2015 (2) TMI 630 - AT - Income Tax

Revision u/s 263 - assessee has not declared proper income because despite a surrender of ₹ 2.15 crores the income returned was only ₹ 1,35,52,050 - fall in GP rate - Held that - As during the survey, inventory was found to be excessive to the extent of ₹ 66,22,665 against which the assessee surrendered a sum of ₹ 70 lakhs. Physical cash was found at ₹ 4,63,570 whereas as per the books the cash was ₹ 75,802 and the assessee surrendered a sum of ₹ 4 lakhs. Lastly, a slip was found according to which the assessee has invested a sum of ₹ 1,31,00,000 in the construction of building and this amount was also surrendered. Therefore, clearly no unrecorded purchases or sales or any other discrepancy was found. The assessee is maintaining proper quantitative details. Further, the reason for fall in gross profit rate was explained. Summary of variation of rates shows that rates of certain items have all of a sudden increased in assessment year 2007-08, i.e., why there was verification in the gross profit rate. Otherwise also from the gross profit chart for the last three years it becomes clear that gross profit was 11.76 per cent. in assessment year 2006-07 which increased in 2007-08 to 17.23 per cent. and again has gone back to 11.49 per cent. in the assessment year 2008-09. These factors have to be seen further in the light of the copy of the trading account which is available at page 151 which shows that this gross profit rate and copy of profit and loss accoun where the net result is loss and loss on February 28, 2008, was ₹ 71,25,651. Obviously, this means that there were some extra expenses during the year and the assessee has duly filed the details of expenses before the Assessing Officer as well as the Commissioner but neither the Assessing Officer nor the learned Commissioner has pointed out that such expenses have been inflated or are not correct. Therefore, in the light of these facts it cannot be said that assessment order is erroneous and prejudicial to the interests of the Revenue. The learned Commissioner has discussed many other case law in respect of rejection of books of account and we have perused the same but could not find even a single case law laying down a principle that books should compulsorily be rejected wherever a survey is conducted. Otherwise also, if this principle is accepted then there would not be any meaning attached to the concept of surrender because in any case books have to be rejected. - Decided in favour of assessee.

Issues Involved:
1. Jurisdiction and issuance of notice under section 263 of the Income-tax Act, 1961.
2. Assessment framed by the Assessing Officer being erroneous and prejudicial to the interests of the Revenue.
3. Proper maintenance and verification of books of account by the assessee.
4. Rejection of books of account due to lack of specific defects.
5. Addition of Rs. 1,83,80,208 to the income by applying a gross profit rate of 17.23% based on the previous assessment year.

Issue-wise Detailed Analysis:

1. Jurisdiction and Issuance of Notice under Section 263 of the Income-tax Act, 1961:
The assessee contended that the Commissioner of Income-tax-III, Ludhiana erred in assuming jurisdiction and issuing notice under section 263. The Tribunal noted that the show-cause notice issued by the Commissioner did not mention the issue of rejection of books of account. It was established that an order found to be erroneous and prejudicial to the interests of the Revenue cannot be revised on grounds not specified in the show-cause notice. The Tribunal cited decisions such as CIT v. Contimeters Electricals P. Ltd. and Maxpak Investment Ltd. v. Asst. CIT to support this view.

2. Assessment Framed by the Assessing Officer Being Erroneous and Prejudicial to the Interests of the Revenue:
The Commissioner argued that the assessment order was erroneous and prejudicial to the Revenue because the Assessing Officer did not make proper verification despite the discrepancies found during the survey. The Tribunal highlighted that the Commissioner must point out specific errors in the assessment order to prove it erroneous and prejudicial to the interests of the Revenue. General observations without pinpointing specific defects were deemed insufficient.

3. Proper Maintenance and Verification of Books of Account by the Assessee:
The assessee maintained that proper books of account were audited and thoroughly checked by the Assessing Officer, who did not find any defects. The Tribunal observed that the Commissioner did not point out any specific errors in the books of account or the documents provided. The Tribunal emphasized that without identifying specific defects, it cannot be alleged that the Assessing Officer failed to apply her mind.

4. Rejection of Books of Account Due to Lack of Specific Defects:
The Commissioner rejected the books of account based on the discrepancies found during the survey and the surrender made by the assessee. However, the Tribunal noted that the show-cause notice did not mention the intention to reject the books of account. The Tribunal cited various decisions, including CIT v. Gabriel India Ltd., to assert that an order cannot be termed erroneous simply because the Commissioner disagrees with the Assessing Officer's conclusions without pointing out specific defects.

5. Addition of Rs. 1,83,80,208 to the Income by Applying a Gross Profit Rate of 17.23% Based on the Previous Assessment Year:
The Commissioner applied a gross profit rate of 17.23% from the previous assessment year, resulting in an addition of Rs. 1,83,80,208 to the income. The Tribunal found that the Commissioner did not provide evidence of volatility in the market or specific defects in the books of account. The Tribunal emphasized that the Assessing Officer had examined the details and found no defects, and the Commissioner failed to demonstrate any errors in the assessment order.

Conclusion:
The Tribunal quashed the order passed by the Commissioner under section 263, concluding that the assessment order was not erroneous and prejudicial to the interests of the Revenue. The appeal of the assessee was allowed, with the Tribunal emphasizing the need for specific defects to be identified and addressed in the show-cause notice and the assessment order.

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