2025 (6) TMI 1707 - AT - Income Tax

Revision u/s 263 - PCIT observed that assessee firm is engaged in the business of manufacturing of Coffee and declaring its income at NIL on the ground that the income of the assessee falls under the category of agricultural income - PCIT observed that the AO ought to have considered the claim of the assessee having regard to the provisions of Rule 7B of the Income Tax Rules 1962 and observed that the AO has not enquired as to the process followed by the assessee for growing and selling coffee.- HELD THAT - The provisions of explanation (2) of the section 263 of the Act provides that where the ld. PCIT is of the opinion that the order is passed without making enquiries or verification which should have been made then such order should be deemed to be erroneous and prejudicial to the interest of revenue. Perusal of the relevant questions as mentioned in show cause notice referred by us herein above would prove beyond doubt that the AO has accepted the claim of the assessee without there been any documents filed from the side of assessee. The role of the AO during the course of assessment proceedings is that of investigator as well as an adjudicator. If during the course of assessment proceedings he accepts any claim of the assessee without enquiring into the facts then such an order is erroneous order. While acting as an adjudicator if he takes a view overlooking the provisions of law then also his order is erroneous. When we examined the facts of the present case then it would be abundantly clear that present is a case where the AO has accepted the claim of the assessee without conducting any enquiries and without referring to the provisions of rule 7B of the I.T.Rule which rules are specifically applicable to the coffee growers. So far as the contention of the assessee that in previous years also the provisions of rule 7B are not invoked would not in any way made the order of the AO justiciable. Therefore we are of the firm opinion that the ld. PCIT is justified in exercising jurisdiction u/s 263 of the Act. With these observations the appeal of the assessee stands dismissed.

Summary

The core legal questions considered in this appeal revolve around the correctness and validity of the order passed under section 263 of the Income Tax Act, 1961, by the Principal Commissioner of Income Tax (PCIT). Specifically, the issues are:

• Whether the Assessing Officer (AO) erred in accepting the assessee's claim of agricultural income from coffee cultivation without proper enquiry and verification, particularly without applying Rule 7B of the Income Tax Rules, 1962.
• Whether the order of the AO is erroneous and prejudicial to the interest of revenue under section 263 of the Act.
• Whether the principle of consistency and prior acceptance of agricultural income in earlier years can preclude the PCIT from revising the AO's order.
• Whether the PCIT was justified in exercising revisionary jurisdiction without examining records of earlier assessment years.

Issue-wise Detailed Analysis:

1. Validity of AO's Acceptance of Agricultural Income Without Enquiry and Application of Rule 7B

Legal Framework and Precedents: Section 263 of the Income Tax Act empowers the PCIT to revise an order if it is erroneous and prejudicial to the interest of revenue. Explanation (2) to section 263 states that if the AO has passed an order without making enquiries or verification which ought to have been made, such order is deemed erroneous. Rule 7B of the Income Tax Rules, 1962, governs the treatment of income from coffee cultivation, particularly distinguishing income from growing and selling raw coffee beans versus income from curing, roasting, or grounding coffee.

Court's Interpretation and Reasoning: The Tribunal noted that the AO, in the assessment proceedings, accepted the assessee's claim of agricultural income from coffee without requiring details or evidence regarding the process of cultivation and sale. The AO's own show cause notice dated 14.9.2022 indicated that the assessee had not submitted details on how coffee was grown and sold, yet the AO accepted the claim without applying Rule 7B. The Tribunal emphasized that the AO's role is both investigative and adjudicatory, and acceptance of claims without enquiry or verification constitutes an erroneous order under section 263.

Key Evidence and Findings: The show cause notice explicitly questioned the assessee about the process of coffee cultivation and sale, highlighting the legal requirement to apply Rule 7B. Despite this, the AO did not make further enquiries or seek documents to verify the claim. The AO's order was thus found to lack the necessary enquiry and verification.

Application of Law to Facts: Since Rule 7B specifically applies to coffee growers and prescribes the apportionment of income based on activities such as curing or roasting, failure to apply this rule or verify the nature of activities undertaken by the assessee rendered the AO's order erroneous. The PCIT's revision under section 263 was therefore justified.

