Vildirect: IncomeTax-caselaws-2004-VIL-267-ITAT-PNE

2004-VIL-267-ITAT-PNE

Equivalent Citation: ITD 095, 326, TTJ 100, 405,

Income Tax Appellate Tribunal PUNE

Date: 30.03.2004

AMBIKA AGRO SUPPLIERS.

INCOME-TAX OFFICER, WARD 2(6), JALGAON.

BENCH

Member(s) : H. L. KARWA., AHMAD FAREED.

JUDGMENT

H.L. Karwa, Judicial Member. - The appeal by the assessee is directed against order of the CIT, Nashik dated 15-9-1998, passed under section 263 of the Income-tax Act, 1961 for the assessment year 1995-96.

2. In this appeal, the assessee has raised the following grounds:

"On the facts and in the circumstances of the case, the CIT is not justified in invoking the proceedings of section 263 and in directing the Assessing Officer to verify the claims etc. without arriving on any conclusion.

2. Both the conditions required for institution of proceedings under section 263 that is erroneous and prejudicial to the interest of revenue are lacking.

3. Any other ground at the time of hearing with the permission of Tribunal."

3. The facts of the case are that the assessee firm is deriving income from fertilizer, seeds and agricultural equipment. For the assessment year under consideration, the assessee filed its return on 26-10-1995 declaring income of Rs. 26,485. However, the Assessing Officer determined the income of the assessee at Rs. 40,470 vide order passed under section 143(3) dated 10-12-1996. Later on, the CIT, Nashik called for and examined the case records of the assessee firm and formed an opinion that the assessment order passed on 10-12-1996 for the assessment year 1995-96 was erroneous, insofar as, it was prejudicial to the interests of revenue for the following reasons. The CIT found that there was a considerable increase in salary, and account writing fee. According to the CIT, the Assessing Officer had not enquired into this aspect at all. The CIT found that in salary expenses, there was an increase of about 98% and similarly expenses relating to account writing were increased by about 140%, whereas sales were increased just by 58% as compared to the immediately preceding year. The CIT opined that the Assessing Officer had not made any enquiries of such abnormal increase in respect of the above expenses and, therefore, it could not be said that the expenses were commensurate to the need of the business and possibility of inflating thesis expenses to reduce the income could not be ruled out. The CIT also noticed from the profit and loss account that the assessee had claimed bad debts amounting to Rs. 24,949. According to the CIT, the Assessing Officer has not conducted proper enquiry to show as to whether the debts were paid in reality. The CIT also found from the records that during the assessment year under consideration, the assessee had made cash payments exceeding Rs. 10,000 for purchase of goods from Prakash Fertilizer, Malegaon to the tune of Rs. 3,86,230 (and not Rs. 4,02,675 as stated in the audit report). It is stated that the assessee had filed a letter from the; seller dated 5-5-1996. In the said letter, date-wise details of cash sales effected to the assessee by the supplier and the P.A. No. of the supplier were mentioned. The CIT noticed that in the statement of total income furnished along with the return of income, it was mentioned by the assessee that 'the payments are covered under Rule 6DD and as per Board's Circular No. 220 the payments are made to the parties, where the assessee has no bank account, as well as the party was new to the assessee.' The CIT noticed that the Assessing Officer had accepted the claim of the assessee without conducting necessary enquiry to verify the genuineness of the transaction, identity of the payee as well as exact circumstances which compelled the assessee to make cash payment. No such attempt was made by the Assessing Officer and, therefore, it was opined by the CIT that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interests of the revenue. The CIT also noticed from the balance sheet that the assessee had accepted unsecured loans of Rs. 20,000 each from Shri Sk. Kallu, Sk. Latif of Mehumbara and Shri Chindha Singh Wamman Bhat. According to the CIT, the Assessing Officer has not conducted any enquiry regarding the genuineness of these loans. The Assessing Officer has simply obtained the account extract of these persons as appealing in the books of the assessee and accepted the loan as genuine. The CIT observed that the Assessing Officer had not brought on record even the confirmatory letters of the creditors. The CIT was of the opinion that the Assessing Officer should have made enquiries for verifying the identity of the creditors, creditworthiness and genuineness of the transactions.

