Case Law Details
Lexico Ceramics Vs PCIT (ITAT Rajkot)
ITAT Rajkot held that the capital contribution made by the partner of the firm cannot be subject to the addition in the hands of the partnership firm.
Facts- The assessee is a partnership firm and engaged in the business of ceramic tiles. The case of the assessee was selected for scrutiny under CASS. Finally, the AO assessed the income vide order dated 28th December 2017.
Subsequently, the learned Pr. CIT from the assessment records found that during the year the assessee firm received an amount of Rs. 3,22,78,000/- from 11 partners as capital introduction. The AO made addition of Rs. 12,00,000/- as unexplained credit on account of capital contribution from 2 partners only whereas no finding was given regarding remaining amount of Rs. 3,10,78,000/- representing capital received from 9 partners.
Likewise, the ld. PCIT further found that the AO made an addition of 10% of sundry creditor for Rs. 4,29,42,277/- (total) on ad-hoc basis to plug possible revenue leakage. However, as per the ld. PCIT, there is no provision under the Act to allow or disallow sundry creditors on ad-hoc and certain percentage basis. As such, the AO was required to verify the entire sundry creditor and accordingly reached to the logical conclusion.
Thus, the learned PCIT was of the opinion that the order of the AO suffers from error which is prejudicial to the interest of the Revenue and accordingly issued notice u/s 263 of the Act. The learned PCIT held that the AO framed the assessment order without making proper inquiry or verification which made the assessment order being erroneous insofar prejudicial to the interest of the Revenue. Being aggrieved by the order of the learned PCIT, the assessee is in appeal before us.
Conclusion- Held that on merit of the case, we note that the honourable courts in series of the cases have held that the capital contribution made by the partner of the firm cannot be subject to the addition in the hands of the partnership firm.
We hold that the allegation framed by the learned PCIT cannot be made subject matter of revision under the provisions of section 263 of the Act. In simple words, the order of the learned PCIT cannot be held as erroneous for not making any addition in the hands of the partnership firm on account of capital contribution by the partner.
FULL TEXT OF THE ORDER OF ITAT RAJKOT
This appeal filed by the assessee is directed against the order of learned Principal Commissioner of Income-Tax, Rajkot-1 [hereinafter referred to as “Ld. Pr. CIT” for short] dated 31.03.2021 passed in exercise of his revisionary jurisdiction under Section 263 of the Income-Tax Act, 1961 [hereinafter referred to as “the Act” for short] for Assessment Year (AY) 2015-16.
2. The only effective issue raised by the assessee is that the learned Pr. CIT erred in holding the assessment order passed under section 143(3) of the Act as erroneous insofar prejudicial to the interest of Revenue.
3. The brief facts are that the assessee is a partnership firm and engaged in the business of ceramic tiles. The assessee in return filed for the year under consideration declared loss at Rs. 2,19,44,882/- which was selected for scrutiny under CASS. Finally, the AO assessed the income at Rs. 91,19,044/- vide order dated 28th December 2017.
4. Subsequently, the learned Pr. CIT from the assessment records found that during the year the assessee firm received an amount of Rs. 3,22,78,000/- from 11 partners as capital introduction. The AO made addition of Rs. 12,00,000/- as unexplained credit on account of capital contribution from 2 partners only whereas no finding was given regarding remaining amount of Rs. 3,10,78,000/- representing capital received from 9 partners.
5. Likewise, the ld. PCIT further found that the AO made an addition of 10% of sundry creditor for Rs. 4,29,42,277/- (total) on ad-hoc basis to plug possible revenue leakage. However, as per the ld. PCIT, there is no provision under the Act to allow or disallow sundry creditors on ad-hoc and certain percentage basis. As such, the AO was required to verify the entire sundry creditor and accordingly reached to the logical conclusion.
6. The ld. PCIT also found that the AO vide paragraph number 9.2 of his order worked the amount of suppressed production at Rs. 2,08,36,851/- but at the time of computing assessed income made an addition of Rs. 2,02,36,851/- only resulting under assessment of income by Rs. 6,00,000.00.
6.1 Thus, the learned PCIT in view of the above was of the opinion that the order of the AO suffers from error which is prejudicial to the interest of the Revenue and accordingly issued notice under section 263 of the Act. The assessee in response to such notice only submitted that original assessment file has been lost, hence it requires time to recollect the data. Thereafter several opportunities of being heard were provided but the assessee failed to avail the same. Hence the learned PCIT in view of the above held that the AO framed the assessment order without making proper inquiry or verification which made the assessment order being erroneous insofar prejudicial to the interest of the Revenue. In holding so, the learned PCIT also referred the explanation 2 to section 263(1) of the Act as well as several judicial pronouncements.
7. Being aggrieved by the order of the learned PCIT, the assessee is in appeal before us.
8. The learned AR before us filed a paper book running from pages 1 to 340 and submitted the AO during the assessment proceedings has carried out necessary verification on all the issues raised by the learned PCIT in his order. The learned AR for this purpose drew our attention on the notices issued under section 142(1) of the Act and show cause notice which are placed on pages 77 to 87 of the paper book. Likewise, the learned AR further contended that the assessee in response to such notices have made detailed reply with the relevant documents which are placed on pages 89 to 324 of the paper book. Accordingly, it was contended by the learned AR that the assessment cannot be held as erroneous insofar prejudicial to the interest of revenue on account of non—verification or non-application of mind by the AO during the assessment proceedings.
8.1 The learned AR further submitted that the issues relating to the addition on account of sundry creditors is pending before the learned CIT(A) and therefore there cannot be any proceedings under section 263 of the Act with respect to such issues pending for adjudication before the learned CIT(A).
9. On the contrary, the learned DR before us submitted that the AO has made the addition on account of capital contribution from 2 partners only whereas the capital was contributed by 11 partners in total. Thus, the stand taken by the AO is contradictory based on the facts available on record. The learned DR further contended that the AO has not carried out the necessary verification which should have been done under explanation 2 to section 263 of the Act. The ld. DR vehemently supported the order of the authorities below.
10. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the assessment order has been passed by Ld. AO without making inquiries or verification or proper application of mind with respect to capital introduced by the partner of the assessee firm, the outstanding balance of the sundry creditor and alleged suppressed production which is erroneous insofar prejudicial to the interest of the Revenue and thus requiring revision by Pr. CIT u/s 263 of the Act.
11. An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were number of judgments by various Hon’ble High Courts in this regard.
12. Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. The relevant observation of Hon’ble Delhi High Court reads as under:
“12. ….. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. ———
From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the 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 conclusion and such a conclusion cannot be termed 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.
15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.”
13. The Hon’ble Bombay High Court in case of Gabriel India Ltd. [1993] 203 ITR 108 (Bom), discussed the law on this aspect in length in the following manner:
“The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all 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.
14. The Mumbai ITAT in the case of Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:-
“20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinizing the nature of enquiry or verification carried out by the AO vis-à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquires or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.”
15. The Hon’ble Supreme Court in recent case of Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates*[2019] 106 taxmann.com 31 (SC), held that where Pr. CIT passed a revised order after making addition to assessee’s income under section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of such on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee’s income. The Principal Commissioner passed a revised order under section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee’s on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee’s on-money transactions and Tribunal, thus, set aside the revised order passed by Commissioner. The Hon’ble High Court upheld Tribunal’s order. The Hon’ble Supreme Court while dismissing the SLP filed by the Department held as under:-
“We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee’s on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed”
16. The Supreme Court in the another recent case of Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd[2020] 114 com 545 (SC), dismissed the Revenue’s SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law, with the following observations:
“Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere with the view of the Tribunal. The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ought to have so held in the order of revision. There was simply no necessity to remand the proceedings to the Assessing Officer when no further inquiries were called for or directed”
17. From the analysis of the above judicial precedents, the principle which emerges is that the phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Assessing Officer adopts one of the course permissible in law and it has resulted in loss of revenue; or where two views are possible and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order causing prejudice to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law, or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind.
