Commissioner Of Income Tax, Kota v. Shri Lakhpat Rai Jain & Sons, Huf

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 1 / 2011 Commissioner of Income Tax, Kota ----Appellant Versus Shri Lakhpat Rai Jain & Sons, HUF, Prop: M/s Bahubali Associates, 54, New Grain Mandi, Kota (deceased) through legal heir. 1/1 Sh. Sushil Jain S/o Late Sh. Lakhpat Rai Jain, R/o 623, Shastri Nagar, Dadabari, Kota. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Parinitoo Jain with Ms. Shiva Goyal For Respondent(s) : Mr. Prakul Khurana for Mr. Sanjay Jhanwar _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHJudgment 05/09/2017 1. By way of this appeal, the appellant has assailed the judgmentand order of the Tribunal whereby Tribunal has allowed the appeal ofthe assessee. 2.This court while admitting the appeal on 3.5.2012 framedfollowing substantial question of law:- “i. Whether the tribunal was legally justifiedin quashing the order passed u/s 263 byholding that the CIT has not pointed outany mistake in the order, specifically whenthe CIT has passed a reasoned order whileholding the assessment order to beerroneous and prejudicial to the interest ofthe revenue? ii. Whether the findings of the Tribunal areperverse in quashing the order of the CITwherein the CIT had found the assessmentorder passed u/s 143(3) to be erroneousand prejudicial to the interest ofrevenue?” 3.The facts of the case are that the assessee respondent is atrader of Charcoal who filed the return of income on 27.9.07 forA.Y. 2007-08 at an income of Rs.4,91,740/- which was processedu/s 143(1). The case was selected for scrutiny because unsecuredloans at the end of the year more than Rs.50 lakhs which alsoexceeded 30% of the total capital employed in the business. Anotice u/s 143(2) was issued on 16.9.08 which was duly served on19.9.08. A notice u/s 142(1) was also issued. During theassessment proceedings it was noticed by the AO that theassessee had claimed expenses with regard to the salary andhandling expenses in the P&L account and the same weredisallowed to certain extent and after the disallowance with regardto only these expenses the total income of the assessee wascomputed at Rs.5,60,336/- vide order dt. 26.3.09. 4.Counsel for the appellant contended that while issuing noticeu/s 263 CIT(A) in para no. 5 to 9 observed as under:- “5. In case of advances given by the assessee incase of three persons, the assessee has filedcopies of account but failed to establish thatthese advances were given for business purpose.Since assessee is having interest bearingborrowed fund, the diversion of such fund togive interest free advances would lead todisallowance of interest. The AO has not givenhis finding in the assessment order and thisaspect remained to be examined. The assesseehas stated that these advances have been givenat the end of the financial year. However,whatever may be the quantum of interest, theAO is directed to verify allowability of interestand decide the issue afresh after giving properthe opportunity of being heard in the matter. 6. Regarding Purchases made from associateconcerns, though the transactions with associateconcerns have been disclosed before the AO butthe assessee failed to establish the reasonableness of the same as per specificprovisions of section 40A(2)(b) of the I. T. Act1961. 6. Regarding Purchases made from associateconcerns, though the transactions with associateconcerns have been disclosed before the AO butthe assessee failed to establish the reasonableness of the same as per specificprovisions of section 40A(2)(b) of the I. T. Act1961. 7. The Hon'ble ITAT, Mumbai Bench in ITA No641/Mum/2004 Asst Year 2000-2001 in case ofM/s Colorcraft, Kashmira Ceramic Compound, SVRoad, NH No-8, Post Mira, Dist-Thane Vs ITO,Ward 4 (4), Thane, vide order dated May 12,2006 in para 10 & 11 has observed as under:"The next question for our consideration iswhether there was lack of enquiry and non-application of mind on the part of AssessingOfficer vis-a-vis the issue relating to unsecuredloans and excessive allowance of expenditure visa-vis Section 40A(2). There is no dispute thatlack of enquiry would render the order ofassessment as erroneous and prejudicial to theinterest of Revenue as held by the Hon'bleSupreme Court in the case of RampyarideviSarogi, 67 ITR 84 and in the case of TaradeviAgrawal, 88 ITR 323. The lack of enquiry wouldinclude not only the situation where no enquiryis made considering would also include thesituation where no proper enquiry is made asthe facts of the case. Whenever expenditure isclaimed by the assessee as deduction, the onusis on the assessee to prove its genuineness.However, where payment is made to the personsin mentioned in Section 40A(2), then it is theduty of Assessing officer to make properenquiry to ascertain whether such expenditure isreasonable with reference to the prevailingmarket price. Similarly, where any receipt isclaimed to be exempt from taxation, it is theduty of Assessing Officer to ascertain whetherconditions for allowing expenditures are fulfilledor not. The duty of the Assessing Officer is tocollect the correct tax due from the assessee-neither a penny more nor a penny less.Therefore, if he fails in performing in his duty,then his order can be considered as erroneousand prejudicial to the interest of Revenue. In ouropinion, mere collection of