Girnar Textiles , Baghpat vs Assessee

order of the Commissioner of Income Tax (Appeals), Meerut dated

28/03/2013 passed u/s 263 of the Income Tax Act, 1961 (for short

Act) for A.Y. 2008 - 09.

2 ITA NO. 3376/ Del/2013

2. The assessee has raised following revised grounds of appeal :-

"1. On the facts and circumstances of the case and in law the order dt. 28.03.2013 passed by the learned Commissioner of Income Tax, Meerut (CIT) u/s 263 of the Income Tax Act, 1961 (the Act) is wrong and bad in alw in as much as the assessment order dt. 05.10.2010 passed by the learned assessing officer u/s 143(3) of the Act was not erroneous and prejudicial to the interest of the revenue.

2. On the facts and circumstances of the case and in law the order dt. 28.03.2013 passed by the learned Commissioner of Income Tax, Meerut u/s 263 of the Income Tax Act, 1961 is wrong and bad in law in as much as the learned CIT did not give reasonable opportunity to the assessee to represent the case and completed the proceedings ex- parte.

3. On the facts and circumstances of the case and in law the learned Commissioner of Income Tax, Meerut has erred in invoking the provisions of section 145(3) and holding that the net profit be assessed at 5% of gross turnover at Rs. 24542252/-.

4. WITHOUT PREJUDICE to other grounds of appeal, on the facts and circumstances of the case and in law the learned Commissioner of Income Tax, Meerut has erred in invoking the provisions of section 145(3) and holding that all other additions and disallowances shall be over and above the net profit assessed at 5% of gross turnover at Rs.

24542252/- resulting in double addition/taxation."

3. Briefly stated the facts giving rise to this appeal are that the

assessing officer completed the assessment u/s 143(3) of the Act by

making certain additions on account of depreciation taken

separately, personal use of convenience and telephone, interest two

partners and remunerations two partners and finalise the 3 ITA NO. 3376/ Del/2013

assessment at Rs. 19,35,120/- as against return income of Rs.

18,65,096/-. Subsequently, the CIT, Meerut picked up the case and

issued notice u/s 263 of the Act on 15.02.2013 pointing out four

issues for proposed inquiry. The relevant part of notice u/s 263 of

the Act reads as under :-

" i) Assessee has taken new unsecured loan from M/s Kabir Oldtex for Rs. 37,50,000/-. The AO has obtained confirmation only Bank A/c of lender has not been obtained to examine the creditworthiness.

ii) Assessee has paid designing charges at Rs. 13,05,900/-. It is not enquired as to whether TDS was made on these payments.

iii) From the purchases, the assessee has reduced amount of Rs. 62,58,623/- on a/c of fire loss. A.O. has not taken any details in this regard nor made any enquiry.

iv) Duty draw back Rs. 6 crores is set off totally & negligible profit is shown which is accepted as such without any enquiry."

4. The CIT(A), Meerut passed impugned order by holding that the

assessment order Dated 5.10.2010 is erroneous as well as prejudicial

to the interest of revenue for the reasons stated therein. Finally the

CIT(A), Meerut directed the AO to properly examine afresh the issues

considering all the four points as stated therein in the notice and also

directed the AO to examine entire amount of sundry creditors of Rs.

10,81,49,561/- including amount of Rs. 57,80,000/- M/s Kabir Oldtex 4 ITA NO. 3376/ Del/2013

and also directed the AO to enhance the net profit by the amount of

2,45,42,252 being 5% of total turnover after considering all evidence

and affording reasonable opportunity of hearing to the assessee.

Being aggrieved by the above order passed u/s 263 of the

Act, the assessee is before this Tribunal with the grounds as

reproduced hereinabove.

5. Ground No. 1 & 2 of the Assessee :-

Apropos ground no. 1 & 2, the Ld. Assessee's Representative (AR)

submitted that the impugned order passed by the CIT(A), Meerut u/s

263 of the Act is wrong and bad in law inasmuch as the assessment

order dated 5.10.2010 passed by the AO u/s 143(3) of the act was

not erroneous and prejudicial to the interest of Revenue. The Ld. AR,

further, contended that the impugned order is not only wrong but also

bad in law as the CIT did not give reasonable opportunity to the

assessee to represent the case and the CIT, Meerut completed

proceedings ex-partly violating principles and natural justice and

assuming invalid jurisdiction for passing impugned order. The Ld. AR

filed copy of the assessment order dated 17.2.2014 passed in

pursuance to the impugned order u/s 263 / 143(3) of the act and 5 ITA NO. 3376/ Del/2013

submitted that the Assessing Officer has not make any additions on

any of four points as mentioned in para 2 of notice u/s 263 of the Act

dated 15.02.2013. The Ld. AR further, pointed out that the Assessing

Officer while passing re-assessment order u/s 263 read with section

143(3) of the act has made two additions viz. first, pertaining to

addition made by CIT(A), Meerut in vide impugned order dated

18.3.2013 passed u/s 263 of the Act being 5% of total turnover and

second addition on account of sundry creditors amounting to Rs.

41,12,950/- in regard to sundry creditors namely M/s Nagin Fabrics

and M/s Ramesh Enterprises & and both these issues were not

pointed out and disputed in the notice u/s 263 of the Act.

6. Placing reliance on the recent decision of ITAT, Delhi Bench A

in the case of B.S.Sangwan Vs. ITO (2015) 53 taxmann. Com 402

(Delhi-Tribunal) to which one of us ( C.M.Garg, J.M) was co-author,

submitted that a revisional order u/s 263 read with section 143(3) of

the Act can only be passed on the ground on which assessee has

been given reasonable opportunity of being heard and it is not open

to the commissionor to set out one reason for revising the order but

actually revising order on the some other ground. To support these 6 ITA NO. 3376/ Del/2013

contentions, the Ld. AR has also placed reliance on the decision of

ITAT, Delhi 'C' Bench in the case of Genesis Colors (P.) Ltd. Vs. CIT

(2014) 42 taxmann.com 552 (Delh) and submitted that where show

cause notice issued u/s 263 of the Act is on one ground and

revisional order is passed on an entirely different ground, then the

order cannot be sustained in law.

7. The Ld. DR supported the orders of the authorities below and

submitted that where the Assessing Officer has not raised any quiry

and has not verified an examine certain important points which

resulted into Revenue loss to the department then in the case of no

inquiry the order would certainly be not only erroneous but prejudicial

to the interest of revenue.

8. On careful consideration on above submissions, we note that

CIT(A), Meerut pointed out four issues in the notice dated 15.2.2013

issued u/s 263 of the Act (as reproduced hereinabove in para 3 of

this order), wherein the issue of unsecured loan from M/s Kabir

Oldtax for Rs. 37,50,000/-, payment of designing charges of Rs.

13,05,900/- in view of TDS, amount of 62,58,623/- on account of fire

loss and set off of Rs. 6 crores towards duty draw back was 7 ITA NO. 3376/ Del/2013

specifically questioned by CIT(A), Meerut. From part 6 of the

impugned order. We note that the CIT also issued reminder dated

28.2.2013 and passed ex parte order on 28.03.2013. From operative

part of para 7 of the impugned order, we note that in para 7 the CIT

has directed the AO to examine entire amount of sundry creditors of

Rs. 10, 81,49,561/- including an unsecured loan from M/s Kabir

Oldtax; from para 10 of the impugned order we also note that the

CIT(A) has directed the AO to bring the income in terms sales the net

profit earned by the assessee has been determined by the CIT(A)

himself to the 5% of gross turnover. The issue of verification of all

sundry creditors of Rs. 10,81,49,561/- and the issue of estimation of

gross profit @ 5% of gross turnover could not found placed in the

notice issued on 15.2.2013 u/s 263 of the Act.

9. We also note from the re-assessment order passed u/s 263 read

with Section 143(3) of the Act dated 17.2.2014 that the Assessing

Officer has not made any addition on any of the four issues raised by

the CIT(A), Meerut in the notice u/s 263 of the act. At the same time,

we note that the Assessing Officer has made addition of Rs.

2,45,48,043/- in pursuance to the direction to the CIT in the impugned 8 ITA NO. 3376/ Del/2013

order and another addition of Rs. 41,12,950/- on account of sundry

creditors namely M/s Nagin Fabrics and M/s Ramesh Enterprises

which were also not part of the notice u/s 263 of the Act.

