Vildirect: IncomeTax-caselaws-2009-VIL-345-ITAT-KOL

2009-VIL-345-ITAT-KOL

Income Tax Appellate Tribunal KOLKATA

ITA No. 556/Kol/2009

Date: 24.07.2009

V.B. CONSTRUCTION (P) LTD.

DEPUTY COMMISSIONER OF INCOME TAX

S. K. Tulsiyan, for the Appellant
Homi Rajhanchi, for the Respondent

BENCH

B. R. MITTAL J.M. and B. C. MEENA A.M.

JUDGMENT

B.C. Meena, A.M. :

This is an appeal filed by the assessee against the order of the CIT, Siliguri dt. 30th March, 2009 for the asst. yr. 2004-05. The return of income filed on 18th Oct., 2004 declaring income at Rs. 17,91,590. The notice under s. 143(2) of the IT Act was issued on 12th Jan., 2005 fixing hearing on 20th Jan., 2005. The order under s. 143(3) passed on 13th Dec., 2006.

2. Grounds of appeal read as under :

"1. The order passed by the CIT under s. 263 of the IT Act, 1961 is arbitrary, without proper reasons, invalid and bad in law.

2. On the facts and in the circumstances of the case, the learned CIT failed to note that all the points raised by him in the notice issued by him for the proceeding under s. 263 of the Act had actually been duly examined by the AO during the course of the assessment proceeding and that due verifications had also been made by him in respect of all the issues under consideration.

3. On the facts and in the circumstances of the case, the learned CIT also failed to note that all the points raised by him in the notice issued by him for the proceeding under s. 263 of the Act, had also been duly explained before him during the course of the proceeding under s. 263 before him.

4. On the facts and in the circumstances of the case and in law, the learned CIT erred in holding that the assessment order passed by the AO was erroneous insofar as it was prejudicial to the interest of Revenue and in that view in passing an order under s. 263 of the Act, setting aside the assessment order and directing to make further enquiry.

5. The appellant craves leave to amend, alter, modify, revise, add to abridge or rescind any or all of the above grounds."

3. The issue involved is against the invoking of the provisions of s. 263 of the IT Act, 1961 by the CIT, Siliguri by which the order passed by the AO was held to be erroneous and prejudicial to the interest of the Revenue and the same was set aside with a direction to make inquiries on the issue and pass a speaking order based on the merits of the case.

4. While pleading on behalf of the assessee, the learned Authorised Representative submitted that there was a survey operation under s. 133A of the IT Act on 11th Sept., 2003 at the business premises of M/s Vohra Brothers and M/s Vohra Auto Parts which are the proprietorship concerns of Sri C.S. Vohra. Sri C.S. Vohra is also a director in the assessee company. Thus a consequential survey action under s. 133A was also conducted on the assessee company on the same date. A notice under s. 142(1) of the IT Act was served on the assessee on 12th Jan., 2004 in respect of the asst. yr. 2004-05. The assessee submitted the return of income on 18th Oct., 2004 declaring income at Rs. 17,91,519. The return was processed under s. 143(1) of the IT Act. The case was selected for scrutiny and notice under s. 143(2) of the IT Act was issued on 12th Jan., 2005.

5. While pleading on behalf of the assessee the learned Authorised Representative submitted that the assessee complied with all the notices and also submitted all the information as required by the questionnaires issued to the assessee. The books of account, bills, vouchers, bank statements were also produced before the AO. The AO verified on test check basis all the information and documents filed by the assessee which the AO himself has mentioned in para 2 p. 1 of his order which reads as under :

"2. Notices under s. 143(2)/142(1) along with questionnaire were issued and served upon the assessee. In compliance to the notices Sri P.C. Maskara, FCA, Authorised Representative of the assessee appeared from time to time and produced books of account including bills and vouchers and bank statements and the same were test checked. Details particulars as per questionnaire and other details as asked for from time to time have also been filed and the same were verified on test check basis."

The AO also examined the purchases and also cross-verified by calling information under s. 133(6) of the IT Act. The AO got direct confirmation from the parties and reached at the conclusion that there was no overstatement of the purchases. Thus the AO has investigated the issues thoroughly and after examination he has made certain disallowances which are as under :

(i) Disallowance of labour expenses @ 1% of the total claim (on the basis that the said expenses were supported by self-vouchers only and that the register containing the daily attendance of the labour and the rate of the daily wages was not produced before the AO).	Rs. 8,346
(ii) Disallowance of fuel charges @ 10% on account of personal use.	Rs. 1,12,220
(iii) Disallowance of carrying charges @ 1% of the total expenses.	Rs. 71,339
(on the basis that the said expenses were in cash and they were supported by self-vouchers only)

The assessee filed appeal against this order of the AO before the CIT(A). The CIT(A) granted certain reliefs vide his order dt. 6th Dec., 2007. Regarding labour expenses disallowed @ 1 per cent by the AO; the CIT(A) granted full relief after verification. The CIT(A) also granted full relief in respect of disallowances from the fuel charges, after detailed examination of the bills and vouchers and the ledger copy submitted before him. The CIT(A) partially allowed the relief from disallowance from carrying charges paid to C.S. Bohra where TDS was deducted. The AO disallowed Rs. 71,339 and the CIT(A) sustained only Rs. 26,399. This order of the CIT(A) has been asserted by the Department as well as by the assessee.

