2003-VIL-181-ITAT-
Equivalent Citation: TTJ 082, 956, [2004] 4 SOT 402 (KOL.)
Income Tax Appellate Tribunal CALCUTTA
I.T. APPEAL NO. 668 (KOL.) OF 2002
Date: 06.06.2003
SIGMA SEARCH LIGHTS LIMITED.
Vs
INCOME TAX OFFICER.
BENCH
Member(s) : B. R. MITTAL., R. C. SHARMA.
JUDGMENT
The assessee has filed this appeal against the order passed by the learned CIT under s. 263 of the Act dt. 30th March, 2001 for the asst. yr. 1996-97 on the following grounds:
"1. For that in view of the facts and circumstances, the order of the CIT, WB-IV passed under s. 263 was wholly bad, illegal, unjustified and uncalled for and is liable to be quashed/cancelled.
2. For that in view of the facts and circumstances, since no proper opportunity of hearing had been allowed, the order of the CIT under s. 263 was wholly bad, illegal, unjustified and uncalled for.
3. For that in view of the facts and circumstances, the CIT was wholly unjustified in holding that no proper and complete enquiry was made by the AO and the order passed under s. 263 was wholly bad, illegal, unjustified and uncalled for.
4. For that in view of the facts and circumstances, since the AO had made all proper and complete enquiries at the time of original assessment, the CIT was wholly unjustified cancelling the said order under s. 263.
5. For that in view of the facts and circumstances, and even otherwise, since there were only two defects pointed out by the CIT in his order under s. 263, the CIT was wholly unjustified in setting aside complete assessment to be done de novo and thereby setting aside the entire assessment."
The AO completed the assessment under s. 143(3) of the Act by order dt. 22nd Feb., 1999 assessing the total income at Rs. 10,39,543 as against the returned income of Rs. 9,89,578.
2. Learned CIT issued a notice under s. 263 of the Act dt. 20th March, 2001 stating that the GP rate declared during the assessment year under appeal has declined from 41 per cent to 31 per cent and business promotion and marketing expenses have gone up from Rs. 22.55 lakhs last year to Rs. 45.84 lakhs this year. It is further stated in the notice that a sum of Rs. 32.99 lakhs remains pending on account of commissions and installation charges which indicates that business promotion and marketing expenses include payment of commissions. CIT stated that the AO while framing the assessment, failed to examine the issue relating to fall in GP and also the details of expenses relating to promotion and marketing expenses were not called for and examined. Learned CIT has further stated that in the details of outstanding commission, the assessee has not mentioned the addresses of the parties to whom the commission has been paid. In view of the above, learned CIT has stated that the AO completed the assessment without making proper enquiries, investigation and, therefore, the assessment can be recorded as erroneous in so far as it is prejudicial to the interest of Revenue. A copy of the said notice is placed at p. 1 of the paper book.
3. In reply to the above notice, the assessee filed a reply dt. 24th July, 2001. In regard to fall of GP, the assessee has stated that during the previous year relevant to the asst. yr. 1995-96, the assessee manufactured mainly energy saving luminaries but in the assessment year under appeal, the assessee added to the existing product, mix variety of towers like skid/trolley and ground mounted telescopic tilting type towers. This resulted in increase of cost of materials and manufacturing expenses. However, the product gave push to sales. The assessee also showed comparative statement of increase in materials cost by producing bills. The assessee further stated that its products were mainly supplied to Government undertakings in a rate contract and the assessee could not increase selling rate. The assessee stated that this resulted in lowering GP rate. In regard to business promotion and marketing expenses, the assessee has stated that the assessee had to appoint dealers/delegates for promoting its products, and commission paid to them. The assessee has stated that the details of business promotion and marketing expenses were called for by the AO during the assessment and the same were furnished as per annex. 15 in reply to the enquiries made by the AO. The assessee also stated that a note was submitted to the AO during the assessment stage necessitating the appointment of dealers/delegates and payment of commission. The assessee also stated that its taxable income during the asst. yr. 1995-96 was Rs. 5.84 lakhs but the same increased Rs. 9.90 lakhs even after the fall in GP. The assessee further stated that the payment of commission to the dealers is made only on receipt of payment from the debtors but the amount of commission payable is provided during the year at the time of sale itself. Thus, outstanding commission is carried forward to be paid at the time of receipt of payment. The copy of the said reply dt. 24th March, 2001 is placed at pp. 2 and 3 of the paper book.
