Section 263 – CIT is empowered to modify the assessment order passed by AO in case, the order is found to be erroneous and prejudicial to the interest of revenue

SBS Clothing (P) Ltd. Vs. DCIT (ITAT Mumbai) – In this case, there was 5-fold increase on account of payment of salary when there was no substantial increase in the turnover. The AO vide note dated 25.10.2007 had asked for reasons for exorbitant rise in salary to which assessee filed letter dated 19.11.2003 replied that the same was because of payment made to job workers in the earlier years whereas in the current year job workers had been taken on salary basis and salary had been paid to them.

The order of assessment shows that the AO accepted the said claim of the assessee without any further enquiry or examination. Once, the assessee makes a particular claim, it is required to be examined and in case AO accepts the claim without any examination or enquiry, the order will be erroneous and prejudicial to the interests of the revenue. Therefore, on the facts of the case we are of the view that the CIT had jurisdiction under section 263 of the IT Act which has been rightly exercised by him. CIT is not bound by the report of AO. He has to pass the order after necessary application of mind, which has been followed in this case. The ld. AR has relied upon the decision in the case of Synergy Entrepreneur Solutions P. Ltd. (supra), which in our view is distinguishable. In that case the Tribunal noted that the CIT had held the assessment order to be erroneous and prejudicial on a ground different from the ground taken in the show cause notice which was not permissible under law. Moreover, the Tribunal also noted that even on merit, the issue of set off of speculation loss against business profit was covered in favour of the assessee by the Jurisdictional High Court in the case of CIT vs. Lokmat Newspaper (322 ITR 43) It was under these circumstances that the order of CIT was held to be devoid of any merit. The case is obviously distinguishable and not applicable to the facts of the present case.

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH ‘J’: MUMBAI

ITA No. 3541/Mum/2010
Assessment Year : 2005- 06

SBS Clothing (P) Ltd.

Vs.

Dy. Commissioner of Income tax

Date of pronouncement : 28th October, 2011

ORDER

Per RAJENDRA SINGH (AM).

This appeal by the assessee is directed against the order dated 30.3.2010 of CIT(A) for the assessment year 2005-06. The assessee in this appeal has challenged the jurisdiction of CIT under section 263 of the Income tax Act, in addition to raising a ground regarding lack of adequate opportunity by the CIT. At the time of hearing ld. AR for the assessee did not press the ground relating to lack of adequate opportunity. Therefore, ground No.2 raised by the assessee is dismissed as not pressed.

2. The facts relating to the ground regarding the jurisdiction of CIT under section 263 are that assessment for assessment year 2005-06 had been completed by AO under section 143(3) on 7.12.2007. Subsequently CIT on examination of records noted that employees’ remuneration paid by the assessee during the year had increased 5-fold to Rs. 2,04,98,187/- as compared to Rs. 46,35,046/- in the immediately preceding year, though there was no substantial rise in the turnover. The AO has allowed the same without examination. CIT therefore, issued a show cause notice dated 2.3.2010 asking the assessee to explain as to why the assessment should not be treated as erroneous and prejudicial to the interest of the revenue as AO had accepted the claim without any examination. CIT had fixed the case on 9.3.2010 but there was no compliance. Subsequently, the assessee vide letter dated 22.3.2010 informed CIT that notice had been received only on 19.3.2010. However, on perusal of the letter of the assessee which had also enclosed part of the notice under section 263, CIT noted that the notice had been received by the assessee on 13.3.2010. Therefore, CIT did not believe the version of the assessee and concluded that the notice sent by speed post to the assessee must have been received by the assessee on 6.3.2010. CIT therefore passed an exparte order on merit. It was observed by him that the AO had allowed the claim of the assessee without any application of mind, and, therefore, order was erroneous and prejudicial to the interest of the revenue in view of the judgment of the Hon’ble Supreme Court in case of M/s. Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83) and several other judgments. CIT, therefore, set aside the order of assessment and directed the AO to pass a fresh order after necessary enquiries and after allowing opportunity of hearing to the assessee.

3. The assessee as pointed out earlier has not pressed the ground relating to lack of opportunity by the CIT. As regard the merit of the case, ld. Authorised Representative for the assessee submitted that the AO had issued a questionnaire with the notice dated 25.10.2007 under section 142(1) in which AO in Q. No. 7 had specifically asked the reasons for exorbitant rise in salaries from Rs. 28.00 lacs to Rs. 1.49 crores. The assessee had given reply vide letter dated 19.11.2007 copy of which has been placed at page-9 of the paper book in which the assessee had explained that the reason for substantial increase in salary compared to the assessment year 2004-05 was that in that year the assessee had engaged job workers who had been separately and which had been added to the cost of sales whereas in assessment year 2005-06 under consideration, the said job workers were taken on pay roll and were paid salary. The ld. Authorised Representative also referred to the letter dated 25.2.2010 addressed to CIT a copy of which is placed at page 16 of the paper book in which the AO mentioned that reasons for exorbitant rise in salary had been examined by AO and therefore, objection raised by audit party was not acceptable. It was thus argued that the AO had allowed the claim after necessary examination and application of mind and order was not erroneous and prejudicial to the interest of the revenue. The ld. AR placed reliance on the decision of the Tribunal in the case of Synergy Entrepreneur Solutions P. Ltd. in ITA No. 3076/M/2010 dated 3 1.3.2011 in support of the case. It was accordingly urged that the order of CIT(A) should be set aside.

3.1 The ld. DR on the other hand strongly supported the order of CIT. It was submitted that the reply given by the assessee vide letter dated 19.11.2007 explaining the steep rise in salary payment had not been examined by the AO and he allowed the claim as made by the assessee without any examination. Therefore, the order was erroneous and prejudicial to the interest of the revenue.

4. We have perused the records and considered the rival contentions carefully. The dispute is regarding legal validity of the jurisdiction under section 263 of the Income tax Act exercised by CIT. Under provision of section 263 CIT is empowered to modify the assessment order passed by AO in case, the order is found to be erroneous and prejudicial to the interest of revenue. A stereotyped order passed without making enquiries which are called for on the facts of the case is erroneous which causes prejudice to the interest of the revenue as held by Honourable Supreme Court in the case of Rampyari Devi Saraogi (67 ITR 84). The same view was followed by the Honourable Supreme Court in the case of Taradevi Aggarwal (88 ITR 323). Following the aforesaid judgements the Honourable High Court of Delhi in case of Gee Vee Enterprises (99 ITR 375) have held that an order is erroneous not only because it contains some apparent error of reasoning or of law or of fact in the face of it but also because it is a stereotyped order which simply accepts what the assessee has stated and fails to make enquiries which are called for on the facts and in the circumstances of the case. It is thus settled legal position that an order passed without necessary examination/ enquiry which are required on the facts of the case is erroneous and prejudicial to the interests of the revenue.

4.1 In this case, there was 5-fold increase on account of payment of salary when there was no substantial increase in the turnover. The AO vide note dated 25.10.2007 had asked for reasons for exorbitant rise in salary to which assessee filed letter dated 19.11.2003 replied that the same was because of payment made to job workers in the earlier years whereas in the current year job workers had been taken on salary basis and salary had been paid to them. The order of assessment shows that the AO accepted the said claim of the assessee without any further enquiry or examination. Once, the assessee makes a particular claim, it is required to be examined and in case AO accepts the claim without any examination or enquiry, the order will be erroneous and prejudicial to the interests of the revenue. Therefore, on the facts of the case we are of the view that the CIT had jurisdiction under section 263 of the IT Act which has been rightly exercised by him. CIT is not bound by the report of AO. He has to pass the order after necessary application of mind, which has been followed in this case. The ld. AR has relied upon the decision in the case of Synergy Entrepreneur Solutions P. Ltd. (supra), which in our view is distinguishable. In that case the Tribunal noted that the CIT had held the assessment order to be erroneous and prejudicial on a ground different from the ground taken in the show cause notice which was not permissible under law. Moreover, the Tribunal also noted that even on merit, the issue of set off of speculation loss against business profit was covered in favour of the assessee by the Jurisdictional High Court in the case of CIT vs. Lokmat Newspaper (322 ITR 43) It was under these circumstances that the order of CIT was held to be devoid of any merit. The case is obviously distinguishable and not applicable to the facts of the present case.