ORDER–Basis thereof.
Ratio:
As the order of assessment is neither erroneous nor for that matter prejudicial to the interest of the revenue, the Commissioner’s order passed under section 263 was to be cancelled and assessing officer’s order was to be restored.
Held:
The order of assessment is neither erroneous nor for that matter prejudicial to the interests of revenue. The payments aggregating to Rs. 2,67,035 out of total amount of Rs. 2,10,65,787 stood covered by the exceptions provided in rule 6DD(j) read with Circular No. 220 dated 31-5-1977 of the Central Board of Direct Taxes. Before framing the assessment the assessing officer had duly applied his mind to the cash payments exceeding Rs. 10,000, as is evident from the queries made and assessee’s reply thereto supported with auditor’s report and books of accounts, vouchers, stock register, etc., produced in the course of assessment proceedings, as specifically recorded in order-sheet dated 22-3-1994. There is no material on record, which could enable the Commissioner to legitimately assume jurisdiction under section 263 when it is a matter of record that on both counts reasonable and requisite enquiries were made. The error envisaged in section 263 is not one which depends on possibility or guess work. It should be actually an error either of fact or of law. It is not a case where the assessing officer either passed an order without making reasonable enquiries on the issues involved or passed a stereotyped order simply accepting what the assessee has stated in his return and failed to make enquiries called for in the circumstances of the case. Tribunal, therefore, cancelled the order of the Commissioner and restored the order of assessment passed by the assessing officer.
Case Law Analysis:
CIT v. Trustees, Anupam Charitable Trust (1987) 167 ITR 129 (Raj) applied. Gee Vee Enterprises v. Addl. CIT (1975) 99 ITR 375 (Del) distinguished.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263
ORDER
Chopra, A. M.
1. This appeal is filled by the assessee against order dated 4-8-1995 of the learned Commissioner of Income-tax, Delhi (Central)-I, New Delhi, passed under section 263 of the Income-tax Act cancelling the order of assessment dated 31-3-1994 passed by the Assessing Officer being erroneous insofar as it is prejudicial to the interest of revenue, the Assessing Officer having failed to make necessary enquiries as “necessitated in the circumstances of the case”.
2. The relevant facts are that the assessee is a public limited company engaged in the manufacture and sale of Indian Made Foreign Liquor and food products, such as snacks foods and malted milk food at Hamira in Punjab, as also manufacture and sale of containers in U. P. Its accounts are audited and its account period is financial year. It filed returns of its income by the due date, i.e., on 31.12.1991 at Rs. 7,44,04,350 along with audited statement of accounts. The Assessing Officer completed assessment under section 143(3) on 31-3-1994 at Rs. 7,57,52,500. On a perusal of relevant record, the Commissioner of Income-tax was of the view that the order of assessment was prima facie erroneous insofar as it is prejudicial to the interests of revenue, inasmuch as (i) the assessee did not furnish true and complete particulars in respect of payments made towards procurement of rice-husk to the tune of Rs. 3.02 crores, in particular payments exceeding Rs. 10,000 which are hit by the provisions of section 40A(3). The Commissioner of Income-tax also took note of additions made on this account by the Assessing Officer in the following assessment year in the case of the assessee. The CIT further noted that the assessee had claimed expenses for the remittances towards its London Office @ 17,000 pounds per month, which are not allowable under section 37(1) being personal in nature and not connected with assessee’s business. He also noted that in the following assessment year a sum of Rs. 74.87 lacs was added by the Assessing Officer on this count. The CIT, therefore, issued a show-cause notice to the assessee on 23-5-1995 to the effect that payments for purchase of husk “may have to be treated as in contravention to the provisions of section 40A(3) of the Income-tax Act, and (ii) London Office being personal and not connected with business are not allowable.
