Subject:- Matter of the present appeals) it is seen that the case of the Assessee was reopened for AYs 1997-98
Referred Sections:
Section 260-A of the Income tax Act, 1961 („Act?)
Section 263 of the Income Tax Act, 1961
Section 143(3) of the said Act
Section 80 HHC
Section 80 IA,
Section 43B of the Act
Section 40A (7) of the Act.
Section 143(3) of the Act
Section 22 of the Act
Section 142(2A)
Referred Cases / Judgments
CIT vs. Kohinoor Foods Limited (2015) 373 ITR 682 (Del)
CIT vs. NTPC Ltd. (2017) 392 ITR 426 (SC):
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 28th March, 2019
Decided on: 16th April, 2019
+ ITA 757/2005
THE COMMISSIONER OF INCOME TAX. ..... Appellant
Through: Mr Asheesh Jain, Senior Standing
Counsel and Mr. Sanjay Kumar,
Junior Standing counsel for Revenue
with Mr. Adarsh Kr. Gupta and Mr.
Manish Sharma, Advocates.
versus
KOHINOOR FOODS LIMITED ..... Respondent
Through: Mr Salil Kapoor and Mr. Sumit
Lanchandwani, Advocates
+ ITA 771/2005
THE COMMISSIONER OF INCOME TAX. ..... Appellant
Through: Mr Asheesh Jain, Senior Standing
Counsel and Mr. Sanjay Kumar,
Junior Standing counsel for Revenue
with Mr. Adarsh Kr. Gupta and Mr.
Manish Sharma, Advocates.
versus
KOHINOOR FOODS LIMITED ..... Respondent
Through: Mr Salil Kapoor and Mr. Sumit
Lanchandwani, Advocates
+ ITA 785/2005
THE COMMISSIONER OF INCOME TAX. ..... Appellant
Through: Mr Asheesh Jain, Senior Standing
Counsel and Mr. Sanjay Kumar,
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 1 of 14
Junior Standing counsel for Revenue
with Mr. Adarsh Kr. Gupta and Mr.
Manish Sharma, Advocates.
versus
KOHINOOR FOODS LIMITED ..... Respondent
Through: Mr Salil Kapoor and Mr. Sumit
Lanchandwani, Advocates
CORAM: JUSTICE S. MURALIDHAR
JUSTICE I.S.MEHTA
JUDGMENT
Dr. S. Muralidhar, J.:
1. These are three appeals by the Revenue, under Section 260-A of the
Income tax Act, 1961 (,,Act) against the common order dated 31st January
2005 passed by the Income Tax Appellate Tribunal (,,ITAT) in ITA
Nos.2442, 2443 and 2444/Del/2004 for the Assessment Years (AYs) 1999-
2000, 2000-2001 and 2001-2002.
2. By an order dated 28th March 2019 of this Court, the name of Assessee
was permitted to be corrected from ,,Satnam Overseas Ltd. to its present
name i.e. Kohinoor Foods Ltd.
Question of law
3. The question of law framed by this Court while admitting these appeals
on 21st November 2008 reads as under:
"Whether the Commissioner of Income Tax correctly exercised
his powers under Section 263 of the Income Tax Act, 1961 in
cancelling the assessment order passed under Section 143(3) of
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 2 of 14
the said Act and in directing the assessing officer to pass a fresh
assessment order on all issues, except those, decided by the
Commissioner of Income Tax (Appeals )?"
Background facts
4. The background facts are that the Respondent Assessee is engaged in
manufacturing and trading of rice. For each of the AYs in question its return
was picked up for scrutiny and an assessment order was passed by the
Assessing Officer (AO) under Section 143 (3) of the Act. The assessment
order for AY 1999-2000 dealt with two of the issues viz., (i) claim of
reduction by the Assessee under Section 80 HHC and (ii) deferred revenue
expenditure. For AY 2000-2001 four issues were dealt with viz., (i) claim
under Section 80 HHC, (ii) claim under Section 80 IA, (iii) issue relating to
Section 43B of the Act and (iv) issue relating to Section 40A (7) of the Act.
