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Sunil Arora, S/o Late Shri Prabhu Dayal, 23, Arya Nagar, Kanker Khera, Meerut. Vs. CIT, Meerut.
April, 10th 2015
              DELHI BENCHES : G : NEW DELHI


                        ITA No.3415/Del/2013
                       Assessment Year : 2008-09

Sunil Arora,                  Vs. CIT,
S/o Late Shri Prabhu Dayal,       Meerut.
23, Arya Nagar, Kanker Khera,


               Assessee By     :   Smt. Rashmi Chopra, Advocate
               Department By   :   Shri Ramesh Chandra, CIT, DR

         Date of Hearing             :   06.04.2015
         Date of Pronouncement       :   08.04.2015

     This appeal by the assessee is directed against the order dated

21.03.2013 passed by the CIT u/s 263 of the Income-tax Act, 1961
                                                         ITA No.3415/Del/2013

(hereinafter also called `the Act') in relation to the assessment year


2.    Briefly stated, the facts of the case are that the assessee is a

proprietor of Ganpati Traders, engaged in the trading of sweets and

namkeens, as a distributor of M/s Haldiram. Original assessment in

this case was completed u/s 143(3) of the Act on 8.12.2010 on total

income of Rs.7,61,920,      making an addition of Rs.1 lac towards

disallowance of Conveyance, freight, labour and travelling expenses

over and above the declared income.         The ld. CIT considered the

following points for exercising the jurisdiction under section 263 of the

Act : -

(i) The assessee showed lesser profit from the trading activity, which

was not properly looked into by the Assessing Officer;

(ii) The AO did not verify sundry creditors ;

(iii) The AO did not verify advances from customers; and

                                                         ITA No.3415/Del/2013

(iv) The AO did not verify TDS claim and even TDS certificates were

not on record.

3.   On the first aspect, the ld. CIT noticed that the assessee had shown

turnover of Rs.13.98 crore but a meager net profit of Rs.6,36,538/- was

declared. In his opinion, the AO did not examine Discount on sales

amounting to Rs.19.76 lac, Commission of Rs.22.27 lac, and Incentive

of Rs.8.56 lac. He further observed that no vouchers, bills or supporting

documents, etc., were produced before the AO. In his view, the AO was

not justified in making an ad hoc addition of Rs.1 lac out of some

improperly vouched expenses.      He, therefore, rejected the books of

account u/s 145(3).    After applying net profit rate of 5% on total

turnover, and, thereafter, adding other income of Rs.50.61 lac, the ld.

CIT computed business income at Rs.65,84,195/-.        As regards non-

verification by the AO of sundry creditors and advances from customers,

he directed the AO to verify their genuineness. On the last aspect, the

AO was directed to examine the genuineness of TDS claim after

                                                          ITA No.3415/Del/2013

obtaining TDS certificates, which were not on record. The assessee is

aggrieved against the impugned order.

4.   We have heard the rival submissions and perused the relevant

material on record. We want to clarify that the mandate of section 263

is attracted only when the assessment order is found to be erroneous and

prejudicial to the interest of the Revenue. These twin conditions have to

be cumulatively satisfied for obtaining a valid jurisdiction under this

section. Merely because an assessment order is prejudicial to the interest

of the revenue is not enough, unless it is shown that the same is

erroneous too. An assessment order can be termed as erroneous in

several circumstances. Non-investigation by the AO on the relevant

issues, which are required to be properly looked into, makes an

assessment order erroneous. However, non-examination of the trivial or

insignificant issues cannot lead to making an assessment order

erroneous. Making due investigation but thereafter taking a patently

erroneous view, also makes an assessment order erroneous. A line of

distinction should be drawn between patently erroneous view and

                                                          ITA No.3415/Del/2013

accepting one of the possible views.        Only the former makes an

assessment order erroneous and not the later. In other words, if there is

a debatable issue and the AO has taken one of the possible and legally

sustainable views, then that aspect goes outside the realm of revision.

Another situation of an erroneous order may be when investigation was

made by the AO, but the circumstances suggest that further investigation

was warranted, which the AO failed to make. This would also make the

assessment order erroneous. But the mere fact that the AO chooses not

to incorporate certain issues in the assessment order on which he gets

satisfied during the course of hearing after proper examination, cannot

be lead to the passing of an erroneous assessment order. If material on

record suggests that the AO did embark upon the investigation and got

satisfied and further there is nothing to prompt further investigation,

then the assessment order cannot be characterized as erroneous simply

because there is no discussion in the assessment order on such aspects.

If a view is taken that non-discussion of an issue in the assessment order

on which the AO is satisfied, means the absence of application of mind

by the AO, then probably all the assessment orders would become
                                                            ITA No.3415/Del/2013

erroneous. It is so for the reason that the AO cannot be expected to

discuss each and every, significant or insignificant aspect of assessment,

in his order. The essence of the matter is that on the non-discussed

relevant issues in the assessment order, so long as there is material to

suggest that the AO conducted inquiry and the assessee did file reply on

them, the assessment order cannot be held as erroneous, until it is shown

that the circumstances required the AO to conduct further inquiry on

such issues.

