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Issues Involved:
1. Legitimacy of expenditure claimed towards purchase of materials. 2. Legitimacy of consultancy fees paid to M/s. B2C India Ltd. Issue-wise Detailed Analysis: 1. Legitimacy of Expenditure Claimed Towards Purchase of Materials: The assessee company, engaged in earth filling work, filed its return of income for the assessment year 2005-06. The assessment was completed by the AO, who made a disallowance of Rs. 1,50,000 on account of labor payments, assessing the total income at Rs. 6,46,286. The Commissioner of Income Tax (CIT) examined the assessment records and observed that the assessee had received a sub-contract from M/s. Simplex Concrete Piles (India) Ltd. (SCPIL) for manual dredging and formation of dyke with dredged earth at Gujarat Adani Port Ltd. (GAPL). The consideration for the sub-contract did not cover the cost of materials, and the expenditure claimed towards the purchase of materials was not disallowed by the AO. The CIT issued a show cause notice under section 263(1) of the IT Act, proposing to pass an order under section 263, considering the assessment order erroneous and prejudicial to the interest of the Revenue. The assessee contended that the work order was a composite contract, including the cost of materials, and submitted a revised clause from SCPIL dated 12th August 2004, clarifying that construction materials issued to the assessee would be charged and deducted from the bill payment. The CIT found that the revised clause was not furnished before the AO and required verification. The assessee argued that if the work order was only for labor, the profit margin would be 84%, which is unrealistic. 2. Legitimacy of Consultancy Fees Paid to M/s. B2C India Ltd.: The assessee claimed consultancy fees of Rs. 60 lakhs paid to M/s. B2C India Ltd. (BIL) for providing consultancy services and plant and machinery for the project. The CIT observed that the project was to be carried out under the instructions of SCPIL's Project Manager, and there was no requirement for the assessee to engage technical consultants or hire plant and machinery. The CIT noted that the AO allowed the expenditure without proper verification and issued a show cause notice under section 263(1). The assessee explained that being new in the field, they appointed BIL for consultancy and deducted appropriate TDS from the payment. The CIT found that the AO did not obtain the assessee's submission on this issue and required examination. Findings and Judgment: The CIT set aside the assessment order and directed the AO to adjudicate afresh on the issues of the expenditure towards the purchase of materials and consultancy fees, providing the assessee with an opportunity of being heard. The CIT cited several legal precedents to support the decision that failure to make proper inquiries renders the assessment order erroneous and prejudicial to the interest of the Revenue. The assessee argued that proper inquiries were made by the AO, who issued notices and received replies with supporting documents. The assessee contended that the CIT's approach was unsustainable in law, as the AO had applied his mind to the evidence and material on record. The assessee relied on various judicial decisions, including the Hon'ble Supreme Court's ruling in Malabar Industrial Co. Ltd., which held that if the AO adopts one of the permissible courses under law, it cannot be treated as erroneous or prejudicial to the Revenue. The tribunal considered the rival submissions and material on record, noting that the AO had issued notices and received detailed replies from the assessee. The AO examined the evidence and material on record, and the successor AO's proposal to invoke section 263 was based on a different interpretation of the same evidence. The tribunal found that the CIT's order was not sustainable in law, as it was a case of change of opinion and reappraisal of evidence, which is not permissible under section 263. The tribunal set aside the CIT's order under section 263 and restored the AO's assessment order dated 20-12-2007, allowing the assessee's appeal. The tribunal emphasized that the CIT must consider the assessee's explanation and cannot invoke section 263 based on a mere change of opinion. Conclusion: The tribunal concluded that the CIT's order under section 263 was not valid, as the AO had made proper inquiries and considered the evidence and material on record. The tribunal restored the AO's assessment order, allowing the assessee's appeal. The judgment underscores the importance of proper inquiry and examination by the AO and limits the CIT's revisional jurisdiction under section 263 to cases where the assessment order is genuinely erroneous and prejudicial to the interest of the Revenue.
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