10. Turning to the ratio of the decision of ITAT, Delhi 'A'Bench in

the case of B.S.Sangwan (Supra) we note that on the similar facts

and circumstances of the case considering the decision of co-

ordinate bench of the Tribunal in the case of Synerg Enterpreneur

Solutions Pvt. Ltd. Vs. DCIT(2011) 46 SOT 111 it has been held thus

:-

9. A co-ordinate bench of this Tribunal, in the case of SynergyEntrepreneur Solutions Pvt Ltd Vs DCIT [(2011) 13 ITR Tribunal 377(Mum)], had an occasion to deal with a somewhat similar situation. That case a case in which in the show cause notice, learned Commissioner held that the loss brought forward could not be set off against profits of the current year, but when the Commissioner was to pass the final revision order, he simply held that the matter is required to be examined afresh in accordance with the law. As to whether such a shift in the stand was permissible, the coordinate bench, speaking through one of us and following the esteemed views of Delhi F bench of this Tribunal in the case of Maxpak Investments Ltd Vs ACIT [(2207) 13 SOT 67 (Del)] articulated through legendary Hon'ble Vice President Easwar (as he then was; later Hon'ble Justice Easwar), held as follows:

....... A plain reading of the impugned revision order clearly shows that theconclusions drawn in the revision proceedings are different from the reasons for revision proceedings set out in the show-cause notice--extracts from which are set out in the revision order itself. It is important to note the shifting stand of the CIT so far as reasons for subjecting the assessment order to revision proceedings. At p. 1, in fifth sentence of the impugned revision order, learned CIT notes that that "on perusal of assessment record, it was noticed that assessment order was erroneous in as much as it was prejudicial to the interest of the Revenue as the details of purchase and sale of share transactions in futures were not verified as to whether the profit or loss from the futures trading amounts to speculation gain or loss". The extracts from show-cause notice, which have been reproduced in the impugned revision order at pp. 1 and 2, do not, however, even remotely support that stand. The stand 9 ITA NO. 3376/ Del/2013

taken in the show-cause notice is that, on merits, set off is not permissible in as much as show-cause notice states that "as per the provisions of s. 73 of the IT Act, any loss computed in respect of speculation business carried on by the assessee shall not be set off except against profits and gains of another speculation business", and, "thereforeyou (the assessee) are not allowed to adjust the speculation loss". The showcause notice, therefore, clearly refers to declining what the CIT perceives as a set off of speculation loss against business profits. That is a categorical entitlement of set off. In the final conclusions in the impugned revision order, however, the CIT once again deviates from the stand so taken and concludes as follows:

I.T.A. No.: 2680/Del/11 Assessment year: 2007-08 Page 7 of 11 "In view of the foregoing, the assessment order dt. 27th Dec., 2007passed by the AO is considered to be erroneous and prejudicial to theinterests of the Revenue. Since the AO has not taken the necessary details to verify whether the profits and loss from futures trading amounts to speculation profits or loss, the assessment order is set aside with a direction to obtain complete details and conduct necessary enquiries and examine the same for the assessment year under consideration. The AO shall provide adequate opportunity to the assessee before passing the assessment order."

5. It is thus clear that there has been shift in the stand of the CIT on whether it was a fit case for revision on the ground that the assessee was not eligible for set off of losses on speculative transactions or whether it was a case for revision on the ground that the AO did not make necessary verifications about the transactions.

The reason given in the show-cause notice is former, while the reason for which revision powers are finally exercised in the impugned order are latter. As to whether such an exercise of revisional powers, on the grounds other than the grounds of revision as set out in the show-cause notice, could be held to be sustainable in law, we find guidance from the decisions of a Co-ordinate Bench in the case of Maxpak Investment Ltd. vs. Asstt. CIT (2006) 104 TTJ (Del) 881 : (2007) 13 SOT 67 (Del) which, inter alia, observes as follows:

".............In CIT vs. G.K. Kabra (1995) 125 CTR (AP) 55 : (1995) 211 ITR 336 (AP) the Andhra Pradesh High Court was dealing with an application seeking reference under s. 256(2), inter alia of the following question :

'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the CIT lacks initial jurisdiction, particularly when the conclusion made by the CIT in the order under s. 263 was on the basis of the information furnished in response to the initial notice ?' While declining to refer the above question, the High Court held as under (pp. 339-

340) :

