Introduction: In the case of Bharatbhai Dilipbhai Makwana Vs PCIT, the Income Tax Appellate Tribunal (ITAT) Ahmedabad was faced with a pivotal question: What happens when a tax auditor uses the wrong words in a tax audit report? Specifically, the debate centered around a terminology error regarding the purchase of granules.
Analysis: The appeal, filed by the assessee (Bharatbhai Makwana), stemmed from an order passed by the Principal Commissioner of Income-Tax, Ahmedabad-1 (PCIT). The PCIT had exercised revisionary powers due to an alleged mistake in the tax audit report concerning the description of a granules purchase transaction. The essence of the appellant’s argument was that the tax audit report inadvertently labeled a “purchase of granules” as “granules work”. This seemingly small discrepancy led to a series of issues. For instance, the PCIT pointed out that the assessee hadn’t furnished enough evidence to prove that the payment made was strictly for granule purchases, not for any granule-related work. But the assessee countered this by presenting their financial statements and various documents, arguing that these records sufficiently proved their claim.
Conclusion: The ITAT Ahmedabad’s review of this case brings to light the paramount importance of precise terminology in tax documentation. A single mislabeling can trigger a chain of legal challenges. From the details available, it seems evident that the assessee’s financial records did not indicate any job work-related expenses, thereby strengthening their argument against the PCIT’s order. The case underscores the need for accuracy, not just in transactional dealings but also in their subsequent documentation and representation.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal filed by the assessee is directed against the order passed by the learned Principal Commissioner of Income-Tax, Ahmedabad-1 [hereinafter referred to as “PCIT”] dated 22.03.2021, in exercise of his revisionary powers under Section 263 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], for the Assessment Year 2016-17.
2. The grounds raised by the assessee read as under:
“1. The order u/s 263 of the Act has been passed beyond the period of limitation prescribed u/s 263(2) of the Act and is thus illegal and bad in law.
2. The ld. PCIT has grossly erred in law and on facts in assuming jurisdiction u/ 263 of the Act on the erroneous ground that the impugned assessment order is erroneous in so far as it is prejudicial to the interest of the revenue.
3. Lt. PCIT grossly erred in not appreciating that in order to invoke s. 263, two conditions must be fulfilled viz. the impugned assessment order must be erroneous and that error must be prejudicial to the interest of the revenue. In the present case, ld. AO has passed the reasoned assessment order after analyzing all details and therefore there was no error in the impugned assessment order so as to justify action u/s 263 of the Act. Under the circumstances, the very assumption of power u/s 263 of the Act is unjustified and bad in law and therefore, order u/s 263 of the Act deserved to be quashed.
4. The subject order u/s 263 passed by ld. PCIT is illegal and bad in law in absence of any finding of ld. PCIT how the alleged error of AO has resulted in loss of revenue particularly when the expense related to purchase of granules and hence was not liable for deduction of tax at source.
5. The ld. PCIT has further erred in law and on facts in not appreciating that the view taken by the AO is a possible view and hence the proceedings are illegal and bad in law.
6. The ld. PCIT has further erred in law in not coming to any concrete conclusion and without conducting any inquiry or investigating the issue, merely directed the AO to frame the assessment order afresh. Without there being any positive finding about order being erroneous and prejudicial to the interest of the revenue, the action of the ld. PCIT is without jurisdiction and illegal and hence deserves to be deleted.
7. PCIT has erred in not considering various facts, submissions, explanations and clarifications as given by the appellant and further erred in not appreciating the facts and law in their proper perspective.”