material is notenough in discharging of such duty. It is also theduty of the Assessing Officer to evaluate thematerial or evidence collected and thenascertain whether such materials are enough tosustain the claim of the assessee. In the above backdrop, let us examine the factsof the present case. Regarding the paymentsmade by the assessee falling u/s 40A(2)(b), theassessee had given details of sister concerns towhom the payments were made (Page-26 of the Paper Book). He also gave details of bills issuedby M/s. Mineral India International (Pages-42and 43 of Paper Book). This detail provides thedates and invoice numbers as well as the totalamount of purchases. No other information wasgiven by the assessee. In our opinion, thisinformation by itself is not sufficient for holdingthat payments made to sister concern u/s40A(2)(b) was reasonable and not excessive.Whether the payment was excessive or notwould depend upon the prevalent market prices.However, the Assessing Officer did not make anyenquiry regarding prevalent market price of thegoods purchased by the assessee from the sisterconcern. In the absence of such enquiry on thepart of Assessing Officer, in our opinion, theassessment order became erroneous. Thereforethe order of the Learned CIT (A) has to be heldto be valid in this regard." 8. The Assessing Officer therefore, directed toexamine these transactions Officer is keeping inview the provisions of section 40A(2)(b) andmay call for necessary evidence either fromassessee or may gather fair market value frommarket for to make the transactions comparablewith a view to establish reasonableness.examine these transactions Officer is keeping inview the provisions of section 40A(2)(b) andmay call for necessary evidence either fromassessee or may gather fair market value frommarket for to make the transactions comparablewith a view to establish reasonableness. 9. Regarding TDS outstanding of Rs 16,407, theassessee has furnished a copy of challan but nofurther details have been filed. The Assessingofficer is directed to verify the same to decidethe deductibility of TDS in accordance with law.” 5.Counsel for the appellant contended that taking intoconsideration the order passed by the CIT(A), the order of AO wasnot found to be just and proper, reasons therefore was prejudicialto the interest of the revenue and notice was issued u/s 263. 6.She further contended that tribunal has committed seriouserror in allowing the appeal of the assessee. 7.Counsel for the respondent contended that tribunal whileconsidering the case discussed the matter issuewise and held asunder:- “The first issue was that the assesseeintroduced Rs.6.40 lacs in capital account ofM/s. Bahubali Associated as credit during yearunder consideration. The AO has not examinedthe source of this deposit and not collected anydetails in this regard. The assessee replied thatvide clause 7C of the letter dt. 13.2.09addressed to the AO, it has been submitted thatPAN of all cash creditors alongwith confirmationof balances were filed, addresses of all thepersons were also submitted and all thecreditors were examined by the AO. It was alsoexplained to the AO that all are familymembers, confirmation of sundry creditors M/s.Swaraj Contractors and Suppliers (P) Ltd andM/s. Kasliwal Corporation were also furnished tothe AO and further intimated that both theseare associate concerns of the assessee. It isexplained that Rs.6.40 lacs has been taken from06 persons and the confirmation in all the caseshave been duly furnished to the AO. The second ground in the notice issued by theld. CIT that as per balance sheet Schedule-7 ofM/s. Bahubali Associates advances to thefollowing persons to have been made:- 1.Ashok BhaiRs.3,20,000/- 2.Babu Bhai DhanjiRs.33,500/- 3.Idris BhaiRs.34,300/- As no interest has not been charged on theseadvances and copies of account of the aboveparties have also not been obtained by the AOat the time of assessment proceedings. It issubmitted before the ld. CIT by the assesseethat three advances mentioned above are tradeadvances given for purchase of Charcoal onwhich no interest is either charged orchargeable. The payees are small suppliers towhom the advances have been given as per thenormal trade practice in this line of business.The copy of their accounts were also filedbefore the ld. CIT. The third issue in the show cause letter raisedby the ld. CIT that TDS of Rs.16,407/- shows asoutstanding but no proof of payment isavailable on record or examined by the AO atthe time of assessment proceedings. It issubmitted before the ld. CIT that there is nooutstanding liability unpaid at the time of filing The third issue in the show cause letter raisedby the ld. CIT that TDS of Rs.16,407/- shows asoutstanding but no proof of payment isavailable on record or examined by the AO atthe time of assessment proceedings. It issubmitted before the ld. CIT that there is nooutstanding liability unpaid at the time of filing of income tax return. Thus the AO has satisfiedhimself on this aspect. Further the books ofaccount of the assessee have been subjected totax audit u.s 44AB of the Act and nothingadverse has been pointed out by the TaxAuditor in this regard. Without prejudice to theabove, it is pertinent to point out that this beingthe first year of Tax Audit of the propretaryconcern, the TDS provision in relation to