6. In the show-cause notice issued under s. 263 of the IT Act by the CIT, the main issues raised are as under :

"1. Cross-verification of the information gathered under s. 133(6) regarding the balances of the following sundry creditors reveal inconsistency which has not been looked into by the AO :

(i) Shri Anand Biswakarma	Rs. 4,72,600
(ii) Shri Subhas Sharma	Rs. 1,87,400
(iii) Shri Keshol Gurang	Rs. 1,77,400
(iv) Shri Shankar Lamichani	Rs. 2,00,000
	Rs. 10,37,400

2. Cash payments made by the assessee supported by self-vouchers not duly examined and verified by the AO :

(i) Land and building	Rs. 8,93,337
(ii) Travelling and conveyance expenses	Rs. 2,21,183
(iii) Carrying charges	Rs. 34,95,000 (Rs. 8,46,000 + Rs. 26,49,000)
(iv) Site Peditar expenses	Rs. 36,21,359
(v) Labour expenses	Rs. 15,44,900

3. (i) The genuineness of the sub-contracts, specifically to its sister concern, M/s M.K. Agarwal & Co. of an amount of Rs. 80,20,075 being not verified by the AO.

(ii) TDS payment by the assessee remained unverified by the AO.

(iii) The AO has failed to scrutinize the payments made to persons specified in s. 40A(2)(b) as laid out and specified in the Annex. III of Form No. 3CD."

The learned Authorised Representative further submitted that the assessee submitted a comprehensive and detailed submission dt. 13th March, 2009 explaining in full the verification and examination process followed by the AO in the s. 143(3) assessment proceedings wherein each and every aspect of the assessee's case was examined, enquired into and verified by the AO and he further submitted that the provisions of s. 263 of the IT Act, 1961 which empower the CIT, the revisionary power read as follows :

"263. Revision of orders prejudicial to Revenue : (1) The CIT may call for and examine the record of any proceeding under this Act and if he considers that any order passed therein by the AO is erroneous insofar 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 afresh assessment."

7. Thus the bare reading of the section makes it clear that the exercise of jurisdiction by the CIT is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT before invoking the provisions has to satisfy himself about the existence of the following two conditions :

(1) The order of the AO sought to be revised is erroneous.

(2) It is prejudicial to the interest of the Revenue.

8. If any condition of them is absent then the CIT cannot take recourse under s. 263 of the IT Act, 1961. The erroneous order does not mean a wrong order and also does not mean an order by which the CIT is unable to agree. An erroneous order would be an order which suffered from a patent lack of jurisdiction, the error must be with reference to the jurisdiction. The provisions cannot be invoked to correct each and every type of mistake or error committed by the AO. Similarly prejudicial to the interest of the Revenue would mean an order which is against the interest of the revenue collection. However, every loss of revenue as a consequence of the order of the AO cannot be treated as prejudicial to the interest of the Revenue. For example, when the AO adopts one of the two courses permissible in law and it has resulted in a loss of revenue where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the AO is unsustainable in law. The powers under s. 263 are quasi judicial powers and the CIT must hear the assessee after issuing the notice and record the reasons to reach the conclusion under s. 263 of the IT Act. There cannot be an universal application for the exercise of revisionary power under s. 263 of the IT Act, it depends on the facts of each and every case. The point-wise details in respect of the issues raised in the show-cause notice can be summarized as under :

"5.1 The first point raised by the learned CIT in the show-cause notice quoted by him in his order under s. 263 at p. 1, is regarding the balance in the sundry creditors which stands in the books of the assessee as follows :

' Shri Anand Biswakarma	Rs. 4,72,600
' Shri Subhas Sharma	Rs. 1,87,400
' Shri Keshol Gurang	Rs. 1,77,400
' Shri Shankar Lamichani	Rs. 2,00,000
	Rs. 10,37,400

5.1.1 The CIT has analysed the statements of the above parties obtained by the AO under s. 133(6) of the Act and held that the sundry creditors, in their statements have not specifically mentioned the year in which they received the above-mentioned amounts. The learned CIT has, on this basis, alleged that the AO should have made an addition of the same in the books of the assessee as the assessee has shown the said amounts as outstanding whereas the parties have stated that the amounts were received by them.

5.1.2 Analyzing the statements of the sundry creditors relied upon by the CIT, the same are quoted as below, as also quoted by the learned CIT in his notice under s. 263 of the Act :

' Shri Anand Biswakarma : Rs. 4,72,600 (copy enclosed at p. 39 of the paper book)

'It is to inform you that I have received the due payment as per my record from V.B. Construction (P) Ltd. Rs. 4,72,600.......... only against the supply of river bed materials during 2003-04.'

' Shri Subhas Sharma : Rs. 1,87,400 (copy enclosed at p. 48 of the paper book)

'An amount of Rs. 1,87,400 was due from V.B.C. (P) Ltd. for the year 2003-04. I have received the said amount in full later on.'

' Shri Keshol Gurang : Rs. 1,77,400 (copy enclosed at p. 40 of the paper book)

'It is to inform you that I have received Rs. 1,77,400............ only from V.B. Construction (P) Ltd. outstanding payment of 2003-04 for the supply of Bazri, boulder and sand.'

