ORDER
Pramod Kumar, A.M.
1. This is an appeal filed by the assessee and is directed against the order dt. 16th March, 2005 passed by the CIT, under Section 263 of the IT Act, 1961 (‘the Act’, in short). The grievances raised by the assessee are as follows:
1. On the facts and in the circumstances of the case and in law, the learned CIT erred in assuming jurisdiction under Section 263 of the IT Act.
2. On the facts and in the circumstances of the case, the learned CIT erred in ignoring the fact that the issue in respect of which proceedings have been initiated pertained to the original assessment and proceedings under Section 263 are time-barred with reference to original assessments.
3. Without prejudice to the forgoing grounds of appeal, on the facts and in the circumstances of the case, learned CIT erred in setting aside the assessment ignoring the fact that all the issues regarding gross profit ratios were duly examined in the course of assessment proceedings.
2. We set out the material facts first. The assessee is a partnership firm and is engaged in the business of trading in Iron Angles, Beams, Squares, MS Sheets, Iron Scrap. The assessment was completed under Section 143(3) of the Act on 14th Feb., 2000 determining a taxable income of Rs. 7,83,530. This assessment was, however, reopened by the AO by issuing a notice under Section 148 of the Act, on 15th March, 2002. In the reassessment proceedings which followed, the AO was satisfied by the submissions of the assessee to the effect that the objections raised are incorrect and that no addition is warranted. The assessment was accordingly retained at Rs. 7,83,530, though, even to retain the assessment at this original figure, a separate assessment order under Section 143(3) r/w Section 147 was passed on 28th Aug., 2002. The ordeal of the assessee was not yet over. On 6th Jan., 2003, the CIT, in purported exercise of his powers under Section 263 of the Act, issued a notice calling upon the assessee to show cause as to why the assessment order dt. 28th Aug., 2002 should not be set aside and the matter remitted to the file of the AO for adjudication de novo, because the order passed by the AO was erroneous and prejudicial on account of the following:
1. appropriate addition was not made in respect of additional stock declared by the assessee, at the time of survey, amounting to Rs. 10,88,638 which was not recorded in the books of account but offered by the assessee as an additional income;
2. appropriate addition to gross profit was not made after examining the trading result shown by the assessee prior to survey conducted by the AO and the post survey period; and
3. the AO failed to make an addition of Rs. 2,16,000 claimed as salary to the partners as there was no such provision for salary to the partners in the original partnership deed and since this salary was claimed in respect of the book profit pertaining to stock which was not recorded in the books of accounts.
3. In the proceedings which followed, the CIT accepted that so far as third issue, set out above, is concerned, no interference is needed. As regards the first question, i.e. non-disclosure of additional stock declared by the assessee, the CIT observed that “though the assessee had not included the value of unaccounted stock in trading account, while computing the income, the same was separately considered” and that “due to fall in value of prices in the post-survey period, the assessee suffered a loss which was adjusted against the income so declared under Section 69A (in respect of unaccounted stock declared)”. This issue was thus dropped. However, on the second point raised above, the CIT was not satisfied with the assessee’s explanations. He, therefore, concluded as follows:
(However, from the records,) it is seen that during the course of original proceedings as well as reassessment proceedings, the sales of the assessee was not duly examined with reference to the sale bills/invoices issued by the assessee and also by cross-examining the ledger accounts of the parties. Therefore, the contention of the assessee regarding the fall in GP (i.e. gross profit) is not acceptable. It is also noticed that the assessee has not recorded, full sales made during the year under consideration for our verification. This issue needs to be examined further.
I, therefore, set aside the assessment order under Section 263 of the IT Act, and direct the AO to re-examine the above issues in accordance with the law.
Aggrieved by the order so passed by the CIT, the assessee is in appeal before us.
