PURNA PURSHOTTAM EXPORTS,MUMBAI V. PRINCIPLE COMMISSIONER OF INCOME TAX (CENTRAL)-MUMBAI-1, MUMBAI

ITA 2143/MUM/2024

AI Insights

The case involves Purna Purshottam Exports, which appealed against the revision order passed by the Principal Commissioner of Income Tax (Central), Mumbai-1. The revision was based on a survey conducted under section 133A of the Income Tax Act, 1961, which revealed discrepancies in the valuation of diamonds. The Tribunal examined whether the revision under section 263 was justified, considering the inquiries made by the Assessing Officer during the original assessment. The Tribunal concluded that the Assessing Officer had adequately addressed the issues raised during the survey and that the revision order was not warranted.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474408 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2018-2019
• Other Referred Cases: Malabar Industries Co. Ltd. Vs. CIT, CIT vs. Gabriel India Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R.A. DHYANI
• Assessee Lawyers: K. GOPAL; NEHA
• Keywords: Set aside; Opportunity of being heard; Unexplained expenditure; Revision of order
• Section: 143(3); 142(1); 154; 263; 131; 69C; 2(A); 133A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “C” BENCH, MUMBAI BEFORE SHRI NARENDER KUMAR CHOUDHRY , JM AND SHRI PRABHASH SHANKAR, AM आयकर अपील सं./ITA No.2143/MUM/2024 (\u0001नधा\u0005रण वष\u0005 / Assessment Year :2018-2019) Purna Purshottam Exports, Gala No.329, Vardhman Industrial pre Co-op Soc. Ltd. S.V.Road, Dahisar East, Mumbai Vs. Pr.CIT (Central), Mumbai-1 \u0001थायी लेखा सं./PAN No. : AAEFP 8085 E (अपीलाथ\r /Appellant) .. (\u000e\u000fयथ\r / Respondent) िनधा\u000e\u000fरती की ओर से /Assessee by : Shri K.Gopal & Ms. Neha Paranjpe, ARs राज\u0011व क\u000b ओर से /Revenue by : Shri R.A.Dhyani, CIT,DR सुनवाई क\u0016 तार\u0018ख / Date of Hearing : 10.02.2025 घोषणा क\u0016 तार\u0018ख/Date of Pronouncement : 18.02.2025 आदेश / O R D E R Per Prabhash Shankar, AM: This appeal preferred by the assessee emanates from the order of the ld. Pr.CIT(Central), Mumbai-1, dated 30.03.2024 for A.Y.2018-19 passed u/s 263 of the Income Tax Act,1961(henceforth ‘the Act’)as per the following grounds of appeal :- The order dated 30.03.2024 passed under section 263 of the Act is without jurisdiction and bad in law 1. The Ld. PCIT is not justified in passing the order dated 30.03.2024 under section 154 r.ws 263 of the Act without appreciating the conditions precedent to invoke the provisions of section 263 of the Act are not satisfied in the present case. Thus, ITA No.2143/Mum/2024 2 the order under section 154 r.w.s 263 of the Act is bad in law and same may be quashed and set aside. 2. The Ld. PCIT is unjustified in invoking the provisions of section 263 of the Act without appreciating that the assessment order passed under section 143(3) of the Act is neither erroneous nor prejudicial to the interest of the revenue and therefore, the provisions of section 263 of the Act are not attracted in the present case. Hence, the revision order passed under section 263 of the Act is without jurisdiction and the same may be quashed and set aside. 3. The Ld. PCIT failed to appreciate that the Assessee has duly considered the stock of rough diamond and its valuation admitted during the course of survey proceedings while computing the closing stock for the year under consideration. The details of diamond sold and the stock in accordance with the survey finding were duly submitted before the Ld.A.O. in the course of assessment. Thus, the PCIT is not justified to infer that the stock shown by the Assessee is not in the line with the survey findings. Therefore, the order dated 154 r.w.s 263 of the Act is not at all justified and the same may be quashed and set aside. 4. The PCIT failed to appreciate that the Ld.A.O. has duly verified and examined the claim of a closing stock and the stock admitted in the course of survey while passing the assessment order. Thus, the assessment order is neither erroneous nor prejudicial to the interest of the revenue and consequentially, the order passed under section 154 r.w.s 263 of the Act is bad in law and void ab- initio ad the same may be quashed and set aside. 5. The Appellant seeks leave to add, alter and amend any of the above grounds. 