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TMI Blog2019 (12) TMI 1035X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 263/ 143(3) of I.T. Act, in pursuance of the aforesaid order dated 18.03.2013 of the Ld. CIT(A); wherein total income was assessed at Rs. 95,10,830/- (rounded off) as against returned loss of aforesaid Rs. 1,75,55,380/-/. The relevant portion of aforesaid Order dated 18.03.2013 is reproduced as under: "In this case an assessment order under section 143(3) of the Income-tax Act, 1961' was passed on 26.11.2010 by the ACIT, Circle-2, Meerut. 2. On examination of records, it was found that the assessment was done without proper enquiry in so far as discussed in subsequent paras, 3 Accordingly, notice un4er section 263 of the Income-tax Act , 1961 was issued pointing out as follows:- a) On the turnover loss of Rs. 1,69,62,106/-, loss of Rs. 1,75,74,887/- has been claimed. A.O. did not make any enquiry while accepting such huge unexplained logs. b) Under the heads selling and administrative expenses of Rs. 56,74,304/- debited in the Income & Expenditure A/C, the assessee hag wrongly claimed a loss on sale of machinery at Rs. 49,46,196/-, The AO has failed to enquire into the same and has failed to disallow the same. c) The balance sheet as on 31.3.2007 showed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of block and depreciation can be accordingly claimed/ allowed. f) A.O. did not enquire into properly before accepting the unsecured loan of Rs. 30.00 Iacs. g) A.O. did not enquire into properly before accepting the Sundry creditors of Rs. 7,16,533/-. h) Freight debited is amounting to Rs. 6,93,425/- on which applicability of provisions of TDS have not been examined. 4. In view of above, the &der passed by the AO was found to be erroneous and prejudicial to the interest of revenue since at the time of the assessment the AO was duty bound to call for such details and examine them. In the case of M/s. Malabar Industries, the Hon'ble Apex court has held that incorrect assumption of facts or incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall order passed without applying the principles of natural justice or without application of mind. 5. The fundamental principles emerged from the Hon'ble Apex Court judgement in Malabar Ind. Co. Ltd. Vs. CIT (2000) 243 ITR 83 (SC) include as follows: i. All incorrect assumption of facts or incorrect application of law will suffice the requirement of the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valid assumption of jurisdiction under section 263 by Commissioner and the Tribunal, in such a situation, did not commit any error in law in confirming the order of CIT(A) for setting aside the assessment and directing the AO to make an order of assessment. ii. Gee Vee Enterprises vs. AddI. CIT, 99 ITR 375 (Del.) in which it is held that the Commissioner can regard the order as erroneous on the ground that in the circumstances of the case, ITO should have made further inquiries before accepting the statements made by the assessee in his return and it was observed that is obvious. The position and functions of the ITO are very different from that of civil court. 5.3. On the facts of the present case, it is evident that the AO accepted the version of the assessee without making any inquiry or verification, whereas it is very well settled that mere failure to make inquiries makes an order erroneous. In order that the Commissioner may consider an order to be "erroneous" for the purposes of section 263, the error of law may not be apparent on the fact of the order. The Commissioner may consider an order of the AO to be erroneous not only if it contains some apparent error of reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jurisdictional ITAT Delhi Bench In the case of Shri Virendra Kumar Gupta Vs CIT in ITA No. 2595/D/2009 dated 21/01/2011 relying upon aforesaid judgments has held that the facts of the case were in pari-materia with above judgments. Further, on consideration of these cases the Hon'ble ITAT viewed that the Id. CIT was right in exercising the revisionary jurisdiction dismissing the appeal filed by the assessee. 5.7. In view of the foregoing, it is evident that the order passed by the AO is erroneous as well as prejudicial to the interests of revenue for the reasons as stated above. 6. During the course of 263 proceedings, Shri Paramjit Singh, CA & counsel of the assessee attended and filed written submissions and the case was discussed with him. 7. As regards the points on which notice under section 263 was given, regarding point (a) the AO did not inquire into the loss to the magnitude which is even higher than entire turnover. Regarding point (b) Though the major addition in the fixed assets was shown in the preceding year that is in the balance sheet as on 31.3.2007 and moreover the machinery worth Rs.I,05,55,232/- is stated to have been sold during the year under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e failed to explain the same for which the onus lies solely and .squarely on the assessee. Reliance is placed on the following judgments: (i) CIT vs. La Medica (2001) 250 ITR -575 (Delhi) (ii) Sri Ganesh Rice Mills vs. CIT (2007) 294 ITR 316 (Alld.) (iii) CIT vs. United Commercial and Industrial co.