BY TIOL News Service

NEW DELHI, APR 23, 2018: THE ISSUE BEFORE THE BENCH is - Whether if the AO fails to conduct inquiry, it is a fit case for invocation of provisions u/s 263. YES is the answer.

Facts of the case:

The assessee company, engaged in the business od trading and processing of dry fruits, spices. It filed the return for the relevant AY decalring its income of Rs. 96,450/–. The AO had completed the assessment proceeding u/s 143(3) by making addition on account of suppression of sales and disallowed the deduction claimed u/s 10B. Consequently, the AO assessed the assessee's total income at Rs. 232,28,035/-. On appeal, the CIT(A) granted complete relief to the assessee.

Meanwhile, the CIT issued a SCN u/s 263 on examination of the records. The CIT found that the assessee had filed the bank statement without any narration and hence, the AO failed to verify the bank statement. Further, the CIT also noticed that the assessee had paid Rs. 4 Lacs to one party but the same was not credited to the party's account. Again, the AO failed to examine the fact that the assessee had made one fixed deposit receipt but no interest income in this regard was declared in its return. Lastly, the CIT also noted that the assessee had made sales in cash on 4 different dates amounting in all to only Rs. 26963/- whereas on various date the assessee has deposited cash of Rs. 16,55,000/-. In reply, the assessee placed its submission but, the same was not accepted by the CIT. Accordingly, the CIT directed the AO to verify the source of the cash deposited in the bank account. With respect to the fixed deposit receipt, the CIT also directed the AO to examine this issue. Subsequently, the CIT passed the order u/s 263 by stating that the assessment order was erroneous and prejudicial to the interest of the Revenue.

the Tribunal held that,

++ according to Sec. 263, the CIT can resort to corrective measures by revising the assessment order passed by the AO, if after examining records such assessment order passed by the AO, the CIT found that such an order is erroneous and prejudicial to the interest of Revenue. In Malabar industrial Co Ltd's case, the Supreme Court held the Commissioner has satisfied of twin conditions namely (i) that the order is erroneous, (ii) that it is prejudicial to the interest of Revenue. As held in several judicial precedents that Commissioner does not have power to revise the order of the AO where there are two views possible and the AO has taken one of the possible view. Further, where the AO has made some enquiry and has reached at a conclusion. Therefore, on debatable issues and where there is absence of "Lack of Inquiry", the powers of the CIT cannot be exercised u/s 263. There exists a difference between "Lack of Inquiry‟ and "inadequate Inquiry";

++ in the present case, we did not find that the AO has made any enquiry on all the 4 issues. Therefore, according to us there is no inquiry made by the AO on the issues raised by CIT in proceedings u/s 263. The arguments of the Counsel for the assessee on the issue with respect to cash deposited in the bank account, loan repaid, bank interest on fixed deposit receipt and absence of narration in the bank statements were more on the aspect that no such addition can be made in the hands of the assessee;

++ however, nothing is lead before us that makes us to ascertain that the AO during the course of assessment proceedings, have inquired about all those things at all. Merely because there are disallowances u/s 10B and addition on account of undisclosed sales which is precisely made on the basis of the information available with the AO in tax audit report only, it cannot be said that on these 4 issues the AO has made any enquiry. The AO notes in the assessment order that despite request the assessee has not produced the complete books of accounts along with the bills and vouchers before him;

++ the assessment in the present case was framed u/s 143(3) on 31/12/2007. This itself shows that the AO has not looked at the books of accounts which are allegedly produced before AO as per version of the assessee on 26/12/2007. This too is the submission of the assessee before CIT(A) which has not been adjudicated by CIT(A). Even otherwise, mere production of books of accounts does not make the issues before us fall in to the category of "inadequate inquiry". If we agree to such an argument then, in all cases where the books of accounts were produced before the AO, then the case would fall outside the purview of Sec. 263. Further, no records of communication by the AO to assessee and reply by assessee to AO was shown to us to show on these four issues that the AO had applied his mind on any of them. According to us, case before us is of "lack of inquiry" and not absence of any inquiry. All judicial precedents relied up on before us related to "absence of adequate inquiry" but none of them dealt with the issues of complete lack of inquiry as in case before us. Hence, we do not have any hesitation in upholding action of the CIT in invoking his jurisdiction u/s 263. Hence, order passed u/s 263 by the CIT is upheld.

(See 2018-TIOL-600-ITAT-DEL)