2012 (1) TMI 196 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the order passed by CIT u/s 263.
2. Examination of contravention of Section 269SS.
3. Verification of expenses and maintenance of stock registers.
4. Verification of closing stock and work in progress.
5. Examination of sundry creditors and applicability of Section 40(a)(ia).

Summary:

1. Validity of the order passed by CIT u/s 263:
The assessee challenged the order passed by CIT u/s 263, claiming it was "bad in law and bad in facts." The CIT had considered the assessment order erroneous and prejudicial to the interest of the revenue. The Tribunal noted that the AO had already made inquiries and recorded findings on various aspects, including maintenance of stock registers and verification of expenses. The Tribunal emphasized that sufficiency of inquiry is subjective and if the AO had made inquiries and considered all aspects, the order could not be termed erroneous and prejudicial to the revenue.

2. Examination of contravention of Section 269SS:
The CIT raised concerns about potential contravention of Section 269SS due to cash deposits in the bank account. The assessee provided extracts from the cash book showing deposits were made from cash in hand. The Tribunal found no evidence that the assessee accepted deposits in violation of Section 269SS, noting that the tax audit report indicated compliance. Thus, the Tribunal held that the CIT's concerns on this issue did not justify invoking Section 263.

3. Verification of expenses and maintenance of stock registers:
The CIT criticized the AO for not verifying expenses and maintaining stock registers. However, the Tribunal observed that the AO had already noted the absence of stock registers and vouchers, and had applied a net profit rate after rejecting the books of accounts. The Tribunal ruled that the AO's inquiries were sufficient and the CIT's concerns did not warrant revision under Section 263.

4. Verification of closing stock and work in progress:
The CIT claimed the AO failed to verify the closing stock and work in progress, which could have led to a higher income assessment. The Tribunal noted that the assessee consistently followed a method of accounting where purchases were treated as consumption, and changing this method would require adjustments in the opening stock as well. The Tribunal concluded that the AO's acceptance of the assessee's consistent accounting method did not make the order erroneous or prejudicial to the revenue.

5. Examination of sundry creditors and applicability of Section 40(a)(ia):
The CIT argued that the AO did not verify sundry creditors, which could have implications under Section 40(a)(ia). The Tribunal referenced the jurisdictional High Court's ruling in CIT vs. G.K. Contractors, which held that no separate addition for cash credits could be made if the books of accounts were rejected. The Tribunal found that the AO's approach was consistent with this precedent and thus not erroneous or prejudicial to the revenue.

Conclusion:
The Tribunal concluded that the CIT was not justified in invoking Section 263, as the AO had made necessary inquiries and the issues raised by the CIT were either already considered by the AO or were not grounds for revision. The Tribunal canceled the CIT's order and allowed the assessee's appeal.