(199) 187 ITR 596 cal. (iv) CIT vs Precision Finance Pvt. Ltd. (Cal) 208 ITR 465 (v) CIT v/s Koriay Trading co. Ltd. (Cal.) 232 ITR 820. (vi) Krishan Kumar Jhanb VIS ITO and Anr (Punjab & Haryana) 17 DTR 249 (vii) M/S Sejai International Ltd v/s CIT Meerut (All.) Appeal No.306 of 2010. (viii) CIT Vs Durga Prasad More, 82 ITR 540 (SC) (ix) CIT vs P. Mohnakala, 291 ITR 278 (SC) (x) CIT vs Sumati Dayal, 214, ITR 801 (SC) (xi) CIT vs Diza Holdings Pvt. Ltd. 255 ITR 573 (Kerla) (xii) CIT Vs Nova Promoters and Finlease Pvt. Ltd. 18 Taxmann 217 (xiii)V.I.S P. (P) Ltd. vs. CIT (MP), 265 ITR 202 Further, section 68 does not confine to cash entries in the book. It has been held by their lordship of M.P. High court in the case of V.I.S. P. (P) Ltd vs. CIT (MP), 265 ITR 202- "If the liability shown in the account is found to be bogus and there is no plaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Submit explanation regarding heavy loss in comparison with last two year. 4. Assessee is required to produce fresh confirmation with confirmed copy of a/c of sundry creditor, with list current address, PAIN details ets. 5. Assessee is required to produce a separate list of sundry creditor, where amount was outstanding more than I year. Assessee is required to produce fresh confirmation of unsecured loan with list of complete current postal address & bank transaction details, (Copy of ITR for A.Y. 2008-09 & A. Y. 2007-08) Provide details of freight debited with copy Of ledger a/c. Provide list Of all parties to whom payment were made along with TDS details- 8. Justifi depreciation debited in P&L a/c 4. In reply, the assessee has filed only ledger copy of account for some of the sundry creditors which were neither signed by the creditors nor by the assessee, which is not acceptable and still remain unverified. Even from the assessment record, it was found that assessee did not file any confirmations of these sundry creditors during the proceedings under section 143(3) of the Income Tax Act, 1961. 5. Regarding unsecured loan, the åSsessee filed confirma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any took a huge term loan of Rs. 190 lakhs and CC limit of Rs. 50 lakhs from Bank of Baroda. However, due to inexperience of the promoters the assessee company could not manufacture proper quality of goods. Further the unit was installed at Roorkee but the required skilled labour was not available there. Most of the textile business is centered at Meerut. The promoters had installed the factory at Roorkee to avail the benefit Of Sales Tax at Uttaranchal (1% rebate is allowed in CST) and there is 100% exemption from Income Tax for first 5 years and 100% exemption from excise but they could not manage the factory by travelling daily from Meerut to Roorkee. The labour was also sourced from Meerut but the labour did not cooperate hence, there was lower production with inferior qualities of goods. The goods were sold at lower rare due to inferior quality. Therefore, huge interest burden of bank, depreciation of plant and machinery and building, and loss on sale of machinery were the reason for such a huge loss.... " 10. The assessee's submission is considered but not found convincing and acceptable. The assessee itself submitted that the factory was installed at Roorkee for getti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein the aforesaid additions of Rs. 8,48,105/- and the aforesaid addition of Rs. 49,46,196/- were confirmed. This present appeal has been filed by Assessee against the aforesaid impugned appellate order dated 07.03.2016 of the Ld. CIT(A). The grounds of appeal, as revised by the assessee during appellate proceedings in Income Tax Appellate Tribunal ("ITAT", for short), are as under: "1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in disallowing the loss of Rs. 1,69,62,107/-. 2. That in any case and in any view of the matter, disallowance of loss is double disallowance to the extent of Rs. 49,46,196/- & Ld. CIT(A) ought to have deleted the disallowance to that extent. 3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in estimating the income at5% of turnover and that too without allowing interest and depreciation. 4. That having regard to the facts and circumstances of the case, brought forward losses for AY 2007-08 ought to be allowed. 5. That the appellant craves the leave to add, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following particular: "1. CIT vs. Bishambhar Dayal & Co., (1994) 210 ITR 0118, High Court of Allahabad. 