SHRI T.R. SOOD AND MS. SUSHMA CHOWLA, JJ.

ORDER

The order of the Bench was delivered by

T. R. Sood (Accountant Member).-The appeal filed by the assessee is directed against the order dated March 28, 2013, of the Commissioner of Income-tax-III, Ludhiana.

2. In this appeal, the assessee has raised the following grounds :

            1. That the worthy Commissioner of Income-tax-III, Ludhiana, has erred in assuming jurisdiction and issuing notice under section 263 of the Income-tax Act, 1961.

          2. That the worthy Commissioner of Income-tax-III has erred in giving his finding that the assessment framed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue.

         3. That the worthy Commissioner of Income-tax-III has erred in not considering the facts that the assessee maintained proper books of account which were thoroughly checked by the Assessing Officer during the course of hearing and assessment was framed after thorough and detailed investigation and with due application of mind.

        4. That the Commissioner of Income-tax-III has erred in rejecting the books of account as no specific defects were found in the books of account by him and also by the Assessing Officer during the course of hearing which were properly maintained.

       5. Notwithstanding the above facts, the Commissioner of Income- tax-III has erred in making addition of Rs. 1,83,80,208 in the income already assessed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 by applying the gross profit rate of 17.23 per cent on the basis of gross profit rate shown in the assessment year 2007-08 on guess work and assumption by rejecting the books of account without finding any specific defects.

3. The brief facts of the case are that a survey was conducted in the premises of the assessee on February 28, 2008 and certain discrepancies in respect of stock, cash and investment in the building were found. The assessee surrendered a sum of Rs. 2,15,00,000 as an additional income. Later on, the assessee filed return of income on September 27, 2008, declaring total income of Rs. 1,35,36,300. The assessment was completed under section 143(3) of the Act at Rs. 1,35,52,050.

4. On examination of the assessment records, the learned Commissioner was of the view that the assessee has not declared proper income because despite a surrender of Rs. 2.15 crores the income returned was only Rs. 1,35,52,050. It was further noticed that in the immediate preceding assessment year the gross profit declared by the assessee was 17.23 per cent. in comparison to 11.48 per cent. during the current year. According to the Commissioner, the Assessing Officer has failed to make proper verification in respect of these aspects and, therefore, assessment completed under section 143(3) was without necessary verification and was thus erroneous and prejudicial to the interests of the Revenue.

5. In response to the show-cause notice it was mainly contended before the learned Commissioner that books of account of the assessee were audited and the books were produced along with stock register, etc., before the Assessing Officer. Various purchases and sale bills were also produced before the Assessing Officer. The confirmation of debtors and creditors were also filed. Details of the expenses were also filed. Details of the expenses were also furnished, therefore, the Assessing Officer has examined all the details and could not find out any defects. It was further pleaded that on the date of survey itself, a trading account was prepared which clearly depicted that there was a loss of Rs. 71,25,651. The survey was conducted at the fag end of the year, i.e., on February 28, 2008 and the assessee could not recover from such losses and ultimately there was a total loss of Rs. 78,63,699 excluding the surrendered amount. The main reason for the loss was increase in the bank interest expenses from Rs. 61,00,000 to Rs. 1.32 crores. With regard to the fall in the gross profit rate it was mainly submitted that this point was explained before the Assistant Commissioner of Income-tax also and it was pointed out that position of gross profit and net profit rate for the last three years was as under :

It was pointed out that if gross profit for the present year is compared over a period of time, then there is no difference. In 2007-08, when the gross profit rate was higher the same was because prices of yarn had increased suddenly whereas in the current year the selling prices of yarn again fell to the normal rate. All these issues were explained to the Assessing Officer in detail.

6. The learned Commissioner examined these submissions and did not agree with the same. He observed that the assessee was specifically asked that why books of account should not be rejected because the same were not reliable in view of the surrender made by the assessee, however, no specific reply was given by the assessee. He further observed that the assessee has adopted certain methods to reduce income after making surrender of Rs. 2.15 crores and the assessee has not given any evidence regarding volatility in the market. He then referred to the statement of Shri Sanjay Gupta which was recorded during the survey, through which each discrepancy in respect of inventory, cash and investment in the building was explained and Shri Sanjay Gupta had surrendered Rs. 70 lakhs on account of inventory, Rs. 4 lakhs on account of cash and Rs. 1.31 crores on account of money spent on construction of the factory building. He further noted that gross profit declared in the current year was 11.48 per cent. in comparison to 17.23 per cent. in the immediate previous year. Thereafter he relied on the following case law for rejection of books of account :

