CIT Revision u/s 263 unjustified alleging wiping out income surrendered u/s 133A treating it business income and not separately u/s 69A

INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR

I.T.A No. 203(Asr)/2014 Assessment Year: 2009-10

M/s Superfine Agro Industries (Appellant) vs. Income Tax Officer (Respondent)

Date of Order: 10/03/2016

ORDER

PER T. S. KAPOOR (AM):

This is an appeal filed by assessee against the order of learned CIT, dated 04.02. 2014 passed u/s 263, for Asst. Year: 2009-10.

2. The assessee has raised various grounds of appeal, however, the crux of grounds of appeal is action of learned CIT by which he has passed order u/s 263.

3. The brief facts of the case as noted in the assessment order are that the assessee is engaged in the business of Gawar Gum Manufacturing. Books of account of the assessee have been audited u/s 44AB of the I.T. Act,1961. The case of the assessee was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer required assessee to file reply to detailed questioner for which written explanations were filed and therefore, the assessment was completed u/s 143(3) after making an addition of Rs.1 lac. The learned CIT observed that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of Revenue as Assessing Officer had not examined and investigated the assessee in a proper manner because of the following facts.

(i) A survey was conducted on the business premises of the assessee on 25.02.2009 and assessee had surrendered an amount of Rs.30,00,000/- which has been wiped out by assessee by debiting various expenses against the additional income and the Assessing Officer had not examined allowability of such expenses. He further observed that surrender income was to be taxed separately which Assessing Officer had failed to do. He observed that the surrendered income was to be taxed u/s 69A of the Act in view of the judgment passed by Punjab & Haryana High Court in the case of Kim Pharma (P) Ltd. vs.CIT, Panchkula.

(ii) The learned CIT observed that assessee had sold Gwar Korma at average rate of Rs.950/- per Qtl. whereas it has valued closing stock at Rs.1150/- per quintal and therefore, the assessee had suppressed sales which the Assessing Officer had not examined.

(iii) He further observed that interest paid to M/s Satiza Trading Company and M/s B.M. Agro Industries Pvt. Ltd. worked out to be at 16.76% and 15.34% respectively which was excessive and which aspect has not been examined by Assessing Officer.

The learned CIT observed that such excessive interest has been debited to reduce the incidence of tax on surrendered income and Assessing Officer had failed to make any enquiries on this issue, therefore, on the above three points he issued show cause notice u/s 263 on 21.1.2014. The assessee furnished reply to the queries raised by learned CIT, however the learned CIT was not satisfied with the reply and he set aside the order of Assessing Officer and directed him to pass a fresh assessment order.

4. Aggrieved the assessee is in appeal before us.

5. At the outset, the learned AR submitted that all the three points raised by learned CIT were examined by Assessing Officer during assessment proceedings and in this respect he referred to paper book page 25 to 28 and our specific attention was invited to page 25, 26 and 27. The learned AR then took us to paper book page 63 and 64 where again reply dated 9.12.2011 to the queries of Assessing Officer was placed. In view of the above the learned AR argued that Assessing Officer had passed order after due application of mind and has finalized the assessment based upon facts of the case. He submitted that the only source of income of assessee is manufacturing of Gum and Allied Products and therefore, income surrendered during survey operations cannot be taxed other than business income. He submitted that facts of the case of M/s Kim Pharma (P) Ltd. vs. CIT, Panchkula and M/s Mohammaed Hazi Hassan are totally different, therefore, observation of learned CIT are totally wrong. Continuing his arguments the learned AR submitted that in fact case of the assessee was covered by the judgment of Gaurish Steel v/s ACIT 43 ITR (Trib) 414 decided by Chandigrh Bench, wherein the judgement of Kim Pharma (P) Ltd has been considered. He submitted that case of M/s Parveen Chappal Centre Abohar, decided by Hon’ble Amritsar Bench under similar facts and circumstances was also in favour of assessee and therefore order of Assessing Officer is not erroneous.

6. As regards suppression of sales as observed by learned CIT, the learned AR submitted that accounts of the assessee are audited u/s 44AB of the Act. He submitted that sales of the assessee has been booked on the basis of prevailing market prices and closing stock was valued at market prices as on the close of year and evidence of valuation of closing stock was duly filed with Assessing Officer and in this respect our attention was invited to paper book page 71, where a copy of bill dated 28.03.2009 was placed. Therefore, it was argued that observation of learned CIT that there is suppression in the value of sale is misconceived.

