Commissioner Of Income Tax-Iiludhiana v. M/S. Raja Industries, Khanna

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 855 of 2010Date of decision: 11.7.2011 Commissioner of Income Tax-IILudhiana --- Appellant Versus M/s. Raja Industries, Khanna --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELACTING CHIEF JUSTICE HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Mr. Denesh Goyal, Standing Counselfor the appellant-revenue. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-Tax Act,1961 (for short “the Act”) has been filed by the revenue against theorder dated 6.8.2009, passed by the Income Tax Appellate TribunalChandigarh Bench (B), Chandigarh (in short “the Tribunal”) in ITANo. 757/CHANDI/2008, relating to the assessment year 2004-05. 2.The following substantial questions of law have beenclaimed for determination of this Court: “(i)Whether on the facts and circumstances of the case, theHon’ble ITAT was right in law in setting aside the orderunder Section 263 passed by the CIT by holding thatHon’ble ITAT was right in law in setting aside the orderunder Section 263 passed by the CIT by holding that Commissioner has not furnished any opinion on any of the issues raised in his order under Section 263? (ii)Whether on the facts and circumstances of the case, theITAT was right in law in setting aside the order underSection 263 of the CIT though the order was erroneousand prejudicial to the interest of revenue on account ofimproper and inadequate scrutiny by the A.O.?ITAT was right in law in setting aside the order underSection 263 of the CIT though the order was erroneousand prejudicial to the interest of revenue on account ofimproper and inadequate scrutiny by the A.O.? 3.The facts, in brief, necessary for adjudication as narrated in the appeal, are that the respondent-firm filed its return of incomefor the assessment year 2004-05 on 27.10.2004 showing income ofRs.8.53,480/-. Thereafter, assessment was made by the assessingofficer, under Section 143(3) of the Act on 21.8.2006 assessing theincome of the assessee at Rs. 8,73,480/- when an addition onaccount of disallowance of Rs. 20,000/- out of telephone expensesand other un-vouched expenses was made. The Commissioner ofIncome-tax {in short “the CIT”}, vide order dated 26.6.2008 passedunder Section 263 of the Act, held that the assessment framed bythe assessing officer was erroneous in-so-for as it was prejudicial tothe interest of the revenue. The CIT set aside the order of theassessing officer with a direction to the assessing officer to pass afresh order after considering and examining the issues mentioned inhis order. Dissatisfied with the order of the CIT, the assesseepreferred appeal to the Tribunal, which was allowed vide the orderimpugned herein. Hence, this appeal. 4.We have heard learned counsel for the appellant andperused the record. No one has appeared on behalf of the assesseedespite service. 5.The issue that requires adjudication in the present appealrelates to exercise of revisional powers under Section 263 of the Actby the CIT. 4.We have heard learned counsel for the appellant andperused the record. No one has appeared on behalf of the assesseedespite service. 5.The issue that requires adjudication in the present appealrelates to exercise of revisional powers under Section 263 of the Actby the CIT. 6.Learned counsel for the revenue submitted that theTribunal had set aside the revisional order of the CIT on wrongpremises whereas the CIT had passed the same after recording adefinite conclusion that the order of the assessing officer waserroneous in-so-far as it was prejudicial to the interest of the revenue.According to the learned counsel, the assessee during the course ofsurvey under Section 133-A of the Act which was conducted on thepremises of the assessee on 22.1.2004 had surrendered additionalincome of Rs. 12,00,000/-. The assessing officer in the assessmentorder passed under Section 143 of the Act had accepted thereturned income of 8,53,480/- besides making an addition of Rs.20,000/- by disallowing certain expenses. The assessing officer hadfailed to take into consideration the income of Rs. 12,00,000/- whichwas surrendered by the assessee. He drew the attention of theCourt to the following order of assessment passed by the assessingofficer: “Return declaring income of Rs.8,53,480/- was filedby the assessee on 27.10.2004 which was processed u/s143(1) on 24.6.2005. Since survey u/s 133A wasconducted in this case on 22.1.2004, the case was takenfor compulsory scrutiny in view of existing guidelines andstatutory notice u/s 143(2) has been issued on 9.12.2004and served upon assessee. Further information u/s 142(1) was called by issue of notice dated 9.12.2004. Inresponse, the