ORDER
Joginder Pall, A.M.
1. By this order, we shall dispose of this appeal of the assessee filed against the order of CIT, Amritsar, passed under Section 263 of the IT Act, 1961 (in short “the Act”) for the asst. yr. 2001-02.
2. The first effective issue raised in this appeal is that the order of CIT passed without allowing proper opportunity was against principle of natural justice. It was stated before us that hearing of case before GIT, Amritsar, was fixed on 29th Nov., 2004. On this date, the counsel for the assessee went along with written submissions but instead of CIT, Amritsar, accepting the submissions himself, the counsel was directed to see ITO (Judicial). Accordingly, the counsel appeared before the ITO (Judicial), filed written submissions and discussed the case with the ITO. The case was adjourned to 17th Jan., 2005. On this date also, the counsel was directed by the CIT, Amritsar, to see the ITO (Judicial). The learned CIT passed the order under Section 263 on 18th Feb., 2005 without hearing/discussing the case with the counsel for the assessee. Not only this, the learned CIT, Amritsar, while passing the order under Section 263 also covered the ground which was not raised in the show-cause notice issued under Section 263 of the Act. In support of these averments, the counsel for the assessee, Sh. Jagdish R. Gupta, also filed an affidavit dt. 31st Jan., 2006.
3. Since the assessee had made serious allegations against the CIT, the affidavit of the counsel was referred to CIT, Amritsar, for comments. The CIT has sent the comments vide letter dt. 17th April, 2006 through Departmental Representative denying the charges made against him. He has stated that after discussing the matter with ITO (Judicial), the counsel came along with ITO (Judicial) and case was discussed with him. He has also stated that during the course of hearing case records of M/s Sant Stone Crusher (P) Ltd. for the assessment year were also shown to him. The CIT has also enclosed the report of ITO (Technical), Shri Charan Dass. A copy of the report of ITO enclosed with the comments shows that though the order sheet was written by him as per past practice and the case records of M/s Sant Stone Crusher (P) Ltd., were also shown to the learned counsel, the order sheet remained to be signed by the CIT. A copy of these comments was also given to learned Counsel for the assessee. He again maintained the allegations made against the CIT.
4. We have heard both the parties and considered the rival contentions. The assessee has made allegations and GIT, Amritsar, has denied these allegations and also supported his. comments with the report of ITO (Judicial). Under these circumstances, we do not consider it necessary to record any specific findings on this issue. However, the points made by both the parties would be taken into account to see whether the CIT, Amritsar, decided the case without allowing an opportunity to assessee which was the statutory duty of CIT before passing an impugned order.
5. The other effective issue raised in this appeal is that the order passed by the CIT, Amritsar, was against provisions of law and, therefore, invalid. The facts of the case are that return filed by the. assessee declaring therein income of Rs. 3,75,800 was processed under Section 143(1)(a) and thereafter the case was selected for scrutiny. During the course of assessment proceedings, the assessee produced the books of account, bills, vouchers, copies of electricity bills and other documents and the AO observed that these were test checked. The AO completed the assessment under Section 143(3) on 31st March, 2003 determining income of Rs. 3,95,840 by making certain additions/disallowances.
6. Thereafter, the CIT, Amritsar, called for the case records and found the assessment order as erroneous and prejudicial to the interests of Revenue. In the show-cause notice dt. 21st Oct., 2004 issued by CIT under Section 263 of the Act (a copy placed at pp. 3-4 of paper book), the CIT pointed out the following infirmities in the assessment order:
(i) As per question No. 3 in the questionnaire issued by the AO, no explanation was given regarding the amount debited in the capital account and amount as per copies of sale deed filed during the assessment proceedings.
(ii) As per question No. 6 of questionnaire issued by the AO, the assessee was asked to explain the reasons for claiming the huge expenses of Rs. 5,74,537 as compared to last year. No further inquiry/investigation was made by the AO.