            (a) National Legguard Works v. CIT (Appeals) [2007] 288 ITR 18 (P&H) ;
             (b) Surinder Kumar Charanjit Kumar v. CIT [2006] 282 ITR 78 (P&H) ;
             (c) Bassi Tubes P. Ltd v. ITO in I. T. A. No. 45/Chd/2009 of the Income-tax Appellate Tribunal, Chandigarh ;
             (d) Bassi Tubes P. Ltd v. CIT in I. T. A. No. 751 of 2010-date of deci sion May 9, 2011 (P&H) ;
             (e) KIM Pharma P. Ltd v. CIT in I. T. A. No. 106 of 2011 (O&M) [2013] 1 ITR-OL 137 (P&H) ;
             (f) Shree Ganpati Embroidery P. Ltd. v. CIT in I. T. A. No. 510 of 2008 (P&H) ;
            (g) CIT v. Abhishek Industries Ltd. in I. T. A. No. 312 of 2011 (P&H) ;
             (h) Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) ; and
             (i) Savera Soap Mills v. ITO in I. T. A. No. 202/Chd/2011 of the Income-tax Appellate Tribunal, Chandigarh.

7. The learned Commissioner also made the following observation in paragraph 14 (at page 12) :

            "14. The Assessing Officer failed to take into account the decision of the hon'ble jurisdictional High Court as well as jurisdictional Tribunal that in these circumstances no cognizance can be taken of the books of account produced by the assessee and also surrendered amount cannot be treated as business income in the absence of any evidence. The books of account of the assessee are rejected. Keeping in view the ratio of the decision of the hon'ble jurisdictional High Court as well as the hon'ble jurisdictional Tribunal, the gross profit rate of the assessment year 2007-08 is applied and the income is enhanced to that extent which is computed as under :

Based on the above discussion, I am also satisfied that the assessee has concealed income or furnished inaccurate particulars of income."

8. In the light of the above discussion, the learned Commissioner held that assessment order was erroneous and prejudicial to the interests of the Revenue and the income was enhanced vide paragraph 17 of the order which is as under :

             "17. I am of the considered opinion that the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The income is enhanced as explained in paragraph 14 of order, i.e., Rs. 1,83,80,208. Penalty proceedings under section 271(1)(c) read with Explanation 1 are initiated separately."

9. Before us learned counsel for the assessee submitted that nowhere in the show-cause notice the Commissioner has pointed out that books of account are proposed to be rejected. Without such mention in the show- cause notice he has no right to reject the books. It is a well-settled that if a ground is not proposed in the show-cause notice, then action cannot be taken on such a ground. In this regard he relied on the following decisions :

              (a) Maxpak Investment Ltd. v. Asst. CIT [2006] 104 TTJ (Delhi) 881;
              (b) CIT v. Contimeters Electricals P. Ltd. [2009] 317 ITR 249 (Delhi) ;
              (c) GPSK Capital P. Ltd. v. CIT I. T. A. No. 353/Kol/2012, ITAT Kolk ata Tribunal ; and
              (d) Colorcraft v. ITO [2008] 303 ITR (AT) 7 (Mum).

10. Learned counsel further referred to various documents in the paper book and pointed out that the Assessing Officer has raised various queries and suitable replies were given accordingly. It was pointed out that there were no discrepancies with regard to the excise and customs duty records and valuation of stock. Quantitative details of the stock, etc., were provided to the Assessing Officer but no defect was pointed out. Specific points relating to the gross profits, sales/purchases and stock of the assessee were raised in the questionnaire and replies were given. Accordingly, details of month-wise sales and purchases were given, party-wise purchase and sales was also given. Complete details of various expenses were given. Even reasons for fall in the gross profit rate were enquired and proper reply was given. After examining these points the Assessing Officer did not point out any defect in the replies. The Assessing Officer has passed the assessment order after considering the replies and, therefore, it cannot be said that Assessing Officer has not applied her mind.

