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TMI Blog2019 (4) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... ry point raised in the show cause notice along with documents and reasons submitted before the AO then it was incumbent upon Pr. CIT, at least to examine those replies and records so as to prima facie come to a conclusion that such a reasoning given by the assessee is divorced from the facts and material on record which is not tenable. It is a well settled law that if CIT is of the view that Assessing Officer has not carried out proper inquiry or there is inadequate inquiry, then he must give and record a finding that the order of inquiry made is erroneous. This can happen only if some kind of inquiry is conducted by the PCIT and he is able to establish the error or mistake made by the AO. CIT himself had to undertake proper inquiry and give reason for coming to the conclusion that assessment order was erroneous and prejudicial to the interest of revenue. This has been further reiterated in the case of Pr. CIT vs. Modi care Ltd [2017 (9) TMI 1238 - DELHI HIGH COURT] and CIT vs. Sun Beam Ltd. [2009 (9) TMI 633 - DELHI HIGH COURT] DR as well as Pr.CIT has much harped upon Explanation 2, but the said explanation will only be applicable when the order of the Assessing Officer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year of the claim on which deduction @ 30% was claimed and same was allowed by the Assessing Officer in the scrutiny proceedings u/s.143(3). The assessee is unlisted public company incorporated on 23rd October, 1996, which is mainly engaged in the business of food processing. The total revenue for the Assessment Year 2013-14 from its entire units was reported at ₹ 45.09 crores. Its first unit was at Delhi, which was not a manufacturing unit but was mainly into trading and sale of oat based products like, whole oats, white oats, oats for atta, oats, poha, etc. Second unit was Baddi unit, (which availed deduction u/s.80IC) engaged in manufacturing of Muesli (ready to eat breakfast cereals), which is made of whole grains, nuts, fruits, berries, honey, etc., in various healthy and delicious combinations. The third unit was Newai unit which was restarted this year and basically is a flour mill producing Maida, Suji, atta, husk from wheat, which is altogether different sector from the other two units. These three units of the assessee were having independent functions, different products and risks undertaken were of their own. In this case, original return was filed u/s.139 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.03.2018 along with voluminous supporting documents, the contents of the said reply has been incorporated in the impugned order from pages 3. In sum and substance, assessee submitted that:- Firstly, it was pointed out that it would be incorrect to hold that this year net profit from eligible unit was shown @ 37.33%; and net loss @ 14.51% from non eligible unit, because the net profit and eligible unit was ₹ 33.73% and correct information of unit turnover and profitability was given in the following manner: Consolidated Baddi (Muesli Unit) Newai (Wheat Flour Unit) Other (Oats Other Units) Revenue 42,81,63,162 22,10,07,155 64,33,722 20,07,22,285 Net ProfitZ(Loss) before tax (a) 5,26,45,050 12.30% 7,45,36,216 33.73% -39,07,443 - 60.73% -1,79,83,723 -8.96% Exceptional loss on sale of Investments (b) 2,59,31,541 Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from third party. Therefore booking stock transfer as sales in Baddi unit to increase the eligible profit/or deduction u/s 80IC of the Act will not help the assesse at all. Sales from both these depots were made during the year from time to time to different parties including modern trades. We have duly received payment from these parties. The transporters who transport from Baddi to these depots are paid mainly by cheque only as far as possible from our side. The company used to file various VAT returns, Entry tax and excise return reflecting the above transfer of goods to these depots from time to time and on time. The transporter has to generate Form No. 26Afor each movement 0/ goods from Baddi to send it to VAT department and the same was generated for these stock transfers also. Fourthly, it would be completely erroneous to hold that Assessing Officer has failed to examine the material facts, because assessee from time to time had submitted all the documents, details of material facts before the Assessing Officer as and when required and by these documents were examined in detail which were flowing from the audited accounts and also tax year added u/s.92E VA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing expenses also increased abnormally in addition to normal annual increase due to increase in retailers and Consumer Schemes. b) Though, we tried to pass on, a little part of the increase in the input cost to the consumer but looking to the circumstances we were forced to offer additional discounts, rebate, brokerage, commission and claims apart from other substantial sales promotion and conference expenses. c) In this connection please also please refer our written submission in reply to 14 points questionnaire by the then AO Smt Shivani Bansal, DCIT particularly vide page no 270, 271 to 311. Also please refer specific query and our written submission in reply to 10 points questionnaire by the then AO Smt. Shivani Bansal, DCIT particularly vide page no 189 d) In case of Newai Unit (wheat flour mill, a noneligible unit), this unit was re-started from Feb-I3 and operated for only one and half months. Due to which there was significant production loss and Overhauling Expenditure incurred at initial phase which resulted into heavy loss in that year. e) There is a substantial loss on sale of investments which directly hit the profitability of non eligible units. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Oat products have dropped substantially in current financial year 2012-13 in comparison to previous year 2011-12. 