In view of the above, the CIT formed the opinion that the assessment order dated 10-12-1996 was erroneous as well as prejudicial to the interests of revenue.

4. The CIT issued a notice to the assessee under section 263 of the Act on 13-7-1998 requiring the assessee to show-cause as to why the assessment framed by the Assessing Officer for the assessment year under consideration should not be held erroneous as well as prejudicial to the interests of revenue. The assessee filed written submissions on 7-8-1998, stating as under:

"Sir,

Ref: Your notices under section 263 of IT Act for assessment year 1995-96 dated 13-7-1998-

Sub: Written submission-

Please refer to above. We have to state that we have received above mentioned notice on 24-7-1998. We have to state as under on the issues raised in the said notice.

At the outset, it is submitted that the assessment has been framed by Assessing Officer on 10-12-1996 after due enquiry and verification of books and information called for from time to time. The assessment framed is not erroneous and no prejudice has been done to the interest of revenue.

Now we deal with issues/reasons which laid your honour to issue notice under section 263.

1. Increase in salary and account writing fee:

In this respect it is submitted that we have given the details of salary and account writing charges paid. We have paid the charges during the year itself no liability is outstanding at year end. Though Assessing Officer has not enquired into the increase in salary in other expenses, but since the overall increase in sales and profit he thought it proper to allow the above expenditure. As such the above expenditure is commensurate to the need of business. We have given the payments on monthly basis and no entries for this expenditure have been passed at year end to decrease the profit. As such there is no possibility of inflating the expenses or to reduce the income. In absence of enquiry made by Assessing Officer the order cannot be called as erroneous and that no prejudice has been done to the revenue. As such both conditions required are not fulfilled.

2. Bad debts:

In this respect it is submitted that we have given all the information account extract of the bad debts claimed by us. The grievance is that the Assessing Officer without satisfying himself about the bad debt claimed, has accepted the claim. In this respect we invite your kind attention to the Board Circular No. 551 dated 23-1-1990 reported in 183 ITR page 7 statute. We invite your kind attention to para 6.6 of page 37. Herein it is mentioned that bad debt will be allowed in the year in which such bad debt has been written off as irrecoverable in the account of the assessee. The Assessing Officer has only to seek whether the provisions laid down in section 36(2) have been fulfilled by the assessee before allowing the bad debt. Assessee is the best judge in deciding whether the debt is bad or not, we are fulfilling the provisions laid down in section 36(2). As such there is no necessity to establish that debts have become bad now. Such compliance was required before assessment year 1989-90. The amendment in the above provisions has been made by Direct Tax Laws (Amendment) Act, 1989 from 1-4-1989.

As such the order passed by Assessing Officer is not erroneous and prejudicial to the interest of revenue on above issue.

3. Cash payments exceeding Rs. 10,000:

In this respect it is submitted that Assessing Officer has made detailed enquiry also called the confirmatory letters from the payees and this fact is also proved from the contains of your notice. The only grievance appears to be that Assessing Officer has failed to record his satisfaction or failed to give office note. But it cannot be denied that Assessing Officer has not made any enquiry about cash payments. We have submitted confirmatory letters, identification of the parties of payees to the satisfaction of Assessing Officer. The lapse if any on the part of Assessing Officer appears to be that he has not left any office note or commented in the assessment order. We bring to your kind notice that it is nowhere mentioned or made compulsory for the Assessing Officer to record his satisfaction either in the section 40A(3) or in the rule 6DD(j). From the submission made by us the Assessing Officer was satisfied and hence he has not made any disallowance under section 40A(3).

As such the order is not erroneous one and no prejudice has been done to the revenue on this ground.

4. Verification in respect of creditors:

It is submitted that Assessing Officer has not made any addition and accepted the unsecured loan of Rs. 20,000 each from Shaikh Kallu, Shaikh Latif and Chindhasingh Bhaskar Bhat, since these persons have paid the above amounts by DDs. The above persons are big agriculturist and derived good agri. Income. He satisfied himself on the oral enquiry made with partner in the course of assessment proceedings. So he did not ask the partner to bring the confirmatory letters from the said parties. The word 'May be charged to Income Tax' has been used in the section 68. So it can not be said that income is escaped. The Assessing Officer may decide not to press for confirmatory letter. The assessee firm cannot be called at. fault if he has not recorded his satisfaction by way of office note. The assessee firm also relies on rulings of 33 TTJ 655 (Hyd.).