4. Shri K. Gopal, learned Counsel for the assessee, submits that the impugned order is time-barred. It is submitted that so far the issue of the gross profit is concerned, it was addressed in the original assessment proceedings and which stood concluded by virtue of AO’s order dt. 14th Feb., 2000. It is pointed out that the reassessment proceedings were confined only on the two issues of (a) non-disclosure of income on account of unaccounted stock of Rs. 10,88,638; and (b) deductibility of salaries of Rs. 2,16,000 paid to the partners. On both of these issues, the AO was satisfied that no addition was called for. We were taken through the reassessment order dt. 28th Aug., 2002 to demonstrate the facts embedded in his arguments. Shri Gopal submits that since the reassessment proceedings were on these limited aspects, and not on the issue which has been taken up by the CIT now in revision proceedings, so far as the limitation for exercise of revision powers on this issue is concerned, it must run from the date on which the original assessment was completed and not from the date on which reassessment was completed. Without prejudice to this line of argument, learned Counsel further submits that in any event, the matter regarding adequacy of gross profit was duly examined in the course of original assessment proceedings and the exercise so conducted cannot be set at naught merely because no addition was made by the AO and by, therefore, ordering a reappraisal of the facts regarding gross profit. It was pointed out that the comparative profit and loss positions for various years was filed before the AO in the first round of proceedings. According to the learned Counsel, it is not for the CIT to now decide whether or not the explanation for the fall of gross profit should have been acceptable to the AO or not, because, by doing so, the CIT is substituting his judgment for the judgment of the AO–something which is not permissible under the scheme of Section 263 of the Act. It is submitted that the issue of lower gross profit had come up during the original assessment proceedings and the AO was satisfied by the explanations given by the assessee. Learned Counsel submits that no specific infirmities are pointed out in the order of the AO. Unless cogent and specific infirmities, which are prejudicial to the interest of the Revenue as well, are noticed by the CIT, it cannot be open to him to assume jurisdiction. Learned Counsel finally submits that since no additions were made in the course of reassessment proceedings, it was not open to the assessee to challenge the validity of reassessment proceedings, but the fact remains that since the very foundation of reassessment notice was unsustainable in law, as accepted by the AO himself by not making the addition in respect of those points, the reassessment order was a nullity and cannot be taken into account for computing the limitation period for exercise of revisionary powers of the CIT. Viewed in this perspective, and computing the time-limit from the date of original assessment, the CIT could not have revised the assessment after the expiry of two years from the end of the assessment year in which the assessment order was passed. The time barring limit thus came into play on 31st March, 2002. For this reason also, according to learned Counsel, the exercise of revisionary powers by the CIT are unsustainable in law. On the basis of these arguments, we are urged to quash the order passed by the CIT. On the other hand, Mrs Srivastava, learned Senior Departmental Representative, vehemently supported the impugned order passed by the CIT. It was submitted that once an assessment order under Section 147 r/w Section 143(3) is passed, and that order exists in the eyes of the law, the time-limit for exercise of CIT’s powers under Section 263 has to be computed with reference to the reassessment order. The original assessment order, according to the learned Counsel, ceases to exist in the eyes of the law, and it is only the reassessment order which is to be taken into account. It is also pointed out that the AO, at no stage, conducted the exercise of examining the sales with reference to the bills and invoices, and by cross examining ledgers of the parties. The verification conducted by the AO was superficial and- without actual application of mind. It was in a routine and mechanical manner that the explanation given by the assessee was accepted by the AO. On the facts of this case, the AO was indeed required to objectively consider the reasons of fall in gross profit, and the AO did not do so. This action on the part of the AO was erroneous and also prejudicial to the interest of the Revenue. The CIT, therefore, was quite justified in assuming the jurisdiction under Section 263. We are, on this line of reasoning, urged to confirm and approve the impugned order, and to decline to interfere in the matter.
5. Having given our thoughtful consideration to the facts of this case, as also to very erudite and elaborate legal contentions raised by the distinguished representatives, we are inclined to uphold the objections raised by the assessee. The plea raised by the learned Counsel, even though we had our initial reservations about the same which we expressed during the course of hearing, is indeed well taken.
