IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA Income-tax Appeal No. 14 of 2008 Reserved on: 9.9.2010. Date of decision: 7.1.2011 Commissioner of Income-tax …Appellant. Versus M/s Alborz Industries …Respondent. Coram The Hon’ble Mr.Justice Deepak Gupta, J. The Hon’ble Mr. Justice Sanjay Karol, J. Whether approved for reporting? For the appellant: Ms. Vandana Kuthiala, Advocate. For the respondent: Mr. Vishal Mohan with Mr. Goverdhan Sharma, Advocates. Per Deepak Gupta, J. 1. This Income-tax Appeal was admitted on some other questions of law but after hearing the parties we are of the considered opinion that the following questions of law arise in this appeal:- 1. What is the scope of the revisionary jurisdiction of the Commissioner under Section 263 of the Income- tax Act, 1961 and whether in the present case the Commissioner exceeded the powers vested in him under the said section? 2 2. Whether the Income-tax Appellate Tribunal was correct in holding that the Commissioner while passing the order under Section 263 had merely substituted his own judgement for that of the Assessing Officer without appreciating that the Assessing Officer had gone into the detailed facts of the case? 2. This appeal has been filed by the revenue and is directed against the order of the Income-tax Appellate Tribunal, Chandigarh dated 13.08.2007 whereby it accepted the appeal of the assessee, set-aside the order of the Commissioner passed under Section 263 and consequently upheld the order of the Assessing Officer. 3. The undisputed facts of the case are that the assessee firm is a partnership firm. The two partners are Shri Neeraj Aggarwal and his wife Smt. Anuradha Aggarwal, who reside at Delhi. The assessee had two units; one a trading unit at Delhi and the other a manufacturing unit at Baddi. The Government of India gave incentives for setting up of industries in certain areas in Himachal Pradesh and in terms of these incentives the manufacturing units based at Baddi were given income-tax benefits and were in fact exempted from payment of income-tax under Sections 80-1A & 80-1B of the Income- tax Act, 1961 (here-in-after referred to as the Act). 3 4. For the assessment year 2001-02 the assessee declared total income of Rs.90,17,776/- and claimed deduction of this entire amount in terms of Section 80-1B. The case of the assessee was taken up for scrutiny in terms of Section 143 of the Act and notices were issued to the assessee calling upon it to give some information. The Assessing Officer vide his order dated 2.4.2003 accepted the explanation given by the assessee and came to the conclusion that the same was genuine and thereby accepted the return of the assessee. 5. Thereafter, the Commissioner Income-tax issued notice to the assessee under Section 263 of the Act. According to the Commissioner, the assessing officer had accepted the assessee’s claim for deduction of the entire income without proper verification. As per the commissioner, the assessing officer had failed to investigate the genuineness of the abnormally high gross profit rates and net profit rates shown by the assessee firm. It was also alleged that the Assessing Officer had failed to look into the legal requirements of maintaining separate books of account laid down in Sections 80I(A) and 801(B) of the Act before allowing the deduction. 6. The Commissioner was of the view that the order passed under Section 143(3) on 2.4.2003 was erroneous and prejudicial to the interest of the revenue. The show 4 cause was replied to by the assessee firm. Various hearings took place and more information was asked for from the assessee but it appears that the assessee firm was not present at most of the hearings. When the assessee was directed to produce the books of accounts of the Baddi unit it reported that the books had been lost. Thereafter, the Commissioner after considering the matter came to certain findings. 7. The Commissioner held that whereas the profit declared for the Baddi unit was abnormally high the loss declared for the Delhi unit was also not justified. According to him it appeared that the profits of the trading unit at Delhi had been transferred to the Baddi unit. The Commissioner came to the conclusion that the assessee had not maintained separate books of accounts of the Industrial Undertaking Baddi, which it was required to maintain in terms of Section 80-1A(7) of the Act. On the query of the Commissioner, copy of profit and loss account of the Baddi unit was filed, but the balance sheet was not furnished. The Commissioner also found that there were discrepancies in the rates of the evaluation of the opening stock and closing stock. Whereas the opening stock was valued at Rs.90 per kg. as on 1.4.2000 the closing stock was valued at Rs.235 per kg. as on 31.3.2001. According to the Commissioner, the assessee had overvalued the 5 stocks. One of the grounds which weighed with the Commissioner in setting aside the order of the Assessing Officer was the abnormally high gross profit and net profit rates. The Commissioner found that the gross profit rate varied from 93% in the first year of production to 58.17% in the relevant financial year and dramatically reduced to 5.51% in the assessment year 2002-03 and the assessee closed the unit in the year 2003-04. As per the incentive scheme the unit was to enjoy 100% deduction under Section 801A and 801B for the first five years and thereafter 75% of the profit were taxable and the assessee closed the unit without any apparent reason because if the unit was so profitable why should it have been closed. 