M/S NARANJAN RICE EXPORTS PRIVATE LIMITED, JALANDHAR V. PR. COMMISSIONER OF INCOME TAX -1, JALANDHAR

ITA 248/ASR/2019

AI Insights

The case involves M/s Naranjan Rice Exports Pvt. Ltd., which appealed against the order of the Principal Commissioner of Income Tax-1, Jalandhar, passed under section 263 of the Income Tax Act, 1961, for the assessment year 2014-15. The PCIT's order was based on an audit objection alleging suppression of sale of 'nakku', a by-product in the rice milling process. The assessee contested that the audit objection was irrelevant to their operations, which primarily involved the production of brown rice for export, not the milling of paddy for government agencies. The Tribunal accepted the additional ground of appeal and relied on precedents that emphasized the need for a proper opportunity and investigation before revising an assessment order.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 114954 (ITAT-AMRITSAR)
• Duration Of Justice: 4 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 15-05-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 21-04-2019
• Other Referred Cases: NTPC vs CIT (1998) 229 ITR 383 SC, Smt. Shardaben B. Patel vs. PCIT in ITA No. 1026/Ahd/2018 order dated 25.09.2019 / (2020) 190 DTR (Ahd. Trib.) 228
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revision of order; Audit objection; Difference of opinion; Assessment record; Borrowed satisfaction; Set aside
• Section: 263; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR. BEFORE DR. M. L. MEENA, ACCOUNTANT MEMBER AND SH. ANIKESH BANERJEE, JUDICIAL MEMBER I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 M/s Naranjan Rice Exports Pvt. Ltd. Amanatpur Road, Suranussi, Jalandhar. [PAN:AAACN7742D] (Appellant) Vs. Pr. CIT-1, Jalandhar. (Respondent) Appellant by Sh. J. S. Bhasin, Adv. Respondent by Sh. Girish Bali, CIT. DR Date of Hearing 16.05.2023 Date of Pronouncement 22.05.2023 ORDER Per:Anikesh Banerjee, JM: The instant appeal of the assessee was filed against the order of the ld. Principal Commissioner of Income Tax-1, Jalandhar,[in brevity the ‘PCIT’], order passed u/s 263of the Income Tax Act 1961, [in brevity ‘the Act’] for A.Y. 2014- 15. I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 2 2. The assessee has taken the following ground: “1. That neither in facts nor on law, the ld.Pr.CIT(A) was justified in exercising jurisdiction under section 263 of the Income Tax Act, 1961, in this case. 2. That the ld. Pr.CIT(A), grossly misconstrued the facts of this case, to allege suppression of sale of 2408 quintals of 'nakku' of the value of Rs.31,30,400/-, so as to justify setting aside the assessment order, by holding it erroneous and prejudicial to the interest of revenue. 3. That the assessee's explanation, given at short notice towards the fag end, has been wrongly rejected, without appreciating the assessee's altogether different manufacturing process, to assume suppression of the alleged sale of 'nakku'. 4. That the order under appeal is against law and facts of the case, besides being contrary to principles of natural justice.” 3. The assessee has taken the following additional grounds: “That the Id. PCIT erred in assuming jurisdictional u/s.263 merely based on audit objection unmindful that the said objection was relevant qua the bye products retained by rice sellers engaged in Government Milling of paddy, whereas the assessee procured and processed paddy to produce ‘Brown Rice” mainly for export purposes”. I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 3 4. Brief fact of the case is thatthe section 263 proceeding was initiated against the assessee on basis of the audit objection. The show cause notice was issued. Factually, the assessee is a manufacturer & partly exporter of brown rice and partly white rice. In the show cause, the assessee was asked about the manufacturing bye- product called ‘Nakku’ which was under investigation for concealment of sale. The issue was duly not taken by the ld. AO during assessment order. The order u/s 263 was passed and after a detailed discussion found that the order of the ld. AO is erroneous and prejudicial to the revenue. So, it is liable to be set aside. Being aggrieved assessee filed an appeal before us by challenging the order of the ld. PCIT, passed u/s 263 of the Act. 5. The ld. AR for the assessee filed a written submission which is kept in the record. The ld. AR prayed for consideration of addition ground filed before the bench. The ld. AR respectfully relied on the order of Apex Court in the case of NTPC vs CIT (1998) 229 ITR 383 SC related acceptance of additional