By TIOL News Service

PANAJI, APR 21, 2015: THE issue before the Bench is - Whether issuing two notices to the assessee on different dates u/s 263 will invalidate the order passed u/s 263. NO is the answer.

Facts of the case

Assessee company filed return of income declaring total income at Rs. Nil and claimed loss of Rs.3,61,09,708/- under the head 'profit and gains from business' and long term capital loss of Rs.46,51,437/-. Assessment u/s 143(3) was completed on the income as returned.

Subsequently, the CIT issued show cause notice to the assessee finding carry forward of the loss of Rs. 361,09,708/- to be erroneous. The assessee objected the jurisdiction being invoked u/s 263. After disposing of the objections of the assessee, the CIT set aside the assessment order directing the AO to pass fresh order after verifying the claim of the assessee in respect of the carry forward of the loss of Rs.3,61,09,708/- as per law.

The assessee challenged the action of the CIT on the ground that the assessment order u/s 143(3) passed by the AO was neither erroneous nor prejudicial to the interest to the revenue. The assessee vehemently contended that the proceedings initiated u/s 263 is illegal and void. The CIT issued two notices one dated 25.10.2013 and other dated 28.10.2013. The facts stated in notice dated 25.10.2013 does not belong to the assessee. This is a settled principle of law that second notice issued during the pendency of the proceedings under first notice is not valid and is liable to be quashed.

On appeal by the assessee, the Tribunal held that,

++ for invoking the provisions of section 263, both the conditions that the order passed by the A.O. is erroneous and also that it is prejudicial to the interest of Revenue must be satisfied. If one of them is absent, the provisions of section 263 cannot be invoked. The term 'erroneous' has not been defined under the Income-tax Act but it is well settled that each and every type of mistake or error committed by the A.O. cannot be said to be an error. An order can be said to be erroneous if there is incorrect assumption of facts or incorrect application of law in the order by the A.O. If the A.O. after making the enquiries and examining the records taken one of the possible view, it cannot be said that the order passed by the A.O. was erroneous;

++ from these reasons recorded by CIT, it is apparent that it was noted that company has not commenced its business or development of SEZ / real estate still the interest payable / paid on the loans and other incidental expenses were charged to the profit and loss account as expenses incurred during the previous year relevant to the assessment year and computed the business loss at Rs.36109708/-. The AO has allowed the carry forward of these expenses even though the assessee has not commenced its business;

++ the Assessee vehemently contended that the AO has made the detailed inquiry into the various aspects of the assessment and after considering the AO allowed the deduction. No doubt the AO issued the questionnaire and the assessee submitted the reply. Neither the AO has inquired of about the commencement of business nor any submission was made in this regard. This is the settled law and expenses can be regarded to be revenue expenditure if it is incurred after the set up of the business. Therefore, so far set up / commencement of business is concerned, it is a case where there is no inquiry made by the AO. Thus, this is a case of lack of inquiry not a case of inadequate inquiry;

++ Now the question arise whether lack of enquiry by the AO will tantamount to be the one which is erroneous and prejudicial to the interest of the revenue. This is a fact that in this case the AO has not issued any notice or raised any query to the assessee in respect of ascertaining whether the business has commenced during the impugned assessment year for ascertaining the nature of the expenditure incurred by the assessee, during the course of assessment proceeding. Even no submissions were also made by the assessee on this aspect;

++ if the assessment has been made without making the inquiry and application of mind, the order is erroneous and prejudicial to the interest of Revenue. Unlike the Civil Court which is neutral to give a decision on the basis of evidence produced before it, an AO is not only an adjudicator but is also an investigator. The AO cannot remain passive on the face of a return which is apparently in order but calls for inquiry. It is the duty of the AO to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke inquiry. If there is failure to make such inquiry, the order is erroneous and prejudicial to the interest of Revenue. The Revenue has not to prove that its order is erroneous and CIT can revise it u/s 263;

++ the judicial pronouncements proves that the lack of inquiry will tantamount to be that the order is erroneous and prejudicial to the interest of Revenue. The CIT has already restored this issue to the file of the AO and the AO, after giving proper opportunity to the assessee has to re-decide the issue whether the assessee is entitled for the deduction;

++ as regards the plea of the assessee that the CIT has issued two notices, issuing two notices to the assessee on different dates u/s 263 will not invalidate the order passed u/s 263;

++ in view of aforesaid discussion, the order passed u/s 263 has to be upheld as, it has passed through test of fulfilment of both the conditions by the CIT that the order passed by the AO is erroneous as well as prejudicial to the interest of the revenue on the issue of claim of expenses allowed to the Assessee without verifying whether the assessee has set up / commenced the business during the year.

(See 2015-TIOL-413-ITAT-PANAJI)