2. Facts of the case as culled from the records reveal that the assessee filed return declaring income at Rs. 95,16,150/-. The assessment u/s.143(3) of the Act,1961 was completed assessing the income at Rs. 4,02,01,020/-based on a survey report. However, the order was found to be prejudicial and erroneous in terms of section 263 of the Act by the ld. PCIT. He noted that a survey u/s. 133A of the Act was conducted in the case of the assessee on 16.02.2018. It was seen from the survey findings that valuation of the diamonds and rate of diamond per carat was quite different from that is taken while framing assessment order. The valuation of the rough diamonds admitted during the survey proceedings had not ITA No.2143/Mum/2024 3 been considered in totality during the assessment proceedings. The records did not contain details of the inventory valuation for the year under consideration for ascertaining the correct value of the diamond held as stock. Further, the rate of diamonds per carat shown in the financials for the year varies with the survey findings. Accordingly, he observed that it was evident that valuation and the quantification of the diamonds that had been sold and held as stock during the year under consideration was not in line with the survey findings that had been admitted by the assessee during the survey proceedings and in the assessment order for determination of total income. Thus, the assessment order passed by the A.O. was rendered erroneous in so far as the assessment order passed for the reasons mentioned above. Therefore, there was prima facie action under section 263 of the Act. He further held that the provisions of section 263 read with deeming provisions of Explanation 2 were squarely applicable as the order was passed without making inquiries or verification which should have been made. Considering the facts and circumstances of the case, he held that the assessment order passed u/s 143(3) dated 21.06.2021 by Assessing Officer was erroneous and prejudicial to the interest of Revenue, within the meaning of section 263 of the Act and set aside the assessment order with a direction to complete the assessment order de novo afresh after considering the abovementioned points discussed in para 2 after affording proper opportunity to the assessee. However, it was later found that the assessee had made a written submission which were not taken into consideration ITA No.2143/Mum/2024 4 as due to some technical glitch the submissions by the assessee was not visible in the system. Accordingly, he invoked provisions of section 154 of the Act r.w. section 263 of the Act and set aside the assessment order for framing it de novo . 3. Before us, the ld. DR for the Revenue relied on the revision order, the ld. Authorised Representative of the assessee per contra made a detailed submission in support of the grounds of appeal reproduced in foregoing paras above. He drew attention to the reply submitted by it before the ld. PCIT in response to the show cause notice issued by him. Factual aspects of the case and the arguments made before him are extracted below for the sake of clarity: “1. The Assessee is engaged in the business of Import and Export of rough and polished Diamonds. On 16.02.2018, a survey action was conducted ACIT Circle 32(1), Mumbai at the office premises of the Assessee at EC 4071, BDB, BKC Bandra (B), Mumbai under section 133A of the Act. During the course of survey proceedings, 'Fortune Note Book' was found. On perusal of the same, it was observed by the survey officer that, the actual value of stock is not disclosed properly by the Assessee in its books of accounts as there are two valuations are maintained in the said book in front of closing stock (7277.52 cts). Thereafter, on 16.03.2018, a statement of Shri Dinesh Kalathiya, a Partner of the Assessee was recorded under section 131 of the Act. In this statement, while answering the question no.16 & 17 pertaining to the above discrepancies, Shri Dinesh Kalathiya stated that there are two valuations pertaining to the closing stock out of which, a rate of Rs.35,395/- is the valuation rate as per books whereas a rate of Rs.40,919/- is the actual rate per carat. Further, while answering to question no.18, Shri Dinesh Kalathiya offered an amount of Rs.4,02,01,020/- [i.e. 7277.52 cts x Rs.5,524/- (being difference of 40,919/--35,395/-) to buy peace of mind and the same was added to the valuation of closing stock which resulted in increased gross profit during the year. 2. The Assessee filed its return of income for the year under consideration i.e. A.Y. 2018-19 on 14.08.2018 declaring total income at Rs.95,16,150/-. The said return was selected for scrutiny assessment in pursuance to the survey action conducted under section 133A of the Act. During the course of assessment proceedings, the Assessee in response to the show cause notice dated 23.04.2021, filed detailed submissions vide letter dated 04.05.2021 along with the details of Average Stock Valuation including the calculation of Closing Stock and also a stock item register. The Average Stock Valuation sheet clearly shows ITA No.2143/Mum/2024 5 that the Assessee has arrived at closing stock of Rs.42,01,93,733/- after considering the closing stock of rough and polished Diamond and the said closing stock is duly reflected in the books of account of the Assessee. 