ground of assessee. Respectfully relied on the order of Hon’ble Apex court additional ground of appeal is accepted.The ld. AR argued that the revision order is based on the audit objection and grievance of revenue is production of ‘Nakku’ and the said bye product was not taken in the sell turnover of the assessee. Copy of Audit Objection I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 4 dated 15.03.2019 is annexed with the additional ground of appeal. The ld. PCIT calculated the valuation of turnover amount of Rs.31,30,400/- which is concealed during financial year. During hearing the assessee submitted that the audit objection was prepared on basis of the rice manufacturer who entirely sold the goods to the government. But the assessee is an exporter and is manufacturer mainly the brown rice. The white rice is bye product after preparation of the brown rice. The assessee is never made any nakku during the manufacturing procedure. 5.1 The ld. AR has drawn our attention in the order of ld. PCIT and relevant para of the ld. PCIT order is extracted as below: “In response to the show cause notice, Sh. Hitesh Kapoor, Advocate, counsel of the assesseeand Sh. Ashutosh Sharma, Acctt. Manager attended the proceedings and filed requisite reply which is reproduced as under:- "The assessee herein is in receipt of your Show Cause Notice bearing No.4222 dated 19.03.2019 issued under section 263 of the Income Tax Act, 1961, in the above case, proposing thereby to set aside the assessment order dated 19.10.2016, passed u/s,143(3) by the Dy.CIT Circle I, Jalandhar, for the alleged failure to account for the suppressed sale of 2408 qtls. of Nakku worth Rs.31,30,400/-. After having carefully perused the show cause notice, the facts of the case I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 5 and the material on record, the humble assessee, while denying the alleged discrepancy, has to submit as follows: 1. The proposed action is wholly misconceived qua the facts of the case, inasmuch as, it is based on information not relevant in the case of this assessee. The projections given in the SCN as to milling of paddy and the production of bye products thereof said to be consistent with the tariff commission report, have no application to this case. The said projections, it may first be clarified, are relevant and apply to the rice shelters who undertake milling of paddy for Government agencies like FCI etc. But the assessee herein, has neither ever entered into any such work contract with the Government agencies, nor even, it is undertaking milling of paddy for production of white rice, which may result in production of the bye-products like nakku. 2. The assessee Company, on the contrary, is engaged, primarily in production of 'brown basmati' for export purposes which forms almost 95% of its total turnover. For production of brown basmati, the paddy procured from various grain markets in Punjab and elsewhere, is subjected to shelling. The 'brown basmati' thus obtained, is further subjected to the process of grading, by putting it through the 'sorting machine' installed in assessee’s premises. The process of sorting, undertaken through automatic sortex machine, separates the broken rice/rejection/immature grain/foreign matter etc from full grain rice. I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 6 The broken (brown) rice, thereafter, is subjected to polishing, to obtain white rice. At times, depending upon the market demand, small quantity of full brown rice is also converted into white rice. It is this subsequent process, when broken brown rice is further polished to convert it into white rice that the by-products like rice bran and rice kani etc are obtained. 3. It is the above manufacturing process, undertaken with an eye to get best of the brown basmati for export purposes, which takes apart the assessee, from other rice shelters, who undertake the normal process of shelling of paddy, mainly for Government agencies, to directly produce white rice. The yield of such shelters, of course, is governed by the Government norms as regards rice, rice bran, kani, nakku etc. These shelters, unlike this assessee, never go for the production of 'brown rice' nor grading thereof to separate the broken rice/rejection from full grain rice. 4. It is in the backdrop of above peculiar manufacturing process undertaken by the assessee, that the point raised in the SCN needs to be addressed. The quantity of 44900 brown rice, subjected to the process of polishing, comprised of 35000 qtls of broken brown rice and only and 9900 qtls of full brown rice, which further yielded following products: White rice manufactured : 39386 qtls (87.71%) I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 7 Rice bran manufactured : 4866 "(10.84%) Difference/wastage : 646 " (1.45%) 5. Now the above shortage/difference of 1.45%, (651 qtls instead of 646 qtls), with its value taken at Rs.5,39,028/-, was brought to tax in the assessment order. 