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TMI Blog2014 (12) TMI 434X X X X Extracts X X X X X X X X Extracts X X X X ..... orised to reject the cost of construction shown by the assessee in his books of account - in the absence of rejection of books of account by the AO, allow the appeal of the assessee and delete the addition made by the AO on the basis of departmental valuation report. Relying upon DIRECTOR OF INCOME TAX vs. JYOTI FOUNDATION [2013 (7) TMI 483 - DELHI HIGH COURT] wherein it has been held that an order cannot be termed as erroneous unless it is not in accordance with law - in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue - It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste - an order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realized - when exercise of statutory power is dependent upon the existence of certain objective facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fically accepting the audited books of account after appropriate inquiry. 2. In the facts and circumstance of the case, the Commissioner of Income-tax is not justified in holding that the order of the Assessing Officer was erroneous and prejudicial to the interests of the Revenue. 3 The Commissioner of Income-tax had failed to appreciate that the view taken by the Assessing Officer in the order under revision was sustainable in law and a plausible view under the law and thus, the said order cannot be treated as erroneous and prejudicial to the interest of Revenue. 4. In the facts and circumstance of the case, the Learned Commissioner of Income Tax has no jurisdiction and is not entitled under section 263 of the Income Tax Act 1961, to revise as erroneous or prejudicial to the interest of Revenue, the order u/s 143(3) dated 17/12/2012 passed after inquiry, without the Learned Commissioner of Income Tax himself embarking on any further inquiry. 5 The impugned order of the Learned Commissioner of Income Tax is opposed to law and facts of the case. 3. The short facts of the case are that the assessee is a scrap dealer. During the assessment proceeding the assessee was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2432385.60 September 0 5166400 4099280 3689352 1477048 October 1477048 9315126 2878097 2590287.30 8201886.70 November 8201886.70 5231632 399689 359720.10 13073798.60 December 13073798.60 3833558 2300316 2070284.40 14837072.20 January 14837072.20 4079419 2109267 1898340.30 17018150.90 February 17018150.90 2249070 1760310 1584279 17682941.90 March 17682941.90 2839307 5678332 5110498.80 15411750.10 After hearing the assessee the Commissioner was of the view that the order passed by the assessee is prejudicial to the interest of revenue, therefore, he has restored the assessment for 2009-10 passed by AO and restore to the issue AO for passing the fresh order after examining the relevant facts and give adequate opportunity of assessee being heard. The AO was directed to verify the stock register, books of account and he was directed to pass a fresh order. Against this order the assessee has come up before T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed GP of 10% for all the months is itself wrong. Therefore the CIT was wrong in adopting a fixed percentage for all the 12 months, while coming to a fallacious finding that the order u/s 143(3) was erroneous, for the AO's not having made estimate of monthly stocks by working backwards on the basis of a fixed GP of 10%. The AR also submitted that it is on record that actual physical stock taken on 20/2/2009 was only ₹ 2750220/-, which was the actual stock, and the CIT himself was in error for estimating the stock in the same month of February as ₹ 17682942/-. Similarly as on 31/3/2009 the physical stock as per list of inventory with the additional stock was only ₹ 27,76,600/- while the CIT estimated the same at ₹ 1,54,11,750/-. He submitted that when actual physical stock taken by the Department during survey in February was available, there is no scope for ignoring the actual stock and estimating stock to a astronomical figure, for coming to a conclusion that the assessment order is erroneous or prejudicial to the interest of revenue. The AR took us through the order of the CIT and submitted that the only point on the basis of which the CIT had he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of lack of inquiry by the AO. He submitted that the necessary inquiry was duly carried out by the AO by obtaining the details of purchases and sales. However the AO did not resort to estimate because it is not permissible to reject the books on the basis of estimate. He relied on following case laws: 1 ITO v/s Dr V K Bansal 2 SOT 844 CHD 2 Goodluck Automobiles Pvt ltd v/s ACIT 254 CTR 1 GUJ 3 ACIT v/s Intermedia Cable Communication pvt ltd 145 TTJ 476 Pune The AR submitted that estimate cannot form the basis of rejection of books, thus it is not possible for the CIT to consider the AO's order as erroneous or prejudicial on this basis, as well. He relied on the following case laws: 1 Associated Petroleum Corporation v/s DCIT 44 SOT 45 AHD 2 ACIT v/s Shiv Agrevo Ltd 123 TTJ 416 JP 3 Malani Ranjivan Jagannath v/s ACIT 316 ITR 120 RAJ The AR submitted that, in a hypothetical case, if the AO himself, after specifically examining and accepting the books of account and without rejecting the same, had resorted to estimating closing stock; this higher authority would have found fault with the AO's action; as has been done in plethora of cases. Hence th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emendously and there is no scope for adopting a fixed percentage of GP for estimation. 5. On the other hand learned DR relied upon the order of Commissioner. 