5. Coming to the facts of the instant case, we find the first objection of

the ld. CIT about non-production of books of account, etc. before the

AO and the resultant rejection of such books and the consequential

computation of business income at Rs. 65.84 lac, as unsustainable. We

have perused a copy of the order sheet entry of the AO, which is

available on pages 368 to 370 of the paper book. It is manifest that the

first notice was issued by the AO to the assessee on 26.8.2009. On

4.8.2010, the assessee appeared and was called upon to furnish various

details listed at sr. nos. a) to o), inter alia, of sundry creditors, various

                                                          ITA No.3415/Del/2013

expenses including discounts, commission, etc.        On 17.8.2010, the

assessee appeared and filed part reply.       Again on 20.10.2010, the

assessee's representative appeared and filed part reply. On 25.10.2010,

the assessee's representative appeared and filed part reply. At this stage,

the assessee was called upon to produce the books of account on the next

date of hearing, namely, 9.11.2010. The order sheet entry of 9.11.2010

divulges that the assessee's counsel appeared and produced books of

account, which were test checked by the AO. Again, on 16.11.2010, the

assessee's C.A. appeared and produced books of account, which were

again test checked and the assessment proceedings were completed on

8.12.2010. A bare perusal of the order sheet entry of the AO amply

demonstrates that the assessee was called upon to produce books of

account, which were duly produced on at least two occasions and the

same were also checked by the AO. The observations of the ld. CIT

about the non-production of books of account are, therefore, not tenable.

It is apparent that initially, the ld. CIT held that books of account were

not produced before the AO, and later on he went on to reject such

books of account. Further, we are unable to find any rationale of the ld.
                                                            ITA No.3415/Del/2013

CIT in applying a net profit rate of 5% on total turnover for computing

income of Rs.65.84 lac from business operations.         This is again an

application of the ad hoc net profit rate, unsubstantiated with any cogent


6. The ld. AR has drawn our attention towards elaborate detail of all the

expenses, etc., which were called for and submitted before the AO,

whose copies have been made available to us as well. It can be seen

from the order sheet entry of the AO dated 4.8.2010 that the AO did ask

for details of Discount on sales and Commission etc., along with all

other expenses, which were duly filed. Simply because such expenses

account for a higher amount, cannot in itself be a reason to hold that the

assessment order, allowing deduction for such expenses, is rendered

erroneous and prejudicial to the interest of the Revenue.

7.   It is vivid from the assessment order itself that some of the expenses

claimed as deduction were on the basis of self-made vouchers. The ld.

AR contended that these were petty payments on account of freight,

carriage, etc. made to rickshawalaas etc., for which there could have

                                                         ITA No.3415/Del/2013

been no external evidence. We find that the AO, on appreciation of

entire material available before him, made an ad hoc addition of Rs.1 lac

to cover up possible leakage of revenue on account of self-made

vouchers. This decision was taken on a holistic consideration of the

material before him. It is not a case of no or improper inquiry conducted

by the AO. The view point of the ld. CIT that the disallowance of Rs.1

lac made by the AO out of expenses is paltry, cannot be a ground to hold

the assessment order erroneous. It cannot be characterized as a patent

mistake committed by the AO. At the most, it may be a debatable issue

as to what amount of expenses should be disallowed. The AO may

consider a particular amount as reasonably disallowable, while the CIT

may consider another amount. Going by any standard, it is a debatable

issue as to the reasonableness of the amount disallowable and as such,

the CIT cannot substitute his opinion of the disallowable amount with

that of the AO in exercising power u/s 263 of the Act.

8. As the AO did carry out investigation on all the relevant aspects of

the matter, which is evident from the order sheet entry, and the reply of

                                                         ITA No.3415/Del/2013

the assessee giving details on several occasions, the assessment order

cannot be termed as erroneous. We, therefore,     set aside the action of

the ld. CIT in making an addition of Rs.65.84 lac by applying an ad hoc

net profit rate.

9.    In so far as the objections at sr. nos. 2 and 3 about the non-

verification of sundry creditors and advances from customers are

concerned, we find from order sheet entry dated 4.8.2010 that the

assessee was called upon to furnish details of sundry creditors along

with their copies of accounts, etc., which the assessee complied with. It

is not a case that there was some information with the AO casting doubt

on the genuineness of creditors and advances and the assessment order

was finalized without examining the creditors from that angle. The ld.

CIT has not referred to any circumstances suggesting, even remotely,

that these creditors were not genuine or at least further inquiry was

necessary due to some specific reasons, which the AO failed to do. It is

a simple case of certain creditors appearing in books of the assessee and

the AO getting satisfied with their genuineness after examining the

                                                            ITA No.3415/Del/2013

details called for by him. It is not a case of no investigation at all by the

AO of such creditors and advances or the AO reaching a patently

incorrect conclusion or not conducting any further inquiry, which the

attending circumstances suggested. Simply saying that it was for the

assessee to prove the genuineness and credit worthiness of the creditors,

without any thing to the contrary in the extant facts of the case, is not

enough to exercise jurisdiction u/s 263. We, ergo, refuse to uphold the

view point of the ld. CIT in setting aside the assessment order on this

aspect of the matter.

10.    As regards the last point about the AO not examining the

genuineness of TDS claim, we find that the assessee did furnish the

necessary details before the AO, which are available on pages 296

onwards of the paper book. The ld. CIT has not spelt out as to how

these details were lacking or incorrect. We are disinclined to accept the

view point of the ld. CIT on this score as well.

11.   In the light of the foregoing reasons, we are satisfied that the ld.

CIT was not justified in cancelling the assessment order by branding it

                                                           ITA No.3415/Del/2013

erroneous and prejudicial to the interest of the Revenue. The impugned

order is, therefore, set aside.

12.       In the result, the appeal is allowed.

          The order pronounced in the open court on 08.04.2015.

               Sd/-                                       Sd/-

     [C.M. GARG]                                      [R.S. SYAL]
  JUDICIAL MEMBER                                 ACCOUNTANT MEMBER

Dated, 08th April, 2015.
Copy forwarded to:
     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                                   AR, ITAT, NEW DELHI.

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