2.1. In reply, the assessee made its detailed submissions running into 24 pages contesting the very foundation for forming opinion by the learned Commissioner of Income-tax that the order of assessment was erroneous insofar as it is prejudicial to the interests of the revenue. The assessee made its submissions both on facts and in law mainly to the effect that the assessment was made by the Assessing Officer after calling for as also after examining the requisite details, in particular as relating to the two points mentioned in the notice. The assessee also invited attention of the CIT to its replies as furnished to the Assessing Officer in response to various specific queries raised, including as relating to purchase of rice-husk and London office expenses and submitted that the Assessing Officer consequently made the assessment with due application of mind. Thus, according to the assessee, the order of assessment was neither erroneous nor prejudicial to the interest of revenue.
2.2. The learned Commissioner of Income-tax, however, rejected the submissions of the assessee for the reasons recorded in para 7 of his order on the issue relating to payment made on account of purchase of rice-husk and in paragraphs 8 & 9 on the issue relating to London office expenses. The learned CIT cancelled the assessment order, holding the same as erroneous insofar as it is prejudicial to the interests of revenue, the Assessing Officer having failed “to make necessary enquiries which were necessitated in the circumstances of the case” and for “lack of proper enquiry and examination by the Assessing Officer” holding that the assessment framed on 31.3.1994 “is a hurried order and is erroneous insofar as it is prejudicial to the interest of revenue and the Assessing Officer has filled to conduct the enquiry in the right direction”. The learned CIT placed reliance on Delhi High Court decisions in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375. The assessee is in appeal before us.
3. Shri O. P. Sapra, the learned Authorised Representative for the assessee submitted that on facts the CIT could not have assumed jurisdiction under section 263 of the Act, the order of assessment being neither erroneous nor prejudicial to the interests of revenue. Taking us through his paper book, Shri Sapra vehemently argued that in the Tax Audit Report (TAR) filed along with the return itself the Auditors had duly indicated number of payments made in cash (2389) for freight and (1009) for others – Rs. 3,03,75,809 and Rs. 1,20,40,991 respectively. He submitted that the assessee had also filed vide letter dated 11-3-1994 (Paper Book pages 33 and 34) details of rice-husk consumed at 64,875 tons (Rs. 3,02,15,986) as against 77,587 tons (Rs. 3,94,32,027) of last year. He also invited out attention to another letter dated 22-3-1994 with a note on cash payment exceeding Rs. 40,000 each, as discussed in TAR, was filed before the Assessing Officer (Paper book pages 35-37). He submitted that both the letters and the note read together clearly show that the Assessing Officer was duly explained about purchase of husk, which is a regular feature with the assessee being an item of fuel required for its boiler and, therefore, there was material on record itself to establish that the assessee, in fact, had furnished full and proper details contrary to the view taken by the learned Commissioner of Income-tax and there was, therefore, no basis for the learned CIT to form even prima facie opinion, much less allege, that the assessee had not furnished details of payments relating to rice-husk and that the assessee had suppressed real fact only because in Annexure 10 of TAR payments exceeding Rs. 10,000 in cash have been shown against freight. Shri Sapra submitted that such payments, which are made to Truck drivers, including price of husk are at the factory at Hameera, where no banking facilities are available and is a regular feature in the case of the assessee, freight being major component of rice-husk purchases. He submitted that even in the bill value of rice-husk is never shown separately as in the past, the value of husk being negligible. He submitted that husk is used as a fuel for boiler and the purchases and consumptions thereof, which is a normal feature with the assessee, is not even challenged. He also placed before us a copy of order-sheet entry as recorded by the Assessing Officer in the course of assessment proceedings and submitted that on 22-3-1994 the Assessing Officer had duly recorded that list of cash payments exceeding Rs. 10,000 and ledger and cash book examined on test check basis. He submitted that it is not in dispute either that there are no banking facilities at Hamira and, therefore, such payments have necessarily to be made in cash, lest business of the assessee comes to a grinding halt, fuel being essential for the boiler. The circumstances thus, according to Shri Sapra, are exceptional and nothing unusual this year either since it is a regular feature in the case of the assessee and, therefore, did not justify the learned Commissioner of Income-tax to take recourse to the provisions of section 263. He submitted that while the CIT was totally unjustified in taking note of additions made on this account in the following assessment year for the purposes of assuming jurisdiction under section 263 for the instant assessment year, even the addition made in the next assessment year already stand deleted by the Commissioner of Income-tax (Appeals) in his order dated 10-3-1996 (Paper Book pages 196 to 252) and similar addition made in assessment year 1993-94 also stand deleted by the CIT (Appeals) vide his order dated 7-6-1996 (Paper Book pages 261-264). Shri Sapra submitted that in the relevant assessment year payments exceeding Rs. 10,000 each for purchase of husk and freight amount only to Rs. 2,76,037 out of total purchases of over Rs. 2.10 crore.
