2012 (6) TMI 543 - AT - Income Tax

Setting aside the best judgment assessment by CIT(A) u/s 263 - directing the succeeding Assessing Authority to make another best judgment - tax audit report annexed to the return of income confirmed that the assessee had not deducted tax at source out of payment made on account of freight charges loading & unloading and hiring charges - Held that - The show cause notice issued u/s 263 were based on audit objection and there is no independent application of mind by the CIT - the assessee had not produced the books of account and the AO with application of his mind had completed the assessment under section 144 r.w.s. 143(3) and computed the income in view of the provisions of section 44AE of the Act and the CIT sent back the matter to the AO to re-determine the income of the assessee by applying a rate other than the rate applied by the Assessing Officer being without jurisdiction is not tenable in law. The provisions of section 263 are clear and absolute that the power is to be exercised by the CIT from the examination of the records of the proceedings under the Act. The explanation under section 263 of the Act defines records as all records relating to any proceedings under the Act available at the time of examination by the Commissioner and the audit objections under no circumstances can be called as record empowering the CIT to exercise jurisdiction under section 263 - set aside the order passed by the CIT - decided in favour of assessee.

Issues Involved:
1. Validity of the order passed under section 263 of the Income Tax Act, 1961 by the Commissioner of Income Tax.
2. Non-deduction of tax at source on certain expenses.
3. Application of net profit rate and disallowance of expenses.
4. Basis of initiation of proceedings under section 263 of the Act on account of audit objections.

Detailed Analysis:

1. Validity of the Order Passed Under Section 263:
The primary issue in the appeal is the validity of the order passed by the Commissioner of Income Tax under section 263 of the Income Tax Act, 1961. The Commissioner set aside the best judgment assessment under section 144 by the Assessing Officer (AO) and directed a re-assessment. The Tribunal noted that the AO had completed the assessment under section 144A read with section 143(3) due to the assessee's failure to produce books of account. The Commissioner believed that the AO had not made adequate inquiries regarding certain expenses on which tax was not deducted at source and a loan given by the assessee. The Tribunal found that the Commissioner was substituting his opinion for that of the AO, which is not permissible under section 263. The Tribunal emphasized that the AO had applied his mind and made an assessment based on available records, and the mere difference in opinion on the percentage of income estimation does not render the AO's order erroneous and prejudicial to the interest of the Revenue.

2. Non-Deduction of Tax at Source on Certain Expenses:
The Commissioner noted that the assessee had claimed expenses on freight charges, loading & unloading, and hiring charges without deducting tax at source, attracting the provisions of section 40a(ia). The assessee contended that payments were made directly to laborers and individual payments did not exceed the threshold limits for TDS. The Tribunal observed that the Commissioner's view was not supported by the production of books of account, which were not provided during assessment or section 263 proceedings. The Tribunal found that the AO had already considered the non-production of books and made an assessment accordingly, and the Commissioner's direction to disallow 10% of expenses was an unjustified substitution of the AO's judgment.

3. Application of Net Profit Rate and Disallowance of Expenses:
The AO had estimated the income from the assessee's business by applying a net profit rate based on comparable cases and section 44AE provisions. The Commissioner, however, believed that a higher rate should be applied and at least 10% of expenses should be disallowed. The Tribunal held that the AO's application of a net profit rate was a plausible view, and the Commissioner's direction to apply a higher rate amounted to substituting the AO's judgment with his own, which is not permissible under section 263. The Tribunal cited precedents where it was held that the AO's estimation, if reasonable, cannot be termed erroneous merely because the Commissioner believes a higher rate should have been applied.

4. Basis of Initiation of Proceedings Under Section 263 on Account of Audit Objections:
The Tribunal examined whether the initiation of section 263 proceedings based on audit objections was valid. It noted that the Commissioner had issued notices under sections 154 and 148 before invoking section 263, all based on audit objections. The Tribunal referred to legal precedents, including decisions by the Punjab & Haryana High Court and Gauhati High Court, which held that audit objections alone do not justify invoking section 263 unless there is independent application of mind by the Commissioner. The Tribunal found no evidence of independent application of mind by the Commissioner and concluded that the proceedings under section 263 were initiated solely based on audit objections, making the exercise of revisionary powers invalid.

Conclusion:
The Tribunal allowed the appeal, setting aside the order passed by the Commissioner of Income Tax under section 263. It concluded that the AO's order was neither erroneous nor prejudicial to the interest of the Revenue, and the Commissioner's directions were an unjustified substitution of the AO's judgment. The initiation of section 263 proceedings based solely on audit objections without independent application of mind was also deemed invalid.

← Previous Next →