GAD FASHION VS PRINCIPAL COMMISSIONER OF INCOME TAX -(ITAT)

1. This appeal by the assessee is directed against the order dated 31.03.2018 of ld. Pr. CIT, Jaipur passed U/s 263 of the IT Act for the assessment year 2009-10. The assessee has raised the following grounds under as under:-

“1. Under the facts & circumstances of the case, the order passed by Ld. CIT U/s 236 is illegal & bad in law and be quashed.

1.1 The Ld. CIT has erred on facts and in law in holding that AO has not made necessary enquiries/ verification with reference to the purchases made from M/s Mohit International and M/s Nakshatra Business Pvt. Ltd. as to the correctness of the rates and at the same time admitting that on account of these purchases, AO has rejected the books of assessee and disallowed 25% of such purchase in the assessment framed U/s 147/143(3) dated 24.06.2016 and therefore, order of AO cannot be held to be erroneous and prejudicial to the interest of Revenue.

2. The assessee craves to amend, alter and modify any of the grounds of appeal.

3. the appropriate cost be awarded to the assessee.”

2. The assessee filed its return of income for the assessment year under consideration electronically on 28.09.2009, declaring total income of Rs. 3,53,79,360/-. The Scrutiny assessment U/s 143(3) was completed on 13.12.2011 at income of Rs. 3,56,72,421/-. Subsequently the assessment was reopened based on the report of the Investigation Wing, Mumbai that the assessee has taken accommodation entries in respect of purchases from the entities managed by Shri Praveen Kumar Jain. The AO issued notice U/s 148 of the Act on 17.03.2015 and thereafter completed reassessment U/s 143(3) r.w.s. 148 of the Act whereby the purchases from two parties namely M/s Mohit International & M/s Nakashatra Business Pvt. Ltd. total amounting to Rs. 41,55,399/- were disallowed by the AO @ 25% of the said purchases. Hence, the AO made trading addition of Rs. 10,38,850/- being 25% of the unverifiable purchases made from these two parties. The assessee challenged the action of the AO before the ld. CIT(A) in the meantime the Pr. CIT propose to revise the order of the Assessing Officer passed U/s 143(3) r.w.s. 147 dated 24.02.2016 by issuing show cause notice dated 29.03.2018. The ld. Pr. CIT was of the view that the order of the AO is erroneous and prejudicial to the interest of the Revenue because the AO has disallowed only 25% of the unverifiable/bogus purchases instead of 100% of the purchase ought to have been disallowed. In response to the show cause notice the assessee filed its reply dated 31.03.2009. It appears that show cause notice U/s 263 was issued by the ld. Pr. CIT at the fag end of the limitation period on 29.03.2018 as the time period for passing the order was to expire on 31.03.2018. Accordingly, the impugned order was passed by the ld. Pr. CIT on 31.03.2018.

3. We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. The ld. AR has pointed out that in the reply to the show cause notice the assessee has clearly stated that the assessee already filed an appeal before the ld. CIT(A) against disallowance of 25% of the purchase made by the AO and the issue which is raised in the revision proceedings is the subject matter of the appeal before the ld. CIT(A) and therefore, Commissioner has no jurisdiction to invoke the provisions of section 263 of the Act against the order of the Assessing Officer which is subject matter of appeal. The ld. AR has further submitted that the ld. CIT(A) has finally passed the order dated 03.07.2018 and confirmed the addition made by the AO on account of unverifiable purchase. He has relied upon the decision of Hon’ble M.P. High Court in case of CIT vs. Narottam Mishra 395 ITR 138.

4. On the other hand, the ld. DR has submitted that once the purchases are considered as bogus due to the accommodation entries availed by the assessee then, the entire purchases ought to have been disallowed instead of 25%. Hence, the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. She has relied upon the impugned order of the Pr. CIT.

