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TMI Blog2016 (7) TMI 820X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d AO observed that in the course of assessment proceedings, books of accounts along with requisite details and supporting documents including the books inventorised on the date of survey were produced and the same were examined on test check basis. He observed that as the books of accounts as on the date of survey were not updated, the survey team could not determine the income concealment etc. Later in the course of scrutiny proceedings, the books of accounts of the assessee were updated with the help of bills / vouchers produced and the figures of purchases, sales, manufacturing expenses as on the date of survey were determined which were duly vouched and accepted by the assessee. Based on this, the ld AO prepared a recasted trading account of the assessee on the date of survey (i.e upto 25.1.2008) by having the figures of vouched figures of opening stock, purchases of various items , manufacturing expenses and sales figures intact. He applied the gross profit disclosed by the assessee in the earlier year at 11.57% on the sales and arrived at the gross profit. Based on this workings, he arrived at the closing stock figure of ₹ 15,08,380/- as a balancing figure. The ld AO co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Ld. CIT erred in preferring to take a different view as a basis for an action u/s.263 when the A.O. had taken a particular view after considering the material on record and after due investigation." 6. The ld AR argued that at the outset, the show cause notice issued by the ld CIT did not state how the order passed by the ld AO is erroneous and prejudicial to the interest of the revenue. He argued that the ld AO had prepared a trading account upto the date of survey i.e upto 25.1.2008 and arrived the closing stock figure as a balancing figure at ₹ 15,08,380/- after applying gross profit @ 11.57% on the turnover. He stated that the ld AO had assumed that the assessee is conducting its business in a controlled environment where the purchase and selling prices are fixed and would remain so for a longer period of time. This assumption is factually incorrect in as much as the prices of raw material (i.e maida) required for manufacturing biscuits (i.e finished goods) fluctuate almost on a daily basis , whereas the selling price of biscuits would remain constant for a considerable period of time. This market situation has to be studied and maintained by the assessee to sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Delhi High Court in the case of CIT vs Sunbeam Auto Ltd reported in (2009) 332 ITR 167 (Del). 7. In response to this, the ld DR supported the ld CIT's order u/s 263 of the Act by stating that the ld CIT had merely directed the ld AO to make enquiry to verify the relatable purchases attributable to the undisclosed sales of ₹ 7,75,963/- have been debited in the books by the assessee so as to decide whether the entire undisclosed sales is to be added or only the profit derived therefrom is to be added. The assessee cannot have any grievance on this aspect as it is a mere guidance to make an enquiry in a particular manner. He further argued that the ld CIT cannot be expected to make these kind of enquiry at his level. 8. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of income tax returns and final accounts for the year ended 31.3.2008 (pages 1 to 15 of paper book) ; tax audit report (pages 16 to 29 of paper book) ; show cause notice issued by the ld CIT (page 30 of the paper book) ; submissions made before the ld CIT (pages 31 to 40 of paper book) and details of closing stock of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. But despite examining the matter at length and hearing the assessee, he could not come to any conclusion that the expenditure was not revenue expenditure but expenditure of capital nature. He referred the matter back to the Income-tax Officer to examine the same and to decide afresh. The Tribunal did not approve such action of the Commissioner. Therefore, the question that arises for consideration is whether the Commissioner without arriving at a finding that the order in question was erroneous can set aside the assessment in exercise of power under section 263 of the Act. It may be expedient at this stage to set out section 263 of the Act. Section 263, so far as relevant, runs as follows : "263. Revision of orders prejudicial to Revenue. - (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e litigation". 11. The power of suo motu revision under subsection (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 sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions "erroneous", "erroneous assessment" and "erroneous judgment" have been defined in Black's Law Dictionary. According to the definition, "erroneous" means "involving error; deviating from the law". "Erroneous assessment" refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, "erroneous judgment" means "one rendered according to course and practice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plete interpretation a lesser tax than what was just has been imposed. 13. 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 revenue due to the State has not been realised or cannot be realised. It can mean nothing else". The aforesaid observations were also applied by the Gujarat High Court in Addl. CIT v. Mukur Corporation [1978] 111 ITR 312. We are of the opinion that the aforesaid interpretation given by the Calcutta High Court to the expression "prejudicial to the interests of the Revenue" is the correct interpretation. 14. We, therefore, hold that 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. We have already held what is erroneous. It must be an order which is not in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng authority. There must be materials available from the records called for by the Commissioner. 15. 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 "erroneous" simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-examine the matter. That, in our opinion, is not permissible. Further inquiry and/or fresh determination can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 8.3. It is well settled that the condition precedent for invoking revisionary jurisdiction is that the twin conditions, i.e (i) order should be erroneous and (ii) it should be prejudicial to the interest of revenue, should be cumulatively satisfied. If, either one of them is absent, then revisionary jurisdiction u/s 263 of the Act fails. Reliance in this regard is placed on the decision of the Hon'ble Apex Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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