3. The Ld.AO, after considering the impounded material as well as the books of account of the Assessee, was of the view that the amount of Rs.4,02,01,020/- offered as an additional amount on account of difference in valuation is nothing but the unexplained expenditure. Therefore, the AO, vide an assessment order dated 21.06.2021 passed under section 143(3) of the Act, added the sum of Rs.4,02,01,020/- under section 69C of the Act and thereby imposed the taxes in accordance with the provisions of section 115BBE of the Act. 4. On appeal, the Ld.CIT(A) dismissed the appeal of the Assessee without appreciating the submissions of the Assessee. 5. The Assessee therefore, filed an appeal before the Hon'ble ITAT challenging the disallowance of Rs. 4,02,01,020/- made by the Ld.A.O. and confirmed by the CIT(A) under section 69C of the Act. The ITAT, after considering the submissions of the Assessee, allowed the appeal [ITA 1618/Mum/2023] for the A.Y. 2018-19 vide an order dated 28.08.2023 The relevant observations of the ITAT as reproduced as under: \"6.4 We have heard rival submission and perused the relevant material on record. It is undisputed that no difference in quantity of the stock was found during the course of the survey. The Assessing Officer has referred only difference in valuation of stock. It is not the case of the Assessing Officer that any of the purchases were not found to be recorded in the books of accounts. The difference in valuation as on the date of the survey as compared to the valuation at the time of purchase comprises in the profit and loss account at the time of recording of sales. Therefore, the assesse was not required to offer the said profit during the year under consideration. Despite the assessee has enhanced value of the closing stock as on the date of the survey and included the same for the purpose of declaring profit. In such scenario, the said disclosure would be at maximum in the nature of business profit and it cannot be in the nature of unexplained expenditure to be taxed u/s 115BBE of the Act. The invoking of the said section by the Assessing Officer is without substantiating that any purchase of the assessee was in the nature of unexplained purchases. The sources of the purchases by the assessee are duly explained and only assessee has offered the difference in valuation of the stock and said valuation was recorded by the assessee in the note found during the course of survey. In the facts and circumstances discussed above, we set aside the order of the Ld. CIT(A) on the Officer to cancel the action of taxing the undisclosed profit declared by the assessee appeal of the assessee are accordingly allowed.” 6. With regard to the show cause notice issued by the ld. PCIT, as per detailed submission made, it was further submitted the issues raised in the show cause notice under section 263 of the Act with respect to the valuation and rates of diamond per carat and the valuation of rough diamonds admitted during the survey had duly been considered by the Ld. A.O. while passing the assessment order. Before finalising the ITA No.2143/Mum/2024 6 assessment, AO has verified all the impounded material found during the survey action and books of accounts submitted by the Assessee along with the valuation of stock and stock item register. On going through all details furnished by the Assessee, the Ld. A.O. was of the view that additional amount of Rs.4,02,01,020/- offered by the Assessee during the survey on account of difference in valuation recorded in the 'Fortune Note book' is an unexplained expenditure under section 69C of the Act. 7….. 8. It is an undisputed fact that there is no discrepancy found with respect to the stock of rough and polished diamond during the course of survey proceedings. The only discrepancy in the course of survey action was pertaining to two different rates mentioned in the Fortune Note Book for which the Assessee has voluntarily offered a sum of Rs.4,02,01,020/- (i.e. 7277.5 cts x Rs.5,524), being the difference of the valuations (i.e. Rs.35,395 and Rs.40,919) pertaining to the closing stock, mentioned in the impugned Fortune Note Book for tax as increased valuation of closing stock, thereby resulting in increased gross profit during the year. The Assessee has furnished all the relevant details and documents including the submissions made before the Ld.A.O., Balance Sheet and Profit and Loss accounts along with Annexures, Details of Average Stock Valuation and the impounded note book before your honours along with the present submission. Your honours would appreciate that the Average stock valuation made by the Assessee clearly shows that the closing stock at Rs.42,01,93,733/- computed by the Assessee comprises of the closing stock of rough diamond valued at Rs.7,43,06,079/- and closing stock of polished diamond valued at Rs.34,58,87,654/-. Further, the said closing stock of Rs.42,01,93,733/- is reflected in the books of accounts of the Assessee which were duly submitted in the course if assessment proceedings and considered by the Ld.A.O. while passing the assessment order. Thus, it is incorrect to mention that the valuation of the rough diamonds admitted during the survey proceedings have not been considered in totality during the assessment proceedings. The rough diamonds purchased by the assesee is duly reflected in the books of accounts and has been accepted. 