As far as AY 2001-02 is concerned the assessment order under Section
143(3) of the Act dealt with the issues of (i) claim under Section 80 HHC,
(ii) depreciation and (iii) claim under Section 80 IA.
5. By the common order dated 23rd November 2004 the Commissioner of
Income Tax (Appeals) disposed of the assessees appeals confirming the
assessment orders for the two AYs 1999-2000 and 2000-2001 and issued
necessary directions in relation to the assessment order for AY 2001-02.
Show Cause Notices
6. The Commissioner of Income Tax (,,CIT) invoked the revisional
jurisdiction under Section 263 of the Act and issued a show cause notice
(SCN) dated 8th March 2004 to the Assessee as regards AYs 1999-2000. For
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 3 of 14
AY 2000-2001 a separate SCN dated 16th February 2004 was issued. In the
said SCNs the following issues were referred to: given the average rate of
Rs.2887 per quintal of rice, the figures of the closing stock of rice as end of
the previous financial year (FY) relevant to the AY in question would be
much more than the figure arrived at in terms of the actual sales of rice.
This indicated a suppression of sales. This got further confirmed by the
packing expenses which were much more than the claim for the preceding
year by 83%. The corresponding increase in the sales as compared to the
immediately previous AYs was only 33%. The AO had failed to take note of
the serious discrepancies and rushed to complete the assessment.
7. Another issue raised by the CIT was that the AO had failed to examine
the substantial revenue expenses claimed by the assessee under several
heads though prima facie some of these expenses appeared to be personal or
capital in nature. For example, the detail of the foreign travel expenses
pertaining to the travel by the relatives of the assessees directors. Further a
portion of the advertisement expenditure and business promotion
expenditure appeared to be towards land and building which may have
brought an advantage of agreeable nature of the assessee. Therefore, these
were to be treated not as revenue expenses and ought to be disallowed.
8. It was further noted that brokerage and commission expenses had been
allowed by the AO without examination and verification. Likewise he also
accepted the assessees computation of the deduction under Section 80
HHC. Lastly, the requisite proof of payment of bonus and sales tax was not
furnished and, therefore, these ought to have been disallowed under Section
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 4 of 14
43B of the Act.
Order of the CIT under Section 263
9. After considering the reply of the Assessee to the above SCNs, orders
were passed by the CIT under Section 22 of the Act on 25th March 2004 (in
respect of AYs 1999-2000 and 2000-2001) and 29th March 2004 (in respect
of AY 2001-2002). The CIT held that the Assessees contention that it had
furnished complete details of purchase and sales was only partly correct.
The quality-wise breakup of rice purchased and sold i.e. Basmati, Tibar,
Dubar and Kinki etc. was not furnished. It was noted that out of the
Assessees total sales for all products aggregating to Rs.340 crores, sale of
rice constituted Rs.244 crores i.e. over 70% for which no item-wise or
quality-wise breakup was furnished.
10. As regards closing stock, the CIT observed that their full particulars
were not furnished. The Assessee produced its stock register but it was
found that they did not contain the record of different qualities of rice. Only
the aggregate quantity of rice received and dispatched was recorded therein.
However, the sales receipts showed that the different quality of rice was
mentioned therein. Consequently, the CIT held that it was not correct to
apply the average rate of rice in the closing stock to the total quantity of rice
sold since the product mix of the rice in the closing stock was significantly
different from the product mix of the rice sold. According to the CIT the
Assessee was unable to reconcile the sale of different qualities of rice vis-a-
vis the availability of the respective quality of rice.
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 5 of 14
11. The CIT noted that there was no explanation for the inventory being
taken only once a year and that too close to the end of the year. These
contained predominantly high quality higher priced products whereas sales
made throughout the year were of medium or low price rice. Referring to the
decision of the Supreme Court in Rampyari Devi Saraogi v. Commissioner
of Income Tax 67 ITR 84 and Tara Devi Aggarwal v. Commissioner of
Income Tax 88 ITR 323 the CIT concluded that:
"the Assessing Officer's failure to make the inquiries which
were called for in the circumstances of the case make the
assessment order erroneous in as much as it is prejudicial to the
interests of the revenue."
