TMI Blog2017 (3) TMI 1465X X X X Extracts X X X X X X X X Extracts X X X X ..... levant questions are asked and enquiries are made to examine about a particular transaction, explanation of the assessee is sought and then a final view is formed by the AO taking into consideration all the relevant facts and circumstances of the case. Now given that the assessee has furnished its explanation regarding the source of deposits in the partner’s capital account and having considered the said explanation, the ld. CIT is correct in remanding the matter back to the AO to examine the said explanation of the asessee. Had the assessee furnished the said explanation before the AO, the ld. CIT may not have the occasion to exercise his revisionary powers u/s 263 of the Act. In our view, these are the basic and the relevant enquiries in terms of examining the source of accretion to the capital account which the AO should have been made at the first place and the AO having been failed to do, the ld. CIT was correct in exercising his revisionary powers u/s 263 of the Act. Unsecured loans - Held that:- In the instant case, though the AO has raised the initial enquiry about this test but while concluding the assessment, there is nothing on record to suggest that he has carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sues: (a) During the year, there was increase in turnover but G.P. had declined substantially which is accepted by the AO without carrying out any verification of the explanation furnished by the assessee and simply accepted the same without any cogent reasons. (b) The AO as per query letter dated 28.02.2013 and 16.12.2013 required assessee to furnish copies of capital account of partners and the explanation towards source of addition to the capital account. The assessee filed detailed capital account but no details regarding source of addition to the capital account is furnished and therefore the same remained unverified and not properly enquired by the AO. (c) The AO as per query letter dated 16.12.2013 required assessee to furnish details of unsecured loans (whether squarred up or not) along with complete details and explanation towards the identity, genuinity and creditworthiness of these parties. In response, the assessee only furnished copies of ledger accounts and no details as to the genuineness and credit-worthiness were furnished. Thus, the unsecured loan remains unverified and not properly enquired by AO. 3. In response to the above show-cause notice, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners capital account during the year under consideration has remained unverified and not properly inquired by the AO. (3) Unsecured loans/cash credits: Perusal of assessment record reveals that as per query letter dated 16.12.2013, the AO had required the assessee to furnish details in respect of the unsecured loans (whether squared up or not) along with complete details and explanation towards the identity, genuinity and credit-worthiness of these parties. In response to the same, only copies of ledger accounts are found to have been furnished by the assessee, as available on record, but no details regarding the detailed query raised by the AO on the genuinity and creditworthiness of these transactions are found to have been furnished and the AO proceeded to complete the assessment proceedings on the basis of such incomplete details filed before him. Under such circumstances and as per details/information available on record the genuinity and credit-worthiness in respect of the unsecured loans has remained unverified and not inquired by the AO. (4) It is well established that credits allegedly based on loan from parties, who are not possessed of sufficient means cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us one. In order to provide clarity on the issue, section 263 of the Income Tax Act has been amended to provide that an order passed by the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if, in the opinion of the Principal Commissioner or Commissioner (a) the order is passed without making inquiries or verification which, should have been made (b) the order is passed allowing any relief without inquiring into the claim (c) the order has not been made in accordance with any order direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any jurisdictional High court or Supreme Court in the case of the assessee or any other person. 53.3 Applicability: This amendment has taken effect from 1st day of June, 2015. In the present case, no enquiry/verification haw been conducted by the AO on the issues covered by the notice issued u/s 263 of the Act. In view of the above, the order passed by the AO for the assessment year 2011-12 dated 29.01.2014 is deemed to be erroneous in so far it is prejudicial to the interest of revenue, as I am of the opinion that the order has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax, the source of deposit made by them can be examined in their individual hand and not in the hands of the firm. In reply dated 20.01.2014 copies of the return of the partners were enclosed and it was submitted that in view of the same there is no need to file the copy of the partners bank account. In proceedings u/s 263, the specific explanations to the source of deposit is submitted in which no discrepancy is found by the CIT. Thus it is evident that AO made the necessary enquiry in respect of addition in the partners capital account and therefore his order on this issue cannot be held to be erroneous or prejudicial to the interest of revenue. 4.3 In respect of unsecured loans, assessee filed confirmed copy of the account of the cash creditors giving all the details required in the query letter. It was explained that all unsecured loans are existing assesses, amount is accepted by account payee cheque, PAN No. and postal address as provided. Therefore, it is incorrect on part of CIT to held that assessee has not found details as to the genuineness and creditworthiness of these transactions. Hence, on this issue also, order of the AO cannot be held to be passed without enqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow s backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward. As was observed in Phillips vs. Eyre, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. 