2014 (7) TMI 382 - AT - Income Tax

Order passed u/s 263 of the Act NP rate already dealt - CIT was of the view that the AO has not properly verified the GP and NP rates of the assessee which were abnormally low - Held that - The AO did notice that the profit disclosed by the assessee was much lower than the profit disclosed by M/s Milestone Fab which is engaged in the similar business - the assessee referred the matter u/s 144A to the ACIT - the assessee explained the reason for low net profit - The assessee also explained that the assessee s case cannot be compared with M/s Milestone Fab because they are manufacturing and selling transformers apart from electrical poles whereas the assessee company is not manufacturing transformers - the assessee s sales were mainly to the electricity board on the basis of tender and during the period, the tender was opened and material was supplied, there was a hike in the price of raw material - while passing the order u/s 263, the CIT cannot go beyond the reasons given in the notice issued u/s 263 - The only ground given in the notice under Section 263 was lack of enquiry into the low profit rate disclosed by the assessee - This reason is found to be factually incorrect - Adequate enquiry into the low profit rate was made by the AO as well as ACIT - the order passed by the CIT u/s 263 is not valid and is liable to set aside Decided in favour of Assessee.

Summary

Issues:
Challenge to order under Section 263 of the Income Tax Act regarding low profit rate disclosure compared to another entity, proper verification by Assessing Officer, Additional Commissioner's involvement, grounds for quashing the CIT's order, validity of CIT's order, impact on additions made by CIT, overall appeal decision.

Detailed Analysis:

1. Challenge to Order under Section 263:
The appeal contested the order under Section 263 of the Income Tax Act, alleging it to be arbitrary, unjust, and illegal. The primary contention was that the Assessing Officer had already examined and accepted the net profit rate, making the CIT's intervention unnecessary. The appellant argued that the CIT's claim of lack of proper verification by the Assessing Officer was factually incorrect, as the matter was referred to the Additional Commissioner under Section 144A, who subsequently approved the net profit disclosed by the appellant.

2. Verification Process and Additional Commissioner's Involvement:
The Assessing Officer had initially raised concerns about the significantly low gross profit and net profit rates declared by the appellant compared to a similar business entity, M/s Milestone Fab. The appellant provided justifications for the low net profit, citing reasons such as contractual obligations, price hikes in raw materials, and the nature of sales to government departments. The Additional Commissioner, after thorough examination, upheld the appellant's position and directed certain disallowances from claimed expenses. The Additional Commissioner's decision was binding on the Assessing Officer, indicating a comprehensive verification process.

3. Validity of CIT's Order under Section 263:
The CIT's order under Section 263 was challenged on the grounds that it exceeded the scope of the reasons provided in the notice issued by the CIT. The notice specifically mentioned lack of enquiry into the low profit rate, but the CIT's order also raised concerns about quantitative record maintenance, a point not included in the original notice. The Tribunal held that the CIT cannot introduce new grounds beyond those specified in the notice while passing an order under Section 263.

4. Impact on Additions Made by CIT and Overall Appeal Decision:
Given the quashing of the CIT's order under Section 263, the Tribunal ruled that the other grounds challenging additions made by the CIT did not require adjudication. Consequently, the appeal of the assessee was allowed, and the original assessment order passed under Section 143(3) was restored, emphasizing the validity of the Assessing Officer's and Additional Commissioner's actions in addressing the low profit rate issue.

In conclusion, the detailed analysis of the judgment reveals a thorough examination of the verification process, the scope of the CIT's order under Section 263, and the impact on the additions made by the CIT. The Tribunal's decision to quash the CIT's order and allow the appellant's appeal underscores the importance of adherence to procedural requirements and the significance of a comprehensive examination of factual and legal grounds in tax assessments.