No Section 263 revision for difference of opinion between AO & CIT

Maharashtra Engineering Vs PCIT (ITAT Pune)

The issue under consideration is whether order passed u/s 263 by CIT is justified in law?

It is noticed that the reopening of the assessment has been done for the specific purpose of examining the said purchases from C.R. enterprises. The A.O after considering the evidences produced came to the conclusion that the addition representing disallowance of 5% of the total purchases would meet the ends of  justice.   Thus, the reasons have been recorded for the purposes of reopening of  the assessment. The  issue on  the  basis  which  reopening has been done, has been examined by the A.O and after verifying the evidences, a conscious decision has been taken by the A.O when passing the assessment order on 11-3-2016.  A perusal of the order u/s 263   passed by the learned CIT shows that in the show cause notice, the learned Pr. CIT has mentioned that the  disallowance of   5%  of   the  total   of  such  purchases  is  erroneous   and prejudicial to the interest of revenue within the meaning of sec. 263 of the Act. However, when it came to the order passed u/s 263 he does not say as to how the said assessment order passed u/s 143(3) read with sec. 147 is erroneous insofar as it is prejudicial to the interest of  revenue.

The learned Pr. CIT also fails to answer the very primary question that if the purchases are going to be treated as bogus and the addition is going to be made of the entirety of the purchases what happens to the sales that have been disclosed, as also the stocks by treating the said purchases as bogus. Sales which have been disclosed cannot be touched. The stock statement of the assessee would also stands disturbed. A perusal of the assessment order however, shows that these have been examined by the A.O and after considering the facts the estimated addition of 5% of purchases have been made by the A.O. Thus, the issues have been examined by the A.O and just because the opinion as arrived by the A.O is at a variation of the opinion of the learned Pr. CIT, would not grant the learned Pr. CIT the powers of revision u/s 263 of the Act. Thus, on merits, the order passed u/s 263 stands set aside.

FULL TEXT OF THE ITAT JUDGEMENT

This is an appeal filed by the assessee against the order of learned Pr. CIT-I, Kolhapur, in Appeal No. KOP/PCIT-1/263/Hawala/A.Y-10-11/ Maharashtra Engg/2017-18 dated 28-3-2018 for A.Y. 2010-11 passed u/s 263 of the Income-tax Act, 1961 (hereinafter referred as “the Act).

