Case Law Details
Daffodills Pharmaceuticals Ltd Vs PCIT (ITAT Delhi)
ITAT Delhi held that invocation of revisionary power u/s 263 of the Income Tax Act without satisfying two conditions i.e. order was erroneous and it was prejudicial to the interest of revenue is unsustainable in law and liable to be quashed.
Facts- The assessment was completed by PCIT-1 u/s. 143(3) r.w.s. 147 of the Act, wherein the A.O. accepted the returned income at Rs.40,87,730/-. PCIT on examination of the assessment records issued a show cause notice u/s. 263 of the Act.
On receipt of the show cause notice, the assessee gave reply. PCIT on not satisfying with the reply given by the Assessee, observed that Assessee is involved in infamous NRHM scam and was raided by CBI and the key persons of the assessee company namely were made accused. According to the PCIT, the original assessment was completed on 28.03.2014 u/s. 143(3) of the Act making addition of Rs.16,573/- on account of unverified sundry creditors and disallowed expenditure of Rs.4,74,445/-. Later on, examining the records of the case along with detailed report received from DDIT, the AO had reason to believe that there was a difference of Rs.12,98,24,582/- between turnover and credit in the bank account, which are not reconciled during the original assessment proceedings.
According to PCIT, during the course of reassessment, AO did not enquire the issues properly and there was lack of enquiry on the part of AO resulted the proceedings in erroneous as well as prejudicial to the interest of revenue.
Conclusion- Held that the pre-requisite condition to exercise jurisdiction by PCIT suo-motu condition is not satisfied. Since PCIT has to be satisfy 2 conditions namely (i) the order of AO sought to be revised is erroneous (ii) it is prejudicial to the interest of the revenue. If one of them is absent, even if the order of the AO is erroneous, but is not prejudicial to the interest of the revenue or if it is not erroneous but it is prejudicial to the interest of revenue, recourse cannot be taken u/s. 263(1) of the Act. If due to an erroneous order of the AO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue.
The assessment framed by AO u/s. 143(3) r.w.s. 147 of the Act and the A.O. had recorded various reasons for reopening assessment and went on framing the assessment on the said basis and collected the information with reference to the reasons so recorded for reopening of the assessment and the A.O. was satisfied with the explanation given by the assessee regarding various issues raised by him. Now PCIT cannot find fault with the action of the AO and direct A.O. to carry out further enquiry on the materials or judgments of the High Court which are not part of the assessment records. Accordingly, we do not find any merit in the issues raised by the PCIT in the order passed u/s. 263 of the Act. Accordingly, we quash the order passed u/s. 263 of the Act by PCIT.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by assessee is directed against order of Principal CIT passed u/s 263 of the Income Tax Act, 1961 (“the Act” for short) for the assessment year 2012-13 dated 29.3.2022. The assessee has raised following grounds of appeal:
“1. That having regard to facts & circumstances of the case, Ld. Pr.CIT has erred in law and on facts in assuming jurisdiction u/s 263 of Income Tax Act, 1961 and has erred in holding the reassessment order dated 29-12-2019 as erroneous as well as prejudicial to the interest of revenue and that too by recording incorrect facts and findings and in violation of principles of natural justice.
2. That having regard to facts & circumstances of the case, Ld. Pr.CIT has erred in law and on facts in setting aside the reassessment order dated 29-12-2019 and directing the assessing officer to make the assessment afresh after taking into account the alleged facts mentioned in para 4.1 to 4.7 after due verification and inquiry in this case and after taking input from the CBI wing relating to this case and pass an appropriate order as per the provisions of Income Tax Act and that to by recording incorrect facts and findings and without observing the principles o natural justice and more particularly when all the necessary details/information/evidences were examined at the time of re- proceedings.
3. That having regard to facts & circumstances of the case, Ld. Pr.CIT has erred in law and on facts in observing as under:-
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- That the assessee company is involved in HRHM Scam.
- That there is a difference of Rs.12,98,24,582/- between the turnover and credits in bank account.
- That the issue of section 40A(2)(b) has not been examined.
- That the depreciation of Rs.2,29,125 is not allowable.
4. That in any case and in any view of the matter, action of Ld. Pr.CIT in passing the impugned order u/s 263 is bad in law and against the facts and circumstances of the case and is in violation of principles of natural justice.