5. Having considered the rival submissions as well as the relevant material on record. We note that the original assessment was completed U/s 143(3) vide order dated 13.12.2011. The assessment was reopened by the AO by issuing notice U/s 148 on 17.03.2015 to assess the income on account of bogus purchases made by the assessee from two parties namely M/s Mohit International & M/s Nakashatra Business Pvt. Ltd. ( Hema Trading Co. Pvt. Ltd.). Thus the AO proposed to reassess the income on account of purchases of Rs. 41,55,399/- made by the assessee from these two above said parties due to the reasons that in the search and survey action carried out by investigation Wing, Mumbai and Surat it was found that these concerns are controlled and managed by one Shri Praveen Kumar Jain who is engaged in providing accommodation entry of bogus sales. Thus, when the very reopening of the assessment was to assess the bogus purchases and the AO has finally completed the reassessment by making disallowance @ 25% of such purchases then it is a clear case of a view taken by the Assessing Officer on this issue which was challenged by the assessee in the appeal filed before the ld. CIT(A). On our direction the Assessing Officer has appeared in the proceedings and has confirmed that on the date of show cause notice dated 29.03.2018 the appeal filed by the assessee was pending before the ld. CIT(A) wherein one of the ground raised by the assessee is against the addition made by the AO to the extent @ 25% of the purchases from two entities. Hence, the Department has not disputed the fact that the subject matter on which the Pr. Commissioner has invoked the provisions of Section 263 of the Act was pending in the appeal before the ld. CIT(A). Even otherwise we note that as per the order passed by the ld. CIT(A) dated 03.07.2018 the date of institution of the appeal is given as on 16.03.2016 and thereafter e-filing on 09.06.2016. The grounds raised by the assessee have been reproduced by the ld. CIT(A) in the said order dated 03.07.2018 in para 3 as under:-

“3. The appellant has taken following grounds of appeal as under:-

1. Under the facts and circumstances of the case, the order passed u/s 147 is illegal and bad in law.

2. The Ld. Assessing Officer has erred in fact and in law in holding that purchases of Rs. 41,55,399/- made from M/s Mohit International and M/s Nakshatra Business Pvt. Ltd. (Hema Trading Co. Pvt. Ltd.) are not genuine and thereby making addition of Rs. 10,38,850/- being 25% of these purchases, to the total income of the assessee, after rejecting the books of accounts U/s 145. He has further erred in making the addition without considering the various evidences filed by assessee to prove the genuineness of these purchases.

3. The assessee craves right to add, alter or amend any of the grounds of appeal.” Thus, it is clear that ground No. 2 in the said appeal before the ld. CIT(A) was regarding the addition made by the AO of 25% of the purchase made from these two companies which is also the subject matter of show cause notice by the Pr. CIT U/s 263 of the Act. Section 263 confers the power to the Pr. Commissioner/Commissioner for calling the record and examination of the same and then may revise the order passed by the Assessing Officer if it is found erroneous and prejudicial to the interest of the Revenue. As per Clause-C of Explanation-1 to Section 263 the powers of the Pr. Commissioner/ Commissioner U/s 263(1) includes and extended to subject matter has not been considered and decided in the appeal if the said order is the subject matter of the appeal. Therefore, in case the order passed by the Assessing Officer has been subject matter of the appeal then the power of the Pr. Commissioner/Commissioner U/s 263 is extended only to the matter which has not been considered and decided in the appeal. For ready reference we quote explanation-1 to section 263(1) as under:-

“ Section 263(1) The Principal Commissioner Or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the [Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. [Explanation.—1 For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—

(a) an order passed [on or before or after the 1st day of June, 1 988] by the Assessing Officer shall include—

(i) an order of assessment made by the Assistant Commissioner [or Deputy Commissioner] or the Income-tax Officer on the basis of the directions issued by the [Joint] Commissioner under section 144A;

(ii) an order made by the [Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120;

(b) “record” [shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the Commissioner;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal [filed on or before or after the 1st day of June, 1988], the powers of the Commissioner under this sub-section shall extend [and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal.]