4. The learned CIT after considering the above reply of the assessee has stated that the explanation given by the assessee regarding low GP rate does not explain the fall of GP rate by a massive 10 per cent. The learned CIT has further stated that while providing the details of business promotion and marketing expenses, the assessee submitted only the names of the person with no addresses or other references. The assessee could not produce any evidence to show that services were actually rendered by the persons to whom commission and such other expenses had been paid. In view of the above, the learned CIT by the impugned order dt. 30th March, 2001, has stated that he is of the opinion that the assessment has been completed without proper enquiries and investigations. The assessment is erroneous in so far as it is prejudicial to the interest of Revenue. The learned CIT set aside the assessment with direction to the AO to complete the assessment de novo after making all the relevant enquiries and investigations and after giving full opportunity to the assessee of producing evidences, documents etc. Hence, the assessee is in appeal before the Tribunal.
5. During the course of hearing of the appeal, the learned authorised representative of the assessee vehemently submitted that the AO made detailed enquiries by issuing a letter dt. 7th Dec., 1998, inter alia, calling for the details of advertisement and/or sales/business promotion expenses. He further submitted that the AO also called for books of account, bills/vouchers, bank statement in original along with bank reconciliation statement. The learned authorised representative of the assessee referred to pp. 34 and 35 of the paper book which is a copy of the letter dt. 7th Dec., 1998 issued by the AO under s. 142(1) of the Act and specifically mentioned question Nos. 19, 20 and 32 of the said letter which are as under :
"19. Details of advertisement and/or sales/business promotion expenses. Please explain their business exigencies.
20. Details of commission/discount/rebate payment explaining the business exigencies of such expense/rebate. Give name and postal address of the concerned parties.
32. Books of accounts, bills/vouchers, bank statement in original along with bank reconciliation statement."
6. The learned authorised representative of the assessee submitted that the assessee furnished the requisite details as called for by the AO during the assessment stage, the copies of which are placed at pp. 36 to 257 of the paper book. The learned authorised representative of the assessee referred to pp. 158 to 159 of the paper book and submitted that the assessee gave the details of business promotion, marketing and guarantee charges of aggregate sum of Rs. 45,84,041.91 as Annex. 19 to the AO at the assessment stage. Further, he referred to p. 136 of the paper book and submitted that assessee also gave the details of outstanding commission of Rs. 32,99,911 along with the name of the parties and their addresses. The learned authorised representative of the assessee further referred to p. 245 of the paper book and submitted that the assessee furnished further details as called for by the AO and, inter alia, also submitted at p. 247 of the paper book, the details of payment of previous year's outstanding commission of Rs. 14 lakhs. The learned authorised representative of the assessee further referred to p. 257 of the paper book and submitted that the assessee also submitted the reasons by way of a note for payment of commission. The learned authorised representative of the assessee further submitted that the assessee submitted the audited accounts and referred the notes of the auditors at pp. 7 to 9 and submitted that the assessee maintained the adequate internal control procedure and following the procedure as per law. The learned authorised representative of the assessee submitted that the learned CIT has not stated as to which enquiry was to be made by the AO while completing the assessment under s. 143(3) of the Act. He further submitted that the learned CIT has not stated that the commission claimed by the assessee is bogus or not genuine. He further submitted that the learned CIT cannot dispute the finality of the assessment merely on presumptions and assumptions or for the reasons that the assessment order is small and does not explain the reasons for allowing the expenses claimed by the assessee. In support of his submission, the learned authorised representative of the assessee placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Joy Commercial Co. Ltd. vs. Jt. CIT (2000) 66 TTJ (Del) 731 : (2001) 76 ITD 65 (Del) and submitted that the Tribunal has held that the learned CIT must give a clear cut finding as to the error and he must also establish