Treatment of Competing Arguments: The assessee argued that the AO had conducted necessary enquiries and that the claim was consistent with prior years' assessments, where Rule 7B was not invoked. The Tribunal rejected this, holding that prior non-application of Rule 7B does not validate an erroneous order. The principle of res judicata was held inapplicable to income tax proceedings, which are fact-specific and year-specific.

Conclusion: The AO's acceptance of agricultural income without enquiry and without applying Rule 7B was erroneous and prejudicial to the revenue. Revision under section 263 was warranted.

2. Applicability of Principle of Consistency and Prior Year Assessments

Legal Framework and Precedents: The doctrine of res judicata or consistency does not strictly apply to income tax proceedings, as each assessment year is treated independently and must be examined on its own facts and merits.

Court's Interpretation and Reasoning: The Tribunal noted the revenue's argument that each assessment year is a separate proceeding and prior acceptance of a claim does not preclude reassessment or revision if the current order is erroneous. The assessee's reliance on prior years' acceptance and the judgment cited was found misplaced as the facts and legal requirements (such as Rule 7B) were not considered previously but are mandatory.

Key Evidence and Findings: The Tribunal observed that the PCIT was not bound by earlier assessments and was entitled to revise the order if it found the AO's order to be erroneous and prejudicial.

Application of Law to Facts: The absence of any fundamental change in facts does not prevent the PCIT from exercising revisionary powers if the AO's order is found to be flawed.

Treatment of Competing Arguments: The assessee's argument that the PCIT should have followed the earlier CIT's opinion was rejected on the ground that the PCIT must independently assess the correctness of the order under section 263.

Conclusion: The principle of consistency or res judicata does not bar the PCIT from revising the AO's order under section 263.

3. Whether PCIT Was Obliged to Examine Records of Earlier Assessment Years

Legal Framework and Precedents: While the PCIT may consider past assessments for context, there is no statutory requirement to examine earlier years' records before exercising revisionary jurisdiction under section 263.

Court's Interpretation and Reasoning: The Tribunal found no error in the PCIT's failure to call for earlier years' records. The revision is based on the AO's order for the relevant assessment year and its own merits.

Key Evidence and Findings: The PCIT's order focused on the AO's failure to apply Rule 7B and conduct enquiries in the current year assessment.

Application of Law to Facts: The absence of examination of earlier years' records does not invalidate the PCIT's jurisdiction or findings.

Treatment of Competing Arguments: The assessee's contention that the PCIT erred in not considering earlier years' records was dismissed.

Conclusion: The PCIT was justified in proceeding without calling for earlier years' records.

Significant Holdings:

"The role of the AO during the course of assessment proceedings is that of investigator as well as an adjudicator. If during the course of assessment proceedings, he accepts any claim of the assessee without enquiring into the facts then such an order is erroneous order."

"The provisions of explanation (2) of the section 263 of the Act provides that where the ld. PCIT is of the opinion that the order is passed without making enquiries or verification, which should have been made, then such order should be deemed to be erroneous and prejudicial to the interest of revenue."

"The principle of res judicata are not applicable to the income tax proceedings and each year is to be examined, having regard to the facts involved therein."

"The ld. PCIT is justified in exercising jurisdiction u/s 263 of the Act."

Core principles established include the mandatory application of Rule 7B to coffee growers' income assessments, the AO's duty to conduct proper enquiry before accepting claims, the independent and fact-specific nature of income tax assessments each year, and the correctness of the PCIT's revisionary jurisdiction under section 263 when the AO's order is found to be erroneous and prejudicial to revenue.

Final determinations on each issue are:

• The AO's order accepting agricultural income without enquiry and without applying Rule 7B was erroneous and prejudicial.
• The PCIT was justified in revising the AO's order under section 263.
• The principle of consistency or res judicata does not prevent revision.
• The PCIT was not required to examine earlier years' records to exercise revisionary jurisdiction.
• The appeal of the assessee is dismissed and the revision order stands upheld.