5. That having regard to the facts and circumstances of the case, Ld. Pr. CIT has erred in law and on facts in assuming jurisdiction u/s 263 which is bad in law inter alia for this reason that the reassessment order passed u/s 147/143(3) dated 29.12.201 which is sought to be revised u/s 263 itself was invalid inter alia on various grounds as mentioned below and thus proceedings initiated u/s 263 against the invalid reassessment order is clearly bad in law.
(a) That the assumption of jurisdiction u/s 147 is itself is bad in law as the reasons recorded would not have led to the formation of belief of escapement of income.
(b) That no valid satisfaction/approval u/s 151 was obtained.
(c) That impugned reassessment order was passed without complying with the mandatory conditions of section 147 to 151.
6. That the appellant craves the leave to add, amend, modify, delete any of the grounds of appeal before or at the time of hearing and all the above grounds and without prejudice to each other.”
2. In the present case, the assessment was completed by PCIT-1, Meerut u/s 143(3) r.w.s. 147 of the Act vide order dated 29.12.2019, wherein the A.O. accepted the returned income at Rs.40,87,730/-. The ld. PCIT on examination of the assessment records issued a show cause notice u/s 263 of the Act vide notice dated 04.03.2022 stating as under:-
“2. From perusal of assessment record, for the year under consideration, following discrepancies/errors have been noticed:-
2. It is observed that the AO did not examine the details submitted by the assessee through third party verification under the various provisions of the ITT Act 1961, despite the fact mentioned in the report received from DDIT(Inv.). Meerut that the company was involved was involved in various unscrupulous activities related to infamous NRHM scam.
2.2. The company had also paid commission of Rs.7,73,876/- on sales to Sh. Prashant Chaudhary. The amount falls under the category of section 40(A)(2)(b). which needed to be examined by the AO but he did not cross verify this fact. It is also seen that contradictory information, which was submitted by the assessee on different occasions during the assessment proceedings, are available on record. The AO did not confront these facts during the examination.
2.3 Further, it is seen from DDIT(Inv) report that a residential flat B514, cosmos executive Apartments, Palam Vihar, Gurgaon was shown to have purchased and depreciation of Rs. 1,17,500/- was wrongly claimed. The AO did not examine this fact during the assessment proceedings.
3. In view of the above, the assessment order passed by the AO, Circle-1. Meerut is erroneous and prejudicial to the interest of revenue and may be cancelled or modified by invoking the provisions of section 263 of the Income Tax Act, 1961.”
3. On receipt of the show cause notice dated 04/03/2022 the assessee gave reply on the above issue. The Ld. PCIT on not satisfying with the reply given by the Assessee, observed that Assessee is involved in infamous NRHM scam and were raided by CBI and the key persons of the assessee company namely Shri Surendra Chaudhary and Shri Narendra Chaudhary were made as accused. The said raids were made in the year 2010 and 2012. It was also pointed out that in earlier investigation report dated 18.03.2019, as per the findings of CBI, assessee supplied products at high cost to Government hospitals after debiting bogus expenses and commission, etc, siphoned of the money to pay the bribe to various parties. According to the ld. PCIT, the original assessment was completed on 28.03.2014 u/s 143(3) of the Act making addition of Rs.16,573/-on account of unverified sundry creditors and disallowed expenditure of Rs.4,74,445/-. Later on, examining the records of the case along with detailed report received from DDIT (Investigation) Unit-1, Meerut, the ld. AO had reason to believe that there was a difference of Rs.12,98,24,582/- between turnover and credit in the bank account, which are not reconciled during the original assessment proceedings. Information was also received from Investigation wing regarding the non-production of books of accounts and vouchers, despite specific and repeated requests, serious allegations and charge sheets, which are also relevant for the year under consideration in view of modus operandi adopted and huge difference in credits and other adverse materials and findings. In view of this, the ld. AO reopened the assessment by issuing a notice u/s 148 of the Act on 30.3.2019 with due permission from ld. PCIT Meerut. According to the ld. PCIT, during the course of reassessment, the ld. AO did not enquire the issues properly and there was lack of enquiry on the part of ld. AO resulted the proceedings in erroneous as well as prejudicial to the interest of revenue.
4. Further, the Ld. PCIT had taken note of the decision of Hon’ble Allahabad High Court in the case of Daffodils Pharmaceuticals Vs. State of UP in case No.8071/2015 dated 24.04.2017, wherein the writ petition of the assessee has been dismissed by following observations:
11. It is necessary to mention certain facts relating to CBI case, on the basis of which the order impugned was passed by the Competent Authority. It is alleged that with the intention to obtain maximum orders of medicine and equipment and obtain profit by way of fake supply to various persons. Shri Surendra and Narender Chaudhary, props M/s Daffodills Pharmaceuticals and M/s Eastern Drug & Sanitary Products in conspiracy with senior officers of Department of Health & Family Welfare, got CMO/CMO (FW) posted in various District by paying huge illegal gratification to Senior Officers, politicians and other public functionaries. The CMOS/ CMO (FW) once posted awarded maximum supply orders for various purchases of medicine, equipment and other items above Rs. 2.72 crore for respective District through their firms fluting all the norms of purchases, by splitting orders to bring them under their financial powers, obtaining bogus quotations, receiving fake supply, accepting spurious/sub standard drugs without proper batch number, expiry dates, creating false/bogus records at Distt level, Primary Health Centers and other Sub Centers. The FIR further says that the PE conducted about the then above mentioned CMOS revealed that they in conspiracy with the supplies ordered and received bogus supply of medicine and other items above 87 lacs (approx) from Shri Surender and Shri Narender Chaudhary, props M/s Daffodills Pharmaceuticals an d M/s Eastern Drug & Sanitary products. The enquiry at the above said Distt disclosed that in the above said Distt medicines, medical and surgical equipments were allegedly purchases at very exorbitant rates which were found to be 4 to 5 times higher than the actual prevailing market rates for the same items from said firms and other companies. Also it was revealed during the enquiry that the said medicine and medical equipments were purchased on the basis of forged quotations of the forged letter heads of reputed companies and payments were received by opening bogus accounts in various banks”.
5. Further, the PCIT has also taken note of another matter related to M/s Daffodils Pharmaceutical in the case of Surendra Chaudhary Vs. State of U.P., wherein the Allahabad High Court vide order dated 03/07/2015, rejected the petition filed u/s 482 of Criminal Procedure Code with a prayer to quash the charge sheet in following manners:-
“This 482 application has been filed for quashing of the proceedings including the charge sheet filed against the applicant The allegations against the applicant are of having involved himself in the transaction of purchase of certain medicines at exorbitant prices. The allegations against the applicant in the charge sheet are as follows:-
“The investigation has revealed that total three tenders were received from M/s. Unicure (India) Pharmaceuticals Pvt. Lid. NOIDA, M/s Daffodills Pharmaceuticals Lid, Meerut and M/s. Sudharshan Pharmaceuticals Pvt Ltd. Indore. It is revealed that the Tender of M/s Unicure (India) Pharmaceuticals Pvt Ltd, NOIDA. U.P is forged one Sh Abdul Mateen, the partner of the firm M/s Unicure Pharmaceuticals Pvt. Ltd was examined and he stated that he/his firm did not participate in the said tender and did not fill the tender and also did not allow/instructed anybody to apply submit the tender. The documents filed with the tenders belong to his firm and are genuine. Hence, the tender of M’s Unicure (India) Pharmaceuticals Pvt. Ltd, NOIDA is forged one.
The investigation also revealed that two Drafts, each amounting Rs 20,000/- bearing No. 201967 and 201968 were issued on 7.2.2011 from ICICI Bank, Meerut in favour of Chief Medical Officer, FW. Meerut from Current A/c No. 628505004795. The said A/c is in the name of M/s. Daffodills Pharmaceuticals Ltd, Meerut in ICICI Bank Raj Lok. Civil Lines, Meerut. The said Drafts were prepared on the written instruction of Sh. Surender Choudhary, Director M’s Daffodils Pharmaceuticals Lid. These Drafts were respectively used for the tenders of Ms. Unicure (India) Pharmaceuticals Pvt. Ltd. NOIDA and M Sudharshan Pharmaceuticals, Indore and Mis. Daffodilla Pharmaceuticals, Meerut are hand in glove in submitted forged tender of Mix. Unicure Pharmaceuticals Pvt. Ltd. NOIDA More so the beneficiary of the tenders ure both the firms.
The Investigation revealed that Sh. Vijay Randhar Director, M/s Sudharshan Pharmaceuticals Pvt. Ltd. Indore got Licence on 7.1.2011 for manufacturing Folifer M Tablet (Iron 30 mg & Folic Acid 250 mcg) The licence was issued by the Licensing Authority Food & Drugs Administration Madhya Pradesh, Bhopal, it is seen that the amount of Rs. 15.12.000 was received by the CMO, FM Meerut in December, 2010. The investigation also revealed that Sh. Surender Choudhary, Director, Ms. Daffodills Pharmaceuticals Ltd. Meerut informed Sh. Vijay Randhar that IFA tablet will be purchased by the CMO, F/W Meerut Hence, Sh. Vijay Randhar applied and received the licence for supplying the IFA to the CMO, F/W, Meerut. The investigation revealed that M/s Sudharshan Pharmaceuticals Pvt. Ltd has not made any other sale to any other person authority except this sale of the IFA M/s. Sudharshan Pharmaceuticals Pvt. Ltd received Rs. 15.12 lacs, vide Six Demand Drafts (amounting Rs. 3,97,020/ dated 1.3.2011, Rs 4,75,373/- dated 1.3.2011 Rs 1,98,510 dated 3.3.2011, Rs. 99,255/- dated 4.3.2011 Rs. 3,34,281/- dated 11.3.2011, Rs. 7,561/- dated 24.3.2011 issued by the CMO. F/W, Meerut.
It is revealed in investigation that the bills on which the payments was sanctioned in the Office of Chief Medical Officer, Family Welfare, Meerut purportedly issued by M/s. Sudarshan Pharmaceuticals. Indore were not issued by them. The Iron Folic Acid Tablets @ 5 paise per tablet by M/s. Sudarshan Pharmaceuticals, Indore to M/s. Daffodills Pharmaceuticals. Meerut and the forged bills of same hatch number were raised at the rate of paise 26 per tablet and payment for the same were received by Mis Sudarshan Pharmaceuticals, Indore from the CMO, F/W, Meerut implying conspiracy of M/s Sudarshan Pharmaceuticals, Indore and M/s Daffodills Pharmaceuticals, Meerut.”
A perusal of the same demonstrates the involvement of the applicant who is the proprietor of M/s Daffodills Pharmaceuticals und Ms. Eastern Drugs & Sanitary Products. The aforesaid allegations in the charge sheet are supported by evidence that has been filed along with the charge sheet itself and has also been explained by the learned counsel for the C.B.I
Learned counsel for the applicant submits that there was no sufficient evidence so as to prosecute the applicant and his alleged involvement is founded on facts which do not link him in any way with the offences alleged.
Similar grounds had been taken by one Devendra Mohan in a 482 application filed before this Court and the same was considered in detail along with other co-accused of the NRHM scam. The said application was dismissed by a detailed judgment of a learned Single Judge of this Court reported in Devendra Mohan v. CBI New Delhi 2013 (4) ADJ Page 620. On the arguments that have been advanced by Sri Sam Gopal the reasons given in the aforesaid judgment clearly apply The entire gamut of facts and the fact of misappropriating government funds resulting in the NRHM scam is clearly extended therein and therefore there is no occasion or any reason to quash the proceedings or the charge sheet against the applicant.
For all the reasons given in the above mentioned judgment as well as the reasons stated hereinabove, no case is made out for quashing of the proceedings or the charge sheet The Application is misconceived and is accordingly rejected.”
6. According to the ld. PCIT, assessee had only furnished the cash flow statement, which is not showing the true picture in respect of difference of Rs.12,98,24,588/- and no confirmation letters from the parties were collected or cross examination has been done by the ld. AO, which is essential in the case. Further, held that the assessee had claimed depreciation at Rs.2,29,125/- on account of flat purchased, which is a residential Flat and no depreciation to be allowed on this count.
7. The assessee had claimed cash expenses as a deduction in P&L account for which no supporting evidence has been furnished. According to the ld. PCIT, this expenditure cannot be allowed in view of the judgment of Hon’ble Allahabad High Court cited (supra) as this is hit by explanation to section 37(1) of the Act. In view of the above, the Ld. PCIT, vacated the assessment order made u/s 143(3) r.w.s. 147 of the Act dated 29.12.2019 and directed the AO to frame the assessment afresh after due verification and enquiry in this case after taking into consideration the input from the CBI wing and also after giving fair opportunity of hearing to the assessee. As against the revision order dated 29/03/2022, the assessee is in appeal before us on the grounds mentioned above.