that the said error is prejudicial to the interest of the Revenue. The learned authorised representative of the assessee further placed reliance on the decision of the Mumbai Bench in the case of Indian Hotels Co. Ltd. vs. Dy. CIT (1999) 107 Taxman 205 (Mumbai)(Mag) and submitted that the mere lack of discussion of the issue by the AO in the assessment order would not render the order to be erroneous as the learned CIT before exercising his jurisdiction under s. 263 of the Act has to establish that the order of the AO sought to be revised is erroneous and it is prejudicial to the interest of the Revenue. He submitted that Supreme Court has held in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) that if one of them is absent, recourse to s. 263 of the Act cannot be had. The learned authorised representative of the assessee also placed reliance on the decision of the Jaipur Bench of the Tribunal in the case of Ashok Khan vs. ITO (1996) 84 Taxman 29 (Jp)(Mag) and submitted that even if a brief or cryptic order is made by the AO after conducting necessary enquiries into the facts, the order cannot be held erroneous and/or prejudicial to the interest of Revenue for that reason alone. The learned authorised representative of the assessee also placed reliance on the decision of the Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 114 CTR (Bom) 81 (1993) 203 ITR 108 (Bom) and submitted that the learned CIT cannot revise the order under s. 263 of the Act merely because he disagrees with the conclusion arrived at by the AO. He submitted that the AO made the assessment order after making adequate enquiries and discussing the case on 16th July, 1998, 5th Jan., 1999 and 11th Feb., 1999, as mentioned in the assessment order, the same cannot be branded as erroneous by the learned CIT simply because according to him the order should have been written more elaborately. The learned authorised representative of the assessee further submitted that the turnover of the assesse in the assessment year under appeal increased from Rs. 1.64 crores approximately in the last year to Rs. 3.1 crores in the assessment year under appeal. He further submitted that the Department has allowed the payment of the commission to the same parties to whom the commission was paid in the assessment year under appeal, in the earlier year and in the subsequent years to the assessment year under appeal and the same has been allowed by the Department. He further submitted that the AO has passed the assessment order under s. 143(3)/263 of the Act on 27th March, 2002 and no addition has been made on the ground of fall in GP which is one of the ground on the basis of the learned CIT considered the assessment order as erroneous and prejudicial to the interest of the Revenue. In support of his submission, the learned authorised representative of the assessee has furnished a copy of the said order dt. 27th March, 2002. The learned authorised representative of the assessee submitted that the order passed by the learned CIT under s. 263 be quashed as the same is arbitrary.
7. On the other hand, learned Departmental Representative strongly supported the action of the learned CIT. He submitted that the AO passed the assessment order without discussing the outcome of the enquiries purported to have been made by him at the assessment stage. He submitted that there was no proper enquiry and no proper verification was made before completing the assessment. Therefore, the learned CIT is justified to consider the order as erroneous and prejudicial to the interest of Revenue. In support of his submission the learned Departmental Representative placed reliance on the decision of the Madhya Pradesh High Court in the case of CIT vs. Kohinoor Tobacco Products (P) Ltd. (1998) 148 CTR (MP) 536 : (1998) 234 ITR 557 (MP) and also the decision of the Orissa High Court in the case of Uma Shankar Rice Mills vs. CIT (1991) 187 ITR 638 (Ori). The learned Departmental Representative submitted that the learned CIT under his revisional jurisdiction under s. 263 of the Act can direct the AO to make further enquiries before accepting the submissions made by the assessee.
8. We have carefully considered the submissions of the learned Representatives of the parties. We have also gone through both the assessment orders dt. 22nd Feb., 1999, as well as 27th March, 2002, passed by the AO and have also gone through the order passed by the learned CIT dt. 30th March, 2001. We have also considered the relevant pages of the paper book to which our attention was drawn at the stage of hearing of the appeal by the representatives of the parties. We have also carefully considered the cases relied on by the learned Representatives of the parties in support of their submissions.