6. Since it is substantially the broken-rice which is put to the process of polishing, it is neither practical nor feasible to separate the negligible quantity of 'nakku' from rice bran, since it has verylow market value i.e. Rs.800 per qtl (Approx), whereas the rice bran is sold for Rs.1500/- per qtl. (Approx). 7. Now in the SCN, the production of nakku has been assumed on following two hypothetical situations: i. 64143 qtls of paddy processed will yield 70% brown rice i.e. 44900 qtls and 2% nakku i.e.1283 qtls. ii. To manufacture 39386 quintals of white rice, 56265 qtls of paddy was milled, which again, yielded 2% nakkui.e. 1125 qtls. Thus the total nakku produced is assumed at 2408 qtls which is alleged to have been sold unaccounted. 8. The above projections are fraught with serious misgivings and distortions. As per the assessee's tested and accepted past history of the case, 100 kg paddy processed yields 70% brown rice and 22% I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 8 husk. The balance about 8% is lost on account of moisture loss, dust and foreign matter etc. Importantly, paddy when purchased, has moisture content as high as 18%, and hence constitutes, even after driage, a major part of the process loss. 9. Now, both the situations discussed in SCN, as to production of nakku in particular, as already stated above, are not relevant in this case. Though it may be correct that one time milling of 64143 qtls of paddy would produce 44900 qtls. of brown rice, but itwould not yield 2% nakku, since, to have rice bran, phak/nakku etc, it is essential that the whole process of paddy milling is directed towards getting white rice as the end product in one go. Therefore, while the first process would not result into production of any nakku, the second process, as projected in SCN, would not require the milling of paddy afresh, which may produce nakku, since it is the brown rice (broken), since obtained at first stage, which is polished to converted into white rice. There is therefore, absolutely no substance in the allegation that the assessee produced nakku to the extent of 2408 qtls, the sale of which was suppressed. In view of the position afore stated, there is no discrepancy, as alleged in the SCN, and therefore, the assessment order dated 25.09.2014, is neither erroneous nor prejudicial to the interest of revenue as may be set aside under section 263. The proposed action, is therefore, prayed to be dropped." I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 9 3. I have carefully considered written submissions and documents filed by the counsel of the assessee during the proceedings u/s 263 of the Act. The assessee has challenged the assumption of jurisdiction by the undersigned u/s 263 of the Act and objected to the maintainability of the notice u/s 263. In this regard, it would be suffice to say that the presumptions of the assessee are not based upon any empirical observations. The view taken by the undersigned is based upon an independent perception of the assessment record. The other objection, with regard to the difference of opinion between the Assessing Officer and the Commissioner of Income Tax, the position of law stands substantially altered with the insertion of Explanation 2 in section 263, by the Finance Act, 2015. As the deeming provision in that section has been specifically invoked, the decisions relied upon by the assessee, pertaining to the pre-amended provisions of section 263, would no longer hold good. 4. The submissions filed by the counsel of the assessee have been examined carefully. The assessee has stated that the ratios of wastage/ by products mentioned in the show cause notice are applicable to be rice millers who do milling of paddy for the Government agencies but the assessee is not doing milling for the govt, agencies. It further stated that the by-product like 'nakku' is generated in milling of the paddy for white rice while the assessee primarily produce brown rice for export which is 95% of its turnover. The explanation of the I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 10 assessee is not backed by any independent documentary evidence, thus, cannot be accepted as such. The generation of byproducts is an essential part of the milling process of paddy and 'nakku' is such by product. Even in its reply, the assessee admitted that some negligible quantity of 'nakku' may have been generated but that cannot be quantified separately. During the assessment proceedings, the Assessing Officer failed to make any enquiries on this issue. The report of the market committee filed by the assessee also confirms production of nakku during milling process of brown rice. The yield percentage shown by the assessee is below the accepted percentage.” 