(iii) In similar case of Sant Stone Crusher (P) Ltd., AO after making detailed analysis of sale/production/electricity, wages, diesel, labour, etc. came to the conclusion that every rupee spent on electricity is capable of generating sale/production of Rs. 12.83. By applying the same yardstick, the difference in production worked out to more than Rs. 90 lakhs in the two stone crushers owned by the assessee. In fact, while selecting the case, the AO had mentioned the GP rate in such cases worked out to 50 per cent.
7. In response to show-cause notice, the assessee submitted a detailed reply vide letter dt. 25th Nov., 2004. It was submitted that assessee had debited an amount of Rs. 5,93,100 to capital account as against cost of land of Rs. 5,82,000. The remaining amount withdrawn was utilized for registration fee and other expenses. Thus, it was contended that excess withdrawals over the cost of land did not warrant any addition. It was further submitted that electricity expenses had increased to Rs. 5,74,537 because the second crusher started w.e.f. 10th Jan., 2000 and in the last year, such expenses were only for two months amounted to Rs. 1,22,965. But in the assessment year under reference, such expenses were for the whole year. It was submitted that photocopies of the electricity bills were filed before the AO and placed on record. Thus, it was stated that AO had accepted the claim after making proper enquiries. As regards the GP rate shown by the assessee, it was submitted that the same varied from 16.15 per cent to 36.25 per cent. The assessee also furnished the names of 13 cases where GP shown varied from 16.15 per cent to 36.25 per cent. As against the same, the assessee had shown GP rate of 36.96 per cent and 37.76 per cent in the two crushers. As regards the case of Sant Stone Crusher (P) Ltd., cited by the CIT in the show-cause notice, the assessee submitted that nowhere it was mentioned that what were the facts of that case and how those were similar to the facts of the present case. Thus, it was contended that the assessment order was neither erroneous nor prejudicial to the interests of Revenue. However, these submissions did not find favour with the CIT, who observed that order passed by AO was erroneous and prejudicial to the interest of Revenue. The relevant findings recorded by the CIT in the impugned order are as under:
4. After examining the assessment record and submission made by the assessee, it is found that the submission made by the assessee is not acceptable as necessary verification/investigation has not been made by the AO in this case. In its reply regarding the huge expenses of electricity of Rs. 5,74,537 in the case of Vishwakarma Industries, it has been explained by the assessee that new crusher was installed during the previous year 2000-01 which started functioning in the last quarter w.e.f. 10th Jan., 2000 and electricity expenses of Rs. 1,22,965 were incurred and in the year under reference the crusher ran for the whole year and expenses of Rs. 5,74,437 were incurred. The explanation of the assessee has to be verified because the production on the basis of every rupee spent on electricity is also similar in assessee’s both the units as under:
(a) Vishwakarma Stone Crushing Co. (b) Vishwakarma Ltd.
Rs. 11,23,516/3,34,568 Rs. 3.35 Rs. 13,90,225/5,74,537 Rs. 2.42
From the above data it is apparent that every rupee spent on electricity is generating sale/production of Rs. 3.35 in the case of Vishwakarma Stone Crushing Company and Rs. 2.42 in the case of Vishwakarma Industries and by applying the same ratio of production of Rs. 3.35 in the case of Vishwakarma Industries, the production should have been shown at Rs. 19,42,028 (574537 x 3.35) whereas production has been shown at Rs. 13,90,225 only which is also to be verified. As already mentioned, this lower ratio of production on the basis of per rupee consumption of electricity as compared to Rs. 12.83 in the case of Sant Stone Crushing Crusher (P) Ltd. has to be verified.
In view of the above facts and circumstances of the case, I find that the abovesaid order passed by the AO is erroneous and prejudicial to the interest of the Revenue and therefore assessment is cancelled and the AO is directed to make fresh assessment in this case.
The assessee is aggrieved with the order of the CIT, Amritsar. Hence, this appeal before us.
8. The learned Counsel for the assessee drew our attention to pp. 3-4 of the paper book which is a copy of show-cause notice issued by the CIT. He then drew our attention to pp. 5 to 8 of the paper book which is a copy of the detailed reply submitted before the CIT. He submitted that the assessee had given a list of 13 cases where GP shown by the assessees varied from 17 per cent to 36 per cent. As against the same, the GP shown by the assessee was better. He submitted that CIT has not even considered these submissions while passing the impugned order. As regards the case of Sant Stone Crusher (P) Ltd., referred to by the CIT, the learned Authorised Representative drew our attention to a copy of order dt. 19th Sept., 2005 of Tribunal, Amritsar Bench, in ITA No. 185/Asr/2005 for the asst. yr. 1997-98 at pp. 13 to 17 of the paper book where all additions were deleted by the Tribunal. Thus, he submitted that order passed by AO was neither erroneous nor prejudicial to the interest of Revenue. Therefore, the order passed under Section 263 was without jurisdiction and invalid.
9. The learned Departmental Representative, on the other hand, heavily relied on the order of CIT, Amritsar.
10. We have heard both the parties at some length and carefully considered the rival contentions, examined the facts, evidence and material placed on record. We have also gone through the order of CIT, Amritsar, and referred to relevant pages of paper book to which our attention has been drawn. From the facts discussed above, it is obvious that the basis of action under Section 263 was failure on the part of AO to make inquiry/investigation before completing the assessment in this case. He has particularly referred to the substantial jump in the electricity expenses from Rs. 1,22,965 to Rs. 5,74,537 and failure on the part of AO to link the production with the consumption of electricity units as done by Jt. CIT, Special Range, Amritsar, in another case i.e. M/s Sant Stone Crushers (P) Ltd. where he had observed that each rupee spent on electricity yielded production worth Rs. 12.83. In this manner, the CIT worked out the difference in the production shown and computed by taking production worth Rs. 12.83 on spending of rupee one on electricity at Rs. 91,50,105 (i.e. Rs. 31,68,991 + Rs. 59,81,104) and pointed out the same to assessee in the showcause notice issued. Now, the question that requires to be decided is whether the CIT was justified in law to exercise his powers vested under Section 263 of the Act in setting aside the assessment completed by the AO. Before dealing with the merits of the case, it would be relevant to reproduce herein the main provisions of Section 263 of the Act which reads as under:
263. (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-Fox the removal of doubts, it is hereby declared that, for the purposes of this Sub-section, –
(a)…
(b)’record’ shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the CIT;
(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.
(2) No order shall be made under Sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in Sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Tribunal, the High Court or the Supreme Court.
Explanation-In computing the period of limitation for the purposes of Sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to Section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any Court shall be excluded.
A bare reading of the aforesaid section shows that the learned CIT(A) is vested with powers to call for and examine the records of any proceedings under the Act and consider if the order passed by the AO is erroneous and prejudicial to the interests of the Revenue. Thus, in order to confer jurisdiction on the CIT under Section 263, the twin conditions i.e. (i) that order passed by the AO must be erroneous and (ii) the same should be prejudicial to the interests of the Revenue must be satisfied. Both the conditions should be satisfied simultaneously. In case the order passed under Section 263 is erroneous, but the same is not prejudicial to the interests of Revenue, the CIT shall have no jurisdiction to revise such order. Likewise, if the order is prejudicial to the interest of Revenue, but is not erroneous, the CIT would have no jurisdiction to revise such order under Section 263 of the Act. Thus, it is quite clear that in order to confer jurisdiction on the CIT under Section 263, both the conditions mentioned above must be fulfilled simultaneously. This issue was considered by the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC), where it was held that pre-requisite for the exercise of jurisdiction by the CIT is that the twin conditions must be satisfied i.e. (i) the order of the AO sought to be revised is erroneous and (ii) it is prejudicial to the interests of the Revenue. The apex Court observed that if one of these conditions is absent i.e. if the order of AO is erroneous but is not prejudicial to the Revenue, recourse cannot be had to Section 263 of the Act. The same view has been held by the various other judgments relied upon by the learned Authorised Representative and as summarized above.
10.1 Now, the aspect that requires to be considered by this Bench is whether both the conditions laid down under Section 263 can be said to have been fulfilled in this case. In order to answer this issue, we have to first find out the meaning of expressions an assessment order being ‘erroneous’ and ‘prejudicial to the’ interests of the Revenue’. This issue was also considered by the Hon’ble Supreme Court in the aforesaid case of Malabai Industrial Co. Ltd. v. CIT (supra). The Hon’ble apex Court held that the expression ‘erroneous’ would mean an incorrect assumption of facts or an incorrect application of law. The apex Court further observed that even the assessment orders passed without applying principles of natural justice or without application of mind would be regarded as erroneous. As regards the expression ‘prejudicial to the interests of the Revenue’, the apex Court observed that this is not an expression of art and was not defined in the Act. However, it was observed that in its ordinary meaning, it is of wide import and was 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 erroneous order of the ITO, the Revenue is loosing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The Hon’ble apex Court also observed that the phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the AO. The relevant findings recorded by the apex Court on p. 83 of ITR 243 are as under:
A bare reading of Section 263 of the IT Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the CIT suo motu under it is that the order of the ITO is erroneous insofar it is prejudicial to the interests of the Revenue. 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 interests of the Revenue, or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to Section 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 enoneous order of the ITO, the Revenue is loosing 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 TTO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the TTO has taken one view with which the CTT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the TTO is unsustainable in law.
(Emphasis, italicized in print, supplied is ours)
From a bare reading of the above judgment, it is clear that the order could be considered as prejudicial to the interests of the Revenue, if the same has not been passed in accordance with the provisions of the Act or the procedure laid down under the law. However, the Supreme Court has also clarified that if the AO has taken one of the courses permissible in law 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 or prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.
10.2 Now, the present case also requires to be decided by applying the above tests laid down by the apex Court i.e. whether the twin conditions laid down for exercise of powers under Section 263 by CIT could be considered to have been satisfied.
10.3 Now, in this case, we find from the show-cause notice dt. 12th Oct., 2004 (a copy placed at pp. 3 and 4 of the paper book) that the CIT initiated action under Section 263 for the reason that the difference between amount debited in the capital account and as per copies of sale deed filed during the assessment proceedings was not explained. In the reply submitted the assessee has stated that the amount withdrawn from capital account was more than the cost shown in the purchase deed and the balance amount of Rs. 10,000 was utilized for payment of registration fees and other charges. Since the amount withdrawn was more, no addition on this account was warranted in this case. Therefore, the assessment could not be considered as erroneous and prejudicial to the interest of Revenue to warrant action under Section 263 on this issue. The next point on which the CIT has passed order under Section 263 is that the AO did not make enquiry/investigation about the expenditure incurred on electricity and production obtained. Taking into account every rupee spent on electricity, the learned CIT has observed that every rupee spent on electricity was generating sale/production of Rs. 3.35 in case of one unit and Rs. 2.42 in respect of another unit and, therefore, the difference in the production worked out to Rs. 5,41,803 (19,42,028 – 13,90,225) even by applying the same ratio as shown in the first unit. The CIT also observed that the production was required to be worked (out) by taking into account the production worth Rs. 12.83 of every rupee spent on electricity as in the case of M/s Sant Stone Crusher (P) Ltd.
10.4 On the other hand, the facts discussed by the AO in the assessment order show that during the course of assessment proceedings, books of account were produced, examined and test checked. The AO also mentioned that separate books of account had been maintained for each unit. Copies of electricity bills and other documents in support of income and expenses were called for and checked. Copies of salary bills and copies of accounts of the creditors were received and placed on record. He also observed that each item of income and expenditure was duly discussed with the assessee. Thus, the charge that AO completed the assessment without making any inquiry is not borne out from record. In fact, the assessment order further shows that notices under Section 143(2) were issued on 30th Oct., 2002, 19th Feb., 2003 and the questionnaire was issued on 4th March, 2003. The assessment was completed on 31st March, 2003. These facts further show that the assessment was not completed by the AO in undue haste and without examining the various aspects of the case. As regards the case of M/s Sant Stone Crusher (P) Ltd., referred to by the CIT in the show-cause notice, the assessee has placed a copy of the assessment order passed in that case at pp. 9 to 12 of the paper book. The assessment in that case was made by Jt. CIT, Special Range, Amritsar, on 10th Jan., 2000. There is no material placed on record to show that the order passed in this case was either on the record of the AO or was within the knowledge of AO at the time the assessment was completed. The very fact that some other AO of the range of Jt. CIT had made the addition by relying on the results of his investigation in another case does not mean that the AO was aware of the facts of that case or he was directed to complete the assessment on the lines as done in that case. Be that as it may, even the additions made in the case of M/s Sant Stone Crusher (P) Ltd. were deleted by the CIT(A) and the order of the CIT(A) was confirmed by the Tribunal vide order dt. 19th Sept., 2005 in ITA No. 185/Asr/2005 for the asst. yr. 1997-98. This case did not relate to the same assessment year. Moreover, the production in each case depends on its own facts, the quality and the condition of machinery used by the assessee and the quality of manpower deployed. There is no universal formula/standard that production in all the cases would be the same/constant and would be worth Rs. 12.83 on expenditure of rupee one on electricity. Thus, the subjective assessment of Jt. CIT in another case which was not upheld even by the first appellate authority could not be a yardstick for deciding the matter that the AO had completed the assessment without making any inquiry or investigation. It is also a fact that the assessee in her reply had stated before the CIT that electricity expenses for the earlier assessment year were low because one crusher had worked only for two months whereas in the assessment year under consideration, both crushers had worked far the whole year. This submission of the assessee has not been rejected by the CIT. Besides, in the reply, the assessee had mentioned the names of 13 other stone crushers engaged in the same business where the GP was shown at the rate varying from 17 per cent to 36.25 per cent. As against the same, the assessee had shown GP in respect of two crushers at 36.96 per cent and 37.76 per cent which was higher than other assessees. The fact that other assessees had shown even lower GP rate than shown by the assessee has not been denied by CIT in the impugned order. There is nothing in the impugned order to show as to how the learned CIT came to the conclusion that assessment was made without making proper enquiry. The issue whether the AO made an enquiry or not could not be decided on the basis of addition made. Even after making an enquiry, the addition may not be warranted by the facts. But, it does not mean that assessment was made without making proper investigation. Thus, the learned CIT was not justified in coming to the conclusion that assessment order passed by the AO was without making any inquiry and, therefore, was prejudicial to the interest of the Revenue. On the contrary, the facts placed on record do show that the AO had examined these aspects at the time of completing the assessment. The very fact that some other AO had made the addition in the case of some otherassessee does not warrant the conclusion that similar addition was called for in all such cases, moreso, when the assessee had pointed out several cases where lower results were shown. In the case of Malabar Industrial Co. Ltd. v. CIT (supra), the Hon’ble apex Court has held that if the AO has taken one of the courses permissible in law or where two views are possible and the ITO has taken one view with which the CIT does not agree, assessment order cannot be treated as erroneous or prejudicial to the interest of the Revenue unless the view taken by the AO is unsustainable in law. We find that the view taken by the AO is in conformity with the provisions of the Act and, therefore, such order cannot be considered as erroneous or prejudicial to the interest of the Revenue. In the case of Asstt. CIT v. Arvind Jewellers , the Hon’ble Gujarat High Court has held that the order passed under Section 263 could not be held as valid because the very fact that some other view was possible than taken by the AO, would not justify revision under Section 263. In the light of legal position discussed above, we find that in the present case, the twin conditions that assessment order should be erroneous as well as prejudicial to the interest of the Revenue are not satisfied. Therefore, the exercise of powers under Section 263 of the Act was not valid and legal.
10.5 In the’ light of these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the CIT was ‘not justified in exercising the power under Section 263 revising the assessment order. Accordingly, the order of the CIT is quashed. The relevant grounds of appeal of the assessee are allowed.
11. In the result, the appeal of the assessee is allowed.