Judgment:
1. This appeal by the assessee has been filed against the order dt.
21st Feb., 2005 of the CIT passed under Section 263.
2. Briefly stated, the facts of the case are that the assessee, Shri Bhanwari Lal Mohan Lal filed return of income for the asst. yr. 2000-01 on 31st Oct., 2000, in the status of individual, showing total income of Rs. 1,88,879. The assessment was completed on a total income of Rs. 2,39,383 under Section 143(3), on 28th March, 2003. From the perusal of the assessment order, the CIT formed an opinion that assessment order was erroneous insofar as it was prejudicial to the interest of the Revenue. The CIT heard the assessee for the proposed setting aside/revising order under Section 263. In the show-cause notice issued under Section 263, on 21st Feb., 2005, the CIT gave the following reasons for his proposed revision: (1) The details of purchase and sales effected on 10th March, 2003 were neither certified by the auditor in his audited report nor such trading account had been filed during the course of survey.
(2) Detailed copy of purchase and sales exceeding Rs. 5,00,000 showed the details of purchases/sales but do not give the description of goods, date of purchase, price rate, weight or quality, mode of payment and receipts. The AO called for the same vide letter dt. 10th March, 2003. The details of the debtors from whom interest was not charged and the creditors to whom the interest was not paid was required by the AO vide notice under Section 142(1) dt. 1st Oct., 2002, but these details were not filed. Therefore, the claim of the interest had not been verified properly by the AO. (3) The creditors were required to attend personally but none of them was produced which resulted in non-verification of the identity of the creditor, genuineness of the deposit and the source of deposit. The assessee gave a detailed reply, which ran in 9 pages and was dt. 21st Feb., 2005 and ultimately submitted that the assessment order is neither erroneous nor prejudicial to the interest of the Revenue and, therefore, prayed for the dropping proceedings under Section 263.
3. We have heard the rival submissions and perused the evidence available on record.
4. Before we come to the factual facts of this case, to ascertain as to whether the requirements of Section 263 of the Act are fulfilled or not, we would like to discuss in bird's eye view the relevant scheme of the revisionary powers of the CIT. Under the scheme of the Act the CIT has revisionary jurisdiction under Sections 263 and 264. We are only concerned with the revision done under Section 263 of the Act, to adjudicate the subject under appeal. Under Section 263 of Act, the CIT has power of revision of the erroneous assessment order which is also prejudicial to the Revenue, because there is no provision in the IT Act whereunder the Department can appeal to the learned CIT(A) against any order passed by the AO. Therefore, this section has been enacted to arm the CIT with the power of revising any order of the AO when the order is erroneous and the error has resulted into a prejudice to the interest of the Revenue. Under this section the CIT may call for and examine the records of any proceedings under the Act. For this purpose he does not need to show any reason, as it is a part of his administrative control. Here a question may arise as to what it means by 'record'. The Hon'ble apex Court in the case of South India Steel Rolling Mills v. CIT has categorically held that the CIT can take into consideration records as is available up to the date of his assuming jurisdiction under Section 263. By the amendment of Expln. (a) to Section 263(1) w.e.f. 1st June, 1988 it is now settled that the CIT can take into consideration all the records relating to any proceeding under the Act available at the time of examination by him. After perusing the records, the CIT may, prima facie, hold that any order passed by the AO is erroneous insofar as it is prejudicial to the interest of the Revenue. In the recent decision, in the case of Malabar Industrial Company Ltd. v. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC), the Hon'ble apex Court has observed that a bare reading of Section 263(1) makes it clear that the prerequisite conditions to exercise revisionary jurisdiction by the CIT, suo motu, is that the order of the AO is erroneous insofar as it is prejudicial to the interest of the Revenue. Meaning thereby, the CIT has to be satisfied with twin conditions, namely, the order of the AO sought to be revised is erroneous and is also prejudicial to the interest of the Revenue. In case one of the above conditions is absent, say, if the order of the AO is erroneous but is not prejudicial to the interest of the Revenue or vice versa, recourse to Section 263 of the Act cannot be taken. The words 'prejudicial to the interest of the Revenue', have not been defined but legally it is well settled that they only mean that order should not have been passed in accordance with the provisions of law, in consequence thereof the lawful revenue, due to the state, has not been realised or cannot be realised. Likewise, the expression "erroneous" has not been defined in the Act. But its plain meaning is that the term 'erroneous' involves error or deviation from law.
Therefore, an assessment order made by complying the provision of law cannot be branded as erroneous by the CIT simply because according to him the same should have been passed or framed in a different manner.
5. In the case of Malabar Industrial Co. Ltd. v. CIT (supra), the Hon'ble Supreme Court had an opportunity to deal with the issue and the Court observed that the provisions of Section 263 could not be invoked to correct each and every type of mistake or error committed by the AO.It is only when an error is erroneous that the section would be attracted. An incorrect assumption of facts or an incorrect application of law would definitely satisfy the requirement of the order being erroneous. In the same category falls the order passed without applying principle of natural justice or without application of mind. To assume jurisdiction under Section 263, the learned CIT has to satisfy, himself, objectively, that the order in question is prejudicial to the interest of the Revenue being erroneous. This satisfaction has to be based on evidences available on record. The Hon'ble Allahabad High Court in the case of CIT v. Bhagat Shyam & Co.
quashed the revisionary proceedings because the learned CIT had initiated the proceedings under Section 263 without properly considering all the facts and the circumstances of the case. Likewise, the Hon'ble Calcutta High Court in the case of Jeevan Lal v. Addl. CIT also quashed the order of the CIT by holding that the revision was made without exercising his own discretion and judgment and acted only on the suggestion of the audit Department. Thus, it is an established law that the CIT has to satisfy himself with the above stated twin conditions before assuming jurisdiction under Section 263.
However, the CIT can take into consideration any material, which has come on record during the course of revision even if it was not available at the time of framing of the assessment order. The Hon'ble Supreme Court in the case of CIT v. Manjunathesware Packing Products & Camphor Works (1997) 143 CTR (SC) 409 : (1998) 231 ITR 53 (SC) has said so. This is also clear from the Expln. (b) to Section 263(1) of the Act.
6. A fine distinction has to be drawn between the revisionary powers as well as powers of reassessment under Section 147 of the Act. The revisionary powers cannot be exercised in relation to any assessment year when some income has escaped assessment. The CIT is not permitted to assume jurisdiction under Section 147 under the guise of revisionary powers. In this connection, reference can be made to the decision of the Hon'ble Karnataka High Court in the case of H. Kenche Gowda v.State of Karnataka (1989) 75 CTR (Kar) 85 : (1988) 174 ITR 389 (Kar).
The Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) has also held that when the AO opted for one between the two courses permitted in law and it has resulted in loss of revenue, as two views are possible and the AO has taken one view to which the CIT does not agree; it cannot be treated as erroneous or prejudicial to the interest of the Revenue unless the view taken by the AO is unsustainable in law. According to the decision of the Hon'ble High Court in the case of Garden Silk Mills Ltd. v. CIT (1996) 135 CTR (Guj) 399 : (1996) 221 ITR 81 (Guj), if the AO passed an order in consonance with the law laid down by the binding decision of the Hon'ble jurisdictional High Court against which the Department contemplated to file special leave petition or the same may have already been filed but without any result, it cannot be said that the AO's order is erroneous so as to entitle the CIT to exercise his revisionary powers.
7. After the satisfaction of the CIT, as stated above, an opportunity of personal hearing has to be given to the assessee. The CIT also must serve upon the assessee, a show cause notice, in writing, stating therein as to how the order of the .AO is erroneous insofar as it is prejudicial to the interest of the Revenue and proposed action to be taken by him. From the language of Section 263 it is imperative on the part of the CIT to point out the exact error in the order in which he proposes to revise, so that the assessee could have adequate opportunity of rebuttal. After hearing the assessee, a speaking order has to be passed in which the relevant error and consequent prejudice must be detailed. This is what exactly is said by the Hon'ble Supreme Court in the case of Dwarka Nath v. ITO .
8. The CIT can enhance, modify, and set aside erroneous order passed by the AO. But in case the order of the assessment is carried into appeal before the CIT(A), the jurisdiction of the CIT shall be limited only to the matter which was not the subject-matter of decision by the first appellate authority. The simple reason for the above proposition being that the order of the AO does not survive and becomes the order of the first appellate authority with relation to the issues taken in the first appeal. But with regard to such matters as has not been considered and decided in the first appeal, according to Clause (c) of the newly substituted Explanation to Section 263(1) w.e.f. 1st June, 1988, the jurisdictional powers of the CIT under Section 263 of the Act shall be deemed to have extended to such matters. The revisionary order can be passed within the prescribed time limit.
9. Having discussed the legal position, we now revert to the controversy in hand. After hearing the assessee, the CIT passed order under Section 263 dt. 21st Feb., 2005 after considering all the material available on record. In the light of the submission made on behalf of the assessee, he set aside the assessment order in question to be decided afresh after providing proper opportunity of being heard to the assessee. The assessee is aggrieved against this order and has filed this appeal.
