Revisionary power us 263-Merely raising query not sufficient. Blindly accepting only part reply is incorrect assumption of facts and non-application of mind by AO-ITAT
ABCAUS Case Law Citation:
ABCAUS 1103 (2017) (01) ITAT
Assessment Year : 2011-12
Important Case Laws Cited:
Anuj Jayendra Shah Vs. PCIT 67 taxmann.com 38
Cit vs. Sunbeam Auto Ltd., 332 ITR 167 (Del.)
Malabar Industries Co. Ltd. v. CIT 243 ITR 83 (SC)
CIT vs. Vatika Township Pvt Ltd (2014) 367 ITR 466 (SC)
Gabril India Ltd. 203 ITR 108 (Bom.)
Narayan Tatu Rane Vs. ITO dt. 06.05.2016 47 CCH 309
Brief Facts of the Case:
The CIT after the assessment was completed u/s 143(3), observed that with reference to the queries made by the Assessing Officer(AO) during the assessment, the assessee had not furnished full particulars of the details enquired. Hence he had issued notice u/s 263 on three grounds:
- Substantial decrease in Gross Profit (G.P) was accepted by the AO without carrying out any verification.
- The assessee did not file source of addition to the capital account and the same remained unverified and not properly enquired by the AO .
- The assessee did not furnish details as to the genuineness and credit-worthiness of parties from whom unsecured loans were obtained and thus the unsecured loan remains unverified and not properly enquired by AO.
After considering the assessee’s submissions, CIT placing reliance on CBDT’s Circular No. 19 of 2015 dated 27.11.2015 i.e. Explanatory Notes to the provisions of the Finance Act, 2015. concluded that the order passes was deemed to be erroneous in so far it is prejudicial to the interest of revenue, as it had been passed without making enquiries or verification which should have been made. Consequently, the order passed u/s 143(3) was set aside u/s 263 with the direction that the AO should properly examine all the issues raised and pass the assessment order afresh after making proper enquiries and after affording adequate opportunity to the assessee.
Contentions of the Assessee:
It was submitted that on all the above three issues, the AO had made detailed enquiry and verification in course of assessment proceedings and after considering the reply and the details submitted accepted the same. Hence the order of AO could not be held to be erroneous or prejudicial to the interest of the revenue.
It was submitted that the statue does not provide as to what enquiries or verification the AO should made before passing an assessment order. Therefore, it is left to the wisdom of AO to make necessary enquiry or verification before he passes an assessment order. Only because according to the CIT, the enquiry or verification made is not adequate, cannot authorise him u/s 263 to level the order passed by AO as erroneous and prejudicial to the interest of revenue.
Again, it was submitted that there is a doubt as to whether the Explanation 2 to section 263 would be applicable to the years under consideration which in that case are AY 2007-08 & 2008-09 when this explanation was not in the statue. Thus, whether this Explanation would apply to earlier AYs or not involves a debate. It is a settled law that where two views are possible, the view in favour of the assessee should be adopted.
Observations made by the Tribunal:
Fall in Gross Profit:
It was observed that the AO had made relevant enquiries and after being satisfied had accepted the the fall in the GP rate and trading results. The reasons for the fall in GP rate had been explained by the assessee and duly considered by the AO in terms of increase of prices of the raw material. Once the necessary enquiries were made and the explanation furnished by the assessee explaining its position, it was the discretion of the AO to accept the explanation of the assessee or where he was not satisfied with the assessee’s explanation, to carry out further enquiries in the matter. In the instant case, the necessary enquiries have been made by the AO.
Accordingly, the Tribunal opined that there was no reason for the CIT to exercise his revisionary powers u/s 263.
Accretion/addition to Partners capital account
The Tribunal observed that the AO had raised a specific enquiry asking for the assessee’s explanation towards the sources of accretion/addition to the individual partners capital account, the assessee furnished the capital accounts however, failed to explain the source of accretion in each of the individual capital account and it was only during the course of revision proceedings u/s 263, the assessee offered necessary explanation regarding source of the deposit which is claimed to be made out of the earlier withdrawals from capital account and not in terms of fresh infusion from other source of income.
The Tribunal was of the view that merely filing the copies of the capital account of the partners and not furnishing the necessary explanation regarding source of deposit (inspite of the specific query raised by the AO) and blindly accepting the part submission of the assessee was clearly a case of incorrect assumption of facts and therefore, a clear case of non-application of mind by the AO and erroneous in nature.
Accordingly, the Tribunal opined that the CIT was correct that the AO had failed to examine basic requirements to examine the source of accretion/ addition to the capital account. Merely raising a query is not sufficient enough to dislodge the revisionary jurisdiction under section 263 of the Act. What is essential is that relevant questions are asked and enquiries are made to examine about a particular transaction, explanation of the assessee is sought and then a final view is formed by the AO taking into consideration all the relevant facts and circumstances of the case.
The Tribunal clarified that had the assessee furnished the said explanation before the AO, the CIT may not have the occasion to exercise his revisionary powers u/s 263.
The ITAT observed that the AO had asked the assessee to furnish details in respect of unsecured loans alongwith complete details and explanation towards the identity, creditworthiness of these parties and genuineness of the loan transactions. In response to that, the assessee had filed copy of account of the cash creditors duly confirmed by them. It was only during the course of revision proceedings, it was submitted that all the cash creditors are existing assessee and their PAN and postal addresses have been mentioned in their confirmations. It was further submitted that the loans have been accepted through the account payee cheques.
The Tribunal opined that the test of examining the identity, creditworthiness of the parties and genuineness of the transaction are basic and at the same time essential and critical test which should have been carried out by the AO. In the instant case, though the AO has raised the initial enquiry about this test but while concluding the assessment, there was nothing on record to suggest that he has carried out the necessary investigation to test these basic requirements. This clearly shows non application of mind by AO, blindly accepting what is being part- submitted by the assessee, without conducting the necessary enquiry and investigation which are bare minimum to examine the transactions in respect of unsecured loans.
The Tribunal again clarified that merely raising a query is not sufficient enough to dislodge the revisionary jurisdiction under section 263 of the Act. What is essential is that relevant questions are asked and enquiries are made to examine about a particular transaction, explanation of the assessee is sought and then a final view is formed by the AO taking into consideration all the relevant facts and circumstances of the case.
Out of three issues raised by the CIT, only in respect of the first issue regarding the fall in GP rate, the necessary enquiries had been made by the AO and the CIT was not correct while exercising his powers under section 263. In respect of other two issues regarding accretion to partner capital account and unsecured loan, the order of the CIT was confirmed.