Appel v. M/S Venus Woollen Mills, Ludhiana

GURBAX SINGH2018.12.03 12:13 IN THE HIGH COURT OF PUNJAB AND HARYANA ALCHANDIGARH. ITA No.111 of 2015 (O&M)Date of decision: 27.9.2018| The Principal Commissioner of Income [Tax 3, Ludhiana .....- Appel Vs. M/s Venus Woollen Mills, Ludhiana .... Responde CORAM: HON BLE MR. JUSTICK AJAY KUMAR MITTALHON BLE MR. JUSTICEK AVNEESH JHINGANHON BLE MR. JUSTICEK AVNEESH JHINGAN Present: |Mr. Rajesh Katoch, Sr. Standing Counsel for the appellant.Mr. Sachin Bhardwaj, Advocate for the respondent. Ajay Kumar MittalJe CM No.17890=ia=2018 Allowed as prayed for. At the joint request of learned counsel for the parties, both theappeals, 1.e. ITA Nos. 111 and 141 of 2015 are taken up for hearing today itself. ITA No.111 of 2015 l.This appeal has been preferred by the revenue under Section 260A ofthe Income Tax Act, 1961 (in short, “the Act’) against the order dated 17.9.2014|(Annexure-3) passed by the Income Tax Appellate Tribunal, Chandigarh Bench|“B’, Chandigarh (hereinafter referred to as “the Tribunal”) in ITANo.407/CHD/2013, for the assessment year 2008-09. The appeal was admitted by|this Court vide order dated 28.7.2016 for determination of the following substantialquestion of law:- “Whether on the facts and in the circumstances of the case,Hon’ble ITAT Chandigarh is justified 1n quashing the revisionary| order under Section 263 made by the CIT-3, Ludhiana without|appreciating the fact that all the comparison of figures made by theassessee 1S very much based on the figure taken from books ofaccount duly admitted defective by the assessee himself during|survey operation?”’ ).A few facts necessary for adjudication of the instant appeal as.narrated therein may be noticed. The assessee 1s engaged in the business of|manufacturing/trading of yarn and fiber waste etc. A survey under Section 133A of|the Act was conducted at the business premises of the assessee on 28.2.2008 and_during the survey, a sum of|zy2,15,00,000/- was surrendered as an additionalincome. The assessee filed its return of income for the assessment year 2008-09 on27.9.2008 declaring an income of|S|1,35,36,300/-. The case was selected for'scrutiny and notice was issued to the assessee. The assessment was completed|under Section 143(3) of the Act by the Assessing Officer vide order dated|8.12.2010 (Annexure-I) by making an addition of|S|15,752/- under Section40(a)(1a) of the Act. Subsequently, the Commissioner of Income Tax-3, Ludhiana|(in short, “the CIT’) vide order dated 28.3.2013 passed under Section 263 of the|Act held that the order of the Assessing Officer was erroneous in so far as it was|prejudicial to the interests of the revenue. It was observed that the Assessing|Officer had failed to make proper verification and the assessment order was passedwithout necessary verification. Accordingly, the CIT vide order dated 28.3.2013(Annexure-2) enhanced the income of the assessee by)zy1,83,80,208/-. Feelingagerieved by the order, Annexure-2, the assessee filed an appeal before the|Tribunal. The Tribunal vide order dated 17.9.2014 (Anenxure-3) quashed the order|dated 28.3.2013 (Annexure A-2) relying upon the decision of the Supreme Court 1nMalabar Industrial Company Limited vs. Commissioner ofIncome Tax,(2000)243 ITR 83. Hence the present appeal by the revenue. 3We have heard learned counsel for the parties and perused the record. 4A Examining the scope of Section 263(1) of the Act, 1t would be expedient to reproduce the said provision which 1s relevant for our purpose:- 5.| 3We have heard learned counsel for the parties and perused the record. 4A Examining the scope of Section 263(1) of the Act, 1t would be expedient to reproduce the said provision which 1s relevant for our purpose:- 5.| (263(1)The Principal Commissioner or Commissioner may call forand examine the record of any proceeding under this Act, and if heconsiders that any order passed therein by theAssessing Officer iserroneous in so far as it is prejudicial to the interests of the revenue,he may, after giving the assessee an opportunity of being heard andafter making or causing to be made such inquiry as he deems.necessary, pass such order thereon as the circumstances of the casejustify, including an order enhancing or modifying the assessment, orcancelling the assessment and directing a fresh assessment.Explanation.