2015 (9) TMI 223 - AT - Income Tax

Validity Revision u/s 263 by CIT(A) - Held that - Commissioner exercising the powers u/s 263 cannot shirk the legal mandate of pointing out the error in the assessment order coupled with the requirement to point out that the error is prejudicial to the interests of the Revenue. It is not each and every error which the law permits the Commissioner to revise as is settled by the Apex Court in Malabar Industries 2000 (2) TMI 10 - SUPREME Court and consistently followed by various Courts. Even otherwise the present case is a case of enquiry and is not a case of no enquiry. It is well settled that the Commissioner u/s 263 cannot revise the order on the reasoning that the enquiry as conducted by the AO be substituted by her method of enquiry without first meeting the twin conditions. The enquiry of the AO cannot be substituted by the Commissioner. The law permits the doing of a thing in a particular manner and the law does not permit a fishing and roving enquiry based on suspicions and surmises. The Commissioner exercising the powers u/s 263 of the Act cannot direct a second investigation without first finding the order erroneous and that too such an extent that it is prejudicial to the interests of the Revenue. Pointing out of an error by the Commissioner is not an empty formality. These twin requirements which the Ld. Commissioner is required, fulfilled cannot be said to be met because the Commissioner is of the view that another view may be possible. The decision of Duggal & Co. 1994 (8) TMI 6 - DELHI High Court strongly relied upon by the Ld. CIT it is seen is distinguishable on facts and the principle arrived at in those facts cannot be selectively picked and applied to facts which are entirely distinguishable. In the facts of that case the assessee company was found to be paying higher rate of interest to the extent of 9 to 12 % on its borrowing while it charged lesser rate of interest on advances made to a particular firm. It was in these circumstances where diversion of a part of its borrowings for its investments for considerations other than that of business that the action of the Commissioner in invoking the provision of Section 263 was consistently upheld. In the facts of the present case there is no such error and it is only a case of suspicion that if proper enquiry is done a different picture may result. Such suspicious do not justify the invokes of the power u/s 263. Thus we hold the section 263 in the facts of the present case has wrongly been invoked - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of the Commissioner of Income Tax (CIT) in invoking Section 263 of the Income Tax Act, 1961.
2. Whether the assessment order was erroneous and prejudicial to the interests of the Revenue.
3. Adequacy of the enquiry conducted by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner of Income Tax (CIT) in invoking Section 263 of the Income Tax Act, 1961:
The assessee challenged the jurisdiction of the CIT in invoking Section 263, arguing that the order was devoid of jurisdiction, misconceived, erroneous, illegal, and unwarranted. The CIT had set aside the assessment order dated 16.11.2010 framed under Section 143(3) and directed a fresh assessment. The CIT's order was based on the premise that necessary enquiries did not appear to have been made, thus invoking revisionary powers under Section 263. The assessee contended that the CIT failed to identify specific errors in the assessment order causing prejudice to the Revenue and that the revision was ordered merely on the basis that necessary enquiries were not properly conducted.

2. Whether the assessment order was erroneous and prejudicial to the interests of the Revenue:
The assessee argued that the CIT did not point out any specific error in the assessment order and failed to demonstrate how the order was prejudicial to the interests of the Revenue. The CIT's usage of terms like "proper enquiry" and "properly to be considered" indicated that some enquiry had been made. The CIT was required to establish that the assessment order was erroneous and prejudicial to the interests of the Revenue, which was not adequately demonstrated. The CIT relied on various decisions, including Malabar Industries Companies 243 ITR 83 (SC), but failed to show how these were applicable to the present case. The CIT selectively extracted principles from these judgments to justify the stand without showing incorrect assumptions of facts or incorrect application of law by the AO.

3. Adequacy of the enquiry conducted by the Assessing Officer (AO):
The assessee provided detailed responses to the AO's queries, which were part of the assessment records. The AO had issued notices under Sections 143(2) and 142(1) and concluded the assessment after considering these responses. The CIT's order did not address what was improper in the enquiry conducted by the AO. The assessee's replies to the AO's queries on issues like unsecured loans, sundry creditors, and profit rates were detailed and available on record. The CIT's insistence on "proper enquiry" without pointing out specific errors or inadequacies in the AO's enquiry was deemed insufficient. The Tribunal noted that the AO's cryptic order did not necessarily indicate a lack of enquiry or application of mind. The Tribunal emphasized that the CIT could not invoke revisionary powers merely because the enquiry was not conducted in the manner the CIT preferred.

Conclusion:
The Tribunal concluded that the CIT's invocation of Section 263 was not justified as the CIT failed to demonstrate specific errors in the assessment order and how these were prejudicial to the interests of the Revenue. The AO had conducted enquiries and considered the assessee's responses before concluding the assessment. The Tribunal quashed the CIT's order and allowed the assessee's appeal, emphasizing that revisionary powers under Section 263 could not be invoked based on mere suspicions or preferences for a different mode of enquiry. The order was pronounced in the open court on 26th August 2015.