, incorrect or incomplete. 6.8. The accounts regularly maintained in the course of business, duly audited under the provisions of IT Act and free from any qualification by the auditors, should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. Even though it is not possible to lay down the exact circumstances in which accounts should be rejected as unreliable or incorrect, yet the accounts may be rejected as unreliable if important entrie....
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....lf and not on the basis of what the labourer has done. The bills for such a contract was prepared, which were got verified by the engineers of contractee before making payments. On the basis of bills which are finally approved by the Government engineers/contractee, the payment was given to the assessee contractor after deducting TDS. Thus, it was humanly not possible to provide the details as to what work a particular labourer has done at the site. AO's allegations to the effect that there was no record on the scrolls as to whom payment is made and against what work done, is not sustainable, since wages scrolls were prepared not on the basis of the work which the labourer carries on, but his/her name, the details such as the number of days the person has worked, the rate of wages, the total amount is given and the receipt is taken from the labourer concerned. It is not possible to mention the work which a particular labourer has carried out during the day. We also found that in earlier years, the book results of the assessee were accepted after verification of books of account subject to minimal changes. The case law referred to by the AO while rejecting books of account are n....
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.... CIT, 220 ZTR 0438 for rejection of the accounts, non maintenance of the day to day records showing the manufacturing details is adequate. Thus, when no discrepancy is noticed in the accounts maintained by the assessee, AO cannot assume jurisdiction u/s 145(3) of the Act as held by the Delhi High Court in the case of Anand Kumar Deepak Kumar. Ii is also relevant to mention that without enlisting the defects, incompletion and inaccuracies in the accounts of the assessee, AO cannot expressively or otherwise, invoke the provisions of section 145(3) of the Act. Ahmedabad Bench of the Tribunal held in the case of M/s Paras Dyeing and Printing Mills P Ltd 004 ITR(Trib) 0029 (Ahd) that when no specific discrepancies or defects in. the books of account of the assessee has been pointed out nor was any material brought to establish that purchases were inflated or receipts suppressed, there is no justification in invoking the provisions of section 145 of the Act, If there was no challenge to the transactions represented in the books, then it is not open to the Department to contend that what was shown by the entries is not the real state of affairs. There was no basis for rejection of books o....
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.... been. In the similar manner books of account of a prudent businessman giving higher income cannot be accepted merely because it has given higher profit even though books of account contained serious defects. In fact examination of accounts is an initial step. Only after crossing this hurdle and giving a finding on the nature of accounts, by pointing out that various ingredients mentioned in section 145 are not satisfied, the Assessing Officer gets jurisdiction/power to estimate the profits. 7.1. Provisions of section 145(3) can be invoked for rejecting the books if Assessing Officer gives a finding that (i) assessee is not following regularly any accounting standard notified by the Central Government in accordance with section 145(2) or (ii) Assessing Officer is not satisfied about correctness or completeness of the account, or (iii) where assessee is not following any method of accounting regularly. If no such finding is given then income chargeable under the head "Profits and gains of business" has to be computed in accordance with the method of accounting regularly employed by the assessee. For rejecting the books by invoking condition No. 1 the Assessing Officer has to show t....
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....incorrect or any infirmity in the audit report. In CIT v. Rajni Kant Dave [2006] 281 ITR 6 (All.) it is held that if there is no finding that books of account are incomplete or incorrect, accounts cannot be rejected. In Ashoke Refractories (P.) Ltd. v. CIT [2005] 279 ITR 457 1 (Cal.) it is held that even though there may be absence of stock register or item-wise accounting of stock, but if there is no finding that income could not be deduced from the method of account followed, accounts cannot be rejected and section 145 cannot be invoked. Similar view was taken by Hon'ble Calcutta High Court in Juggilal Kamlapat Udyog Ltd. v. CIT [2005] 278 ITR 522 wherein it is held that if there is no finding that income could not be deduced from the accounts maintained by the assessee, then rejection of accounts would be invalid. Hon'ble Gujarat High Court in CIT v. Vikram Plastics [1999] 239 ITR 161 has held that where books of account have been maintained regularly and no defects have been found in the accounts then the Tribunal would be justified in holding that accounts cannot be rejected under section 145. Accordingly we hold that books of assessee cannot be rejected and, therefore, Assess....
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....circumstances of present case, account books are maintained as they were ordinarily maintained years after years and which were found to yield a fair result. Mere deviation in GP rate cannot be a ground for rejecting books of account and entering realm of estimate and guesswork. Lower GP rate shown in the books of account during current year and fall in GP rate was justified and also admitted by the AO as well as CIT(A) as well as the Tribunal. Therefore, fall in GP rate lost its significance. Having accepted the reason for fall in GP rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated GP by rule of thumb merely for making certain additions. We are, therefore, of the opinion that the findings arrived at by the Tribunal suffers from basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except what has been shown by the assessee in th....
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.... part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be ' erroneous' simply because in his order he did not make an elaborate discussion in that regard. 7.7. Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possib....
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....s, 231 ITR 53 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous. 7.9 In INCOME TAX OFFICER vs. DG HOUSING PROJECTS LTD. (2012) 343 ITR 329 (Delhi) the court observed that in the present case, inquiries were certainly conducted by the Assessing Officer. It is not a case of no inquiry. The order under Section 263 itself records that the Director felt that the inquiries were not sufficient and further inquiries or details should have been called. However, in such cases, as observed in the case of DG Housing Projects Limited (supra), the inquiry should have been conducted by the Commissioner or Director himself to record the finding that the assessment order was erroneous. He should not have set aside the order and directed the Assessing Officer to conduct the said inquiry. Thus we find that the unanimous legal principle established is that if books of account are accepted and unless the books are rejected, no estimate can be resorted to. The AO has followed this principle in the assessment. The CIT has considered the order to be erroneous only because the AO di....
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....iction 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 subsection, viz., (i) the order is erroneous ; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions "erroneous", "erroneous assessment " and " erroneous judgment " have been defined in Black's Law Dictionary. According to the definition, "erroneous" means "involving error ; deviating from the law ". " Erroneous assessment" refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, "erroneous judgment " means " one rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles ". From the aforesaid definitions it is clear that an order cannot be terme....
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....ial to the interests of the Revenue ' have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. It can mean nothing else ". The aforesaid observations were also applied by the Gujarat High Court in Addl. CIT v. Mukur Corporation [1978] 111 ITR 312. We are of the opinion that the aforesaid interpretation given by the Calcutta High Court to the expression "prejudicial to the interests of the Revenue" is the correct interpretation. 8. We, therefore, hold that 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. We have already held what is erroneous. 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. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be preju....
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....et out above. The Income-tax Officer 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 Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income tax Officer 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 Income-tax Officer to re-examine the matter. That, in our opinion, is not permissible. Further 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....