'The necessary implication in the expression 'after giving opportunity of being heard' relates to the point on which the CIT considers the order to be erroneous and judicial to the interests of the Revenue. In other words, it is necessary for the Commissioner to point out the exact error in the order which he proposes to revise so that the assessee would have an I.T.A. No.: 2680/Del/11 Assessment year: 2007-08 Page 8 of 11 adequate opportunity of meeting the error before the final order is made.' (Emphasis, italicsed in print, supplied) In the case before the High Court, the show- cause notice referred to two issues to which the assessee had given satisfactory 10 ITA NO. 3376/ Del/2013

replies. No action was taken under s. 263 in respect of these two issues. However, in the said order the CIT mentioned the hire charges as the ground for revising the assessment. This point had not been mentioned as a ground in the show-cause notice. The High Court held that 'in as much as the CIT had not chosen to show these two points as the errors in making the final order and the final order under s. 263 refers only to the inference of hire charges being exigible to tax which was not mentioned at all in the show-cause, obviously the assessee had no opportunity to meet that point." (Emphasis, italicsed in print, supplied)10. The ratio of the decision, clear from the above observation, is that if a ground of revision is not mentioned in the show-cause notice issued under s. 263, that ground cannot be made the basis of the order passed under the section, for the simple reason that the assessee would have had no opportunity to meet the point. ..............."

11. In view of above, we are of the considered opinion that

the views so express by the coordinate bench of the Tribunal in the

case of B.S. Sangwan (Supra) are squarely applicable to the present

case. We further proceed to examine the facts of the instant case in

the light of legal position set out by the coordinate bench of the

Tribunal in the case B.S.Sangwan (Supra) and find that in the

impugned revision proceedings u/s 263 of the Act the CIT pointed out

4 mistakes in the assessment order which was subjected to the

revision proceedings and the CIT concluded that the said assessment

order was passed without making proper, requisite and desired

inquiries and held that the same is erroneous and prejudicial to the

interest of the revenue.

12. In our humble understanding of statutory provision of

Section 263 of the Act, lack of proper inquiries which the assessing

officer ought to have conducted on the facts of the case altogether 11 ITA NO. 3376/ Del/2013

different reason from inadmissibility of the claim of deduction or an

income which to have been brought to tax. We are of the considered

view of that the impugned revision order is contrary to the scheme of

law as stipulated u/s 263 of the Act because the CIT proceeded to

issue notice by pointing out any four issues as reproduces

hereinabove. At the same time we notice in the impugned order

passed u/s 263 of the Act, the CIT(A) directed to the AO to make

inquiry not only on four points but also enhanced the scope of inquiry

to entire sundry creditors and also for estimation of net profit at the

rate of 5 % of gross turnover of the assessee which were not

mentioned in the notice u/s 263 of the Act.

13. It is also pertinent to note that while passing order u/s 263

read with section 143(3) of the Act on 17.2.2004, the assessing

officer has not made any addition in regard to any of four points

raised by the CIT in the notice u/s 263 of the Act. Per contra the

assessing officer made two additions viz. first addition on account of

estimation of profit at the rate of 5% of gross turnover and second on

account of sundry creditors in regard to the M/s Nagin Fabrics and

M/s. Ramesh Enterprises which were not also part of notice u/s 263 12 ITA NO. 3376/ Del/2013

of the Act as we have already noted above.

14. The Ld. AR strenuously contended that the CIT rejected the

books of accounts at the assessee u/s 145(3) of the Act without

affording due opportunity of hearing for the assessee and directed the

AO to estimate net profit @ 5% of the total turnover without

comparing results of the assessee for earlier and succeeding

assessment years and also without considering any other suitable

and proper comparable similar to the assessees' business to above

contentions of the assessee. The Ld. DR replied that the AO did not

verify books of accounts of the assessee when it was considered by

the CIT then it was found not property maintained, therefore the CIT

was justified in rejecting books of accounts of the assessee. The Ld.

AR, on this point, placed a rejoinder and submitted that the CIT was

working with a predetermined and in a unjustified manner as the CIT

estimated the net profit @ 5% at total turnover and at the same time

he directed the AO make other additions on four points stated in the

notice u/s 263 of the Act which is not permissible. 13 ITA NO. 3376/ Del/2013

On careful consideration at above rival submission, we note

that the CIT invoked section 145(3) with following observation and

conclusion :

The regular books of account, as such are not properly

maintained, provisions of section 145(3) of the I.T.Act, 1961 are thus

invoked rejecting the same since accounts are not properly

maintained and are not verifiable as briefly enumerated in following

para :-

"Form 3CD of the tax audit report shows only cash book, ledger and stock register maintained and examined from which business results could not be ascertained or verified in the absence of bills, vouchers and other relevant records and documents to support the same. The stock details as per para 28 of Form 3CD are also not verifiable as Raw Materials are given in weight while finished goods in nos. And even the size of finished goods is not given though stated that the same are of different sizes. Inventories of stocks have also not been furnished by the assessee. In order to perview the tax as reasonable and to bring the income in terms of sales the net profit earned by the assessee is held @ 5% of gross turn over comparing to the type of business as carrying out by the other assesses of same trade and declaring the NP on or above in the same reasonable ratio of 5% to the gross turn over after invoking section145(3) of the I.T.Act, 1961. The income on other issues arising out of this order shall be added separately in addition to the income calculated @ of 5% of gross turn over of the business as follows :-

Total turn over = Rs. 49,08,45,042/- Net profit @ 5% = Rs. 2,45,42,252/- 14 ITA NO. 3376/ Del/2013

Add (other Income, Interest received_ = Rs. 5791/-"

15. In view of above conclusion of the CIT we are unable to see

wheathe the CIT provided opportunity of being heard to the

assessee which is paramount and mendatory requirement of the Act

prior to invoke provision of Sec. 145(3). The CIT rejected books of

accounts by pointing out that the business results could not be

ascertained or verified in the absence of bills, vouchers and other

relevant records to support the same. The CIT also noted that the

stock details are not verifiable as raw material are given in weight

while finished goods in nos. and size of finished goods is also not

given. The deficiencies as noted by the CIT cannot held inclusive until

and unless the assessee is provided due opportunity of being heard

to explain his stand which has not been granted by the CIT. Hence,

on the basis of foregoing discussions we are inclined to hold true the

CIT rejected books of accounts of the assessee in a unjustified

manner and rejection of books and estimation of net profit in pursuant

To it and enhancing the assessment without affording due opportunity

of hearing to the assessee is not only against the scheme of the Act

but also violative to the principles of natural justice and hence, 15 ITA NO. 3376/ Del/2013

conclusion of CIT is not sustainable cannot be held as valid in this

regard.

16. Under these clear facts and circumstances of the present case

we hold that the issue is covered on all four corners in favour of

assessee by decision of the coordinate bench of in the case of

B.S.Sangwan (supra) and we are inclined to hold that the revision u/s

263 of the Act can only be passed on the ground on which assessee

has been given reasonable opportunity of being heard in the notice

u/s 263 of the Act and it is not allowable and open to the CIT to set

out one reason for revising the assessment order but actually revising

the assessment order on some other ground in addition to grounds

which found place in the notice u/s 263 of the Act, by passing final

order u/s 263 of the Act. We may further point out that the AO did not

make any addition on any one out of four issues, which were raised

and pointed out int he notice u/s 263 of the Act, in the order framed

u/s 263 r.w.section 143(3) of the Act in pursuant to the impugned

order.

Hence, impugned order u/s 263 of the Act is not valid and

sustainable and therefore, we quash the same and all subsequent 16 ITA NO. 3376/ Del/2013

proceedings and order passed in pursuant thereto. Accordingly,

ground no. 1 and 2 of the assessee are allowed.

17. Since by the earlier part of this order we have quashed

the impugned order passed u/s 263 of the Act, and all subsequent

proceedings and order passed in pursuance thereto, therefore,

ground no. 3 and 4 of the assessee becomes infructuous and we

dismiss the same as being infructuous.

In the result, appeal of the assessee is allowed on legal grounds

no. 1 & 2 as indicated above.

Order pronounced in open court on 30th March , 2015.

Sd/- Sd/- (R.S.SYAL) (C.M.Garg) Accountant Member Judicial Member

Dated 30th March, 2015 B.Rukhaiyar

Copy forwarded to 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. CIT (ITAT), New Delhi. By order 17 ITA NO. 3376/ Del/2013

AR, ITAT N. Delhi

Sl. Description Date No. 1. Date of dictation by the Author 16.03.2015

2. Draft placed before the Dictating 24.03.2015 Member

3. Draft placed before the Second Member

4. Draft approved by the Second Member

5. Date of approved order comes to the Sr. PS

6. Date of pronouncement of order

7. Date of file sent to the Bench Clerk

8. Date on which file goes to the Head Clerk

9. Date of dispatch of order 18 ITA NO. 3376/ Del/2013