8. We have heard the rival submissions and perused the materials available on record. Under Section 263 of the IT Act, the ld. PCIT may call for and examine the record of any proceeding if he considers that any order passed therein by the AO is erroneous and prejudicial to the interests of the Revenue. The Ld. PCIT may after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. As per Section 263 of the Act, the ld. PCIT can exercise such power when the following factors exist:
(i) There should be a proceeding under the Act;
(ii) In such proceeding the AO must have passed an order;
(iii) The ld PCIT should consider that the order so passed is erroneous;
The Ld. PCIT should consider that the order so passed is prejudicial to the interest of Revenue.
9. It is held in the case of CIT vs. Gabriel India Ltd. Reported in 203 ITR 108 (Bombay) that suo-motu revision can be exercised by the ld. PCIT only on examination of record under the Act if the PCIT considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interest of the Revenue. It is not an arbitrary power. It can be exercised only on fulfilling of requirements laid down in Section 263(1) of the Act. The consideration of the ld. PCIT as to whether the order is erroneous insofar as it is prejudicial to the interest of the Revenue must be based on material on record of proceedings called for. If there are no material on record on the basis of which it can be said that the ld. PCIT acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by the PCIT will be illegal and without jurisdiction. The ld. PCIT 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. The first requirement to exercise the power suo-motu is that the order is erroneous. Secondly it should be prejudicial to the interests of Revenue. If the order is erroneous but not prejudicial, ld. PCIT cannot exercise the power under Section 263 of the Act. Every erroneous order cannot be the subject-matter of revision because second requirement must also be fulfilled. There must be prima facie material on record to show that tax which was lawfully eligible was not imposed or by application of relevant statute on an incorrect interpretation a lesser tax than was just has been imposed. Thus under s. 263 the revisionary power can be exercised only if the order of the AO is erroneous and prejudicial to the interests of Revenue. In the absence of any one of the said conditions the revisionary power cannot be exercised by the ld. PCIT. The Supreme Court in the case of Malabar Industrial Co. Ltd. vs. ld. PCIT (supra) has observed as follows :
“A bare reading of s. 263 of the IT Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the CIT suomotu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interest of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent—if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it not erroneous but is prejudicial to the Revenue—recourse cannot be had to s. 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the AO, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase ‘prejudicial to the interests of the Revenue’ is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO, cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.”
10. When an order of the AO is erroneous and granted relief not in accordance with law and secondly when the AO has failed to make out a case as is expected from him because he is an adjudicator as well as investigator, he cannot remain passive. It is the duty of the AO to invoke an enquiry. If the AO has failed to make an enquiry to unearth the true facts, the order is said to be erroneous.
11. In the present case, the ld. AO is not doing the original assessment. This is the case of reopening of assessment u/s 147 of the Act after issuing notice u/s 148 of the Act. We have to see the reasons for recording reopening of the assessment, which are as follows:
(a) On the basis of STR information received from DDIT (Inves.) Unit-1, Meerut that difference between the credits in bank statements and turnover was amounting to Rs.12,90,50,706/-.
(b) Verify the commission paid on sale at Rs.7,73,876/- and Rs.3,00,000/-during the financial year 2011-12 relevant to the assessment year 2012-13.
(c) The ld. AO on examining these issues accepted the returned income at Rs.40,87,730/- vide assessment order dated 29.12.2019 passed u/s 143(3) r.w.s. 147 of the Act.
12. Now the contention of the ld. D.R. is that:
(i) AO failed to obtain necessary documents from the assessee regarding difference of Rs.12,98,24,582/- between turnover and credits in the bank account.
(ii) AO did not enquire through Government officers or the officers of the CBI, wherein the assessee was claimed to have sold medicine in lieu of which paid commission of Rs.1,36,12,647/- to the agents including Shri Prashant Chowdhury and ld. AO also did not enquire whether the agents have included commission income in the income tax return filed for the assessment year. The ld. AO did not verify the implication of section 40A(2)(vi) of the Act.
(iii) Further, the ld. AO did not verify the claim of depreciation at Rs.2,29,125/- on account of purchase of residential flat on which no depreciation is allowable.
13. As seen from the above, the Ld. PCIT wants to do enquire on the issues, which are not subject matter of reopening of assessment u/s 147 r.w.s. 148 of the Act. In our humble opinion, when the assessment is reopened usually, it is not open to him to go beyond the issues raised in the reasons recorded for reopening of the assessment. In other words, the A.O’s jurisdiction is limited to the issues, which are subject matter of reopening. For this purpose, we rely on the judgment of Hon’ble Supreme Court in the case of LD. PCIT Vs. Jet Airways (I) Ltd. Reported in 331 ITR 236 wherein it was held that “AO may assess or reassess income in respect of any issue, which comes to his notice subsequently in the course of proceedings, though the reasons for such issue were not included in the notice. However, if after issuing the notice u/s 148 of the Act, the ld. AO accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as the matter of fact not escaped assessment, it is not open to him independently to assess some other income”, which is clear from the following observation of the Hon’ble Supreme Court.
