Addition of sales reversal entry as unexplained expenditure is unjustified

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Chotanagpur Petroleum Agency Vs PCIT (ITAT Kolkata)

ITAT Kolkata held that addition of sales reversal entry alleging the same as unexplained expenditure is unjustified and unsustainable in law.

Facts- Case of the assessee was selected for scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act and the reason for selection for the scrutiny was cash deposit during demonetization period. The details called for were filed by the assessee and the assessment was completed after making minor disallowances of bonus, gift & presentation charges, motor car expenses and addition was made for income from oil tanker and income assessed at Rs. 13,36,141/-. Prima facie no addition was made on the issue of cash deposit during demonetization period. Subsequently, ld. Pr. CIT called for the assessment records and issued show cause notice u/s 263 of the Act.

Pr. CIT was not satisfied with these submissions and he held the order of ld. AO dated 04.12.2019 as erroneous and prejudicial to the interests of the Revenue and also directed ld. AO to pass a fresh assessment order. Being aggrieved, the present appeal is filed.

Conclusion- Held that it is merely a sales reversal entry and not a case of unexplained expenditure. Complete documentary evidences in support of these transactions have been filed and we are satisfied that it is not a case of unexplained expenditure. Even otherwise all these details of cash sales including the cash book have examined by ld. AO in detail while carrying out the assessment proceedings for the reason for which the case selected for scrutiny i.e. cash deposit during demonetization period, therefore, ld. Pr. CIT erred in referring to other issue which was not required to be dealt by ld. AO and thus, wrongly invoked jurisdiction u/s 263 of the Act.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This appeal filed by the assessee pertaining to the Assessment Year (in short “AY”) 2017-18 is directed against the order passed u/s 263 of the Income Tax Act, 1961 (in short the “Act”) by ld. Pr. Commissioner of Income Tax, Kolkata- 1, Kolkata [in short “ld. Pr. CIT”] dated 22.03.2022.

2. The assessee is in appeal before this Tribunal raising the following grounds:

“1. For that in view of the facts and in the circumstances, the Ld. Pr. CIT was wholly unjustified in setting aside the order so passed by AO u/s 143(3) dt. 4.12.2019 and in view of the facts and in the circumstances the Ld. Pr. CIT’s action in setting aside the impugned order is bad and illegal and as such the order so passed by Ld. Pr. CIT is liable to be quashed / cancelled/ set aside and it may be held accordingly.

2. For that in view of the facts and in the circumstances, the order so passed by Ld. Pi. CIT u/s 263 of the Act is bad on both in the eyes of law and on facts and it may be held accordingly.

3. For that in view of the facts and in the circumstances, the Ld. Pr. CIT failed to conduct any enquiry of his own and as such the order u/s 263 so passed by the Ld. Pr. CIT is bad in law and it may be held accordingly.

4. For that in view of the facts and in the circumstances, the Ld. Pr. CIT was wholly unjustified in setting aside the order u/s 263 dt. 12.2019 without giving any finding as to the manner in which the order u/s 143(3) is “erroneous” and “prejudicial to the interest of revenue” and in view of the facts and in the circumstances the order of Ld. Pr. CIT is bad in law and is liable to be quashed / cancelled / set aside and it may be held accordingly.

5. For that in view of the facts and in the circumstances, the Ld. Pr. CIT was wholly unjustified in passing the order u/s 263 for the verification of the impugned subject matter and as such the order so passed by the Ld. Pr. CIT is not covered within the ambit of sec. 263 and in view of the facts and in the circumstances it may be held accordingly.

6. For that in view of the facts and in the circumstances, the Ld. Pr. CIT erred in holding that Rs. 67,85,064/- represented unexplained expenditure whereas such sum was reversal of sales and in view of the facts and circumstances Ld. Pr. CIT failed to appreciate the matter and conduct enquiry on its own and merely set aside the matter for verification and hence the order u/s 263 is bad in law and it may be held accordingly.

7. For that your petitioner craves the right to put additional grounds and / or to alter / amend / modify the present grounds at the time of hearing.”