7. As regards payment of interest to two parties learned AR submitted that learned CIT has wrongly calculated interest @ 16.76% and 15.34% and in fact rate of interest has 15% which is quite reasonable keeping in view the fact that loans were raised without any security and the details of party wise payment of interest was submitted to Assessing Officer and he has taken a plausible view in accepting that interest payments were not excessive.

8. In view of the above, he argued that there was due application of mind by the Assessing Officer and every thing stands examined and hence order u/s 263 is not justified. Reliance in this respect was placed on the following case laws.

(i) Venus Woolen Mills as reported in 36 ITR (Trib)388 (ii) Khushi Ram & Sons as reported in 40 ITR (Trib) 92 (iii) Hari Trading Co. vs. CIT (P&H HC) as reported in 263 ITR 437. (iv) Amrik Singh vs. ACIT (Chandigarh Bench) as reported in 36 DTR 111. (v) Sh. Narain Singla vs. CIT (Central) in ITA No.427/Chd/2015 order dated 31.08.2015. (vi) Pawan Kumar vs. CIT in ITA No.435/Chd/2012 vide order dated 19.08.2015.

9. Without prejudice the learned AR submitted that internal audit team of Income Tax Department had raised the objection regarding wiping out of entire surrendered amount of Rs.30,00,000/- vide audit note dated 16.05.2013, copy was placed in paper book page 65 and 66. The leaned AR submitted that the Assessing Officer vide its reply dated 16.05.2013 to the objection of audit team had replied and had requested to file the objection. The learned AR further took us to paper page 69 to 70 where a copy of letter written by Commissioner of Income Tax, Bathinda was placed where in the Commissioner of Income Tax, Bathinda has directed as to why audit objection has been ignored. The learned AR submitted that the sequence of events suggests that notice u/s 263 was issued on the basis of audit objection which is not as per law and reliance in this respect was placed on the following case laws.

(i) Sh. Jaswinder Singh Vs. CIT (ITA No.690/Chd/2010) (ii) M/s Refex Industries Ltd. vs. DCIT (ITA No.972/Mds/2014 (iii) CIT vs. Sohana Wollen Mills (2008) 296 ITR 238 (P&H) (iv) J.Thomas & Co. Pvt. Ltd. Vs. JCIT (OSD) ITA No.570/Kol/2012 (v) Vinay Partap Thacker Vs. CIT (ITA No. 2939/Mum/2011. (vi) CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom).

Without prejudice it was submitted that learned CIT has only set aside the order which was passed after due application of mind and therefore, learned CIT was not of confirmed view about his action and therefore, the order u/s 263 was bad in law. Reliance in this respect was placed on the case law of CIT vs. M/s Kanda Rice Mills 178 ITR 446 (P&H).

10. The learned DR, on the other hand, invited our attention to the provisions of section 263 and submitted that learned Commissioner has all powers to initiate action u/s 263 if the order of Assessing Officer was prejudicial to the interest of Revenue and was erroneous. The learned DR invited our attention to assessment order in this respect and submitted that there is no whisper of examination of the points raised by learned Commissioner of Income Tax and therefore, learned CIT was justified in holding that order was erroneous and prejudicial to the interest of Revenue. Commenting upon the merits of the case the learned DR submitted that the survey was conducted in the last month of financial year and how the assessee had inflated its expenses was not examined by Assessing Officer.

11. As regards the arguments of learned AR that section 263 was initiated on the basis of audit objection, the learned DR submitted that the CAG is a part of Government of India and the objection raised by it cannot be ignored. He further submitted that the learned CIT was not guided by audit objection only and there were other issues also such as suppression in value of sale of Gwar Koram and excessive payment of interest.

12. The learned DR submitted that during survey proceedings the assessee had even handed over the cheques also for payment of tax, therefore, the assessee had manipulated its accounts to wipe out the surrendered income which aspect has not been examined by Assessing Officer and therefore, the action of the learned CIT was as per the provisions of law. 13. The learned AR in his rejoinder submitted that all the reasons for incurring of loss during this year was explained to Assessing Officer, therefore, it can not be said that Assessing Officer has not examined the expenses booked by assessee. As regards Gwar Koram the learned AR submitted that all sales of the assessee were vouched and these were booked at market prices and monthwise figures of sales were also filed during assessment proceedings. Regarding handing over of cheuqes the learned AR submitted that Profit/Loss of an assessee can be determined any after close of the year and therefore, handing over of cheques does not amount to admission of tax liability as the cheques were not enchased.

14. We have heard the rival parties and have gone through the material placed on record. We find that a detailed questionnaire was issued by Assessing Officer which is placed at paper book page 21 to 24. The Assessing Officer besides other issues had raised the following queries from the assessee.

