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TMI Blog2011 (1) TMI 1161X X X X Extracts X X X X X X X X Extracts X X X X ..... s directed against the order of the Income-tax Appellate Tribunal, Chandigarh dated 13.08.2007 whereby it accepted the appeal of the assessee, set-aside the order of the Commissioner passed under Section 263 and consequently upheld the order of the Assessing Officer. 3. The undisputed facts of the case are that the assessee firm is a partnership firm. The two partners are Shri Neeraj Aggarwal and his wife Smt. Anuradha Aggarwal, who reside at Delhi. The assessee had two units; one a trading unit at Delhi and the other a manufacturing unit at Baddi. The Government of India gave incentives for setting up of industries in certain areas in Himachal Pradesh and in terms of these incentives the manufacturing units based at Baddi were given income-tax benefits and were in fact exempted from payment of income-tax under Sections 80-1A and 80-1B of the Incometax Act, 1961 (here-in-after referred to as the Act). 4. For the assessment year 2001-02 the assessee declared total income of Rs.90,17,776/- and claimed deduction of this entire amount in terms of Section 80-1B. The case of the assessee was taken up for scrutiny in terms of Section 143 of the Act and notices were issued to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner, the assessee had overvalued the stocks. One of the grounds which weighed with the Commissioner in setting aside the order of the Assessing Officer was the abnormally high gross profit and net profit rates. The Commissioner found that the gross profit rate varied from 93% in the first year of production to 58.17% in the relevant financial year and dramatically reduced to 5.51% in the assessment year 2002-03 and the assessee closed the unit in the year 2003-04. As per the incentive scheme the unit was to enjoy 100% deduction under Section 801A and 801B for the first five years and thereafter 75% of the profit were taxable and the assessee closed the unit without any apparent reason because if the unit was so profitable why should it have been closed. 8. The Commissioner also found that on 22.10.2001 an Inspector of the Income-tax Office at Parwanoo had visited the factory premises which was locked and gave a deserted look. No work was being done and only one Chowkidar was found. The statement of the Chowkidar was recorded and he stated that no work was being done in the factory for the last two years and he did not know the name of Manager. During assessment procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduction In Kgs. 1. March, 2000 220 388 Nil Nil 2. April, 2000 560 973 Nil Nil 3. May, 2000 400 898 Nil Nil 4. June, 2000 10 33 Nil Nil 5. July, 2000 2070 4605 Nil Nil 6. August, 2000 197 448 Nil Nil 7. Sep.2000 - - 1805 1805 8. Oct.2000 - - 28,398 28,398 9. Nov.2000 325 833 33136 33136 10. Dec.2000 263 670 2913 2913 11. Jan.2001 890 2918 390 390 12. Feb.2001 1159 5167 48,591 48,591 13. March, 2001 779 4216 14501 14501 12. The Commissioner also found that as per the record the assessee had claimed that he had engaged 10 to 11 workers at Baddi and manufacturing process was carried out through the whole year. The assessee did not file the details of the salary and wages paid to each worker. The total sum debited on account of wages was Rs.2,49,436/- per annum i.e. Rs.20,786/- per month and the salary of each worker would come only Rs.2,078/- per month, which was barely equal to the minimum wages. According to the commissioner, the chart prepared in this regard clearly indicated that sufficient number of workers were not engaged. 13. The Commissioner also found that the assessee had availed a packi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 263. The Commissioner could not substitute his own judgement for that of the Assessing Officer. The Income-tax Appellate Tribunal held that an order can be considered to be erroneous under Section 263 if it is based on wrong or incorrect application of law. Even an order passed without proper application of mind or without making proper inquiry can also be said to be erroneous for the purposes of under Section 263. However, the Tribunal went on to hold that the Commissioner went into a searching and roving inquiry which was intended to overcome the stand of the Assessing Officer. The Tribunal was of the view that the first show cause notice did not show as to under what circumstances the Commissioner had inferred that the deduction allowed by the Assessing Officer had been granted without looking into the fulfillment of the necessary conditions. It also found that the Commissioner had made some erroneous findings. The Tribunal went on to hold that there was no material on record to conclude that the unit at Baddi was only a façade and there was no actual manufacturing and no export of goods. It went on to hold that the initiation of proceedings under Section 263 did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner to call for and examine the record of any proceeding under the Act and pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or canceling the assessment and directing a fresh assessment, if he considers that any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The section did not at first contain any Explanation. An Explanation was added to section 263(1) by the Taxation Laws (Amendment) Act, 1984. By the Finance Act, 1988, the said Explanation was substituted with effect from June 1, 1988. The Explanation was again amended by the Finance Act, 1989. By the amendments made by the Finance Acts of 1988 and 1989 a definition of the term "record" was provided. It has been provided that "record" shall include and shall be deemed always to have included all records relating to any proceeding under the Act available at the time of examination by the Commissioner." 19. A Division Bench of the Madras High Court in Mofussil Warehouse and Trading Co. Ltd. vs. Commissioner of Income-tax, (1999) 238 ITR 867 was dealing with a case where the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not conferred (confined) to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy and Co. v. S.P. Jain, (31 ITR 872) : (AIR 1957 Cal 244), the High Court of Karnataka in Commissioner of Income-tax, Mysore v. T. Narayana Pai, (1975) 98 ITR 422, the High Court of Bombay in Commissioner of Income-tax v. Gabriel India Ltd., 203 ITR 108 : (1994 Tax LR 116) and the High Court of Gujarat in Commissioner of Income-tax v. Smt. Minalben S. Parikh, (1995) 215 ITR 81 treated loss of tax as prejudicial to the interests of the revenue. Mr. Abaraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Company v. Commissioner of Income-tax, (1987) 163 ITR 129 interpreting "prejudicial to the interests of the revenue". The High Court held, "In this context, it must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the Order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax can cancel that order and require the concerned Assessing Officer to pass a fresh order in accordance with law after holding a detailed enquiry. But when enquiry in fact has been conducted and the Assessing Officer has reached a particular conclusion, though reference to such enquiries has not been made in the order of assessment, but the same is apparent from the record of the proceedings, in the present case, without anything to say how and why the enquiry conducted by the Assessing Officer was not in accordance with law, the invocation of jurisdiction by the Commissioner of Income-tax was unsustainable." 