9. In view of the above, the Assessee submits that the assessment order is neither erroneous nor prejudicial to the interest of the Revenue. Therefore, your honours are not justified to invoke the provisions of section 263 of the Act. The Assessee to support its contentions relied on the decision of Hon'ble Supreme Court in the case of Malabar Industries Co. Ltd. Vs. CIT [2000] 243 ITR 83(SC) also relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. [1993] 203 ITR 108 (Bom). 4. We have carefully considered all the relevant facts of the case as also rival submissions and the legal position in the matter. It appears that the ld. PCIT proposed action u/s 263 mainly on the ground of valuation of the diamonds and rate of diamond per carat which according to him was quite different from that is taken while framing assessment order. The ITA No.2143/Mum/2024 7 ld.AR has explained that there is no discrepancy found with respect to the stock of rough and polished diamond during the course of survey proceedings. The only discrepancy in the course of survey action was pertaining to two different rates for which the assessee voluntarily offered a sum of Rs.4,02,01,020/- (i.e. 7277.5 cts x Rs.5,524), being the difference of the valuations (i.e. Rs.35,395 and Rs.40,919) pertaining to the closing stock for tax as increased valuation of closing stock, thereby resulting in increased gross profit during the year. 4.1 We also find from the records that the issue relating to the excess stock found during the survey has been examined by the AO in detail during assessment proceedings which is evident from the notices and questionnaires issued from time to time. The ld.AR has taken us through various pages of the paper book submitted by him before us. As per pages 82-84 of, vide notice u/s 142(1) dated 15.02.2021, the AO issued a detailed questionnaires calling for various details relating to financial of the assessee. More specifically, he called for the Trading and Profit and loss account for the period 1.4.2017 to 16.2.2018(date of survey) and for the subsequent period upto 31.3.2018.Specific query appears on Excess stock on point no.15 pertaining to the additional income offered of Rs 4.02 cr. Vide another letter dated 23.4.2021, he also issued a show cause notice specifically w.r.t. the survey pertaining to the valuation rates as per paras 3 to 5.Another show cause notice dated 1.6.2021 specifically related to the excess stock as found during survey. It is found from the page-95 to 104 of the detailed reply submitted by the AR of the assessee that various ITA No.2143/Mum/2024 8 explanations were furnished by the assessee vide reply dated 4.5.2021. Reconciliation of the stock as on the date of survey and the stock position of Rough diamonds submitted before him are also part of the reply. The assessee has also furnished all the relevant details and documents including the submissions made before the AO, Balance Sheet and Profit and Loss accounts along with Annexures, Details of Average Stock Valuation and the impounded note book etc. It was further explained to us that the average stock valuation made by the assessee clearly shows that the closing stock at Rs.42,01,93,733/- computed by it comprised of the closing stock of rough diamond valued at Rs.7,43,06,079/- and closing stock of polished diamond valued at Rs.34,58,87,654/-. Further, the said closing stock of Rs.42,01,93,733/- is reflected in the books of accounts which were duly submitted in the course if assessment proceedings and considered by the AO while passing the assessment order. Thus, it is incorrect to mention that the valuation of the rough diamonds admitted during the survey proceedings had not been considered in totality during the assessment proceedings. Rough diamonds purchased by the assessee is duly reflected in the books of accounts and has been accepted. 