3.1. As regards London officer expenses, Shri Sapra drew our attention to order-sheet entry dated 24-1-1994 and 17-3-1994 whereby the Assessing Officer had specifically called for details of London expenses and Reserve Bank of India permission regarding expenditure to be incurred on London Office, to which reply dated 22-3-1994 was filed (paper book pages 35-36), along with details of remittances for expenses at London officer and copies of blanket permits issued by the RBI, as filed before the Assessing Officer (Paper Book pages 165 to 175 and 357 to 385). Shri Sapra submitted that all the relevant facts and details, i.e. permission granted by the Reserve Bank of India on 11-2-1988 to open a non-trading office in London and Company Law Board’s approval dated 14-8-1988, 28-9-1989 and 20-8-1990 for payment of salary to Shri A. P. Jaiswal, Director as resident representative in London, were placed before the Assessing Officer as specifically demanded and having satisfied himself with the claim made by the assessee and accepted the same when he framed assessment on 31-3-1994. Shri Sapra also assailed the observations of the Commissioner of Income-tax as factually incorrect that there were no exports to Europe, U. K. and USA, when exports including to these areas aggregate to 27.22 crore. He submitted that the Commissioner of Income-tax refused to see reason and chose to ignore facts on record. Shri Sapra equally assailed the observations of the Commissioner of Income-tax that during the year no joint venture/agreements were executed. According to Shri Sapra, such important events take time to mature since they involve various stages like identifications of parties, negotiations, finalisation taking approval from various Government departments and finally implementation of joint venture/agreement. He invited out attention to assessee’s reply at pages 21-23 of the paper book to the Commissioner of Income-tax detailing actual work done at London Officer. Thus, according to Shri Sapra, while the Assessing Officer had applied his mind on the issue, the Commissioner of Income-tax chose to read the situation in his own way in disregard to facts on record.
3.2. Regarding use of London office also as residential premises by Shri A. P. Jaiswal, Shri Sapra submitted that as per terms of appointment letter dated 15-1-1988 and 1-8-1989 (Paper Book pages 383-384) it was a condition imposed on Shri Jaiswal to stay there itself to look after business interests of the assessee for various reasons including Time Zone difference in India, USA and U. K. and Shri Jaiswal was to stay singly and such arrangements were for business interests of the assessee, as also aimed at economy in view of restricted foreign exchanges granted by the Reserve Bank of India. On remuneration remitted to Shri Jaiswal coming under section 40(a)(iii) Shri Sapra submitted that not only this issue was not referred to in his show-cause notice by the Commissioner of Income-tax, his observations in his order under appeal, which are obviously without having the benefit of reply of the assessee, are in fact without any basis, inasmuch as the provisions of section 40(a)(iii) did not apply in this case, as Shri Jaiswal is a Non-Resident assessed in London and was paid remuneration out of London account of the assessee. He submitted that as the salary was taxable in U. K. only under Articles XVI of the Convention for Avoidance of Double Taxation between India and Great Britain, no T. D. S. was required to be deducted in India since Shri Jaiswal was paying his taxes in U. K. as also filing his returns there, N. R. I. Shri Sapra also referred to order of the learned Commissioner of Income-tax (Appeals) for assessment years 1992-93 and 1993-94, when additions made on this account, obviously based in view of order of the Commissioner of Income-tax under appeal, were deleted.
3.3. Dealing with the ratio of Hon’ble Delhi High Court in the case of Gee Vee Enterprises (supra), Shri Sapra submitted that this is misapplied by the learned Commissioner of Income-tax in the case of the assessee being out of context. He submitted that the judgment was delivered on a Writ. He submitted that the Assessing Officer having made full and proper enquiries on the issues, the Commissioner of Income-tax could not justifiably take the help of ratio in the case of Gee Vee Enterprises (supra) just to support his view that there was lack of enquiry or a hurried assessment was made. Shri Sapra relying on Supreme Court judgment in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 and the observations of the Delhi High Court itself in Gee Vee Enterprises’ case (supra) in a subsequent judgment in the case of Addl. CIT v. Achal Kumar Jain [1983] 142 ITR 606/[1982] 11 Taxman 228 (Delhi) at page 613 argued that the decision rendered in Gee Vee Enterprises’ case (supra) had no application to the facts of assessee’s case at all, since there has been no failure on the part of the Assessing Officer to make enquiries and the order of assessment passed is also not stereotyped. On the other hand, Shri Sapra relied on a host of judgments, including CIT v. Ratlam Coal Ash Co. [1988] 171 ITR 141/[1987] 34 Taxman 443 (MP); CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (BOM.), CIT v. Goyal (P.) Family Specific Trust [1988] 171 ITR 698/[1987] 35 Taxman 522 (All.) as followed in CIT v. Kiran Family Trust [1991] 191 ITR 508 (All.).
3.4 It was also the contention of Shri Sapra that onus lay on the Commissioner of Income-tax to prove that the assessment order dated 31-3-1994 was erroneous insofar it was prejudicial to the interest of revenue, which has not been discharged by the Commissioner of Income-tax at all, when there has been proper application of mind by the Assessing Officer while framing assessment based on material gathered. The view of the learned Commissioner of Income-tax that there has been lack of proper enquiry as also failure to conduct enquiries “in the right direction” clearly render the assumption of revisionary power by the learned CIT as without authority of law. Shri Sapra further placed reliance on CIT v. Bhagat Shyam & Co. [1991] 188 ITR 608 (All.) at page 610; CIT v. Shanti Lal Aggarwalla [1983] 142 ITR 778/15 Taxman 107 (Pat.); Ballarpur Paper & Straw Board Mills Ltd v. CIT [1979] 118 ITR 613 (Bom.) and CIT v. Shamshuddin Manzoor Haque [1988] 172 ITR 696 (All.). Shri Sapra submitted that powers under section 263 have to be exercised judiciously and not with a view to raise additional demand, while in this case the Commissioner of Income-tax has not proved that the order of assessment was erroneous insofar as it is prejudicial to the interest of revenue and had not, thus, exercised his power judiciously. He referred to Madras High Court judgment in the case of Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129/30 Taxman 528.
4. On the other hand, the learned Senior Departmental Representative mainly relied on the reasons given by the learned CIT in support of invoking provisions under section 263. He submitted that voucher-wise details given by the assessee (Pages 53 to 158 of the paper book) while gave relevant details, such as number, date, payee amount, truck No., etc., but did not show that such payments were for rice-husk purchase/freight. He submitted that no harm had been caused to the assessee when the learned CIT merely cancelled the assessment directing the Assessing Officer to make fresh assessment. He relied on Nandlal Bhandari & Sons v. CIT [1984] 147 ITR 710 (MP).
5. Shri Sapra, in reply, submitted that in para 10 of the order of the Commissioner of Income-tax, he had referred to cash purchases of rice husk which, according to the CIT himself amounted to Rs. 2,10,65,787 and the details given at pages 53 to 158 of the paper book are also pertaining to the same amount. He also pointed out that at pages 40 to 52 of the paper book, the assessee had even furnished month-wise and day-wise purchases of husk, as supported by vouchers, cash book, stock register which were duly and admittedly examined by the Assessing Officer, as per order-sheet entry dated 22-3-1994. In Appendix 10 of the TAR the word “freight” against cash payment was mentioned for the reason already given, freight being major component of purchase regularly year in and year out and the Assessing Officer had duly scrutinised the detail. Shri Sapra distinguished the judgment in the case of Nand Lal Bhandari (supra), as relied on by the learned Departmental Representative and submitted that in that case facts on record justified examination of applicability of section 52 of the Act, which the Assessing Officer had not done and the CIT in his order under section 263 directed the Assessing Officer to consider the applicability of section 52. On the other hand, in the case of the assessee, Shri Sapra submitted the Assessing Officer having called for all the relevant details relating to the issued and having applied his mind before making the assessment which is therefore neither erroneous nor prejudicial to the interests of the revenue.
6. Learned representatives of the parties are heard at length and relevant record seen. The case laws relied upon by the respective parties have also been gone through. As the Department cannot go in appeal against order of assessment framed by the Assessing officer, section 263 of the Income-tax Act arms the Commissioner of Income-tax with the powers to revise an order of assessment only which is erroneous insofar as it is prejudicial to the interests of revenue. Provisions of section 263 can be invoked only when the order is erroneous and prejudicial to the interest of the revenue. Therefore, what is to be seen is whether on facts of the case the order dated 31-3-1994 passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the revenue. In our considered opinion, the order of assessment dated 31-3-1994 is neither erroneous nor for that matter prejudicial to the interests of revenue. The view of the learned Commissioner of Income-tax that no “proper enquiries in the right direction” were made by the Assessing Officer on the two issues as contained in his show-cause notice and the order of assessment was passed in undue haste is not borne out form record. It is a matter of record that the Assessing Officer had, in fact, called for relevant details before making the assessment, including details on the two issues and having satisfied himself with the claim of the assessee on both counts made no disallowances. There has, obviously, been no failure on the part of the Assessing Officers in making “proper enquiries” in the “right direction”. The fact that cash payments exceeding Rs. 10,000 in respect of rice husk purchases/freight amounted to Rs. 2,67,035 only, the rest being below Rs. 10,000, is borne out from record and is not either contested before us by the learned Departmental Representative. Neither the genuineness of such purchases or consumption thereof stand doubted by the revenue, nor the fact that there are no banking facilities at Hamira where rice-husk is delivered by truck drivers. Therefore, such payments aggregating to Rs. 2,67,035 out of total amount of Rs. 2,10,65,787 stood covered by the exceptions provided in Rule 6DD(j) read with Circular No. 220 dated 31-5-1977 of the Central Board of Direct Taxes. We also agree with Shri Sapra that before framing the assessment the Assessing officer had duly applied his mind to the cash payments exceeding Rs. 10,000, as is evident from the queries made and assessee’s reply thereto supported with auditor’s report and books of accounts, vouchers, stock register, etc., produced in the course of assessment proceedings, as specifically recorded in order-sheet dated 22-3-1994.