32. The obvious basis of the principle against retrospectivity is the principle of fairness , which must be the basis of every legal rule as was observed in the decision reported in L Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co.L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the insertion of Explanation 2 to section 263 by FA, 2015 is explained as under:- 19. The law interpreted by the High Courts makes it clear that the Ld Pr. CIT, before holding an order to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the assessing officer is erroneous, the Ld Pr. CIT should have shown that the view taken by the AO is unsustainable in law. In the instant case, the Ld Pr. CIT has failed to do so and has simply expressed the view that the assessing officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the Ld Pr. CIT is not in accordance with the mandate of the provisions of sec. 263 of the Act. The Ld Pr. CIT has taken support of the newly inserted Explanation 2(a) to sec. 263 of the Act. Even though there is a doubt as to whether the said explanation, which was inserted by Finance Act 2015 w.e.f. 1.4.2015, would be applicable to the year under consideration, yet we are of the view that the said Explanation cannot be said to have over ridden the law interpreted by Hon ble Delhi High Court, referred above. If that be the case, then the Ld P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have retrospective or prospective application shall not be relevant. 6. If the principal laid down in case of Narayan Tatu Rani is applied to the facts of the case of the assessee it can be noted that on the issue of trading addition, AO raised specific query requiring the assessee to explain the reasons in the variation of g.p./n.p. rate. This is replied by the assessee which is verified by the AO with reference to the books of accounts and the quantitative and qualitative details furnished by the assessee. On the issue of addition to the partner s capital account, AO raised query vide letter dt. 28.02.2013 and 16.12.2013 in response to which the assessee furnished copy of partner s capital account, copy of their return and its own bank account in support of the amount received from the partner and thereafter AO after verification accepted the credit in the partner s capital account. On the issue of unsecured loans, AO raised the query and in response thereto, the assessee filed the confirmed ledger account of the creditors along with their PAN No. the postal address and the AO accepted the same after necessary verification. Therefore, in case of the assessee, it cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest of Revenue. It would be relevant to examine each of the three issues raised by the ld. CIT to see whether the matter falls within the revisionary jurisdiction of ld CIT. 6.1 The first issue is regarding decline in GP rate from 5.19% in AY 2010-11 to 3.17% in the impugned assessment year. In this regard, the AO has made the necessary enquiry vide his letter dated 28.02.2013 asking the assessee to file head wise chart showing amount of total sales, GP rate, NP rate for the relevant and preceding two years along with reasons for the variation and the contemporary verifiable evidences. In reply, the assesee vide its letter dated 12.12.2013 has submitted a comparative chart showing the sales, GP rate and the NP rate for the relevant and preceding 2 years for the reasons of fall in the GP rate. The assessee submitted that during the year under consideration, the prices of raw material have increased in more proportion than the sale prices with a result that the gross profit has fallen down. It was further submitted that the ratio of cost of raw material to the cost of production was 90.4% in the earlier year which have gone up to 93.4% during the year under consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts explanation as to the source of deposit in the individual s capital account. It was submitted by the assessee that the partners have introduced the capital out of the withdrawals made by them from their capital account on the earlier occasions and it is not the case where the partners have introduced fresh capital from other source of income. It was therefore submitted that the capital account of the partners maintained with the asessee is itself the sources of the amount credited in the capital account. As per ld. CIT, no details regarding the explanation on the sources in the capital accounts were furnished by the assessee and the AO proceeded to complete the assessment proceedings on the basis of such incomplete details filed before him. The ld. CIT further stated that as per records, it revealed that out of the seven partners, there were accretion/addition to capital in the case of 6 partners as per their capital account and under such circumstances, the same remains unverified and not properly enquired by the AO. The ld. CIT further stated that during the course of assessment proceedings, the assessee choose not to furnish the complete details as requisitioned by the AO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 263 of the Act. In our view, these are the basic and the relevant enquiries in terms of examining the source of accretion to the capital account which the AO should have been made at the first place and the AO having been failed to do, the ld. CIT was correct in exercising his revisionary powers u/s 263 of the Act. 6.3 Now coming to the third issue in respect of unsecured loans, the AO as per his query letter dated 16.12.2013 has asked the assessee to furnish details in respect of unsecured loans alongwith complete details and explanation towards the identity, creditworthiness of these parties and genuineness of the loan transactions. In response to that, the assessee had filed copy of account of the cash creditors duly confirmed by them. During the course of revision proceedings, it was submitted that all the cash creditors are existing assessee and their PAN and postal addresses have been mentioned in their confirmations. It was further submitted that the loans have been accepted through the account payee cheques. As per ld. CIT, only copies of the ledger account are found to have been furnished by the assessee but no details regarding the query raised by the AO on the genui ..... 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