theexpenditure in question were not applicable tohim. Even though tax has been deducted atsource and deposited. Hence provisions ofSec.40(a)(ia) has application only whebn ‘tax isdeductible at source under Chapter XVII-B”. Thezerox copy of the TDS challan showing depositwas submitted befoe ld. CIT, therefore, theprovision of Section 40a(ia) is not applicable. The fourth issue raised in the show cause letteris that examination of the statement-A of theaudit report of M/s. Bahubali Associates revealsthat the assessee has made purchases fromM/s. Swan Industries Ltd. and M/s. SwarajConstruction & Suppliers of Rs.56.99 lacs andRs.12.46 lacs respectively. The AO failed tomake any verification with reference to thesepurchases as regard to the reasonableness ofthe cost of the material purchased vis a vismarket price. It is submitted before the ld. CITthat duly confirmed copy of account of M/s.Swaraj Construction & Suppliers (P) Ltd wasfiled to the AO vide clause 7C of the letter dt.13.2.09 in which there is only one purchasetransaction. Similarly, copy of account of M/s.Swam Industries Ltd. has been submitted atClause-2/Annexure-1 of the letter dt. 13.2.09 tothe AO alongwith copy of account of otherparties including M/s. Swaraj Construction &Suppliers (P) Ltd from whom purchases overRs.5.00 lacs have been made. The quantitypurchased is shown in the party accounts. Thepurchase account also shows the quantity andamount alongwith the name of the party againsteach and every entry. Thus the rates are easilyverifiable from the above papers. However, theld. CIT observed that though the transactionswith associate concerns have been disclosedbefore the AO but the assessee failed toestablish the reasonableness of the same as perspecific provisions of Sec.40A(2)(b) of the Act. The fifth issue raised by the ld. CIT is that theStatement-D of the audit report of M/s.Bahubali Associates shortage of Charcoal at217.450 Metric Ton has been claimed. The 8.While considering the case, the tribunal has held as under:- The fifth issue raised by the ld. CIT is that theStatement-D of the audit report of M/s.Bahubali Associates shortage of Charcoal at217.450 Metric Ton has been claimed. The 8.While considering the case, the tribunal has held as under:- “14. Considering the issued raised by the ld.CIT in the show cause letter and submissionmade by the assessee as discussed in foregoingparagraphs, we noted that ld. CIT had found theassessment order erroneous and prejudicial tothe interest of Revenue on the ground that oninterest is charged on the advance given whilethe assessee submitted that there is no advanceon interest and capital of the assessee is morethan the advance and the assessee has topurchase the Charcoal at the end of the year.This issue has been examined by the AOregarding the purchase from sister concerned.The AO noted from the copy of the accountindicting quantify and amount of purchase fromsister concerned and another parties andaccording to the AO, the same were reasonable.Regarding TDS outstanding, it has beensubmitted that after deducting TDS, the samewas paid and copy of challan was alsofurnished. Thus the provisions of Sec.40(a)(ia)is not applicable in this year. Regardingshortage of Charcoal, the ld. CIT directed theAO to verify the past records of the assesseewhile we noted that this is the first year of thebusiness of the assessee. Thus the question ofverifying past record does not arise. After considering the issues raised and thesubmission made before the ld. CIT and onperusal of the records and submission of boththe parties, we noted that the ld. CIT failed toestablish that the assessment order passed bythe AO is erroneous and prejudicial to theinterest of Revenue. In the case of CIT vs.Gaberil India Ltd. 203 ITR 108 (Bombay), it isheld that the power of suo moto revision u/s 1of Sec. 263 of the Act is in the nature ofsupervisory jurisdiction and can be exercisedonly if the circumstances specified therein exist.Two circumstances must exist to enable theCommissioner to exercise the power of revisionunder this sub-section viz (I) the order shouldbe erroneous and (ii) by virtue of the orderbeing erroneous prejudice must have been caused to the interest of the Revenue. An ordercannot be termed as erroneous unless it is notin accordance with law. If an Income Tax Officeracting in accordance with law makes certainassessment, the same cannot be branded aserroenous by the Commissioner simply becauseaccording to him, the order should have beenwritten more elaborately. Further reliance isplaced in the case of CIT vs. Trutees of AnupamCharitable Trust 167 ITR 129 (Raj.) wherein it isheld that the error envisaged by Sec. 263 is notone which depends on possibility or guessworkbut it should be actually an error either of factor of law. In the instant case, we find that nomistake has been pointed out by the ld. CIT inthe order passed u/s 263 of the Act. Therefore,order passed by the ld. CIT is quashed.” 9.Taking into consideration the fact that the judgment regarding transaction has been followed by the tribunal, in ourconsidered opinion, the view taken by the tribunal is required tobe accepted. 10.In that view of the matter, the issues are answered in favourof the assessee and against the department. 11.The appeal stands dismissed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Brijesh 41.