Revision u/s 263 merely for non-mentioning of assessee’s reply in assessment proceedings/order invalid

Revision u/s 263 merely on ground of non-discussion / non-mentioning of reply to queries in assessment proceeding/order is invalid

ABCAUS Case Law Citation:
ABCAUS 3123 (2019) (08) HC

Important case law relied upon by the parties:
Malabar Industrial Company vs. CIT (2000) 109 taxman 66 (SC)
CIT vs. Krishan Capbox Ltd. (2015) 372 ITR 310
CIT vs. Mahendra Kumar Bansal (2008) 297 ITR 99
Goyal Private Family Specific Trust [1988] 171 ITR 698
CIT vs. Goyal Private Family Specific Trust (1988) 171 ITR 698
CIT v. Fine Jewellery (India) Ltd.) [2015] 372 ITR 303/230 
CIT vs. Anand Kumar Jain (2015) 231 Taxman 534
Malabar Industrial Company vs. CIT (2000) 109 Taxman 66 (SC)
Swarup Vegetable Products vs. CIT (1991) 54 Taxman 175
CIT vs. Bhagwan Das (2005) 142 Taxman
CIT Vs. Vikash Polymers [2012] 341 ITR 537/ [2010] 194 Taxman 57
CIT v. Vodafone Essar South Ltd. [2012] 28 taxmann.com 273/ [2013] 

The instant Income Tax Appeal was filed by the assessee under Section 260A of the Income Tax Act, 1961 (the Act) against the order passed by the Income Tax Appellate Tribunal (Tribunal / ITAT) and Revisional order passed by Commissioner of Income Tax (CIT) u/s 263 of the Act.

The High Court had admitted the appeal on the questions of law as to whether the ITAT rightly held that the CIT had correctly assumed jurisdiction under Section 263 and whether the ITAT was right in upholding the order of CIT passed u/s 263 without controverting the appellant’s explanation/submissions made before the Assessing Officer (AO) in compliance of his queries in relation to verification of loan creditors and trade creditors?

The assessee was a private limited company. The return of the company was processed under Section 143(1) of the Act. Case of the assessee was selected for scrutiny and notice under Section 143(2) of the Act was issued by the Assessing Officer followed by notice under Section 142(1), along with questionnaire raising several queries. The assessee duly filed his replies to the queries raised. The  AO further required the assessee to furnish explanation, which was submitted by the assessee.

Therafter, the AO passed the assessment order under Section 143(2) of the Act accepting the return of income.

However, the Commissioner Income Tax exercising power under Section 263 of the Act issued notice which was duly replied by the assessee by detailed objections stating that all the details and documentary evidence in regard to the investment in share capital, unsecured loans, creditors and expenses was submitted before the Assessing Officer by the assessee in reply to the queries raised by the Assessing Officer. 

The Commissioner Income Tax partly accepted the objection of the assessee as far as the investment in share capital was concerned but, as regards unsecured loans and creditors were concerned, the case of the assessee was relegated back to the Assessing Officer directing him to examine, call for requisite details, confirmations and examine them properly. 
The said order passed by the CIT under Section 263 of the Act was challenged by the assessee before the Income Tax Appellate Tribunal which dismissed the appeal of the assessee upholding the order.

Before the Hon’ble High Court, the assessee/ appellant submitted that the Tribunal failed to consider that the Commissioner Income Tax was not justified in invoking the provisions of Section 263 of the Income Tax Act, as the order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of the revenue. It was further contended that after the case of the appellant was selected for scrutiny, the Assessing Officer had issued notice under Section 143(2) of the Act, raising sevarl queries which were in regard to the investment in share capital, unsecured loans, creditors and expenses, which was replied by the assessee, furnishing the entire details along with the documentary evidence. It was also submitted that details of all unsecured loans was furnished to the Assessing Officer along with their PAN numbers and other details as required. 

It was further submitted that the Commissioner Income Tax while exercising power under Section 263 as well as the ITAT dismissing the appeal had wrongly applied the law laid down by the Apex Court.

The second limb of argument of the counsel for the assessee is that mere non-discussion and non-mentioning about the reply to the queries submitted by the assessee cannot lead to an assumption by the CIT as well as ITAT that Assessing Officer has not applied his mind.

It was further contended that the queries raised during assessment proceedings and the same not having been dealt in the assessment order would not lead to the conclusion that no enquiry was made and the Assessing Officer has not applied his mind.

The Department on the other hand submitted that the assessment order was totally silent in respect of unsecured loans and creditors and the Assessing Officer was bound to examine the identity of creditors, creditworthiness of creditors and genuineness of the transactions before any loan or cash credit is accepted. 

It was further contended that the Commissioner of Income Tax had rightly exercised his power mandated, under Section 263 and, it was only after giving due opportunity of hearing to the assessee that the assessment order was set aside to certain extent with direction to the Assessing Officer to verify the details.

It was also submitted that the Tribunal, being the last fact finding Authority, and it was after appreciating the evidence and material on record, came to the conclusion that the matter required no interference in the order passed under Section 263 of the Act. 1

The Hon’ble High Court observed that Assessing Officer after the case was selected for scrutiny had issued notice under Section 143(2) of the Act and also notice under Section 142(1) with 28 queries to the assessee, which was replied by him along with the documentary evidence, and the Assessing Officer being satisfied passed the order under Section 143(3) of the Act. The CIT while exercising power under Section 263 of the Act, partially accepted the reply submitted by the assessee as regards the investment in share capital holding that the outstanding unsecured loans of six persons to be adjusted against the share application money account, but as regards the unsecured loans and creditors, it directed the Assessing Officer to examine, call for requisite details, confirmations and examine them properly and relegated the matter back to him.

The Hon’ble High Court observed that the Hon’ble Supreme Court held that the phrase ‘prejudicial to the interests of the revenue’ is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax.

The Hon’ble High Court noted that in the present case, the CIT himself while relying upon the reply submitted by the assessee had partially accepted the claim as far as investment in share capital was concerned but it did not accept the documentary evidence and reply submitted by the assessee before the Assessing Officer as far as unsecured loans and creditors are concerned.

The Hon’ble High Court noted that the Department failed to point out how the order of the Assessing Officer was erroneous insofar as it is prejudicial to the interest of the revenue. While the assessee submitted that the order passed by the assessing authority was not without application of mind, as the same was passed after the replying upon the documentary evidence submitted by the assessee.

Revision 263 merely for non-mentioning of assessee’s reply in assessment proceedings/order invalid

It was noted that the Hon’ble High Court itself while interpreting the language of Section 263 had held that where the Assessing Officer passes an order without application of mind or an incorrect statement of fact or incorrect application of law, then the order so passed would be erroneous. But in the present case, Assessing Officer after issuing notice and raising certain queries to the assessee passed the assessment order which cannot be called as erroneous. 

The Hon’ble High Court noted that in one case it had dealt with the question as to whether discussion of queries and reply received from assessee, in assessment order, is necessary or not. The Court held that once inquiry was made, a mere non discussion or non- mention thereof in assessment order cannot lead to assumption that Assessing Officer did not apply his mind or that he has not made inquiry on the subject and this would not justify interference by Commissioner by issuing notice under Section 263 of the Act.

It was noted that the Delhi High Court had held that if a query was raised during the course of scrutiny by the Assessing Officer, which was answered to the satisfaction of the Assessing Officer, but neither the query nor the answer was reflected in the assessment order, that would not, by itself, lead to the conclusion that the order of the Assessing Officer called for interference and revision. Also in another case it was held that the lack of any discussion on this cannot lead to the assumption that the Assessing Officer did not apply his mind.

It was again noted that the Bombay High Court had taken a similar view and observed that if a query is raised during assessment proceedings and responded to by the assessee, the mere fact that it is not dealt with in the Assessment Order would not lead to a conclusion that no mind had been applied to it.

It was further observed that in one case, the Hon’ble High Court had observed that it had held that merely because the order of the ITO is not lengthy, it would not establish that the assessment order passed under Section 143(3) of the Act is erroneous and prejudicial to the interest of the revenue.

The Hon’ble High Court opined that merely because the Income- tax Officer had not written lengthy order it would not establish that the assessment order passed under Section 143(3)/148 of the Act is erroneous and prejudicial to the interests of the Revenue without bringing on record specific instances, which in the present case, the Commissioner of Income Tax has failed to do.

The Hon’ble High Court pointed out that after the notice was issued by the Assessing Officer raising 28 queries from the assessee, which was also replied by him along with the documentary evidence in regard to each of the query, thus the assessment order passed under Section 143(3) of the Act would not render the same as erroneous and prejudicial to the interest of Revenue, unless the Commissioner exercising power under Section 263 brings on record to show that the order of the Assessing Officer is erroneous, as the same was passed without application of mind or the Assessing Officer had made an incorrect assessment of fact or incorrect application of law.

However, the Hon’ble High Court opined that case in hand not being such case, and the CIT relying upon the reply and the documentary evidence submitted by the assessee granted partial relief passed under Section 263 relegating back the matter to the Assessing Officer as regards unsecured loans and creditors was unsustainable. 

Accordingly it was held that the order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of the Revenue and the appeal of the assessee was allowed.

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