The Hon’ble M.P. High Court in case of CIT vs. Narottam Mishra (supra) has considered and decided an identical issue in para 8 to 12 as under:-

“8. It is clear from the aforesaid that if two views are possible and if the Assessing Officer has taken a view with which the commissioner does not agree, it cannot be treated as erroneous order, prejudicial to the interest of revenue. In this case also the Assessing Officer appreciated the entire aspect and came to one conclusion and merely because a different view was possible the exercise of power under Section 263 could not be made. The appellate tribunal has considered all these aspects of the matter and it is only after applying the law in the case of Malabar (supra) that the appeal has been allowed. This judgment of the Supreme Court in the case of Malabar Industrial (supra) has been followed in the case of Commissioner of Income Tax (Central) Ludhiana vs Max India Ltd. (2008) 166 Taxman 188 (SC) and in para 2 the following principles have been crystalized : “At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this court has taken the view that the phrase ‘prejudicial to the interest of the revenue’ under Section 263 has to be read in conjunction with the expression “erroneous” order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when the income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income Tax Officer is unsustainable in law.” (Emphasis Supplied)

9. A Division Bench of this Court has followed the principle laid down in the case of Malabar Industrial (supra) and followed this principle in the case of Commissioner of Income Tax vs. Shalimar Housing and Finance Ltd. (2010) 320 ITR 157 (M.P.) and the tribunal after taking note of all these factors has found that exercise of power under Section 263 was not warranted in the present case and, therefore, the CIT’s revision order was quashed, we find no error in the same warranting reconsideration as we are also of the considered view that the exercise of power by the Commissioner under Section 263 was not proper.

10. In this case, if we go through a detailed order passed by the Commissioner Appeal exercising its power of revision on 31.12.2012 we find that the only reason given to hold the order of the Assessing Officer to be erroneous and prejudicial to the interest of revenue is that once the amount of proceed received from M/s. Nagarjuna Construction Company Ltd. and M/s. Simplex Infrastructure Ltd. is found to be 16.02 crores and 10.50 crores, then making an addition to the tune of only Rs.14,24,60,600/- and 1,53,41,000/- is not proper. This is the only reason for holding the order of the Assessing Officer to be erroneous. However while doing so, the authority namely the Commissioner of Income Tax exercising jurisdiction under Section 263 lost sight of the fact that the learned Assessing Officer in detail had gone into this aspect of the matter and has recorded a specific finding to say that appreciating the primary evidence from No.1 to 9 along with corroborative evidence 1 to 6 an addition of only Rs.14,24,60,600/- can be made and similarly by considering primary evidence 1 to 5 along with corroborated evidence no. 7 an addition of Rs.1,53,41,000/- only permissible, thus on a due analyses of the evidence, assessing officer arrived at a particular conclusion and if this is one of the views possible based on evidence that were appreciated by the Assessing Officer, merely because a different view was possible interference under section 263 on this count could not be made. Thereafter this addition is also analyzed by the appellate authority in detail while passing the order originally on 12.12.2012 and this addition is also found to be unsustainable for reasons as have been indicated in the said order and which is considered by us in the preceding paragraph.

11. Merely because in a given set of circumstances two different opinions can be formed, it is not appropriate to interfere with one of the opinion expressed until and unless the opinion is found to be perverse or based on no evidence or material. If this principle is applied to the present case, we find that the tribunal has not committed any error, it was a case where the exercise of jurisdiction under Section 263 by the Commissioner being unsustainable, the tribunal has rightly interfered into the matter, in view of the interpretation to Section 263 made by the Supreme Court, as detailed hereinabove, interference made by the Commissioner Appeal being unsustainable, we answer question No.1 and 3 by holding that the exercise of power under Section 263 by the appellate authority namely the Commissioner Appeal while passing the appellate order on 31.12.2012 was not proper and by interfering in a proceeding under Section 263 an error has been committed and if the tribunal has interfered on same, no illegality is committed by the tribunal. Once we hold that the exercise of power under Section 263 by the commissioner while passing order on 31.12.2012 was not warranted we have to dismiss this appeal and the other questions, i.e. question No.2 formulated need not to be gone into.