6. It is no doubt true, as emphasized by the learned Departmental Representative, that a reassessment order wipes away the original assessment order, and, as long as this reassessment order exists in the eyes of law, the time-limit for exercise of powers of the CIT under Section 263 has to be computed with reference to the date of the assessment order. In this regard, therefore, there are two questions which immediately arise–one, whether the reassessment order in question was a valid order or not, and, second, whether at this stage, when we are only in seisin only of the appeal against the revision order passed by the CIT, we can adjudicate upon the validity of the reassessment order. Of course, there is another interesting and fundamental question i.e. whether the order dt. 28th Aug., 2002, passed by the AO, is to be viewed as a reassessment order at all, or is to be viewed as an order dropping the reassessment proceedings. That aspect we will take up a little later. As regards the validity of the reassessment order, in the light of the law laid by Hon’ble Supreme Court in the case of GKN Driveshaft India Ltd. v. ITO (2003) 179 CTR (SC) 11 : (2003) 259 ITR 19 (SC), the AO was under an obligation to furnish the reasons for reopening and to meet all objections thereto. In the present case when the AO was satisfied that no income actually escaped assessment on account of the point raised in the reassessment notice, even remission of the matter to the AO is not needed. The verdict is already given by the AO, and the objections raised by the assessee are already accepted. Only if the AO had followed the methodology laid down by the Hon’ble Supreme Court, he had to drop the proceedings at the notice stage instead of de facto dropping the reassessment proceedings by adopting the same income as was finalized in the original assessment proceedings. The reassessment was only in form and not in substance, and, as we have stated-above, it could not have been even in the ‘form’ if the law laid down by the Hon’ble Supreme Court was followed. The very reassessment was, therefore, vitiated in law. The second question that we had posed for ourselves was whether at this stage, when we are, only in seisin only of the appeal against the revision order passed by the CIT, we can adjudicate upon the validity of the reassessment order. Let us deal with this aspect now. The question raised before us is of CIT’s order being barred by limitation of time, and to decide the issue of limitation, we have to consider as to with reference to which assessment order, we compute the time-limits on CIT’s powers. As we do so, we are confronted with a reassessment order which accepts the originally assessed income as reassessed income. This is now a legal impossibility in the light of law settled by the Hon’ble Supreme Court in GKN Driveshaft’s case (supra) because if, upon hearing the assessee, which the AO has to mandatorily hear before he proceeds with the reassessment proceedings, the AO is satisfied that there is no income escaping assessment, he has to drop the proceedings itself. Therefore, legally, there cannot be a reassessment order which has the originally assessed income as reassessed income, and rightly so, because such an order is a meaningless ritual. It is incorrect to state that an income assessment figure be substituted by the same assessment figure, because, in such a situation, the income assessment figure is retained, not substituted. This order is superfluous legal nullity, in its avatar as an assessment order, though it is surely a testimony of the fact that the AO, in his wisdom, decided not to proceed with the reassessment of income. It is in fact an order dropping reassessment proceedings though termed as an assessment order. If we are to compute the time-limit available to the CIT with reference to a document which cannot be termed as a reassessment order at all, either in the eye of law or in fact, we will end up extending the time-limit available to the CIT beyond what was legally permissible to him. Therefore, and to that extent, we do have the powers and, indeed, duty, to examine the nature of order passed by the AO as ‘reassessment order’ and whether this order can be termed as a reassessment order at all. The fact that the order in question is in substance an order dropping the reassessment proceedings is glaring and easily discernable from the following observations made by the AO in the said order:
The assessment was reopened vide issuance of notice under Section 148, dt. 15th March, 2002, due to an audit query….
Notices under Sections 143(2) and 142(1) were issued on 8th Aug., 2002. In response to the above notices, Shri Ajay Sekhri chartered accountant attended and furnished various explanations/details called for and the case was discussed.
During the (re)assessment proceedings the query raised by audit was verified and found that the assessee had complied with his declaration made during survey under Section 133A and the taxes have been paid….
The assessee’s submissions were verified from the records and enclosures to the return of income filed on 21st Oct., 1997. It is explained during the (re) assessment proceedings that the additional stock of Rs. 10,88,638 was offered and included in stock details in Annex.-D filed along with return of income. The assessee has also filed copy of addendum to the partnership deed entered on 1st April, 1996 which is on stamp paper.
Considering the above facts and declarations made by assessee during the survey and also allowability of salary to partners is explained by the assessee, and accordingly, assessee’s income is computed as follows:
Total income as per order under Section 143(3) dt.
14th Feb., 2002 : Rs. 7,83,530 Assessed accordingly. Give credit for taxes paid. Issue demand notice, if any. Sd/xxxx AO Office Note:
1. In this case, survey under Section 133A was conducted on 9th Oct., 1996 and a declaration of Rs. 10,88,638 was made by the assessee. The assessment was completed under Section 143(3) on 14th Feb., 2000 after verifying the declaration made by the assessee on account of excess stock found. An addition of Rs. 34,337 was also made. During the assessment proceedings, the AO has examined all the details and books of accounts relevant to the assessment. In this case audit objections were raised by Dy. CIT, Audit X, Mumbai, on 5th Dec, 2000 regarding declaration of additional income and allowability of salary to partners. A detailed report on the audit objection was sent to Addl. CIT, Audit X, Mumbai, vide letter dt. 30th March, 2001 rejecting all the audit objections raised. As there was no reply from the audit regarding acceptance or rejection of explanation submitted, a notice under Section 148 was issued on 15th March, 2002.
2. As the reopening was made on the specific points, the proceedings are restricted to these points only, keeping in mind that detailed scrutiny has already been done while completing assessment under Section 143(3) on 14th Feb., 2000.
3. The assessment is completed after discussions with Jt. CIT, Range 21(3), Mumbai.
Sd/xxxx
AO
7. We do not think it is permissible for us to take this order, which is nothing more than an order dropping the assessment proceedings, for computing
time-limit available to the CIT to revise the assessment framed by the AO on the points which are not even touched by this order. It is incorrect to plead that such an order can be viewed as anything but an order dropping the reassessment proceedings. It cannot be viewed as an assessment order, though termed so, in the eyes of the law. Let us also not lose sight of the scheme and spirit of Section 292B of the Act. This section, inter alia, provides that no proceedings purported to have been taken in pursuance of any of the provisions of the IT Act shall be invalid, or shall be deemed to be invalid, merely by the reason of any mistake, defect or omission in the proceedings if such proceeding is “in substance and effect in conformity with or according to the intent and purpose of this Act”. It would thus follow that what is to be really looked at is the ‘substance’ and not the ‘form’ alone, and that legal rights of the parties are to be settled as per substance of the proceedings irrespective of whatever nomenclature is assigned to the proceedings. This approach to interpretation of the IT Act, which is embedded in the Act itself by the virtue of a specific provision to that effect, cannot be a one-way traffic and merely operate in favour of the Revenue. A fair and reasonable approach to interpretation of the Act requires the same equity to be read into provisions of the Act, in favour of the assessee. Seen in this light, what is termed as a reassessment order is really required to be viewed as an order dropping the reassessment proceedings. The assessee could not have been aggrieved of this order per se because it did not prejudice the assessee at that stage as it did not actually assess any income which was not already assessed in the original assessment order. As there was no enhancement of income or tax liability, it was an academic question whether or not the AO resorted to reassessment proceedings. The assessee could not have raised an academic question in an appellate proceeding; it is well settled in law that it is only an aggrieved party which appeals against the order. The assessee could not have had the clairvoyance to know that this order can cause prejudice to him. The prejudice was caused to the assessee by the reassessment proceedings only when the impugned revision order was passed because it was admittedly as a result of this reassessment order that the CIT claimed to have a right to exercise his revisionary powers even beyond 31st March, 2002; but for the fact of the reassessment order, the CIT could not have even claimed the existence of a lawful right to do so. Undoubtedly, Section 254(1) of the Act provides that the Tribunal shall, after giving both the parties to an appeal opportunity of being heard, “pass such orders thereon as it thinks fit” and Hon’ble Supreme Court, in the case of Hukumchand Mills Ltd. v. CIT , viewed this provision as restricting “the jurisdiction of the Tribunal to the subject-matter of appeal”, but the question then is what is ‘subject-matter of appeal’ in the case before us. The subject-matter of appeal before us is validity of the revision order passed by the CIT on 16th March, 2005. This legal validity is to be examined, inter alia, on the touchstone of time-limits set out for exercise of these powers under Section 263 of the Act. And to decide this controversy, it is also important to decide whether or not the order dt. 22nd Aug., 2002 is to be viewed as an order dropping the reassessment proceedings or as an reassessment order per se. That is how, in our considered view, we have powers to decide whether or not what is termed as reassessment order can indeed be viewed as an assessment order or is to be viewed as an order dropping the reassessment proceedings. In case we are to view this order as an assessment order, and compute the time-limit on that basis, we will end up upholding the prejudice caused to the assessee on account of his not doing something which he is not permitted to do anyway, i.e. raise an academic question about validity of reassessment proceedings when no additions are made to his income in the course of such reassessment proceedings. The time-limit for exercise of CIT’s powers, therefore, must be computed with reference to the assessment order passed on 14th Feb., 2000.