2. Shri Rajesh Shah is represented for the assessee and Shri Deepak Garg is represented for the Revenue.

3. It was submitted by the learned A.R. that the assessee is a partnership firm which is in the business of manufacturing of Tractor & Precision Sheet Metal Work. It was his submission that the assessee had, during the relevant assessment year, done purchase of H.R. and C.R. sheets which are basically M.S. Sheets from one M/s. C.R. Enterprises for a total consideration of Rs. 1,70,55,525/- The assessee had sold the same and he had also disclosed profit on the sales in his P & L a/c. The return of income had been filed for the relevant assessment year on 31-10-2009 disclosing total income of Rs. 6,80,159/-. Certain information had come to the possession of the A.O from the Dy. CIT (Inv) Pune that assessee was beneficiary from bogus Hawala purchases done with Raju Bhanubhai Doshi (C.R. Enterprises), Mumbai, to the extent of Rs. 1,70,55,525/- during the year. Consequently, the case of the assessee was re-opened by issuing notice u/s 148 of the Act and the accounts of the assessee was examined. Details were called for and the assessment was completed on 11-3-2016 u/s 143(3) read with sec. 147 of the Act wherein transactions with M/s, C.R. Enterprises were verified. In the course of assessment proceedings, it was verified by the A.O with regard to the documentary proof for purchases from said Hawala dealer and its subsequent sales thereof. It was understood that all the transactions were duly recorded in the books. The assessee had also admitted that the transactions were in the nature of circular transactions in order to enhance the turnover. It was admitted by the assessee that the purchases and sales were not bogus but were genuine and subsequently had agreed to addition of 5% of purchases made from the alleged Hawala dealers in addition to its trading results. The A.O had verified the transactions and recorded in the assessment order that the cheques had been issued in regards to the purchases and the cheques were also received from the parties to whom the sales had been made. The assessee was unable to produce alleged Hawala parties from whom the assessee had made purchases. Consequently, the A.O assessed 5% of the purchases as income on the transactions. It was submitted that subsequently a show cause notice was issued by the learned Pr. CIT on 22-2-2018 asking the assessee to submit a reply by 27-3-2018. It was his submission that in the show cause notice, the learned Pr. CIT has taken a stand that he proposes to apply the decision of the Hon’ble Gujarat High Court in the case of N.K. Proteins Ltd. Vs. DCIT (2016) 72 Taxman.com 289 (Gujarat) to say that when the entire purchases were found to be bogus then confirming the disallowance of 5% of the bogus purchases goes against the principles of section 68 of the Act. It was the submission that since the assessee did not get adequate time, he was unable to respond to the show cause notice by 27-3-2018 but the assessee had responded on 30-3-2018 with all the details as called for by the learned Pr. CIT. It was his submission that however, the Pr. CIT passed an order u/s 263 on 28-3-2018 setting aside the assessment order passed us 143(3) read with sec. 147 of the Act on 11-3-2016 for A.Y. 20-10-11 for fresh determination of income after proper examination of the facts and law. It was his submission that all the issues having been considered by the A.O in the course of re-opened assessment and re-opening of the assessment has been exclusively for the purposes of examining the said alleged Hawala purchases and the A.O having formed his opinion and having accepted the purchases and sales, the revision as proposed by the learned Pr. CIT is unsustainable as it amounts to change of opinion.

4. The learned CIT D.R vehemently supported the order of the Pr. CIT. At this point, it was put to the learned CIT D.R as to how the order passed u/s 263 could be sustained especially in view of the fact that the said order has been passed in total violation of principles of natural justice insofar as the issues that arose in the assessment year 2010-11 which had been considered and assessment passed in 2016 is being proposed for revision by show cause notice dated 22-2-2018 and the assessee was granted only five days time to respond i.e. by 27-3-2018. 27^th March, 2018 is Tuesday and 29^th March 2018 is Thursday. It was further put to the learned CIT D.R. for the Revenue as to how it can be said that an effective opportunity has been granted to the assessee in the form of such issue of notice. In reply, the learned CIT D.R. submitted that the issue could be restored to the file of the learned CIT for fresh adjudication. However, he failed to explain as to how such an opportunity can be given which would in effect be extending the time limit provided u/s 263 of the Act. The learned CIT D.R. was further requested to explain as to how the provisions of sec. 263 can be applied when the provision of sec. 263(1) specifically provides for “after making or causing to be made such inquiry as he deems necessary” before the learned CIT passed an order on 28-3-2018. The learned CIT D.R. was requested to show as to how and what was the inquiry which has been done by the learned Pr. CIT or the inquiry which he has caused to be made before he passed an order u/s 263 of the Act on 28-3-2018. To this, the learned CIT D.R was unable to point out any of the inquiries. It was however, his submission that this was a case of Hawala transaction and the purchases were bogus and that the entire purchases were liable to be assessed as against which the A.O had made the addition of only 5% of the alleged Hawala purchases. The learned CIT D.R. vehemently supported the order of the learned Pr. CIT Kolhapur.

5. We have heard the rival contentions and perused the material on record. It is noticed that the reopening of the assessment has been done for the specific purpose of examining the said purchases from C.R. enterprises. The A.O after considering the evidences produced came to the conclusion that the addition representing disallowance of 5% of the total purchases would meet the ends of  justice.   Thus, the reasons have been recorded for the purposes of reopening of  the assessment. The  issue on  the  basis  which  reopening has been done, has been examined by the A.O and after verifying the evidences, a conscious decision has been taken by the A.O when passing the assessment order on 11-3-2016.  A perusal of the order u/s 263   passed by the learned CIT shows that in the show cause notice, the learned Pr. CIT has mentioned that the  disallowance of   5%  of   the  total   of  such  purchases  is  erroneous   and prejudicial to the interest of revenue within the meaning of sec. 263 of the Act. However, when it came to the order passed u/s 263 he does not say as to how the said assessment order passed u/s 143(3) read with sec. 147 for the A.Y.2010-11 dated 11-2-2016 is erroneous insofar as it is prejudicial to the interest of  revenue.    For  brevity,  the  finding  of  the  learned  CIT  in  paras  9  to  13  is extracted herein below.

