Lack of enquiry or inadequate enquiry. Revision u/s 263 quashed by ITAT applying the large number of judgments of High Court and Supreme Court.
ABCAUS Case Law Citation:
ABCAUS 1220 (2017) (04) ITAT
The appellant assessee was aggrieved by the revisionary order passed by the Commissioner of Income Tax (‘CIT’) u/s 263 of the Income tax Act, 1961 (‘the Act’) holding that the assessment order passed by the Assessing Officer (‘AO’) was erroneous in so far as it is prejudicial to the interest of Revenue.
The main grounds raised by CIT u/s 263
- That the AO failed to make any enquiry as regards the incurrence of trading loss by the assessee.
- The AO had failed to make any enquiry as regards loans advanced by the assessee to various parties which could have resulted in disallowance of interest u/s 36(1)(iii).
- That as per the balance sheet, there was no factory and godown in the list of fixed assets. The AO did not make enquiry as to whom the premises belonged and how the assessee was operating from these premises.
- That the assessee had made investment of Rs. 5,52,00,000/- but AO had not made any enquiry regarding disallowance u/s 14A / Rule 8D.
The Question for determination:
Whether the assessment order passed by the AO suffered from lack of enquiry or inadequate enquiry?
Assessment Year : 2011-12
Date/Month of Pronouncement: April, 2017
Brief Facts of the Case:
The assessee was an individual who derived income from export of garments, leather and handicraft goods etc.. During the year under consideration, there was survey at the business premises of the assessee in which the assessee made a surrender of Rs. 18,25,22,250/- as additional income on account of excess stock found in his premises. The assessee declared the income surrendered at the time of survey and included the same in his returned income. The assessment proceedings were completed u/s 143(3).
Subsequently, the CIT issued show cause notice u/s 263. alleging that the AO did not make the inquiry on various points and the case was set aside back to the file of Assessing Officer to make fresh assessment.
Contentions of the appellant assessee:
The assessee explained in respect of each and every point raised by the CIT and claimed that proper inquiry was made by the Assessing Officer in respect of each and every point and the allegation of CIT was factually as well as legally untenable. The assessee placed reliance in number of case laws.
Contention of the Respondent Revenue:
According to the Revenue the alleged inquiry made by the Assessing Officer was, in effect, no inquiry at all because the Assessing Officer had to discharge twin functions of adjudicator as well as investigator. Merely obtaining certain details or papers from the assessee and keeping it on record could not amount to making a proper inquiry expected from an Assessing Officer. Like assessee, Revenue also supported its case by quoting several case laws.
Observations made by the Tribunal:
The Tribunal observed that both the parties had relied upon large number of judicial pronouncements which included decisions of the ITAT, Hon’ble High Court including Jurisdictional High Courts as well as Apex Court to draw an analogy or support for interpreting section 263.
The ITAT opined that when the direct decision of Hon’ble Jurisdictional High Court as well as Apex Court interpreting section 263 was available, it was not be necessary to look into the other decisions. The ITAT applied the ratio of the decisions to the facts of the assessee’s and ealt with the following decisions:
G.V. Enterprises vs Addl. CIT
“ It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income Tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case, the Income Tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income Tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income Tax officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word “erroneous” in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.”
CIT vs Maithan International
“In the instant case, the Commissioner had reasons to hold that creditworthiness of the alleged lenders was not enquired into. Mere examination of the bank pass book, profit and loss account and balance sheet of the creditors is not enough. When the requisite enquiry was not made, the order is bound to be erroneous and prejudicial to the interest of the revenue. The Tribunal proceeded on the theory that it was not a case of no enquiry; that no doubt is true, but that is not enough. If the relevant enquiry was not made, it may in appropriate cases amount to no enquiry and may also be a case of non-application of mind The power under section 263 can be exercised where the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. When an order is erroneous, then the order is also deficient and in order to remedy the situation, power under section 263 has been given. Therefore, the view that the powder could not have been exercised to allow the Assessing Officer to make up the deficiency is altogether an incorrect impression of the law.