' Shri Shankar Lamichani : Rs. 2,00,000 (copy enclosed at p. 43 of the paper book)

'I am informing you that as per my books for the year 2003-04, I have supplied sand and Bazri to M/s V.B. Construction. I have received the payment of Rs. 2,00,000 from V.B. Construction.'

In connection to the above it is submitted by the assessee as also submitted in its reply to the notice under s. 133(6) that the said sundry creditors were petty, illiterate suppliers of river bed materials, i.e. Bazri, boulder and sand at the site where the contract work of the assessee was going on. Further the fact that the AO has recorded the statements of the sundry creditors under s. 133(6) of the Act is proof of the process of detailed investigation followed by the AO.

An analysis of the statements of the sundry creditors which is quoted as above, clearly shows that the creditors have in fact, specifically in black and white, confirmed that the said amounts were due to them from the assessee for the supply of materials made for the year under appeal, being the financial year 2003-04. However, regarding the receipt of the payment, the creditors have simply in full honesty stated that they have received the dues on the date of the statement. The said statements under s. 133(6) were obtained by the AO during the assessment proceedings in the year 2006 and the creditors have in full honesty simply stated that by the year 2006, the due payment was received by them. The creditors have nowhere mentioned that the said amount was received in the year under appeal, being the year 2003-04 (asst. yr. 2004-05) as alleged by the CIT. They have simply omitted to mention the year or date on which the due payment was received by them from the assessee.

In such an event, to draw any conclusion to the effect that the amount was not outstanding for that particular year is totally bad in law and thus the action of the CIT in assuming the contrary which has not been stated by the creditors is totally unreasonable and prejudiced.

5.1.3 Further the AO had in his assessment proceedings examined and verified in full details, the said responses of the creditors furnished under s. 133(6) of the Act as is noted by him in his order sheet on 11th Sept., 2006 which can be evidenced at p. 15 of the paper book.

It was only after such detailed examination and verification that the AO formed his opinion that the creditors were genuine and the amount shown as outstanding against each of the creditor was genuine. The learned CIT while alleging that the AO should have made an addition of the above amounts has tried to impose his views on a matter which was duly examined and verified by the AO. In this connection it is submitted that in a situation like in the case of the assessee, where the AO enquires into a certain matter and arrives at a particular finding, the CIT has no jurisdiction under s. 263 of the Act to impose his findings over that arrived at by the AO.

It was held by the apex Court in the case of CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266: (2007) 295 ITR 282(SC) that 'when the AO adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the AO is unsustainable in law.

Reference is again made to the decision of the Delhi High Court in the case of CIT vs. Ashish Rajpal (2009) 23 DTR (Del)266, wherein it was held that 'It would be important to remind one than while the supervisory power of CIT is wide, it cannot be invoked to substitute the view of the AO'.

5.1.4 However, it is further mentioned here that the AO in spite of having conducted full enquiries into the said issue has not made a specific mention of the same in his assessment order. It is hereby mentioned that the AO while framing his assessment order under s. 143(3) of the Act has however noted down only those areas where certain irregularities were observed by him. There was no mention of each and every investigation carried out by him. The learned CIT has while making the said allegation taken recourse to the fact that the AO has in particular not made any reference to the said statements of the creditors.

In connection to the aforesaid it is submitted that the absence of a specific mention or finding by the AO in his assessment order should not be misunderstood to be a failure on the part of the AO to conduct the required enquiries. Placing reliance on certain judicial decisions which absolutely deal with the same issue, it is stated that in a very recent judgment of the Delhi High Court dt. 14th May, 2009, in the case of CIT vs. Ashish Rajpal (2009) 23 DTR (Del)266, it was held that 'The point to be noted is that on a perusal of the record the Tribunal observed, by reference to a general practice in vogue, that merely because the assessment order did not refer to the queries raised during the course of the scrutiny and the response of the assessee thereto, it could not be said that there was no enquiry and hence the assessment was erroneous and prejudicial to the interest of the Revenue. This observation of the Tribunal deserved due weight, as in its vast experience it would have come across several such orders. The fact that a query was raised during the course of scrutiny which was satisfactorily answered by the assessee but did not get reflected in the assessment order, would not by itself lead to a conclusion that there was no enquiry with respect to transactions carried out by the assessee. The fact that there was an enquiry can also be demonstrated with the help of the material available on record with the AO'.

Also the Rajasthan High Court has clearly and specifically on this issue itself stated in the case of CIT vs. Ganpat Ram Bishnoi (2005) 198 CTR (Raj) 546: (2008) 296 ITR 292(Raj),that 'when enquiry had been conducted and the AO had reached a particular conclusion, though reference to such enquiries had not been made in the order of assessment, it was apparent from the record, without anything to show how and why the enquiry conducted by the AO was not in accordance with law, the invocation of jurisdiction by the CIT was unsustainable'.

It has further been stated by the Tribunal, Banglore in the case of Infosys Technologies Ltd. vs. Jt. CIT (2006) 105 TTJ (Bang) 802: (2006) 287 ITR 211(Bang)(AT) that 'Once the matter has been examined and considered the fact that it is not mentioned in the assessment order does not render the assessment order erroneous insofar as prejudicial to the interest of the Revenue. The power of revision is not meant to be exercised for the purpose of directing the officer to hold another investigation when the order of the AO is not found to be erroneous. For making a valid order under s. 263(1), it is essential that the CIT records an express finding of fact that the order sought to be revised, is erroneous as well as prejudicial to the interest of the Revenue'.