As such the order is not erroneous one and no prejudice has been done to the revenue.

Considering all the above submission it is prayed to drop the proceedings and oblige.

Thanking you,

Yours faithfully,

Sd/-"

For the detailed reasons given in para 4 of the order, the CIT set aside the assessment on the above issues holding the same as Erroneous as well as prejudicial to the interests of revenue. The CIT also directed the Assessing Officer to frame a fresh assessment after proper enquiries and after allowing reasonable opportunity of being heard to the assessee.

5. Before us, Shri K.A. Sathe, the ld. Counsel for the assessee reiterated the submissions made before the CIT. He further submitted that it is well settled law that while making the assessment, if the Assessing Officer had made reasonable and requisite enquiries on issues raised by the CIT during proceedings under section 263, no order under section 263 could be passed. While relying upon the decision of Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108. It was contended by the ld. Counsel that the Commissioner cannot revise an assessment for the purpose of rowing enquiries. Such an action will be against the well accepted proposition that there must be finality in legal proceedings. It was also submitted by the ld. Counsel for the assessee that before exercising the power under section 263 of the Act, the CIT was required to see both the conditions, i.e., assessment made was erroneous and prejudicial to the interests of revenue. In other words, both the above conditions are sine qua non for assuming jurisdiction under section 263 of the Act. He further submitted that regarding increase in salary and accounting writing fee, all the relevant details were furnished before the Assessing Officer and the Assessing Officer was fully satisfied with the explanation given by the assessee in this regard. It was also brought to our notice that these payments were made on monthly basis and no entries were made at the end of the year to decrease the profit and as such, there was no possibility of inflating the expenses. As regards bad debts, it was contended by the ld. Counsel for the assessee that the Assessing Officer was required to see whether provisions laid down in section 36(2) were fulfilled by the assessee or not. According to the Id. Counsel for the assessee, it is not required to show that debts have become bad. Reliance was placed on the decision of this Bench of the Tribunal dated 18-9-2003 in the case of Asstt. CIT v. Suresh kumar B. Kalantri [ITA No. 1498/Pune of 1996] relating to assessment year 1993-94, wherein it has been held that by denying the deduction in the year of write off, the assessee would be denied deduction under section 36(1)(vii) for ever. It was also held by the Tribunal that by not allowing deduction in the year of write off, the assessee was permanently deprived of the deduction. He further relied on the decision of the Single Member case of this Bench of the Tribunal dt. 7-5-2002 in the case of Dy. CIT v. Sou Ratna M. Jani [ITA No. 1153 (Pune) of 2000] for the assessment year 1994-95, wherein it has been held that law has undergone a change with effect from assessment year 1989-90 and the claim of the assessee with respect to bad debt written off is specifically allowable in the year in which such effect is given in the books of account. He, therefore, submitted that the Assessing Officer was justified in accepting the claim of the assessee. As regards the cash payment exceeding Rs. 10,000, it was submitted that the assessee had written a letter on 6-9-1996 to the Assessing Officer stating that the payments made by the assessee to M/s. Prakash Fertilizers, Malegaon, Dist. Nashik were covered under Rule 6DD read with Board's Circular No. 220 since the assessee was not having any bank account where the payee was trading. It was claimed that the Assessing Officer was satisfied with the above explanation of the assessee. As regards verification in respect of creditors, it was submitted that both the creditors are agriculturists and were deriving agricultural income. It was claimed that the Assessing Officer was satisfied himself on oral enquiry made with partner in the course of assessment proceedings and, therefore, the Assessing Officer did not ask the partner to bring the confirmatory letter from the said parties. In view of the above submissions, Shri K.A. Sathe, the ld. counsel for the assessee submitted that it is not a case where no enquiry was made by the Assessing Officer. The Assessing Officer has made enquiries and he was satisfied and he framed the assessment under section 143(3) determining the income of the assessee at Rs. 40,470 as against returned income of Rs. 26,485.