11. Even before the Commissioner, details of the replies filed before the Assessing Officer were furnished and it was specifically pointed out to him that even at the time of survey, i.e., on February 28, 2008, there was a loss in the business of the assessee as per the trading account prepared on the date of survey. The loss on that date was Rs. 71,25,651 and the copy of such trading account is available at pages 187 and 188 of the paper book. This would itself explain why the return was less than the surrendered amount because at the completion of the 11 months of the financial year, there was a huge loss of Rs. 71,25,651. In the detailed reply dated March 15, 2013, a copy of which is available at pages 184 to 186, the reason for fall it the gross profit and comparative gross profit chart, etc., were also filed. Despite of this information the Commissioner observed that "the assessee adopted some methods to offset the income surrendered. Otherwise income should not have come below the income surrendered by the assessee plus a normal income declared in the last year". This observation is totally vague and if the Commissioner wants to hold assessment order to be erroneous and prejudicial to the interests of the Revenue then he is required to point out some error in the assessment order and general observation cannot lead to the conclusion that assessment order was erroneous and prejudicial to the interests of the Revenue. For example, in paragraph 6, the Commissioner has observed that purchases and sales cannot be believed but he has not pointed out even a single instance how such purchase or sales are not proper. Simply, because the assessee has furnished the return below the surrendered income cannot be a reason for holding that assessment order is erroneous and prejudicial to the interests of the Revenue. In respect of this contention learned counsel relied on the various decisions of the Chandigarh Bench of the Tribunal which have been filed in the paper book containing judgments and particularly relied on the decision of the hon'ble Punjab and Haryana High Court in the case of Hari Iron Trading Co. v. CIT [2003] 263 ITR 437 (P&H). While concluding his argument he also referred to the various decisions relied on by the learned Commissioner and pointed out the distinguishing features of those judgments and how the same were not applicable to the present case.

12. On the other hand, the learned Departmental representative submitted that perusal of the assessment order clearly shows that practically no enquiries have been made by the Assessing Officer. This case was of survey and, therefore, the Assessing Officer should have made detailed enquiries. During the survey, the assessee has declared a sum of Rs. 2.15 crores whereas return was filed for Rs. 1,35,52,050 and the Assessing Officer should have at least raised specific enquires why the profit declared was low. No such enquires have been conducted by the Assessing Officer and once proper enquiry is not conducted, assessment order becomes erroneous and in this regard she relied on the following decisions :

              (1) Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC) ;
              (2) Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) ; and
              (3) Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi).

13. She further submitted that in the absence of any discussion in the assessment order the same is to be treated as erroneous and prejudicial to the interests of the Revenue and in this regard he relied on the decision of the hon'ble Karnataka High Court in the cases of CIT v. Infosys Technologies Ltd. (No. 2) [2012] 341 ITR 293 (Karn) and CIT v. Namdhari Seeds P. Ltd. [2012] 341 ITR 342 (Karn) (copies of these decisions were furnished). She submitted that even if it is assumed that various details were filed on behalf of the assessee but then assessment order does not show whether the same were examined by the Assessing Officer which shows lack of application of mind and, therefore, assessment order becomes erroneous and prejudicial to the interests of the Revenue.
14. The learned Departmental representative further submitted that where a survey has been conducted and particularly when the return filed is less than the returned income then the Assessing Officer should have rejected the books of account because the same were warranted by facts of the case. In this regard she relied on the following decisions :

              (i) Action Electricals v. Deputy CIT [2002] 258 ITR 188 (Delhi) ; and
              (ii) Axia Engineering Works v. CIT [2007] 292 ITR 577 (P&H).
She also referred to the decision relied on by the learned Commissioner in his order passed under section 263 of the Act.

15. We have considered the rival submissions carefully. The show-cause notice issued by the learned Commissioner which has been incorporated by him in the order passed under section 263 reads as under :

             "This is with reference to your assessment order completed under section 143(3) of the Act on December 8, 2010, at an income of Rs. 1,35,52,050 as against returned income of Rs. 1,35,36,300. A survey under section 133A was conducted at your business premises on Feb ruary 28, 2008. During the course of survey a sum of Rs. 2,15,00,000 as an additional income other than normal income was surrendered by you which is as under :

              (a) Rs. 70,00,000 was on account of excess stock ;
             (b) Rs. 4,00,000 was on account of excess cash ;
             (c) Rs. 1,31,00,000 on account of unexplained investment in the building ; and
              (d) Rs. 10,00,000 on account of other discrepancies.
2. You have filed return of income declaring total income at Rs. 1,35,36,300 which is even lower than the additional income declared by you during the survey. A summary of your trading and profit and loss account is as under :