8. The Commissioner also found that on 22.10.2001 an Inspector of the Income-tax Office at Parwanoo had visited the factory premises which was locked and gave a deserted look. No work was being done and only one Chowkidar was found. The statement of the Chowkidar was recorded and he stated that no work was being done in the factory for the last two years and he did not know the name of Manager. During assessment proceedings this Chowkidar stated that he had made the statement in respect of the sister concern M/s B.R.Industries and not about the assessee firm. According to the Commissioner the assessing officer erred in accepting the statement of 6 Chowkidar without any verification. The Commissioner in Para 5.5. held as follows:- “5.5. Had the unit been genuinely in operation :- i) there would have been considerable activities when the Inspector visited the premises on 22.10.2001. ii) there would have been substantial amounts of stocks and machinery etc. iii) The assessee would not have scaled down its operations and then closed the units also after the enquiries were initiated by the Department. iv) No reasons have been given for closing down the Unit particularly when it had been yielding very-very rich dividend to the assessee for the last 3-4 years. When it became known to the assessee that the fake nature of its operations had come to the deparment’s notice, it deemed it fit to show the unit as closed because it thought that it would not be able to survive the hard scrutiny its case will be put to.” 9. On this basis the Commissioner found that the assessee was using the unit at Baddi as a façade to route his undisclosed income earned elsewhere. The Commissioner also found that the total plant and machinery at Baddi was of Rs.2,74,985/-. The assessee did not have even essential tools and equipments and on the basis of this small machinery such huge profits could not have been earned. The Commissioner also found that on comparison of the records of the assessee with that of the sister concern at Delhi the Electrical Stampings were 7 sold at huge profit by the Baddi Unit but in case of the sister concerned these have been sold at a loss. 10. The Commissioner, in fact, held that no manufacturing process was taking place at Baddi. In support of this the Commissioner stated that no raw material was available with the assessee on certain dates but huge manufacturing was shown in the plant. 11. The Commissioner also found that the consumption of power in the unit was so low that no manufacturing could take place. The table relating to consumption of power vis-à-vis production is reproduced below:- Sr. No Month Electricity Consumed in Unit Bill Amount in Rs. Raw material consumed in Kgs. Production In Kgs. 1. March,2000 220 388 Nil Nil 2. April, 2000 560 973 Nil Nil 3. May, 2000 400 898 Nil Nil 4. June, 2000 10 33 Nil Nil 5. July, 2000 2070 4605 Nil Nil 6. August, 2000 197 448 Nil Nil 7. Sep.2000 - - 1805 1805 8. Oct.2000 - - 28,398 28,398 9. Nov.2000 325 833 33136 33136 10. Dec.2000 263 670 2913 2913 11. Jan.2001 890 2918 390 390 12. Feb.2001 1159 5167 48,591 48,591 13. March, 2001 779 4216 14501 14501 8 12. The Commissioner also found that as per the record the assessee had claimed that he had engaged 10 to 11 workers at Baddi and manufacturing process was carried out through the whole year. The assessee did not file the details of the salary and wages paid to each worker. The total sum debited on account of wages was Rs.2,49,436/- per annum i.e. Rs.20,786/- per month and the salary of each worker would come only Rs.2,078/- per month, which was barely equal to the minimum wages. According to the commissioner, the chart prepared in this regard clearly indicated that sufficient number of workers were not engaged. 