It is not the law that the Assessing Officer occupying the position of an investigator and adjudicator can discharge his functions by perfunctory or inadequate investigation. Such a course is bound to result in erroneous and prejudicial orders. Where the relevant enquiry was not undertaken, as in this case, the order is erroneous and prejudicial too and therefore revisable. Investigation should always be faithful and fruitful. Unless all truthful areas of enquiry are pursued the enquiry cannot be said to have been faithfully conducted.”
Malabar Industrial Co. Ltd. vs CIT
“ The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, total income will certainly be prejudicial to the interests of the Revenue. The phrase “prejudicial to the interests of the Revenue “ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law.”
Director of Income Tax vs Jyoti Foundation
“Revisionary power under section 263 of the Income Tax Act, 1961 is conferred by the Act on the Commissioner/Director of Income tax when an order passed by the lower authority is erroneous and prejudicial to the interests of the Revenue. Orders which are passed without inquiry or investigation are treated as erroneous and prejudicial to the interests of the Revenue, but orders which passed after inquiry/investigation on the question/issue are not per se or normally treated as erroneous and prejudicial to the interests of the Revenue because the revisionary authority feels and opines that further inquiry/investigation was required or deeper or further scrutiny should be undertaken. In cases where there is inadequate inquiry but not lack of enquiry, the Commissioner must record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the Commissioner and he is able to establish and show the error or mistake made by the AO, making the order unsustainable in law. An order of remit cannot be passed by the Commissioner to ask the Assessing Officer to decide whether the order was erroneous.”
Income Tax Officer vs DG Housing Projects Ltd.
“ A distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order erroneous and prejudicial to the interests of the Revenue and cases where the Assessing Officer conducts an enquiry but the finding recorded is erroneous and which is also prejudicial to the interests of the Revenue. In the latter cases, the Commissioner has to examine the order or the decision taken by the Assessing Officer on the merits and then form an opinion on the merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. In the second set of cases, the Commissioner cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not.”
CIT vs DLF Ltd.
“It is not mere prejudice to the Revenue, or a mere erroneous view which can be revised, under section 263 of the Income Tax Act, 1961. There should be the added element of “unsustainability” in the order of the Assessing Officer, which clothes the Commissioner with jurisdiction to issue notice, and proceed to make appropriate orders.”
CIT vs Nirrav Modi
“It is a settled position in law that powers under s. 263 can be exercised by the CIT on satisfaction of twin conditions viz. the assessment order should be erroneous and prejudicial to the Revenue. By erroneous is meant contrary to law. Thus, this power cannot be exercised unless the CIT is able to establish the order of the Assessing Officer is erroneous and prejudicial to the Revenue. Thus where there are two possible views and the Assessing Officer has taken one of the possible views, no occasion to exercise powers of revision, can arise. Nor can revisional power be exercised for directing a fuller inquiry to find out if the view taken is erroneous, when a view has already been taken after inquiry. The power of revision can be exercised only where no inquiry as required under the law is done. It is not open to enquiry in cases of inadequate inquiry.”
CIT vs Arvind Jewellers
“The provisions of section 263 of the Income Tax Act, 1961, cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. It is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase “prejudicial to the interests of the Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer and every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. When an Assessing Officer adopts one of courses permissible in law and it has resulted in loss of Revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.”
The Tribunal noted that CIT had proceeded u/s 263 on the premise that the AO had failed to make enquiries qua the issue show caused in the notice whereas the assessee raised objection that all the enquiries now sought to be conducted by CIT have been duly conducted by the AO. More so, during the enquiry conducted by the CIT, no concrete findings came on record that the assessee had suffered trading loss during the year under assessment.
According to the CIT the assessee had sold the goods on loss the AO had not made any enquiry qua incurrence of trading loss. However, as per the ITAT when the assessee had brought on record audited profit & loss account, balance sheet, statement of affairs and capital account of the assessee which have been duly examined and the AO has also verified the books of account, vouchers, etc., there was no question of lack of enquiry on the part of the AO qua loss of trading account.
The Tribunal observed that the finding of the CIT that the assessee had incurred loss on goods was factually incorrect as CIT did not consider export incentive and fluctuation in exchange rate which was linked to the business of export and needed to be included in the same.
Thus according to the ITAT when the assessment has been completed after scrutinizing all the details and explanation supported with the documentary evidences filed by the assessee in response to the issue noticed by the AO, the question of lack of inquiry on the part of the AO did not arise.
Also, it was observed that when the entire capital account of the assessee had been examined by the AO and nothing had been brought on record by the CIT that there was any escapement of income by making withdrawal from the capital account during the year under assessment. Again, there was no question of lack of enquiry
With regard to disallowance u/s 36(1)(iii), the ITAT opined that when the assessee had submitted the complete details of unsecured loans along with confirmation of each of the transaction, bank account of each of the person and income-tax acknowledgement return of each lenders from whom unsecured loans were availed to the AO who had duly examined the same during the course of assessment, it could not be a case of lack of enquiry. It was observed that the CIT without bringing on record any substantive piece of evidence to dispute the genuineness of the transactions proceeded on the basis of surmises to hold that the AO has not conducted any enquiry. The observation of CIT in the notice/order u/s 263 clearly showed that enquiries with regard to loan creditor/sundry creditor was made by the Assessing Officer. However, in the opinion of CIT, the Assessing Officer should have made further inquiry. Thus, at best, case made out by CIT was of inadequate inquiry and not of no inquiry.
Regarding the factory and godown, the Tribunal observed that the assessee brought on record the fact that the factory premises and godown at were the ancestral property of the assessee for more than last 50 years and no rent was required to be paid. There is not an iota of doubt on the file to dispute the fact that the factory premises and godown were ancestral property of assessee’s family. Moreover, when no rent had been claimed in the balance sheet qua the property in question it would not affect the tax liability of the assessee in any manner.
Regarding disallowance u/s 14A/ Rule 8D, the ITAT observed that the assessee had categorically submitted before the CIT that the he had earned no exempt income on investment during the year under assessment, then strangely enough, instead of examining the issue in the light of the settled principle of law, CIT directed the AO to examine the case law and decide accordingly and this fact showed the casual approach adopted by the CIT.
It needs to be investigated as to whether the assessee has taken duty drawback on bogus exports and the assessee has himself voluntarily accepted additional income of Rs.18 crores during survey and enquire in this regard has not been conducted by the AO
The assessee submitted that the CIT had drawn adverse inference on the basis of non-existent facts by holding that there was lack of enquiry on the part of the AO as to the modus operandi of the assessee by making observation regarding the enquiries of the DRI against brother of the assessee, Sahdev Gupta. The Tribunal observed that CIT holding that investigation was required to know if the assessee had taken duty drawback on bogus exports and the assessee had himself voluntarily accepted additional income of Rs. 18 crores during survey and enquire in this regard had not been conducted by the AO showed that the CIT had proceeded on the basis of surmises even by ignoring the fact that the assessee had no trading transaction with his brother. So again, it was not a case of lack of enquiry.
Thus, the Tribunal opined that a bare perusal of the written submissions filed by the Revenue, went to prove that the Revenue had merely relied upon the case law to clarify the legal position so as to invoke the provisions contained u/s 263 of the Act but had failed to bring on record that the order passed by the AO was erroneous and prejudicial to the interest of the Revenue by bringing on record the evidence.
