2022 (9) TMI 551 - AT - Income Tax

Revision u/s 263 by CIT - as per CIT assessment order has been passed by Ld. AO without making inquiries or verification - Lack of inquiry v/s inadequate inquiry - HELD THAT - An inquiry made by the Assessing Officer considered inadequate by the Commissioner of Income Tax cannot make the order of the Assessing Officer erroneous. In our view the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered there is no law which provides the extent of inquiries to be made by the Ao. It is Assessing Officer s prerogative to make inquiry to the extent he feels proper. Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgments by various Hon ble High Courts in this regard. Delhi High Court in the case of CIT Vs. Sunbeam Auto 2009 (9) TMI 633 - DELHI HIGH COURT made a distinction between lack of inquiry and inadequate inquiry. The Hon ble court held that where the AO has made inquiry prior to the completion of assessment the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. 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. As in the case of the assessee the AO during the course of assessment proceedings made enquiries on the issues as discussed above and after consideration of written submissions filed by the assessee and documents / evidence placed on record and then framed the assessment under section 143(3) accepting the return of income. This fact can be verified from the notice issued under section 142(1) of the Act by the AO and the reply of the assessee against such notice. Thus it is not the case that the AO has not made any enquiry. Indeed the Pr. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of matters objected by the Ld. PCIT. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. We find in the instant set of facts that the AO had made enquiries and after consideration of materials placed on record accepted the genuineness of the claim of the assessee. PCIT in his order passed under section 263 of the Act has made reference to the explanation 2 of section 263 - PCIT has not invoked the explanation 2 of section 263 of the Act in show cause notice dated 17 January 2022 about the same. Therefore the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus on this count the learned PCIT erred in taking the re-course of such provisions while deciding the issue against the assessee. Secondly the learned PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made we are not convinced by his order passed under section 263 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessment order framed under section 143(3) of the Income Tax Act was erroneous and prejudicial to the interest of the Revenue.
2. Examination of unaccounted stock of brass scrap found during the survey.
3. Verification of the sharp decline in gross profit (GP) and net profit (NP) ratios.
4. Eligibility and verification of the deduction claimed under section 80IA of the Act.
5. Verification of fresh loans from directors and shareholders.

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial Assessment Order:
The primary issue is whether the assessment order under section 143(3) was erroneous and prejudicial to the interest of the Revenue. The Principal Commissioner of Income Tax (PCIT) held that the assessment was erroneous due to inadequate verification by the Assessing Officer (AO). The Tribunal emphasized that an inquiry deemed inadequate by the Commissioner does not render the AO's order erroneous. The AO has the prerogative to determine the extent of inquiry, and the Commissioner cannot impose his own understanding of the extent of inquiry required.

2. Unaccounted Stock of Brass Scrap:
The PCIT found that the unaccounted stock of brass scrap amounting to Rs. 53,00,075/- discovered during the survey was not offered for tax in the income tax return. The AO did not verify this properly during the assessment proceedings. The assessee contended that all necessary details regarding the excess stock were submitted during the assessment, and the AO had considered these details. The Tribunal noted that the AO had made inquiries and considered the submissions, thus the assessment could not be deemed erroneous on this ground.

3. Decline in Gross Profit and Net Profit Ratios:
The PCIT noted a sharp decline in the GP and NP ratios compared to the previous year, which the AO did not verify thoroughly. The assessee argued that the AO had considered the reasons for the decline, as evidenced by the notices and replies submitted during the assessment proceedings. The Tribunal found that the AO had made inquiries and considered the explanations provided by the assessee, thus the assessment could not be deemed erroneous due to inadequate inquiry.

4. Deduction under Section 80IA:
The PCIT observed that the deduction claimed under section 80IA amounting to Rs. 30,06,181/- was not included in the gross total income and was allowed without necessary verification. The assessee contended that the AO had verified the claim, as evidenced by the clarification and supporting documents submitted during the assessment. The Tribunal noted that the AO had made inquiries and considered the submissions, thus the assessment could not be deemed erroneous on this ground.

5. Verification of Fresh Loans:
The PCIT found that fresh loans from directors and shareholders amounting to Rs. 1,35,36,000/- and Rs. 17,28,949/- respectively were not verified for identity, creditworthiness, and genuineness of the transactions. The assessee argued that the AO had verified these loans, as evidenced by the notices and replies submitted during the assessment. The Tribunal found that the AO had made inquiries and considered the submissions, thus the assessment could not be deemed erroneous due to inadequate inquiry.

Conclusion:
The Tribunal concluded that the AO had made inquiries and considered the submissions for all the issues raised by the PCIT. The inquiries made by the AO were deemed adequate, and the assessment order could not be considered erroneous or prejudicial to the interest of the Revenue. The Tribunal quashed the revisional order passed by the PCIT and allowed the appeal filed by the assessee. The judgment emphasized the distinction between lack of inquiry and inadequate inquiry and upheld the AO's discretion in determining the extent of inquiry required.