18. Now in the facts before us, the first allegation of the learned PCIT is that the AO has not carried out inquiry and given finding with regard to the capital contribution by 9 remaining partners. In this regard we note that the AO during the course of assessment proceedings, raises specific query on the issue capital contribution by the partners and required the assessee to furnish supporting evidence which can be verified from the notice issued under section 142(1) of the Act dated 14-06-2017 and 17-08-2017 and show cause notice dated 18-12-2017. The relevant question reads as under
i. Notice dated 14-06-2017:
“….
14. On perusal of audited accounts, it is seen than the partners have introduced substantial capital during the relevant previous year. Please furnish Copy of Return; Bank Statement; Copy of final/personal accounts of the partner for FY 2013-14 who have introduced new capital firm.”
ii. Notice dated 17-08-2017
“….
(3) On perusal of audited accounts, it is seen than the partners have introduced substantial capital during the relevant previous year. Please furnish Copy of Return; Bank Statement; Copy of final/personal accounts of the partner for FY 2013-14 who have introduced new capital firm.
(4) Copy of accounts of partners and acknowledgement of returns of income filed by them.”
iii. SCN dated 18-12-2017
“CAPITAL INTRODUCTION BY THE PARTNERS
During the year, partners have introduced fresh capital of Rs.3,22,78,000/-. Vide query No. 14 of the questionnaire of dt. 14.06.2017 you were requested to furnish copy of return of income, bank statement and personal accounts of the partners who have introduced new capital into Firm but no such details have been furnished by you so far. Therefore, in absence of any supportive documentary evidence fresh capital received by you aggregative Rs.3,22,78,000/- is to be treated as unexplained and necessary addition to be made.”
19. The assessee in response to such notice vide letter dated 22-12-2017 made following reply:
“As per above caption notice, capital introduction is considered of Rs.3,22,78,000/- during AY 2015-16 whereas the actual net addition in capital is Rs.2,62,58,000/- which is derived after considering withdrawal of partners during the year, which is explained in below table. While the supportive document of each partner are also annexed herewith.”
20. From the above, it is revealed it is not the case that the AO has not made any enquiry with regard to capital introduction by the 11 partners, as such the AO carried out adequate inquiry with regard to all the 11 partners who introduced capital in the assessee firm and thereafter made addition under section 68 of the Act on account of capital introduced by the 2 partner only. Thus, the allegation of Pr. CIT for initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification with regard to other partners is factually incorrect. At this juncture we also feel pertinent to refer the judgment of Hon’ble Delhi High Court in case of CIT vs. Vikas Polymers reported in 194 Taxman 57 where it was held that where the AO raised query but such query and reply thereto not reflected in assessment order, then such order cannot made subject to revision under section 263 of the Act. The relevant observation of the Hon’ble High court is extracted as under:
This is for the reason that if a query is raised during the course of scrutiny by the Assessing Officer, which was answered to the satisfaction of the Assessing Officer, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the Assessing Officer called for interference and revision.
21. Thus, the order of the AO cannot be held erroneous on account of first allegation made by the learned PCIT i.e. the AO has not carried out inquiry and given finding regarding capital introduction by the remaining 9 partners.
