M/S Tejaswini Engineering Pvt Ltd.,, ... vs Assessee

M/s Tejaswaini Engg. Pvt. Ltd., vs. Commissioner of Income-tax- Hyderabad. II, Hyderabad

PAN - AABCT 6421A (Appellant) (Respondent)

Assessee by : Shri P. Murali Mohan Rao Revenue by : Smt. G. Aparna Rao

Date of hearing 29-04-2015 Date of pronouncement 08-05-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by assessee is directed against the order dated 25/03/2014 passed u/s 263 of the IT Act, 1961 (Act) by ld. CIT-II, Hyderabad for the AY 2009-10.

2. Briefly the facts are, assessee a company is engaged in the business of trading in steel products. For the AY under consideration, it filed its return of income on 31/03/2010 declaring income of Rs. 20,71,880. Subsequently, assessee filed a revised return on 26/08/2010 declaring total income of Rs. 27,78,371. In course of assessment proceeding, AO after verifying the books of account and other informations available on record found that assessee has made purchases and sales from April to October with no major gain or loss. However, from November'08 onwards, assessee started incurring loss and in the month of November incurred huge loss to the extent of Rs.

2 ITA No. 748 /Hyd/2014 M/s Tejaswini Engineering Pvt. Ltd.

2.81 crores. He further observed that as per the details furnished, the average cost of material purchased during the months of February and March works out to Rs. 29,109 per tone. However, assessee has admitted closing stock @ 33,004, which is more than the cost price. AO observed that purchases for the month of March as declared by assessee is Rs. 67,48,30,627 whereas as per the VAT return purchases were shown at Rs. 71,53,67,397. AO also noted discrepancies in the sales figures as per the books and as per the VAT return. In view of the aforesaid facts, AO concluded that the books of account of assessee cannot be relied upon, hence, to be rejected. After rejecting the books of account, AO proceeded to estimate gross income of assessee from steel trading business @ 1% of sales. From such estimated gross income, AO allowed expenditure of Rs. 1,98,42,745 comprising of employees payment, administrative and selling expenses, depreciation, preliminary expenses, etc and ultimately determined the total income at Rs. 3,54,11,850 in the assessment order passed on 30/12/2011. Being aggrieved of the assessment order so passed, assessee preferred appeal before ld. CIT(A).

3. As it appears from record before ld. CIT(A), assessee specifically challenged rejection of books of account and estimation of gross income at 1%. Ld. CIT(A) after considering the submissions of assessee, though, upheld the rejection of books of account, however, reduced the estimation of gross income of assessee from 1% to 0.7% of the turnover. Still aggrieved with the order of ld. CIT(A), assessee as well as department preferred appeal before ITAT.

4. When the matter stood like this, ld. CIT in exercise of power u/s 263 of the Act called for the assessment records of assessee for the year under consideration. After examining the same, ld. CIT was of the view that assessment order is erroneous and prejudicial to the interests of revenue and accordingly issued a notice on 26/02/2014 to 3 ITA No. 748 /Hyd/2014 M/s Tejaswini Engineering Pvt. Ltd.

assessee directing it to show cause as to why assessment order shall not be revised due to the following errors:

"3. On verification of asst. record, it is seen that while completing the assessment, the books of account were rejected on the ground that there were some discrepancies and the income was estimated @ 1% on the gross sales of Rs. 545,10,64,804 and the total income was determined at Rs. 3,54,11,850 after allowing preliminary expenses, selling and administrative expenses and salaries to employees and depreciation amounting to Rs. 1,88,86,251. When the books of account were rejected and income was estimated on gross receipts, that itself takes care of all expenditure under the provisions of the IT Act. Therefore, allowing of expenditure of Rs. 1,88,86,251 separately is not in order."

In response to the show cause notice, assessee appeared before ld. CIT and made elaborate submissions challenging not only the jurisdiction invoked u/s 263, but, also the issue on merit. The specific plea taken by assessee before ld. CIT was assessment order passed having merged with the order of ld. CIT(A) and in further appeal before ITAT, exercise of power u/s 263 is invalid. The other contention of assessee was since AO has taken a view on the issue of estimation of income, ld. CIT cannot take recourse to section 263 to substitute his opinion. Ld. CIT after considering the submissions of assessee did not find merit in the same. As far as the issue of merger of the assessment order is concerned, ld. CIT referring to Explanation

(c) to sub-section (1) of section 263 of the Act, observed that only those issues which were considered and decided by appellate authority are outside the purview of section 263. He observed that since allowability of expenditure was not an issue before ld. CIT(A) invoking of jurisdiction u/s 263 is in accordance with law. He further observed that once books of account are rejected and income is estimated, AO cannot rely on the same books of account for allowing expenses from the estimated income. For coming to such conclusion, he relied upon certain judicial precedents. On the aforesaid reasoning, ld. CIT finally concluded that assessment order passed 4 ITA No. 748 /Hyd/2014 M/s Tejaswini Engineering Pvt. Ltd.

being erroneous and prejudicial to the interests of revenue has to be set aside with a direction to AO to pass the assessment order taking into consideration the issue of non-allowability of expenditure from the estimated income. Being aggrieved with the order of ld. CIT, assessee has preferred this appeal raising as many as 10 grounds both on the jurisdictional issue as well as on merits.

5. We have heard the parties and perused the materials on record. Ld. AR's submission precisely, is the issue of estimation of profit being subject matter of appeal before ld. CIT(A) and having been considered and decided by ld. CIT(A), exercise of jurisdiction u/s 263 is contrary to the statutory mandate as provided in Explanation (c) to section 263(1) of the Act. Ld. AR submitted, in fact, while considering the appeals preferred by assessee as well as revenue against the order of ld. CIT(A), ITAT has remitted the matter back to the file of AO with a direction to examine assessee's books of account and other documents and thereafter decide the issue. Thus, it was submitted by ld. AR, since there is no assessment order in existence as on date by virtue of the order of ITAT, revision order passed u/s 263 has no legs to stand.

6. Ld. DR, on the other hand, submitted before us, since the issue relating to allowance of expenditure on income estimated was not considered and decided by the appellate authority, ld. CIT was well within his power to exercise jurisdiction u/s 263. She further submitted, assessment order is erroneous and prejudicial to the interests of revenue due to the fact that once income is estimated no further allowance of expenditure can be given.

7. Having considered the submissions of the parties, we are unable to accept the contention of ld. DR. It is manifest from the facts 5 ITA No. 748 /Hyd/2014 M/s Tejaswini Engineering Pvt. Ltd.

and materials on record, AO after rejecting the books of account estimated the gross income of assessee from steel trading business and from such estimated gross income allowed certain expenditure. Assessee preferred appeal against the said assessment order before ld. CIT(A) by specifically challenging the rejection of books of account and estimation of gross income at 1%. Ld. CIT(A) while disposing of the appeal, though, upheld the rejection of books of account, but, estimation of gross income was reduced from 1% to 0.7%. Thus, as can be seen from the aforesaid facts, assessee has not only challenged the rejection of books of account but also estimation of gross income before ld. CIT(A). Therefore, all issues ancillary and incidental to the estimation of profit also became subject matter of appeal before ld. CIT(A). In that view of the matter, contention of ld. DR that issue relating to allowance of expenditure was not subject matter of appeal before ld. CIT(A) is not acceptable. Moreover, as can be seen, while disposing of appeals filed by assessee as well as department, ITAT in order passed in ITA Nos. 406 & 546/Hyd/2014, dated 11/03/2015 has set aside the order of ld. CIT(A) and remitted the matter back to the file of AO with a direction to examine the books of account and other documents of assessee and decide the issue accordingly. Thus, the directions of ITAT make it clear that the entire issue is open before AO as he has been directed to make a fresh assessment. In these circumstances, when the assessment order has been restored back by ITAT to the file of AO with a direction to make a fresh assessment after examining the books of account, the impugned order of ld. CIT has become infructuous. Accordingly, we set aside the order of ld. CIT and direct AO to complete the assessment as per the directions of ITAT in ITA Nos. 406 & 546/Hyd/2014, dt. 11/03/2015.

6 ITA No. 748 /Hyd/2014 M/s Tejaswini Engineering Pvt. Ltd.

8. In the result, assessee's appeal is considered to be allowed.

Pronounced in the open court on 8 th May, 2015.

Sd/- Sd/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 8 th May, 2015 kv

Copy to:-

1) M/s Tejaswini Engg. Pvt. Ltd., C/o. P. Murali & Co, CAs., 6-3-655/2/3, 1 st Floor, Somajiguda, Hyderabad - 500 082

2) CIT-II, Hyderabad 3 Addl. CIT, Range - 2, Hyderabad

4) The Departmental Representative, I.T.A.T., Hyderabad.