“The effect of s. 147 as it now stands after the amendment of 2009 can be summarized as follows : (i) The AO must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year; (ii) Upon the formation of that belief and before he proceeds to make an assessment, reassessment or re-computation, the ld. AO has to serve on the assessee a notice under sub-s. (1) of s. 148; (iii) The ld. AO may assess or reassess such income, which he has reason to believe, has escaped assessment and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section; and (iv) Though the notice under s. 148(2) does not include a particular issue with respect to which income has escaped assessment, he may nonetheless, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section.
Upon the formation of a reason to believe under s. 147 and following the issuance of a notice under s. 148, the AO has the power to assess or reassess the income, which he has reason to believe had escaped assessment and also any other income chargeable to tax. The words “and also” cannot be ignored. The interpretation which the Court places on the provision should not result in diluting the effect of these words or rendering any part of the language used by Parliament otiose. Parliament having used the words “assess or reassess such income and also any other income chargeable to tax which has escaped assessment”, the words “and also” cannot be read as being in the alternative. On the contrary, the correct interpretation would be to regard those words as being conjunctive and cumulative. It is of some significance that Parliament has not used the word “or”. The legislature did not rest content by merely using the word “and”. The words “and”, as well as “also” have been used together and in conjunction. The words ‘such income’ refer to the income chargeable to tax which has escaped assessment and in respect of which the AO has formed a reason to believe that it has escaped assessment. Hence, the language which has been used by Parliament is indicative of the position that the assessment or reassessment must be in respect of the income in respect of which he has formed a reason to believe that it has escaped assessment and also in respect of any other income which comes to his notice subsequently during the course of the proceedings as having escaped assessment. If the income, the escapement of which was the basis of the formation of the reason to believe is not assessed or reassessed, it would not be open to the AO to independently assess only that income which comes to his notice subsequently in the course of the proceedings under the section as having escaped assessment. If upon the issuance of a notice under s. 148(2), the AO accepts the objections of the assessee and does not assess or reassess the income which was the basis of the notice, it would not be open to him to assess income under some other issue independently. Parliament when it enacted the provisions of s. 147 w.e.f. 1st April, 1989 clearly stipulated that the AO has to assess or reassess the income which he had reason to believe had escaped assessment and also any other income chargeable to tax which came to his notice during the proceedings. In the absence of the assessment or reassessment of the former, he cannot independently assess the Parliament, when it enacted the Exp/n. 3 to s. 147 by the Finance (No. 2) Act, 2009 clearly had before it both the lines of precedent on the subject. The precedent dealt with two separate questions. When it effected the amendment by bringing in Expln. 3 to s. 147, Parliament stepped in to correct what it regarded as an interpretational error in the view which was taken by certain Courts that the AO has to restrict the assessment or reassessment proceedings only to the issues in respect of which reasons were recorded for reopening the assessment. The corrective exercise embarked upon by Parliament in the form of Expln. 3 consequently provides that the AO may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice under s. 148(2). Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under s. 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the AO could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Exp/n. 3 by the Finance Act (No. 2) of 2009. However, Expln. 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of s. 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Sec. 147 has this effect that the AO has to assess or reassess the income (“such income”) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, it after issuing a notice under s. 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him to independently assess some other income. If he intends to do so, a fresh notice under s, 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee—ld. PCIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC) : (1992) 64 Taxman 442 (SC) relied on.”
14. In the present case, Ld. AO carried out an enquiry with regard to issues raised by him on reasons recorded for reopening of the assessment. Ld. PCIT was of the opinion that assessee was involved in NRHM scam and decision of Hon’ble High Court of Allahabad in the case of Daffodils Pharmaceuticals Vs. State of UP in case No.8071/2015 dated 24.04.2017 and also another matter relating to M/s Daffodils Pharmaceuticals in the case of Surendra Chaudhary Vs. State of U.P. & another of Allahabad High Court which are having bearing on the assessment of assessee for the assessment year 2012-13 and he ought to have considered the said Judgments while framing the reassessment.
