2012 (8) TMI 94 - AT - Income Tax

Treatment of closing stock found at the time of survey - CIT(A) invoked provisions of s. 263 against AO s order u/s 143(3) - Held that - From the perusal of the Order u/s 143 it is clear that the AO while framing the assessment order had considered the submissions of the assessee and carried out cross verification of certain sales and purchases particularly in respect of the period after the date of survey, thus appears that the AO had examined the aspect of valuation of closing stock and had applied his mind and after being satisfied passed the assessment order. If the closing stock as worked out in the show cause notice is considered, the Gross profit of the assessee would be on a higher side i.e approximately 27.2% as compared to the GP of 22% taken by the survey party and as estimated by the AO. This also indicates that the AO has verified the details of closing stock - CIT has not been able to establish and pin point unequivocally the error or the mistake made by the AO which makes the order unsustainable in law as the finding of the CIT must be clear, unambiguous and not debatable - in favour of assessee.

Summary

Issues:
Assessment year 2005-2006 - Challenge to order under Section 263 - Treatment of closing stock found during survey - Invocation of provisions of Section 263 by CIT - Consideration of all materials by Assessing Officer - Exercise of supervisory jurisdiction by CIT.

Analysis:

The appeal pertains to the assessment year 2005-2006 challenging the order under Section 263 of the IT Act, 1961. The primary issue revolves around the treatment of closing stock found during a survey conducted on the business premises of a partnership firm dealing in clothes. The Assessing Officer (AO) had determined the taxable income, considering the excess stock found during the survey as deemed income under Section 69B, contrary to the assessee's declaration as business income. Subsequently, the Commissioner of Income Tax (CIT) held the AO's order to be erroneous and prejudicial to the Revenue's interest, emphasizing the need for detailed verification of the closing stock's valuation. The CIT contended that the AO failed to conduct necessary inquiries and apply proper scrutiny, leading to an erroneous assessment.

Upon review, the Appellate Tribunal noted that the AO had examined the submissions of the assessee, conducted cross-verification of sales and purchases post-survey, and accepted the book results. The Tribunal highlighted the Bombay High Court's stance on the CIT's power of suo motu revision under Section 263, emphasizing that an order can only be deemed erroneous if it deviates from the law. The Tribunal also referenced the Delhi High Court's rulings, emphasizing that an order becomes erroneous only if the AO overlooks materials, fails to conduct proper inquiries, or arbitrarily assesses the income. The Tribunal further stressed that the CIT must unequivocally pinpoint errors in the AO's order to justify invoking Section 263.

Ultimately, the Tribunal concluded that the AO had diligently considered all facts, accepted the books' results, and exercised proper judgment, making the order non-erroneous and non-prejudicial to Revenue's interest. Citing various judicial pronouncements, the Tribunal held that the CIT failed to establish any clear, unambiguous, or non-debatable errors in the AO's assessment, leading to the quashing of the CIT's order under Section 263. Consequently, the Tribunal allowed the assessee's appeal, emphasizing the importance of a clear demonstration of errors to justify invoking supervisory jurisdiction under Section 263.

In summary, the Tribunal's detailed analysis focused on the proper exercise of supervisory jurisdiction by the CIT, emphasizing the necessity of unequivocally identifying errors in the AO's assessment to invoke Section 263. The judgment underscored the importance of thorough examination, inquiry, and clear findings to establish an order's erroneous nature, ensuring the protection of Revenue's interests while upholding the principles of law and judicial precedents.