2014 (12) TMI 554 - AT - Income Tax

Power of the CIT to invoke section 263 - Assessment was done without proper inquiry or not Order prejudicial to interest of revenue - Held that - None of the points raised by CIT while invoking the provision of Section 263 and detailed in the show cause notice have been enquired into touched upon discussed or considered before passing the assessment order as decided in Malabar Industrial Co. Ltd. Vs. CIT 2000 (2) TMI 10 - SUPREME Court - The provision cannot be invoked to correct each and every type of mistake or error committed by the AO 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 - since the assessee has not been able to establish that proper enquiry has been conducted by the AO before finalizing the assessment order therefore the CIT considering this vital aspect while invoking the provisions of Section 263 has concluded to set aside the order of the AO for redoing the same by conducting proper enquiry after giving due opportunity to the assessee - non conducting of proper enquiry renders the order of the assessment erroneous and prejudicial to the interest of the Revenue thus the action of CIT is justified and does not call for any interference the order is upheld Decided against assessee.

Summary

Issues Involved:
1. Invocation of provisions of Section 263 by CIT.
2. Examination of the assessment order passed under Section 143(3).
3. Adequacy of inquiries conducted by the Assessing Officer (A.O.).
4. The legal principles from various judicial precedents regarding erroneous and prejudicial orders.

Detailed Analysis:

1. Invocation of Provisions of Section 263 by CIT:
The CIT invoked Section 263 to set aside the assessment order dated 05.10.2013, framed under Section 143(3) by the A.O. The CIT found the assessment order erroneous and prejudicial to the interests of the Revenue due to lack of proper inquiry. The CIT issued a notice under Section 263, pointing out several deficiencies in the assessment process, including non-disallowance of interest on unsecured loans, inadequate inquiry into sundry creditors, unsecured loans, addition in capital, and fixed assets, and failure to consider commission expenses and low net profit rate.

2. Examination of the Assessment Order Passed Under Section 143(3):
The assessment order under Section 143(3) was scrutinized, revealing that the A.O. had accepted the return of income without proper verification of critical aspects such as interest on unsecured loans, sundry creditors, unsecured loans, additions in capital and fixed assets, and commission expenses. The CIT highlighted that the A.O. did not conduct a thorough inquiry or verification, rendering the assessment order erroneous and prejudicial to the Revenue.

3. Adequacy of Inquiries Conducted by the A.O.:
The CIT's notice under Section 263 pointed out specific areas where the A.O. failed to conduct adequate inquiries:
- Interest on Unsecured Loans: The A.O. did not disallow interest proportionately despite the assessee not charging interest on loans given to others.
- Sundry Creditors: The A.O. accepted sundry creditors amounting to Rs. 3,21,71,459/- without proper inquiry.
- Unsecured Loans: The A.O. did not adequately verify unsecured loans amounting to Rs. 95,28,007/-.
- Addition in Capital: The A.O. failed to verify the source of the addition in capital of Rs. 16,00,000/-.
- Fixed Assets: The A.O. did not obtain bills or verify the source of investment for additions in fixed assets amounting to Rs. 23,13,334/-.
- Commission Expenses: The A.O. did not account for commission expenses despite the case being selected for scrutiny for this reason.
- Net Profit Rate: The A.O. accepted a low net profit rate of 0.66% without any inquiry.

4. The Legal Principles from Various Judicial Precedents:
The CIT relied on several judicial precedents to support the invocation of Section 263, emphasizing that an order passed without proper inquiry or application of mind is erroneous and prejudicial to the interests of the Revenue. Notable cases cited include:
- Malabar Industrial Co. Ltd. Vs. CIT: Incorrect application of law or facts renders an order erroneous.
- CIT Vs. V.N.M.A. Rathinasabapathy Nadar: Orders passed in ignorance of relevant facts are erroneous.
- Swarup Vegetable Products Industries Ltd. Vs. CIT: The Commissioner has the power to set aside an assessment order if further inquiry is necessary.
- Duggal & Co. Vs. CIT: The A.O. must investigate facts stated in the return; failure to do so renders the order erroneous.
- Express Newspapers Pvt. Ltd. Vs. CIT: The Commissioner can set aside an assessment if further inquiry is warranted.

Conclusion:
The Tribunal upheld the CIT's order, agreeing that the A.O. did not conduct proper inquiries before finalizing the assessment. The Tribunal emphasized that non-conducting of proper inquiry renders the assessment order erroneous and prejudicial to the interests of the Revenue. Consequently, the appeal of the assessee was dismissed, and the CIT's order to set aside the assessment for fresh consideration was confirmed.