15. In our opinion, the above judgments are not part of the assessment record and at the time of reassessment, the ld. AO is required to go through the records in accordance with reasons recorded and he cannot presume certain facts which are beyond his records. Even otherwise, the ld. PCIT is expected to examine the assessment records at the time of issuing notice u/s 263 of the Act. At the time of issuing notice u/s 263 of the Act by Ld. PCIT, the above referred Judgments were also not forming part of the assessment records.
16. Being so, the findings of the ld. PCIT on this issue are contrary to facts and also against the material brought on record by ld. AO. The ld. AO is not expected to carry out enquiry with regard to issues which are not subject matter of the reopening. In such circumstances, the findings of the ld. PCIT to give direction to the ld. AO to reframe the assessment order in the light of the Judgments of Allahabad High Court in the case of Daffodils Pharmaceuticals cited (supra) is unwarranted, which is beyond the scope of the jurisdiction which the PCIT can exercise u/s 263 of the Act.
17. Further, with regard to payment of commission of Rs.1,36,12,647/- to various persons, the ld. PCIT expected the ld. AO to verify with various Government officers including CBI officers. In our opinion, this is also not subject matter of reasons recorded for reopening of assessment. As such, the ld. AO is not required to carry out enquiry on this issue while passing assessment order u/s 143(3) r.w.s. 147 of the Act.
18. Even the allowability of depreciation on Flat is also not subject matter of reason recorded for reopening of assessment. This cannot be verified by ld. AO when the main issue for reopening of the assessment is not sustained. The one more issue raised by the ld. PCIT was that payment of commission was passed to public policy in view of the explanation to section 37(1) of the Act. It has been noted from the reasons recorded that the ld. AO not alleged about applicability of explanation to section 37(1) of the Act while reopening assessment. Once it is not the issue of reopening assessment, the ld. AO cannot be expected to carry out the enquiry as suggested by the ld. PCIT. At the cost of repetition we make it clear that in the case of reopening, the ld. AO raised the following issues:-
a. Details of 2 DDs were purchased in favour of Daffodils Pharmaceuticals Ltd. And Eastern Drugs and sanitary purchasers for total amount of Rs.1,61,11,315/-.
b. Explanation regarding difference between credits in bank statements and turnover of Rs.12,90,50,706/-. The details of payments falls u/s 40A(2)(b) of the Act payment of sales commission of Rs.7,73,876/-.
19. The ld. AO satisfied about the correctness of the above and after calling for the details from the assessee and came to a conclusion that there was no necessity of any addition on the above issues and duly framed the assessment u/s 143(3) r.w.s. 147 of the Act.
20. In our opinion, on the facts of present case, the pre-requisite condition to exercise jurisdiction by ld. PCIT suo-motu is not satisfied. Since the ld. PCIT has to be satisfied with 2 conditions namely (i) the order of ld. AO sought to be revised is erroneous (ii) it is prejudicial to the interest of the revenue. If one of them is absent, even if the order of the ld. AO is erroneous, but is not prejudicial to the interest of the revenue or if it is not erroneous but it is prejudicial to the interest of revenue, recourse cannot be taken u/s 263(1) of the Act. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the ld. AO. If due to an erroneous order of the ld. AO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue. The phrase “prejudicial to the interest of the revenue” has to be read in conjunction with the erroneous order passed by the ld. AO. Every loss of revenue has a consequence of an order of the ld. AO cannot be treated as a prejudicial to the interest of revenue. For example, when ld. AO adopted one of the courses presumably in the law and it has resulted in loss of revenue, or where two views are possible and the ld. AO has taken one view with that ld. PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the ld. AO is unsustainable in law. In the present case, the assessment framed by ld. AO u/s 143(3) r.w.s. 147 of the Act and the A.O. had recorded various reasons for reopening assessment and went on framing the assessment on the said basis and collected the information with reference to the reasons so recorded for reopening of the assessment and the A.O. was satisfied with the explanation given by the assessee regarding various issues raised by him. Now the ld. PCIT cannot find fault with the action of the ld. AO and direct A.O. to carry out further enquiry on the materials or judgments of the Hon’ble High Court which are not part of the assessment records. Accordingly, we do not find any merit in the issues raised by the ld. PCIT in the order passed u/s 263 of the Act. Accordingly, we quash the order passed u/s 263 of the Act by the ld. PCIT.
21. In the result, the appeal filed by the Assessee is allowed.
Order pronounced in open Court on 19th September, 2023
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