2. Shri Ram Jhanwar Lal vs. ITO & Ors., (2010) 321 ITR 0400, High Court of Rajasthan. 3. CIT vs. Jain Construction Co. & Ors., (2000) 245 ITR 0527, High Court of Rajasthan. 4. CIT vs. Chopra Bros. India (P) Ltd., (2001) 252 ITR 0412, High Curt of Punjab & Haryana. 5. Copy of CBDT Circular No: 29-D (XIX-14) dated 31.08.1965." (B.3.2) Moreover, Brief Synopsis was also filed from the assessee's side, the relevant portion of which is reproduced as under: "BRIEF SYNOPSIS BEFORE HON'BLE INCOME TAX APPELLATE TRIBUNAL AGAINST ORDER U/S 143(3)7263 FOR A.Y 2008-09 IN ITA NO. 2504/DEL- 2016 Assessee's Appeal GROUND NO. 1 it relates to the action of Ld. A.O. in disallowing the loss of Rs. 1,69,62,107/- which was confirmed by Ld. CIT(A). Ld. AO. has discussed this issue at page 3-4 of the assessment order. -Appellant's detailed reply are reproduced at page 3-4 of the assessment order according to which there were bank loans on which interest was paid and detailed justification for the loss was given. PB 64 is submissions during original assessment proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f account, bills, vouchers etc. were produced by the assessee during first round of assessment proceeding (resulting in aforesaid Assessment Order dated 26.11.2010) which was examined by the AO on test check basis; and the trading results were accepted. The Ld. Counsel for Assessee submitted, that book results should have been accepted in the second round of assessment proceedings also (resulting in aforesaid Assessment Order dated 28.03.2014). However, the Learned Departmental Representative ("Ld. DR", for short) contended that the Ld. CIT vide aforesaid order dated 18.03.2013, which was passed under Section 263 of the I.T. Act, had restored the matter back to the AO with direction to pass fresh order after examining the issue properly. Therefore, the assessee was required to produce the books of account, bills, vouchers etc. before the AO in the second round of assessment proceedings also (resulting in aforesaid Assessment Order dated 28.03.2014). The Ld. DR further submitted that the aforesaid order dated 18.03.2013 of the Ld. CIT passed under Section 263 of I.T. Act has attained finality because the assessee's appeal against this order was dismissed by ITAT vide order dated 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following two additions: 1. disallowance of Rs. 41,253/- towards expenses on duties and taxes on the ground that same were not related to business expenses and disallowed under section 43B of the Act; 2. disallowance of Rs. 21,744/- to cover of the possible leakage due to selfmade and internal vouchers under the head repair and maintenance, welfare expenses, freight and cartage and vehicle maintenance, at the rate of 10% of the expenses. 3. Subsequently, the learned Commissioner of Income Tax examined the records and issued notice under section 263 dated 06/03/2013 stating that the assessment order was erroneous so as to prejudicial to the interest of Revenue and it was passed without inquiring on the following points: (a) the loss of Rs. 1,75,74,887/- on the total turnover of Rs. 1,69,62,106/-; (b) the loss on sale of machinery at Rs. 49,46,196/- under the head selling and administrative expenses of Rs. 56,74,304/-; (c)(i) the transaction of addition of new machinery in the year ending 31/03/2007 and out of which sale of machinery worth 1.05 crore resulting into loss to the tune of Rs. 49,46,196/-, and whether it was a collusive one or if the sales made to the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties covered under section 40A(2)(b) of the Act; d. the AO is directed to inquire into correctness of the claim towards financial charges which claimed it more than double of the previous year; e. the Assessing Officer did not enquire into unsecured loan and sundry creditors and the assessee failed to explain the same; f. the AO is further directed to inquire into correctness of applicability of TDS and disallowance under section 40(a)(ia) of the Act in respect of freight expenses debited to the tune of Rs. 6.93 Lacs. 4. Against the above order under section 263 of the Act passed by the learned Commissioner of Income Tax, the assessee is in appeal before the Tribunal raising grounds as reproduced above. 5. The ground No. 1 was not pressed by the learned Authorized Representative of the assessee and therefore dismissed as infructuous. 6. In ground No. 2, the assessee has challenged in making addition of Rs. 49,46,196/- claimed by the assessee for loss on account of machinery. It was contended by the learned Authorized Representative that loss was accepted by the Assessing Officer after due consideration. It was submitted by the learned Authorized Representative that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the view taken by the Assessing Officer was one of the best, while framing the assessment under section 143(3) of the Act and setting aside those issues for further Inquiry was nothing but duplication of work, which was not permitted under section 263 of the Act. 4.1 He further submitted that learned Commissioner of Income Tax has not carried out enquiries in the respect of the above issues himself and arrived at whether the order was erroneous as well as prejudicial to the interest of the Revenue. 