The Tribunal applied the various decisions to the instant case as under:
Malabar Industrial Company Limited vs. CIT
Hon’ble Supreme Court held that the phrase “prejudicial to the interest of the Revenue” has to be read in conjunction with an erroneous order passed by the AO and where the Income-tax Officer adopted one course permissible in law and resulted in loss of revenue or where two views are possible and the Income-tax Officer has taken one view with which Commissioner does not agree, it cannot be treated as erroneous order “prejudicial to the interest of the Revenue” unless the view taken by the AO is unsustainable in law. Not a single fact has been brought on record by the ld. CIT that the assessment order is prejudicial to the interest of the Revenue. Because the CIT had calculated loss which was factually incorrect had been calculated without including the export incentive and the fluctuation in the exchange rate which were part and parcel of business of export and i effect, the assessee had earned profits not loss.
CIT vs. Amitabh Bachchan
Hon’ble Apex Court in held that though a notice to show cause is not a condition precedent for the CIT to hold that the order is erroneous and prejudicial to the Revenue still an opportunity to be heard in all the issue is mandatory to controvert all the relevant facts. In the instant case, CIT had drawn adverse inference against the assessee merely on the basis of alleged information regarding action taken by the DRI against brother of the assessee with whom the assessee did not have any trading transaction. First of all, no show-cause notice had been issued by the CIT regarding this allegation nor confronted the assessee on this issue during proceedings u/s 263.
CIT vs DLF Ltd.
The Hon’ble jurisdictional High Court held that it is not mere prejudice to the Revenue or a mere erroneous view which can be revised u/s 263 of the Act but there should be an added element of unsustainability of the assessment order which empowers the Commissioner to issue notice u/s 263. In the instant case, there was not an iota of evidence on the file to support the element of unsustainability of the assessment order.
Director of Income Tax vs Jyoti Foundation
In cases where there is inadequate enquiry but not lack of enquiry, the Commissioner must record a finding that the order made is erroneous. This is only possible if an enquiry and verification is conducted by Commissioner and he is able to establish and show the error or mistake by the AO, making the order unsustainable in law. CIT cannot pass an order of remit to ask the AO to decide whether the order is erroneous. In the instant case, CIT had specifically directed the AO to examine the sustainability of the claim of the assessee u/s 14A in the light of the case laws i.e. Holcim and Cheminvest Ltd. relied upon by the assessee during proceedings u/s 263 of the Act to which the CIT was not empowered. It was for the CIT to decide that the order was erroneous.
Income Tax Officer vs DG Housing Projects Ltd.
Hon’ble Delhi High Court explained the distinction in the cases where the AO does not conduct an enquiry and in that case, the lack of enquiry itself renders the order erroneous and prejudicial to the interest of the Revenue and cases where the AO conducts an enquiry but the finding recorded is an erroneous and which is also prejudicial to the interest of the Revenue. In the second set of cases, the Commissioner cannot direct the AO to conduct further enquiry to verify and find out whether the order passed is erroneous or not. This judgment is applicable to the facts and circumstances of the case because CIT found the enquiry conducted by AO inadequate and directed the AO to conduct further enquiry to verify and find out whether order passed was erroneous or not.
NIIT vs. CIT
The Revenue by relying upon the above case contended that expression “lack of enquiry” and “inadequate enquiry” have not been defined and, therefore, when the action of AO would be suggestive of lack of enquiry or inadequate enquiry will depend upon the facts obtaining in a particular of case. But, in the instant case, no such facts had been pointed out that the requirement of essential enquiries and of law had not been properly complied with by the AO. Because, when the AO had accepted the claim of the assessee by applying his mind, though the CIT had different opinion on the same it would certainly fall in the category of inadequate enquiry. So, in case of inadequate enquiry, the Commissioner was not empowered to invoke the provisions contained u/s 263.
Thus the Tribunal opined that that at the most, this was a case of inadequate enquiry on the part of the AO and not a case of lack of enquiry by any stretch of imagination, and the decisions of Hon’ble Jurisdictional High Court would be squarely applicable to the case.
Order passed by CIT u/s 263 was quashed and the appeal filed by the assessee was allowed.