M/s. Tara Paints & Chemicals, Ahmedabad V. The Pr. CIT-3, Ahmedabad

ITA 73/AHD/2022

AI Insights

The case involves M/s. Tara Paints & Chemicals, which appealed against the order of the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, concerning the assessment year 2017-18. The Pr. CIT had found the original assessment order erroneous as it failed to properly examine the claims of depreciation on plant and machinery and loss of stock due to a fire incident. The Tribunal examined whether the AO had adequately investigated these claims during the original assessment. The Tribunal concluded that the AO had indeed made sufficient inquiries and that the Pr. CIT's order was based on assumptions rather than concrete evidence, leading to the reversal of the Pr. CIT's order.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131353 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-03-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 24-03-2022
• Other Referred Cases: CIT Vs. Sunbeam Auto, Gabriel India Ltd., Sh. Narayan Tatu Rane Vs. ITO
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation
• Section: 2; 143(3); 2(A); 73; 22

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “A” BENCH Before: Shri Waseem Ahmed, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member M/s. Tara P aints & Ch emical s A/423 /1 4, MahaGujaratIn dl. Estate, B/h. Sarvottam Ho tel, Sarkhej-Bav la Road, Moraiya, Ah medabad -3 82210 PAN: AA HFT55 79N (Appellant) Vs Pr. CIT-3, Ah med abad (Resp ondent) Asses see b y : Shri A. C. Shah, A. R. Revenue by : Shri Vijay Kumar J aisw al, CIT-D. R. Date of hearing : 06-03 -2 023 Date of pronouncement : 25-04 -2 023 आदेश /ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-3, Ahmedabad, in proceeding u/s. 263 of the Act vide order dated 11/03/2022 passed for the assessment year 2017-18. ITA No. 73 /Ahd/2022 Assessment Year 2017-18 I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 2 2. The assessee has taken the following grounds of appeal:- “1. The learned PCIT has erred in holding that the order passed under Section 143(3) dated 16-11-2019 is erroneous and prejudicial to the interest of Revenue on the ground that the depreciation of Rs. 3,33,25,458/- under Section 32(1)(iii) and loss of stock by fire of Rs. 99,46,010/- is not ascertained in as much as the depreciation and loss of stock are duly ascertained and verified by the A.O. during the assessment proceedings therefore order passed under Section 143(3) dated 16-11-2019 is not erroneous and prejudicial to the interest of Revenue.” 3. The brief facts of the case are that the assessee is engaged in the business of manufacturing of paints varnish/thinner. The assessee filed its return of income for assessment year 2017-18 declaring loss of 69.43 lakhs. The assessee’s case was selected for scrutiny and the assessment was completed assessing the total income as per the return of income. The Principal CIT observed that on examination of assessment records, it was observed that a fire had broken out in the factory premises on 16-03-2017 and entire plant and machinery, building, furniture etc. were destroyed due to fire. The Principal CIT observed that as a result of fire, the assessee had claimed deduction on plant and machinery u/s 32(1)(iii) of the Act amounting to 3, 33, 25, 458/-. Further, the Principal Commissioner observed that assessee had claimed deduction of 99, 46,010/ - on account of loss of stock due to the fire. According to the Principal Commissioner of Income Tax, the deduction of machinery u/s 32(1)(iii) of the Act was a mere provision and not actual loss. Further, in respect of loss of stock of 99, 46,010/-, the assessee was unable to produce any evidence whatsoever in I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 3 respect of loss caused by fire. According to the principal CIT, the AO did not examine the aforesaid claim from the correct perspective. 4. During the course of 263 proceedings, the assessee submitted that the Form 3CD Report contained the complete working of deduction u/s 32(1)(iii) of the Act with respect to the plant and machinery and the same was examined by the AO during the course of assessment proceedings. Further, the assessee submitted that the assessee had not taken out any fire policy for plant and machinery and therefore, the entire plant and machinery loss was claimed as a deduction. The assessee further pointed out that the AO issued notice under section 142 (1) of the Act dated 14-10-2019, in which the AO had asked for complete working of loss of fixed assets and stock in trade due to fire with complete documentary evidences. In response thereto, the assessee had replied by letter dated 09-11-2019 in which the assessee had given complete working of loss of fixed assets and stock in trade due to fire with complete documentary evidences. The assessee further submitted that details of deduction u/s 32(1)(iii) of the Act were also submitted to the AO during the course of assessment proceedings. The assessee submitted before the Principal CIT that loss on account of fire of plant and machinery amounting to 3,33,25,458/- is the actual loss and not a provision as stated by the ld. PCIT. Further, the assessee submitted that it had not taken out any insurance policy with respect to plant and machinery and had taken insurance policy only with respect to stock in trade. However, the insurance company had given lesser claim of stock lost in fire by the assessee and therefore, the assessee had filed a case before the Consumer Forum with respect to the balance claim, which is pending litigation. I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 4 5. However, Principal CIT held that the order passed by the AO is erroneous and prejudicial to the interests of the revenue for the following reasons: (a) Firstly, with respect to claim of deduction u/s 32(1)(iii) of the Act amounting to 3,33,25,458/-, while it is not disputed that fire had broken out in the premises of the assessee, however, the assessee did not provide the exact valuation/quantification of the loss of plant and machinery with corroborative evidences. Therefore, the veracity of this claim of loss of plant and machinery remained to be examined by the AO. (b) Secondly, a perusal of the survey report of independent surveyor dated 14-12-2018, which was with respect to the loss of stock, shows that there were evident discrepancies which were noted by the surveyor. The most evident discrepancy was that after the fire broke down at the premises, even though the computers were working, the assessee did not permit the surveyors to examine the same, so as to arrive at the correct figure of loss of stock. Therefore, evidently, the assessee did not follow the laid down procedure so as to allow the surveyor to correctly assess loss of stock. Accordingly, the assessee had not given the correct figure of loss of stock and this aspect was not examined by the AO as part of the assessment proceedings. 