12. Reference was also made to the decision in Malabar Industrial Co. Ltd.
v. CIT 243 ITR 83, Duggal & Co. v. CIT 220 ITR 456 and Gee Vee
Enterprises v. Addl. CIT 99 ITR 375. The decision of the Guwahati High
Court in Tarajan Tea Co. Pvt. Ltd. v. CIT 205 ITR 45 was also referred to.
The matter was remanded to the AO to consider the issues afresh. Detailed
directions were issued as to how the AO should proceed in the matter.
13. The conclusions in the impugned order of the CIT read as under:
"16. While making inquiries in respect of the issue of possible
suppression of sales by the assessee, the Assessing Officer will
particularly look into the following and record his findings on
each of the issues before completing the assessments:-
(i) genuineness and correctness of purchases made by the
assessee;
(ii) genuineness and correctness of sales made by the assessee;
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 6 of 14
(iii) quantitative analysis in respect of purchase, production and
sale of rice and other products dealt by the assessee;
(iv) the production process of the assessee and the yield,
shortages, wastages etc. and whether these are line with the
industry trends;
(v) whether the assessee's contention that quality-wise stock
registers are not maintained in the industry is correct and
whether in the absence of such record, it is possible to
determine the assessee's income correctly;
(vi) quantitative analysis in respect of packing material and
whether the assessee's explanation regarding the steep increase
in packing expenses is justified.
17. If considered necessary, the provisions of section 142(2A)
may also be invoked."
14. The above order of the CIT was challenged by the Assessee by filing
three appeals being ITA Nos.2442, 2443 and 2444/Del/2004 in the ITAT. It
was inter alia contended by the Assessee before the ITAT that the CIT had
erred on facts and law in assuming that the AO had not made proper
quantitative analysis or conducted necessary examination of the assessees
manufacturing and trading results. It was further submitted that the CIT was
in error in examining the foreign travel expenses of the relatives of the
directors.
Impugned order of the ITAT
15. The ITAT framed the following issue which arose for consideration:
"whether the assessments had been framed after making proper
enquiries, as contended by the assessee both before the CIT and
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 7 of 14
during the course of instant proceedings."
16. The ITAT disagreed with CIT that sales had been suppressed by the
Assessee. It was held that:
"No sales made have been found to be suppressed. Sales are
fully verifiable and are all through cheques, which are locally
made and export sales are also fully verifiable. There is also no
finding that any sales made were found not having been account
ted for. There is also no basis to even suspect that what was
sold as superior quality was sold at the rate of inferior quality,
since all the sales are verifiable. In fact as stated above no
record either of production of superior quality or sale thereof is
being maintained."
17. It was held that if a uniform rate of closing stock of rice was applied it
would give a misleading result since rice is of different qualities and on
different rates have been sold to parties and it is bound, therefore, to give a
misleading result. The ITAT then enquired into the merits of the claims and
held that the order of the AO cannot be held to be erroneous.
18. This Court has heard the submissions of Mr Asheesh Jain, learned
Senior Standing Counsel for the Revenue and Mr. Salil Kapoor and Sumit
Lanchandwani, learned counsel for the Assessee.