9. We do agree with the learned Departmental Representative that the assessment order passed by the AO under s. 143(3) of the Act dt. 22nd Feb., 1999, is a brief order and he has not discussed in the said order the details of the expenses, inter alia, claimed by the assessee for business promotion and marketing. It is also a fact that the AO has not discussed in the assessment order that there was a fall in GP in the assessment year under appeal vis-a-vis the GP declared by the assessee in the previous assessment year. However, it is stated by the AO in the assessment order that he discussed the details furnished by the assessee with the representatives of the assessee on 16th July, 1998, 5th Jan., 1999 and 11th Feb., 1999. There is also no dispute to the fact that the AO before completing the assessment vide letter dt. 7th Feb., 1998, asked for the details by raising 33 questions. On perusal of the said letter it is observed that the AO, inter alia sought the details from the assessee in respect of loan, sundry debtors, sundry creditors, details of statutory liabilities, party wise purchase details, details of labour charges etc. consumption of electricity details, telephone bills, details of repairs and maintenance expenses, details of advertisement, business promotion expenses, details of commission/discount/rebate payment along with the reasons of business exigencies of such expenses. Further, the AO also sought for the details of business receipt/sales and the books of accounts etc. There is no dispute also to the fact that the assessee furnished those details and also further details as called for by the AO and the copies of which are placed at pp. 36 to 57 of the paper book. We observe that the assessee also gave the details of the outstanding commission payable along with the addresses of the parties besides giving the details of the business promotion, marketing, guarantee charges, the details of which are placed at pp. 136, 158 and 159 of the paper book. In regard to exigencies of payment of commission, the assessee also submitted a note the copy of which is placed at p. 257 of the paper book. We consider it relevant to reproduce the said note which is as under:
"Sigma Products are non conventional and both luminaries and telescopic tilting type towers falls under the category of "concept selling". Sigma uses stainless steel reflectors for sustained lasting efficiency of their luminaries. These reflectors work out 6 times more costly than conventional aluminium reflectors which results in high manufacturing cost and as such the luminaries need push sale as well as prolonged free trials and demonstrations at remote areas before the customer is convinced of the usefulness of these products. This can be achieved either by own sales force or through the net work of delegates/dealers. Sigma products are used by mines all over the country which are at far flung places. It would simply not work out economical to open our own offices at all these places to sell the products and provide after sales services. Our reflectors are guaranteed for a period of 5 years and after sales service is to be provided for these 5 years. Travelling, conveyance, other allowances and salaries payable to the sales staff as well as other fixed/statutory liabilities would work out more than the commission paid by us to our delegates/dealers. In the absence of media advertisements which would further add to the cost of products we prefer marketing through dealers/delegates."
10. On perusal of the above papers, we find force in the submission of the assessee that the AO before completing the assessment conducted enquiries into the facts and thereafter has passed a brief order dt. 22nd Feb., 1999. In this regard, a similar issue has been considered by the Jaipur Bench in the case of Ashok Khan wherein the AO made brief assessment orders without recording therein all the facts and accepted assessee's version. The question was whether such an order could be said to be an order under s. 263 of the Act an erroneous and prejudicial to the interest of the Revenue for the reasons that proper enquiries were not made before making the assessments in the opinion of the CIT. It has been held by a co-ordinate Bench at Jaipur that an order may be brief or cryptic but if has been passed after conducting the proper enquiries into the facts stated in the return, such an order cannot be held erroneous inasmuch as prejudicial to the interest of the Revenue for that reason alone. The Mumbai Bench of the Tribunal has also held in the case of Indian Hotels Co. Ltd. that mere lack of discussion of an issue by the AO in his order would not render the order to be erroneous and prejudicial to the interest of the Revenue. Their Lordships of the Bombay High Court in the case of Gabriel India Ltd., while considering the power of the learned CIT under s. 263 of the Act has held that the supervisory jurisdiction of the CIT can be exercised only if two circumstances therein exist, viz., (i) the order should be erroneous; and (ii) by virtue of the order being erroneous prejudice must have been caused to the interest of the Revenue. Their Lordships have further held that an order cannot be formed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes 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. Their Lordships of the Bombay High Court have further observed that s. 263 of the Act 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 higher figure than the one determined by the ITO. But 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 a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the CIT the order in question is prejudicial to the interest of the Revenue. But that by itself will not be enough to vest the CIT with the power of suo motu revision, because the first requirement, namely, that the order is erroneous, is absent. It was further held that similarly if an order is an erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible, has not been 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. Their Lordships of the Bombay High Court while answering the question in favour of the assessee and against the Revenue confirmed the order of the Tribunal in setting aside the order passed under s. 263 of the Act and held that the AO made enquiries in regard to the nature of the expenditure incurred and the assessee had given detailed explanation in that regard by a letter in writing. Such a decision of the ITO cannot be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. Their Lordships have further stated that the learned CIT also simply asked the ITO to re-examine the matter. It was held that such a direction by the learned CIT for making further enquiry and/or fresh determination is not permissible under s. 263 of the Act and accordingly, the learned CIT does not get the power to set aside the assessment. It may be stated that during the course of hearing of the appeal the learned Departmental Representative also placed reliance on the aforesaid decision of the Bombay High Court viz. Gabriel India Ltd. However, we find that the said decision squarely applies to the facts of the case before us in favour of the assessee as in the instant case also the AO completed the assessment after calling for the details and making enquiries in regard to the expenses claimed by the assessee but the AO only passed a brief assessment order without making any discussion. Further, the learned CIT while setting aside the assessment has also not given any reasons as to whether the expenses claimed by the assessee on account of payment of commission and business promotion and marketing are bogus or not genuine. The learned Departmental Representative has not disputed the submission of the learned authorised representative of the assessee that the assessee paid commission to the same parties in earlier and subsequent assessment year to the assessment year under appeal and the same was allowed by the Department and there was no resort to s. 263 of the Act.