5.2 The ld. AR further placed that the issue was duly explained. But the assessing authority never find any ‘Nakku’ as by product for manufacturing of the brown rice and white rice in case of assessee. 6. The ld. DR vehemently argued and relied on the order of the ld. PCIT. The ld. DR further placed that the assessee’s submission was not back of any independent documentary evidence, accordingly it was accepted by the ld. PCIT. 7. We heard the rival submission and relied on the documents available in the record. The ld. AR strongly relied on the addition ground and it is pertinent that the issue raised by the ld. AR related to manufacturing of the brown rice and assessee I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 11 is a fully exporter not a local seller. The ld. AR relied on the order of ITAT, Ahmedabad Bench in the case of Smt. Shardaben B. Patel vs. PCIT in ITA No. 1026/Ahd/2018 order dated 25.09.2019 / (2020) 190 DTR (Ahd. Trib.) 228, relevant paragraphs 6.9& 6.10are extracted as below: “6.9 Most significantly, in the instant case, as noted above, the matter has been remanded to actually carry out the conclusions already drawn by the PCIT unilaterally which conclusion gives the infallible impression of it being absolute and rigid. The PCIT has thus actually foreclosed the matter without opportunity. Therefore, the whole exercise of remanding the matter back to the AO is only a pretence and an empty formality. Such act of the PCIT thus cannot be endorsed when seen in entirety. The contentions of the assessee on palpable illegality in the order passed under s.263 of the Act merits acceptance. 6.10 To sum up, the revisional action under Section 263 of the Act in unsustainable in law on two counts; (i) A revisional action which began with a nondescript notice and culminated in revisional order without an y effective opportunity despite specific request is an order passed in blatant transgression of natural justice & (ii) The Revisional CIT made an unflinching and adverse conclusion in the league of finality (without granting an y opportunity) and closed the I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 12 door for the assessee before the AO while setting aside the order of AO. The enquiry or investigation set in motion in the proceedings before the AO in pursuance to the revisional order is clearly a pretence and an empty formality. The AO was effectively asked to obdurately adhere to the pre-conceived observations made in the revisional order of ex parte nature. Such directions are clearly unsustainable.” 7.1 In fact, the issue was already taken care by the ld. AO during assessment proceeding. The submission was made by the assessee was not properly confronted by the ld. PCIT in the revision order. Only on basis of the audit objection the order was passed, and the ld. AR specifically mentioned that the order was passed on basis of “borrowed satisfaction”. After the submission of assessee against the reply of the show cause notice no separate investigation was completed by the ld. PCIT related the manufacturing process. Mere, a statement of erroneous cannot be an order is liable for setaside. The investigation was completed by the ld. AO which is reflected in the order of assessment. The assessment order is not totally silent about the process of Manufacturing. The paragraphs 2 &3 of assessment order is depicted about the manufacturing process. The reason is not well talked over to convert an order of assessment as erroneous assessment order. We fully relied on the order of I.T.A. No.248/Asr/2019 Assessment Year: 2014-15 13 the ITAT-Ahmedabad Bench in the case of Smt. Shardaben B. Patel, supra. The revision order is unsustainable and liable to be set aside. Considering this the order passed by the ld. PCIT u/s 263 is quashed. 8. In the result, the appeal of the assessee bearing ITA No. 248/Asr/2019is allowed. Order pronounced in the open court on 22.05.2023 Sd/- Sd/- (Dr. M. L. Meena) (ANIKESH BANERJEE ) Accountant Member Judicial Member AKV Copy of the order forwarded to: (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T. True Copy By order