6. We have carefully considered the rival submission and perused the material placed before us along with case laws and order of CIT U/s. 263. We are of the view that in order to invoking the provisions of Section 263. Both the conditions that order passed by AO is erroneous and it is prejudice to the interest of revenue must be satisfied. If one of them is absent, it may be held that provisions of Section 263 were not lawfully invoked. The term erroneous has not been defined in IT Act but it is well settled that each and every type of mistake for error committed by AO cannot be said to be erroneous if there is incorrect assumption of fact or an incorrect application of law in the order by AO. If the AO after making the inquiry an examining the record taken one of the possible view, it cannot be said that the order passed by AO was erroneous, the record of evidence produced before us. During the course of hearing it clearly reflect that inquiry in the impugned case has been carried out by AO on both relating issues of G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has produced books of account consisting of cash book, ledger etc. which were test checked. The information/evidence regarding the various cash credits introduced by the assessee as well as the details of expenditure debited in P L a/c furnished by the assessee have been examined. The AO did not reject the books of account of the assessee but made addition merely by relying on the Departmental valuation report which only gives the estimated cost of construction and not the actual cost of construction incurred by the assessee. In absence of rejection of books of account, in our opinion, the AO is not authorised to reject the cost of construction shown by the assessee in his books of account. We, therefore, in the absence of rejection of books of account by the AO, allow the appeal of the assessee and delete the addition made by the AO on the basis of departmental valuation report. 6.4. In the case of COMMISSIONER OF INCOME TAX vs. UTKAL ALLOYS LTD. (2009) 319 ITR 339 wherein it has held that admittedly, in course of search, the search party did not find any incriminating document or duplicate books of account involving the respondent-assessee in any clandestine business activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial principles. Accounts regularly maintained in course of business have to be relied upon unless there are strong and sufficient reasons to disbelieve them. Needless to say that discrepancy worked out on the basis of estimation of quantity and value of stock is not accurate, correct and scientific. Therefore, in absence of any defect found out in the books of account, maintained in regular course of business, no addition can be made to the income disclosed by the assessee in its return of income on the basis of discrepancy worked out on estimation of stock. 6.7. In YOG RAJ SONI vs. ASSISTANT COMMISSIONER OF INCOME TAX (2007) 108 TTJ (Del) 912 it is held that we have considered the rival contentions carefully, gone through the materials placed on record and the orders of the authorities below. We have also deliberated on the case law cited by the AO and CIT(A) in their respective orders, as well as referred to by the learned Authorised Representative and Departmental Representative with respect to rejection of book results and estimation of profit on contract receipts. From the record, we found that assessee was engaged in business of construction since 1984, mainly undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of bills, wherein such materials are used. Thus, the difference found out by the AO with respect to contract amount on which TDS was deducted and the contract amount disclosed in the audited books of account were basically attributable to such secured advance being made by the department. As such advances were not actual payments for the work done, but were merely advances to be adjusted against the final bills, no TDS was deducted on such advances. These advances, when settled and adjusted against the final bills, the same were subjected to TDS. Therefore, the AO found difference and without reconciling the same with respect to the secured advance adjusted at the time of the final payment, he worked out difference at ₹ 1,42,990. However, the CIT(A) called reconciliation statement and confirmation was furnished by the Government department with regard to release of such secured advance whereon no TDS was deducted. Therefore, the CIT(A) accepted the assessee's contention and deleted the addition made by the AO on account of such difference. During the course of scrutiny assessment under Section 143(3), the assessee produced books of account and which were also examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, we found that even as per Government manuals, the percentage of labour expenses as a percentage of total value of contract, in respect of civil contract, is 25 per cent, whereas in the instant case, the expenses claimed under labour charges work out to 20.67 per cent (total contract receipts ₹ 364.54 lakhs, labour charges ₹ 75.37 lakhs). Thus, it is not a case of excess payment of labour charges to reduce the profit, but, on the contrary, as against the standard norms of 25 per cent labour charges amounting to ₹ 91.13 lakhs, the assessee has actually incurred only ₹ 75.37 lakhs, which works out to be 20.67 per cent. We had also carefully gone through the details of monthly expenses incurred on labour, materials and other expenses, copy of labour charges account, copy of staff salary rolls from October, 1997 to March, 1998, copy of cash book from February, 1998 to March, 1998, as placed in the paper book page Nos. 23, 29 to 54, and do not find any mistake therein. After production of books of account and submission of explanation by the assessee, if any, asked for, with respect to the contents of the return and books of account, the Revenue may accept the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleged that the actual date of payment was not mentioned by the payee receiving the wages. In this respect we found that the date on which the entry has been made in the wages register was actual date of payment. As per the nature of the contract work executed by the assessee, the assessee gets a contract to carry out a particular job or a contract for which the material was supplied by the CPWD/DOT and the labour was provided by the assessee contractor. The assessee used to make payments to the labourers on the basis of mandays put by in by the labourers and not on the basis of work performed by them on each day. We, therefore, do not find any merit in the allegations of the AO that work performed by the labour was not mentioned on the payment vouchers and to make them basis for rejection of books of account. We also found that payment to the assessee contractor was also made on the basis of work completed and measured by the department itself and not on the basis of what the labourer has done. The bills for such a contract was prepared, which were got verified by the engineers of contractee before making payments. On the basis of bills which are finally approved by the Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dissatisfaction of the AO about the fairness or correctness of the accounts and thus the AO is empowered to make the best judgment assessment. It is the settled law that the books cannot be rejected u/s 145 of the act and resort to best judgment assessment, unless the AU record any finding that the books of accounts maintained by the assessee are incorrect rendering it impossible to deduce the profits. AU needs to indicate that he noticed any inconsistency or infirmity in the Audit report. Judgment of Hon ble High Court in the case of Madnani Construction corporation P Ltd vs CIT (296 ITR 0045) (Gauhati) is relevant. Allegation of lower GP is no ground for rejection of books u/s 145 of the Act as held by the High Court of Punjab Haiyana in the case of CIT vs Patiala District Co op Milk Producers Union Ltd (328 0625 and another case reported in 336 ITR 0332. it is the judgment of the jurisdictional High court in the case of Bastiram Naayandag Maheshri vs CIT, 220 ZTR 0438 for rejection of the accounts, non maintenance of the day to day records showing the manufacturing details is adequate. Thus, when no discrepancy is noticed in the accounts maintained by the assessee, AO canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer to give a finding as to whether method of accounting adopted by the assessee is such that it will not enable the Assessing Officer to compute the income of the assessee correctly or that there are serious defects in the maintenance of accounts which will not enable the Assessing Officer to work out the income of the assessee. Thus section 145 only relates to method of accounting or recording of the events which take place during the course of business. Section 145 cannot be invoked for carrying out business imprudently or very good results in the business are not shown. It is for the assessee to carry out the business as per his own prudence. Efficient businessman may give better results and higher income whereas imprudent or inefficient businessman may not be able to earn the profit to that extent. The books of an imprudent businessman cannot be rejected because in the eyes of Assessing Officer he has not declared the profits as it ought to have been. In the similar manner books of account of a prudent businessman giving higher income cannot be accepted merely because it has given higher profit even though books of account contained serious defects. In fact examina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt to estimation after rejecting the books if adequate material is not available to support the estimation of higher income as compared to what assessee has shown. Thus rejection of the books in accordance with section 145 is the initial step before Assessing Officer resorts to next step i.e., estimation of income. Thus, the rejection of books cannot be done without pointing the defects in accounts or accounting method. As we have held above, the Assessing Officer has neither given any finding about rejection of books nor it is discernible from his order, the working of his mind for rejection of the books. In view of this we hold that Assessing Officer has failed to discharge the onus of rejecting the books and invoking section 145(3). We are supported by the decision of Hon ble Gauhati High Court in Madnani Construction Corpn. (P.) Ltd. v. CIT [2008] 296 ITR 45 wherein it is held that accounts cannot be rejected if Assessing Officer did not find books of account incorrect or any infirmity in the audit report. In CIT v. Rajni Kant Dave [2006] 281 ITR 6 (All.) it is held that if there is no finding that books of account are incomplete or incorrect, accounts cannot be rejected. In As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been any ground for the Revenue to arrive at different result. So far as closing stock is concerned, inventories of existing stock were not found to be incorrect by the AO i.e. that position of stock as shown in the account books was not incorrect. There being no dispute about the sales and purchases, non-maintenance of stock register lost its significance so far as arriving at the gross profit is concerned. Therefore, the Commissioner of Income-tax (Appeals) was right in his reasoning about the admitted state of affairs. Resorting to estimate of the gross profit rate was founded on no material. It was merely a case of making certain additions on the basis of certain defects pointed out by the Assessing Officer and which he has shown in different account by giving margin of unvouched expenses. He has disallowed certain expenses. 7.4. The Tribunal committed basic error in not appreciating the reasoning given by the CIT(A). It is trite to say that in the facts and circumstances of present case, account books are maintained as they were ordinarily maintained years after years and which were found to yield a fair result. Mere deviation in GP rate cannot be a ground for rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income- tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be formed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion . . . There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed . .. 7.6. We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT vs. Shree Manjunathesware Packing Products, 231 ITR 53 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous. 7.9 In INCOME T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f finality inall legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. (See Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC), at page 10). As observed in Sirpur Paper Mills Ltd. v. ITO [1978] 114 ITR 404, 407 (AP) by Raghuveer J. ( as his Lordship then was ),the Department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstances. If this is permitted, litigation would have no end, except when legal ingenuity is exhausted . To do so, is . . . to divide one argument into two and to multiply the litigation . The power of suo motu revision under sub-section (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this subsection, viz., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. As observed in Dawjee Dadabhoy and Co. v. S. P. Jain [1957] 31 ITR 872 (Cal), at page 881, the words ' prejudicial to the interests of the Revenue ' have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded under the law. As already stated it is a quasi-judicial power hedged in with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly, it is an administrative act, but on examination to consider or in other words, to form an opinion that the particular order is erroneous in so far as it is prejudicial to the interests of the Revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of re-examination and reconsideration of an order of assessment, which has already been concluded and controversy which has been set at rest, is set again in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from the records called for by the Commissioner. We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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