4.2 In response to this, the learned Commissioner of Income Tax (Departmental Representative) submitted that the Assessing Officer did not call for any information in respect of loss claimed on sale of machinery and, therefore, this is the case of total lack of enquiry by the Assessing Officer, which rightly warranted invoking of jurisdiction by the learned Commissioner of Income Tax, under Section 263 of the Act. Further, in respect of the other issues, also he submitted that the Assessing Officer, though called for information in respect of sundry creditors and unsecured loans but no confirmations were filed in respect of sundry creditors and no banks and other details w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer is required to look into, makes the assessment order erroneous. Similarly, after making investigation but thereafter taking the patently erroneous view, also makes an order erroneous. But, however, if there are two possible view on the point of issue, then order cannot be said to be erroneous. In other words, if issue is debatable and the Assessing Officer has taken one possible and legally sustainable view, then the Commissioner of Income Tax, cannot be allowed to substitute his view holding the order as erroneous. In another situation, any order may be erroneous due to lack of enquiry on the issue. When the investigation was made by the Assessing Officer, but the circumstances warrant that further investigation was required, and the Assessing Officer failed to carry out such enquiry, this would also make the assessment order erroneous. However, if the Assessing Officer carried out proper investigation and gets satisfied during the course of hearing after proper examination, the assessment order cannot be characterized as erroneous simply because there is no discussion in the assessment order on such aspects. In this regard, as long as there is material to suggest that en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of assets including machinery was raised by the Assessing Officer. It is also clear that no query in respect of sale of machinery was made by the Assessing Officer. In absence of any stamp of acknowledgement by the Department on the letter dated 15/11/2010 and 25/11/2010, it cannot be treated that same were filed before the Assessing Officer. Even if it is considered that the assessee filed reply dated 15/11/2010 and 25/11/2010 before the Assessing Officer, the Assessing Officer was required to carry out Inquiry in respect of the claim of loss on sale of machinery, however, no such enquiry was made by the Assessing Officer, and, therefore, the case of the assessee falls in the category of complete lack of Inquiry on the issue of loss from sale of machinery. In view of above, we are of considered opinion that the assessment order on the issue is erroneous insofar as prejudicial to the interest of the Revenue and the learned Commissioner of Income Tax is right in assuming jurisdiction under section 263 of the Act. 4.5 Insofar as objections raised in ground No.3, in respect of correctness of the claim toward financial charges, correctness of unsecured loan in sundry creditors, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax is correct in holding that further enquiry was necessary to examine the sundry creditors, financial charges, liability of TDS on freight charges. 4.9 The Hon'ble jurisdictional High Court in the case of Meerut Roller Flour Mills Ltd (supra) held the assessment order as erroneous and prejudicial to the interest of the Revenue when the Assessing Officer had not conducted a proper Inquiry to verify cash credits and trade creditors and the matter remanded to the Assessing Officer under section 263 of the Act. The relevant finding of the Hon'ble High Court is reproduced as under: "16. It was incumbent upon the Assessing Officer to have examined the cash credit entries appearing in the accounts of the petitioner assessee in detail keeping in view the explanation furnished by the petitioner. Having failed to do so, it is but obvious that the assessment order is erroneous and prejudicial to the interest of the Revenue. Mere filing of the reply by the assessee to which the attention of the Court was invited is not sufficient. We find that with regard to the trade creditors, copies of their account books were filed vide letter dated 9th of November, 2010, ; t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts pleas as well as to cross-examine Dr. Vyas. Therefore, the question is whether it is obligatory on the CIT