INCOME TAX APPELLATE TRIBUNAL, BENCH “D”, KOLKATA

ITA No.2299/Kol/2013 Assessment Year : 2006-07
Ritesh Kumar Boyed (Appellant) vs. C.I.T. (Respondent)
Date of Order: 15-01-2016

ORDER

Per Shri N.V.Vasudevan, JM
This is an appeal by the Assessee against the order dated 25.3.2013 by the CIT, Kolkata-XIV-Kolkata, passed u/s.263 of the Act, relating to AY 2006-07.

2. The Assessee is an individual. He carries on the business of dealing in auto parts under the name and style M/S.Surendra Motor. For AY 2006-07, the Assessee filed return of income on 31.10.2006 declaring total income of Rs.2,28,726/-. The return of income was processed u/s.143(1) of the Act on 28.9.2007.

3. There was a survey conducted by the revenue u/s.133A of the Income Tax Act, 1961 (Act) in the business premises of the Assessee on 25.1.2008. Based on the material found in the course of survey, proceedings u/s.147 of the Act were initiated by issue of a notice u/s.148 of the Act on 27.11.2009.

4. In the course of survey the material found by the Revenue was that the Assessee was not recording some of the transaction of sales made by him during the previous year relevant to AY-06-07and 07-08 in the regular books of accounts maintained by the Assessee. As far as AY 06-07 is concerned, the sale transactions not recorded in the regular books of accounts were to the extent of Rs.2,26,293/-. In the course of assessment proceedings, the AO examined the Assessee and confronted the Assessee with the material found in the course of survey which showed that transactions of sale were not recorded in the regular books of accounts maintained by the Assessee. The Assessee submitted before the AO that it was usual practice in the trade that mechanic or garage owners take automobile parts from the shop and it is only when the parts suit their needs they purchase automobile parts. They may return the goods if the automobile parts do not suit their purpose. The sale transaction in such case is not recorded in the books of accounts and only on customer’s approval the sale is recorded in the books of accounts. Therefore there was no transaction of sale which is not recorded in the books of accounts.

5. This plea of the Assessee was not accepted by the AO in the course of assessment. He held that the Assessee neither produced documentary evidence to substantiate his contention regarding existence of such practice nor did he maintain any other hand book or record of such transactions nor was such hand book or record found in the course of survey. The AO therefore concluded that the Assessee had in fact done transaction of sale of auto parts and such transactions were not recorded in the books of accounts maintained by the Assessee.

6. The next question before the AO was how to compute income from such transactions of sale which are not recorded in the books of accounts of the Assessee. The AO found that the Gross profit declared by the Assessee on sales recorded in the books of accounts was 7.53%. However in the statement recorded at the time of Survey the Assessee had in answer to question no.2 stated that the Gross Profit in his business would vary between 15.5% and 53%. The AO therefore applied 17% Gross profit on unrecorded sales of Rs.2,26,293/- and made an addition of Rs.38,470/- to the total income of the Assessee. The AO passed the order u/s.143(3) r.w.s.148 of the Act on 30-12-2010.

7. The CIT in exercise of his powers u/s.263 of the Act, was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue. The main point of dispute which is subject matter in this appeal as raised by the CIT in the proceedings u/s.263 of the Act was as that the AO should not have stopped by just adding Gross Profit on unrecorded sales. According to CIT the entire sale should have been added as income of the Assessee. Alternatively, the purchases or peak purchase, related to the unrecorded sales, ought to have also been added as income of the Assessee.

8. In reply to the proposal of the CIT stated above, the Assessee submitted that the AO was in possession of the entire documents, records and books of accounts found at the time of survey and only on examination of all those documents the AO has come to a conclusion that an addition of Gross Profit on sales not recorded in the books of accounts could be added as income. The Assessee pointed out that when the AO in exercise of his powers after due enquiry had come to a conclusion, which is a possible conclusion, the CIT cannot exercise of his powers u/s.263 of the Act, just because he does not feel satisfied with the conclusions reached by the AO. In other words it was submitted that jurisdiction u/s.263 of the Act cannot be invoked to substitute the view of the AO with that of the CIT. It was submitted that the jurisdiction can be invoked only when two conditions viz., the order in question being erroneous and prejudicial to the interest of the revenue are established. The Assessee placed reliance on the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Gabriel India Ltd. 203 ITR 108 (Bom.) for the above proposition. The Assessee also pointed out that since unrecorded sales are made throughout the year, unrecorded purchases were also made throughout the year. The profit margin on sale and the realization from sale would be sufficient source of funds out of which the Assessee would have made purchases and hence no separate addition of income on account of unrecorded purchases should be made. The Assessee placed reliance on the decision of the Hon’ble Gujarat High Court in the case of President Industries Ltd. 258 ITR 654 (Guj.) and the ITAT Delhi in the case of India Seed House Vs. ACIT (2001) 69 TTJ (Delhi) 241 for the proposition that only gross profit on unrecorded sales have to be treated as income and not the entire undisclosed sale.

9. The CIT however did not deal with any of the aforesaid submissions but nevertheless concluded that the Gross Profit adopted by the AO for making addition on account of income from unrecorded sales was proper. He went on further to add that the element of unaccounted purchase ought to have been added by the AO and the order of the AO without going into this aspect has resulted in underassessment of income. The CIT further held that if purchases and sales recorded in the books of accounts are correlated than gross profit rate can be applied and income from unrecorded sales estimated. Since the AO has not verified the above aspect the order of the AO is erroneous and prejudicial to the interest of the revenue. The CIT accordingly passed order u/s.263 of the Act setting aside the assessment order dated 30.12.2010 with a direction to pass a fresh assessment order after examining the evidence and documents in respect of various issues raised after giving opportunity to the Assessee and in accordance with law.

10. Aggrieved by the order of the CIT, the Assessee is in appeal before the Tribunal. 11. At the time of hearing it was brought to our notice that in respect of similar addition made in AY 2007-08 on the basis of material found at the time of survey, an assessment was made by the AO by order dated 21.12.2009 adding Gross Profit on unrecorded sales. That order was revised by the CIT in exercise of his powers u/s.263 of the Act by an order dated 23.3.2012. In the said order the CIT gave similar directions as was done in AY 2006-07. The said order was challenged by the Assessee before the ITAT in ITA No. 1245/Kol/12 and this Tribunal by its order dated 16.5.2013 was please to quash the order of the CIT u/s.263 of the Act. The said order of the Tribunal has however been reversed by the Hon’ble Calcutta High Court in G.A.No.3284 of 2013 dated 4.4.2014. The Assessee preferred SLP before the Hon’ble Supreme Court against the order of the Hon’ble Calcutta High Court and the Hon’ble Supreme Court in Civil Appeal No.3113 of 2015 by its judgment dated 23.3.2015. The Hon’ble Supreme Court set aside the order of the Hon’ble Calcutta High Court and remitted the matter to the Hon’ble High Court to proceed in accordance with law i.e., frame substantial questions of law and thereafter proceed with the matter.

12. The point for consideration in this appeal is as to whether the CIT rightly invoked jurisdiction u/s.263 of the Act. We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned counsel for the Assessee reiterated submissions made before the CIT and the learned DR relied on the order of the CIT.

13. We have given a careful consideration to the rival submissions. It is seen from the order of the AO that the AO rejected the claim of the Assessee that the unrecorded sales were goods given to customers and the customers may approve or may return such goods. It is only on approval sales are recorded in the books of accounts. Therefore, there were no suppressed sales, whatsoever. This was rejected by the AO and he made an addition on account of gross profit on unrecorded sales at 17% of unrecorded sales. The crucial words in the order of assessment reads as follows: “Considering the facts and circumstances of the case the G.P. rate on undisclosed sale is calculated @ 17%. And the same is added back to the total income of the assessee. No further expenses are allowed as assessee has already debited huge expenses (Addition Rs.38,470/-)”

14. It is clear from the above observations of the AO and the observations in para-3 of the order of assessment that he had taken due cognizance of all debit items in the profit and loss account, the tax audit report, the impounded documents, statement recorded during Survey and during assessment proceedings, books and accounts and other documents, bills, vouchers etc.

15. The CIT has exercised jurisdiction u/s.263 of the Act on the ground that the AO failed to make proper enquiry which he ought to have made before completing the assessment. There is a distinction between "lack of enquiry" and "inadequate enquiry". If there is an enquiry, even inadequate, that would not by itself give occasion to the CIT to pass order under s. 263, merely because he has a different opinion in the matter. Such a course of action is open only in cases of "lack of enquiry". Although apparently the assessment does not give any reasons why purchased were not being added as income, that by itself would not be indicative of the fact that the AO has not applied his mind to the issue. AO is not required to give detailed reason in respect of each and every item of deduction in the assessment order. AO had called for explanation regarding suppressed sales and the assessee had furnished his explanation. Thus, it cannot be said that it is a case of 'lack of enquiry'. Further, even the CIT is not clear as to whether entire purchases has to be added or peak purchases has to be added or the entire sales has to be added as income. Therefore, the view taken by the AO was one of the possible views and the assessment order passed by the AO could not be held to be prejudicial to the Revenue. Even the CIT conceded the position that the AO made the inquiries, elicited replies on Gross Profit and thereafter passed the assessment order. The grievance of the CIT was that the AO should have made further inquiries as to whether any addition has to be made on account of unrecorded purchases or whether the entire suppressed sales had to be regarded as income of the Assessee rather than accepting the explanation. Therefore, it cannot be said that it is a case of 'lack of inquiry'. The decision of the Hon’ble Bombay High Court in the case of Ganbriel India Ltd. (supra) clearly supports the stand taken by the Assessee in this regard. We also derive support for our conclusions as above from the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd. 332 ITR 167 (Del.).

16. For reasons stated above, we are of the view that the jurisdiction u/s.263 of the Act was not properly exercised by the CIT as the condition precedent for invoking the same viz., that the order of the AO is erroneous and prejudicial to the interest of the revenue is not shown to be present in the present case. We therefore quash the order u/s.263 of the Act and allow the appeal by the Assessee.

17. In the result, appeal by the Assessee is allowed. Order pronounced in the court on 15.1.2016.

[Waseem Ahmed]                     [N.V.Vasudevan]
Accountant Member                 Judicial Member