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TMI Blog2008 (1) TMI 497X X X X Extracts X X X X X X X X Extracts X X X X ..... pleted for the period 1st April, 1996 to 24th Oct., 2002 under s. 158BC(c), dt. 31st Dec, 2004. The total undisclosed income was determined at Rs. 5,23,33,910. In this total undisclosed income, there was a component of a protective addition; however, the same is not the subject-matter of this appeal. The learned CIT has broadly given two reasons for the invocation of the provision of s. 263 of IT Act, as follows : "2. It is noticed that while completing the assessment, the AO has not considered the issue of investment required by the assessee to achieve substantial turnover of undisclosed transactions of sale and purchase of gold and jewellery items. The AO had also not applied the provisions of s. 40A(3) of the IT Act when the evidences found during the course of search indicated cash purchases of over Rs. 93.76 crores during the period 1999-2000 to 2002-03." As is evident, the first reason given was that the AO has not considered the investment made by the assessee towards undisclosed turnover so also corresponding purchases and second reason was non-application of the provisions of s. 40A{3) in respect of cash purchases of over Rs. 93.76 crores. A show-cause notice was issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Panas seized by the Department. The initial investment so determined by the learned CIT(A) considering the turnover of only first three years of the block assuming the average turnover of Rs. 75 lakhs is not commensurate with the investment required to achieve the substantial higher turnover to the tune of Rs. 38 crores per year in the subsequent period of the block starting from financial year 1999-2000 till the date of search. For the reason of failure to determine the 'initial investment by the AO particularly with reference to huge undisclosed turnover in financial years 1999-2000 onwards and inclusion thereof into the undisclosed income, the assessment order framed by the AO appears to be erroneous insofar as the same is prejudicial to the interests of Revenue." In respect of the other reason, the observation was that for the period beginning from 1999-2000 to 2002-03, there were purchases of Rs. 93.76 crores in cash, therefore, attracted the provisions of s. 40A(3) of IT Act to which 20 per cent disallowance was to be made, however, the same has escaped the assessment. Learned CIT has reproduced the submissions of the assessee, which were argued; to be dealt with in the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er based upon that audit report, then the said order of the AO should not have been treated an erroneous order as there was no error committed by the AO. For this proposition, he has cited the decision in the case of CIT v. Mehrotra Brothers [2004] 270 ITR 157 (MP), Saw Pipes Ltd. v. Addl. CIT [2005] 94 TTJ (Del) 1036, Dhruv N. Shah v. Dy. CIT [2004] 82 TTJ (Mumbai)(TM) 369 : [2004] 88 ITD 118 (Mumbai)(TM) and Sitaldas Narayandas, ITA No. 540/Pn/1997, Pune Bench. The next argument was about the possible view taken by the AO. The learned Authorised Representative has stated that a decision was taken by the AO in respect of the initial capital investment and on proper application of mind, he has arrived at a figure which was taxed in the hands of the assessee, therefore, it was wrong on the part of the learned CIT to hold that the decision of AO is erroneous. For this proposition, case laws relied were (1) CIT v. Mepco Industries Ltd. [2007] 207 CTR (Mad) 642; (2) CIT v. Sohana Woollen Mills [2007] 207 CTR (P H) 178; (3) Vilas J. Jankar v. Asstt. CIT, PCAJ Nov. 2005, p. 26; (4) Indian Shaving Products Ltd. v. Addl. CIT [2007] 108 TTJ (Jp) 1004. The learned Authorised Repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of IT Act and in this regard, Mr. Jain has argued that the auditor had already dealt with this question, so the AO had no option but to follow the said report of the special auditor. There was an argument from his side that on similar fact the learned CIT has directed the proceedings under s. 263 in one of the group case of Ranka Jewellers (P.) Ltd., hence the learned CIT should not be permitted to adopt pick and choose policy as the same is not permissible in the eyes of law. Learned Authorised Representative has concluded that even after the detailed submissions, through which, the appellant has established that there was no failure on the part of the AO but the learned CIT(A) has overlooked all those submissions without, assigning proper reasons. Finally, he had relied upon the decision in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 159 CTR (SC) 1 : [2000] 243 ITR 83 (SC) for the exercise of jurisdiction by the learned CIT deserves to be held as unjustified. 4. From the side of the Revenue, learned CIT-Departmental Representative Mr. Pradeep Sharma appeared and drew our attention on certain documents which were part of the compilation to establish that the AO as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed this finding. Similarly, in the next two years of the block period, i.e., for 1997-98 and 1998-99 in the absence of full details, the turnover has once again been estimated at Rs. 75 lacs and Rs. 1 crore respectively and profit worked out therefrom as per the AO and accepted by the appellant came to Rs. 8,22,000 and Rs. 14,24,000 respectively. Since for the first three years of the block period, the turnover and profit are estimated figures, in my considered opinion, it is deemed fit to take average of the turnover of the first three years and then to work out the seed capital by applying a reasonable percentage. The average of the turnover for the three years will work out to Rs. 75 lacs and at the rate of 12.5 per cent which is a reasonable percentage, the profit comes to Rs. 9,37,500. However, this figure is rounded off to Rs. 10,00,000. The undisclosed income will go up by Rs. 10 lacs as worked out." Learned Departmental Representative, Mr. Sharma has vehemently argued that it is evident from the concluding para that learned CIT(A) has only taken into consideration the first three years for the purpose of initial capital and arrived at the figure of Rs. 10,00,000. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned revisional order have been carefully examined. The factual position as emerged from the above discussion as also from the material placed before us is that the learned CIT(A) has indeed taken into account the first three years of the block period to assess the initial capital. The relevant paras of CIT(A) commenced from para 16 in which he has reproduced the request of enhancement made by the Revenue authority reproduced below : "While compiling the assessment, the profit in this case was computed on the basis of seized documents for certain period, the turnover was also estimated in view of seized documents for incomplete financial year. In asst. yr. 1997-98 also, the turnover was estimated as mentioned in the assessment order. The assessee had done purchase and sale transactions of gold and jewellery at large scale and hence for the first year of the block period, initial investment, to carry out the undisclosed business was required to be estimated and added to the undisclosed income. However, inadvertently, such estimation of initial investment remained to be made in this case. Since the appellate proceedings are in progress, it is requested to enhance the undisclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an error on the part of the AO due to which, the justifiable revenue was adversely effected making the said order an erroneous order. 5.2 We may like to clarify at this stage itself that none of the observation is going to effect in either way the question of the fixation of the quantum, its assessability and also the merits at the time of disposal by any of the Revenue or appellate authority. This judgment has a limited scope just revolving around to consider the assumption of jurisdiction under s. 263 of IT Act by learned CIT, nonetheless, facts and circumstances of the case, if any, related to the merits in respect of the quantum addition, being an independent issue, shall not be governed or effected as admittedly the same is set aside for a fresh adjudication, naturally free from outside control, by the AO without being influenced by such order passed on a different issue. 5.3 The scope of s. 263 is not a limited one, rather gives a significantly wide, supervisory powers to the learned CIT. It is enough for the CIT to invoke this section if he considers that the AO has passed an erroneous order and this conclusion, having regard to the language of s. 263, apparently, is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd available and considered thereupon that the order was erroneous, then he is empowered for revision of the impugned assessment order or he may direct the AO for fresh assessment after making the requisite enquires. 6.1 Reverting back to the question of merger, Expln. (c) to s. 263 is to be looked into wherein the words "considered" and "decided" are conjoined with a conjunction "and". It means it is not suffice that the matter should only be "considered" by CIT(A) but it is equally necessary that learned CIT(A) should "decide" the matter by giving his appropriate finding. Both the conditions, thus, have to be fulfilled. The decision of Hon'ble Supreme Court in the case of CIT v. Shri Arbuda Mills Ltd. is applicable in such a situation as in this appeal wherein it was held that powers of the CIT shall be deemed to have extended to matters not considered and decided in appeal. The Hon'ble Gujarat High Court in the case of CIT v. Panna Knitting Industries [2002] 173 CTR (Guj) 327 : [2002] 253 ITR 656 (Guj) have also given the finding on the question of merger and in that case as well, it was held that if part of the claim was considered by CIT(A) and rest of the part remained unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Authorised Representative which were on the issue of "lack of enquiry" whether committed by the AO however, all these cases were on peculiar facts of those precedent such as in the case of Mehrotra Brothers wherein the evidence were on record in respect of the genuineness of the cash creditors and once this factual finding was recorded, then it was held that the order under s. 263 was on vague grounds. Likewise in the case of Saw Pipes Ltd. the observation was that the CIT must revise an assessment order on the basis of the objective material and not merely on subjective satisfaction. In that case, the AO had issued a show-cause notice and a reply was furnished by making reference to the facts, hence the respected Bench has held that the contentions on which the CIT invoked s. 263 have already been part of the assessment proceedings, therefore, revision was unjustifiable. Likewise in the case of Dhruv N. Shah, the respected Co-ordinate Bench has held that assessee having offered a detailed explanation about non-chargeability of a particular receipt on an enquiry being raised by the AO and AO having allowed the claim by recording his satisfaction, then the CIT cannot hold s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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