3. A perusal of the order passed by the learned PCIT reveals that the error noted by him in the order passed by the Assessing Officer so as to assume revisionary jurisdiction, was non-examination of the issue of contractual payment made to a related party of the assessee without deduction of tax at source as applicable, which warranted disallowance of 30% of the expenses as per section 40(a)(ia) of the Act. The order reveals that the ld. PCIT noticed these alleged facts from the Tax Audit Report furnished by the assessee during assessment proceedings which, in the Schedule requiring disclosure of payment made to related persons as specified under Section 40A(2)(b) of the Act, revealed payment made by the assessee of a sum of Rs.86,55,661/- to a partnership firm M/s. Anand Synthetic, in which the assessee was a partner, the nature of payment being mentioned as for “Granules Work”. The ld. PCIT noticed that no TDS was deducted from the aforesaid payment made by the assessee for ‘Granules Work’ and accordingly 30% of the said expenses were liable to be disallowed in terms of Section 40(a)(ia) of the Act. Paragraph 2 of the ld. PCTIT’s order reveals the aforesaid facts as under:-
“2. On perusal of records related to AY 2016-17, it was noticed that assessee was one of the partners in partnership firm named M/s. Anand Synthetic. It was also noticed that during the relevant assessment year, assessee had paid Rs.86,55,661/- to the said partnership firm for “Granule Work” done by it which was also reported in Audit Report under schedule of payment made to persons specified under section 40A(2)(b) of the Act. However, it was noticed that assessee had not deducted TDS while making aforesaid payment made by it for Granule Work. Thus, as per the provisions of section 40(a)(ia) of the Act, thirty percent (30%) of the expenses made on account of Granules Work done by the firm for the assessee was required to be disallowed.”
4. The AO having not examined this issue, Ld. PCIT held the assessment order erroneous causing prejudice to the Revenue and directed AO to pass fresh assessment order after examining this issue.
5. We have heard both the parties. We have noted that the constant refrain of the assessee before the ld. PCIT was that the Tax Audit Report had inadvertently mentioned “Granules Work” as the nature of payment made to M/s. Anand Synthetic when in reality the payment was made for ‘purchase of Granules’ and not any “work” relating to granules. The ld. PCIT, we find, did not accept this explanation of the assessee for want of substantiation. His finding in this regard at paragraph No. 4.1 of the order are as under:-
“4.1 The reply filed by the assessee has been perused. Assessee has stated that it had paid 86,55,661/- to the partnership firm on account of purchase of Granules from it. However, the assessee has not furnished any bills or invoices which could substantiate that the said transaction pertained to purchase of Granules and not of any job work. No qualitative or quantitative details of Granules claimed to have been purchased from the partnership firm was furnished by the assessee in his reply. Further, assessee has not submitted details as to when and where such granules, claimed to have been purchased from the firm, were delivered alongwith relevant details of delivery like name and address of the transporter, vehicle number etc. The assessee has simply stated that he has paid Sales Tax and VAT on the aforesaid purchase, but even then no evidence regarding the same was furnished by the assessee while furnishing his reply dated 25/02/2021. The Assessee has only furnished ledger account of M/s. Anand Synthetics in the books of Suresh Synthetics of which assessee is Proprietor. This ledger account is a self serving evidence as the same is not certified or confirmed by the partnership firm. He has not furnished any document from the partnership firm that could justify that the said transactions were actually recorded in the books of the partnership firm M/s Anad Sythetics. The assessee has stated that the auditor has mistakenly mentioned the aforesaid transactions as Granules Work considering the same as job work but has not submitted any clarification from the Auditor in this regard. Therefore, the contention of the assessee is not verifiable.”
6. The above findings of the Ld. PCIT reveal that he was not satisfied with this explanation of the assessee since the assessee had not furnished any purchase bills or invoices to evidence the fact that the payment of Rs.86.55 lakhs was made for ‘purchase of granules’ and not for any ‘granules work’. He further found that no qualitative or quantitative details of granules were furnished by the assessee and no evidence regarding payment of Sales Tax and VAT on the aforesaid purchase was furnished as stated by the assessee. Thus, briefly put, the ld. PCIT found that the assessee was unable to prove the genuineness of its explanation that no payment was made for granules work but the payment made related to only purchase of granules.
7. The facts on records, however, we find, are to the contrary, clearly demonstrating that the assessee had not incurred any such alleged “granule work” expenses, but in fact the disclosure in the tax audit report related to purchase of granule.
8. A perusal of notices issued to the assessee during assessment proceedings and the reply filed by the assessee to the same, placed before us in the paper-book, reveal that the assessee was asked to file its Annual Accounts as also the copy of the Tax Audit Report along with all the schedules, grouping and notes on account for the impugned year vide notice issued under Section 142(1) of the Act dated 30.07.2018, placed before us at paper-book page no.31. In response to the same, the assessee filed the required documents vide its response placed before us at paper-book page no.33. The Annual Accounts of the assessee placed before us at paper-book page nos. 5-28 reveal, from its Profit and Loss Account, that the assessee is into the business of manufacturing since the trading/manufacturing account reveals sales and against which raw-material consumption and manufacturing expenses are debited. The manufacturing expenses at Schedule P-8, which is at paper-book page no. 24, was scrutinized by us and we found that there were no job work expenses debited in it. The maximum that we found debited to the said account related to some work done classified as labor charges and the amount debited is only Rs.1000/-. The remaining expenses debited in the manufacturing expenses account related to power, oil, salary, workers’ wages and discount and other expenses. Besides, the assessee has debited raw-material consumption expenses, schedule of which at P-4, shows only raw-material consumption and no job work expenses debited to it.