3. Brief facts of the case as culled out from the records are that the assessee is a partnership firm engaged in selling of lubricants and engine oils. Income of Rs. 11,52,500/- declared in the e-return for AY 2017-18 filed on 17.10.2017. Case selected for scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act and the reason for selection for the scrutiny was cash deposit during demonetization period. The details called for were filed by the assessee and the assessment was completed after making minor disallowances of bonus, gift & presentation charges, motor car expenses and addition was made for income from oil tanker and income assessed at Rs. 13,36,141/-. Prima facie no addition was made on the issue of cash deposit during demonetization period. Subsequently, ld. Pr. CIT called for the assessment records and issued show cause notice u/s 263 of the Act dated 17.02.2022 and the relevant portion of the issue raised in the show cause notice is extracted below:

“Whereas the undersigned had called for and examined the record of your case and it is considered that the impugned assessment order passed u/s 143(3) of the I T Act, 1961 by the ITO, Ward-40(1), Kolkata on 04.12.201 9 for A. Y. 2017-18 is, prima facie, erroneous in so far as it is prejudicial to the interests of the revenue for the following reasons:

It was observed from the statement of Analysis of month wise cash sales and deposits from 01.04.2016 to 08.11.2016 that cash expenses was made by the assessee amounting to Rs. 92,52,023/-. On further analysis of the items of balance sheet and P/L account for F. Y.201 6-17, it was noticed that there was no such item on which the mentioned expenditure was incurred. Therefore, expenses amounting to Rs.67,85,064/- (Rs.92,52,023 – Rs.24,66,959 being selling, general and admn., expenses excluding depreciation) was required to be treated as unexplained expenditure and added back to total income. Omission to do so resulted in under assessment of income for Rs.67,85,064/- and short levy of demand for Rs.20,96,584/- (30% of Rs.67,85,064/- EC @ 3%) excluding interest.

The AO has passed the impugned assessment order without any application of mind nor conducting any enquiries or verifications which should have been made in this case.”

4. In reply to the same, the assessee made the submission that the allegation that there is an unexplained expenditure of Rs. 67,85,064/- is not correct and the said amount was received from the customers to whom credit sale was made and even if it is presumed that the said sum is an unexplained expenditure then since the assessee is entitled to reduction of sales of the equivalent amount which will thus, make no impact on the net income of the assessee. However, ld. Pr. CIT was not satisfied with these submissions and he held the order of ld. AO dated 04.12.2019 as erroneous and prejudicial to the interests of the Revenue and also directed ld. AO to pass a fresh assessment order considering the following finding given in para 5 of the impugned order:

“5. I have considered the facts of the case. In assessee’s submission dated 04.03.2022 the assessee stated that the A.O had specifically gone through the cash book of the assessee and after having satisfied with such cash book and other relevant documents. The AO duly accepted the cash sales and deposits from 01.04.2016 to 08.11.2016 which already indicated that the AO verified the cash book with respect to one of the reasons of scrutiny selection that is cash deposits during demonetisation period as per SFT/ 14/FIU.

Proposed 263 is related to the difference of cash expenditure of Rs. 67,85,004/-. Regarding this differences the assessee explained that the differential amount was notional cash entry. In respect of notional cash entry the assessee explained that the assessee had some fixed parties as local credit customer. As per assessee prevailing practice as and when daily local credit customers sales were made the amount is included in cash sales though some payments are received in subsequent dated. However, the said amounts are transferred to the name of the truck owner with truck-numbers. Simultaneously, when the payment were received the amount again credited to daily cash sales customers’ accounts. In a normal business practice cash book only effected as and when cash comes in or out from the cash book. Here the assessee already stated that they are maintaining book as per prevailing practice, this complex method of accounting only for prevailing practice needs to be verified. It is also a matter of verification that whether the company availed such type of accounting procedure during the current year or adopt this method previously or owned after current assessment year. In normal business organisation, the cash book maintained by the organisation reflects the physical cash flow for any purpose related with the business. So the increase/decrease of cash directly depend on the physical movement of cash due to business activity. In case of petrol pump normally the sales almost accounted for by issuing a small printed memo /computerized memo and all the cash sales accounted for after depositing the cash amount through issued cash memo after verifying the reading of the sold fuel, after deducting credit sales. Therefore for smooth running without any hazards in business proceedings the owner always maintain separate ledger for cash and credit sales. It helps the fuel business organisation to tabulate its monetary management easily. But here offered explanation and so called prevailing practice is drawing quite different picture as credit system in same nature of this type of business organisation, so the accounting method adopted and explained by the assessee is also in question and needs to be verified. In para (iii) of the submission dated 04.03.2022 the assessee stated as follows It will be appreciated that if at all such sum of Rs.67,85,064/- is treated as unexplained expenditure, then the assessee is entitled to reduction of sales of the equivalent amount i.e. Rs.67,85,064/- from it sales and on such exercise the net effect of the taxable income of the assessee is nil and hence the impugned order u/s. 143(3) cannot be treated as