Analysis and reasons
19. The scope of the power of the CIT under Section 263 of the Act has been
explained in several decisions. Two essential requirements are that the CIT
must find the order of the AO to be both erroneous and prejudicial to the
interests of the Revenue. This conclusion has to be reached by the CIT after
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 8 of 14
undertaking some basic inquiry into the issues which are considered to have
been either not inquired into at all by the AO or in regard to which the
conclusions are found to be erroneous. Illustratively, in Income Tax Officer
v. DG Housing Projects Limited (2012) 343 ITR 329 (Del), this Court
observed as under:
"..... An order of remit cannot be passed by the Commissioner to
ask the Assessing Officer to decide whether the order was
erroneous. This is not permissible. An order is not erroneous,
unless the Commissioner hold and records reasons why it is
erroneous. An order will not become erroneous because on
remit, the Assessing Officer may decide that the order is
erroneous. Therefore, the Commissioner must after recording
reasons hold that the order is erroneous. The jurisdictional
precondition stipulated is that the Commissioner must come to
the conclusion that the order is erroneous and is unsustainable in
law. It may be noticed that the material which the Commissioner
can rely includes not only the record as it stands at the time
when the order in question was passed by the Assessing Officer
but also the record. Nothing bars/prohibits the Commissioner for
collecting and relying upon new/additional material/evidence to
show and state that the order of the Assessing Officer is
erroneous."
20. In the present case, the inquiry undertaken by the AO has been referred
to by the ITAT in paras 15 and 16 of its impugned order. The ITAT noted
that the AO did examine the Assessees production record and books of
account. The ITAT noted that the nature of the business "remains the same
as in the past" as does, "the method of accounting production". It was noted
that Assessee had "duly furnished the details of opening stock, closing stock,
sales and production i.e. consumption of paddy etc." The ITAT observed:
"The Assessing Officer has examined the production records and
Books of Accounts. We also notice from the order of assessment
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 9 of 14
that AO has recorded a finding that the nature of business
continues as in the past. It is a matter of record that the assessee
has been maintaining statutory production records and the
production and sale of rice has been reflected on the basis of such
registers. The sales made are all verifiable and accounts are duly
audited. It is also not in dispute that the assessee is engaged in the
production of agro based products and as such the production
percentage cannot remain uniform from year to year or month to
month, more particularly because the production of Rice depends
upon the supplies received of paddy and the variety and quality of
production of rice achieved from such paddy. Thus, if the quality
of supplies of paddy is superior, production percentage of fine
quality i.e. wand goes up. However, in case the quality supplied
of paddy is inferior, the fine quality of production percentage goes
down. The supplies received of paddy, depends upon nature and in
case the rains in a particular paddy season is excessive or less, the
quality of paddy cultivation deteriorates and as such the
production percentage of superior quality of Rice cannot remain
uniform. The assessee in fact does not maintain quality wise any
separate record of production, as it is neither possible nor was
statutorily required."
21. It cannot therefore be said that this was a case of ,,no inquiry by the AO.
Added to this is the fact that the CIT has himself not undertaken any
independent inquiry to contradict the conclusions reached by the AO and to
demonstrate that the order of the AO was erroneous and prejudicial to the
interest of the revenue. It is interesting that the CIT, while giving a direction
to the AO to make an inquiry, observed in para 23:
"23. While making inquiries in respect of the issue of possible
suppression of sales by the assessee, the Assessing Officer will
particularly..."
22. In Globus Infocom Ltd. v. CIT [2014] 369 ITR 14 (Del) this Court
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 10 of 14
observed as under:
"....The use of the word "possible" would indicate that there was
no finding and adjudication by the Commissioner and his
observations were based on mere suspicion and certainly
uncertain... Thus the Commissioner was unsure; whether or not
the bifurcation was right or wrong. This does not show and
establish that the finding of the assessing officer was erroneous."
23. There were other issues that arose from the order of the AO apart from
the valuation closing stock. These included the disproportionate increase in
the packaging expenses and suppression of sales. The CIT has in its
impugned order dated 29th March, 2014 refrained from giving a finding on
the said issues and therefore failed to come to any conclusion that the order
of the AO on these issues was erroneous and prejudicial to the interest of the
revenue. This again was not in compliance with the mandate of Section 263
of the Act.
24. Mr. Kapoor, learned counsel for the Assessee, pointed out that an
identical issue has been adjudicated by this Court, in the case of this very
Assessee for AYs. In CIT vs. Kohinoor Foods Limited (2015) 373 ITR 682
(Del) the issue of suppression of sale was dealt with and decided in favour
of the Assessee. No Special Leave Petition was preferred against the said
judgment which thus attained finality. A consolidated order was passed by
the ITAT for AYs 2002-03 and 2007-08 and in doing it followed the earlier
order passed by it for AYs 1999-2000 to 2001-02 which is impugned in the
present appeal.