6. Smt. Kusum Ingale, the ld. DR strongly supported the order of the CIT. She further submitted that it is well-settled law that failure on the part of the Assessing Officer to make enquiry on a relevant point would make the assessment erroneous as well as prejudicial to the interests of the revenue. While referring to the provisions of section 143(3), the ld. DR submitted that the Assessing Officer is an Investigating Officer as well as Assessing Officer and, therefore, he was required to make necessary enquiry before accepting the explanation of the assessee which was not supported by cogent evidence. The Assessing Officer was also required to see the conditions to be fulfilled by the assessee regarding the provisions of section 36(2) as well as section 40A(3) of the Act. She has also submitted that there was an abnormal increase in salary account and account writing fee, as compared to the immediate preceding year. The Assessing Officer was bound to enquire in the matter. She further submitted that the CIT has only set aside the order of the Assessing Officer for making fresh assessment and no specific directions have been given to the Assessing Officer to make additions. The CIT has also directed the Assessing Officer to give an opportunity of being heard to the assessee in the matter. She therefore submitted that no prejudice has been caused to the assessee and the assessee is at liberty to substantiate its claim before the Assessing Officer. In that view of the matter also, the CIT was fully justified in his action.

In view of the above, the ld. DR submitted that the order of the CIT may not be disturbed since he has given strong reasons while setting aside the assessment order.

7. We have given our anxious thoughts to the rival contentions and have also carefully gone through the orders of the authorities below. We have also considered the decisions relied upon by the ld. Counsel for the assessee. We also mention here that, we have perused the letters of the assessee dated 30-7-1996 and 12-8-1996 addressed to the Assessing Officer in response to the notice under section 143(2) of the Act. The assessee has also furnished copies of details of purchases from 1-4-1994 to 31-5-1995 made from various parties. Such details are available at pages 5 & 6 of assessee's compilation. Details of salary expenses are available at page 7 of assessees compilation. The account extracts Sh. Kallu Sh. Latif, Mehunbare and Shri Chindhusing Waman, Bhaur, Shri Rammdas Shankar, Dhamni, Shri Shivaji Motiram, Pinjarpade, Shri Vijay Kondu, Pinjarpade, Shri Suresh Damu, Ghusardi and Shri Shankar Raising, Umberkhed are available at pages 9 to 11 of the assessee's paper book. A copy of account of M/s. Prakash Fertilizers is available at page 14 of assessee's compilation. The assessee also submitted a copy of the letter dt. 6-9-1996 addressed to the Assessing Officer, wherein it is stated that the payments made to M/s. Prakash Fertilizers were covered under rule 6DD read with Board's Circular No. 220. We also mention here that the assessee has produced copies of invoices from Prakash Fertilizers which are available at pages 25 to 34 of the paper book. It was one of the contentions of the ld. Counsel for the assessee that all these materials were produced/filed before the Assessing Officer during the course of assessment proceedings.

At this stage, we think it appropriate to reproduce the assessment order dt. 10-12-1996 passed under section 143(3) of the Act, which reads as under:

"Return of income declaring total income of Rs. 26,485 has been filed on 26-10-1995. The return of income is processed on 22-12-1995. As the case is picked up for scrutiny, notice under Section 143(3) was issued and served on the assessee within the time limit.

In response to the notice under section 143(2), Shri S.S. Dhaman, CA and AR of the assessee attended and explained the return. The assessee firm derives income from fertilizers, seeds and agricultural equipment for which it has maintained regular books of account. Audit report in Form No. 3CD is accompanied along with return of income. The assessee firm has maintained full quantity details. Therefore, books result are accepted. On perusal P & L account it is seen that the assessee has debited motor car expenses of Rs. 30738, 1/3 of same Rs. 10,246 and depreciation thereon Rs. 3,739 are disallowed being for the personal use of the partner.

Subject to the above, total income of the assessee firm is computed as under:

Computation of income:

Total income declared Rs. 26,485

Add: As discussed above Rs. 10,246

(ii) depreciation on car Rs. 3,739

is disallowed Rs. 13,985

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Total income: Rs. 40,470

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Assessed under section 143(3). Issue DN and challan.