23. The Apex Court again dealt with the scope of Section 263 in Commissioner of Income-tax vs. Max India Ltd. (2007) 295 ITR 282 and held as follows:- "At this stage we may clarify that under paragraph 10 of the judgement in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 this court has taken the view that the phrase "prejudicial to the interests of the Revenue" under section 263 has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct assumption of facts would satisfy the requirement of order being erroneous. In case the orders are passed without applying the principle of natural justice or without application of mind then also the Commissioner can exercise his revisional powers. It is important to note that the Apex Court in Malabar Industrial Co. Ltd. vs. Commissioner of Income-tax (supra) further held that the expression prejudicial to the interest of the revenue has very vide connotation and was not confined to loss of tax. If the Assessing Officer adopts one or two courses available under law and it result in loss of revenue then the order cannot be said to be erroneous or prejudicial to the interest of revenue within the meaning of Section 263 but where the view taken by the Income-tax Officer is unsustainable then the orders passed by the Assessing Officer is not only erroneous but also prejudicial to the interest of revenue. 27. We shall now deal with the facts of the present case in the light of law laid down by the Apex Court. The Assessing Officer no doubt issued notice to the assessee on various issues and came to the conclusion that the process which was taking place at Baddi amounte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny as 20 dates were fixed. Only on three occasions the assessee was represented. The Tribunal in its order has blown out the proportion the mistake in the order of the Commissioner only on the ground that the entire record had been filed before the Assessing Officer. When the Commissioner was adjourning the case and sending letters to the assessee and putting specific queries to the assessee, was it not the duty of the assessee to answer such queries and assist the Commissioner? The assessee's attitude towards the Commissioner was virtually contemptuous and it did not make any attempt to assist the Commissioner and did not appear before it. When thousands of pages of record had been filed the Commissioner could not have, without the assistance of the assessee, gone through the entire record. The assessee failed to assist the Commissioner and therefore, as pointed out above one or two minor mistakes have crept in but in our view these do not detract us from the main issue. 29. The main issue in this case was whether the unit at Baddi was just a façade and cover up operation to divert profits from other places to Baddi so that it became exempted from tax. There are cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired to be engaged. In case, the unit did not utilise power then 20 workers were to be engaged. In this behalf reference may be made to Sections 80-1A to (v) and 80-1A to (iv). 32. We are dealing here with a case where according to the assess itself on a total turn over of Rs.2,59,69,820/- it has earned a net profit of Rs.1,23,08,053/- i.e. 58.17% profits in the relevant year. The wages shown in the books of account for the manufacture of goods worth Rs.2,59,69,820/- are only Rs.2,49,436/- or less than 1% of the total turn over. This is an extremely low figure and not commensurate with the production. Even more surprising is the fact that according to the assessee it had engaged the workers on daily waged basis. A chart of the workers employed by the assessee was filed by the assessee and as per this chart it is clear that throughout the year 24 different persons worked intermediately. Other than the watchman Naresh Kumar, there are only two other workers who had worked regularly for 12 months. The other workers had worked for few days off and on. This also shows that no person was regularly employed by the assessee firm. If the working days by adding the work of all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar provisions exist in Section 80-1B to (iv). 34. When we take into consideration the electricity consumption and also take into consideration the list of workers filed, it does not in any way correlate with the total amount of electrical stamping manufactured during the period. It is obvious that if more electrical stamping had to be produced more employees should have been employed but in the present case the number of employees hardly varies. Most importantly, in the present case, the assessee cannot even urge that all the employees were permanent employees because the chart filed by the assessee himself shows that the workers were working off and on for a few days and 24 workers were engaged throughout the year and as pointed out earlier only three of them have worked for the entire year. The only inference which one can be drawn is that no manufacturing process was going on at Baddi. 35. In addition to these two important factors which clearly show that no manufacturing process was being carried on at Baddi, the total non application of mind by the assessing officer is also apparent from the fact that the assessing officer failed to notice that whereas the open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed belief that it was earning crores of rupees of profit. 39. In addition to the above findings, we also find that not much reliance can be placed on the books of account of the assessee in view of the various discrepancies in its books of account noticed by the Commissioner and detailed here-in-above. The assessee claimed a sum of Rs.23,71,100/- on account of foreign travel by one Shri Himanshu Singhal. It cannot be believed that an employee who is getting a sum of Rs.2,000/- per month would be given the duty of going abroad and be permitted to spend Rs.23,17,100/- during foreign travel which is almost 100 times his annual salary. If the assessee was earning profits on export it would have taken benefit of the incentives in this behalf but as rightly noticed by the Commissioner the assessee did not claim any such benefits in its books of account under Section 80 HHC. Further the assessee had availed bank credit limit of 40 lakhs but the interest expenditure had not been deposited in the profit and loss account of the Baddi unit. This clearly shows that the books were not being maintained in a proper manner. 40. We are constrained to observe that whereas the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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