“Question No. 5:- Rate of interest charged on advances/loans which have been given and if rate of interest charged is lower vis- a- vis interest paid on loans raised, please explain why the difference be not disallowed and added to your income. Please give the working of such difference indicating the rate of interest charged and paid.

Question No.7:- Inventory of opening and closing stock with method of valuation.

Question No.10:- Month-wise sale /purchase with quantity and amount.”

In reply to these queries the assessee filed its reply vide letter dated 1.08.2011 placed at paper book page 25 to 28, in which besides other replies on other queries the reply to relevant queries were furnished as under:

“(i) The details of interest are enclosed mentioning therein the rate of interest. Interest bearing funds have not been diverted for non business purposes. The interest bearing funds have not been diverted in low interest bearing investments.

(ii) The details of opening and closing inventory are enclosed. The closing inventory has been valued at market price. The evidence regarding market rates prevailing as on 31st March, 2009 are enclosed.

(iii) The purchases and sales are completely vouched. The supporting vouchers, in respect of expenses, are produced in respect of expenses debited to profit and loss account. The items manufactured by the concern are all sold on basis of market rates prevailing in the area. The sale and purchase rate vary from minute to minute by market forces therefore G.P rate of one year can not act as barometer for ascertaining the profitability of another year. The current under assessment is first year of its business operations. However item wise trading accounts of each commodity stating therein the quantities/weight are enclosed.

(iv) The details of expenses exceeding Rs.50000/- debited to Profit & Loss Account are enclosed. The Comparative chart of expenses debited to Profit and Loss Account can not be prepared as current year is first year of its business operation.

15. The assessee vide letter dated 9.12.2011 further clarified regarding surrendered income and expenses incurred by it. For the sake of convenience the reply of assessee as placed in paper book page 63 and 64 is annexed herewith as part of the order.

To                                                                                                                                                                09-12-2011

The Income Tax Officer,

Ward -11 (3)

Abohar

Dear Sir,

Sub. :-Assessment proceedings for the assessment year 2009-10 in case of Superfine Agro Industries,Burj muhar Road, Abohar.

In connection with the ongoing assessment proceedings in the above said case it is submitted that survey u/sl33A was conducted on the business premises of the assessee on 25-02-2009. No books of accounts were impounded. The surrendered amount was declared/reflected in the books of accounts. There is no retraction of disclosure, if any, made during survey. The current assessment year in question is the first year of business operations of the assessee. The substantial amount of building or plant & machinery were installed prior to survey operations and insignificant amount of investment was made to assets after survey operations and there is no instance of claiming higher deduction of depreciation. In fact the assessee was under heavy losses at the time of survey due to inadequacy of funds & higher interest charges. The assessee was pressurized to surrender the amount of loss otherwise there were no difference in stocks or books. It was specifically stated in the offer letter that all discrepancies as on the date stands covered in the survey. In the light of above facts the income declared by the assessee may kindly be accepted.

Regarding low profitability it is submitted that assessment year in question was first year of its business operation. The concern had garnered gross profit of Rs 4064533.01 but the same vanished under heavy load of following expenditure.

Brokerage 130498.00

Depreciation 953946.00

Discount 788932.47

Electricity Expenses 775900.00

Insurance 86918.00

Interest 2500201.00

Total 6086895.47

The above expenses in any case were required to be incurred for effectively running the factory .The own capital of the partners was negligible hence interest cost in the first year of its business activity stood at Rs 25, 00,201.00.The surrendered amount was completely wiped out by remaining variable expenses like rates & taxes, machinery repairs, legal fee, godown rent, printing & stationary etc. The expenses of the concern are genuine and completely vouched. None of the expenses is of personal in nature or has been incurred for non-business purposes. Keeping in view the totality of the facts the trading results of the concern may kindly be accepted.

Submitted for favourable and sympathetic consideration.

Thanking You

Yours Faithfully,

For Superfine Agro Industries,

Sd/-

(O.P.Doda) Partner

16. From the queries raised by Assessing Officer and from the reply filed by assessee, we find that Assessing Officer has examined all the three issues raised by Commissioner of Income. The assessee has clarified that its purchases and sales are completely vouched and has produced complete vouchers in respect of expenses and even item wise trading account along with quantity was also submitted. The evidence regarding market rates prevailing as on 31st March, 2009 were also submitted in the form of Bill No.267 dated 28th March, 2009 which was for Gwar Korma which was sold at the rate of Rs.1150/- per Qntl. The copy of bill is placed at paper book page 71.

17. In view of the above observation of learned CIT, that there was suppression in sales of Gwar Korma is not correct as the valuation of stock was done at prices prevailing as on 28th March, 2009 and sales of the assessee were completely vouched.

