M/s. Watchland Distributors, Aurangabad V. ITO, Wd. 2(2), Aurangabad

ITA 616/PUN/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 66837 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 20-12-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 13-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Keywords: Audit objection
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER , AND SHRI R.K. PANDA, ACCOUNTANT MEMBER. ITA.NO.616/PN/2011 (ASSESSMENT YEAR 2006-07) WATCHLAND DISTRIBUTORS, TULSI VIHAR, SARAFA ROAD, AURANGABAD. .. APPELLANT PAN NO.AAAFW 2162R VS. INCOME TAX OFFICER, WARD-2(2), AURANGABAD .. RESPONDENT ASSESSEE BY : SMT. DEEPA KHARE REVENUE BY : SHRI S.K. SINGH DATE OF HEARING : 03-04-2013 DATE OF PRONOUNCEMENT : 10-04-2013 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 01-03-2011 PASSED U/S.263 BY THE CIT, AURANGABAD RE LATING TO ASSESSMENT YEAR 2006-07. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF WHOLESALE AND RETAIL TRA DING AND DISTRIBUTION OF ELECTRIC GOODS AND SPARES. IT FILED ITS RETURN OF INCOME ON 26-10-2006 DECLARING TOTAL INCOME AT RS.92,500/-. THE ASSESSI NG OFFICER COMPLETED THE ASSESSMENT U/S.143(3) AT A TOTAL INCOME OF RS.2,63, 920/- ON 10-12-2008. WHILE COMPLETING THE ASSESSMENT THE ASSESSING OFFIC ER MADE ADDITION ON ACCOUNT OF GROSS PROFIT AMOUNTING TO RS.1,71,422/- TO THE DECLARED INCOME. 2.1. SUBSEQUENTLY, THE ASSESSING OFFICER SENT A PRO POSAL U/S.263 TO THE CIT STATING THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS TO THE EXTENT OF RS.75.41 LAKHS FOR GIVING INTEREST FREE L OANS AND ADVANCES TO THE SISTER CONCERNS AND RELATED PARTIES AND THE PROPORT IONATE DISALLOWANCE ON 2 ACCOUNT OF THE SAME WORKS OUT TO RS.10,81,999/-. B ASED ON THE ABOVE THE LEARNED CIT ISSUED A SHOW CAUSE NOTICE TO THE ASSES SEE ASKING IT TO EXPLAIN AS TO WHY THE ORDER OF THE ASSESSING OFFICER SHOULD NOT BE SET-ASIDE SINCE THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICE R IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. THE AS SESSEE SUBMITTED THAT THE ASSESSING OFFICER HAD RAISED THIS ISSUE DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND THE ASSESSEE HAD MADE DETAILED SUBM ISSION ALONG WITH THE COPIES OF EXTRACTS OF ACCOUNTS ETC. SINCE THE ASSES SING OFFICER HAD ALREADY EXAMINED THE ISSUE AT THE TIME OF ASSESSMENT PROCEE DINGS, THEREFORE, 263 PROCEEDINGS CANNOT BE INVOKED. VARIOUS DECISIONS W ERE ALSO RELIED UPON. 3. HOWEVER, THE LEARNED CIT WAS NOT CONVINCED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND HELD THAT THE ORDER PASSE D BY THE ASSESSING OFFICER IS ERRONEOUS AND PREJUDICIAL TO THE INTERES T OF THE REVENUE. HE OBSERVED THAT THE ASSESSING OFFICER WITHOUT VERIFYI NG THE FACTS DEEPLY HAD ACCEPTED THE WRITTEN SUBMISSION OF THE ASSESSEE THA T NO INTEREST BEARING FUNDS WERE UTILISED FOR NON BUSINESS PURPOSES. HE ACCORDINGLY SET-ASIDE THE ORDER PASSED BY THE ASSESSING OFFICER INVOKING THE PROVISIONS OF SECTION 263 WITH A DIRECTION TO REFRAME THE ASSESSMENT AFTE R CONSIDERING THE PROPER FACTS AND SUBMISSION OF THE ASSESSEE. 4. AGGRIEVED WITH SUCH ORDER OF THE CIT THE ASSESSE E IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 1. THE LEARNED CIT ERRED IN LAW AND ON FACTS IN IN VOKING THE PROVISIONS OF SECTION 263 BY HOLDING THE ORDER PASSED BY THE LEAR NED AO AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE IN RESPE CT OF ALLOWANCE OF INTEREST U/S.36(1)(III). 2. THE LEARNED CIT ERRED IN LAW AND ON FACTS IN HOL DING THAT THERE WAS A DIRECT NEXUS BETWEEN THE BORROWINGS AND THE WITHDRAWALS FR OM BANK WHICH WARRANTED DISALLOWANCE OF INTEREST ON BORROWINGS. 3 3. THE LEARNED CIT FAILED TO APPRECIATE THAT THE IS SUE OF ALLOWANCE OF INTEREST U/S.36(1)(III) HAS BEEN PROPERLY EXAMINED BY THE LE ARNED AO DURING THE ASSESSMENT PROCEEDINGS AND HAS TAKEN A VIEW WHICH IS A POSSIBL E VIEW BOTH ON FACTS AND IN LAW. THE ACTION U/S.263 BEING UNJUSTIFIED ON FACTS AND I N LAW MAY KINDLY BE CANCELLED. 4. THE APPELLANT CRAVES TO ADD, ALTER, MODIFY OR SU BSTITUTE ANY OTHER GROUNDS OF APPEAL AT THE TIME OF HEARING. 5. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT AFTER THE ASSESSMENT WAS COMPLETED THE AUDIT PARTY HAS RAISED OBJECTION FOR DISALLOWANCE OF INTEREST. THE ASSESSEE VIDE LETTER DATED 22-02-2010 HAD REPLI ED TO THE AO WHICH READS AS UNDER : THIS IS REGARDING THE AUDIT OBJECTION RAISED BY AU DIT PARRY IN THE ASSESSMENT ORDER OF M/S. WATCHLAND DISTRIBUTORS, AURANGABAD OF A.Y. 2006-07. THE ORDER U/S 143(3) WAS PASSED ON 10/12/2008 DETERMINING TOTAL INCOME A T RS.2,63,920/-. THE AUDIT PARTY HAS RAISED THE OBJECTION THAT THE ASSESSING O FFICER HAS NOT DISALLOWED THE INTEREST OF RS.10,81,999/-. IN THIS REGARD WE WOULD LIKE TO STATE THAT THE ASSESSING OFFICER HAD RAISED QUERY ON THE SAME ISSUE DURING T HE ASSESSMENT PROCEEDINGS FOR A.Y.2006-07. EXPLANATION WAS GIVEN IN THE SUBMI SSION MADE ON 23/10/2008 AT PARA 4, THE SAME IS BEING REPRODUCED FOR YOUR PERUS AL: 'THE FIRM HAS UNSECURED LOANS OF RS.1,96,00,000/- W HICH ARE MAINLY FROM THE FAMILY MEMBERS, FRIENDS AND RELATIVES ON WHICH THE FIRM HAS NOT PAID ANY INTEREST. SIMILARLY, THE LOANS AND ADVANCES GIVEN ARE TO THE SISTER CONCERNS ON WHICH NO INTEREST HAS BEEN CHARGED. THE SECURED LOAN CONSIST OF TERM LOAN OF RS.33.86 LACS WHICH ARE AGAINST THE FIXED ASSETS AND DEPOSIT AND THE CASH CREDIT OF RS. 187.32 LACS ARE AGAINST THE CURRENT ASSETS OF THE FIRM WHI CH ARE OF RS.207.53 LACS .THE LOANS AND ADVANCES GIVEN TO SISTER CONCERNS ARE OUT OF UNSECURED LOANS AND OUT OF CURRENT LIABILITIES RS.83.75 LACS. SO THE TOTAL SOU RCES ARE RS.279.75 LACS AS AGAINST LOANS AND ADVANCES GIVEN OF RS.271.41 LACS. AS THER E ARE NO PAYMENT OF INTEREST ON UNSECURED LOANS THE PROVISION OF SEC 40A(2B) ARE NO T APPLICABLE. IN THIS REGARD PLEASE REFER TO CLAUSE 18 OF FORM 3 CD OF AUDITORS REPORT. AS THE ASSESSING OFFICER WAS SATISFIED ABOUT THE EX PLANATION AND AS PER THE SAID EXPLANATION THE ASSESSEE HAD USED THE BORROWED FUND S FOR THE PURPOSE OF BUSINESS. THE AUDIT OBJECTION IS NOT TENABLE. 6. SHE SUBMITTED THAT THEREAFTER THE LEARNED CIT ON THE BASIS OF THE PROPOSAL U/S.263 SENT BY THE AO INVOKED JURISDICTIO N U/S.263. REFERRING TO THE DECISION OF THE TRIBUNAL IN THE CASE OF INDERCHAND AMARCHAND CHOPDA VIDE ITA NO.792/PN/2010 ORDER DATED 05-10-2011 FOR A.Y. 2005-06 SHE SUBMITTED THAT UNDER IDENTICAL FACTS AND CIRCUMSTANCES THE TR IBUNAL HAD SET-ASIDE THE 263 PROCEEDINGS AND ALLOWED THE APPEAL FILED BY THE ASS ESSEE. SHE ACCORDINGLY 4 SUBMITTED THAT THIS BEING A COVERED MATTER THE ORDE R PASSED BY THE CIT SHOULD BE SET-ASIDE AND THE GROUNDS RAISED BY THE ASSESSEE BE ALLOWED. 6.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE CIT. 7. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE LEARNED CIT AN D THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. THERE IS NO DISPUTE TO THE FACT THAT THE AO IN THE INSTANT CASE HAS PASSED THE ORDER U/S.143(3) ON 10-10-2008 DETERMINING THE TOTAL INCOME AT RS.2,63,920/- AGAINST THE RETURNED INCOME OF RS.92,500/-. THERE IS ALSO NO DISPUTE TO THE FACT THAT SUBSEQUENT TO THE COMPLETION OF ASSESSMENT THERE WAS AUDIT OBJECTION FOR DISALLOWANCE OF INTER EST AND THE ASSESSEE VIDE LETTER DATED 22-02-2010 HAD GIVEN EXPLANATION TO TH E SAME, THE DETAILS OF WHICH ARE ALREADY EXTRACTED AT PARA 5. THE LD. DR COULD NOT CONTROVERT THE ABOVE FACT STATED BY THE LD. COUNSEL FOR THE ASSESSEE. W E FIND SUBSEQUENT TO THE AUDIT OBJECTION AND REPLY GIVEN BY THE ASSESSEE THE LEARN ED CIT INVOKED JURISDICTION U/S.263 AND SET-ASIDE THE ORDER PASSED BY THE AO ON THE GROUND THAT AO HAS NOT MADE PROPER ENQUIRY REGARDING DIVERSION OF INTE REST BEARING FUNDS TO SISTER CONCERNS WITHOUT CHARGING ANY INTEREST. 7.1 WE FIND UNDER SOMEWHAT SIMILAR FACTS AND CIRCUM STANCES THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF INDERCHAND AMA RCHAND CHOPDA (SUPRA) HAD CANCELLED 263 PROCEEDINGS INITIATED BY THE CIT WHEREIN 263 PROCEEDINGS WERE INITIATED ON THE SAME ISSUE ON WHICH THERE WAS AUDIT OBJECTION. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AS UNDER : 3. AT THE VERY OUTSET, THE LEARNED COUNSEL FOR THE ASSESSEE MENTIONED THAT THE THIS IS A CASE WHERE ASSESSMENT WAS COMPLETED U /S. 143 (3) OF THE ACT. 5 SUBSEQUENTLY, AN AUDIT OBJECTION WAS RAISED BY THE REVENUE AUDIT AND THEN THE AO SOUGHT CLARIFICATIONS ON THE SAID OBJECTION WHIC H IS EVIDENT FROM THE DOCUMENT AT PAGE NO.45 OF THE PAPERBOOK. AS PER THE SAID LETTER BY THE AO, HE SOUGHT CLARIFICATION ON THE ISSUE OF ADDITIONAL INC OME OF RS.41,95,490/- WHICH INCLUDES EXCESS STOCK OF RS.22,97,843/- VIDE LETTER DATED 11.08.2008. IN RESPONSE TO THE SAME, THE ASSESSEE REPLIED AND PRO VIDED THE DETAILED CLARIFICATION ON THE ISSUE RAISED BY THE ASSESSING OFFICER. THE RELEVANT REPLY IS PLACED IN THE PAPERBOOK. AS PER THE ASSESSEE, ASSE SSING OFFICER WAS SATISFIED WITH THE CLARIFICATIONS ON THIS ISSUE OF EXCESS STO CK ORIENTED INCOME AMOUNTING TO RS.22,97,843/-. IT IS A FACT THAT THE AO DID NOT INITIATE ANY ACTION AFTER THE RECEIPT OF THE EXPLANATION OF THE ASSESSEE ON THIS ACCOUT. HOWEVER, THE CIT INITIATED PROCEEDINGS U/S.263 OF THE ACT BY ISSUI NG SHOW CAUSE NOTICE LETTER DATED 16/12/2009 ON THE SAID SOLITARY ISSUE RELATING TO ADDITIONAL INCOME OF RS.22,97,843/-. COPY OF THE SHOW CAUSE NOTICE IS P LACED IN PAPERBOOK ON PAGE NO.1. EVENTUALLY THE CIT PASSED AN ORDER U/S.263 O N 30.03.2010. 4. IN THIS REGARD, BEFORE US, LEARNED COUNSEL FOR T HE ASSESSEE MENTIONED THAT THE CIT(A) ERRONEOUSLY ASSUMED THE JURISDICTIO N U/S. 263 OF THE ACT. AS THE ASSESSING OFFICER HAS ALREADY APPLIED HIS MIND TOWA RDS THE ISSUE RAISED BY THE CIT(A) IS CONSEQUENT TO THE AUDIT OBJECTION. HE H AD ALSO DEMONSTRATED THE WAY ASSESSING OFFICER WAS SATISFIED BY EXPLANATION GIVE N BY THE ASSESSEE ON THIS ISSUE. FURTHER, THE LEARNED COUNSEL FOR THE ASSE SSEE MENTIONED THAT THE IDENTICAL AND THE TECHNICAL ISSUE CAME UP FOR ADJUD ICATION IN THE CASE OF B AND A PLANTATION AND INDUSTRIES LTD VS. CIT, 209 ITR 395 GOUHATI AND HONBLE HIGH COURT HELD THAT THE INVOKING OF JURISDICTION U/S 26 3 IN SUCH IDENTICAL FACTS IS BAD IN LAW IN THE SAID CASE. IN THAT CASE, THE RELEVANT FACTS ARE THAT RECTIFICATION PROCEEDING WERE INITIATED TO GIVE EFFECT TO THE AUDIT OBJECTION AND THE SAME WAS DROPPED ON HAVING SATISFIED EXPLANATION OF THE ASSE SSEE. ON THE SAME ISSUE, THE CIT INVOKED THE PROVISIONS OF SECTION 263 OF THE AC T AND THE SAME IS NOT HELD VALID BY THE HONBLE HIGH COURT. CONSIDERING THE HO MOLOGY THE FACTS AND PROCEEDINGS INVOLVED IN THE INSTANT CASE, WE ARE OF THE OPINION THAT THE CIT ERRED IN ASSUMING JURISDICTION U/S. 263 OF THE ACT, AS TH E PROCEEDINGS INITIATED BY THE ASSESSING OFFICER TO GIVE EFFECT TO THE AUDIT OBJEC TION DURING THE POST ASSESSMENT PROCEEDINGS OF GET MERGED WITH ASSESSING OFFICER ORDER PASSED U/S. 143(3) OF THE ACT. THEREFORE, ON THIS PRELIMINARY ISSUE, WE A RE OF THE OPINION THAT THE ASSESSEE SHOULD GET RELIEF ON THE GROUNDS RAISED IN THE APPEAL. ACCORDINGLY GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 8. SINCE IN THE INSTANT CASE THE 263 NOTICE WAS ISS UED ON THE SOLITARY ISSUE OF DISALLOWANCE OF INTEREST ON ACCOUNT OF DIVERSION OF INTEREST BEARING FUNDS TO SISTER CONCERNS WITHOUT CHARGING INTEREST AND SINCE THE AO HAS ALREADY APPLIED HIS MIND TOWARDS THE SAME ISSUE IN CONSEQUENCE TO T HE AUDIT OBJECTION, THEREFORE, WE FIND MERIT IN THE SUBMISSION OF THE L EARNED COUNSEL FOR THE ASSESSEE THAT THIS IS NOT A FIT CASE FOR INVOKING J URISDICTION U/S.263 IN VIEW OF THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL CITE D SUPRA. WE THEREFORE SET- 6 ASIDE THE ORDER OF THE CIT ON THIS ISSUE AND THE GR OUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 10 TH OF APRIL, 2013. SD/- SD/- (SHAILENDRA KUMAR YADAV ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER SATISH PUNE, DATED THE 10 TH APRIL 2013. COPY OF THE ORDER IS FORWARDED TO: 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT, AURANGABAD 4. THE ACIT, RANGE-2, AURANGABAD 5. THE DR B BENCH, PUNE. 6. GUARD FILE BY ORDER // TRUE COPY // PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE.