2012 (4) TMI 845 - AT - Income Tax

Validity of Revision u/s 263 - CIT after examining the record found the order to be erroneous and prejudicial to the interest of the Revenue for the reason that the assessee could not prove the genuineness of its trading account the correct course of the AO was to prepare separate correct quantitative tally for the period up to the date of survey and post survey - HELD THAT - CIT on perusal of records may be of the opinion that the addition made by the AO is on the lower side and the ld. CIT may be of the opinion that income could be estimated at a higher amount then such opinion can not be subject matter of section 263 of the Act and the Ld. CIT is not vested with the power to re-examine the amount and determine the figure at higher figure. In the present case when the AO in his quasi-judicial power had conducted extensive inquiry and had made the addition then the Ld. CIT(A) is not empowered to re-examine the matter which is not erroneous and prejudicial to the interest of the revenue. In our opinion no fresh inquiry can be made at the instance of the ld. CIT unless earlier decision of the AO is erroneous and prejudicial to the interest of the revenue. The Ld. CIT cannot put his words in the mouth of the A.O. Therefore we direct to cancel the order of the Ld. CIT passed u/s 263. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the order passed under section 263 of the Income-tax Act, 1961 by the Commissioner of Income Tax (CIT) cancelling the assessment order of the Assessing Officer (AO) was legal and justified.

(b) Whether the AO's assessment order under section 143(3) of the Act, which rejected the assessee's books of account and made additions based on gross profit rate adjustments, was erroneous and prejudicial to the interest of the Revenue.

(c) Whether the CIT was justified in revising the AO's order without proper quantification of stock and production figures, particularly by ignoring certain periods and stock classifications (finished goods vs. stock-in-process).

(d) Whether the CIT had jurisdiction and authority to re-examine and enhance the income beyond the AO's findings when the AO had already conducted extensive inquiry including verification of quantitative tally, production, sales, and stock details.

(e) Whether the CIT's order under section 263 was premature or invalid given that the matter was sub judice before the Commissioner of Income Tax (Appeals) (CIT(A)) and the assessee had filed appeals against the AO's additions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Legality and correctness of the CIT's order under section 263 cancelling the AO's assessment order

The relevant legal framework includes section 263 of the Income-tax Act, which empowers the CIT to revise an order if it is found to be erroneous and prejudicial to the interest of the Revenue. The CIT's jurisdiction under section 263 is supervisory and cannot be exercised to re-assess or re-determine facts already examined by the AO unless the AO's order is found to be perverse or without proper inquiry.

The CIT relied on precedents such as CIT vs. Active Traders (P) Ltd. (Calcutta High Court) which held that if an assessment is made in undue haste or without proper inquiry, the CIT can direct the AO to re-assess after proper investigation. The CIT also relied on the Supreme Court decision in Tara Devi Aggarwal vs. CIT, which clarified that assessments made without proper basis or to achieve indirect taxation are erroneous and can be revised.

The CIT's reasoning was that the AO failed to prepare a correct quantitative tally for the entire relevant period, particularly around the survey date, and thus the addition made by the AO (Rs. 29,80,453) was understated. The CIT computed a higher short stock figure (Rs. 56,29,470) based on monthly consumption, production, and sales figures, and found the AO's order erroneous and prejudicial to revenue.

The assessee contended that the AO had conducted extensive inquiry over multiple hearings, verified books, vouchers, stock, production, and sales data, and made additions accordingly. The assessee argued that the CIT's order ignored the detailed inquiry and evidence already on record and improperly extended the scope of inquiry beyond the AO's findings.

The Tribunal observed that the AO's order sheet and assessment record demonstrated thorough examination, including verification of stock and manufacturing accounts, production details, and quantitative tallies. The AO's addition was based on this detailed inquiry, and the assessee had filed appeals against the AO's addition, which were pending.

The Tribunal held that the CIT cannot substitute his own opinion or re-assess facts already examined by the AO unless the AO's order is shown to be perverse or made without inquiry. The CIT's attempt to re-quantify stock and production figures without new evidence was beyond the scope of section 263.

Issue (c): Treatment of stock and production figures, including period from 23.12.2004 to 31.12.2004 and classification of finished goods vs. stock-in-process

The CIT's show cause notice and order under section 263 did not include production and sales figures for the period 23.12.2004 to 31.12.2004, and allegedly misclassified stock-in-process as finished goods, leading to an inflated estimate of short stock.

The assessee pointed out that the physical stock verification at the time of survey recorded 13,822 pieces of finished blankets, whereas the CIT's tally considered 25,687 pieces, resulting in an excess of 11,865 pieces. The assessee also submitted that unfinished goods (12,165 pieces) found during survey were accounted for separately and properly reflected in the AO's assessment.

The Revenue argued that inclusion of unfinished goods would only cause minor differences and supported the CIT's order. However, the Tribunal found that the AO had duly considered all such stock categories and production details in the assessment order, and the CIT's exclusion of certain periods and incorrect stock classification rendered his quantitative tally flawed.

The Tribunal emphasized that the AO's detailed inquiry and record examination included pre-survey and post-survey production and sales data, and the stock figures were reconciled accordingly. The CIT's failure to consider these facts undermined the validity of his order.

Issue (d): Jurisdiction of the CIT under section 263 to re-examine and enhance income beyond AO's findings

The Tribunal reiterated that the CIT's power under section 263 is limited to correcting orders that are erroneous and prejudicial to revenue, not to re-assess or re-determine facts or figures already examined by the AO. The CIT cannot act as an appellate authority or substitute the AO's judgment unless the AO's order is shown to be perverse or without any inquiry.

In this case, since the AO had conducted extensive inquiry, verified records, and made additions after due consideration, the CIT's attempt to enhance income on the basis of his own computations was beyond the scope of section 263.

The Tribunal held that the CIT cannot "put his words in the mouth of the AO" or reopen the matter on a different quantification without new material or evidence.

Issue (e): Effect of pending appeal before CIT(A) on the validity of CIT's order under section 263

The assessee contended that the matter was sub judice before the CIT(A) with appeals filed against the AO's additions, and the CIT(A) had also been requested by Income Tax authorities for enhancement of income. Therefore, the CIT's order under section 263 was premature and liable to be quashed.

The Tribunal did not specifically elaborate on this aspect but implicitly recognized that since the AO's order was not perverse or without inquiry, and the CIT's order was an attempt to re-assess, the pendency of appeal further militated against the validity of the CIT's revisionary order.

3. SIGNIFICANT HOLDINGS

The Tribunal held, preserving the core legal reasoning verbatim, that:

"In the present case, when the AO in his quasi-judicial power had conducted extensive inquiry and had made the addition, then the Ld. CIT(A) is not empowered to re-examine the matter, which is not erroneous and prejudicial to the interest of the revenue. In our opinion, no fresh inquiry can be made at the instance of the ld. CIT unless earlier decision of the AO is erroneous and prejudicial to the interest of the revenue. The Ld. CIT cannot put his words in the mouth of the A.O."

The Tribunal established the core principle that the jurisdiction under section 263 is not a tool for re-assessment or second-guessing the AO's findings where proper inquiry has been conducted, and that the CIT's order must be based on the AO's order being demonstrably erroneous and prejudicial to revenue.

On all issues raised, the Tribunal concluded that the AO had conducted a thorough inquiry, the additions made were based on proper verification of records including quantitative tallies, production, sales, and stock, and that the CIT's revisionary order was without jurisdiction and liable to be quashed.

Accordingly, the Tribunal allowed the appeal and set aside the CIT's order passed under section 263 of the Income-tax Act.