13. The Commissioner also found that the assessee had availed a packing credit limit of Rs.40 lakhs but no interest expenditure had been debited in the profit and loss account of the Baddi unit. Since the credit had been raised for the unit at Baddi the interest could not have been debited to the Delhi unit. According to the Commissioner the assessee had artificially inflated the income of the Baddi unit and reduced the income of the Delhi unit. 14. The Commissioner also found that in the profit and loss account the assessee firm had deposited a sum of Rs.23,71,100/- on account of foreign travel by only one person Shri Himanshu Singhal to various countries. Himanshu Singhal was shown as an employee of the Delhi 9 unit and his salary was only Rs.2,000/- per month. According to the Commissioner it did not stand to reason that such a lowly paid employee could be entrusted with the task of visiting foreign countries and incurring a huge expenditure of Rs.23,71,100 on foreign tours. He also found that the export of the Baddi unit was only to UAE and therefore, the visit of Himanshu Singal who was a close relative of the partners to other foreign countries was not in connection with the business work. Hence, he disallowed this expenditure also. The Commissioner also found that whereas the assessee claimed more than 90% of his production was exported but no bills of lading, shipping evidence and the sale consideration was produced. According to the Commissioner, the assessee also had not claimed any deduction under Section 80HHC and had not filed Form No.10CCAC. The Commissioner of Income-tax thereby assessed the profit of the Baddi unit of Rs.25,48,805 and that of the Delhi unit at Rs.91,86,599/-. He also held that since the Baddi Unit is not a manufacturing unit the entire income was subject to income-tax. 15. Aggrieved by this order the assessee filed an appeal to the Income Tax Appellate Tribunal (ITAT). The first objection of the assessee was that under Section 263 of the Act revisional proceeding could only be initiated if 10 the order was erroneous and prejudicial to the interest of the revenue. It was urged that powers of Section 263 could not be invoked. The main argument of the assessee was that the Assessing Officer had dealt with all the facts and conducted a complete inquiry and once the Assessing Officer came to certain conclusion these could not be set- aside by the Commissioner in exercise of his power under Section 263. The Commissioner could not substitute his own judgement for that of the Assessing Officer. The Income-tax Appellate Tribunal held that an order can be considered to be erroneous under Section 263 if it is based on wrong or incorrect application of law. Even an order passed without proper application of mind or without making proper inquiry can also be said to be erroneous for the purposes of under Section 263. However, the Tribunal went on to hold that the Commissioner went into a searching and roving inquiry which was intended to overcome the stand of the Assessing Officer. The Tribunal was of the view that the first show cause notice did not show as to under what circumstances the Commissioner had inferred that the deduction allowed by the Assessing Officer had been granted without looking into the fulfillment of the necessary conditions. It also found that the Commissioner had made some erroneous findings. The Tribunal went on to hold that there was no material on 11 record to conclude that the unit at Baddi was only a façade and there was no actual manufacturing and no export of goods. It went on to hold that the initiation of proceedings under Section 263 did not fulfill the various prerequisites of Section 263 and accordingly set-aside the order. 16. To appreciate the rival contention of the parties, it would be apposite to refer to Section 263 of the Income- tax Act, relevant portion of which reads as follows:- “263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he 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 canceling the assessment and directing a fresh assessment.” 17. The Bomaby High Court in Commissioner of Income- tax vs. Gabriel India Ltd., (1993) 203 ITR 108 held as follows:- “The power of suo motu revision under sub-section (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz. (i) the order is 12 erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expression “erroneous”, “erroneous assessment” and erroneous judgement” have been defined in Black’s Law Dictionary. According to the definition, “erroneous” means “involving error; deviating from the law”. “Erroneous assessment” refers to an assessment that deviates from the law and is, therefore, invalid and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, “erroneous judgement” means “one rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles.” 18. The Apex Court in Commissioner of Income- tax vs. Shree Manjunathesware packing products and camphor works, (1998) 231 ITR 53, held as follows:- “Section 263 of the Income-tax Act, 1961 enables the Commissioner to call for and examine the record of any proceeding under the Act and pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or canceling the assessment and directing a fresh assessment, if he considers that any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The section did not at first contain any Explanation. An Explanation was added to section 263(1) by the 13 Taxation Laws (Amendment) Act, 1984. By the Finance Act, 1988, the said Explanation was substituted with effect from June 1, 1988. The Explanation was again amended by the Finance Act, 1989. By the amendments made by the Finance Acts of 1988 and 1989 a definition of the term “record” was provided. It has been provided that “record” shall include and shall be deemed always to have included all records relating to any proceeding under the Act available at the time of examination by the Commissioner.” 