- XxxXxxXxxxand examine the record of any proceeding under this Act, and if heconsiders that any order passed therein by theAssessing Officer iserroneous in so far as it is prejudicial to the interests of the revenue,he may, after giving the assessee an opportunity of being heard andafter making or causing to be made such inquiry as he deems.necessary, pass such order thereon as the circumstances of the casejustify, including an order enhancing or modifying the assessment, orcancelling the assessment and directing a fresh assessment.Explanation.- XxxXxxXxxx A bare perusal of Section 263 of the Act makes it clear that before the CIT passes any order, an opportunity of hearing 1s required to be provided to the|assessee and thereafter, prima facie finding recorded that the order made by the|Assessing Officer 1s erroneous in so far as it 1s prejudicial to the interests of the|revenue. Power under Section 263 of the Act can be exercised in relation to a/proceeding in which the Assessing Officer has passed an erroneous order|prejudicial to the interests of the Revenue. The law envisages fulfillment of|following conditions for assumption ofjurisdiction under Section 263 of the Act:- (a) such order should be erroneous; | (b) and it should be prejudicial to the interests of the revenue. In other words, two circumstances must exist to enable the Commissioner to exercise power of revision under Section 263, viz., (a) the order is erroneous; (b)|by virtue of the order being erroneous, prejudice has been caused to the interests ofthe revenue. Wherever one of them is absent - 1f the order of the assessing officer|is erroneous but is not prejudicial to the interests of the revenue or if it 1s not|erroneous but is prejudicial to the interests of the revenue - assumption of|revisional jurisdiction under Section 263 of the Act would not be proper. 6.|The object of the enactment of the aforesaid provision is to correct an.order which is prejudicial to the interests of the revenue. The purpose behind|incorporating this provision 1n the statute is to ensure that interests of the revenue|is safeguarded by an erroneous order passed by the Assessing Officer as the|Department has no right to file an appeal against the order of the Assessing|Officer. It 1s not the power as a substitute for the power of the Assessing Officer tomake assessment whereas the revisional power under Section 263 of the Act 1s|certainly available where the order of the Assessing Officer 1s erroneous and_prejudicial to the interests of the revenue. There is no strait jacket formula for|categorizing an order to be erroneous and prejudicial to the interests of the revenuebut depends upon the facts of each case. Jo|Section 263 of the Act had been matter of legal interpretation innumerous decisions. The Apex Court inMalabar [Industrial Co. Limite°’s case(supra) observed as under:- Jo|Section 263 of the Act had been matter of legal interpretation innumerous decisions. The Apex Court inMalabar [Industrial Co. Limite°’s case(supra) observed as under:- "7. There can be no doubt that the provision cannot be invoked to.correct each and every type of mistake or error committed by theAssessing Officer; it 1s only when an order 1s erroneous that thesection will be attracted. An incorrect assumption of facts or anincorrect application of law will satisfy the requirement of the orderbeing erroneous. In the same category falls orders passed withoutapplying the principles of natural justice or without application ofmind.’’ 8Adverting to the factual matrix in the present case, a survey was.conducted at the business premises of the assessee on 28.2.2008 and during survey,4 surrender ofzy2,15,00,000/- was made by the assessee as additional income. Theaforesaid surrender was on account of following undisclosed income:-_ (a)zy70,00,000/- on account of unexplained investment 1n stock; (b)S|4,00,000/- on account of excess cash found during survey; (c)S|1,31,00,000/- unaccounted investment made in construction of)building at 424, I.A.Area, Ludhiana; (d)zy10,00,000/- additional income offered on account of discrepancyon account of any mistake/omission/discrepancy in the books of)account. 