25. Turning to the period prior to AYs 1999-2000 to 2001-02 (which form
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 11 of 14
the subject matter of the present appeals) it is seen that the case of the
Assessee was reopened for AYs 1997-98 and 1998-99 by notices dated 25th
March, 2004 and 30th March, 2005 and for AYs 1999-2000 and 2000-01 by
the notice dated 8th March, 2004. The writ petitions filed by the Assessee
challenging the re-opening was allowed by this Court by the judgment dated
11th December, 2009 for the following reasons:
"We feel that the Writ Petitions have to succeed because the
contentions as raised on behalf of the counsel for the petitioner
are well founded. The only reason which has been given seeking
re-opening of the assessment for the years 1997-98 and 1998-99
is that suppression of sales have taken place on account of the
fact that when average price of the closing stock is multiplied
with the quantity of the sales in the year then the value of the
sales would be at a higher figure than that as declared by the
assessee. Clearly, there is no new material which is alleged to
have come to the notice of the Assessing Officer which has
caused him to seek re-opening of the assessment. Admittedly,
the reasons given for seeking re-opening of the assessment
contains the expression "perusal of the case record reveals"
clearly showing that it is on the basis of the same assessment
record as was filed by the assessee, during the relevant
assessment years and also scrutinized by the Assessing Officer
before passing the orders under Section 143(3) is the basis for
seeking re-opening of the assessment."
"....Not only this, the rationale/logic/reasons given that sale price
of stocks during the entire assessment year would remain
constant is something which indeed confounds us. It cannot
stand to reason that the price of sale of paddy/rice/pulses
remained constant throughout the year so that on the basis of an
average price of the closing stock the sale price for the entire
year comprising of 12 months. 48 weeks and 365 days can be
ascertained in that the same would have remained fixed
throughout this period"
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 12 of 14
26. It is further pointed out by the learned counsel for the Assessee, without
being contradicted by learned counsel for the Revenue, that from AY 2011-
12 onwards, no addition was made on account of discrepancy in closing
stock. There is merit in the contention therefore of the Assessee that since
the issue in the previous and subsequent years stands adjudicated in its
favour by the ITAT and this Court, it would be futile to reopen the issue
only for three AYs in between viz., 1999-2000 to 2001-02. It is no longer a
,,live issue. In this context, reference may be made to the following
observation of the Supreme Court in CIT vs. NTPC Ltd. (2017) 392 ITR
426 (SC):
"We do not consider it necessary to go into the question
whether at the relevant point of time the exercise of jurisdiction
under Section 263 of the Income Tax Act, 1961 by the
Commissioner of Income Tax (Appeals) was justified in view
of the fact that the subsequent events have clearly demonstrated
that there has been no leakage of revenue and the matter has
become academic."
27. It is sought to be contended by the Revenue that each AY is a separate
year and that the principle of res judicata has no application in tax law. It is
contended that the mere fact that the issues stands decided in favour of the
Assessee for the earlier and subsequent AYs should not matter.
28. The Court cannot be unmindful of the fact that for a number of AYs
from 1997-1998 till 2014-15, barring the three AYs in question, the issues
have been decided ultimately in favour of the Assessee. In each of these
AYs it was a scrutiny assessment under Section 143 (3) of the Act. Surely,
the rule of consistency would apply in such a scenario. Accordingly, the
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 13 of 14
Court sees no reason why only for the three AYs in question, the matter
should be reopened.
29. Accordingly, the Court answers the question of law in the affirmative i.e.
in favour of the Assessee and against the Revenue.
30. The appeals are accordingly dismissed.
S. MURALIDHAR, J.
I.S. MEHTA, J.
APRIL 16, 2019
tr/mw
ITA 757/2005, ITA 771/2005 & ITA 785/2005 Page 14 of 14
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