18. Now coming to another objection regarding allegation of learned CIT that assessee wiped out surrendered income, we find that assessee had produced vouchers for expenses and had also submitted break up of various expenses and Assessing Officer was not able to point out any discrepancy in the same. In the letter filed by assessee on 9.12.2011, the assessee submitted that the assessee was under heavy losses at the time of survey due to inadequacy of funds and higher interest charges, therefore, it cannot be said that Assessing Officer had not examined the expenses incurred by assessee.

19. As regards the objection of learned CIT that assessee should have declared the surrendered income as separate income u/s 69A, we find that the assessee vide surrender letter placed at paper book page 20 had surrendered additional income of Rs.30 lacs over and above the normal income as mentioned in the surrender letter. The only income of assessee is income from operations of this business only and therefore, assessee had rightly credited the amount of surrender to its Profit and Loss Account as additional income which fact is verifiable from paper book page 16, where a copy of Profit & Loss Account is placed. The Assessing Officer while dealing with surrendered income has taken a plausible view as decided by various judgments. The Amritsar Bench in the case of M/s Parveen Chappal Centre vs. ACIT, in ITA No.626(Asr)/2011 decided on 28.06.2013 has held the surrender income of Rs.50 lacs to be a business income. The Assessing Officer in this case had made an addition of Rs. 50 lacs which was surrendered during the course of survey u/s 133A relying upon the case law of Fakir Mohamad Haji Hasan vs. CIT, 247 ITR 290 (Gujrat High Court), however the Tribunal held the same to be assessed as business income. We further find that the Hon’ble Chandhgarh Tribunal in the case of Gaurish Steel (Pvt.) Ltd. vide order dated Sep.17, 2015 after relying upon the case of Kim Pharma (P) Ltd. vs. CIT, Panckula and Fakir Mohamad Haji Hasan vs. CIT (supra) has held that other than cash the other income surrendered can be brought to be taxed under the head business income while the cash can be assessed as deemed income u/s 69A of the Act. From the contents of surrender letter placed at paper book page 20 we find that assessee had surrendered additional income of Rs.30 lacs covering all discrepancies in cash, stock, loose papers, valuation of building and other discrepancies, however the extent of difference in cash book and physical cash has not been mentioned. The Assessing Officer on the basis of surrendered letter has accepted the claim of income to be assessed as business income which is a plausible view.

20. As regards examination of expenses, we find that assessee had filed complete details of expenses and had also produced vouchers of expenses, the Assessing Officer applying his mind had made addition of Rs.1 lac only. Therefore, observation of learned CIT that Assessing Officer did not examine the expense is not correct. Similarly the assessee had filed complete details of interest which were paid to the lenders and which was found to be at market price by Assessing Officer, therefore, the observation of learned CIT that interest expenses were excessive is not correct.

21. In view of the above, we are in agreement with the arguments of learned AR that Assessing Officer had examined from each and every angle and therefore, the order was not erroneous. The Hon’ble Punjab & Haryana High Court in the case of Hari Trading Company Vs. CIT as reported in 263 ITR 437 has held as under:

“ AO having made full inquiries before accepting the claim of the assesse qua the amount surrendered at the time of survey on account of discrepancy in stock and accordingly passed the order without making the addition, the order of CIT under s.263 could not be sustained on the ground that the assessment was made without proper enquiry, moreso when the assessee’s case was being monitored by the CIT for time to time and the assessment order has been passed after a draft order had been forwarded to the then CIT for his approval.”

We further find that Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC) held as under:

“A bare reading of provisions of s.263 makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interest of the Revenue. The CIT has to be satisfied of twin conditions namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the ITO is erroneous but is non prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to s. 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of kind. The phrase ‘prejudicial to the interests of the Revenue’ is not an expression of art and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the Revenue. The phrase ‘prejudicial to the interests of the Revenue’ has to read in conjunction with an erroneous order passed by the AO. Every loss of revenue as consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue, example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CTT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.”

In the present case the Assessing Officer has examined all the points raised by Commissioner of Income Tax. The action of learned CIT cannot be termed as justified so long as Assessing officer has examined from each and every angle and has taken a plausible view. In view of the facts and circumstances and the legal precedents relied upon by learned AR the appeal of the assessee is allowed. As we have already decided the issue in favour of assessee, the other alternative arguments raised by learned AR has not been adjudicated.

22. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open Court on 10th March, 2016.

(A.D. JAIN) JUDICIAL MEMBER (T. S. KAPOOR)  ACCOUNTANT MEMBER

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