2012 (10) TMI 427 - HC - Income Tax

Suo motu revisional jurisdiction under s. 263 of the Act Held that - If the order of the AO was based on wrong assumption of facts, incorrect application of law or non-application of mind, interference was permissible - order of the AO suffers from non-application of mind - AO failed to make basic enquiry required to be made when there was unusual increase of prices of shares purchased by the assessee by cash and the identity of the persons from whom the shares were purchased and to whom the shares were sold, was not ascertained nor the broker examined - shares were not of well known company and possibility of undisclosed income being introduced in the form of capital gain was not ruled out - case was clearly within the purview of exercise of suo motu revisional jurisdiction The observations of the Tribunal that since as many as 7 hearings had taken place and that the CIT could not have raised an objection to the manner of assessment, are unsustainable in law and not warranted by legal requirement under s. 263 of the Act for exercise of suo motu revisional jurisdiction. - in favour of the Revenue

Summary

Issues:
1. Jurisdiction under section 263 of the Income Tax Act, 1961.
2. Validity of the assessment order regarding long-term capital gain.
3. Exercise of revisional jurisdiction by the Commissioner of Income Tax.

Issue 1: Jurisdiction under section 263 of the Income Tax Act, 1961:
The appeal before the Gauhati High Court involved the exercise of jurisdiction under section 263 of the Income Tax Act, 1961. The Court considered whether the order of assessment was erroneous and prejudicial to the interest of the Revenue, allowing for the revision of such orders. The Full Bench clarified that jurisdiction under section 263 could be invoked for errors arising from wrong assumptions of fact, incorrect application of law, and non-application of mind. The Court referred to previous judgments, emphasizing that jurisdictional error encompassed a wider range of errors beyond just jurisdictional issues.

Issue 2: Validity of the assessment order regarding long-term capital gain:
The case revolved around the assessment of long-term capital gain claimed by the assessee from the sale of shares. The Assessing Officer (AO) had allowed the claim under section 54F of the Act, arising from the sale of 4,000 shares. However, the Commissioner of Income Tax (CIT) exercised suo motu revisional jurisdiction under section 263, deeming the AO's decision erroneous due to the significant increase in share prices within a short period. The CIT highlighted the lack of scrutiny by the AO regarding the genuineness of the share transactions, including the identities of the parties involved and the source of funds.

Issue 3: Exercise of revisional jurisdiction by the Commissioner of Income Tax:
The Tribunal set aside the CIT's revisional order, stating that the AO had conducted multiple hearings and scrutinized the details before making the assessment. The Tribunal emphasized that the volume of business and quantum of income determined the depth of investigation required by the AO. However, the High Court disagreed with the Tribunal's view, asserting that the AO's order suffered from a lack of application of mind. The Court held that basic inquiries, such as verifying the existence of the company, examining price quotations, and scrutinizing transaction details, were necessary to establish the genuineness of the transactions. The Court concluded that the CIT was justified in exercising jurisdiction under section 263, as the AO's order lacked essential inquiries and failed to address potential undisclosed income.

In conclusion, the Gauhati High Court allowed the appeal by the Revenue, holding that the CIT was justified in invoking jurisdiction under section 263 of the Income Tax Act, 1961. The Court emphasized the importance of conducting thorough inquiries to establish the genuineness of transactions, especially in cases involving significant price fluctuations and potential undisclosed income. The judgment reaffirmed that errors arising from incorrect assumptions of fact, misapplication of law, or lack of due diligence warranted revisional intervention to safeguard the interest of the Revenue.