5 Increase in Repair Maintenance due to re-starting of Newai Flour Mill; 6 Reduction in Other Income in comparison to previous year (i.e. ₹ 2.27 Crores from 3.50 Crores). 7 There is a substantial loss on sale of investments. And gross profit ratio was also explained in the following manner: The main reasons are furnished below for the fall in Gross Profit Ratio. i. There is a increase in the input cost mainly raw material cost, For examples-Increase in Major raw material (Oats, Dry Fruit Flakes) cost. ii. Substantial increase in manufacturing (e.g. processing charges, Power Fuel). iii. Increase in other direct expenses (i.e. Wages Cost, Repair Maintenance of Plant Machinery. etc iv. We like to further add that prices of oats which we import has increased in this year and processing charges we pay for processing of oats is also increased during the year due to increase in power and labour cost. This has resulted in lower GP ratio of the company and in particular substantially decreasing the total profit of Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer, therefore, in view of Explanation-2 to Section 263 it is deemed that Assessment Year passed by the Assessing Officer is erroneous in so far as prejudicial to the interest of revenue and accordingly he set aside the assessment order in the following manner: 8. In view of the discussion in paras 5 and 6, it is established beyond doubt that the assessment in the instant case was completed without proper enquiries into the claim of the assessee. By invoking the deeming provision in the Explanation 2 to section 263 of the Act, it is held that the order u/s 143(3) of the Act dated 17-02- 2016 is erroneous in so far as it is prejudicial to the interests of the revenue and is therefore cancelled. The Assessing Officer is directed to conduct proper enquiries in respect of the issues raised in this order and frame the assessment afresh. 7. Before us, learned counsel for the assessee, Mr. Vinod Kumar Bindal, submitted that during the course of the assessment proceedings the assessee had filed voluminous information/documents before the Assessing Officer as and when required by the Assessing Officer which is evident from the following letters and the documents annexed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts filed by the assessee were examined by the AO. It is after receiving the details and the documents on several hearings and after perusing the same Assessing Officer called for further related details/documents in respect of issues examined earlier. He also informed us that after the passing of the assessment order on 17.10.2016, Assessing Officer vide letter dated 16.05.2016 informed that audit party has made certain observation that the net profit in eligible unit was shown at ₹ 33.73%, while in non eligible unit has declared loss and the allocated expenses percentage was very high in non eligible units and accordingly assessee was required to explain the same. In response, the assessee has filed very detail reply and information which has been placed at paper book from pages 324 to 328. It was explained that the increase in the advertisement expenses was due to entry of many big companies / MNC like Kellog, Horlicks, Quaker etc in the Oats field. It was emphatically explained that the comparison of profit ratio of the eligible unit with non-eligible Newai unit is not possible on account of the products dissimilarity as eligible unit is in MUESLI production while non-elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... error or mistake made by the Assessing Officer. The matter cannot be remitted to the Assessing Officer for a fresh decision or to conduct further inquiry without finding that the assessment order is erroneous. In support he relied upon the following judgments:- (i) ITO vs. DG Housing Projects Ltd. 2012-TIOL-195-HC-DEL-IT (ii) PCIT Vs Modicare Ltd. 2017-TIOL-1946-HC-Del-IT (iii) CIT vs. Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del) (iv) Amira Pure Foods Pvt. Ltd. ITA No. 3205/Del/2017 dated 29.11.2017 10. On the other hand, learned Department Representative after referring to the various observations made in the impugned order submitted that in the instant case, Pr. CIT while conducting proceedings under section 263 has observed that AO had issued two questionnaires raising various queries. AO further raised few queries through note sheet entries. However, AO failed to raise even a single pertinent and pin pointed query on the most vital issue at hand, as to how the net profit rate of eligible unit could go drastically low in the sixth year of claiming deduction u/s 80IC, particularly since the rate of exemption allowable from sixth year was going to be 30% as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment of Hon'ble Jurisdictional High Court in the case of Nagesh Network Pvt. Ltd., 345 ITR 135 and NIIT vs. CIT (2015) 60 taxmann.com 2013. During the course of proceedings u/s 263, this issue was considered and after considering the relevant material on record and giving due opportunity of being heard to the assessee, the CIT came to a logical and judicious conclusion that many vital issues were not considered and examined by the AO. 10.2 Again in his written submission he has referred to various judgments which are more on scope of 263. The list of such judgment reads as under: 1. Hon'ble Supreme Court in the case of Deniel Merchants Pvt. Ltd. vs. ITO(Appeal No. 2396/2017) dated 29.11.2017. (copy enclosed). In this group of cases, Hon'ble Supreme Court has dismissed SLPs in cases where AO did not make any proper inquiry while making the assessment and accepting the explanation of the assessee(s) in so far as receipt of share application money is concerned. On that basis the Commissioner of Income Tax had, after setting aside the order of the Assessing Officer, simply directed the Assessing Officer to carry thorough and detailed inquiry. The relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would reach after due appreciation of such material. If this component is missing, it will always be a case