4.2 All the above stated facts clearly demonstrate that the issue of excess diamond has been deeply scrutined by the AO during assessment proceedings and it is not a case where no enquiry has been conducted into the issue as alleged by the ld.PCIT. Even, the hon’ble ITAT allowed the appeal of the assessee vide ITA 1618/Mum/2023 for the year vide order dated 28.08.2023 w.r.t. the excess stock. ITA No.2143/Mum/2024 9 4.3 We observe the Pr.CIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 1-6- 2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue. It is on this basis, the assessment order passed by the AO under section 143(3) of the Act has been set aside with a direction to the AO to pass a fresh assessment order. It will be therefore imperative to dwell upon the impact of Explanation 2 for the purposes of section 263 of the Act. The aim and object of introduction of aforesaid Explanation by Finance Act, 2015 was explained in CBDT Circular No. 19/2015 [F.NO.142I14/2015T PL], Dated 27-11-2015 which is reproduced hereunder: \"53. Revision of order that is erroneous in so far as it is prejudicial to the interests of revenue. 53.1 The provisions contained in sub-section (1) of section 263 of the Income-tax Act, before amendment by the Act, provided that if the Principal Commissioner or Commissioner considers that any order passed by the Assessing Officer is erroneous in so far as it/s prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making an enquiry pass an order modifying the assessment made by the Assessing Officer or cancelling the assessment and directing fresh assessment. 53.2 The interpretation of expression \"erroneous in so far as it prejudicial to the interests of the revenue\" has been a contentious one. In order to provide clarity on the issue, section 263 of the Income-tax Act has been amended to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner. (a) the order is passed without making inquiries or verification which, should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. 53.3 Applicability: This amendment has taken effect from 1st day of June, 2015.\" ITA No.2143/Mum/2024 10 4.4 We find merit in the plea of the assessee that the ld. PCIT is expected to demonstrate that the view taken by the AO is wholly unsustainable in law before embarking upon exercise of revisionary powers. The powers cannot be exercised for directing a fuller inquiry to merely to find out if the earlier view taken is erroneous particularly when a view was already taken after inquiry. If such course of action in the light of the Explanation 2 is permitted, he can possibly find fault with each and every assessment order without himself making any inquiry or verification and without establishing that assessment order is not sustainable in law. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to section 263 of the Act 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 authorize 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. This would inevitably mean that every order of the lower authority would thus become susceptible to section 263 of the Act and, in turn, will cause serious unintended hardship to the tax payer concerned for no fault on his part. Apparently, this is not intended by the Explanation. Howsoever wide the scope of Explanation 2(a) may be, its limits are implicit in it. It is only in a very gross case of inadequacy in inquiry or where inquiry required on the basis of record available before the AO was not conducted, the revisionary power so conferred can be exercised to invalidate the action of AO. The ITA No.2143/Mum/2024 11 AO in the present case has not accepted the submissions of the assessee on various issues summarily but has duly scrutinize the whole issue of excess stock as apparent from various queries made during the assessment proceedings. He passed after making due enquiries after due application of mind. 4.5 We find that twin conditions are not satisfied for invoking the jurisdiction under section 263 of the Act. Here, in our view, it cannot be held that the assessing officer did not carry out enquiry or verification which should have been done. Thus, we are of the view that the Ld Pr. CIT was not justified and not correct in law in holding that the impugned assessment order was erroneous. Accordingly, we find merit in the contentions of the assessee that the revision order passed by ld. PCIT for the year under consideration is beyond the scope of section 263 of the Act and hence not valid. Accordingly, we set aside the revision order passed by him. 5. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 18.02.2025. Sd/- (NARENDER KUMAR CHOUDHRY) Sd/- (PRABHASH SHANKAR) \u0007ाियक सद\f / JUDICIAL MEMBER लेखा सद\f / ACCOUNTANT MEMBER मुंबई/Mumbai; \u001eदनांक Dated 18/02/2025 Prakash Kumar Mishra, Sr.P.S. ITA No.2143/Mum/2024 12 आदेश क\u000b \u0013\u0001त\u0015ल\u0017प अ\u001aे\u0017षत/Copy of the Order forwarded to : आदेशानुसार/ BY ORDER, (Assistant Registrar) आयकर अपील\u001eय अ\u001fधकरण, मुंबई/ ITAT, Mumbai 1. अपीलाथ\r / The Appellant- . Purna Purshottam Exports, Gala No.329, Vardhman Industrial pre Co-op Soc. Ltd. S.V.Road, Dahisar East, Mumbai 2. \u000e\u000fयथ\r / The Respondent- Pr.CIT (Central), Mumbai-1 3. आयकर आयु\u0016(अपील) / The CIT(A), 4. आयकर आयु त / CIT 5. िवभागीय \u001cितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 6. गाड# फाईल / Guard file. स\u000fया%पत \u000e&त //True Copy// "