assessee attended the proceedings with Sh.Bhupinder Sharma, Advocate, from time to time andfurnished the requisite information/documents. Books ofaccount along with supporting vouchers have beenproduced and examined. After discussion, assessment ismade as under:- The assessee is carrying the business ofSteel Rolling Mills. During the course of survey u/s133A, the assessee declared additional income ofRs.12 lacs which is well reflected in Profit & Lossaccount. Further after discussion and examinationof books of account and bills/vouchers of expenses,a disallowance of Rs.20,000/- is made out oftelephone expenses and other unvouchedexpenses being of personal or unverifiable nature. In view of above discussion, income iscomputed as under: Returned income Rs.8,53,480/- Addition of Rs.20,000/- -As discussed above.Rs. 20,000/ Total incomeRs.8,73,480/- Assessed at income of Rs.8,73,480/-. Chargeinterest u/s 234D and 234C of the Income Tax Act. ITNS150 is enclosed as a part of this order. Issue demandnotice and challan. tax, Sd/- ( B.R.Madaan ) Asstt. Commissioner of Income- Circle, Khanna.” 7.He urged that a perusal of the assessment order clearlyspells out the manner in which the accounts of the assessee appearto have been scrutinized. 8.Learned counsel further submitted that the CIT in therevisional order had noted various details which had not been verifiedby the assessing officer before accepting the returned income of theassessee. In terms of order of CIT dated 26.6.2008, the followingissues had not been verified by the assessing officer while makingassessment under Section 263 of the Act: Total incomeRs.8,73,480/- Assessed at income of Rs.8,73,480/-. Chargeinterest u/s 234D and 234C of the Income Tax Act. ITNS150 is enclosed as a part of this order. Issue demandnotice and challan. tax, Sd/- ( B.R.Madaan ) Asstt. Commissioner of Income- Circle, Khanna.” 7.He urged that a perusal of the assessment order clearlyspells out the manner in which the accounts of the assessee appearto have been scrutinized. 8.Learned counsel further submitted that the CIT in therevisional order had noted various details which had not been verifiedby the assessing officer before accepting the returned income of theassessee. In terms of order of CIT dated 26.6.2008, the followingissues had not been verified by the assessing officer while makingassessment under Section 263 of the Act: “(A) The G.P. rate shown by the assessee in this A.Y. wasonly 2.45% whereas the G.P. rate shown in A.Y. 2002-03was as high as 4.08%. The Assessing Officer inperfunctory manner without any enquiry accepted thecontention of the assessee that the G.P. rate was almosthigher than the last year. It was incumbent upon theAssessing Officer to verify the correctness of the G.P.rate when in fact the Assessing Officer has also collectedthe G.P. rate for the A.Y. 2002-03 from the assessee.The Assessing Officer failed to verify this aspect.only 2.45% whereas the G.P. rate shown in A.Y. 2002-03was as high as 4.08%. The Assessing Officer inperfunctory manner without any enquiry accepted thecontention of the assessee that the G.P. rate was almosthigher than the last year. It was incumbent upon theAssessing Officer to verify the correctness of the G.P.rate when in fact the Assessing Officer has also collectedthe G.P. rate for the A.Y. 2002-03 from the assessee.The Assessing Officer failed to verify this aspect. (B) Further the Assessing Officer also failed to examine thecorrectness of the electricity expenses shown by theassessee; which was higher than the last year whencompared on the basis of manufacturing done. In A.Y.2003-04 the assessee had manufactured 700.123 units offinished product. The electricity expense claimed was Rs.21,02,499/- which comes to Rs. 3,003/- per unit of goodsmanufactured . However, in A.Y. 2004-05, the assesseemanufactured only 575.034 units of finished goods. Thecorrectness of the electricity expenses shown by theassessee; which was higher than the last year whencompared on the basis of manufacturing done. In A.Y.2003-04 the assessee had manufactured 700.123 units offinished product. The electricity expense claimed was Rs.21,02,499/- which comes to Rs. 3,003/- per unit of goodsmanufactured . However, in A.Y. 2004-05, the assesseemanufactured only 575.034 units of finished goods. The electricity expenses claimed was Rs. 21,82, 859/-. Theelectricity expense per unit was Rs. 3,796/- which wasabnormally higher as compared to immediately precedingyear (increase by approximately 26.40%). Despite this,which was evident from the record, the Assessing Officerfailed to make any verification and enquiry and acceptedthe claim of the assessee in a perfunctory manner. electricity expenses claimed was Rs. 21,82, 