19. A Division Bench of the Madras High Court in Mofussil Warehouse and Trading Co. Ltd. vs. Commissioner of Income-tax, (1999) 238 ITR 867 was dealing with a case where the assessee company paid amounts to the holding company by way of reimbursement in relations to the utilization of the service of the employees of the holding company. The Assessing Officer had not taken into consideration the exact nature of the claim or the unreasonableness thereof. The Madras High Court held that non performance of such a duty cast upon the Income-tax Officer entitled the Commissioner to invoke his power under Section 263. Relevant observation of the Madras High Court reads as follows:- “The non-performance of such a duty on the part of the Income-tax Officer culminated in distortions and prejudices to the Revenue. Such distortions and prejudices to the Revenue for being set right, the Commissioner of Income-tax invoked his power under Section 263 and in exercise of such power he 14 cancelled the assessment passed by the Income-tax Officer with a direction to him to make a fresh assessment, according to law.” 20. The Apex Court in Malabar Industrial Co. Ltd. Vs. Commissioner of Income-tax, (2000) 243 ITR 83, has dealt with the revisional powers under Section 263 in detail. The Apex Court held as follows:- “A bare reading of this provision makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer 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 Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue - recourse cannot be had to Section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; 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 conferred (confined) to 15 loss of tax. The High Court of Calcutta in Dawjee Dadabhoy and Co. v. S. P. Jain, (31 ITR 872) : (AIR 1957 Cal 244), the High Court of Karnataka in Commissioner of Income-tax, Mysore v. T. Narayana Pai, (1975) 98 ITR 422, the High Court of Bombay in Commissioner of Income-tax v. Gabriel India Ltd., 203 ITR 108 : (1994 Tax LR 116) and the High Court of Gujarat in Commissioner of Income-tax v. Smt. Minalben S. Parikh, (1995) 215 ITR 81 treated loss of tax as prejudicial to the interests of the revenue. Mr. Abaraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Company v. Commissioner of Income-tax, (1987) 163 ITR 129 interpreting "prejudicial to the interests of the revenue". The High Court held, "In this context, it must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the Order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration". In our view this interpretation is too narrow to merit acceptance. 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 Income- tax Officer, 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 Assessing Officer. Every loss of revenue as a consequence of an order 16 of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi v. Commissioner of Income-tax, (1968) 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. Commissioner of Income-tax, (1973) 88 ITR 323 (SC).” 21. The Kerala High Court has followed the judgement of the Apex Court in Paul Mathews and Sons vs. Commissioner of Income-tax, (2003) 263 ITR 101. 22. The Rajasthan High Court in Commissioner of Income-tax vs. Ganpath Ram Bishnoi, (2008) 296 ITR 292, held that no presumption could be raised that the Assessing Officer had not applied his mind on the various aspect of the matter and therefore, jurisdiction under Section 263 could not be invoked. The relevant observation of the Rajasthan High Court are as follows:- “Undoubtedly, the jurisdiction under section 263 is wide and is meant to ensure that due revenue ought 17 to reach the public treasury and if it does not reach on account of some mistake of law or fact committed by the Assessing Officer, the Commissioner of Income-tax can cancel that order and require the concerned Assessing Officer to pass a fresh order in accordance with law after holding a detailed enquiry. But when enquiry in fact has been conducted and the Assessing Officer has reached a particular conclusion, though reference to such enquiries has not been made in the order of assessment, but the same is apparent from the record of the proceedings, in the present case, without anything to say how and why the enquiry conducted by the Assessing Officer was not in accordance with law, the invocation of jurisdiction by the Commissioner of Income-tax was unsustainable.” 23. The Apex Court again dealt with the scope of Section 263 in Commissioner of Income-tax vs. Max India Ltd. (2007) 295 ITR 282 and held as follows:- “At this stage we may clarify that under paragraph 10 of the judgement in the case of Malabar Industrial Co. Ltd. Vs. CIT (2000) 243 ITR 83 this