9The Assessing Officer vide assessment order dated 08.12.2010 passed|under Section 143(3) of the Act after recording that surrender ofzy2,15,00,000/-.was made during survey under Section 133A of the Act on 28.2.2008 assessed thetaxable income atZL1,35,52,050/- after making an addition of onlyv15,752/-under Section 40(a)(1a) of the Act to the returned income of41,35,36,300/-. Aperusal of the assessment order does not show that the Assessing Officer applied|its mind to the correctness of the books of account produced before her except tonote that the books of accounts were produced and test checked. The Assessing|Officer was required to have carefully dealt with the present case especially wherethe assessee had surrenderedS|2,15,00,000/- during survey under Section 133A ofthe Act carried out on 28.2.2008 where huge amount ofS|1,31,00,000/- wassurrendered on account of undisclosed investment in construction of building in|424 [A-Area, Ludhiana andS|70,00,000/- on account of unexplained investment 1nstock. From the narration of facts noticed hereinabove, it 1s clear that the assessee|has attempted to off set the surrender made by him by claiming loss figure 1n the|business otherwise the taxable income could not have beenzy1,35,52,050/- against|4 surrender ofS|2,15,00,000/- made by it. The Tribunal has also made certain)observations 1n that behalf but proceeded to cancel the revisional order passed by|CIT under Section 263 of the Act. The relevant observations read thus:-| “26. Before parting, we would like to observe that Assessing Officer|may have called for certain details which have been filed but nodiscussion at all has been made in the assessment order and in ouropinion the Assessing Officer in general should be more cautious and vigilant and discuss the various aspects of the case at least briefly inthe body of the assessment order. Xxxxxx’’ 10. _The CIT vide order passed under Section 263 of the Act hadcomputed the enhancement of S|1,83,80,208/- as under:- “14 The AQ failed to take into account the decision of the Hon’ble|Jurisdiction High Court as well as Jurisdiction Tribunal that in thesecircumstances no congnizance can be taken of the books of accountsproduced by the assessee and also surrendered amount cannot betreated as business income in the absence of any evidence. The booksof account of the assessee are rejected. Keeping in view the ratio ofthe decision of the Hon’ble Jurisdiction High Court as well as Hon’bleJurisdiction Tribunal, the GP rate of assessment year 2007-08 isapplied and the income is enhanced to that extent which is computedas under:-. Income to be enhanced byS|1,83,80,208/- 10. _The CIT vide order passed under Section 263 of the Act hadcomputed the enhancement of S|1,83,80,208/- as under:- “14 The AQ failed to take into account the decision of the Hon’ble|Jurisdiction High Court as well as Jurisdiction Tribunal that in thesecircumstances no congnizance can be taken of the books of accountsproduced by the assessee and also surrendered amount cannot betreated as business income in the absence of any evidence. The booksof account of the assessee are rejected. Keeping in view the ratio ofthe decision of the Hon’ble Jurisdiction High Court as well as Hon’bleJurisdiction Tribunal, the GP rate of assessment year 2007-08 isapplied and the income is enhanced to that extent which is computedas under:-. Income to be enhanced byS|1,83,80,208/- Based on the above discussion, I am also satisfied that the assessee has_concealed income or furnished inaccurate particulars of income.”’ 11.JIn such circumstances, it cannot be concluded that the assessment|order dated 08.12.2010 passed under Section 143(3) of the Act was not erroneous|and prejudicial to the interests of the revenue. Accordingly, it 1s held that the|Tribunal erred 1n setting aside order dated 28.3.2013 passed by CIT under Section|263 of the Act. 12.At this stage, 1t was pointed out that in pursuance to the order passedby the CIT dated 28.3.2013, the assessment was completed under Section 143(3)|read with Section 263 of the Act on 28.3.2013 recomputing the taxable income|enhancing the returned income byzy1,83,80,208/-. The onus was heavily on theassessee to discharge its obligation to satisfy that the books of account were|genuine and properly maintained especially when a huge surrender ofzy2,15,00,000/- had been made during survey under Section 133A of the Act on|28.2 2008. 