From the above point of view it is also necessary to verify the cash book and other books of accounts to ascertain the entitlement of the reduction of sales equivalent to the amount of Rs.67,85,004/- from the total sales. The AO has passed the impugned assessment order without conducting any enquiries or verifications which should have been made in this case. The assessee has failed to completely disclose its true and correct income by non-furnishing of details as required under provisions of the I. T. Act, 1961. Clause (a) and (b) of Explanation-2 to Section 263(1) is attracted in this case. Accordingly, it is held that the assessment order is erroneous in so far as it is prejudicial to the interest of revenue. Hence, in fitness of things, there is no alternative but to set aside the case to the AO, before whom the assessee is given another chance to argue his case.”

sales reversal entry as unexplained expenditure

5. Aggrieved, the assessee is now in appeal before this Tribunal. Ld. Counsel for the assessee again reiterated the submissions filed before ld. Pr. CIT and also added that firstly, the assessment proceedings were carried out only for examining the issue of cash deposit during demonetization period and there is no specific addition on that account. Since ld. Pr. CIT is alleging about unexplained expenditure whereas the case of the assessee was scrutinized for cash deposits. Further, it was also submitted that all the books of accounts with relevant details were placed before AO who has examined the same thoroughly making complete enquiry and therefore, it cannot be said to be a case of no enquiry.

6. On the other hand, ld. D/R vehemently argued supporting the orders of both the lower authorities.

7. We have heard rival contentions and perused the records placed before us. Since the issue before us pertains to the invocation of jurisdiction u/s 263 of the Act, we find that the provisions of Section 263 of the Act has direct bearing on the issue raised before us, therefore, it is pertinent to take note of this Section which reads as under:

“263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

Explanation- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-

(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include-

(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the 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 the time of examination by the Commissioner;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the 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.

No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.

Explanation- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”

7.1. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263.

7.2. Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC) has laid down following ratio with regard to provisions of section 263 of the Act:

“There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue – Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). [Emphasis Supplied]”

8. Now, examining the facts of the instant case, we notice that during the course of hearing, ld. Counsel for the assessee has referred to the written submission filed during the course of revisionary proceedings regarding the issue of alleged expenditure of Rs. 67,85,064/- and the same is reproduced in para 4 of the impugned order which reads as follows:

“4. In response to the said notice the assessee furnished written submission which states as follows:

“i) In the order u/s 143(3) and during the course of proceedings so conducted in such respect, the AO had gone through the entire records of the assessee including the clash book and the journal and had required the assessee to furnish the details of cash book in a particular format so given by him Indeed the impugned proceedings were initiated vide notice u/s 143(2) for the cash so deposited in the bank account of the assessee during the period 9.11.2016 to 31.12.2016 and as such the AO had specifically gone through the cash book of the assessee and after having satisfied with such cash hook and other relevant documents. The AO duly accepted the cash sales and deposits from 1.4.2016 to 8.11.2016 and as such the AO had passed the order in such respect as per law only and after going through all details so obtained in such respect has taken reasonable view in the matter.

ii) As regards the contention of your goodselves for the difference of cash expenditure being Rs.67,85,064/- (Rs.97,52,023/- – Rs. 24,66,959/), it has been contended that the said amount is unexplained expenditure and hence proposed to be added back to the total income of the assessee. Indeed, your goodselves has failed to appreciate the real nature of the differential amount since the said amount of Rs. 67,85,064/ was notional cash entry and were in. fact sales reversal which were reverted on the very day in which the receipt in such respect was shown In the cash book. It is also submitted that a number of vehicles which were regular at the petrol pump of the assessee were paying cash sales immediately after Idling of the petrol. Assessee had some fixed panics as credit customers and others as daily credit customer local. As per our prevailing practice, as and when daily credit customer local sales are made the amount is included in cash sales though some payments are-received in subsequent’ dates. However, the said amounts arc transferred to the name of Truck owner with Truck Nos. simultaneously and when the payment received the amount again credited “Daily (.’ash Sales Customer Account” Actual amount of received under collection of Sundry Debtors and daily credit customer local arc amount billed (both cash & credit) less amount not received under “Daily Credit Customer” focal A/c and Cash expenses which is actually deposited to Bank. To explain the same, we are enclosing herewith a few sample entry which is included herewith ai Annexure – A. We are also enclosing herewith the summary of the same month wise sales and reversal at Annexure – It and we have also enclosed the entire cash book for the period at Annexure – (‘. On a perusal of the 3 documents so mentioned above it will be clear that the impugned amount of Rs.67,85,064/- is not any kind of expenditure by it is sales reversal which has been booked subsequently on receiving the payment. Hence this cannot be treated as unexplained expenditure in any manner and it may be considered accordingly.

Hi) Without prejudice to the above, it will be appreciated that if at all such sum of Rs.67,85,064/ is treated as unexplained expenditure, then the assessee is entitled to reduction of sales of the equivalent amount i.e. Rs. 67,85,064/- front it sales and on such exercise the net effect of the taxable income of the assessee is nil and hence the impugned order u/s 143(3) cannot be treated as “erroneous” or “prejudicial” in any manner.

iv) a) Without prejudice to what has been stated above and in this connection this is to submit that as will appear from the assessment order, the assessment had been completed only, after the AO had obtained all the necessary details & particular; and only after due consideration of the entire matter and only after fully satisfying himself and hence provisions of sec. 763 did not validly he in the fact

……………….. Hence the matter may kindly be considered sympathetically unci judiciously and proceedings u/s. 263 initiated at your end illegally may kindly be dropped.

Any further clarifications and/ or details required in this regard shall be immediately made available on further hearing from your end.

In view of the aforesaid facts and circumstances this is again to submit that the matter may kindly be considered sympathetically and judiciously and the proceeding initiated u/s 263 by the aforesaid letter by you may kindly be dropped.”

9. From perusal of the above submission and examining the same in light of the detailed paperbook filed by the assessee containing 116 pages we notice that when the assessee makes some credit sales to the regular customers, though the amount is not received but the same is entered in the cash sales register and the amount is shown outstanding in the name of truck owners with truck numbers. Subsequently, when the amount is received the same is credited to the daily cash sales customer accounts. Though the policy adopted by the assessee is not at par with the settled accounting policies since the cash is entered in the books without actually receiving the cash, however, going through the flow of the transactions we find that this is in the nature of sales reversal, in other words, the sales which is booked at the time of giving goods to the regular customers and though the amount is not received but still the cash sales are increased by that amount but subsequently, when the actual amount is received then again the regular sales is credited with that amount and the amount shown in the past as cash sales from such customers (not actually giving cash), the same is reversed. Therefore, it is merely a sales reversal entry and not a case of unexplained expenditure. Complete documentary evidences in support of these transactions have been filed and we are satisfied that it is not a case of unexplained expenditure. Even otherwise all these details of cash sales including the cash book have examined by ld. AO in detail while carrying out the assessment proceedings for the reason for which the case selected for scrutiny i.e. cash deposit during demonetization period, therefore, ld. Pr. CIT erred in referring to other issue which was not required to be dealt by ld. AO and thus, wrongly invoked jurisdiction u/s 263 of the Act. Therefore, since no prejudice is caused to the Revenue due to this accounting system consistently followed by the assessee and since the order of ld. AO is not erroneous as complete examination of details has been carried out through issuance of notice u/s 142(1) of the Act to which proper compliance has been made by the assessee filing requisite details and thus, the assessment proceedings u/s 143(3) of the Act has been carried out after making proper enquiry, proper application of mind and taking a plausible view in accordance with law.

10. We, therefore, find no justification in the jurisdiction assumed by ld. Pr. CIT u/s 263 of the Act for carrying out the revisionary proceedings and even on merits, the impugned proceedings are not valid. We, therefore, quash the impugned order passed u/s 263 of the Act and restore the assessment order dated 04.12.2019 u/s 143(3) of the Act.

11. In the result, the appeal filed by the assessee is allowed. Kolkata, the 24th April, 2023

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