Therefore, the net profit declared by you is Rs. 1,35,36,301 only which is after taking into consideration an income of Rs. 2,15,00,000 disclosed by you during the course of survey. In other words if the income of Rs. 2.15 crores disclosed during the survey is taken out, the loss declared by you comes to Rs. 79,63,699 against the profit of about Rs. 27 lakhs shown by you in the preceding financial year. It is further seen that the gross profit rate for the assessment year under consideration comes to 11.48 per cent. against that of 17.23 per cent. shown in the immediately proceeding year. Also in the assessment year 2007-08 the net profit shown was 9.23 per cent. whereas in this year you have rather shown net loss of Rs. 79,63,699. Your trading results therefore were required to be verified and cross checked.

3. The Assessing Officer however has failed to make proper veri fication with respect to the above aspects and the assessment was completed in your case under section 143(3) of the Income-tax Act, on December 8, 2010, without necessary verification. The assessment made vide order dated December 8, 2010, is thus erroneous and prejudicial to the interests of the Revenue. In the instant case, twin statutory conditions precedent namely-(i) the impugned assessment order of the Assessing Officer is erroneous, and (ii) it is prejudicial to the interests of the Revenue, stand cumulatively satisfied, as contemplated under section 263 of the Act. Consequently, due to the said erroneous order of the Assessing Officer, the Revenue has lost tax revenue lawfully, payable by the assessee. You are, therefore, requested to show cause as to why the assessment completed in your case on December 8, 2010, may not be enhanced/modified/cancelled or reframed under section 263 of the Income-tax Act.

         4. For the purpose, you are requested to attend this office on March 21, 2013, at 11.30 a.m. at my office Aayakar Bhawan Rishi Nagar, Ludhiana. In case you do not wish to attend personally, you may file written submissions with regard to the same on or before the stipulated date of hearing."

16. The perusal of the above very clearly shows that nowhere the learned Commissioner referred to the issue of rejection of books or he intends to reject the books of account. Therefore, there is merit in the contention of learned counsel for the assessee that unless a particular ground is mentioned in the show-cause notice which is supposed to be exercised, then such ground cannot be later on taken for the purpose of revising the particular assessment order. In this regard a reference was made to the decision of the hon'ble Delhi High Court in the case of CIT v. Contimeters Electricals P. Ltd. [2009] 317 ITR 249 (Delhi). In that decision at paragraph 10, an observation has been made on the basis of the decision of the hon'ble Supreme Court in the case of Commissioner of Customs v. Toyo Engineering India Ltd. [2006] 7 SCC 592 wherein it was observed by the court that the Department cannot travel beyond the show-cause notice. The Delhi Bench of the Tribunal in the case of Maxpak Investment Ltd. v. Asst. CIT [2006] 104 TTJ (Delhi) 881 held that revision on a ground different from the one stated in the notice is not possible. Similar observations have been made by the Calcutta Bench of the Tribunal in I. T. A. No. 353/Kol/2012 in the cases of GPSK Capital P. Ltd. v. CIT and Colorcraft v. ITO 105 ITD 599 (Mumbai ). In the case of last mentioned case, the headnote reads as under :

              "Revision-Validity-Revisional order based on reasons not spec ified in show-cause notice-Is invalid-Section 263 provides an opportunity to the assessee to show cause against reasons mentioned in notice on which assessment is sought to be revised, hence, if the CIT intends to deviate from the reasons mentioned in show-cause notice, he must confront the assessee with fresh reasons and allow the assessee a fresh opportunity-Reason given by the CIT in show- cause notice being that duty-drawback could not be considered as profit derived from exports for purposes of deduction under section 80HHC, revisional order passed by CIT on the basis of alleged wrong treatment of export incentives, Central excise refund and sales-tax set off could not be sustained."

