2016 (12) TMI 1646 - AT - Income Tax

Revision u/s 263 - Held that - CIT must initially indicate the mistake in the assessment order on merits by making proper enquiry at his end before cancelling assessment under section 263. This judgment makes it palpable that the very fact that the ITO had not made sufficient enquiries before granting registration to the firm was considered as sufficient enough to clothe the CIT with the power to revise the assessment order and it was not considered necessary in such circumstances for the CIT to have himself made enquiries before cancelling the assessment. Similar view has been taken by the Hon ble Supreme Court in the case of Rampyari Devi Saraogi vs. CIT (1967 (5) TMI 10 - SUPREME Court) holding that an assessment made by the AO in undue haste without making any enquiry would render an assessment order erroneous and prejudicial to the interests of the revenue. Similar view has been reiterated by the Hon ble Apex Court in Smt. Tara Devi Aggarwal vs. CIT (1972 (11) TMI 2 - SUPREME Court). We have held in earlier parts of this order that the assessment order under consideration was passed in undue haste, thereby making it rightly eligible for revision by the CIT u/s 263 of the Act. In view of the foregoing discussion, we are satisfied that the ld. CIT was right in setting aside the assessment order and directing the AO to make a fresh assessment. The impugned order is, therefore, countenanced. Genuineness of agricultural income. - A.Y. 2011-12 - Agricultural produce was not proved; transportation of the same to UAA was also not proved; bills issued by UAA were not genuine; cash received from UAA shown at ₹ 1.00 crore did not appear in their books of account; the expenses claimed were not backed by any vouchers/bills; and all the expenses were claimed to have been incurred on one single day and that too in cash. We fail to comprehend as to how the assessment order accepting the genuineness of carrying out the agricultural operations and earning a huge income in such circumstances can be considered as an order made after proper inquiry as has been canvassed by the assessee. It is a case of a patent non-application of mind by the AO to the facts, which were loudly calling for in-depth investigation. CIT was fully justified in setting aside the assessment order and directing the AO to frame a fresh assessment. AR for this year has also assailed the impugned order by adopting the arguments on the legal propositions made in the case of Virbhadra Singh (HUF), namely, inadequate inquiry by the AO cannot empower the CIT to revise order; debatable issue; and the CIT should have himself shown infirmity in the assessment order rather than sending the matter back to the AO. We have elaborately dealt with such issues in our order of Virbhadra Singh (HUF), which mutatis mutandis apply to the assessee also.

Summary

Issues Involved:
1. Revision of Return
2. Non-compliance of Directions u/s 144A
3. Investment in LIC more than Income Earned During the Year
4. Genuineness of Agricultural Income
5. Evidence in Appeal
6. Additional Evidence
7. Whether the AO conducted adequate inquiry
8. Debatable Issue
9. CIT should have himself shown infirmity in the assessment order rather than sending the matter back to the AO

Detailed Analysis:

I. Revision of Return
- The assessee filed a revised return declaring additional agricultural income after the issuance of notice u/s 143(2). The CIT held that the revised return did not meet the conditions of section 139(5) as it involved intentional non-disclosure of income in the original return. The CIT found that the income was already accrued and known to the assessee, thus the revised return was invalid.

II. Non-compliance of Directions u/s 144A
- The CIT observed that the AO failed to comply with the directions issued by the Addl. CIT u/s 144A, which were binding. These directions included verifying the details of income/expenditure accounts and coordinating with the ITO, Ward-1, Shimla. The AO's failure to follow these directions rendered the assessment order erroneous and prejudicial to the interests of the Revenue.

III. Investment in LIC more than Income Earned During the Year
- The CIT noted that the AO accepted the assessee's explanation for the investment in LIC policies without proper verification. The AO failed to inquire about the source of additional funds invested in LIC policies, which exceeded the declared agricultural income.

IV. Genuineness of Agricultural Income
- The CIT found that the AO did not conduct proper inquiries to verify the genuineness of the agricultural income declared by the assessee. The AO relied on the statements and documents provided by the assessee without independent verification. The CIT observed that the AO should have examined the capacity of the orchard, the actual yield, and the market rates of the produce.

V. Evidence in Appeal
- The assessee objected to the additional evidence filed by the Revenue, arguing that it pertained to events and documents posterior to the passing of the impugned order by the CIT. The Tribunal held that the definition of 'Record' in Explanation 1(b) to Section 263(1) applied to the exercise of power by the CIT and did not restrict the right of parties to rely on evidence during appellate proceedings before the Tribunal.

VI. Additional Evidence
- The Tribunal admitted the additional evidence filed by the Revenue, noting that it was relevant to the issues considered by the CIT and necessary for proper adjudication. The Tribunal held that the additional evidence supported the CIT's view of non-application of mind by the AO.

VII. Whether the AO conducted adequate inquiry
- The Tribunal found that the AO did not conduct adequate inquiries and failed to verify the genuineness of the agricultural income and the source of investments. The AO's acceptance of the assessee's explanations without proper verification amounted to non-application of mind.

VIII. Debatable Issue
- The Tribunal rejected the assessee's argument that the AO took a possible view on a debatable issue. The Tribunal held that the AO's acceptance of the assessee's explanations without proper inquiry was not a legally sustainable view.

IX. CIT should have himself shown infirmity in the assessment order rather than sending the matter back to the AO
- The Tribunal held that in cases where the AO did not conduct proper inquiries, the CIT was justified in setting aside the assessment order and directing the AO to make a fresh assessment. The CIT was not required to show the infirmity in the assessment order on merits in such cases.

Conclusion:
The Tribunal upheld the CIT's orders setting aside the assessment orders for the relevant assessment years and directing the AO to make fresh assessments after conducting proper inquiries. The appeals were dismissed.