* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 23.05.2018
Pronounced on: 20.07.2018
+ ITA 907/2017, C.M. APPL.38789/2017
PR. COMMISSIONER OF INCOME TAX-II ..... Appellant
versus
SHRI BRAHAM DEV GUPTA ..... Respondent
+ ITA 1162/2017, C.M. APPL.46234/2017
PR. COMMISSIONER OF INCOME TAX ..... Appellant
versus
BRAHM DEV GUPTA ..... Respondent
Through: Sh. Zoheb Hossain, Sr. Standing Counsel with
Sh. Deepak Anand, Jr. Standing Counsel and Sh. Piyush
Goyal, Advocate, for the appellant.
Sh. Salil Aggarwal with Sh. Madhur Aggarwal and Sh.
Uma Shankar, Advocates, for respondent.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A.K. CHAWLA
MR. JUSTICE S. RAVINDRA BHAT
%
1. The question of law in these two appeals is common:
"Did the Income Tax Appellate Tribunal ("ITAT") erred in
holding that invocation of Section 263 of the Income Tax Act,
1961 in the assessee's case, for two years (AY 2011 -12 and
2012-13) was not warranted?"
2. On 02.09.2010, during the year under consideration, there was a
survey at the business premises of the assessee. It surrendered `18.25 odd
crores as additional income on account of excess stock found in his
premises. The assessee's returns for AY 2011-12 declared income of `21,
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58,62,170/-, (inclusive of `18.25 crores surrendered during survey). For AY
2012-13, the return disclosed income of `25,36,38,801/-. The returns were
selected for scrutiny and notice issued to the assessee. The Assessing Officer
(AO) added some amounts to the declared income of the assessee on the
basis of disallowance of 10% non-business expenditure; likewise, 10% of the
amount claimed towards vehicle expenditure was disallowed. On
01.10.2015, the Commissioner (CIT) issued a Show Cause Notice under
Section 263 of the Income Tax Act, 1961 [hereafter "the Act"] to the
assessee observing that the AO failed to make any enquiry as regards, inter
alia, the, incurring of trading loss amounting to `38,62,38,61/- amongst
other issues.
3. The revision orders under Section 263 of the Act enhanced the
assessee's income, holding that the AO's original order was erroneous and
prejudicial to the interest of Revenue; reliance was placed on Commissioner
of Income Tax v Gotzee India Limited, 361 ITR 505 (HC); Commissioner of
Income Tax v Nagesh Knitwears Pvt. Ltd. 345 ITR 135 and Gee Yee
Enterprises v Additional Commissioner of Income Tax 99 ITR 375 which
held that the AO's role also involves investigation and that an order is
erroneous when such enquiries are not made. The CIT held that the assessee
had shown trading loss in its of books of accounts. The assessee was
proprietor of M/s DSM International. It came to the Revenue's notice that to
Directorate of Revenue Intelligence (DRI) was making enquiries as regards
the role of M/s DSM International on account of fraudulent exports. Further,
the brother of the assessee - Sahdev Gupta is under the radar of DRI for
claiming duty drawback on bogus exports. The assessee is also in the same
kind of business. The AO has failed to make any enquiry as regards the huge
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duty drawback claimed by the assessee and the modus operandi of the
assessee. During the scrutiny carried out under Section 263 of the Act, it was
found that the assessee could not supply the PAN of certain creditors. Even
during the proceedings under Section 263, the assessee failed to supply the
same. Therefore, there was a lack of inquiry on the part of the AO to find out
bogus purchases or inflation of expenses so as to reduce profits. The AO
should get necessary information from concerned authorities like DRI as
regards the role of assessee in making bogus exports and the low profits
being shown by the assessee. It was also held that the assessee claimed
interest in P&L account (`1,81,32,989/-), and, on the other hand, made
interest free advances by saying that these are out of interest free funds. The
AO did not make any inquiry as regards the utilization of borrowed funds for
non-business purposes. The CIT also faulted the AO in failing to inquire
about genuineness of these transactions. It was held that there were a number
of credits, even in crores of rupees, and immediately cheque is issued either
on the same day or within 2 or 3 days to some persons. Even though they
were family members, yet it was the duty of the AO to enquire into the
genuineness of the transactions, as these persons are not showing very high
return of income. The CIT held that on perusal of the accounts of Jai Dev
Gupta, Kapil Dev Gupta and Maya Gupta, it was found that certain credits
were in the name of Mangal Traders and Yogmaya Traders, who were
involved in bogus exports. It appears that such persons are receiving funds
from fictitious individuals and forwarding them to the assessee in form of
loans. The genuineness of such transactions needed to be examined. The
issue of inquiry into disallowance under Section 14A of the Act and the
AO's failure to investigate into the matter was also stated in the CIT's order.
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On account of all these reasons, the CIT held that the assessment order was
erroneous and prejudicial to the Revenue's interest.
4. Similar findings were rendered for AY 2012-13 in regard to the issue
of trading loss. As regards purchases (it was observed that only 37 out of 114
parties had responded to the notices, and therefore, the genuineness of the
purchases could not be verified). It was held that the assessee has been in
the business for years, and it is highly unlikely that persons who have made
sales in crores of rupees would not respond to notices issued by the
department.
5. On further appeal, the Income Tax Appellate Tribunal (ITAT) set
aside the orders of the CIT; it was held that the assessee had declared
undisclosed income of `21.58 crores in his return of income which included
`18.25 crores declared during survey proceedings on account of excess stock
(for AY 2011-12). As regard the issue of loss, to the tune of `38 crores, the
ITAT held that the assessee had placed on record its audited profit & loss
account, balance sheet, statement of affairs and capital account which were
duly examined by the AO. Further, during enquiry made by the CIT, no
concrete findings have come on record that are adverse to the assessee. The
computation of loss at `38 crores was incorrect, as the CIT has failed to
account export incentive and fluctuation in exchange rate. Therefore, when
assessment has been completed after scrutinizing all details and explanation
supported with the documentary evidences filed in response to the notice
issued by AO, the question of lack of enquiry on the Private Mortgage
Insurance (PMI) of the AO does not arise.
6. As regards unsecured loans received by the assessee, the ITAT
observed that the loan amount was duly disclosed in the audited balance
ITA 907/2017 & ITA 1162/2017 Page 4 of 13
sheet. Further, when the assessee submitted the complete details of
unsecured loans along with confirmation of each of the transaction, bank
account of each of the person, and acknowledgement of ITR of lenders,
which have been duly examined by the AO, it cannot be the case of lack of
enquiry. The ITAT faulted the CIT in doubting the genuineness of those
transactions without any substantive evidence. The AO at best made
inadequate inquiries, and did not omit to do so. The assessee furnished
details of 22 out of 80 sundry creditors, and claims to not have filed the
details of the rest because they have been squared out in the subsequent
years, or no further transactions took place during assessment proceedings.
This established a "discreet" enquiry by the AO. On the issue of ownership
of factory premises, the assessee submitted that it was his ancestral property
and no rent was payable. There is no iota of doubt that the property is
ancestral property of the assessee; non-payment of rent did not in any
manner affect the assessee's tax liability in any manner. Lastly on
disallowance under Section 14A of the Act, ITAT held that the assessee
claimed that there was no exempt income and quoted the case of Cheminvest
Ltd. v. Commissioner of Income Tax 378 ITR 33. The CIT has directed the
AO to examine the issue in the light of the case law, instead of examining
the issue in the light of settled principle of law. Therefore, the ITAT
disagreed with the CIT that that no enquiry had been conducted by the AO.
On inquiry with respect to Mr. Sahdev Gupta, the ITAT observed that the
assessee had no trading transaction with the individual and the question of
drawing inferences and further investigation does not arise. Merely
conducting of an enquiry on Sahdev Gupta by DRI, does not confer powers
ITA 907/2017 & ITA 1162/2017 Page 5 of 13
upon CIT to act under Section 263. It was held that the CIT proceeded on the
basis of surmises, and, therefore, it is not a case of lack of enquiry.
7. The Revenue argues that the ITAT fell into error in quashing the
CIT's order under Section 263 of the Act. It was urged that the CIT not only
recorded satisfaction but also examined the materials placed before him
thoroughly. Learned counsel highlighted that the assessee's statement during
the survey proceedings disclosed that he dealt with diamonds for which there
was no separate trading account or profit & loss account as was urged during
the course of proceedings before the ITAT. Therefore, the AO ought to have
conducted enquiry to ascertain the expenditure actually incurred and,
therefore, ought to have sought clarifications on the trading loss incurred to
the tune of `38.62 crores. Consequently, the CIT's order that the assessment
order was erroneous in law and prejudicial to the interests of the Revenue
was justified. Reliance was also placed upon the judgment of the Punjab and
Haryana High Court in CIT I v. Abhishek Industries Ltd. 2006 (286) ITR 1,
which held that when deduction of interest is claimed under Section
36(1)(iii), the assessee has to satisfy the AO as to why interest from loans
had to be advanced. Furthermore, the genuineness of the amounts claimed to
be loans by the assessee was never gone into by the AO. Learned counsel
submitted that the law on this aspect is clear that the initial burden is upon
the assessee to establish under Section 68 that the expenditure claimed or the
investment or the amounts received were from authentic source. Without
proving the identity of the creditor, the genuineness of the transaction or the
creditworthiness of the individual or concerns, which had allegedly advanced
the amounts, the assessee's claim for the entries, which it treated as loans,
could not have been allowed. Learned counsel emphasized that the AO's
ITA 907/2017 & ITA 1162/2017 Page 6 of 13
order was silent on most of the aspects and facially needed to be corrected
for the purpose of which the powers under Section 263 were correctly
invoked. Reliance is placed on Toyota Motor Corporation v. CIT 2008 (306)
ITR 52 (SC).
8. Learned counsel for the assessee submitted that the order of the ITAT
made for both years was correct given the facts and circumstances. It was
submitted that the AO's order was duly made after enquiry into the question
of the profit & loss statement; the AO took note of the fact that the assessee
had received incentives. Learned counsel submitted that the order of the AO
was not based on ignorance of facts; rather, he took into account the amounts
advanced by various creditors. It was argued that the AO issued notices to
the concerned parties and many of them had even turned up in the
proceedings. After satisfying himself that the amounts advanced were
genuine, the AO finalized the assessments. Learned counsel highlighted that
the export incentives were linked to the export sales and could not have been
ignored. It had earned gross profit of `7,19,11,427/-. In this regard, reliance
was placed upon the decision in Topman Exports v. CIT 342 ITR 49 where
the Court held that export incentives were part of business profits. With
respect to the statement of credits from entries such as Mangal traders and
Yogmaya Traders, learned counsel submitted that the bank account of Sh.
Jaidev Gupta was duly noticed. As far as the issue of disallowance under
Section 14A was concerned, the decision in CIT v. Aman Khera 387 ITR 33
squarely applied.
9. It was argued that the invocation of powers under Section 263 had to
be for cogent reasons and on valid grounds. Given that the AO had
conducted a thorough investigation into all the circumstances, the fact that
ITA 907/2017 & ITA 1162/2017 Page 7 of 13
CIT(A)'s disagreement was based on surmises rather th an on an appropriate
appreciation of the record. It was submitted that not every error, real or
cogent that can result in a lawful revision, learned counsel submitted that it is
only such errors that are prejudicial to the interests of Revenue that can
authorize invocation of CIT's powers under Section 263, learned counsel
relied upon the judgment of the Supreme Court in Malabar Industrial
Company Ltd. v. CIT 2000 (243) ITR.
Analysis and Conclusions
10. Malabar Industrial Company (supra) is a seminal authority upon the
question of the circumstances that can trigger a justified recourse to Section
263. The Supreme Court pertinently observed as follows:
"The Commissioner noted that the ITO passed the order of nil
assessment without application of mind. Indeed, the High Court
recorded the finding that the ITO failed to apply his mind to the
case in all perspective and the order passed by him was
erroneous. It appears that the resolution passed by the board of
the appellant company was not placed before the Assessing
Officer. Thus, there was no material to support the claim of the
appellant that the said amount represented compensation for
loss of agricultural income. He accepted the duty in the
statement of the account filed by the appellant in the absence of
any supporting material and without making any inquiry. On
these facts, the conclusion that the order of the ITO was
erroneous is irresistible. We are, therefore, of the opinion that
the High Court has rightly held that the exercise of the
jurisdiction by the Commissioner under section 263(1) was
justified"
11. In this case, as far as the issue of drawback is concerned, the CIT spelt
out why the AO had to investigate the matter further:
"The firms of Sh. Sahdev Gupta are under scanner of DRI. The
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raids were also conducted by DRI. This information is on
record that raids were conducted in August 2015. It. appears
that the assessee is also in same kind of business and duty
drawback is taken from the Government. It needs to be
investigated as whether the assessee obtained duty drawback.
on bogus exports. As far as Income tax is concerned the
assessee has offered it as its income. A survey u/s 133A was
also conducted wherein the assessee has voluntarily accepted
additional income of Rs. 18 crores. Complete investigation was
not carried out by the AO. There was lack of inquiry as regards
the modus operandi of the assessee, particularly when the
assessee has declared very law income even after getting huge
duty drawback."
12. On the question of failure on part of the AO to investigate the
genuineness of loans, the CIT observed as follows:
"the assessee was informed that AO failed to make inquiries as
regards the genuineness of the transactions of the persons who
have given loans. The assessee submitted that there are only
brought forward balances in respect of 8 persons and the other
persons Jai Dev Gupta & Kapil Dev Gupta are brothers and
Maya Gupta is wife of the assessee's brother. It is very unusual
that there are a number of credits even in crores and
immediately cheque is issued either on the same day or within 2
or 3 days to some persons. Even though they are family
members yet it was the duty of the AO to enquire into the
genuineness of the transactions because on the face of it these
appears to be non-genuine particularly these persons are riot
showing very high return of income.
16. It may be noted that the assessee has filed bank statement
of Sh. Jai Dev Gupta who is having transactions with the
assessee (copy enclosed). The perusal of the bank statement
shows that there are certain credits from certain entities like
Mangal Traders, Yogmaya Traders. From the newspaper
reports, it is learnt that these concerns i.e. Mangal Traders and
ITA 907/2017 & ITA 1162/2017 Page 9 of 13
Yogmaya Traders are also involved in bogus kind of exports.
The assessee has received loans from Sh. Jai Dev Gupta.
Similarly there are various credit in their bank accounts of
persons like Kapil Dev, Maya Gupta. It appears that these
persons are receiving funds from some non-genuine persons
and in tum give loans to the assessee. Therefore genuineness of
these transactions need to be examined. The AO at the time of
assessment did not make these inquiries. The assessee has not
discharge his onus to prove the genuineness of these
transaction. Particularly now the other authorities are
investigating these cases. This also becomes part of record as
per the definition of 'record' in Section 263 of the IT Act."
13. Interestingly, the ITAT not only went into the merits of the CIT's
order, which can be considered as only indicative of what were missed out
by the AO, but also recorded its findings. It proceeded to hold that amounts
due to drawbacks/incentives and foreign exchange fluctuations were to be
considered and had been considered, by the AO but not the CIT. As a matter
of fact, the AO records no observation or findings on these issues; nor the
issue of the loans, which the assessee received, or the amounts claimed by
him as interest. Given these matters of record, this Court finds it difficult to
validate the ITAT's approach reading into the AO's order, reasons which are
simply not there. The ITAT's order itself discloses that the AO did not
investigate into the question of advances given to others, (having regard to
the assessee's claim for having taken loans, for which interest expenditure
was claimed). This is apparent from the following observations, for AY
2011-12:
"the assessee has furnished copies of account of 22 parties out
of 80 sundry creditors to the AO vide letter dated November
2013, available at pages 41 to 43 of the paper book, who has
raised specific queries qua the creditors vide letter dated
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23.07.2013, available at page 38 of the paper book. The ld. AR
for the assessee argued that the assessee could not furnish PAN
of only those parties in whose case there was no further
transactions at the time of assessment proceedings and that the
account of the parties out of 17 parties stood squared off in
subsequent years and details thereof was filed before ld. CIT.
This fact goes to prove that a discreet enquiry has been
conducted by the AO qua all the sundry creditors and the
findings of the ld. CIT that the AO did not make any enquiry
even on sample basis to find out the genuineness of the sundry
creditors is based upon surmises. At the most, it can be a case
of inadequate enquiry, in which ld. CIT has no power to
intervene u/s 263 of the Act."
14. In this Court's opinion, such findings and reasoning are clearly
indefensible; they amount to putting a gloss over the AO's glaring
omissions. Repeated decisions have emphasized that the AO should at least
as regards what appears from the record, and what are issues inquired into,
during scrutiny assessment, indicate the briefest of reasons, accepting or
rejecting any argument. In this case, the mere fact that out of 80 debtors,
particulars of 22 were furnished and that PAN particulars of most of them
were not provided (for AY, cannot lead to the conclusion that the doubting
of genuineness of those transactions was unwarranted, under Section 263).
15. For AY 2012-13, the CIT, pertinently observed with regard to
expenditure claimed towards purchases, as follows:
"It was informed to the assessee that a number of parties have
not responded to the notices. The assessee has admitted that
only 37 parties out of 114 have responded to the notices. Other
parties out of 114 have not even responded to the notices.
Therefore the genuineness of these documents i.e. purchases
could not be verified. At least the matter needed further
examination."
ITA 907/2017 & ITA 1162/2017 Page 11 of 13
Again, the ITAT did not say how this observation was unwarranted. On the
other hand, the AO's order made originally is silent about this aspect
altogether.
16. The first issue is with respect to interest; on this the Revenue relied on
Abhishek Industries (supra), which held as follows:
"If in the process of examination of genuineness of such a
deduction, it transpires that the assessee had advanced certain
funds to sister concerns or any other person without any
interest, there would be very heavy onus on the assessee to be
discharged before the Assessing Officer to the effect that inspite
of pending term loans ·and working capital loans on which the
assessee is incurring liability to pay interest, still there was
justification to advance loans to sister concerns for non-
business purposes without any interest.."
17. In this Court's opinion, the ITAT's approach was entirely faulty; it
overlooked that the explanation, if any, why interest deduction was
necessary, given that it had advanced substantial amounts on interest free
basis was not reflected in the AO's order. Likewise, on the issue of
purchases, the lack of any factual foundation and why despite verification
only 37 out of 111 parties came forward, the expenses could be allowed, is
absent. For the other years, the reasoning why 22 parties could have been
taken into account, for a vast majority of others (58) is absent, for AY 2011-
12.
18. In Toyota Motor Corporation vs. Commissioner of Income Tax (2008)
306 ITR 52 (SC) it was held by the Supreme Court as follows:
"We are unable to appreciate this reasoning given by the
Tribunal simply because that the AO himself did not say any
such thing in his order. There is no doubt that the proceedings
before the AO are quasi-judicial proceedings and a decision
ITA 907/2017 & ITA 1162/2017 Page 12 of 13
taken by the AO in this regard must be supported by reasons.
Otherwise, every order, such as the one passed by the AO,
could result in a theoretical possibility that it may be revised by
the CIT under Section 263 of the Act. Such a situation is clearly
impermissible.
10. It is also necessary for the parties to know the reasons
that have weighed with the adjudicating authority in coming to
a conclusion. The order passed by the AO should be a self-
contained order giving the relevant facts and reasons for
coming to the conclusion based on those facts and law.
11. We find that the order passed by the AO is cryptic, to say
the least, and it cannot be sustained. The Tribunal cannot
substitute its own reasoning to justify the order passed by the
AO when the AO himself did not give any reason inthe order
passed by him"
19. In the present case too, the ITAT's findings amount to supplying
reasons in respect of the AO's order, on aspects, which are not expressly
reflected in the assessment order. It is no doubt the duty of the CIT to record
why revision is warranted; however, the ITAT's jurisdiction is not to re-
write the AO's order and improve upon it, in a manner of speaking. Clearly,
the orders of the ITAT cannot be sustained. They are set aside.
20. The question of law is answered in favour of the Revenue and against
the assessee; the appeals are allowed.
S. RAVINDRA BHAT
(JUDGE)
A.K. CHAWLA
(JUDGE)
JULY 20, 2018
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