Unreported Decisions – January 2020

By Ajay R. Singh, Advocate

1. S. 143 – Assessment – General (Assessment on non-existing company) – Amalgamation – The assessment framed by Assessing Officer on a nonexisting company would be void ab initio.

The assessee is a registered NBFC and mainly involved in the business of investment, trading in shares and securities, promotion of companies and to have financial and equity participation in various fields, temporary lending of funds available with or without interest, with a view to have a commercial expediency or to have a business strategic interest in the borrowing companies. This company i.e., Churu Trading Company Pvt. Ltd. was amalgamated and got merged with Sprit Textiles Pvt. Ltd., with appointed date effective from 01-10- 2012 pursuant to the scheme of arrangement approved by the Hon’ble Bombay High Court vide its order dated 08-03-2013. The assessee had duly intimated this fact of merger with Sprit Textiles Pvt. Ltd., before the ld. AO vide letter dated 20-03-2015.

The ld. AO vide letter dated 23-03-2015 addressed to the Principal Officer of Churu Trading Company Pvt. Ltd., had taken cognizance of the fact of amalgamation with Sprit Textiles Pvt. Ltd. by referring the letter dated 20- 03-2015 supra of the assessee, had expressed his inability to grant further time to the assessee for furnishing of balance details that were originally called for by him. This letter dated 23-03-2015 addressed by the ld. AO to the amalgamating
company i.e. Churu Trading Company Pvt. Ltd., clearly goes to prove that the ld. AO was conscious of the fact of merger of Churu Trading Company Pvt. Ltd., with Sprit Textiles Pvt. Ltd. Despite this, the ld. AO proceeded to frame the assessment u/s. 143(3) of the Act on 31-03-2015 in the name of amalgamating company i.e., Churu Trading Company Pvt. Ltd.

Tribunal held that the appeal was preferred before the ld. CIT(A) wherein the case title was clearly mentioned as Churu Trading Company Pvt. Ltd., (now merged with Sprit Textiles Pvt. Ltd.). However, the assessee had not challenged this jurisidictional issue of framing of assessment on a non-existent company by the ld. AO in the grounds of appeal raised before the ld. CIT(A). This ground has been raised vide additional ground before us wherein the assessee seeks to challenge the validity of assessment framed by the ld. AO on a non-existent company. The additional ground raised in this regard by the assessee goes to the root of the matter and does not involve fresh investigation of facts and accordingly the same is admitted for adjudication.

It is not in dispute that assessee had duly intimated the fact of merger with Sprit Textiles Pvt. Ltd., to the ld. AO vide its letter dated 20-03-2015 referred supra. It is not in dispute that the ld. AO had taken due cognizance of fact of merger by addressing a specific letter to the assessee dated 23-03-2015 expressing his inability to grant further time for furnishing of remaining details that were called for. Hence, it could be safely concluded that assessment per se has been framed by the ld. AO in the instant case in the hands of amalgamating company which had ceased to exist with effect from 01-10-2012 onwards pursuant to the scheme of merger approved by the Hon’ble Bombay High Court. We hold that no assessment could be framed on a nonexistent entity. This issue is now well settled by the recent decision of Hon’ble Supreme Court in the case of PCIT vs. Maruti Suzuki India Ltd. reported in (2019) 107 Taxman.com 375 (SC). The ld. AO was wrong in framing the assessment in the hands of the non-existent entity i.e., Churu Trading Company Pvt. Ltd. and accordingly, the entire assessment framed thereon, had to be declared as null and void ab initio. In view of this decision, where the entire assessment has been quashed.

2. S. 145 : Addition to closing stock – Assessee is dealer – typographical error in audit report in Form No. 3CD – Assessing Officer treated assessee as manufacturer having stock of raw materials – hence deletion of addition was held to be justified.

The assessee is a partnership firm engaged in the business of trading of acids and chemicals. The assessee is reseller in acids. The assessee is a wholesale selling agent of Gujarat Narmada Valley Fertilizers and Chemicals Limited (GNFC). During the course of assessment proceedings, the AO noted from audit report filed in Form No. 3CED, item No. 35bA and 35bB that the assessee has disclosed the raw material and finished products which is applicable in the case of manufacturing concern, whereby the quantitative details of items of raw materials, finished products and byeproducts is given.

The assessee explained before the AO that in view of the information regarding manufacturing details there was a typographical error due to computer cut and paste operation switching between the files, while preparing audit report in Form No. 3CD clause 10A,11,35(aB) and 35(bB). It was explained that due to that error, the details of another assessee are posted in the said form of the assessee and it is not a manufacturer firm. The assessee filed the copy of purchase summary with sample of bills, soft copy of sale summary with summary bills, expenses of ledger account and stock register and also furnished requisite trading details. For this, he gave various explanation but the AO did not accept. The Assessing Officer noted that the assessee is in manufacturing and hence, he added the estimated closing stock of ₹ 2,62,92,142/- being manufacturing stock.