859/-. Theelectricity expense per unit was Rs. 3,796/- which wasabnormally higher as compared to immediately precedingyear (increase by approximately 26.40%). Despite this,which was evident from the record, the Assessing Officerfailed to make any verification and enquiry and acceptedthe claim of the assessee in a perfunctory manner. (C) The Assessing Officer failed to examine the correctnessof the G.P. rate shown by the assessee in pre-survey andpost-survey period. As per the details on record theassessee had shown G.P. rate at 2.33% in the pre-surveyperiod but 3.25% in the post-survey period. This aspectneeded verification and it was incumbent upon theAssessing Officer to verify the correctness of GP rateshown. It was necessary to verify the reasons-whether itwas actual or manipulated trading results. It wasnecessary to examine the low G.P. rate shown in the pre-survey period. The Assessing Officer failed to examineand verify this issue.of the G.P. rate shown by the assessee in pre-survey andpost-survey period. As per the details on record theassessee had shown G.P. rate at 2.33% in the pre-surveyperiod but 3.25% in the post-survey period. This aspectneeded verification and it was incumbent upon theAssessing Officer to verify the correctness of GP rateshown. It was necessary to verify the reasons-whether itwas actual or manipulated trading results. It wasnecessary to examine the low G.P. rate shown in the pre-survey period. The Assessing Officer failed to examineand verify this issue. (D)The Assessing Officer also did not verify the correctnessof the closing stock of raw material which was shown atRs. 1,69,217/- for 17.160 units. (Rs.9861/- per unit),whereas the average purchase price of the purchase of2662.590 units for Rs. 3,24,50,559/- came to Rs. 12,187/-per unit. The assessing officer has not examined theissue and why the value of closing stock of raw materialwas shown at a lower figure.of the closing stock of raw material which was shown atRs. 1,69,217/- for 17.160 units. (Rs.9861/- per unit),whereas the average purchase price of the purchase of2662.590 units for Rs. 3,24,50,559/- came to Rs. 12,187/-per unit. The assessing officer has not examined theissue and why the value of closing stock of raw materialwas shown at a lower figure. (E)The Assessing Officer has allowed the deduction onaccount of theft of Rs. 3.00 lakh merely on the basis of aletter of the police which only stated that the accusedwere let off and discharged by the court from the criminalproceedings in the absence of evidence. The AssessingOfficer failed to collect details of FIR and examine thefact that the FIR was against unknown persons. TheAssessing Officer also did not obtain copy of the Court’sorder releasing the accused made by the police andexamine all the facts. The assessee had claimed thededuction of Rs. 3 lakhs based on the Court’s order oncriminal proceedings. The Assessing Officer failed toexamine when actually the sum had becomeirrecoverable. The Assessing Officer also did notexamine the statement of Shri Kamal Talwar and Sh.Jaswinder Singh and their subsequent retraction. TheAssessing Officer did not examine the fact when the sumhad become irrecoverable. No enquiry in this regard fromthe police was made nor evidence was collected by theAssessing Officer on this point. Mere decision of theCourt in the criminal proceeding can not be the soledeciding factor to pinpoint the time of irrecoverability ofthe theft amount. The Assessing Officer has failed toexamine the issue and collect details and evidence in thisregard. The Assessing Officer has accepted the claim ofthe assessee without collecting all details, orders,statements and reports. The case of Durga Jewellers relied upon by the assesseeis clearly distinguishable. The hope of recovery has to beexamined and seen with reference to the FIR as towhether it was against known or unknown persons. TheAssessing Officer has not examined all the aspects andhas not ascertained from the police as to when the stolensum had become irrecoverable. Mere disposal of acriminal case by itself could not be a final point ofreference in regard to irrecoverability of the stolen sum itsallowances as deduction while computing the income ofthe assessee.” 9.We find considerable force in the submission of learnedcounsel for the revenue. 10. The Tribunal without considering the aforesaid issuesdiscussed by the CIT had set aside the said order with the followingobservations: “In this case, the Commissioner has advanced fourreasons to say that the assessment order has beenpassed by the Assessing Officer without application ofmind. On each of the issues, the assessee had furnishedan explanation before the Commissioner, which was onsimilar lines as was made before the Assessing Officerduring assessment proceedings. We find that on each ofthe issues, the Commissioner had not rendered a definiteand clear opinion as to why the order of the AssessingOfficer was erroneous and prejudicial to the interests ofthe Revenue. As noted earlier, ‘erroneous’ in the contextof section 263 is to be understood as to mean somethingwhich is unsustainable in law or is devoid of factualsupport. On none of the issues, is there any finding bythe Commissioner as to how the order of assessment deviates from the law or is otherwise invalid. TheCommissioner has merely set aside the assessment anddirected a fresh assessment and has directed theAssessing Officer to consider the issues raised by theassessee. Quite clearly, on all the issues, elaboratesubmissions were made by the assessee and in thecontext of the same, there is no finding of theCommissioner as to how the assessment order wascontrary to law or that it was based upon a mistaken viewof law or of fact. For instance, with regard to thededuction of Rs. 3,00,000/- on account of theft, theCommissioner has concluded that the said deduction wasallowed by the Assessing Officer without verification. Inthe ‘show cause notice’ issued u/s 263 dated 21.11.2007,the Commissioner observed that the theft had takenplace on 9.6.2000 and, therefore, being an expenditure ofan earlier assessment year, could not be allowed duringthe year under consideration. The assessee explainedthat the amount was written off in the books of accounton the basis of a report from the police, which mentionedthat the Hon’ble Civil Court had acquitted the accused on11.7.2003 and no recovery has been made. Since, theissue was settled by the Civil Court on 11.7.2003, theamount in question was claimed as a deduction duringthe year under consideration. On the fact of suchexplanation, there is no finding of the Commissioner as tohow the assessment order dated 21.8.2006 waserroneous wherein the said amount was allowed. TheCommissioner has merely set aside and required theAssessing Officer to examine the issue. Similarly, theCommissioner has referred to the low GP during the yearin comparison to the GP rate declared of two years earlieri.e. for assessment year 2002-03. When the assesseeexplained that the GP rate during the year was 2.45% asagainst 2.42% in the immediately preceding assessmentyear and also explained that the GP rate of 2.45% waswithout considering the income surrendered during the survey. According to the assessee, if the incomesurrendered was added, the GP rate for the year underconsideration would come to 5.70% which was muchhigher in comparison to the earlier rate. In the face ofsuch explanation, the Commissioner merely observedthat the GP of 2.45% during the year was lower than theGP rate of 4.08% declared for the assessment year 2002-03 and, therefore, the Assessing Officer was to examinethe GP rate in the pre and post-survey period. In fact, theassessee had also explained that the separate tradingaccount was furnished for pre-survey and post-surveyperiod. In the pre-survey period, the GP rate was 2.33%and it was 3.25% in the post-survey period. Theassessee had also explained the reasons for the same.The Commissioner has merely required the AssessingOfficer to examine the same without pointing out as tohow the acceptance of the trading results in theassessment order was erroneous or that it had resulted inloss of revenue to the Department.” 11. It would be expedient to analyse the assessment orderpassed by the assessing officer before delving into the legality andvalidity of order of the Tribunal. A perusal of the assessment orderpassed under Section 143 of the Act clearly shows that none of theissues as has been noticed by the CIT had been considered andanalysed by the assessing officer. Further, it has not been discussedby the assessing officer as to how and why the returned income ofRs.8,53,480/- was accepted against the surrendered income ofRs.12,00,000/- by the assessee. The assessee was required tojustify that surrendered income had to be reduced to declaredincome due to post surrender losses. Though no specific format isprescribed for passing an assessment order, yet in the facts, thecircumstances and the basis thereof were required to be dealt with by the assessing officer. The Tribunal has also failed to appreciateand advert to the aforesaid aspect of the matter. Accordingly, theorder of the Tribunal cannot be sustained. The questions of law are,thus, answered in favour of the revenue and against the assessee.The matter is remitted to the Tribunal for decision afresh inaccordance with law. (AJAY KUMAR MITTAL) JUDGE July 11, 2011*rkmalik* (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE