Hanuman Trading Company,, Hyderabad vs Assessee

This is an appeal filed by the assessee-appellant against the order of the Ld. Commissioner of Income Tax, Vijayawada, dated 26-03-2014 for the AY. 2009-10 passed exercising powers u/s. 263 of the Income Tax Act, 1961 [Act] raising the following grounds of appeal:

" 1. The order of Commissioner of Income Tax is erroneous both on facts and in law."

2. The learned Commissioner of Income Tax erred in holding that there is a mistake in the order passed by the Assessing Officer which is prejudicial to the Revenue and further erred in holding that the provisions of Sec. 263 have any application.

3. The learned Commissioner of Income Tax erred in giving direction to the Assessing Officer to examine the trading Account.

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4. The learned Commissioner of Income Tax erred in applying the provisions of Sec. 263, directing the Assessing Officer examine and apply the provisions of 68 and 269SS of I.T. Act.

5. The learned Commissioner of Income Tax erred in directing the Assessing Officer to examine provisions of Sec. 40A(3) and sec 14A of the I.T. Act.

6. Any other ground that may be urged at the time of hearing".

2. The brief facts of the case are that the assessee is a partnership firm engaged in the business of whole sale trader in fast moving consumer goods. The appellant had filed the return of income for the assessment year under consideration on 26-09-2009 declaring total income of Rs. 45,418/-. After processing the said return under the provisions of Section 143(1) of the Act, the case was selected for scrutiny assessment by issuing notice u/s. 143(2) of the Act and finally, the assessment came to be completed u/s. 143(3) vide order dt. 31-05-2011 by the Income Tax Officer, Ward-I, Kothagudem at a total income of Rs. 2,11,207/- after making disallowance of Rs. 1,42,650/- u/s. 40A(3) and Rs. 23,137/- u/s. 40(a)(ia) of the Act. The assessment order was not agitated before the CIT(Appeals). While matter stood thus, the Ld.CIT, Vijayawada issued a show cause notice on 29th October, 2012 u/s. 263 of the Act calling upon the assessee to furnish the reasons as to why the order of assessment should not be revised u/s. 263 of the Act on account of failure of AO to :

i) Examine the reason for fall in the gross profit compared to the AY.

2008-09;

ii) verify the opening stock in respect of OST Toor Dal A/c;

iii) verify the Freight Charges of Rs. 7,02,060/- with reference to the provisions of Section 40(a)(ia) of the Act;

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iv) verify whether the unsecured loans received through account payee cheques or otherwise and also applicability of provisions of Section 269SS of the Act;

v) verify the partnership deed evidencing the sharing ratio of the partners and details of the withdrawals made by the partners;

vi) verify the cash withdrawals of Rs. 18,80,000/- from the bank account of CC A/c of SBH.

3. In response to the show cause notice, the assessee vide letter dt. 11-12-2012 submitted as under:

"Sub: - Revision U/s 263 of the l.lAct.. 1961, - Scrutinv Assessment order Passed U/s 143(3) of I.T. Act, 1961, Dated 31/05/2001- A.Y.2009-2010 Reply to Show cause notice - Reg.

Ref: - Your letter dated 29/10/2012.

With reference to the above we submit the following Para wise remarks.

1. GROSS PROFIT VARIANCE:-

The Gross Profit for the A.Y 2008 .. 2009 was 6.1 % on o turnover of Rs. 1,99,11,667/- at Rs. 12,41,485/- while the Gross Profit reported for the AY 2007- 2010 works at 5.87% on a turnover of 2,53,61,201/- which works out to 14,91,076/-, Thus there is a difference of 0.23% which works out to Rs. 58,377/-

Against the above observations we submit that the Assessing officer has completed the assessment u/s 143(3) accepting the book of accounts. Hence he was not done anything erroneous and prejudicial to the interest of revenue. The goods being consumer items, they are perishable- and seasonal. Their purchase price or sole price are not fixed or predictable. As such constant GP rote cannot be expected for every year. Comparison of GP rotes is not prescribed under any provisions of the IT Act. As such the oction of the Assessing Officer is not comparing the GP rates connot be said to be erroneous. As such on this issue U/s 263 is not legally correct.

2. OST TOOR DAL A/C:-

It was pointed out that as per the Trading Account for the A.Y 2008-2009 no closing stock was shown under the head OST TOOR DAL Account. While for :- 4 -: I.T.A. No. 1307/Hyd/2014 Hanuman Trading Co.,

the A.Y. 2009-2010 opening stock was brought down at Rs. 3,16,882/- and that similar was the case of A.P. WHEAT Account.

It is submitted that OST TOOR DAL closing stock was Rs. 2, 16,857/- on 31/03/2007. It was shown in Trading Account and Balance Sheet. For the A.Y. 2008-2009 there were no purchases or sales. Yet the closing stock was valued at enhanced market price of Rs. 3,16,882/- as on 31/03/2008 and shown in the Balance Sheet. The same was shown as opening stock for the A.Y. 2009-2010. As such there is no accounting error or omission on this count. In fact the closing stock was overvalued by about Rs. 1,00,000/- as on 31/03/2008 by the accountant, keeping in view of the market prices. The same occurred in the case of A.P.WHEAT Account. Though there is no increase in valuation.

3. FRIEGHT CHARGES Rs. 7, 02,060/- , APPLICABILlTY OF SECTION 40a (ia) :-

This expenditure pertains to mainly local dispatches on cyclerikshawa, bullock carts and human drawn carts only, a few expenditure pertain to lorry transports. In any case the expenditure were neither in excess of Rs. 20,000/- at a time nor exceeding Rs. 50,000/- in aggregate. As such the provisions of section 40(a)(ia) do not apply.

4. LOAN FROM HEMANT SARADA, BINDU SARADA AND NIKITHA SARADA:-

The depositors are the Son and Daughters of the assessee. These amounts represent gifts given by relatives on different occasions. As a parent he had safe custody of these amounts and brouqht into family business during the year. As such the provision of section 269SS do not applv.

5. PARTNERSHIP DEED: -

Copy of partnership deed is enclosed herewith.

6. The assessee has withdrawn amount of Rs. 18,80,200/- from SBH, Kothagudem in aggregate throughout the year 10 meet the day to day expenses of the business in cash and some payments were made by barer cheques up to permissible limits U/s 40A(3). The assessee does not have any other activity, the incomes of which are exempt. The assessee has not diverted any amounts to any other activity. The amounts of each withdrawals being very small, this aspect need not be doubted.

As such we request you to drop the proceedings U/s. 263.

Thanking you,

Yours truly"

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4. After considering the replies filed by the assessee-firm, the CIT in exercising his powers u/s. 263 of the Act, passed the impugned order vide para 4.4 to 7.2 as under:

"4.4. The above submissions are considered carefully. The assessee has not admitted any closing stock of OST Toor Dal for the fy 2007-08. However, it has admitted opening stock OST Toor Dal at Rs.3,16,882/- in the fy 2008-09. The assessee has stated that it has shown OST Toor Dal closlnq stock at Rs.2,16,857/- on 31/03/2007. It was also shown in Trading a/c and balance sheet for the ay 2008-09. The assessee further states as there were no purchases or no losses, the closing stock was valued at enhanced price at Rs.3,16,882/- on 31/03/2008 and shown the same in the balance sheet. The reply given by the assessee is vague and not inaccordance with the accounting principles. Thus, though there is no closing stock for the ay 2008-09, the assessee claimed the opening stock value at Rs.3,16,882/- for the assessment year 2009-10. Thus, it is clear that the AO has not examined the trading account properly. In view of that the assessment order is held as erroneous & prejudicial to the interests of revenue and hence it is set aside.

5. The next issue is extracted as under;

As per the P&L, it is noticed that the assessee firm has debited an amount of Rs.7,02,060/- under the head "Freight" and the AD has not examined with reference to the provisions of section 40(a)(ia) of the Act.

5.1. Assessee's reply is extracted as under

This expenditure pertains to mainly local dispatches on cyclerikshaws, bullock carts and human drawn carts only, a few expenditure pertain to lorry transports. In any case the expenditure were neither in excess of Rs.20,000/- at a time not exceeding Rs.50,000/- in aggregate. As such the provisions of section 40(a)(ia) do not apply.

5.2. During the course of hearing, the assessee was asked to furnish the details of this expenditure. In response to that, the assessee has furnished copies of vouchers which do not contain details of the recipients so their genuineness can't be verified. Thus, as per the information available on record, the AD has not verified this claim. The assessee has failed to furnish relevant particulars about the freight charges paid by the assessee.

6. The next issue is extracted as under;

Further, it is observed that the unsecured loans with the confirmation letter from Hemanth Sarada, Bindu Sarada and Nikitha Sarada to the assessee firm does not specify whether the loans were given by way of' cash or 'through account payee cheques etc. The AD has not examined with material evidence and also the applicability of provisions of section 269SS of the :- 6 -: I.T.A. No. 1307/Hyd/2014 Hanuman Trading Co.,

IT Act.

6.1. Assessee's reply is extracted as under;

The depositors are the Son and Daughters of the assessee. These amounts represent gifts given by relatives on different occasions. As a parent he had safe custody of these amounts and brought into family business during the year. As such the provision of section 26955 do not apply.

6.2. Regarding the unsecured loans, the assessee has furnished confirmation letter before the AD from Mr./Ms. Hemanth Sarada, Bindu Sarada, Nikitha Sarada. However, the confirmation letters do not contain the dates on which the said loan was given, cheque no. etc. The AD failed to examine these details and also the applicability of Sec.269SS of the Act.

6.3. It is further stated that all the creditors are students studying 1st year Intermediate, 2nd year Degree and 3rd year Degree. The sources in the hands of the creditors were not verified at the time of assessment. The assessee has replied that the depositors are Son and Daughters of the assessee and these amounts represent gifts received from relatives on different occasions. As a parent he had safe custody of this amount and brought into business during the year. As such, the provisions of Sec.269SS do not apply. The explanation given by the assessee is vague. The AD failed to examine and apply the provisions of Sec.68 and 26955 in accordance with law.

7. The final issue in this case is extracted as under;

As per the cc a/c copy of the assessee maintained with SBH, it is noticed that huge amounts were withdrawn by way of cash to the extent of Rs. 18,80,200/- on various dates means of bearer cheques 14A of the IT Act.

7.1. Assessee's reply is extracted as under;

The assessee has withdrawn amount of Rs.18,80,2000/- from SBH, Kothagudem in aggregate throughout the year to meet the day to day expenses of the business in cash and some payments were made by barer cheques upto permissible limits u/s 40A(3). The assessee does not have any other activity, the incomes of which are exempt. The. assessee has not diverted any amounts to any other activity. The amounts of each withdrawals being very small, this aspect need not be doubted.

7.2. The assessee has withdrawn Rs.18,80,200/- during the fy relevant to the ay under consideration from SBH, Kothaqudem. But, the AO has not verified the purpose for such huge withdrawals and also the applicability of Sec.14A, if any".

Finally concluded that, AO had not conducted the due enquiry or examined the above issues and hence the assessment order passed by :- 7 -: I.T.A. No. 1307/Hyd/2014 Hanuman Trading Co.,

the AO was held to be erroneous and prejudicial to the cause of Revenue and therefore, set aside the order.

Aggrieved by this order, the appellant-assessee had come up with the present appeal.

5. It was argued by the Ld. AR that the very same issues were examined by the AO during the course of assessment proceedings and he brought to our notice, page No. 9 to 16 of the Paper Book wherein, the copies of the information filed before the AO during the course of assessment proceedings were shown and therefore, he argued that the CIT fell in error in exercising the jurisdiction u/s. 263.

6. On the other hand, the Pr. CIT-DR vehemently supported the order of CIT u/s. 263. She further argued that since the AO has failed to conduct proper enquiry on the issues raised in show cause notice, the order is liable to be set aside u/s. 263.

7. We heard the rival parties and perused the material on record. On perusal of page No. 9 to 16 of the Paper Book, we find that the issues raised by the Ld.CIT in his show cause notice were examined by the AO. However, the AO had not made any mention in the assessment order. After examining those details, he felt that no further enquiry was required and took a view that these are all allowable expenditure. Even before the CIT, appellant had produced cogent material rebutting the contentions of the CIT. The CIT without assigning any reasons as to why the explanation tendered by the appellant is not acceptable had simply set aside the order for denovo assessment, on the issues raised in the show cause notice. The sum and substance of the order of the CIT is that the AO failed to conduct enquiry on issues raised. But from the :- 8 -: I.T.A. No. 1307/Hyd/2014 Hanuman Trading Co.,

material on record, it is clear that the AO made enquiries on the very same issues during the course of assessment proceedings and merely because, the returned income is lower, the assessment order cannot be termed as erroneous. It is only after the examination of detailed information filed during the course of assessment proceedings that assessment order came to be passed. It is not a case of lack of enquiry. It is for the AO where to stop the enquiry. It is only in the case of non- enquiry, the jurisdiction u/s. 263 can be exercised by the Commissioner. We notice that the Ld.AO after duly considering the explanation and information filed in response to the questionnaire on various issues, on being satisfied with such explanation chose not to make any further enquiry. Endless enquiry is not possible and it is for the Ld.AO to decide when to end the enquiry. The Ld.CIT cannot transgress the jurisdiction u/s. 263 of the Act by mentioning that no proper enquiry was made. Reliance in this regard, we rely on the decision of Hon'ble Agra Bench of ITAT in the case of Rishi Kumar Gupta Vs. CIT [90 TTJ 645].

In this connection, it is apt to extract the observation of the following:

i. Hon'ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd., [332 ITR 167] held that:

"We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the CIT under s. 263 of the IT Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the AO did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO in the assessing order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his :- 9 -: I.T.A. No. 1307/Hyd/2014 Hanuman Trading Co.,

submission that one has to keep in mind the distinction between "lack of inquiry"

and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the CIT to pass orders under s. 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabrial India Ltd. (supra), law on this aspect was discussed in the following manner :

"........From a reading of sub-s. (1) of section, it is clear that the power of suo motu revision can be exercised by the CIT only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the ITO is 'erroneous insofar as it is prejudicial to the interests of the Revenue'. It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-s.

(1). The consideration of the CIT as to whether an order is erroneous insofar as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the CIT acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The CIT cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induces repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. [see Parashuram Pottery Works Co. Ltd. vs. ITO 1977 CTR (SC) 32 : (1977) 106 ITR 1 (SC) at p. 10]. ...............

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the CIT simply because, according to him, the order should have been written more elaborately This section does not visualise a case of substitution of the judgment of the CIT for that of the ITO, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The CIT, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the CIT he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the CIT with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. ...............There must be some prima facie material on record to show that tax which was lawfully exigible has not been :- 10 -: I.T.A. No. 1307/Hyd/2014 Hanuman Trading Co.,

imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed".

ii. Bombay High Court in the case of CIT Vs. Fine Jewellery [372 ITR 303] followed the same ratio.

iii. Idea Cellular Ltd., Vs. Dy. CIT [301 ITR 407] the Hon'ble Bombay High Court held that, "if a query is raised during the assessment proceedings and responded to by the assessee, the mere fact that it is not dealt with in the assessment order would not lead to a conclusion that no mind has been applied to it" .

iv. Delhi High Court in the case of CIT Vs. Anil Kumar Sharma [335 ITR 83] (Delhi) held that "Once such application of mind is discernible from the record, the proceedings u/s. 263 would fall into the area of the Commissioner having a different opinion".

v. In the case of CIT Vs. Max India Ltd., [295 ITR 282 (SC)] it was held that "It is a settled principle of law that even after examining the details, the AO took a view, which is a possible view, then it cannot be treated that the order passed by the AO is erroneous and prejudicial to the interest of Revenue".

8. Respectfully following the ratio laid down in the cases mentioned supra, in the present case, it cannot be held that the AO had not applied his mind on the issue nor had made no enquiry. The fact that the AO issued the questionnaire on several issues and the assessee had responded to the same by filing the information and on consideration of replies from the assessee, the AO held that an amount of Rs. 23,137/- u/s. 40(a)(ia) and an amount of Rs. 1,42,650/- u/s. 40A(3) of the Act held to be disallowable, goes to prove that the AO had applied his mind :- 11 -: I.T.A. No. 1307/Hyd/2014 Hanuman Trading Co.,

while passing the assessment order and therefore, we hold that the Ld.CIT is not correct in exercising the jurisdiction in the present case under the provisions of Section 263 of the Act. Hence, the grounds of appeal filed by the appellant-assessee are allowed.

9. In the result, the appeal is allowed, accordingly.

Order pronounced in the open Court on 27th May, 2015

Sd/- Sd/-

(SAKTIJIT DEY) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 27th May, 2015

TNMM

Copy to :

1. Hanuman Trading Co., D.No. 6-3-144, Peddabazar, Kothagudem, Khammam, C/o. T. Chaitanya Kumar, Advocate, Flat No. 409, Metroresidency, Rajbhavan Road, Somajiguda, Hyderabad.

2. The Income Tax Officer, Ward-1, Kothagudem.

3. CIT-Vijayawada.

4. The Addl. CIT, Khammam Range, Khammam.

5. D.R. ITAT, Hyderabad.