2008 (6) TMI 595 - HC - Income Tax

Powers conferred on CIT u/s 263 - sundry credits not proved to be genuine - Whether the Tribunal has erred in law in quashing the order passed by CIT u/s 263 and is there any illegality in the order of the CIT directing the AO to make assessment de novo after giving the opportunity to the assessee? - HELD THAT - In our opinion the word erroneous used in the section includes the expression erroneous in law as well as erroneous in fact . When the CIT was satisfied that the sundry credits were not duly verified, it rightly found that the AO has erred in accepting the huge sundry credits. As far as the requirement of prejudicial to the interest of revenue is concerned if the amount shown on sundry credits is not found verified and becomes part of the taxable income, the interest of the revenue is certainly prejudicially affected. As such, in our opinion, both the conditions were fulfilled in the present case and the CIT had committed no error of law in passing the order. We do not agree with the reasons given by the ITAT for quashing the order passed by CIT that heavens would have not fallen if one more opportunity was given to the assessee before passing the order. The question of giving further opportunity would have arisen only when the assessee would have sought further date to give the reply. In a casual manner ITAT has mentioned that loans were confirmed by the AO, but it has not given any details as a court of fact that what amount was got confirmed by which document. Therefore, we are of the view that the ITAT has erred in law in quashing the order passed by CIT u/s 263, and we find that there is no illegality in the order passed by CIT directing the AO to make de novo assessment. Accordingly the question of law stands answered in favour of revenue and the appeal is allowed. The impugned judgment and order passed by ITAT, is hereby set aside.

Summary

Issues Involved:
1. Appeal against the order passed by Income-tax Appellate Tribunal (ITAT) quashing the order of Commissioner of Income-tax (CIT) under section 263 of the Income-tax Act, 1961.

Detailed Analysis:
1. The appeal was filed against the ITAT's decision to allow the assessee's appeal and quash the order passed by the CIT under section 263 of the Income-tax Act. The main question of law involved was whether the ITAT erred in law in quashing the CIT's order and if there was any illegality in the CIT's direction for a de novo assessment by the Assessing Officer after providing the assessee an opportunity to respond.

2. The case revolved around M/s. Kwality Hardware Agencies, where the CIT found discrepancies in the assessment conducted by the Assessing Officer, particularly regarding unverified sundry credits and advances without a disclosed source of payment. The CIT issued notices under section 263, but the assessee failed to respond adequately, leading to the CIT canceling the original assessment order and directing a fresh assessment by the Assessing Officer.

3. The appellant/revenue contended that the ITAT's decision was erroneous as the assessee did not respond to the CIT's notice under section 263. They argued that the CIT rightly exercised its powers given the discrepancies in the assessment, which were prejudicial to the revenue's interest. The respondent/assessee, on the other hand, argued that the CIT's actions were justified based on legal precedents and the conditions required for invoking jurisdiction under section 263 were met.

4. The court analyzed the legal requirements for invoking section 263, emphasizing that the order must be both erroneous and prejudicial to the revenue's interest. It was noted that the CIT had valid reasons to find errors in the assessment, especially regarding unverified credits, which affected the revenue's interest. The court also highlighted that the assessee had the opportunity to provide explanations but failed to do so adequately, justifying the CIT's decision for a fresh assessment.

5. Ultimately, the court concluded that the ITAT erred in quashing the CIT's order under section 263. It was determined that there was no illegality in the CIT's directive for a de novo assessment by the Assessing Officer. The court ruled in favor of the revenue, setting aside the ITAT's decision and allowing the appeal against the ITAT's order dated 15-7-2005 in Income-tax Appeal No. 5352/Delhi/2004.

By thoroughly analyzing the legal aspects and factual circumstances, the court upheld the CIT's actions under section 263, emphasizing the importance of proper verification in assessments to safeguard the revenue's interests.