“9. I have gone through assessment order. On the basis of information received from Maharashtra Sales tax Department, it is found that the aforesaid transactions are bogus without actual sale/delivery of goods. Further, on enquiries by the A.O the sellers are found to be non-existent at the given addresses. The assessee has also failed to file confirmations, failed to produce the suppliers. The letters issued have come back un-served, which proved that the whole purchases were not genuine. As stated above, the Hon’ble Supreme Court vide it’s judgment in SLP in CC No. 769/2017 has dismissed the SLP filed by the assessee thereby confirming the judgment of the Hon’ble Gujarat High Court in the case of N.K. Proteins Ltd Vs. DCIT (2016) 72 Taxman.com 289 (Gujarat) which has held that addition on percentage basis on bogus or Hawala purchases is against the spirit of I.T. Act. Considering all these facts and legal position, the assessment order is required to be set aside.

10. However, on this issue, it may be noted that the ITAT Mumbai Bench ‘F’ Mumbai, vide its order under ITA No. 4557 and 4558/Mum/2015 dated 28-7-2017 in the case of dy. CIT 14(1)(2) Mumbai Vs. Fagiol India Pvt. Ltd., has distinguished the judgment of Supreme Court in the case of N.K. Proteins. The ITAT has held that considering factual matrix, what needs to be taxed is profit element embedded in such purchases but not the entire purchases. Therefore, in the light of the above judgment, the A.O is required to re-examine the factual matrix and then to decide whether addition of entire purchases or only profit element is warranted in this case.

11. In view of the above facts and circumstances and legality of the case, the order passed u/s 143(3) r.w.s. 147 for A.Y. 2010-11 dt. 11-3-2016 is hereby set aside for fresh determination of income after proper examination of the facts and law.

 12. However, before arriving at any conclusion, the A.O shall give an opportunity to the assessee to adduce evidence in support of its claim of purchases, verify its allowability in the light of the prevailing position of law. Hence, to ensure that the assessee is given proper opportunity of being heard and for substantiating its claim, it would be just and proper to set aside the assessment completed on 11-3-2016 for the A.Y. 2010-11 for de-novo examination of facts. This being done in spirit of the Hon’ble Supreme Court’s decision in the case of Rampyari Devi Saraogi Vs. CIT (1969) 67 ITR 84 (SC) wherein it is held that since the assessee is getting an opportunity of being heard, no prejudice is caused to the assessee if the order is set aside.

 13. In the result the assessment order as referred above is set aside.”

6. The learned Pr. CIT also fails to answer the very primary question that if the purchases are going to be treated as bogus and the addition is going to be made of the entirety of the purchases what happens to the sales that have been disclosed, as also the stocks by treating the said purchases as bogus. Sales which have been disclosed cannot be touched. The stock statement of the assessee would also stands disturbed. A perusal of the assessment order however, shows that these have been examined by the A.O and after considering the facts the estimated addition of 5% of purchases have been made by the A.O. Thus, the issues have been examined by the A.O and just because the opinion as arrived by the A.O is at a variation of the opinion of the learned Pr. CIT, would not grant the learned Pr. CIT the powers of revision u/s 263 of the Act. Thus, on merits, the order passed u/s 263 stands set aside. We are not going into the  technical issues as has been discussed in this order above as we have, on merits, set aside the revisional order passed u/s 263 of the Act.

7. In the result, the appeal of the assessee is allowed.

Order pronounced in open Court on this 20^th day of February 2020.