11. During the course of hearing of the appeal, the learned Departmental Representative placed reliance on the decision of the Madhya Pradesh High Court in the case of Kohinoor Tobacco Products (P) Ltd. and the decision of the Orissa High Court in the case of Uma Shankar Rice Mill. In regard to the case of Kohinoor Tobacco Products (P) Ltd., we observe that the AO completed the assessment without making any enquiry at all to ascertain as to whether the income received from letting out of the properties was assessable as income from business or as income from house property. The AO completed the assessment merely by accepting the assessee's claim that such income was assessable as income from business and thereby allowed excessive deductions towards repairs and also depreciation. The above facts clearly establishes that the assessment completed by the AO was made without making any enquiry and thus the assessment was not only erroneous but also prejudicial to the interest of the Revenue. The facts of that case do not apply to the case before us. We have already observed that the AO before completing the assessment asked for the details and discussed the case with the authorised representative of the assessee. The only fact is that the AO passed a very brief assessment order and no infirmity has been pointed out by the learned CIT in regard to allowing the claim by the AO to the assessee, inter alia, the expenses for business promotion and marketing. The case of Uma Shankar Rice Mill is not relevant for the issue under consideration before us as in that case the issue was whether there was any question of law, arose from the order of the Tribunal. The Delhi Bench of the Tribunal has held in the case of Joy Commercial Co. Ltd. that it is necessary for the CIT to state in which manner he considered that the order of the ITO was erroneous and prejudicial to the interest of the Revenue and should also state the basis for arriving at such conclusion. In the absence of specific finding by the learned CIT, the assessment order cannot be construed to be erroneous and prejudicial to the interest of the Revenue. The Madras High Court has held in the case of CIT vs. Smt. D. Valliammal (1997) 140 CTR (Mad) 433 : (1998) 230 ITR 695 (Mad) that the CIT cannot be set aside an assessment order under s. 263 of the Act on the ground that verification of accounts was needed. The Mumbai Bench of the Tribunal has held in the case of Andhra Valley Power Supply Co. Ltd. vs. Dy. CIT (1995) 53 TTJ (Bom) 647 : (1995) 55 ITD 24 (Del) that the CIT's action under s. 263 must resemble that of a surgeon's knife and he cannot open the assessment wide and direct the AO to consider everything afresh. The Supreme Court has held in the case of Malabar Industrial Co. Ltd. vs. CIT that the phrase 'prejudicial to the interest of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of Revenue as a consequence of an order of the AO cannot be termed as prejudicial to the interest of the Revenue, for 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 to which the CIT does not agree, it cannot be treated as erroneous or prejudicial to the interest of the Revenue unless the view taken by the ITO is unsustainable in law. The Madras High Court in the case of CIT vs. Sakthi Charities (2000) 168 CTR (Mad) 107 : (2000) 244 ITR 226 (Mad) confirmed the order of the Tribunal in holding that the assessment order did not call for any interference under s. 263 from the CIT when the Tribunal found that the ITO had considered all relevant materials on record and when the CIT in his order did not indicate that the enquiry undertaken by the ITO fell short of the required that was expected by him in considering the question of grant of exemption. Therefore, we are of the considered view that the order passed by the learned CIT in setting aside the assessment with the direction to the AO to complete the assessment de novo after making all the relevant enquiries and investigation is not sustainable and the same is liable to be quashed. Not only this, we observe that the AO while making the assessment by order dt. 27th March, 2002, under s. 143(3)/263 of the Act has not made any addition on account of fall in GP which was one of the aspects considered by the learned CIT while setting aside the assessment under his revisional jurisdiction under s. 263 of the Act. Therefore, in our considered opinion, condition precedent for assuming jurisdiction under s. 263 did not exist in the case before us. Accordingly, we quash the impugned order.
12. In the result, the appeal of the assessee stands allowed.
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