2011 (5) TMI 564 - HC - Income Tax

Order u/s 263 of CIT(A) set aside - Search and seizure - whether the AO had examined the issue and surrender of Rs. 61.30 lacs at the time of search in his statement recorded during the search out of an amount of Rs. 62.30 lacs found at his residence - Held that - There was no proper consideration by the AO to the issue at hand he left many loose ends that too in a case where huge cash was found during survey; most of it was surrendered by giving statement at the time of search though retracted and sought to be explained afterwards. It was necessary for the AO to properly adjudicate upon this issue and the assessment order should have at least reflected that he had satisfied with the explanation disclosing source of the cash found and that there was a proper and valid retraction. The AO in the assessment order did not discuss the statement recorded at the time of search. No doubt as per the assessee this statement was retracted. In a case like this it was necessary for the AO to at least reflect that the retraction was proper. Thus the order of the CIT passed under Section 263 of the Act is restored. Against assessee.

Summary

Issues Involved:
1. Legality of the ITAT's decision to set aside the CIT's order under Section 263 of the Income Tax Act.
2. Examination of the assessee's surrender of Rs. 61.30 lakhs during the search and its treatment in subsequent assessment years.
3. Validity of the CIT's invocation of revisionary jurisdiction under Section 263 of the Act.
4. Tribunal's scope of review and its adherence to the principles of Section 263.

Issue-wise Detailed Analysis:

1. Legality of the ITAT's Decision to Set Aside the CIT's Order under Section 263 of the Income Tax Act:
The primary question of law addressed was whether the ITAT was correct in setting aside the CIT's order passed under Section 263 of the Income Tax Act. The CIT had passed orders for the assessment years 2003-04 and 2004-05, setting aside the AO's assessment orders due to non-examination of the assessee's surrender of Rs. 61.30 lakhs during a search operation. The ITAT, however, found that the AO had indeed examined the issue, verified the books of accounts, and accepted the assessee's claim, thus setting aside the CIT's order.

2. Examination of the Assessee's Surrender of Rs. 61.30 Lakhs During the Search and Its Treatment in Subsequent Assessment Years:
During a search operation conducted under Section 132 of the Act, Rs. 62,30,300/- was found at the assessee's residence. The assessee offered Rs. 61.30 lakhs for taxation as undisclosed income for the assessment year 2003-04. However, in the return for the assessment year 2003-04, the assessee declared an income of Rs. 1,57,24,780/-, and the AO assessed it at Rs. 1,58,10,044/-. The CIT noted that the surrendered amount was not included in the return, prompting him to pass orders under Section 263 to re-examine the issue.

3. Validity of the CIT's Invocation of Revisionary Jurisdiction under Section 263 of the Act:
The CIT invoked Section 263, arguing that the AO's failure to examine the surrendered cash rendered the assessment order erroneous and prejudicial to the interest of revenue. The CIT directed the AO to re-examine the issue of cash found during the search. The Tribunal, however, observed that the AO had indeed considered the assessee's explanation, verified the cash books, and accepted the claim, even if this was not explicitly mentioned in the assessment order. The Tribunal concluded that the CIT's order was based on surmises and conjectures.

4. Tribunal's Scope of Review and Its Adherence to the Principles of Section 263:
The High Court scrutinized whether the AO had properly examined the issue. It noted that while the AO had asked the assessee to explain the cash found, the assessment order lacked detailed discussion or satisfaction on the explanation provided by the assessee. The High Court emphasized that the AO should have reflected on the retraction of the statement and the explanation of the cash found. The CIT's order highlighted several discrepancies and the need for a thorough examination, which the AO had not adequately addressed. The High Court held that the Tribunal overstepped its bounds by re-evaluating the merits of the explanation, which was the AO's responsibility.

Conclusion:
The High Court concluded that the CIT was justified in invoking Section 263, as the AO had not properly considered the issue of the surrendered cash. The Tribunal's order was set aside, and the CIT's order under Section 263 was restored. The appeals were disposed of with directions to the CIT (A) to decide the appeals against the fresh assessment order on merits.