2011 (9) TMI 1033 - AT - Income Tax

Revision u/s 263 - Held that - CIT was not justified in passing the order under s. 263 of the Act. Hence the order of the learned CIT is cancelled.

Summary

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act by the CIT.
2. Verification of the genuineness of the assessee's claim regarding outstanding sundry creditors.
3. Jurisdiction of the CIT under Section 263 based on the adequacy of the AO's enquiry.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act by the CIT:
The assessee challenged the CIT, Kota's decision to invoke Section 263 of the Act, claiming it was contrary to the provisions of law. The CIT issued a notice under Section 263, stating that the assessment order under Section 143(3) was erroneous and prejudicial to the interest of Revenue because the AO did not verify the genuineness of the sundry creditors amounting to Rs. 19,65,614. The CIT argued that the AO failed to take the names and addresses of the farmers on record.

2. Verification of the genuineness of the assessee's claim regarding outstanding sundry creditors:
The assessee provided a detailed explanation of their business operations as a Kachcha Adatiya, which involved selling farmers' crops in auctions and making payments to farmers during a sight period. The assessee claimed that this process inherently led to outstanding payables to farmers, and they produced complete books of accounts before the AO. The CIT, however, found that the AO did not verify the genuineness of the creditors, as the full addresses and date-wise details of transactions with the farmers were not recorded. The CIT concluded that the assessment order was erroneous and prejudicial to the interest of Revenue and set it aside for fresh assessment after proper verification.

3. Jurisdiction of the CIT under Section 263 based on the adequacy of the AO's enquiry:
The assessee argued that the CIT could only assume jurisdiction under Section 263 if the order was both erroneous and prejudicial to the interest of Revenue. They contended that the AO had raised detailed queries and received replies, indicating that an enquiry was made. The CIT's assumption of jurisdiction was challenged on the grounds that it was based on the opinion that the AO's enquiry was insufficient rather than non-existent. The assessee cited various judicial precedents, including decisions from the Hon'ble Delhi High Court and the jurisdictional High Court, to support their claim that the CIT's invocation of Section 263 was unwarranted if the AO had made some enquiry, regardless of its perceived adequacy.

The Tribunal examined the records and found that the AO had indeed made an enquiry, as evidenced by the office note and the details of trade creditors provided by the assessee. The Tribunal noted that the AO's enquiry might have been deemed insufficient by the CIT, but it was not a case of no enquiry. The Tribunal referenced the Hon'ble Delhi High Court's rulings, which held that jurisdiction under Section 263 could not be assumed merely because the CIT considered the AO's enquiry inadequate. The Tribunal concluded that the CIT was not justified in passing the order under Section 263 and cancelled the order.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the CIT's invocation of Section 263 was not justified as the AO had made an enquiry, and the assessment order was not erroneous or prejudicial to the interest of Revenue based on the facts and legal precedents presented.