acting under s. 263 to enter into a regular inquiry in all cases before the original assessment order is cancelled and the ITO is directed to make a fresh assessment. There is nothing in the section itself which would justify such a view, because, on the question of inquiry, the section specifically says that that inquiry should be as "deemed necessary" by the CIT. In this connection, we may profitably refer to some of the observations of the Supreme Court in Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC) : TC57R.202. In that case, the order which was passed by the CIT mentioned some facts which were not indicated or intimated to the assessee and which the assessee had no opportunity of meeting. The assessee made a grievance of this but the Supreme Court disposed of the contention raised by the assessee by observing that all the additional material, on which the CIT had relied upon, was supporting material and did not constitute the basic ground on which the order under s. 33B (of the Act of 1922) was passed. The Supreme Court further observed that even if the facts, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t settled the assessment finally, and has preferred to direct the ITO to make an order for fresh assessment, it was proper that he did not express any final conclusions and recorded only prima facie conclusions at which he had arrived with reference to the facts of the case. Here it should be noted that, as the assessment was to be freshly made by the ITO, the only proper course for the CIT was not to express any final opinion as regards the controversial points. 18. Shri Patel heavily relied upon the Allahabad High Court decision in J. P. Srivastava & Sons Ltd. vs. CIT (1978) 111 ITR 326 (All) : TC57R.331 for the proposition that it was obligatory on the CIT to examine the merits of the objections raised by the assessee and, therefore, it was not proper to "delegate" that power to the ITO by setting aside the assessment order and directing him to make fresh assessment. The facts of that case were that the only ground upon which action was taken by the CIT under s. 33B (of the Act of 1922) was that the ITO did not apply his mind to the claim of the assessee as contained in part D of the return. The Court found that the CIT himself did not apply his mind to the merits of claim an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of profit @ 5% of gross business receipt was a reasonable estimate, and should be confirmed. We have heard both sides. We have also perused the materials available on record. It is not in dispute that the assessee had failed to produce books of account, bills, vouchers etc. before the AO during the second round of assessment proceedings (resulting in aforesaid Assessment Order dated 28.03.2014). It is also not in dispute that the order of the Ld. CIT passed under Section 263 of I.T. Act has attained finality and accordingly the directions given in this order by the Ld. CIT have also attained finality. Moreover, the Assessee has not offered to produce books of account, bills, vouchers etc. even during the appellate proceedings before the Ld. CIT(A) and in ITAT. Merely because the assessee had produced the books of accounts, bills, vouchers etc. during the first round of assessment proceedings which were accepted by the AO, it cannot be said that the assessee was not required to produce books of account, bills, vouchers etc. again during second round of assessment proceedings, having regard to direction of the Ld. CIT of aforesaid order dated 18.03.2013 under Section 263 of I.T. Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition of the same amount is not sustainable in law. (E) The third issue before us, is regarding the claim of depreciation. At the time of hearing before us, both sides were in agreement that the assessee was eligible for depreciation of Income Tax Act, 1961 and Income Tax Rules, 1962. As the AO has estimated net profit and not gross profit of business, both sides were also in agreement that the depreciation as claimed by the assessee in the books stands already allowed in the estimation of net profit; and therefore, depreciation to be allowed to the assessee as per Income Tax Act, 1961 and Income Tax Rules, 1962 needs to be reduced by the amount of depreciation claimed by the assessee in the books of accounts. In view of the foregoing, and as both sides have agreed to this at the time of hearing before us, we direct the AO to allow depreciation as per Income Tax Act, 1961 and Income Tax Rules, 1962 as reduced by the amount of depreciation claimed by the assessee in the books of account. (F) The next issue before us, is regarding the assessee's claim for interest expenses. The Ld. Counsel for assessee relied on the case of Hon'ble Rajasthan High Court in the case of CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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