12. We accordingly hold that the power exercised by the Commissioner under Section 263 of the Income Tax Act being unsustainable, the appeal is liable to be and is accordingly dismissed.” The Hon’ble Supreme Court in case of CIT vs. Arbuda Mills Ltd. 231 ITR 50 has also examined the Explanation-1(c) to section 263 and held in para 2 to 8 as under:-

“2. The assessee is a company. The relevant assessment year is 1975-76 ending on 31st Dec., 1974. The assessment was completed under s. 143(3) r/w s. 144B, on 31st March, 1978, in which the net business loss was computed at Rs. 3,61,086 and the income under the head "Capital gains" at Rs. 38,874. The ITO had made certain additions and disallowance while computing the loss and income as above and had also accepted, inter alia, the following three claims:

(i) Deduction of a sum of Rs. 23,82,621 by way of provision for gratuity;

(ii) Depreciation on Rs. 4,21,000 which was paid by the assessee to United Textile Industries as consideration for transfer of installed property of 17,480 spindles and 400 looms of Old Manek Chowk Mills;

(iii) Loss on account of difference in exchange rate which was referable to the purchase of machinery, etc., as revenue expenditure.

3. For the purposes of the present matter, it is only these three items of claim which are relevant.

4. In the appeals filed by the assessee, the items in respect of which the decision was in its favour were not the subject-matter of the appeals. In respect of these three items, the CIT exercised his power under s. 263 of the IT Act. The above question arises in this context.

5. The main contention of the assessee which was considered by the Tribunal was whether or not the order of the ITO regarding the said three items in respect of which the assessee had no occasion to prefer an appeal had merged in that of the CIT(A) so as to exclude the jurisdiction of the CIT under s. 263 of the Act.

6. We may refer to the amendment made in s. 263 of the IT Act by the Finance Act, 1989, with retrospective effect from 1st June, 1988. The relevant part thereof for the present case is as under: "Explanation.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—.

(c) where any order referred to in this sub-section and passed by the AO had been the subject-matter of any appeal filed on or before or after 1st June, 1988, the powers of the CIT under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal".

7. The consequence of the said amendment made with retrospective effect is that the powers under s. 263 of the CIT shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in an appeal. Accordingly, even in respect of the aforesaid three items, the powers of the CIT under s. 263 shall extend and shall be deemed always to have extended to them because the same had not been considered and decided in the appeal filed by the assessee. This is sufficient to answer the question which has been referred.

8. The question referred is, therefore, answered in the negative, in favour of the Revenue and against the assessee. Accordingly, when the addition made by the AO was the subject matter of appeal before the ld. CIT(A) and this issue was pending before the ld. CIT(A) then, the Pr. CIT has not powered to invoke the jurisdiction of U/s 263 of the Act on the same issue. In view of the above facts and circumstances of the case the issue which was the subject matter of appeal before the ld. CIT(A) at the time of issuing the show cause notice then, the initiation of proceedings U/s 263 itself is not valid. Further, it is apparent and manifest from the record that the ld Pr. CIT issued the show cause notice on 29.03.2018 and passed the impugned order on 31.03.2018 as failing which the time limit available would have expired. Thus passing the revision order in such a haste without considering the relevant material as well as reply filed by the assessee is otherwise not sustainable in law. We find that the Pr. CIT while passing the impugned order has not even made any reference to the reply filed by the assessee thus such an order passed in violation of principle of natural justice is not sustainable and liable to quash. Accordingly, we set aside the impugned order passed U/s 263 of the Act. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 17/07/2018.

Sd/- Sd/-

(Vikram Singh Yadav) (Vijay Pal Rao)

Accountant Member Judicial Member