Commissioner Of Income Tax-Ii, Chandigarh v. M/S Assam Tea House

of 2010 *** IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Income-tax Appeal No. 32of 2010 Date of decision: 28.9.2010 Commissioner of Income Tax-II, Chandigarh ...Petitioner Versus M/s Assam Tea House ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Ms. Urvashi Dhugga, Advocate for the appellant. Mr.Akshay Bhan, Advocate for the respondent.**** ADARSH KUMAR GOEL, J (Oral). 1.This appeal has been preferred under Section 260A ofIncome Tax Act, 1961 (hereinafter referred to as “the Act”) proposingfollowing substantial question of law arising out of the order dated1.8.2009 of the Income Tax Appellate Tribunal, Chandigarh Bench 'B'Chandigarh (hereinafter referred to as “the Tribunal”) passed in ITANo.327/Chandi/2009 in respect of assessment year 2004-05:- “(i).Whether in the facts and circumstances of the caseand in law the ITAT was justified in setting-aside the orderpassed by the Commissioner under Section 263 of theAct, holding that it does not contain any firm decision thatthe order passed by the Assessing Officer u/s 143 (3) *** was erroneous and prejudicial to the interest of revenue? 2.After the Assessing Officer made assessment, theCommissioner exercising the powers under Section 263 of the Actcalled for record for examination and set aside the order with theobservations (i) that the books of accounts were not produced as perorder sheet of the Assessing Officer. (ii) The order recorded thatAssessing Officer had seen the books of accounts but the order didnot reflect any checking or verification of books of accounts. (iii) Thecorrectness or genuineness of the closing stocks, details ofpurchases and verification of transportation was not carried out. (iv)The assessee had paid commission to its partners but did not deducttax at source under Section 194H of the Act. (v) The rate of interestat which loan was advanced to family members was not examinedwith reference to Section 40A(2)(b). 3.On appeal of the assessee, the Tribunal set aside theorder passed under Section 263 of the Act holding that after criticismof the order of the Assessing Officer, the Commissioner did not reachany firm conclusion about evasion of tax which was conditionprecedent for exercise of power as per law laid down by Hon'bleSupreme Court inMalabar Industrial Corporation Ltd. Vs. CIT 243 ITR 83 (SC)and a judgment of this Court inCIT Vs. Kanda RiceMills178 ITR 446 (P&H). 4.We have heard learned counsel for the parties. 5.It has been submitted on behalf of the appellant that theTribunal erred in law in interpreting Section 263 of the Act as *** requiring final conclusion to be reached by the Commissioner on theissue of order of AO being prejudicial to the interest of revenue.Requirement of the said provision is met if the order of theAssessing Officer is erroneous and prejudicial to the interest ofrevenue. For holding the order to be prejudicial to the interest ofrevenue, final conclusion on evasion of tax was not a must. 6.Learned counsel for the assessee supported the viewtaken by the Tribunal. 7.Before we consider the rival submissions, it will beappropriate to notice the reasons given in the order of Commissionerand order of the Tribunal. 8.The Commissioner, inter-alia, observed:- “From the record it was observed that:- i)The assessee has not produced the books ofaccounts and stock register. Even in the reply dated24.5.2006 furnished by the assessee before the A.O.,though it was mentioned of producing of books ofaccount, the A.O. Has given a remark that books ofaccount, are not produced. This shows that theassessment has been framed by the A.O. in the absenceof books of accounts. However, while passing the order,the Assessing Officer has mentioned that books ofaccounts were produced and test checked. 7.Before we consider the rival submissions, it will beappropriate to notice the reasons given in the order of Commissionerand order of the Tribunal. 8.The Commissioner, inter-alia, observed:- “From the record it was observed that:- i)The assessee has not produced the books ofaccounts and stock register. Even in the reply dated24.5.2006 furnished by the assessee before the A.O.,though it was mentioned of producing of books ofaccount, the A.O. Has given a remark that books ofaccount, are not produced. This shows that theassessment has been framed by the A.O. in the absenceof books of accounts. However, while passing the order,the Assessing Officer has mentioned that books ofaccounts were produced and test checked. ii)During the course of assessment proceedings theA.O. has obtained the details of party wise purchases, butnot verification has been carried out from the parties. The *** verification was essential, as the balance sheet shows nocreditor, whereas you have debited purchases ofRs.79,38,749/- during the month of March. Even thecopies of accounts of these parties have not been calledfor by the Assessing Officer. iii)Further, you have shown interest of Rs.4,53,249/-on FDRs and debited a sum of Rs.2,60,778/- on accountof interest on unsecured loans to family members. Thesame has been allowed without verification i.e. at whichrate the interest has been paid and what was the rate ofinterest of FDRs. The issue should have been examinedu/s 40A(2)(b) of the I.T. Act, 1961. xxxxxxxxx .....The points on which the assessee could not offer anysatisfactory explanation are discussed as below:- (i)Non-production of books of accounts: From the perusal of assessment record it wasobserved that on 24.5.06 the assessing officer had madea noting that the books of accounts of the assessee havenot been produced. However, the assessment ordermentions that the books of accounts were produced andexamined and the expenses