Thus it is concluded that in view of the various detailed examination process followed by the AO as detailed above such an allegation of the CIT is totally against the natural principles of law.

5.2 The second point raised by the CIT is regarding the cash payments made by the assessee. The CIT has raised the following objections with relation to the following cash expenses. The submission of the assessee issue-wise with regard to each of the said expenses is submitted herewith as follows :

(i) Land and building : Rs. 8,93,337

The learned CIT has alleged that the source of the above payment remained unverified by the AO.

In connection to the above it is firstly submitted by the assessee that the above land and building account is a capital account of the assessee. It is neither claimed as a stock-in-trade nor as expenditure by the assessee. Thus any non-verification or failure on the part of the AO in investigating in the said matter would not result in any loss to revenue. As pointed out earlier, for an order to be revised under s. 263 of the Act, the order sought to be set aside has to fulfil the twin conditions that the order is erroneous and prejudicial to the interests of the Revenue. In view of the facts stated in the case of the assessee any error with regard to the land and building account would definitely not satisfy the conditions of being prejudicial to the interests of the Revenue and thus it is submitted by the assessee that this point raised by the CIT is unsustainable in law.

Further, regarding the allegation of the learned CIT that the AO had failed to verify the said account it is pointed out the AO had undertaken the following detailed examination and verification process with regard to the same in his assessment proceedings as follows :

The AO had specifically in his questionnaire dt. 11th Jan., 2005 (at p. 18 of the paper book) vide query No. 6 enquired into the details of the addition of Rs. 4,81,475 to the land made by the assessee.

To this the assessee company had duly filed the details which can be seen at p. 59 of the paper book.

The said details were duly examined and verified by the AO as per his notings in the order sheet on 4th Feb., 2005 (at p. 10 of the paper book).

Thus in view of the above detailed verification process followed by the AO it is submitted that the learned CIT has, overlooking all the said, based his allegation merely on suspicion and surmises wherein he has not been able to pinpoint any particular failure on the part of the AO. He has taken recourse to the fact that the AO has in particular not made any reference to the said land account. It is further mentioned here, again that the absence of a specific mention or finding by the AO in his assessment order should not be misunderstood to be a failure on the part of the AO to conduct the required enquiries. Reliance in this connection is again placed on the above quoted decisions.

Further discussing the above issue on merits it is submitted that a detailed account of land and building was maintained in the regular books of accounts of the assessee. The said detailed account was also submitted before the learned CIT in response to his notice under s. 263 of the Act wherein the position of the said account was duly explained. The account was detailed as under :

	Opening balance as on 1-4-2003	Rs. 4,11,862
Add :	Additions during the year
	(i) Labour (paid in cash)	Rs. 3,37,780
	(ii) Marble (paid in cheque)	Rs, 57,000
	(iii) Glass (paid in cheque)	Rs. 36,500
	(iv) Building materials (paid in cheque)	Rs. 50,195	Rs. 4,81,475
			Rs. 8,93,337

On the basis of the above it is thus submitted on merits that out of the total of Rs. 8,93,337; Rs. 4,11,862 was the brought forward balance from the previous year. Also, other than the labour payments in cash (which is separately discussed by the assessee), all the other payments were made by cheque. Thus the action of the AO whereby no addition on the said account was made by him was based on his correct appraisal of the facts of the case of the assessee and was thus just and fair and no revision proceedings by the CIT on the said issue are justified.

(ii) Travelling and conveyance expenses : Rs. 2,21,183

The learned CIT has again alleged that the above expense which was made in cash was unverified by the AO.

In connection to the above allegation of the learned CIT that the AO had failed to verify the said expenses it is pointed out that the assessee had furnished full details about the said expenditure which can be evidenced at p. 60 of the paper book. It was duly explained by the assessee that the said expenses of Rs. 2,21,183 being in the nature of petty expenses was incurred by both cash and cheque. It was also submitted that the expense was duly supported by vouchers.

In view of the specific information as above, supplied by the assessee before the AO, it is thus submitted by the assessee before your Goodself that the AO had in his assessment proceedings duly examined and verified the same and then had taken the view that all being in order and being supported by vouchers, no adverse inference was warranted. The absence of a specific mention or finding by the AO in his assessment order should not be misunderstood to be a failure on the part of the AO to conduct the required enquiries. The learned CIT has, overlooking all the said, based his allegation merely on suspicion and surmises. He has taken recourse to the fact that the AO has in particular not made any reference to the said travelling and conveyance account.

Also it is submitted that in a case where a matter has been examined and the AO has arrived at a particular finding with regard to the said matter in his assessment order, any revision of the said order by the CIT would result in a situation where the CIT is trying to impose his view over that of the AO as has been discussed earlier also.

(iii) Carrying charges : Rs. 34,95,000 (Rs. 8,46,000 + Rs. 26,49,000)

The learned CIT has again alleged that the source of the above payments which was once again in cash, remained unverified by the AO.

In connection to the above it is firstly submitted that the allegation of the learned CIT that the said account was unverified by the AO is totally wrong and not based on the facts of the case of the assessee. In fact the AO had in his assessment proceedings analysed the said account in great details as follows :

On 15th Feb., 2006 the AO has specifically asked the assessee to furnish the ledger account of the carrying charges. The same is evidenced vide the noting of the AO made in his order sheet, copy of which is enclosed and can be seen at p. 12 of the paper book.

The said account was duly furnished by the assessee on 20th Feb., 2006 again noted by the AO in his order sheet (at p. 12 of the paper book).

Further, additional details and information regarding the carrying charges were filed during the assessment proceedings and can be evidenced at pp. 60 and 62 of the paper book.

It was duly submitted as also stated in the reply to the show-cause notice stated that the said carrying charges were paid to various truck owners, the details of which were all filed before the AO and were examined by him. The details filed showed the truck numbers and also the details of the materials carried to the site.

Thus in view of the above it is submitted that after examining the said account in detail as stated above the AO in his assessment order at para 5, p. 2, arrived at the conclusion that the carrying charges of Rs. 71,33,910 were inflated and unreasonable.

Further it is submitted that the matter was taken up in appeal before the learned CIT(A) where after detailed examination and verification of the information submitted by the assessee, the learned CIT(A) had, vide his order dt. 6th Dec., 2007, held that out of the total sum of Rs. 71,33,910; Rs. 44,93,975 was paid to Shri C.S. Vohra and since the TDS on the same had been deducted and also the P&L a/c of the party had been produced and verified, the deduction on account of the same was to be deducted. However on the balance Rs. 26,39,935, which is the matter of concern before the CIT in his proceedings under s. 263 the learned CIT(A) had upheld the disallowance @ 1 per cent amounting to Rs. 26,399.

Thus it is submitted by the assessee that in view of the above facts as quoted above it stands totally proved that the matter was fully examined and investigated by the AO and also the said matter was fully covered and decided in appeal by the learned CIT(A). The learned CIT is under s. 263(1) Expln. (c) of the Act, barred by law in seeking revision of the order of the AO on the said issue which was dealt with by the CIT(A) in his order. The said s. 263 of the Act clearly lays down the same and it reads as follows :

'263. Revision of orders prejudicial to Revenue'(1) The CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar 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 : 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 the 1st day of 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.'

Also in connection to the above total reliance is placed on the decision of the apex Court in the case of CIT vs. Shri Arbuda Mills Ltd. (1998) 147 CTR (SC) 474: (1998) 231 ITR 50(SC) wherein it was held that 'the Explanation to s. 263(1) which was substituted by the Finance Act, 1988, w.e.f. 1st June, 1988, was again amended by the Finance Act, 1989, with retrospective effect from 1st June, 1988, to the effect that where any order referred to in the sub-section and passed by the AO had been the subject-matter of any appeal (filed on or before or after the 1st day of June, 1988), the powers of the CIT under the 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 consequence of the 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'.

Following the above order it was again held by the apex Court in the case of CIT vs. Alagendran Finance Ltd. (2007) 211 CTR (SC) 69: (2007) 293 ITR 1(SC) that 'Expln. (c) appended to sub-s. (1) of s. 263 of the IT Act, 1961, which deals with the power of the CIT in revision is clear and unambiguous, as in terms thereof the doctrine of merger applies only in respect of such items which were the subject-matter of appeal and not in respect of those which were not'. Also it was held in the case of CIT vs. Span International (2004) 270 ITR 538(All) that 'Revision'Doctrine of merger'Amendment in s. 263(1)'Effect'CIT can revise matters not considered and decided in appeal filed by assessee to CIT(A)'IT Act, 1961, s. 263(1), Expln (c)'.

(iv) Site Peditar expenses : Rs. 36,21,359

The learned CIT has once again alleged that the said expenses which were made in cash remained unverified by the AO.

In connection to the above it is submitted by the assessee that the site Peditar expenses are in fact the labour payments which were made by the assessee company to the site labour. The said payments were made to the labour through payment, sheets and after taking the proper signature/thumb impression of the labour. Petidars are only the guarantor of the labour. The payment is in actuality made directly to the labours.

In connection to the allegation of the CIT that the said expense was not duly verified by the AO it is submitted that the AO had in his assessment proceedings specifically vide his questionnaire dt. 19th Oct., 2006 (at p. 53 of the paper book) questioned the assessee in great detail with regard to the labour payment. After detailed scrutiny of the informations submitted by the assessee it was noticed by the AO that the labour charges were paid in cash and were supported through self-vouchers and he had on those basis made some addition also in his assessment order under s. 143(3). This fact has been put down by the AO in his assessment order at para 3, p. 1 of his order. In such an event any revision sought by the CIT under s. 263 on the ground that the required investigation and enquiries were not carried out by the AO is totally unjust.

Further it is submitted that the AO while framing his assessment order under s. 143(3) of the Act has however noted down only those areas where certain irregularities were observed by him. There was no mention of each and every investigation carried out by him. The AO did notice irregularities in the labour payment and this was duly pointed out by the AO. However since no irregularity was noticed by the assessee with regard to the site Peditar expenses, no specific mention of the same was made in black and white. The CIT has however, while cancelling the assessment order of the AO, taken recourse to this fact and alleged that the AO had not examined the said account.

(v) Labour expenses : Rs. 15,44,900

Once again the learned CIT has pointed out to the labour charges paid in cash. The learned CIT has alleged that the total labour payment was to the tune of Rs. 15,44,900 as submitted by the assessee himself and thus the disallowance by the AO should be of Rs. 15,449 @ 1 per cent instead of Rs. 8,346 as added back by the AO.

It is once again submitted that the matter was taken up in appeal before the learned CIT(A) wherein full relief was granted to the assessee at p. 2 of the order on this count inasmuch as it was submitted by the assessee that the said payment was on account of salary payment only and there was no inclusion of wages in it. The break-up of the salary and the salary register was also produced by the assessee before the CIT(A), all of which was duly verified by the CIT(A) and found to be correct. Thus this matter also stands covered by the order of the learned CIT(A).

Further it is also submitted that the assessee had in its reply to the show-cause notice clearly explained the above labour expenses stating that the same included the salary payments of Rs. 5,25,600 to various staff and the balance amount of Rs. 10,19,300 was paid to C. Prakash and Pawan Goel specifically and was not on account of temporary casual labour as alleged by the CIT. All the said salary payments were routed through the staff register which was all produced before the CIT(A) and was duly verified and found to be correct.

5.3 The third point raised by the CIT in his show-cause notice under s. 263 of the Act is regarding the genuineness of the sub-contracts being not verified by the AO.

(i) The learned CIT has observed that a total of Rs. 1,20,61,780 was paid by the assessee towards sub-contract, out of which Rs. 80,20,075 was paid by the assessee to its sister concern, M/s M.K. Agarwal & Co. In this connection the CIT has alleged at para 3(ii), p. 4 of his order that the AO should have scrutinized as to whether the sub-contract was given to the sister concern at the market price.

It is submitted by the assessee that the AO had during his assessment proceedings, vide his questionnaire dt. 19th Oct., 2006, specifically vide query No. 8, enquired into the sub-contracts of the assessee company (at p. 54 of the paper book). Full details and information were duly submitted by the assessee which was considered by the AO.

Also it is submitted that the accounts of the assessee were duly audited and were accompanied by the auditors report. The said auditors report specifically mentions at cl. V of the MAOCARO report that the said sub-contract was made on the basis of the prevailing market price. The same was duly verified by the AO and in the absence of anything to the contrary was accepted as such by him. Any prejudiced and assumed inference drawn by the CIT has no basis.

(ii) The learned CIT has further observed from the TDS return that a total TDS of Rs. 1,82,745 was paid on payments of Rs. 1,65,87,755 made by the assessee to various parties. He however alleged that out of the above TDS payment of Rs. 1,82,745 only a sum of Rs. 1,640 was relatable to the payment to the chartered accountant of the assessee. He thus assumed that the remaining amounts paid by the assessee remained unverified by the AO.

In connection to the above it is submitted that a copy of the TDS return was duly filed along with the return of income. The same was verified by the AO and was duly found to be correct. The AO has again in relation to this matter also raised specific query before the assessee vide query No. 10 of his questionnaire dt. 19th Oct., 2006 (at p. 55 of the paper book).

The details of the same were produced before the AO and are reproduced as below as also submitted by the assessee in its response to the show cause under s. 263 :

Details of sub-contract and TDS

Sub-contract :	Payments	TDS
' M.K. Agrawal & Co. (sister concern)	Rs. 80,20,075	Rs. 87,175
' Nakul Ch. Paul	Rs. 23,76,135	Rs. 26,135
' Ram Chandra Saha	Rs. 16,65,570		Rs. 18,320
	Rs. 1,20,61,780
	Rs. 1,31,630
Carrying charges :
' Vohra Brothers	Rs. 44,93,975	Rs. 49,475
Audit and other fees :
' P.C. Maskara (Chartered accountant)		Rs. 32,000	Rs. 1,640
		Rs. 1,65,87,755		Rs. 1,82,745

From the above details it is amply clear that all the TDS paid was relatable to the payments made by the assessee and the allegation of the CIT that proper verification was not carried out by the AO is totally baseless and based purely on assumptions and suspicions. The learned CIT has sought to making roving enquiries which do not find any place in the provisions of s. 263 of the Act.

(iii) Lastly the CIT has in a very unreasonable manner and without any basis whatsoever alleged that the AO has failed to scrutinize the payments made to persons specified in s. 40A(2)(b) as laid out and specified in the Annex. III of Form No. 3CD.

It is submitted by the assessee that in the absence of anything to the contrary this allegation of the CIT has no basis whatsoever. The director's remuneration and salary as paid under s. 40A(2)(b) were very much in accordance with the policy followed by the assessee and was as per the companies resolutions. The same was practiced in the earlier years also.

5.4 In view of all the above it is submitted that all the matters raised by the CIT in his show-cause notice were matters which were recorded in the regular books of the assessee and which were duly supported by all required documents and evidences which were all duly produced and verified by the AO. The learned CIT has completely ignored and overlooked all the detailed examination and verification carried out by the AO and also the detailed submissions made by the AO."

and he also relied on the following decisions :

(1) CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266 : (2007) 295 ITR 282 (SC);

(2) Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC);

(3) CIT vs. Clough Engineering Ltd. (2008) 300 ITR 435 (Uttarakhand);

(4) CIT vs. Ganpat Ram Bishnoi (2005) 198 CTR (Raj) 546 : (2008) 296 ITR 292 (Raj);

(5) CIT vs. Mepco Industries Ltd. (2007) 207 CTR (Mad) 642 : (2007) 294 ITR 121 (Mad);

(6) CIT vs. Pathy Cine Enterprises (2007) 207 CTR (Mad) 507 : (2007) 292 ITR 495 (Mad);

(7) Infosys Technologies Ltd. vs. Jt. CIT (2006) 105 TTJ (Bang) 802 : (2006) 287 ITR 211 (Bang)(AT);

(8) CIT vs. Mangilal Didwania (2006) 206 CTR (Raj) 472 : (2006) 286 ITR 126 (Raj);

(9) CIT vs. Ashish Rajpal (2009) 23 DTR (Del)266.