The CIT(A) held that the AO has not specified for reasons of rejecting the books of account. The AO should have recorded clear findings that correct profits cannot be deduced from the method of accounting adopted by the appellant before rejecting the books of account. It is difficult to accept that the books of account of the assessee are defective or incomplete from which the correct profit cannot be computed. Therefore, the addition made by AO cannot be justified.

The Tribunal held that the above typographical error was explained to the AO vide letter dated 20-12-2017 along with other proof that the dealer is not a manufacturer having stock of raw materials and finished goods. The books of account and final accounts did not show any manufacturing account. No manufacturing expenses such as wages, processing charges were claimed by the assessee. The accounts did not show any factory nor any depreciation on any factory, the items stated in Clauses 35(bA) and 35(bB) were not borne out by any purchase or sales invoices. The AO has rejected books of account u/s. 145(3) on the doubt that the assessee was engaged in manufacturing of chemicals which activity was not disclosed by the assessee.

Tribunal noted from the above facts that the assessee is able to explain that there was typographical error due to switching between two different clients screens simultaneously and as a result, the data of the other client was cut and pasted in clauses 10(a) and 11 and corresponding clauses 35(bA) and 35(bB) in Form No. 3CB and CD of the assessee’s report. Hence, there is no manufacturing and it is only dealing in the business of trading of acids and chemicals. In view of the above facts of the case, we are of the view that the CIT(A) has given reasonable finding and rightly deleted the addition. Therefore Revenue’s appeal is dismissed.

3. S 263 – Revision – Of orders prejudicial to interest of revenue – Since closing stock was never subjectmatter of limited scrutiny, Assessing Officer could not have considered same – Therefore, Commissioner was not justified in invoking jurisdiction under Section 263 on issues other than those decided in limited scrutiny assessment.

The assessee company which is engaged in the business of manufacturing, trading, import & export of diamonds, jewellery, gold & silver had e-filed its return of income for A.Y. 2014-15 on 29-11-2014. Subsequently, the case of the assessee was selected for “Limited scrutiny through CASS” and notice under Sec. 143(2) was served upon the assessee. The case of the assessee was selected for “Limited scrutiny” under CASS for two reasons viz. (i) Large other expenses claimed in the P&L A/c.; and (ii) Low income in comparison to High Loans/advance/Investment in shares. On the basis of the order passed under Sec. 143(3), dated 08- 12-2016 the income of the assessee was assessed by the AO under the normal provisions at a loss of (-) ₹ 6,31,90,753/-, while for the “book profit” under Sec. 115JB was worked out at a loss of (-) ₹ 6,65,17,726/-.

In exercise of the powers vested with him under Sec. 263 of the Act, the Pr. CIT called for the records of the assessee. After perusing the financial statements of the assesssee company, it was observed by him that the assessee during the year under consideration had out of its manufactured goods of ₹ 14,78,69,007/- sold goods worth ₹ 6,86,49,334. Observing, that the “closing stock” of the finished goods with the assessee company should have been reflected at ₹ 7,92,19,673/- [₹ 14,78,69,007/- (-) ₹ 6,86,49,334/-] as against that shown by it at Nil, the Pr. CIT held a conviction that the AO had prima facie failed to carry out a proper investigation.

It was observed by the Pr. CIT, that as the case of the assessee was selected for “Limited scrutiny” under CASS for two reasons viz., (i) Large other expenses claimed in the P&L A/c.; and (ii) Low income in comparison to High Loans/advance/Investment in shares, therefore, the AO had no occasion to carry out a comprehensive scrutiny of the issues relating to “closing stock” in the course of the assessment proceedings. Accordingly, the Pr. CIT holding a view that the assessment order passed by the AO under Sec. 143(3), dated 08-12-2016 was erroneous, insofar it was prejudicial to the interest of the revenue, therefore, set aside his order, with a direction to examine the issue relating to “closing stock” after affording an opportunity of being heard to the assessee.

Tribunal held that when the case of the assessee was selected for limited scrutiny for the reasons viz., (i) Large other expenses claimed in the P&L A/c.; and (ii) Low income in comparison to High Loans/advance/ Investment in shares, therefore, no infirmity could be attributed to the assessment framed by the AO on the ground that he had failed to deal with other issues which though did not fall within the realm of the limited reasons for which the case was selected for scrutiny assessment. In other words, the Pr. CIT in the garb of his revisional jurisdiction u/s. 263 cannot be permitted to traverse beyond the jurisdiction that was vested with the AO while framing the assessment. In sum and substance, revisional jurisdiction cannot be exercised for broadening the scope of jurisdiction that was vested with the AO while framing the assessment. As a matter of fact, what cannot be done directly cannot be done indirectly. Accordingly, in terms of our aforesaid observations, we are of the considered view that as the AO had aptly confined himself to the issues for which the case of the assessee was selected for limited scrutiny, therefore, no infirmity can be attributed to his order, for the reason, that he had failed to dwell upon certain other issues which did not form part of the reasons for which the case was selected for limited scrutiny under CASS. We thus not being able to concur with the view taken by the Pr. CIT that the order passed by the AO under Sec. 143(3), dated 08-12-2016 is erroneous, therefore set aside his order and restore the order passed by the AO. The appeal of the assessee is allowed in terms of our aforesaid observations.