22. Even on merit of the case, we note that the honourable courts in series of the cases have held that the capital contribution made by the partner of the firm cannot be subject to the addition in the hands of the partnership firm. In this regard, we find support and guidance from the judgment of Hon’ble Gujarat High court in the case of CIT Pankaj dyestuff Industries IT Reference No. 241 (Guj.) of 1993, dated 6-7-2005, the relevant extract of the judgement of the order is reproduced as under:
“13. Applying the aforesaid principles to the facts of the present case, it is apparent that the assessee had furnished the details, which would discharge the onus which lay on the assessee. It is not the case of the revenue that the partners of the assessee firm are fictitious. The Income Tax Officer has not disputed that the credits in the accounts of the partners were not deposits from the partners. Moreover, it is an admitted position that this was the second year of the firm, and that it was running in loss. It is true that the Income Tax Office did not accept the explanation given on behalf of the assessee in respect of the new deposits or cash credits in the accounts of the partners. The mere non-acceptance of that explanation does not, however, provide material for finding that the said sum represented income of the assessee firm. As held by the Allahabad High Court in case of Jaiswal Motor Finance (supra), in the absence of any material to indicate that there were profits of the firm, the amount credited to the partners’ accounts could not be assessed in the hands of the firm. Once the partners have owned that the monies deposited in their accounts are their own, the Income Tax Officer is entitled to and may proceed against the partners and assessee the same in their hands, if their explanation is not found satisfactory.”
23. In view of the above we hold that the allegation framed by the learned PCIT cannot be made subject matter of revision under the provisions of section 263 of the Act. In simple words, the order of the learned PCIT cannot be held as erroneous for not making any addition in the hands of the partnership firm on account of capital contribution by the partner.
24. The next allegation of the learned PCIT for holding the assessment order as erroneous insofar prejudicial to interest of revenue is that the AO made addition of outstanding sundry creditor on ad-hoc i.e. certain percentage of outstanding balance without making proper inquiry and reaching to the logical conclusion. Likewise, the third allegation of learned PCIT is that the actual amount worked out for supressed production and amount added while computing assessed income are different. Regarding both the issues, we note that the assessee is in appeal before the learned CIT(A). This fact can be verified from the memo of appeal filed by the assessee before the learned. CIT(A) against the assessment order framed under section 143(3) of the Act. The relevant extract of the memo of appeal is reproduced as below:
“The learned Assessing Officer has erred in law as well as on facts in making addition of Rs.42,94,228/- on account of alleged unexplained sundry creditors.”
“The learned Assessing Officer has erred in law as well as on facts in making addition of Rs.2,02,36,851/- on account of alleged suppression of production of goods.”
25. Once the issue is pending before the learned CIT(A), the same cannot be made subject matter of revision under the provisions of section 263 of the Act. In such facts and circumstances, we note that the Hon’ble Allahabad High Court in case of CIT vs. Vam Resorts & Hotels (P.) Ltd. reported in 111 com 62 has held that when an appeal is pending before the appellate commissioner, then the power under section 263 of the Act cannot be exercised. The relevant finding o the Hon’ble High Court is extracted as under:
25. As, Clause (c) of Explanation 1 to Section263 of the Act provides that when an appeal is pending before the Commissioner, the exercise of jurisdiction under Section263 of the Act by CIT is barred. Thus, in the present case, the CIT wrongly exercised jurisdiction under Section263 of the Act by remanding back the matter to assessing authority on 25.3.2013, while the appeal was decided by CIT (A) on 5.6.2013. Thus, the order passed by the ITAT does not suffer from any irregularity and needs no interference.
25.1 From the above principles laid down by the Hon’ble High Court, we hold that the matters which are pending before the Ld. CIT(A) for the purpose of adjudication cannot be disputed in the proceeding’s u/s 263 of the Act.
25.2 As we have decided the appeal of the assessee in its favour on merit, we are not inclined to adjudicate the issue raised by the assessee on the validity of the order passed under section 263 of the Act being barred by time. Accordingly, such ground raised by the assessee become infructuous. Thus, we dismiss the same. In view of the above, we set aside the order of the Ld. PCIT and quash the same. Hence, the grounds of appeal of the assessee are partly allowed.
26. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 12/05/2023 at Ahmedabad.
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