debited to P & L accounthave been test checked with reference to evidencesmaintained. However, the order sheet entry on 10.8.06does not mention whether the books of accounts wereproduced or not. Thus, the assessing officer has failed to check the books of account at the time of assessmentand the order passed by him is not only erroneous butalso prejudicial to the interest of revenue. (ii)Closing stock details not verified During the proceedings u/s 263 of the I.T.Act, 1961the counsel for the assessee was asked to produce thestock register. From the details filed by the assessee and'Bilty Register' it was noticed that there were number ofinstances where orders of tea were given in November,2003 and its payments were made in first part ofDecember, 2003 but goods (tea) was received on 30[th]March, 2004. The assessee was asked to explain thisunusual observation. However, the assessee could notoffer any convincing explanation for this inordinate delayin giving order in November, 2003 making payments forthese purchases of tea in December, 2003 and its actualdelivery (receipt by the party). On 30.3.2004, here it maybe mentioned that in usual course goods ordered inJanuary, 2004, have been received in January, 2004 inFebruary, 2004 and so on. This issue has not beenexamined by the assessing officer in detail. Theassessing officer should have verified the purchases andtheir actual receipt by making enquiries from theconcerned transporters and whether these purchasesstand reflected in sale or closing stock. In fact as notiedin para (i) it is cledar that the assessing officer has not *** seen the books of accounts and thus he could not testcheck the details and carry out requisite requisite enquiryand verification. The order passed by assessing officer isnot only erroneous but also prejudicial to the interest ofrevenue. (iii)Non deduction of TDS on commission paid topartner: *** seen the books of accounts and thus he could not testcheck the details and carry out requisite requisite enquiryand verification. The order passed by assessing officer isnot only erroneous but also prejudicial to the interest ofrevenue. (iii)Non deduction of TDS on commission paid topartner: From the perusal of the return of income filed by theassessee it was noticed that the assessee has paidcommission of Rs.16,66,815/- each to three partners andhas not deducted tax on it. This fact was confronted tothe assesseee vide order sheet entry dated 19.2.2009.The counsel of the assessee filed reply in this regardvide letter dated 6.3.2009 and 16.3.2009. In these repliesthe counsel of the assessee submitted that as per section40(b) of the I.T. Act, remuneration to any partnerincludes, salary, loans, commission or remuneration bywhatever name called and there is no principal and agentrelationship between the partner and the firm and henceprovision of section 194H are not applicable. The argument given by the counsel of theassessee is not convincing. Whenever a firm/party payscommission to any person (including partner of a firm) therelationship of principal and agent comes into places.The firm in this case was required to deduct TDS oncommission paid to partners. In any case this issue has 8. *** not been examined by the assessing officer and thus theorder is not only erroneous but also prejudicial to theinterest of revenue. (iv)The A.O. has failed to examine the issue u/s 40A(2)(b) of the I.T.Act regarding rate of interest at whichinterest has been given on unsecured loan to familymembers vis-a-vis the interest income on FDRs and thusthe order passed by him is not only erroneous but alsoprejudicial to the interest of revenue. 4.I have carefully considered the fact of the case,submissions made by the assessee and relevantprovisions of the I.T.Act, 1961. The assessment made bythe Assessing Officer is erroneous and prejudicial to theinterest of the revenue. The A.O. has failed to gather thefacts and carry out proper investigations. In view of the above, the assessment framed by theAssessing Officer u/s 143(3) on 25.9.2006 is herebycancelled u/s 263 of the I.T.Act, 1961 as it is not onlyerroneous but also prejudicial to the interest of revenueand A.O. , is directed to frame fresh assessment aftercarrying out the proper investigation and after affordingreasonable opportunity to the assessee to present itscase.” The Tribunal, inter-alia, observed:- “10.Quite clearly, on none of the issues, any opinion has been furnished by the Commissioner before setting *** In view of the above, the assessment framed by theAssessing Officer u/s 143(3) on 25.9.2006 is herebycancelled u/s 263 of the I.T.Act, 1961 as it is not onlyerroneous but also prejudicial to the interest of revenueand A.O. , is directed to frame fresh assessment aftercarrying out the proper investigation and after affordingreasonable opportunity to the assessee to present itscase.” The Tribunal, inter-alia, observed:- “10.Quite clearly, on none of the issues, any opinion has been furnished by the Commissioner before setting *** aside the order of the Assessing Officer to make a freshassessment. In fact, the error in the assessment framedhas not been established by the Commissioner. Forinstance, the assessee pointed out that the closing stockdetails were furnished and even the stock registers wereexamined by the Assessing Officer. The Commissionerof Income-tax too called for and examined the stockregister but has not pointed out any infirmity which goesto show that the figure of closing stock accepted by theAssessing Officer was erroneous. There is no errorshown in the assessment to prove that any tax lawfullydue to the revenue has been lost. Similarly, with regardto the TDS on commission payment to the partners, theassessee made out a