9. The learned Departmental Representative relied on the order of the CIT and also submitted that although the details and the books of accounts have been submitted before the AO, but he had not examined them thoroughly. He had not made adequate enquiries. Hence, the order is erroneous and prejudicial to the interest of the Revenue. He also relied on the following decisions :

(1) Supreme Court decision in the case of Malabar Industrial Co. Ltd. vs. CIT (supra) wherein the apex Court held that an incorrect assumption of facts or incorrect application of law will satisfy the requirement of the order being erroneous.

(2) The Madhya Pradesh High Court in the case of CIT vs. Deepak Kumar Garg (2007) 212 CTR (MP) 152: (2008) 299 ITR 435(MP) held that for want of time semblance enquiry made and that too in slip shod manner and accepted the version of assessee without proper enquiry shall make an order erroneous and prejudicial to the interest of the Revenue.

He also relied on Delhi High Court decision in the case of Duggal & Co. vs. CIT (1994) 122 CTR (Del) 171: (1996) 220 ITR 456(Del) and decision of Madhya Pradesh High Court in the case of CIT vs. Ratlam Coal Ash Co. (1987) 65 CTR (MP) 305: (1988) 171 ITR 141(MP).

Finally, he pleaded to dismiss the appeal of the assessee.

10. After hearing both the sides and going through the various case laws relied upon, we hold as under.

11. The CIT has mentioned in his order that the AO has passed an order in haste without making any inquiry on the issues. In this connection, we hold that the case was selected on a scrutiny on 12th Jan., 2005 fixing the hearing on 20th Jan., 2005. The order was passed on 13th Dec., 2006. Thus there was a time of two years for investigation of the case. The details on the order sheet are placed in the paper book at pp. 8 to 17. We find that the questionnaire has been issued and that too under the direction of the Addl. CIT which is evident from p. 9 of the paper book which is a note sheet dt. 19th Jan., 2005. The various notings in the note sheets show that the assessee has produced the books of account, bills and vouchers which have been verified by the AO. The questionnaires issued to the assessee calling details are also evident from pp. 18, 19, 20, 21, 53, 54 and 55 of the paper book. Thus these facts show that the AO has issued the details of questionnaires on the various issues which had been replied by the assessee which is evident from pp. 56 and 57 of the paper book. The first point raised by the CIT in respect of the sundry creditors we find that the AO has himself verified these sundry creditors by calling information under s. 133(6) of the IT Act and they have replied to the AO by confirming the transaction. Thus after inquiry the AO has reached to the conclusion not to make addition on this issue. Thus the AO has adopted one course of two courses permissible in law. The AO had taken one view where two views are plausible and such view cannot make the order erroneous and prejudicial to the interest of the Revenue. The CIT's view cannot be invoked to substitute the view of the AO. The assessment also does not become erroneous where queries raised during the assessment proceedings are not recorded in the final assessment order. The queries were raised during the assessment proceedings which have been answered by the assessee and the AO has taken a view and on that the order passed by the AO does not become ipso facto erroneous and prejudicial to the interest of the Revenue.

12. The second issue regarding the payments made in cash,we find that the AO has made specific queries in respect of the land and building expenditure which is capital in nature of Rs. 8,93,337 in his questionnaire dt. 11th Jan., 2005 which is evident from page No. 18 of the paper book. Thus the necessary inquiry in this regard appears to have been made by the AO and after examination he has not made any addition on this account. Similarly the expenses debited under the head "Travelling and conveyance expenses" we find that necessary details were submitted which is evident from p. 60 of the paper book and after verification the AO did not make any addition on this account. Similarly in the case of carrying charges the AO asked the details which is evident from p. 12 of the paper book. The assessee furnished the information and details in this regard during the assessment proceedings which are evident from pp. 60 and 62 of the paper book and after the examination the AO arrived at a conclusion and made the addition @ 1 per cent of the total expenses at Rs. 71,339 against which the assessee filed an appeal before the CIT(A) and after verification the addition has been reduced to Rs. 26,399. Thus this issue has not only been examined by the AO but also by the CIT(A) and after the verification the CIT(A) granted partial relief to the assessee. Thus this issue cannot be made a basis for invoking the revisionary power by the CIT. Similarly in respect of the labour expenses, after verification, the AO made certain additions and in the appeal the CIT(A) had deleted the addition after verification. As far as the site Peditar expenses are concerned, we find that the AO made a specific query in his questionnaire dt. 19th Oct., 2006 which is evident from page No. 53 of the paper book. After the verification the AO made same addition and this issue cannot be made a basis to invoke the revisionary powers under s. 263 of the IT Act.

13. The third issue raised in the show-cause notice regarding the genuineness of the sub-contracts being not verified by the AO, we find that the amount was paid and the AO in his questionnaire dt. 19th Oct., 2006 has specifically made a query in this regard which is evident from page No. 54 of the paper book and the assessee submitted details and information in this regard. Audited accounts also show that the sub-contract made to the sister concern M/s M.K. Agarwal & Co. was made on the prevailing market price. As far as TDS on this account is concerned, the assessee has submitted TDS return which was also verified by the AO which is evident from page No. 55 of the paper book. Regarding the payments made to the persons as specified in s. 40A(2)(b), we find that there was no deviation from the policy followed by the assessee in the past years. Thus from the above facts we are of the view that the invoking of the provisions of s. 263 by the CIT is not justified. In holding so, we also get the strength and support from the following decisions :

' CIT vs. Max India Ltd. (supra) :

"The phrase 'prejudicial to the interests of the Revenue' in s. 263 of the IT Act, 1961, has to be read in conjunction with the expression 'erroneous' order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when the AO adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the AO is unsustainable in law."

' Malabar Industrial Co. Ltd. vs. CIT (supra) :

"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 not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to s. 263(1) of the Act. 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 mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import 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 interests of the Revenue. The phrase 'prejudicial to the interests 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 treated as prejudicial to the interests 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 with which the CIT 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."

' CIT vs. Clough Engineering Ltd. (supra) :

In the said case revision by CIT was sought on the ground of failure to file tax audit report. However it was held that the assessment order cannot be treated as erroneous and prejudicial to interests of Revenue as the assessment order was passed after examining vouchers and evidence.

' CIT vs. Ganpat Ram Bishnoi (supra) :

"It was held that 'the jurisdiction under s. 263 of the IT Act, 1961, is wide and is meant to ensure that due revenue reaches the public treasury. If it does not on account of some mistake of law or fact committed by the AO, the CIT can cancel that order and require the concerned AO to pass a fresh order in accordance with law after holding a detailed enquiry. Jurisdiction under s. 263 cannot be invoked for making short enquiries or to go into the process of assessment again and again merely on the basis that more enquiry ought to have been conducted to find something'.

........when enquiry had been conducted and the AO had reached a particular conclusion, though reference to such enquiries had not been made in the order of assessment, it was apparent from the record, without anything to show how and why the enquiry conducted by the AO was not in accordance with law, the invocation of jurisdiction by the CIT was unsustainable. The finding of the Tribunal that the AO had passed the assessment order after relevant enquiries and considering the aspects of the matter required by the CIT to be considered by him was a finding of fact. The basis on which the jurisdiction was assumed by the CIT being non-existent his order must be held to be not sustainable."

' CIT vs. Mepco Industries Ltd. (supra) :

It was held that "the CIT while exercising power under s. 263 of the Act, had not rendered an independent finding to the effect that the course adopted by the AO was neither permissible, nor that the view taken by the AO resulted in loss of revenue which was prejudicial to the interests of the Revenue. In the absence of any such finding, the Tribunal was right in setting aside the order of the CIT.

Even on the merits, on the point that inter-unit loss was not adjusted against the profit for the purpose of allowing deduction under s. 80-IA of the Act, there are two views possible; one in favour of the Revenue and the other in favour of the assessee. The CIT was not justified in invoking the jurisdiction under s. 263".

' CIT vs. Pathy Cine Enterprises (supra) :

It was held that "it was clear that what was not prejudicial to the Revenue for two decades could not be construed as prejudicial to the Revenue for the assessment year in question merely because the lessee happened to be one of the directors of the assessee-company, as it was well-settled that the phrase 'prejudicial to the Revenue' must be read in conjunction with an erroneous order. In any event, when there were sufficient materials to support the claim of the assessee to treat the income derived from the hiring of air conditioners as business income for over two decades, the CIT had no authority to invoke the revisionary jurisdiction under s. 263".

' Infosys Technologies Ltd. vs. Jt. CIT (supra) :

"Once the matter has been examined and considered, the fact that it is not mentioned in the assessment order does not render the assessment order erroneous insofar as prejudicial to the interest of the Revenue.

The power of revision is not meant to be exercised for the purpose of directing the officer to hold another investigation when the order of the AO is not found to be erroneous. For making a valid order under s. 263(1), it is essential that the CIT records an express finding of fact that the order sought to be revised, is erroneous as well as prejudicial to the interest of the Revenue.''

' CIT vs. Mangilal Didwania (supra) :

In the said case it was held that where the Tribunal held that the AO made enquiries into the various aspects of the case before framing the assessment, there was no justification for the CIT to hold it as erroneous and prejudicial to the interests of the Revenue and the assessment could not be said to have been completed in undue haste.

' CIT vs. Ashish Rajpal (supra) :

In a very recent judgment of the Delhi High Court dt. 14th May, 2009, which applies totally to the case of the assessee firm, it was held that :

"In the course of scrutiny, several communications were addressed by the assessee to the AO whereby, the information, details and documents sought for, were adverted to and filed.

The Tribunal in order to satisfy itself as to whether the AO had sought for details and carried out an enquiry in respect of transactions which were entered into by the assessee in the course of his business, called for the assessment record and scrutinized the same. The Tribunal returned a finding of fact that the assessee had submitted copies of documents and details with regard to various matters, including in particular, with respect to the properties at MN as well as those located at GE and DC.

The issue that has been raised is that, since the assessment order adverted to only MN property and was silent with respect to the properties located at GE and DC: on this short ground alone the revisional order of CIT ought to be sustained.

14. We, therefore, set aside the order of the CIT and the appeal of the assessee is accordingly allowed.

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