2016 (7) TMI 820 - AT - Income Tax

Revision u/s 263 - whether the purchases relatable to the unreconciled sales have been recorded or not? - Held that - In the instant case, no discrepancies were noticed on the quantitative particulars filed by the assessee either by the ld AO or by the ld CIT. We find that the ld CIT had directed the ld AO to verify whether the purchases relatable to the unreconciled sales have been recorded or have not been recorded in the books already by the assessee. This only tantamount to ld CIT trying to direct the ld AO to make fishing and roving enquiry in this aspect to justify his suspicion. We find that the ld CIT is not sure about the aspect as to whether the order of the ld AO is erroneous or not. Hence it could be safely concluded that the ld CIT had not given any categorical finding in his order that the order of the ld AO is erroneous. Hence the basic assumption of revisionary jurisdiction u/s 263 of the Act fails The purchases, sales and manufacturing expenses disclosed by the assessee are not disturbed by the revenue. Hence it could be safely concluded that the alleged unreconciled sales could have emanated only out of alleged undisclosed purchases. In such an event, the only recourse to tax the income is by applying the gross profit percentage thereon, which is what has been ultimately done by the ld AO in the assessment by making an addition of ₹ 89,779/- . Hence the order passed by the ld AO cannot be considered as erroneous in nature and prejudicial to the interest of the revenue. In fact the order in the given set of facts and circumstances could only be viewed as prejudicial to the interests of the assessee and not for the revenue. In any case, we are in complete agreement with the arguments advanced by the ld AR that the profit for the whole year has to be determined by the ld AO and by the ld CIT. We find that the ld AO had only arrived at an arithmetical figure of closing stock as on 25.1.2008 as a balancing figure at ₹ 15,08,380/-. It is pertinent to note that the said figure would automatically become the opening stock as on 26.1.2008 thereby making it revenue neutral. Ultimately no discrepancies were noticed by the ld AO and by the ld CIT in the final audited accounts of the assessee and the books of accounts produced by the assessee from where the profits of the assessee could be reasonably deduced therefrom. The books of accounts and the audited figures of the assessee were not rejected by the ld AO or by the ld CIT. Under these circumstances, the order passed by the ld AO cannot be construed as prejudicial to the interest of the revenue. - Decided in favour of assessee

Issues Involved:
1. Justification of invoking revisionary jurisdiction under Section 263 of the Income Tax Act.
2. Validity of the assessment order passed by the Assessing Officer (AO).
3. Adequacy of the enquiry conducted by the AO.
4. Determination of whether the assessment order was erroneous and prejudicial to the interest of the revenue.

Issue-wise Detailed Analysis:

1. Justification of Invoking Revisionary Jurisdiction under Section 263 of the Income Tax Act:
The core issue in this appeal was whether the Commissioner of Income Tax (CIT) was justified in invoking revisionary jurisdiction under Section 263 of the Income Tax Act. The CIT argued that the AO should have added the entire sum of ?7,75,963/- towards undisclosed sales rather than just the gross profit thereon. The CIT directed the AO to verify whether the relatable purchases had been debited in the books of accounts and, if so, to add the entire sales proceeds of ?7,75,963/-.

2. Validity of the Assessment Order Passed by the AO:
The AO had conducted a survey under Section 133A of the Act and found discrepancies in the stock valuation. The AO prepared a recasted trading account up to the date of the survey and arrived at a closing stock figure of ?15,08,380/- as a balancing figure. The AO concluded that the difference of ?7,75,963/- between the closing stock and the stock recorded during the survey represented sales made outside the books. The AO applied a gross profit rate of 11.57% on this difference and made an addition of ?89,779/-, which the assessee accepted.

3. Adequacy of the Enquiry Conducted by the AO:
The assessee argued that the AO had conducted a thorough enquiry by preparing a trading account up to the date of the survey and had arrived at the closing stock figure after applying the gross profit rate. The assessee contended that the AO's assumption that the business was conducted in a controlled environment with fixed purchase and selling prices was factually incorrect. The AO had examined the books of accounts, which were not rejected, and no discrepancies were found in the quantitative particulars filed by the assessee.

4. Determination of Whether the Assessment Order was Erroneous and Prejudicial to the Interest of the Revenue:
The tribunal held that the CIT had not provided any categorical finding that the AO's order was erroneous. The CIT's direction to the AO to verify the relatable purchases was seen as an attempt to conduct a fishing and roving enquiry. The tribunal emphasized that the condition precedent for invoking revisionary jurisdiction under Section 263 is that the order should be both erroneous and prejudicial to the interests of the revenue. The tribunal found that the AO had not found any discrepancies in the books of accounts, and the survey team had not found any incriminating materials. The tribunal concluded that the alleged unreconciled sales could have emanated only from undisclosed purchases, and the AO's application of the gross profit percentage was appropriate. The tribunal also noted that the closing stock figure arrived at by the AO was hypothetical and would become the opening stock for the next period, making it revenue neutral.

Conclusion:
The tribunal quashed the order passed under Section 263 of the Act, holding that the AO's order was neither erroneous nor prejudicial to the interests of the revenue. The tribunal emphasized that the twin conditions for invoking revisionary jurisdiction were not satisfied, and the CIT's direction for further enquiry was unjustified. The appeal of the assessee was allowed, and the tribunal's order was pronounced in the open court on 08.07.2016.

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