By TIOL News Service

NEW DELHI, AUG 08, 2018: THE ISSUE IS - Whether when the AO fails to examine certain aspects in the assessment order and the CIT invokes revisionary powers u/s 263, the Tribunal is right in supplying reasons to AO's order. NO IS THE VERDICT.

Facts of the case

THE assessee was subjected to survey proceedings during the relevant AY. The assessee later surrendered about Rs 18.25 crores as income on account of stock found in excess. In his returns for the relevant AY, the assessee declared income of about Rs 21.58 crores. In his returns for the next AY, the assessee declared income of Rs 25.36 crores. On assessment, the AO disallowed 10% of non-business expenditure & 10% of vehicle expenditure. Such amounts were added to the assessee's income. Later, the CIT exercised power of revision u/s 263 on grounds that the AO did not enquire into trading loss of about Rs 38.62 crores. The CIT noted that the assessee's firm was being enquired into by the DRI for some fraudulent exports & that the assessee's brother was under the DRI's scanner for claiming duty drawback on such bogus exports. Hence the CIT held that the assessee too was involved in this scheme and that the AO omitted to look into the huge drawback claimed by the assessee. The CIT also noted that the assessee failed to submit PAN details of some creditors. Thus the CIT held the AO to be at fault for not looking into the utilization of borrowed funds for non-business purposes. The CIT also held that some of the assessee's creditors received funds from bogus entities & forwarded them to the assessee. Hence the order passed by the AO was held to be erroneous and prejudicial to Revenue's interests. Subsequently, such findings were quashed by the Tribunal.

On appeal, the High Court held that,

++ the Tribunal not only went into the merits of the CIT's order, which can be considered as only indicative of what were missed out by the AO, but also recorded its findings. It proceeded to hold that amounts due to drawbacks & incentives and foreign exchange fluctuations were to be considered and had been considered, by the AO but not the CIT. As a matter of fact, the AO records no observation or findings on these issues; nor the issue of the loans, which the assessee received, or the amounts claimed by him as interest. Given these matters of record, this Court finds it difficult to validate the Tribunal's approach reading into the AO's order, reasons which are simply not there. The Tribunal's order itself discloses that the AO did not investigate into the question of advances given to others, (having regard to the assessee's claim for having taken loans, for which interest expenditure was claimed);

++ such findings and reasoning are clearly indefensible; they amount to putting a gloss over the AO's glaring omissions. Repeated decisions have emphasized that the AO should – at least as regards what appears from the record, and what are issues inquired into, during scrutiny assessment, indicate the briefest of reasons, accepting or rejecting any argument. In this case, the mere fact that out of 80 debtors, particulars of 22 were furnished and that PAN particulars of most of them were not provided (for AY, cannot lead to the conclusion that the doubting of genuineness of those transactions was unwarranted, u/s 263). Also considering the CIT's findings regarding expenditure claimed towards purchases, the ITAT did not say how this observation was unwarranted. On the other hand, the AO's order made originally is silent about this aspect altogether;

++ the first issue is with respect to interest. The Tribunal's approach was entirely faulty; it overlooked that the explanation, if any, why interest deduction was necessary given that it had advanced substantial amounts on interest free basis was not reflected in the AO's order. Likewise, on the issue of purchases, the lack of any factual foundation and why despite verification only 37 out of 111 parties came forward, the expenses could be allowed, is absent. For the other years, the reasoning why 22 parties could have been taken into account, for a vast majority of others (58) is absent, for AY 2011-12;

++ the Tribunal's findings amount to supplying reasons in respect of the AO's order, on aspects, which are not expressly reflected in the assessment order. It is no doubt the duty of the CIT to record why revision is warranted; however, the Tribunal's jurisdiction is not to re-write the AO's order and improve upon it, in a manner of speaking. Clearly, the orders of the Tribunal cannot be sustained. They are set aside.

(See 2018-TIOL-1547-HC-DEL-IT)