detailed case, based on case-laws,as per the written submissions filed before theCommissioner. Inspite of the arguments raised, theCommissioner merely observed that the issue beexamined by the Assessing Officer. The error of fact orlaw, if any, in the assessment made by the AssessingOfficer in this context is also not established by theCommissioner. Similarly, is the situation with regard todirection of the Commissioner to examine the applicabilityof section 40A(2)(b) of the Act regarding the interest paidto family members, In fact, the Commissioner appears tohave been guided by the interest earned by the assesseeon FDRs to examine the reasonability of interest paid on *** loans raised from the family members. In fact, therequirements of section 40A(2)(b) are that theexcessiveness or the unreasonableness of anexpenditure incurred by way of payment to the specifiedperson have to be evaluated in the context of the marketvalue of such goods or services. In other words, if theinterest paid to the family members is required to bedisallowed u/s 40A(2)(b) of the Act, the requirement of thelaw is to compare the same with the interest ratesprevailing in the market on unsecured loans. Instead,the Commissioner has referred to the rate of interestearned by the assessee on FDRs with the Bank.Ostensibly the basis adopted by the Commissioner in thecontext of Section 40A (2)(b) is misconceived. In fact, onthis issue, the Commissioner has furnished his opinion asto justification for applying the provisions of section 40A(2) (b) of the Act and has merely directed the AssessingOfficer to examine the same.” 9.A perusal of the reasons given by the Tribunal as also theCommissioner quoted above shows that the Tribunal assumed it tobe the requirement that the Commissioner should have recordedfinal conclusion on taxability. This view is legally erroneous. TheCommissioner could have proceeded under Section 263 of the Act ifthe Assessing Officer had made assessment without application ofmind. The Commissioner held that as per order sheet no record wasproduced while in the order a contrary statement was made. The order of the Assessing Officer did not show the verification of closingstock, purchases and transportation and other items mentionedabove. These reasons were valid reasons for exercise of powerunder Section 263 of the Act. The Tribunal held that the AssessingOfficer was not required to discuss these aspects in its order andthat the assessee had explanation to the points made by theCommissioner. This approach of the Tribunal cannot be sustained.10.In Malabar'scase (supra), it was observed :- order of the Assessing Officer did not show the verification of closingstock, purchases and transportation and other items mentionedabove. These reasons were valid reasons for exercise of powerunder Section 263 of the Act. The Tribunal held that the AssessingOfficer was not required to discuss these aspects in its order andthat the assessee had explanation to the points made by theCommissioner. This approach of the Tribunal cannot be sustained.10.In Malabar'scase (supra), it was observed :- “The phrase “prejudicial to the interests of the Revenue”is not an expression of art and is not defined in the Act.Understood in its ordinary meaning it is of wide importand is not confined to loss of tax. xxxxxxxxxx In the instant case, the Commissioner noted that theIncome-tax Officer passed the order of nil assessmentwithout application of mind. Indeed, the High Courtrecorded the finding that the Income-tax Officer failed toapply his mind to the case in all perspective and the orderpassed by him was erroneous. It appears that theresolution passed by the board of the appellant-companywas not placed before the Assessing Officer. Thus, therewas no material to support the claim of the appellant thatthe said amount represented compensation for loss ofagricultural income. He accepted the entry in thestatement of the account filed by the appellant in theabsence of any supporting material and without making *** any inquiry. In these facts the conclusion that the order ofthe Income-tax Officer was erroneous is irresistible. Weare, therefore, of the opinion that the High Court hasrightly held that the exercise of the jurisdiction by theCommissioner under Section 263(1) was justified.” 11.In Additional Commissioner of Income-Tax, GujaratVs. Mukur Corporation(1978) 111 ITR 312, it was observed:- “Next question is whether at the time of passing the finalorder, the Commissioner was bound to record finalconclusions. Now, even on this question, we find thatthere is nothing in section 263(1) to show that beforepassing the final order under that section, theCommissioner must necessarily and in all cases recordfinal conclusions about the points in controversy beforehim. As already noted by us above, we would haveexpected him to record final conclusions, which hethought proper if he was to settle the assessment finallybut since he has not settled the assessment finally, andhas preferred to direct the Income-tax Officer to make anorder for fresh assessment, it was proper that he did notexpress any final conclusions and recorded only primafacie conclusions at which he had arrived with referenceto the facts of the case. Here it should be noted that, asthe assessment was to be freshly made by the Income-tax Officer, the only proper course for the Commissionerwas not to express any final opinion as regards the of 2010 controversial points.” *** 12.In view of the above the Tribunal erred in interfering with the order of the Commissioner. The question raised has to be answered in favour of the revenue. 13.Accordingly, the appeal is allowed. (Adarsh Kumar Goel) Judge September 28,2010Pka (Ajay Kumar Mittal) Judge