2013 (2) TMI 18 - AT - Income Tax

Jurisdiction u/s 263 assumed by CIT(A) - assessment finalized u/s 143(3) - payments made to related parties u/s 40A(2)(b) by the assessee has been allowed by AO without checking the reasonableness of expenditure and without investigation/verifying any evidence for actual rendering of services - Held that - AO had completed assessment u/s 143(3) and vide questionnaire seeking detail of commission and syndication fee with nature of services rendered and assessee do replied to that query explaining Rs.57,36,986/- which was part of earlier year expenditure of Rs.95 lakhs. As from the reading of questionnaire it can be concluded that AO wanted to know about commission and syndication fees only which he might have noted from computation of income wherein the assessee had claimed deduction a sum of Rs.57,36,986/- being out of earlier year expenses. AO did not enquire about the guarantee fees paid to M/s Religare Holding Ltd. and M/s Oscar Investment Ltd. and neither the assessee explained it. The contention of Assessee that adequate enquiry was conducted by the AO during course of original assessment proceedings is not correct. Though break up of expenses of finance charges and syndication fees was available with the AO yet he did not raise any question regarding the reasonability and genuineness of expenses. The written submissions filed before AO on dated 20.12.2007 & 21.6.2008 & 29.8.2008 does not anywhere deal with the payments of guarantee fee amounting to Rs.33,06,000/- & Rs.77,14,000/- - Observations of CIT that assessment order was erroneous and prejudicial to the interest of revenue is correct & had rightly initiated proceedings u/s 263 but the action of the CIT in not considering the merits of objections raised by assessee and just remitting back to AO for re-adjudication was not appropriate. Thus remit the file back to the office of CIT for adjudication and recording his findings on the objections to show cause notice which were filed by assessee vide letter dated 11.1.2010.

Summary

Issues:
- Jurisdiction of CIT under section 263 of the Income Tax Act, 1961
- Allowability of expenses without proper investigation
- Assessment order being erroneous and prejudicial to the interest of revenue
- Adequacy of assessment proceedings by the Assessing Officer

Analysis:
1. Jurisdiction of CIT under section 263 of the Income Tax Act, 1961:
The appeal was filed against the order passed by CIT under section 263 of the Act. The appellant contested the assumption of jurisdiction by CIT, arguing that the notice was based on surmises and conjectures without proper material on record. However, the ITAT upheld the initiation of proceedings under section 263, stating that the assessment order was indeed erroneous and prejudicial to the interest of revenue.

2. Allowability of expenses without proper investigation:
The CIT initiated proceedings under section 263 based on three payments made by the assessee to related parties without proper verification of the reasonableness of expenditure or actual services rendered. The ITAT found that the Assessing Officer did not adequately investigate these expenses during the assessment proceedings, leading to the conclusion that the assessment order was indeed erroneous. The ITAT agreed with the CIT's decision to re-decide the allowability of the expenses after necessary inquiries.

3. Assessment order being erroneous and prejudicial to the interest of revenue:
The ITAT observed that the Assessing Officer had not thoroughly examined the expenses incurred in previous years and claimed in the current year, particularly the guarantee fees paid to related parties. The ITAT agreed with the CIT that the assessment order was erroneous and prejudicial to the interest of revenue due to the lack of proper investigation and verification of expenses. The ITAT upheld the initiation of proceedings under section 263.

4. Adequacy of assessment proceedings by the Assessing Officer:
The ITAT noted that while the Assessing Officer had some information regarding certain expenses, there was a lack of detailed inquiry into the reasonability and genuineness of the expenses, especially related to guarantee fees paid to specific parties. The ITAT found that the Assessing Officer did not adequately address these expenses during the assessment proceedings, leading to the conclusion that the assessment order was erroneous. The ITAT directed the file to be remitted back to the CIT for further adjudication on the objections raised by the assessee.

In conclusion, the ITAT allowed the appeal for statistical purposes, emphasizing the need for a more thorough examination of expenses and proper adjudication by the CIT.