10. We have heard the rival submissions and perused the evidence on record.
11. In the given facts and circumstances of this case it has been vehemently contended by learned Authorised Representative, Shri S.D.Saraf that there is no error in the order of the AO insofar as it is prejudicial to the interest of the Revenue. According to learned Authorised Representative, the assessment order has been passed in consonance with the legal procedure and each and every factual detail had been examined very finely by the learned AO during assessment proceedings. On the other hand, the learned Departmental Representative, Shri K.C. Solanki has controverted the above contention of the learned Authorised Representative and has reiterated the reasonings given by the CIT in the impugned order.
12. In this case, undeniably, the assessee had filed return of income for asst. yr. 2000-01 along with audit report in Form No. 3CD and statements of trading and P&L a/c. Besides the above, the assessee also filed balance sheet and other details. Subsequently, in respect of query dt. 23rd Sept., 2002 (copy placed at page Nos. 31-32 of the paper book), the assessee also furnished the required information/explanation, copies of accounts and other evidences. The AO must have examined all the cash credits, 'arath' account, bank statement and every aspect of income and expenditure before passing the assessment order. Now, we will take up each and every ground taken in the show-cause notice issued under Section 263 to decide as to whether revisionary jurisdiction can be assumed by the CIT in the given facts and circumstance of this case or not.
13. From the available record, it is evident that the assessee had filed date-wise copy of 'arath account' in which arath receipts amounting to Rs. 6,90,578 was -declared. The copy of arath account was also filed even before the CIT (copy of which is placed at page No. 12 of the paper book). The AO seems to have verified the purchases and sales of goods on which the assessee earned 'arath'. The assessee purchased agricultural produce on behalf of the parties and such goods were either dispatched out of station or stocked by the party and sold at a later date. Goods were purchased as directed, from the market and journal entries were passed. This is reflected from the specimen entries, which are placed at pp. 81-82 of the paper book. The sales and purchases made by assessee considered as sales for the purpose of monetary limit of Rs. 40,00,000 in respect of obtaining audit report under Section 44AB and also for sales-tax purposes. But such sales/purchases are not in respect of assessee's own trading and, therefore, not included in the trading account. From the records it is revealed that the AO has fully verified the purchases/sales of the goods, on which the assessee had earned 'arath'. We are not convinced that the accounts of the assessee were not correct and complete. The AO had desired from the assessee to file the copies of accounts of parties who have made purchases from the assessee or sold goods to the assessee for amounts exceeding Rs. 5,00,000. The assessee provided requisite copies of such accounts. This act is also evident from the reply of the assessee dt. 12th Nov., 2002. The purchases' and sales made by the assessee are fully vouched along with quantitative tally; and the payments were made through account payee cheques. The AO examined the trading accounts and the accounts of the parties who had dealt with the assessee as stated above. Therefore, we are unable to understand as to how the CIT concluded that the AO had not applied his mind in arriving at the impugned conclusion. In view of the; above detailed legal discussion, we feel that this is not a valid ground for assumption of jurisdiction under Section 263.
14. The next ground of the impugned order relates to interest receipts from the assessment order. It is evident that the assessee had furnished complete details and copies thereof have been placed at pp.
20-30 of the assessee's paper book. The assessee had also furnished other details, in reply to the query letter dt. 12th Nov., 2002 and the AO had examined the receipts and payments of interest from and to the different parties.
15. After going through the two examples given by the CIT relating to accounts of Shri Mukesh Kumar in whose account, the assessee has claimed the payment of interest of Rs. 56,000 but according to CIT when the assessee has been maintaining the accounts on mercantile basis, the assessee has first to apply interest on the credit amount on the date of purchase of goods and has to charge interest on the debit balance upto the date when the amount has not come back from there. The CIT concluded that the assessee had claimed excess interest of Rs. 38,052.
16. The reply of the learned Authorised Representative that the interest was credited to the account of Shri Mukesh Kumar on his opening credit balance of Rs. 3,09,504 as on 1st April, 1999 and that interest was not chargeable. Only transactions of purchase and sale of Rs. 4,45,810 were debited and credited to his account, as the party denied having made such purchase and sale. In our opinion, the CIT has tried to calculate the receipts and payments of interest as per his requirements and has ignored the method followed by the assessee.
Likewise, in the case of Vijay Traders, on similar reasoning, the CIT concluded that the assessee had to charge interest of Rs. 31,912 and instead he had paid interest of Rs. 35,133. Again, the explanation of the assessee is that, in the account of Vijay Traders, interest was credited on their deposit of Rs. 10,00,000 and interest was not payable on the debit and credit of Rs. 20,63,750. Regarding purchase and sale of goods, the assessee had filed confirmation and copies of account of the parties who have confirmed the receipt of interest from the assessee as shown by him. In these circumstances, it could not be stated that the AO has not applied his mind. More than one view may be possible on a particular issue but the CIT cannot substitute his view unless the twin conditions of Section 263 are fulfilled. As mentioned in the foregoing paragraphs, this does not amount to an error.
Therefore, this ground also taken by the CIT to revise the assessment order, does not fall under purview of Section 263 of the Act.
17. The next ground in respect of which the assessment order has been revised relates to cash credits. The assessee had filed the list and copies of accounts of the creditors. Most of the credits were old balances and the new deposits from regular traders who were assessed to income-tax and their confirmation and copies of accounts were filed. In the cases of some of the creditors, the AO had directed the assessee to file copies of account for this year and the same were filed (paper book 65-67). There was only one non-business creditor Shri Hari Ram who had deposited Rs. 5,00,000 with the assessee on 6th March, 2000 by account payee cheque of Rs. 5,63,039 from the joint account No. 2572 with SBBJ, Raisingh Nagar. The depositor had died on 16th Nov., 2002 and thus, could not be produced. But his death certificate was filed. A copy of the joint bank account was also filed. This depositor had deposited credit balance in his account on the date of issue of cheque in favour of the assessee. He had a credit balance of Rs. 8,70,269, copy of the bank account at pp. 54-57. The learned CIT is of the view that since the identity of Shri Hari Ram was not established and the cash creditors were not produced as required vide order dt. 2nd Feb., 2002, the AO has not applied his mind. But we are sorry to say that Shri Hari Ram, the creditor had already died and all the relevant evidence to prove his creditworthiness were submitted. With regard to other creditors, who were classified in three categories, by the entries and the full particulars of each of them had also been given, most of the creditors being old creditors/trading creditors. Therefore, it cannot be stated that the AO had not applied his mind. The assessee had filed before the AO confirmed copies of account from the creditors showing the deposits made by them. They were regular accounts and they made deposits by way of account payee cheques. Copies of all the documents are placed at pp. 45 to 61 of the paper book. When the creditors were verifiable from their accounts, it could not be stated that the identity, their creditworthiness, and genuineness of the transactions is not proved by their personal attendance. The only known assessee creditor is Shri Hari Ram. In relation to him, copy of account (p. 5 paper book), photostat of account-payee cheque (paper book 51), affidavits of the depositor dt. 17th Nov., 2001 (paper book 53), photostat of joint account of the depositor showing the credit balance upto Rs. 5,00,000 and even after the encashment of cheque (paper book.
54-57) and photostat of death certificate (paper book 58) are such over-whelming pieces of evidence which speak clearly in support of the assessee's claim. On this ground also there seems to be no error insofar as it is prejudicial to the interest of the assessee.
18. The assessee was purchasing goods on behalf of the parties and also sending goods to them after purchasing from his own account. The transaction of sale and purchase of wheat from M/s Vijay Trading from assessees own wheat account and appears in the copy of arath account of 1983-84. The assessee had purchased 110 bales of cotton for Rs. 7,12,280 from Oriental Cotton Traders, for and on behalf of the arathies and the same did not appear in the trading account of the assessee. The assessee had also filed datewise copies of arath account, which revealed datewise receipt of arath. The observation of the CIT that the assessee received arath of Rs. 6,90,738 while net income is Rs. 1,31,085 which was neither reflected in the audit report nor was enquired into by the AO, is not correct. The audit report contained P&L a/c copy of which is placed at p. 24 of the paper book and it shows total receipt of Rs. 9,30,58 (sic) from arath and GP in dealing in these commodities. Against this gross income, the assessee had shown the debit of Rs. 4,80,000 towards interest and Rs. 3,18,489 towards expenses like salary, telephone expenses, vehicle expenses and depreciation etc. Therefore, P&L a/c shows the net income of Rs. 1,31,085. The audit report contained all these details duly examined by the AO and, therefore, did not find any discrepancy therein.
In view of our foregoing discussions, we come to conclusion that the ground taken by the learned CIT for revising the assessment order are not erroneous insofar as these are prejudicial to the interests of the Revenue.