By TIOL News Service

NEW DELHI, APRIL 12, 2018: THE ISSUE IS - Whether the CIT can assume jurisdiction u/s 263 in a case of inadequate verification of the details produced by the assessee before the AO during the assessment proceeding. NO IS THE VERDICT.

Facts of the case:

The Assessee, an individual and proprietor of M/s. P.M. Overseas, engaged in the business of manufacturer and export of handicraft items. The Assessee had filed her return for the relevant AY declaring its total income. In the course of the assessment proceeding, the AO had made disallowance of certain expenses and complete the proceeding u/s 143(3). Subsequently, the CIT the Assessee had filed list of sundry creditors amounting to Rs. 3,95,04,920.07 in respect of 94 creditors. Out of this number, confirmations of only 8 creditors were found to be placed however, the same were not accompanied with any other supporting evidence. But, the AO had also not investigated the same properly. Further, the Assessee had also given advances for purchase of land/flat and the AO failed to examine the source and nature of such advances. Again, a survey u/s 133A was carried out and the books of accounts and other documents were impounded from the Assessee's business premises. Those account books were in the AO's possession but the same were not examined by the AO. Therefore, the CIT issued a SCN asking the Assessee to explain as to why the order passed u/s 143(3) could not be revised u/s 263.

the Tribunal held that,

++ the Assessee, in the instant case, has filed a list of 94 creditors to explain the details of creditors totaling to Rs.3,95,04,920.07. A perusal of the audited accounts shows that the list was very small. Further, there are certain discrepancies in the amounts shown under the names of different persons as per the audited accounts and the list filed during the course of assessment proceedings. Since the AO, in the instant case, has not at all applied his mind and has not asked for the reconciliation of those creditors, therefore, there is non-application of mind on the issue of sundry creditors which was the basis for selecting the case for scrutiny. Therefore, due to non-application of mind by the AO on the issue of sundry creditors, the order of the CIT assuming jurisdiction u/s 263;

++ advance of Rs.45,09,962/- for purchase of land/flat, this Tribunal finds that the Assessee during the course of assessment proceedings has filed full details. All the payments were made through the banking channels. Therefore, it cannot be said that AO has not applied his mind. Therefore, the order of the CIT on this issue is set aside. In the light of the provisions of sec. 40(a)(ia) is concerned, this Tribunal finds from the submission of the Counsel for the Assessee that none of the land lords has been given more than Rs.1,80,000/- and, therefore, there is no question of deduction of tax and consequently application of provisions of sec. 40(a)(ia). Therefore, the order of the CIT is set aside on this issue;

++ the issue relating to fair expenses and expenses under the head EPCH fair expenses is concerned, the Assessee has filed the details regarding such expenses. A perusal of the audited profit and loss account, shows that such fair expenses is clubbed with foreign tour and fair expenses. The AO in the body of the assessment order has disallowed an amount of 10% of such expenses, therefore, there is due application of mind by the AO on this issue. Therefore, the order of the CIT is set aside on the issue of fair expenses and EPCH fair expenses;

++ the issue relating to survey is concerned, there is no doubt that the books of accounts and other documents were in the possession of the AO. The CIT cannot dictate the manner in which the AO has to pass the order. In the instant case, this Tribunal finds various issues raised by the CIT have been examined by the AO, except the issue of sundry creditors where the AO has failed to apply his mind properly. However, in the remaining other issue for which the CIT has also assumed jurisdiction u/s 263 is concerned, there is enquiry by the AO. It may be a case of inadequate enquiry by the AO as per the version of the CIT because according to him the AO should have conducted further enquiries. However, it cannot be said that it is a case of no enquiry;

++ the various courts are holding that CIT can assume jurisdiction u/s 263 only in a case of no enquiry, however, he cannot assume jurisdiction u/s 263 in a case of inadequate enquiry. The CIT cannot dictate the AO to pass an order in a particular manner. Since in the instant case, the Assessee has filed the requisite details before the AO on various other issues except sundry creditors and the AO after due application of mind has passed the order u/s 143(3) and has made certain disallowances out of various expenses, therefore, this Tribunal believes that the order is erroneous and prejudicial to the interest of the Revenue only to the extent of sundry creditors and there is no error in the order passed by the AO on the remaining issues. Therefore, this Tribunal uphold the order of the CIT assuming jurisdiction u/s 263 only to the extent of sundry creditors where the AO has failed to apply his mind by reconciling the creditors shown in the audited balance sheet and in the list of creditors filed during the course of assessment proceedings. Therefore, the order of the CIT is upheld only to this extent i.e. the issue regarding the sundry creditors.

(See 2018-TIOL-533-ITAT-DEL)