6.1 Regarding London office expenses, the facts stated by the learned Authorised Representative for the assessee, Shri Sapra, have not been controverted nor they are in dispute. The London office was opened with prior permission of the Reserve Bank of India, for which necessary evidence exists on record in the form of letter dated 11-8-1988 (Pages 165-166 of the paper book) whereby RBI also fixed release of foreign exchange for expenses. The RBI has been issuing periodic permits to the assessee for remittances to be sent abroad to the bank account of the assessee in London from which expenses are incurred by the resident-representative. The remuneration paid to Shri A. P. Jaiswal is in accordance with the approval granted by Department of Company Affairs, Government of India (Paper Book pages 169-170) and again 171 to 175. The Commissioner of Income-tax, in our view, was also not justified in observing that there are exports of Rs. 27.02 crores, exports to U. K. amount to Rs. 2.20. crores and to U. S. A. Rs. 2.89 crores, besides substantial exports to various European countries (details on page 337 of the paper book). Similarly, the fact that joint ventures and technical agreements, cited by the appellant in its reply, were not signed during the relevant previous year, was not relevant for the purposes of section 263 of the Act nor the observation of the Commissioner of Income-tax that they were not related to assessee’s exports business. The assessee had opened a non-trading office in London not only to boost its exports but also for promoting its business interests, including import of machinery, equipment, raw-material, financial and technical collaboration as explained by the assessee in its reply to the learned CIT, as also in its letter at pages 381 and 383 of the paper book. As regards use of office premises by Shri Jaiswal as his residence, we find that the show-cause notice issued by the learned Commissioner of Income-tax did not indicate any such ground which renders the order of the CIT on this issue as without lawful jurisdiction. The Hon’ble Calcutta High Court in the case of CIT v. General Trade Agency 1973 Tax LR 1383, have held that such an order under section 263 cannot be sustained by observing as under :
“When the show-cause notice did not fairly indicate the ground used by the Commissioner of Income-tax in his order under section 263, it was held that the assessee was deprived of a fair opportunity to show cause against proposed action. In such a case revisionary order of the Commissioner of Income-tax cannot be sustained.”
Still we find that facts on record indicated that it was in the business interest of the assessee that Shri Jaiswal should use the office premises as also his residence. We have also gone through the London office expenses at page 164 of the paper book and find that similar expenditure incurred in the preceding assessment year stands allowed, as per details at page 338 of the P. B.
6.2 As regards applicability of the provisions of section 40(a)(iii), here again we observe that no indication was given by the learned Commissioner of Income-tax in his notice while adverse comments have been made in his order, which again renders the order on this point without lawful jurisdiction. Still we find ourselves in agreement with the submissions made by Shri Sapra as detailed above on this issue. Further, the Assessing Officer had called for and examined the details of the claim before allowing the same. We do not fine any material on record, which could enable the Commissioner of Income-tax to legitimately assume jurisdiction under section 263 when it is a matter of record that on both counts reasonable and requisite enquiries were made. The error envisaged in section 263 is not one which depends on possibility or guess work, it should be actually an error either of fact or of law – CIT v. Trustees, Anupam Charitable Trust [1987] 167 ITR 129/31 Taxman 335 (Raj.). Further, being an extraordinary power it is to be employed not as a judicial corrective or as a review of Assessing Officer order in exercise of supervisory capacity. It is to be invoked and employed only for the purpose of setting right distortions and prejudice to the revenue – Venkatakrishna Rice Co.’s case (supra). It is not a case where the Assessing Officer either passed an order without making reasonable enquiries on the issues involved or passed a stereotyped order simply accepting what the assessee has stated in his return and failed to made enquiries called for in the circumstances of the case. Manifestly the ratio in the case of Gee Vee Enterprises (supra) is not applicable on the facts and in the circumstances of the case. The learned Commissioner of Income-tax, in our view, was not justified in rejecting explanation of the assessee when facts on record themselves clarify the issues raised in the show-cause notice, as highlighted in assessee’s reply to the same. The power of the Commissioner of Income-tax under section 263 being quasi-judicial makes it obligatory for him to act in judicial manner. In Sirpur Paper Mills Ltd. v. CWT [1970] 77 ITR 6 (SC), it had been held :
“The power of revision conferred on the Commissioner is not administrative; it is quasi-judicial. In the exercise of that power, the Commissioner must bring to bear an unbiased mind, consider impartially the objections raised by the aggrieved party and decide the dispute according to procedure consistent with the principles of natural justice. He cannot permit his judgment to be influenced by matters not disclosed to the assessee.”
The view taken by the learned Commissioner of Income-tax is contrary to facts on record and, therefore, is in the nature of conjectures and surmises, there being no facts on record enabling the learned CIT to assume lawful jurisdiction under section 263 as the Assessing Officer had made reasonable detailed enquiries on both the issues before completing the assessment. We, therefore, cancel the order of the learned CIT and restore the order of assessment dated 31-3-1994 passed by the Assessing Officer.
7. In the result, appeal is allowed.