Provision u/s 263 cannot be invoked merely because AO did not use any specific wording while allowing claim

Issue before Court:

Whether CIT rightly invoked provision under section 263.

Brief facts:

• The assessee firm was carried on the business of textiles and garments sale. The Revenue surveyed its premises under Section 133A during which certain discrepancies in accounts were found in the form of excess stocks and the balance constituted excess cash.
• The assessee surrendered this amount and incorporated them in the books of accounts. The final books produced during the course of hearing for the year ending 31.03.2006, disclosed that all these amounts were duly reflected. The assessee had filed a return claiming to be taxed for the sum of Rs. 42,44,290/-. Scrutiny assessment was completed and AO framed the order of Rs. 44,01,300/-.
• Subsequently CIT called for the record and was of the opinion that since the surrendered amount had not been disclosed over and above normal income and the surrendered stock was not accounted for properly, in addition to other existing discrepancies, the matter required re-examination under Section 263 of the Act.
• Accordingly, a notice was issued under that provision, which was resisted by the assessee. The CIT proceeded to finalize the assessment and added considerable amounts, and framed the assessment at a higher amount of Rs. 87,83,468/-.
• On appeal ITAT relying upon CIT v. Sunbeam Auto Ltd. 332 ITR 167 (Del) allowed assessee’s appeal and quashed the order passed u/s 263 by CIT.

Contention of the revenue:

• The CIT took into consideration the fact that stock which was initially valued at Rs. 17 lakhs was sold at Rs. 1,35,400/-, which was dubious. CIT therefore, applied a 20% G.P. rate on the assessee’s normal sales which worked out to Rs. 1,07,19,727/- after giving some allowance for valuation of defective sales and the actual amount claimed, i.e. Rs. 1,37,400/-.
• AO’s order plainly accepted the assessee’s assertions of the need to sell stocks at vastly depressed rates, even though such stocks had been purchased previously for considerably higher amounts.
• The reasoning of the AO was unsupportable, and in addition, there was prejudice to the Revenue, which could be construed as erroneous within the expression of Section 263 of the Act.

Contention of the assessee:

• AO had considered, in detail, the explanations with respect to the clearance sales as well as depressed consideration at which the assessee was forced to sell the stocks.
• Stock clearance sale, whereby discount upto 60% was offered, was resorted to on account of the ongoing sealing drive conducted by the municipal authorities.
• The threat of ongoing sealing drive drove it to sell the stock at throwaway prices.
• Hon’ble Delhi High Court in the case of CIT v. Sunbeam Auto Ltd.(Supra)have held that

“if the application of mind by assessing officer emerges from the assessment record, merely because while allowing the claim some specific wording is not used in assessment order, it will not be an occasion for the Commissioner to hold the assessment order as erroneous and prejudicial to the interests of revenue.”

Held by the Court:

• The various authorities of the Supreme Court in Malabar Industrial Co. Ltd. v. CIT 243 ITR 83 has highlighted that the power under Section 263 cannot be invoked to correct a mere error of an AO, based upon an incorrect assumption of fact. There has to be something more to hold that the determination is both erroneous and prejudicial to the interests of the Revenue.
• Sunbeam (supra) cited by the assessee also notices the same aspect.
• The explanation of the assessee that for sales, the stocks would have been inaccessible for an inordinately long period of time, thus considerably risking its business, as against which it chose to liquidate its stocks, cannot be characterized as unreasonable.

Conclusion:

The CIT cannot invoke provision u/s 263 where assessee applied his mind in examining the facts and circumstances of the case and just because AO assumed a wrong fact.