17. Thus, from the above it becomes clear that an order which is found to be erroneous and prejudicial to the interests of the Revenue cannot be revised on the basis of reasons other than the reasons mentioned in the show- cause notice. In the case before us, ultimately the learned Commissioner has rejected the books of account and applied the gross profit rate but nowhere he has whispered in the show-cause notice about his intention of rejecting the books of account. Learned counsel had also referred to page 4 of the paper book which is part of the Form 3CB furnished before the Assessing Officer showing the method of valuation of closing stock and the auditor has not reported any discrepancy. From pages 20 to 23 the quantitative details of stock tally were furnished before the Assessing Officer and the Assessing Officer did not point out any error. Then he referred to pages 51 to 53, which is the copy of questionnaire issued by the Assessing Officer raising detailed enquires. He particularly invited our attention wherein details of the gross profit and net profit for two years along with the reasons for fall in the same were asked. Details of month-wise purchases, opening and closing stock, sales and purchases of sister concern, nature of business, names of the partners and their shares, details of bank, details of unsecured loans, details of squared up loans, details of sundry creditors above rupees three lakhs, detail of sundry debtors, detailed expenses, etc., were raised through this questionnaire which was duly replied and in this regard various documents were brought to our attention. All those documents have been filed before the learned Commissioner also. Even, if assuming that the Assessing Officer has not applied her mind to those documents even then the learned Commissioner had also not pointed out even a single defect in these documents. Without any such defect, we are afraid it cannot be alleged that the Assessing Officer has not applied her mind. The learned Commissioner from pages 1 to 3 has reproduced the show-cause notice thereafter up to page 8, he has referred to the reply given by the assessee and made some observations at paragraphs 5 and 6. Thereafter, he has referred to the contents of the statements recorded during survey, through which surrender was made and then some more observations have been made at paragraphs 12, 13 and 14. Thereafter, the learned Commissioner has simply discussed the case law. To understand this, we would like to reproduce paragraphs 5, 6, 8, 12, 13 and 14, which are as under :

             "5. I have carefully considered the submissions of the assessee. The assessee was specifically asked as why the books of account be not rejected as the books of account are not reliable in view of the surrendered made by the assessee on various heads. The assessee did not give any specific reply and simply stated that the Assessing Officer did not point out any specific defects in the books of account. What greater proof is required then the own admission of the asses see that there are discrepancies in the books of account and offer a huge sum of Rs. 2.15 crores. No accountancy principle justifies that such books of account are reliable. The Assessing Officer failed to reject the books of account, rather without making any proper inquiry accepted the books of account as true.

              6. It is also seen that the assessee adopted certain methods to reduce the income after making surrender of Rs. 2.15 crores. The assessee has taken a plea that there was volatility in the market. The assessee failed to give any evidence that there was volatility in the market. The purchase/sale bills cannot be believed in view of the fact that such books of account are reliable to be rejected.

          8. The above statement itself shows that the assessee's books of account cannot be relied upon in view of the details of discrepancies found during course of survey and the assessee has also admitted such discrepancies. If excess stock/excess cash is found, it is incon ceivable that such books of account are reliable. The assessee is unnecessarily putting an emphasis that the Assessing Officer has verified all the records. In fact, the Assessing Officer failed to apply his mind that under such circumstances such books of account cannot be relied upon.

          12. The Assessing Officer failed to apply his mind and simply accepted the explanations of the assessee. Once there are discrepan cies in the books of account and also surrender is made, the Assessing Officer did not come to a logical conclusion that the very books of account which are unreliable have been relied upon while accepting the explanations of the assessee. In paragraph of the reply dated March 15, 2013, the assessee has submitted that there is not much difference in the gross profit rates as returned by the assessee if the previous year's rate is taken out of the picture. The assessee has been earning profits and the assessee has failed to give any cogent evi dence for the drastic fall in the gross profit rate as compare to earlier years. A general statement that there was fluctuation in the rates is not acceptable. Moreover, the books of account of the assessee are not reliable.

          13. One more aspect on the peculiar facts of case is required to be seen. The assessee adopted some methods to offset the income surrendered. Otherwise the income should not have come below the income surrendered by the assessee plus a normal income declared in the last year. It was a conscious attempt on the part of the assessee to offset the income declared during course of survey. Even the net profit rate has been brought down from 9.32 per cent. to 4.32 per cent. This further indicates that the assessee has adopted a method to offset the amount surrendered.

        14. The Assessing Officer failed to take into account the decision of the hon'ble jurisdictional High Court as well as jurisdictional Tribunal that in these circumstances no cognizance can be taken of the books of account produced by the assessee and also surrendered amount cannot be treated as business income in the absence of any evidence. The books of account of the assessee are rejected. Keeping in view the ratio of the decision of the hon'ble jurisdictional High Court as well as hon'ble jurisdictional Tribunal, the gross profit rate of the assessment year 2007-08 is applied and the income is enhanced to that extent which is computed as under :

Based on the above discussion, I am also satisfied that the assessee has concealed income or furnished inaccurate particulars of income."

18. The above para clearly shows that basically the learned Commissioner was surprised that how the assessee could declared an income for less than the amount surrendered during the survey that is why he went with the presumption that assessment order is wrong but in such a situation the learned Commissioner was duty bound to point out few defects in the details filed before him. Perusal of the highlighted paragraphs shows that he has simply stated as mentioned in paragraph 6 'it is also seen that the assessee adopted certain methods to reduce the income after making surrender of Rs. 2.15 crores', in our opinion would not prove that assessment order is erroneous and prejudicial to the interests of the Revenue'. Similarly observations at paragraph 13 are not sufficient to show how assessment order is erroneous. The Commissioner is atleast expected to point out which method the assessee has adopted to reduce the profit.

19. It is pertinent to mention here that it was explained before us that during survey a trading account was drawn as on February 28, 2008, the copy of which is available at pages 187 and 188 of the paper book which shows that there was a loss of Rs. 71,25,651 which means that the assessee has suffered a loss of Rs. 71,25,651 up to February 28, 2008. This is a major reason for filing the return for less than the surrendered amount. The learned Commissioner could easily called for the survey folder and find out whether this trading account was correct or not and whether there was any defect in this trading account or otherwise but the learned Commissioner has not bothered to do this exercise and simply observed that the assessee has adopted some method to reduce the surrendered income and, therefore, assessment order is erroneous. This is not possible without pointing out an error. Obviously, if the assessee has suffered loss in the day-to-day running of the business and even if three discrepancies have been found in this case for which surrender was made, the assessee has the right to reduce the business loss of the current year against the surrendered amount.

20. The learned Departmental representative referred to the decisions in the cases of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi), Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). No doubt in all these cases it has been clearly held that if the Assessing Officer fails to make enquiries then the assessment order can be held to be erroneous and prejudicial to the interests of the Revenue. But in the case before us it cannot be said without pinpointing which enquiry has not been made and that such order is erroneous. In this regard we find force in the submissions of learned counsel of the assessee on the observations made in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom). In that case following observation was made :

              "The power of suo motu revision under sub-section (1) of section 263 of the Income-tax Act, 1961, is in the nature of supervisory juris diction and can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commis sioner to exercise the power of revision under this sub-section, viz., (i) the order should be erroneous ; and (ii) by virtue of the order being erroneous prejudice must have been caused to the interests of the Revenue. . . An order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the Income tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a higher figure than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. This is because the Income-tax Officer has exercised the quasi judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself would not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, that the order is erroneous, is absent. Similarly if an order is erro neous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute, on an incorrect or incomplete interpretation, a lesser tax than what was just has been imposed. . . when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for an examined by such authority."

21. Further, it was held as under :

          "Held, that the Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explanation in that regard by a let ter in writing. All these were part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. This decision of the Income-tax Officer could not be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard. More over, in the instant case, the Commissioner himself, even after initi ating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-exam ine the matter. That was not permissible. The Tribunal was justified in setting aside the order passed by the Commissioner of Income-tax under section 263."

Thus, it is very clear from the above that there may be a case where enquires could have been made and which may not be recorded in the assessment order but in such cases without further pinpointing any error the order would not become erroneous and prejudicial to the interests of the Revenue. Further, the learned Departmental representative has relied on the decisions by the learned Commissioner and, therefore, we would examine those decisions also. The first decision relied on by him is the decision of the hon'ble Punjab and Haryana High Court in the case of National Legguard Works v. CIT (Appeals) [2007] 288 ITR 18 (P&H). In this case following questions were raised (page 19) :

           "(i) Whether, on the facts and circumstances of the present case, the action of the authorities below in restricting the deduction under section 80HHC of the Income-tax Act, 1961, on its own presumption is legally sustainable in the eyes of law ?

            (ii) Whether the action of the Tribunal in confirming that stock surrendered under survey is income from other sources and not eligible for deduction under section 80HHC claimed by the appellant/ assessee without appreciating the ratio of the judgments laid down by the appellant/assessee in its correct perspective, is legally sustainable in the eyes of law ?"

Reading of the questions itself shows that the main question whether surrendered income during the survey can be said to have been derived from business and whether the same was eligible for deduction under Chapter VIA. Therefore, this decision has nothing to do in what circumstances the books needs to be rejected.

22. The next decision relied on by him is the case of KIM Pharma (P.) Ltd v. CIT [2013] 1 ITR-OL 137 (P&H). In that case, during the assessment proceedings it was noticed by the Assessing Officer that the assessee was not maintaining quantitative tally and details of various items and some discrepancies were noticed in the stock found at the time of survey conducted in the business premises of the assessee. Further, the assessee has shown gross profit rate of 27.48 per cent. as against 30.43 per cent. and therefore, he estimated the gross profit rate at 28 per cent. On these facts, the hon'ble High Court extracted the observations of the Tribunal at paragraph 4, which are as under (page 579 of 292 ITR) :

           "4. We have also considered the alternative plea of the assessee that the surrender of Rs. 2 lakhs should cover against the addition of gross profit. On the facts and circumstances of the case, we are of the considered view that since the assessee has himself shown a higher gross profit rate in the preceding years, the estimate of gross profit at the rate of 28 per cent. adopted by the Assessing Officer by invoking the provisions of section 145(2) was justified. We are also of the opinion that the surrender of Rs. 2 lakhs during survey would not cover against the addition on account of gross profit as the same was made against specific items detected at the time of survey under section 133A. Therefore, we do not find any force in the arguments of the assessee in respect of the surrender of Rs. 2 lakhs. Accordingly, we do not find any infirmity in the order of the Commissioner of Income-tax (Appeals) and uphold the same. The ground raised by the assessee stands rejected and the appeal dismissed."

Thereafter, it was observed at paragraphs 5 and 6 as under (page 580) :
           "5. We do not find any infirmity in the findings recorded by all the authorities below while rejecting the books of account of the assessee.

           6. As is found from the facts on record, the estimation done by the Assessing Officer after rejection of the books of account was upheld up to the Tribunal. The contention of the assessee that this court should make its own assessment of the percentage of gross profit of the appellant, is not acceptable to us as the same does not fall within the domain of guiding principles to determine as to what amounts to a substantial question of law."

23. From the above it becomes clear that first of all no ratio has been laid down and even the hon'ble High Court refused to accept that there was some substantial question of law involved and simply confirmed the findings of the Tribunal. The decision of the Superior Court need to be taken as precedent only when some ratio has been laid down. Secondly, in this case certain discrepancies were found during the survey and the Assessing Officer further noticed that the assessee had declared gross profit rate of 27.48 per cent. against the previous rate of gross profit, i.e., 30.43 per cent. and made a nominal addition of half per cent. by estimating a profit at 28 per cent. Nowhere it is laid down in this case that in the case of survey books needs to be rejected universally. In fact this situation becomes more clear from the decision referred to by the learned Commissioner of Income-tax-Departmental representative by the hon'ble Delhi High Court in the case of Action Electricals v. Deputy CIT [2002] 258 ITR 188 (Delhi). In that case the search was conducted in the premises of the assessee and a sum of Rs. 5 lakhs was surrendered on account of cash, various outstanding from parities and various gadgets like VCR, TV, etc., found during the search. During the assessment proceedings, the Assessing Officer rejected the books of account and estimated the sales at Rs. 40 lakhs against the sales declared by the assessee at Rs. 38,76,081 and applied the gross profit rate 13.36 per cent. declared by the assessee. The Tribunal confirmed the major addition made by the Assessing Officer. It was contended before the hon'ble High Court that the Tribunal has failed to appreciate that except for the surrender made by the assessee at the time of search there was no other material before the Assessing Officer to come to the conclusion that books of account maintained by the assessee were not correct. On these facts and contentions the hon'ble High Court adjudicated the issue as under (page 191) :

           "We are unable to persuade ourselves to agree with learned counsel for the assessee. Section 145(2) of the Act empowers the Assessing Officer to make a best judgment assessment when he is not satisfied about the correctness or completeness of the accounts of the assessee. It is not possible to categorise various types of defects which may render rejection of books of account of an assessee on the ground that the accounts are not complete or correct. Each case has to be considered on its own peculiar facts, having regard to the nature of business. Though it is true that the absence of stock register, in a given situ ation, may not per se lead to an inference that the accounts are incomplete or false the absence of such a register, coupled with other factor, like fall in profits, etc., may lead to an inference that the accounts are not correct. As noticed above, in the instant case, non- maintenance of stock register, coupled with the fact that unaccounted sales were detected during the course of search, in our opinion, is a relevant factor to sustain the view of the Assessing Officer. We do not find any legal infirmity in the view taken by the Tribunal that the dis closures/surrender of Rs. 5 lakhs by the assessee at the time of search, as its unaccounted sales, constitutes sufficient material for the Assessing Officer to base his satisfaction that the books of account of the assessee are not correct and complete. In so far as the estimation of the sales/ gross profit rate is concerned, it being a best judgment assessment, based on past years results cannot be said to be arbitrary."

24. From the above it becomes clear that no universal principals were laid down in what situation the books can be rejected and the court very clearly observed that each case has to be considered on its own peculiar fact having regard to the nature of business. In that case rejection was upheld because the assessee has not maintained stock register, coupled with the facts that some unaccounted sales were detected during the search and surrender of Rs. 5 lakhs was made.

25. In the case before us, during the survey, inventory was found to be excessive to the extent of Rs. 66,22,665 against which the assessee surrendered a sum of Rs. 70 lakhs. Physical cash was found at Rs. 4,63,570 whereas as per the books the cash was Rs. 75,802 and the assessee surrendered a sum of Rs. 4 lakhs. Lastly, a slip was found according to which the assessee has invested a sum of Rs. 1,31,00,000 in the construction of building and this amount was also surrendered. Therefore, clearly no unrecorded purchases or sales or any other discrepancy was found. The assessee is maintaining proper quantitative details. Further, the reason for fall in gross profit rate was explained. Details for verification in the gross profit rates of various years have been filed at pages 152 to180 of the paper book. In fact summary of variation of rates have been filed at page 152 which reads as under :

This shows that rates of certain items have all of a sudden increased in assessment year 2007-08, i.e., why there was verification in the gross profit rate. Otherwise also from the gross profit chart for the last three years it becomes clear that gross profit was 11.76 per cent. in assessment year 2006-07 which increased in 2007-08 to 17.23 per cent. and again has gone back to 11.49 per cent. in the assessment year 2008-09. These factors have to be seen further in the light of the copy of the trading account which is available at page 151 which shows that this gross profit rate and copy of profit and loss account which is available at pages 187 and 188 where the net result is loss and loss on February 28, 2008, was Rs. 71,25,651. Obviously, this means that there were some extra expenses during the year and the assessee has duly filed the details of expenses before the Assessing Officer as well as the Commissioner but neither the Assessing Officer nor the learned Commissioner has pointed out that such expenses have been inflated or are not correct. Therefore, in our opinion in the light of these facts it cannot be said that assessment order is erroneous and prejudicial to the interests of the Revenue. The learned Commissioner has discussed many other case law in respect of rejection of books of account and we have perused the same but could not find even a single case law laying down a principle that books should compulsorily be rejected wherever a survey is conducted. Otherwise also, if this principle is accepted then there would not be any meaning attached to the concept of surrender because in any case books have to be rejected.

26. Before parting, we would like to observe that the Assessing Officer may have called for certain details which have been filed but no discussion at all has been made in the assessment order and in our opinion the Assessing Officer in general should be more cautious and vigilant and discuss the various aspects of the case at least briefly in the body of the assessment order. However, we are quashing the order of revision not because of this reason itself but because the learned Commissioner himself has not been able to show any error in his revisionary order. Learned counsel also relied on the decision of the hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd v. CIT [2000] 243 ITR 83 (SC). This decision was referred to by learned counsel for the assessee as well as the Commissioner of Income-tax-Departmental representative also. In this case the hon'ble Supreme Court rejected the contention of counsel which was based on the observation of Madras High Court in the case of Venkatakrishna Rice Company v. CIT [1987] 163 ITR 129 (Mad). This is recorded at page 88 of the report.

27. Therefore, in view of the above detailed discussion, we quash the order passed by the learned Commissioner. Resultantly, the appeal of the assessee is allowed.

28. In the result, the appeal of the assessee is allowed.

The order pronounced in the open court on September 17, 2014.