8. We would arrive at this very destination even if we were to traverse along a different dialectic. Let us analyze these facts from another perspective. In order to exercise powers under Section 263, two conditions are to be satisfied–first, the order sought to be revised should be erroneous; and–second, that the order sought to be revised should be prejudicial to the interest of the Revenue. An order in accordance with the law can obviously not be said to be erroneous. Now, the fundamental question then arises whether the AO could have, during the course of reassessment proceedings, made an addition for lower gross profit at all. If he could not have done so under the reassessment proceedings in question, and has not therefore done so, his action cannot be said to be erroneous–which is the fundamental condition for assumption of jurisdiction under Section 263 of the Act. Let us not forget that on both the issues, admittedly on which reopening was sought, no additions were made. Learned CIT also does not dispute this action of the AO and, therefore, he agrees that additions could not have been made in respect of the issues on which reopening was done. The question then arises whether it was open to the AO to make in respect of any other income, in a situation in which he does not consider it necessary to make any additions in respect of the incomes which were said to have escaped assessment and for which reason reassessment proceedings were resorted to. The answer is firmly in the negative. It is by now well settled in law that in case no additions are considered necessary by the AO on the issues on which reassessment proceedings are resorted to, it cannot be open to him to make any other additions also. The question of other additions can only arise when additions are made in respect to at least one of the issues on which reassessment proceedings are initiated. For this reason, it is not the reassessment order passed by the AO which can be said to be erroneous for not having made on account of lower gross profit, but that error, even if that be so, can be said to exist in the original order, i.e. order dt. 14th Feb., 2000, passed by the AO.
9. It is also difficult to comprehend as to how can a CIT, in the garb of exercising his powers under Section 263, direct an AO to do what the AO did not have power to do at the time when the order sought to be revised was being passed. If the AO could not have made, on the given facts, an addition on account of lower gross profit rate at the time of passing the reassessment order, he cannot also make such an addition on the reassessment order being set aside by the CIT under Section 263–particularly when no fault is found with the AO in not making the additions on the points on which the assessment was reopened. That matter has now attained finality and cannot be touched at all. The CIT was clearly acting beyond the time frame permitted to him under the scheme of the Act for reviewing the order passed by the AO. What the AO could not have done on his own at the time of passing the so-called reassessment order, the AO cannot do in the garb of following the revisionary directions of the CIT either. The law is well settled. What a statutory authority cannot do directly, it cannot indirectly do either. An order in exercise of revision authority of the CIT cannot confer any more powers on the AO than the powers the AO had at the time of passing the order subjected to such revision proceedings.
10. In view of the above discussions, and for the detailed reasons set out above, we are of the considered view that the impugned order passed by the CIT(A) was time-barred. Whichever way one looks at it, it is clear that the order sought to be passed by the CIT was vitiated in law on the ground that it was barred by the period of limitation. The impugned order is, accordingly, set aside as time-barred.
11. In the result, the appeal is allowed.