COCHIN BENCH ASSISTANT COMMISSIONER OF N.P. SANTHOSH v. INCOME TAX, KUMAR CENTRAL CIRCLE, CALICUT November 23, 2007 JUDGMENT Order: Per Riyaz S. Padvekar, Judicial Member. - This appeal by assessee is directed against order of Commissioner of Income-tax, Central, Cochin dated 1-2-2007 passed under section 263 of Income-tax Act. 2. assessee has taken following effective grounds:- '2. CIT (Central) went wrong in initiating proceedings under section 263 and cancelling assessment order in respect of block assessment under section 158BC dated 18-3-2005, alleging that said order was erroneous and prejudicial to revenue. 3. It is submitted that direction given by CIT (Central) to Assessing Officer 'to take suitable action to re-compute undisclosed income earned by assessee from 'suppression of income from Soda Sales' after verifying genuineness of various claims put forward by assessee before undersigned vide his written reply dated 10-1-2007", is illegal and unsustainable. 4. direction of CIT (Central) contained in order under section 263, is to make roving enquiry which indicates that there is no material for passing order under section 263. 5. appellant respectfully submits that there is no basis or material before CIT (Central) to assume that order Block Assessment under section 158 BC dated 18-3-2005 was erroneous and prejudicial to revenue. In absence of basic requirements under section 263 for initiating action, present order is without jurisdiction. impugned order is erroneous, illegal and unsustainable.' 3. From grounds taken by assessee, sole issue which arises for our consideration is whether ld. CIT is justified in setting aside block assessment by invoking section 263 and directing Assessing Officer to redo assessment. 4. briefly stated facts are as under: assessee is engaged in business engaged in business of trading in Indian Made Foreign Liquor (IMFL). In addition to that, he also runs fast food centre, aqua fast food and also bakery business. There was search action under section 132 of Income-tax Act at residential premises of assessee at Mysore and Kannur and also in business premises situated on Mysore-Bangalore road on 27-3-2003. In addition to search action, survey action under section 133A of Act was also carried on at business premises of assessee. On basis of incriminating documents found during course of search action, notice under section 158BC of Act was issued to assessee and in response to said notice, assessee filed his return of income in Form No. 2D declaring undisclosed income at Rs. 1,54,53,960. After elaborately dealing with documentary as well as oral evidence determined total income of assessee at Rs. 1,61,42,970. 5. After completion of assessment of assessee, CIT examined income-tax record and he was not happy in respect of undisclosed income determined by Assessing Officer from soda sales which was at Rs. 17,71,528 as admitted by assessee. CIT has noted as under:- '...........During course of action under section 132 it was found that assessee was showing purchases of Soda from outside agency whereas Soda was actually manufactured 'in house' since 1994 by one Shri P.K. Abdul Latheef, employee of assessee. On basis of sworn statement recorded and other evidences obtained during course of search, Assessing Officer came to conclusion that Soda for assessee's bar was being manufactured 'in house' by assessee and that purchases of Soda debited in Trading account were bogus. However assessee vide his letter dated 12-3-2005 admitted that he has earned undisclosed income of Rs. 17,71,528 on account of suppression sales as under:- Financial year Purchases Sales Difference(a/ctd Rs. Rs. income) Rs. 1996-97 9,11,855.20 10,82,629.50 1,70,774.30 1997-98 10,38,884.00 11,74,560.00 1,35,676.00 1998-99 11,02,873.10 12,50,954.00 148,080.90 1999-2000 10,62,399.90 11,33,334.00 70,934.10 2000-01 11,15,642.50 11,92,349.00 76,706.50 2001-02 12,98,343.45 12,78,982.50 (-)19,360.95 Total 65,29,998.15 71,12,809.00 5,82,811.00 Income estimated @ 33.1% on sale of Rs. 71,12,809 (being average gross profit margin over above period on liquor sales) 23,54,339 Less: Accounted income 5,82,811 Undisclosed income 17,71,528 From above computation it can be seen that on total sales turn-over of Rs. 71,12,809 assessee has admitted income of Rs. 23,54,340 (being 33.1 per cent of total turnover on soda sales) taking into account average gross profit on liquor sales for concerned period. Since assessee himself has accounted income of Rs. 5,82,811, balance amount of Rs. 17,71,528 was offered for taxation for block period as undisclosed income from Soda sales. As mentioned in immediately preceding para, assessee himself has admitted that he was manufacturing Soda 'in house' for use at Bar and that amount shown as purchases of soda and debited in Trading account were bogus. Moreover soda was manufactured by Shri P.K. Abdul Latheef employee of assessee. In his sworn statement he has furnished all details viz., supply of bottles, number of Gas Cylinders used etc. etc. assessee, who is having in house facility for manufacturing soda by installing plant and by buying all inputs would have debited all expenses required for manufacturing soda in Trading account/P&L A/c regularly maintained by him. Again, no evidence whatsoever is seen examined by Assessing Officer for ascertaining manufacturing cost of soda amounting to Rs. 71,12,809. I am therefore, of view that order passed by Assessing Officer under section 158BC read with section 143(3) of Income-tax Act, 1961 on 18-3-2005 is erroneous and prejudicial to interest of revenue to this extent, warranting initiation of action under section 263 of Income-tax Act. Accordingly, notice under section 263 of Income-tax Act.' 6. ld. CIT, therefore, issued notice under section 263 of Act to assessee on 18-12-2006 calling for assessee's objection. assessee resisted action proposed by CIT. CIT rejected all objections of assessee and held that block assessment order passed by Assessing Officer under section 158BC dated 18-3-2005 determining undisclosed income relating to suppression of soda sales at Rs. 17,71,528 on total sales turnover of Rs. 71,12,809 has erroneous and also prejudicial to interests of revenue. CIT directed Assessing Officer to recompute undisclosed income in respect of soda sales. Now, assessee has challenged order of CIT passed under section 263 of Act before us. 7. We have heard rival submissions of parties. We have also carefully considered facts of this case. We have also carefully considered precedents relied on by learned counsel. There was search action against assessee under section 132 of Act. assessee is engaged in hotel business and also IMFL. After search action, assessment of assessee was completed under section 158BC read with section 143(3) of Act vide assessment order dated 18-3-2005. After examining assessment record of assessee, CIT was not happy in respect of undisclosed income accepted by Assessing Officer, more particularly relating to soda sales. During course of search, it was found that assessee was showing purchase of soda for his bar from outside agency but in fact, soda was actually being manufactured 'in house' by assessee himself. search party recorded statement of one Shri P.K. Abdul Latheef who deposed that he was engaged for preparing soda for assessee's hotel and bar and he was employed on monthly salary. As per statement of Shri Latheef, he was preparing on average 1300 soda bottles. required gas cylinder and other expenses for soda manufacturing were handled by manager. In respect of utilization of cylinder Shri Latheef deposed that approximately 5000 bottles of 300 ml. can be manufactured from one cylinder. assessee admitted undisclosed income of Rs. 17,71,528 on account of suppression of income from soda sales which details are given by Assessing Officer on page 6 of assessment order. Assessing Officer estimated 33.1 per cent profit on determined sales of Rs. 71,12,809 and worked out total income from soda sales at Rs. 23,54,339. Assessing Officer reduced declared income by assessee from soda which was of Rs. 5,82,811 determining undisclosed income from soda sales at Rs. l7,71,528. 8. learned counsel for assessee vehemently argued that while completing assessment, Assessing Officer has taken into consideration entire seized material and arrived at total profit from sale of soda which was prepared 'in house' and served to customers of assessee in hotel and bar. It is further argued that merely because in opinion of CIT there is loss of revenue, it cannot be said that order of Assessing Officer is erroneous. learned counsel referred to assessment order where Assessing Officer has made computation as well as given reasons for determining undisclosed income from soda sales. learned counsel also relied on following precedents:- (i) CIT v. Gabrial India Ltd. [1993] 203 ITR 108 (Bom.) (ii)Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC). 9. Per contra, ld. Sr. DR supported order of CIT and vehemently submitted that CIT has directed Assessing Officer only after examining evidence on record and assessee should not have any grievance as CIT has rightly exercised his powers under section 263 of Act. 10. Section 263 of Act reads as under:- '263. (1) Commissioner may call for and examine record of any proceeding under this Act, and if he considers that any order passed therein by Assessing Officer is erroneous insofar as it is prejudicial to interests of revenue, he may, after giving assessee opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as circumstances of case justify, including order enhancing or modifying assessment, or cancelling assessment and directing fresh assessment. Explanation.-For removal of doubts, it is hereby declared that, for purposes of this sub-section,- (a) order passed on or before or after 1-6-1988 by Assessing Officer shall include- (i)an order of assessment made by Assistant Commissioner or Deputy Commissioner or Income-tax Officer on basis of directions issued by Joint Commissioner under section 144A; (ii)an order made by Joint Commissioner in exercise of powers or in performance of functions of Assessing Officer conferred on, or assigned to, him under orders or directions issued by Board or by Chief Commissioner or Director General or Commissioner authorised by Board in this behalf under section 120; (b) 'record' shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at time of examination by Commissioner; (c) where any order referred to in this sub-section and passed by Assessing Officer had been subject-matter of any appeal filed on or before or after 1-6-1988, powers of Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after expiry of two years from end of financial year in which order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), order in revision under this section may be passed at any time in case of order which has been passed in consequence of, or to give effect to, any finding or direction contained in order of Appellate Tribunal, National Tax Tribunal, High Court or Supreme Court. Explanation.-In computing period of limitation for purposes of sub-section (2), time taken in giving opportunity to assessee to be reheard under proviso to section 129 and any period during which any proceeding under this section is stayed by order or injunction of any court shall be excluded.' 11. There is no dispute about proposition that powers vested in CIT under section 263 of Act are supervisory in nature. Two conditions are required to be fulfilled for exercising said powers. They are:- (i) order is erroneous (ii)By virtue of order being erroneous, prejudice has been caused to interests of revenue. Time and again section 263 has undergone judicial scrutiny by Hon'ble Supreme Court and different High Courts. 12. In case of Malabar Industrial Co. Ltd. (supra), Their Lordships of Hon'ble Supreme Court have examined scope of section 263 and held as under:- 'The phrase 'prejudicial to interests of revenue' has to be read in conjunction with erroneous order passed by Assessing Officer. Every loss of revenue as consequence of order of Assessing Officer cannot be treated as prejudicial to interests of revenue. For example, when Income-tax Officer adopted one of courses permissible in law and it has resulted in loss of revenue; or where two views are possible and Income- tax Officer has taken one view with which Commissioner does not agree, it cannot be treated as erroneous order prejudicial to interests of revenue, unless view taken by Income-tax Officer is unsustainable in law. It has been held by this court that where sum not earned by person is assessed as income in his hands on his so offering, order passed by Assessing Officer accepting same as such will be erroneous and prejudicial to interests of revenue. Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC).' 13. In case of Gabrial India Ltd. (supra)- '...We, therefore, hold that in order to exercise power under sub-section (1) of section 263 of Act there must be material before Commissioner to consider that order passed by Income-tax Officer was erroneous insofar as it is prejudicial to interests of revenue. We have already held what is erroneous. It must be order which is not in accordance with law or which has been passed by Income-tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to interests of revenue. order can be said to be prejudicial to interests of revenue if it is not in accordance with law in consequence whereof lawful revenue due to State has not been realised or cannot be realised. There must be material available on record called for by Commissioner to satisfy him prima facie that aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon existence of certain objective facts, authority before exercising such power must have materials on record to satisfy it in that regard. If action of authority is challenged before, court it would be open to courts to examine whether relevant objective factors were available from records called for and examined by such authority...' 14. In present case, it is necessary to reproduce relevant part of assessment order where Assessing Officer has determined undisclosed income from soda sales which is as under:- 'It would be clear from above that soda for assessee's Bar was being manufactured 'in house' and purchases of soda debited in Trading account were bogus. assessee's counsel was asked to give clarifications on this point. assessee vide letter dated 12-3-2005 admitted undisclosed income of Rs. 17,71,528 on account of suppression of income from soda sales as follows:- 'Details of soda sales: Financial Year Purchases (Rs.) Sales (Rs.) 1996-97 9,11,855.20 10,82,629.50 1997-98 10,38,884.00 11,74,560.00 1998-99 11,02,873.10 12,50,954.00 1999-2000 10,62,399.90 11,33,334.00 2000-2001 11,15,642.50 11,92,349.00 2001-2002 12,98,343.45 12,78,982.50 Total 65,29,998.15 71,12,809.00 Accounted Income = Sales - Purchase = Rs. 5,82,811.00 Income estimated @ 33.1 per cent on sale of Rs. 71,12,809 = (being average gross profit margin over above period on Liquor sales- 32.82 + 32.74 + 32.07 +34.37 + 32.81 + 33.83/6 = 33.1%) Less: Accounted Income Rs. 5,82,811.00 Undisclosed Income Rs. 5,82,811.00 Considering fact that GP shown by assessee in returns of income for block period from sale of soda was less than 9 per cent and assessee has now surrendered income from soda sales by estimating GP on sale of soda at rate of 33.13 per cent claim made by assessee is found to be acceptable and undisclosed income of Rs. 17,71,528 as admitted by assessee is brought to tax as undisclosed income from sale of soda for period from 1-4-1996 to 31-3-2002.' 15. As far as determination of income from sale of soda is concerned, Assessing Officer has taken possible view which in his opinion was reasonable view considering material available before him. Merely because view taken by Assessing Officer is not liked by CIT, order of Assessing Officer cannot be treated as erroneous order and revenue loss is not sole criteria for exercising powers under section 263 of Act. In our opinion, CIT has exceeded his powers as order passed by Assessing Officer is not erroneous. We, therefore, cancel order passed by CIT under section 263 of Act. 16. In result, assessee's appeal is allowed.