9. The Annual Accounts of the assessee therefore clearly reveal that the assessee has not incurred any expenses of the nature of job work charges. On the contrary, the schedule of sales ,P-1 ,at paper-book page no. 23, reveals that the assessee has earned income from job work to the tune of Rs.47,21,424/-. Even otherwise, we have noted that the total manufacturing expenses incurred by the assessee during the year, which ought to have included the job work expenses if any incurred by the assessee, was to the tune of Rs.60,99,563/- while, as per the ld. PCIT, the Tax Audit Report revealed granules work payment paid by the assessee to the tune of Rs.86,55,661/-.
10. It is abundantly clear, therefore, that the documents in the assessment records itself substantiated the assessee’s explanation that it had not incurred any job work charges of the nature of granules work at all. Therefore, the ld. PCIT’s finding of error in the order of the Assessing Officer that the assessee having made payment for job-work without deducting tax at source and the AO having not examined the issue, we find, does not emanate and is in fact negated from the facts on records before him by way of audited financial statements which do not reveal any payment /expense incurred by the assessee for job-work.
11. For the above reason we do not agree with the ld. PCIT that the assessee failed to substantiate its explanation that the tax audit report mistakenly mentioned “granule work”, when the fact is that his explanation was patently obvious from the data revealed in the financial statements of the assessee itself.
12. Even otherwise, learned Counsel for the assessee has demonstrated before us that the Assessing Officer had appreciated the nature of income and expenses incurred by the assessee correctly and noted that the assessee had earned income from job work charges and not paid any expenses on account of the same. He pointed out that, noting the data reflected in the financial statements of the assessee the Assessing Officer had asked the assessee to furnish the details of “job work done” along with ledger account for the same with reference to TDS vide notice issued under Section 142(1) of the Act dated 05.09.2018 placed before us at paper-book page no.34; in response to which the assessee had furnished complete job work account which revealed clearly the fact of job work done by the assessee for Anand Synthetic. Copy of the ledger account was placed before us at paper-book page No.37-39. He also pointed out that the copy of the TDS deducted on job work done by the assessee was also placed before the Assessing Officer, which account was placed before us at paper-book page nos. 40-41. Our attention was also drawn to the fact that during scrutiny proceedings the Assessing Officer had asked for details of opening closing stock, purchase and sales in response to which complete details were filed by the assessee along with the purchase books reflecting purchase of granules therein. Our attention was also drawn to the fact that the assessee had also furnished the copy of account of M/s. Anand Synthetic to the Assessing Officer during the assessment proceedings which revealed the fact that the assessee had purchased granules from Anand Synthetic during the year and had done job work for Anand Synthetic also.
13. It is obvious from the above ,that the records with the Assessing Officer, which included the financial statements of the assessee – more particularly the Profit and Loss Account as noted by us above along with its schedules, the purchase books of the assessee, the ledger of purchases, the copy of job work account, the copy of account of Anand Synthetic – all revealed the fact that the assessee had not incurred any expenses on account of job work; that the expenses incurred in relation to Anand Synthetic, noted by the ld. PCIT, was in relation to purchase of granules and not for any job work and in fact the assessee had earned job work income from M/s. Anand Synthetic. The facts coming out so clearly from the records, the ld. PCIT surely was misguided by the incorrect words used by the Tax Auditor in the Tax Audit Report mentioning expenses incurred by the assessee with its related party Anand Synthetic in the nature of granules work instead of granules purchased.
14. In view of the above facts, we are convinced that there was no error in the order of the Assessing Officer vis-à-vis the issue of the assessee having not deducted tax at source on any alleged granules work payment made to its related parties warranting disallowance of expenses @ 30%; the order passed by the ld. PCIT is, therefore, held to be not sustainable in law and is, therefore, set aside.
15. In effect, the appeal of the assessee is allowed.
Order pronounced in the open Court on 26/07/2023 at Ahmedabad.