5.1 Therefore, in instant facts, the Principal CIT observed that the claim of loss of plant and machinery u/s 32(1)(iii) of the Act and loss of stock was not correctly examined by the AO during the course of assessment I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 5 proceedings, and the AO had only accepted the version of the assessee, and therefore the order passed by the AO is erroneous and prejudicial to the interests of the revenue. 6. The assessee is in appeal before us against the aforesaid order passed by the Principal CIT. The counsel for the assessee submitted before us that the details of loss of plant and machinery as claimed by the assessee u/s 32(1)(iii) of the Act were part of Form 3CD Report and therefore, the loss claimed by the assessee was neither provisional and further, the AO had enquired into the claim of the assessee during the course of proceedings by notice dated 14-10-2019. Further, the assessee had also replied to the said notice by way of letter dated 09-11-2019. Accordingly, the loss of plant and machinery and claim of deduction u/s 32(1)(iii) of the Act was duly enquired by the AO during the course of assessment proceedings. Further, the counsel for the assessee drew our attention to pages 64-95 of the paper book containing details of stock statement before fire (quantity and Bill Wise), stock statement after fire (quantity and Bill wise) and stock burnt in fire (quantity and Bill Wise) and submitted that the aforesaid details were provided to the A.O. during the course of hearing. Further, the counsel for the assessee submitted that the assessee had also provided to the AO the Panchnama report-Excise Department and the Panchnama report-Police Department, wherein, it was specifically noted by the police department that the entire assets etc. were lost by fire and it appears that there is a great loss. The copy of the aforesaid reports have been reproduced before us at pages 96-100 of the paper book for our perusal. The counsel for the assessee further submitted that there is an ongoing dispute with the insurance I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 6 company, which had settled the claim of loss of stock of the assessee for a lesser amount then which was claimed by the assessee and the copy of the consumer case filed by the assessee is attached at pages 101-113 of the paper book. This fact was also brought to the notice of the AO during the course of assessment proceedings. Further, the counsel for the assessee drew our attention to pages 114-123 of the paper book at Schedule-19 of the profit and loss account, in which the details of loss due to fire with complete asset-wise and item wise details have been mentioned, and the same were submitted before the AO during the course of assessment proceedings. The assessee also submitted before us few of the photographs to demonstrate that there was completed loss of plant and machinery and stock in the fire at the factory premises of the assessee. Accordingly, the counsel for the assessee submitted that the assessee had incurred complete loss of plant and machinery and stock in the fire and further, this aspect was enquired into by the assessing officer during the course of assessment proceedings and secondly, the details of loss of plant and machinery and stock had also been submitted before the AO for necessary verification during the course of assessment proceedings. Accordingly, Principal CIT has erred in holding that the AO failed to carry out the necessary verification during the course of assessment proceedings, thereby making the assessment order erroneous and prejudicial to the interests of the revenue. 7. In response, the DR placed reliance on the observations made by the principal CIT in the 263 order. I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 7 8. We have heard the rival contentions and perused the material on record. On going through the assessment records, we observe that the AO had enquired into this aspect of claim of loss of deduction of plant and machinery u/s 32(1)(iii) of the Act by way of a specific notice dated 14-10- 2019, to which the assessee had also filed reply dated 09-11-2019. Besides the above, through separate notices, the AO had also enquired into the details of additions to plant and machinery during the year under consideration and the claim of depreciation during the year under consideration. We observe that there is no dispute regarding the fact that a fire had broken out at the premises of the assessee in which the assessee had incurred substantial losses. It is also not disputed that the AO had enquired into the claim of loss of deduction with respect to claim of deduction of plant machinery u/s 32(1)(iii) of the Act and loss of stock, during the course of assessment proceedings. The reason for which the Principal CIT has set aside the assessment order was that the assessee has not been able to correctly quantify the precise amount of loss with respect to claim of deduction u/s 32(1)(iii) of the Act in respect of plant and machinery and also there are certain discrepancies in the surveyors report, which indicate to the fact that the loss in respect of stock is not completely correct. However, we observe that the assessing officer had specifically enquired into this aspect during the course of assessment proceedings and the assessee had also given supporting documents to show the quantum of loss incurred during the course of assessment proceedings in the form of reply dated 09-11-2019 and details of stock statement before fire (quantity and Bill Wise), stock statement after fire (quantity and Bill wise) and stock burnt in fire (quantity and Bill Wise). Further, a perusal of the Form 3CD also indicates that the I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 8 loss on account of plant and machinery is not provisional as stated by the Principal CIT. The report of the Excise Department and the Police Department also indicates that the assessee had incurred almost complete loss due to the fire. Further, we observe that the Principal CIT has observed at page 17 that “it is not ascertained that how the assessee has arrived to a conclusion that entire plant and machinery stood as on 01-04-2016 and purchase during the year got destroyed in the fire. Possibility cannot be ruled out that some of the assets were sold out (plant and machinery and other assets) during the year and also that some obsolete plant and machinery was lying there, which might fetch no scrap value as shown in the books”. Further, the principal CIT observed at page 19 of the order that “further, the assessee has another factory building, and godown under and also. Therefore, it might be that plant and machinery, furniture, computers, office equipments are also kept there and included in the assets on which the assessee has claimed the same as loss by fire”. Further, the principal CIT, observed at page 22 of the order that “it might be that the stock would be useful, manufacturing, some finished stock would be sold, etc. and, therefore, in absence of such treaties, it is not tenable as to how the assessee could arrived conclusion in quantification of the stock as on the date of fire, is not verifiable”. A perusal of the order passed by the Principal CIT indicates that while arriving and conclusion, certain assumptions/presumption have been drawn by the principal CIT while holding that the assessment order is erroneous and prejudicial to the interests of the revenue. Further, it is also not the case of the principal CIT that the AO had failed to carry out any enquiry on this aspect of claim of deduction during course of assessment proceedings. Further, it is also not been I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 9 evidently disputed that the assessee incurred substantial loss in the fire which had broken out at its premises. Further, the loss incurred by the assessee was also corroborated by the reports of the Police Department and Excise Department. The working of loss was also reported in Form 3CD, which was placed before the AO for his verification. Accordingly, in the light of the above facts, we are of the considered view that the AO had made the necessary enquiries and it cannot be held that the assessment order was erroneous and prejudicial to the interest of revenue. 9. Regarding the scope of proceedings u/s 263 of the Act, an inquiry made by the Assessing Officer is considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly to the facts of the case. As far as adequacy of enquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make enquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgments by various High Courts in this regard. 9.1 Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 on the ground of inadequate inquiry I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 10 “12...... There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. ——— From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income- tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 11 the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it c PAN annot be said that it is a case of ‘lack of inquiry’.” I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 12 9.2 In Gabriel India Ltd. [1993] 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113) “The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner 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. 9.3 The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words: “20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 13 considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant. 9.4 Therefore, in our view, this is not a case where no enquiry has been made by the assessee officer during the course of assessment proceedings. It is also not the case of the Pr. CIT that the Ld. AO failed to apply his mind to the issues on hand or he had omitted to make enquiries altogether or had taken a view which was not legally plausible in the instant facts. As held by I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 14 various Courts, Principal CIT cannot in 263 proceedings set aside an assessment order merely because he has different opinion in the matter. In our view, s 263 of the Act does not visualise a case of substitution of the judgment of the Principal CIT for that of the Assessing Officer who passed the order, unless the decision is held to be wholly erroneous. As noted in various judicial precedents highlighted above, the Principal CIT, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Assessing Officer. That would not vest the Principal Commissioner with power to re-visit the entire assessment and determine the income himself at a higher figure. Now on the issue that the Ld. AO passed a cryptic order and did not discuss in detail regarding assessee’s submissions on various queries raised vide the various notices, in our view it is a well settled position of law that if from the assessment records, it is evident that the Ld. AO has made due enquiries in response to which assessee has filed its submissions, then even if the assessment order does not discuss all aspects in detail with regards to claim of the assessee, it cannot be held that the order is erroneous and prejudicial to the interests of the Revenue. The above proposition has been upheld in the case of CIT v. Reliance Communication 69 taxmann.com 109 (Bombay), Smt. Anupama Bharat Gupta v. ITO in ITA 1685/Ahd/ 2018, Goyal Private Family Specific Trust [1988] 171 ITR 698, CIT v. Mahendra Kumar Bansal [2008] 297 ITR 99 (All.) (para 10) etc. We thus find no error in the order of Ld. AO so as to justify initiation of 263 proceedings by the Ld. Pr. CIT. The Grounds of appeal raised by the assessee are thus allowed. I.T.A No. 73/Ahd/2022 A.Y. 2017-18 Page No. M/s. Tara Paints & Chemicals vs. Pr. CIT 15 10. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 25-04-2023 Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 25/04/2023 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद