Where assessing officer allowed the claim for loss without examining in detail and not considered the profit rate on sale and also omitted to disallow sales-tax liability for earlier years, hence Commissioner was justified in exercising revisional powers.
Income Tax Officer's order was against the interest of the revenue and was therefore, prejudicial.
1. This is an appeal against the order of the Commissioner made under Section 263. 2. As the Commissioner was of the view that the assessment order of the ITO for this year is erroneous and prejudicial to the interests of revenue, he invoked the provisions of Section 263. He issued a notice dated 19-10-1979 to the assessee pointing out the various items which the ITO has not examined. The assessee by its letter dated 6-11-1979 explained the various points raised in the notice issued by the Commissioner.
3. After considering the objections of the assessee, the Commissioner has passed his order dated 20-11-1979 under Section 263 of the Income-tax Act, 1961 ("the Act"). He has held that in respect of loss of Rs. 3,71,000 on account of breakages of bottles, the ITO ought to have scrutinised this item in great detail before accepting the assessee's claim. With regard to the sales tax liability of Rs. 96,238 he held that this related to the earlier years and it is not debitable for this year. On the point relating to the sale of beer, he held that the price reductions were not the result of commercial consideration but something else. He further held that for advance tax purpose the income was estimated at Rs. 12 lakhs on 12-12-1977 but the return was filed showing the income of Rs. 2,90,690. This would show that various adjustment entries were passed with a view to reduce the profits of the company. He also held that the ITO's action in not invoking the provisions of Section 144B of the Act is not correct. Thus, the Commissioner set aside the assessment order with a direction to the ITO to make it afresh according to law. Against the same, the present appeal is filed.
4. The learned counsel for the assessee strongly urged that, on the facts and circumstances of the case, the Commissioner was not justified in invoking the provisions of Section 263. There is no material to hold that the adjustment entries are made to reduce the profits. The loss of Rs. 3,71,000 on account of breakage of bottles claimed was a proper one and the ITO has rightly allowed the same. He further urged that as regards the rate at which the beer is to be sold, it was for the assessee and the purchaser to settle it, and it is not for the department to say at what rate it should be sold. It is only after proper negotiations with the purchaser that the rate has been settled.
He also urged that there is no illegality in debiting the sales tax liability in this year. He further urged that if the ITO has not invoked the provisions of Section 144B, the assessment order cannot be said to be prejudicial to the interests of revenue. Thus, he strongly urged that the order of the Commissioner should be cancelled.
5. The learned departmental representative submitted that the ITO has not scrutinised the various items pointed out in the notice of the Commissioner. In fact, in the questionnaire issued by the ITO to the assessee for information the items noted in the notice of the Commissioner do not figure though the amounts involved are heavy. The ITO without scrutiny, has accepted the claim of the assessee in respect of the loss on breakage of bottles, the sales tax liability, and the reduction in the rate of selling price of beer, with retrospective effect. He also pointed out that for advance tax, the estimated income was Rs. 12 lakhs whereas the returned income was Rs. 2,90,000. This itself required a probe by the ITO but he did not properly make enquiries. With regard to the rate of sale price, he submitted that it was fixed by the purchaser. This is evident from the correspondence in this regard on record. The reduction in selling price with retrospective effect is not investigated by the ITO. He urged that the action taken by the Commissioner under Section 263 is perfectly justified.
6. We have considered the rival submissions. In cur view, the action of the Commissioner in passing the order under Section 263 is perfectly justified. The assessee had claimed loss of Rs. 3,71,000 on account of breakage of bottles. Though this is a huge amount, the ITO has not scrutinised this item in great detail. In the questionnaire dated 26-12-1978 issued by him for information, the item does not figure. No details in respect of this item have been furnished before the ITO. The ITO ought to have examined this item in great detail, but he failed to do so. This action of the ITO in accepting the claim of the assessee without scrutiny is certainly prejudicial to the interests of revenue.
Similarly, with regard to the rate of selling price of beer, the ITO has not scrutinised it though there is a price reduction. In fact, the correspondence that has passed between the assessee and the purchaser shows that the price has been fixed at the instance of the purchaser.
This is evident from letter dated 3-1-1978. The assessee and the purchaser are the subsidiary companies of United Breweries. In view of the close connection, the ITO ought to have probed into the matter. The action of the Commissioner with respect to this item also is perfectly justified.
7. Coming to the sales tax liability, it is admittedly a liability for the assessment years 1973-74, 1974-75 and 1975-76. Even the demand for these three years has not been raised in this year, but has been raised in the earlier years. In view of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363, this item cannot be allowed as a deduction in this year. The action of the ITO in allowing the same as a deduction is certainly prejudicial to the interests of revenue. The returned income when compared to estimated income for advance tax needs to be examined in detail. Thus, in our view, the action of the Commissioner under Section 263 is perfectly valid. It is true that the ITO has not invoked the provisions of Section 144B. To that extent the action of the ITO is erroneous. But we need not consider the question whether the action of the ITO is prejudicial to the interests of revenue or not, since we have already held that on various items which have been discussed in the above paras, the action of the ITO in not scrutinising those items is prejudicial to the interests of revenue. In view of (hat, we do not consider this aspect of the matter.
8. In Gee Vec Enterprises v. Addl. CIT  99 ITR 375 the Delhi High Court has held that the Commissioner can regard the order of the ITO as erroneous on the ground that in the circumstances of the case the ITO should have made further inquiries before accepting the statements made by the assessee in the return. It is the duty of the ITO to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an enquiry. The order of the ITO becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. In Addl. CIT v. Mukur Corporation  111 ITR 312, the Gujarat High Court has held that the initiation of action under Section 263 by the Commissioner was quite proper as it was obvious that the ITO had committed an error in not making an enquiry into the details as regards both the deductions and also that want of such enquiry had resulted in prejudice to the interests of the revenue.
9. In Rampyari Devi Saraogi v. CIT  67 ITR 84 the Supreme Court, on the facts of the case, held that there was material to show that the ITO had made the assessment in undue haste, without any evidence or inquiry and the Commissioner has jurisdiction under Section 33B of the 1922 Act to revise the assessment order. It was further held that the assessee had not in any way sufferred from the failure of the Commissioner to indicate the results of the enquiries to the assessee as the assessee would have full opportunity of showing to the ITO whether the income assessed in the assessment order, which was originally passed, was correct or not. The ratio laid down in the above cases squarely applies to the facts of the instant case.
10. The decisions relied upon by the assessee's counsel in CIT v.Calcutta Discount Co. Ltd.  91 ITR 8 (SC) and CIT v. A. Raman & Co.  67 ITR 11 (SC) have no application to the facts of the instant case. In our view, the Commissioner's action in invoking the provisions of Section 263 and passing the order dated 20-11-1979 under Section 263 is perfectly valid. Accordingly, we uphold his order.