of lack of inquiry and not inadequate inquiry. Decision 11. We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material placed on record. The facts in detail have already been discussed above. Here in this case, the assessee is having three units, one which is at Baddi, was carrying out manufacturing of Muesli; other Unit is at Delhi which is a trading Unit which carries out trading of oats along with various depots; and third is Nawai Unit which is a wheat flour unit. In so far as claim of deduction u/s.80IC of Baddi Unit is concerned in the earlier years same have been allowed. This was the sixth year of claim, wherein the assessee has claimed deduction of 30% which has been allowed by the Assessing Officer in the order passed u/s.143(3) vide order dated 17.02.2016. It appears that thereafter, there was certain audit objections raised by the audit party that net profit in the eligible unit was shown at 33.73% while non eligible there was a loss and also the allocated expenses percentage were shown fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed to inquire about comparison of GP and NP ratio of eligible and non eligible range; secondly, whether expenses shown in all eligible units are actually pertaining to that unit or not; thirdly, whether the various expenses relating to managerial expenses are debited only in non eligible unit and same has been operated the same between eligible and non eligible unit; fourthly, marketing of products of eligible unit through branch office have been shifted to non eligible units; and lastly, whether u/s.80IA(10) and 80IC(7) were required to be invoked. On all these points, it is seen that, not only before the Assessing Officer but also before the ld. Pr.CIT, assessee has given very detailed submission and reasoning which though has been partly acknowledged and incorporated in the impugned order but instead of rebutting those submissions and replies, the ld. Pr.CIT has tried to hold that, since all these issues have not been properly examined by the Assessing Officer has been accepted and therefore, assessment order is erroneous in so far as prejudicial to the interest of revenue because of no proper inquiry had been made. First of all, we find that assessee has three units which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligible unit has been shifted to non eligible unit and without such finding the assessee s contention cannot be rejected. The assessee has also explained the overall fall in NP ratio and the comparative chart which is also there in the paper book. It has been explained that the overall decrease in the GP NP ratio was due to increase in the cost of inputs/raw materials, increase in the manufacturing expenses, increase in the advertisement and promotional expenses due to stiff competition, substantial decrease in sales of oats, increase in repair and maintenance expenses due to restarting of the Newai Unit, reduction in other income, and sale of old investments in equity shares, etc. Apart from that, from the perusal of the replies filed before the Assessing Officer, we find that the assessee has explained the reasons before the Assessing Officer as to why no profit can be allocated according to eligible profit. The said reply filed before the Assessing Officer is placed from pages 324 to 328 of the paper book. Each and every points which have been raised in the impugned order is appearing in the various replies and documents filed before the Assessing Officer including reasons for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions made by the Ld. Counsel before Ld. PCIT are reproduced herein below:- AO conducted extensive enquiries, raised queries and examined the books of account, expenses, related party transactions, reason for fall in NP. a) The assessment proceedings spanned over continuous 18 or 19 months, where voluminous details / documents / books of account asked for and were examined by the AO. The AO on receiving details / documents in one hearing, perused and considered same and accordingly, called for further related details documents in respect of issues examined earlier. b) On perusal of the questionnaire dated 22/04/2015 (reiterated on page 16),it would be seen that a query was raised to furnish reasons and make disclosure in support of various claims made in the return of income, GP and NP ratio for three years and justification for any downfall, with supporting evidences. c) In the other questionnaire, queries were raised regarding income / loss on purchase or sale of shares, valuation of stock and its computation, purchases, creditors, repairs and maintenance expenses, justification for drastic fall in net profit rate, large other expenses claimed in the profit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g officer raised specific query regarding related party transaction vide para 5 of the questionnaire dated 22/04/2015. The related party transactions were properly disclosed in the various audit reports. Details of related party transactions including the processing charges paid to the sister concern were submitted before the AO (Refer page 251-255 of the PB) which were accepted by her after verification. Importantly, the assessing officer examined and verified the books of account and it clearly means that she was satisfied on all counts which have been raised by the PCIT. Production of the books of account satisfies the entire possible queries. h) The AO raised various queries about the expenses and their justification. The assessee placed on record all the evidences regarding the same which shows her application of mind to the issues. The PCIT cannot decide the manner in which the queries need to be raised. i) Moreover, the PCIT has not said anywhere that the books of account so examined and accepted by the AO were not reliable or correct. The aforesaid submissions which are also borne out from the record clearly clinches the issue that Assessing Officer did ..... X X X X Extracts X X X X X X X X Extracts X X X X
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