13.The powers of CIT under Section 263 of the Act are very wide. The,only limitation on his power is that he must have some material which would|enable him to form a prima facie opinion that the order passed by the officer was|erroneous in so far as it 1s prejudicial to the interests of the revenue. Once he|concludes on the basis of the material that the order of the Assessing Officer waserroneous and prejudicial to the internets of the revenue, the CIT 1s empowered topass an order as the circumstances of the case may warrant. He may pass an orderenhancing the assessment or he may modify the assessment. He 1s also|empowered to cancel the assessment and direct a fresh assessment. The CIT 1s|fully competent to adopt any one of the three causes indicated by the said|provision. | 14.The CIT while coming to the conclusion that declared income 1s to beenhanced byzy1,83,80,208/- had dealt with the matter in detail before so|concluding. It would be expedient to reproduce the findings of the CIT which are|quoted below:- “5. | have carefully considered the submission of the assessee. The|Assessee was specifically asked as to why the books of account be notrejected as the books of account are not reliable in view of thesurrender made by the assessee on various heads. The Assessee did not give any specific reply and simply stated that the AO did not pointout any specific defects 1n the books of account. What greater proof 1s.required than the own admission of the assessee that there arediscrepancies in the books of account and a huge sum ofS|2?15 crores.had been offered. No accountancy principle justifies that such booksof account are reliable. The AO failed to reject the books of account,rather without making any proper inquiry accepted the books ofaccount as true. 6. It 1s also seen that the assessee adopted certain methods to reducethe income after making surrender ofv2?15 crores. The assessee has)taken a plea that there was volatility in the market. The assessee failedto give any evidence that there was volatility in the market. Thepurchase/sale bills cannot be believed in view of the fact that suchbooks of account are reliable to be rejected. 6. It 1s also seen that the assessee adopted certain methods to reducethe income after making surrender ofv2?15 crores. The assessee has)taken a plea that there was volatility in the market. The assessee failedto give any evidence that there was volatility in the market. Thepurchase/sale bills cannot be believed in view of the fact that suchbooks of account are reliable to be rejected. 7. A statement of Shri Sanjay Gupta partner of M/s Venus WoollenMills was recorded on 28.2.2008. The statement is reproduced asunder:- Q.! During the course of survey inventory of stock of the firm VenusWoollen Mills has been prepared. As per this inventory stockavailable physically comes to’S|6,40,65,390/-. As against this stock asper books have been shown atzy5,/4,42,727/-. Thus, there 1s.ditference ofS|66,22,665/- being excess stock found at your premises.How do you explain the same’| Ans. I cannot explain this difference at the moment. However, to buypeace of mind and settle the aftair I offer an additional income ofS|SQ|lacs (Seventy lacs) in respect of unexplained investment in stocksubject to no penalty under Section 271(1)(c).. Q.2. During the course of survey inventory of cash available at yourbusiness premises has been prepared as per this inventory cashphysically available is.44,63,570/-. However, cash as per your books|of account comes to475,802/-. Please explain the source of excesscash found atzy3,87,/68/-. Ans. | cannot explain this at moment. However, to buy peace I offer asum ofL4 lacs being additional income on this account subject to nopenalty under Section 271(1)(c). Q.3. During the course of surveya slip has been found. As per this slipa sum of.zy1,31,00,000/- has been invested by you 1n the constructionof building at 424, ].A-A. Please go through the same and show wherethe amount so invested is accounted for 1n the books? [f not what is.the source thereof? Ans. I have perused this slip. I have also put my signatures thereon as.a book of having seen this slip. As per slipS|1,31,00,000/- has beenspent on construction of factory building of Venus Woollen Mills at424, Industrial Area-A, Ludhiana during the financial year 2007-08over and above the amount disclosed in the regular books of account.This amount has been spent out of the undisclosed income of the firmwhich | am offering for tax subject to no penalty under Section271(1)(c). | Q.4. Do you wish to offer any additional income on anything otherthan the above? Ans. | wish to declare a sum of!S|10 lacs over the above discrepancies|to cover any possible mistake/omission/discrepancy in the books ofaccount for the financial year 2007-08. Thus, in total a sum ofy2,15,00,000/- (Rs.Two crores and fifteen lacs) 1s offered for tax overand above the normal income as per account for the financial year2007-08. 