Sd/- (M.N. Chitgopekar)

ITO, Wd-2(6), Jalgaon

It is noticed that the CIT has summoned the records and after examining the same found that the Assessing Officer has not made proper enquiry as regards the issues mentioned in the notice under section 263 dated 13-7-1998. It is also observed here that after giving a due and reasonable opportunity of being heard to the assessee, the CIT set aside the assessment order for making a de novo assessment. In our view, the CIT has correctly held that the assessment framed by the Assessing Officer was erroneous as well as prejudicial to the interests of the revenue. He has supplied strong reasons in support of his action. We have reproduced the assessment order passed by the Assessing Officer hereinabove. On a perusal of the assessment order, it would be clear that the Assessing Officer has not discussed the issues regarding claim of bad debts and cash payments exceeding Rs. 10,000. Similarly, there is no mention in the order to show that whether any verification in respect of creators was done. In the instant case, it is one of the contentions of the assessee's learned counsel for the assessee that necessary explanations were given in respect of the above issues. In our view, mere filing of explanation does not necessarily indicate the application of mind on the part of the Assessing Officer. In our opinion, the order of the Assessing Officer is silent as regards the above issues. There is no such indication as to whether the Assessing Officer has ever examined the above issues, keeping in view the relevant provisions of law. It is also not mentioned in the order whether he was satisfied with regard to the above issues. Regarding the bad debts, the Assessing Officer did not mention as to whether he has conducted any enquiry before allowing the claim. As regards the cash payments exceeding Rs. 10,000, the Assessing Officer has not made any enquiry to ascertain this fact whether the explanation given by the assessee was true and correct or whether the said payment was covered under rule 6DD read with Board's Circular No. 220. No doubt, the assessee had given the explanation stating that payment was covered under rule 6DD. However, the Assessing Officer had not conducted any enquiry. As we have already observed hereinabove that mere filing of the explanation is not sufficient and at the same time, it cannot infer that the Assessing Officer has applied his mind. It seems that the there was also no proper verification in respect of creditors, viz. Shri Sk. Kallu, S.k. Latif and Shri Chindhasingh Waman Bhat from whom the assessee had accepted unsecured loans of Rs. 20,000 each. The CIT has rightly observed that no specific enquiries to prove the genuineness of these loans had been conducted by the Assessing Officer. The Assessing Officer has simply obtained account extracts of these parties as appearing in the books of the assessee and accepted the loan as genuine. It is true that no confirmation letters were filed from these parties. The assessment order is also silent as to whether the Assessing Officer has made enquiries for verifying the identity of the creditors, their capacity to advance the loan and genuineness of the transactions. In our view, the CIT has rightly observed that failure to make enquiries in this regard renders the assessment order passed by the Assessing Officer as erroneous and prejudicial to the interests of the revenue. It is seen that during the year under consideration the assessee had paid Salary to staff of Rs. 76,200 as against Rs. 38,400 paid during the assessment year 1994-95. Similarly, account writing fee was paid at Rs. 12,000 as against Rs. 5,000 paid in 1994-95. On both counts, there was an abnormal increase as compared to the immediate preceding year. The Assessing Officer has not made any enquiries for such abnormal increase in these expanses in order to ascertain the genuineness of the expenses as well as legitimate needs of the business, if any. Thus, legally speaking, the CIT has given cogent reasons in support of his action. He has also mentioned the various defects noticed by him in the assessment order dated 10-12-1996. In our considered view, the CIT has wide powers under section 263 of the Act. Therefore, in the facts and circumstances of the present case, he has rightly set aside the assessment order holding that the same is erroneous as well as prejudicial to the interests of the revenue. It is trite law that failure on the part of the Assessing Officer to make enquiry on relevant points would make the assessment order erroneous and prejudicial to the interests of the revenue. In the instant case, it seems that the Assessing Officer has accepted the claim of the assessee without making any enquiry. In our view, acceptance of explanation of the assessee without any enquiry renders the order erroneous as well as prejudicial to the interests of revenue.

In view of the above discussion, we do not see any valid ground in interfering with the order of the CIT passed under section 263 of the Act. The appeal is devoid of any merit and accordingly, we dismiss the same.

8. In the result, the appeal is dismissed.

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