8 |The above statement itself shows that the assessee’s books of'account cannot be relied upon in view of the details of discrepanciesfound during the course of survey and the assessee has also admittedsuch discrepancies. If excess stock/excess cash is found, it 1sinconceivable that such books of account are reliable. The assessee 1s.unnecessarily putting an emphasis that the AO has verified all therecords. Infact, the AO failed to apply his mind that under suchcircumstances such books of account cannot be relied upon. Q |The AO conducted the proceedings by raising queries on|various dates in the order sheet. A copy of order sheet 1s placed asAnnexure I. 10.The AO also issued questionnaire vide letter dated|22.11.2010. A copy is placed as Annexure II. The assessee filed replyvide letter dated 29.11.2010. A copy is placed as Annexure II]. 11. The assessee also filed further reply vide letter dated 3.12.2010. Inpara 11 of the reply dated 3.12.2010, the assessee submitted as under:- Q |The AO conducted the proceedings by raising queries on|various dates in the order sheet. A copy of order sheet 1s placed asAnnexure I. 10.The AO also issued questionnaire vide letter dated|22.11.2010. A copy is placed as Annexure II. The assessee filed replyvide letter dated 29.11.2010. A copy is placed as Annexure II]. 11. The assessee also filed further reply vide letter dated 3.12.2010. Inpara 11 of the reply dated 3.12.2010, the assessee submitted as under:- “As regards, fall in the GP rate comparison to the last year isconcerned, we have already filed detailed submissions vide ourearlier letter. Further, in continuation of that we are filingherewith the trading account as on date of survey and in thattrading account GP comes to 11.13% and its proof our bonafideat page 69. Another reason was that during the year underconsideration, our purchase rate 1s increased as compared to thelast year and while sale rates are decreased as compared to thelast year, the comparison for the same 1.e. purchase and sales arebeing filed therewith at page 70-98 alongwith bills of sales andpurchase that 1s why our GP rate has gone down as compared tothe last year.” 12. The AO failed to apply his mind and simply accepted theexplanations of the assessee. Once there are discrepancies in thebooks of account and also surrender is made, the AO did not come toa logical conclusion that the very books of account which areunreliable have been relied upon while accepting the explanations ofthe assessee. In para of the reply dated 15.3.2013, the assessee hassubmitted that there 1s not much difference in the GP rates asreturned by the assessee if the previous year’s rate 1s taken out of thepicture. The assessee has been earning profits and the assessee hasfailed to give any cogent evidence for the drastic fall in the GP rateaS compared to earlier years. A general statement that there wasfluctuation in the rates 1s not acceptable. Moreover, the books ofaccount of the assessee are not reliable.| 13. One more aspect on the particular facts of case 1s required to beseen. The assessee adopted some methods to offset the incomesurrendered. Otherwise the income should not have come below theincome surrendered by the assessee plus a normal income declared inthe last year. It was a conscious attempt on the part of the assessee tooffset the income declared during course of survey. Even the netprofit rate has been brought down from 9.32% to 4.32%. This furtherindicates that the assessee has adopted a method to offset the amountsurrendered.’ 145.No illegality or perversity could be pointed out in the order passed bythe CIT which may warrant interference by this Court. Accordingly, the appeal 1s allowed and the order dated 17.9.2014 (Annexure-3) passed by the Tribunal 1s set|aside. The substantial question of law 1s answered in favour of the revenue. | 16.Before parting, 1t 1s considered appropriate to direct the Registry ofthis Court to forward a copy of this order to the Central Board of Direct Taxes|(CBDT) to issue necessary instructions to all the Assessing Officers that 1n cases ofsearch and seizure or where survey operations have been carried out by the|Department and surrender made or concealed income detected, to ensure proper|scrutiny of such cases and discuss reasons for rejecting or accepting the books of|account of the assessee and not to merely record in slipshod or cursory manner that“the books of account produced and test checked’ as done by the Assessing Officer|in the present case. Judge| (Ajay Kumar Mittal) September 27, 2018. (Avneesh Jhingan) |Judge | Whether speaking/reasoned Whether reportable YesYes