1990 (2) TMI 323 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the order under section 263 passed by the Commissioner of Income Tax (CIT).
2. Whether the Income Tax Officer (ITO) made proper inquiries before finalizing the assessment.
3. The necessity of further inquiries by the CIT before setting aside the ITO's order.
4. The impact of the CIT's order on the assessee and whether it caused prejudice.

Issue-wise Detailed Analysis:

1. Validity of the order under section 263 passed by the Commissioner of Income Tax (CIT):

The CIT initiated action under section 263, noting that the ITO had accepted the assessee's trading results without proper scrutiny. The CIT observed that the net profit rate declared by the assessee was significantly lower than in previous years and that the ITO had not made necessary inquiries or examined the books of account. The CIT relied on precedents such as Rampyari Devi Saraogi v. CIT, Smt. Tara Devi Aggarwal v. CIT, and Gee Vee Enterprises v. Addl. CIT to support the proposition that an order is erroneous and prejudicial to the interests of the Revenue if proper inquiries are not made.

2. Whether the Income Tax Officer (ITO) made proper inquiries before finalizing the assessment:

The ITO finalized the assessment based on the audited copies of trading account, profit and loss account, and balance sheet filed by the assessee. The CIT found that the ITO had not made any inquiries into the reasons for the decline in the net profit rate, which was significantly lower than in previous years. The CIT noted that in earlier years, the assessee's trading results had not been accepted, and higher net profit rates had been applied. The CIT concluded that the ITO's failure to make proper inquiries rendered the assessment order erroneous and prejudicial to the interests of the Revenue.

3. The necessity of further inquiries by the CIT before setting aside the ITO's order:

The assessee argued that the CIT should have made further inquiries before setting aside the ITO's order. However, the Tribunal referred to the judgment in Gee Vee Enterprises, which stated that the CIT could regard an order as erroneous if the ITO failed to make inquiries that were called for in the circumstances of the case. The Tribunal noted that the CIT is not required to make further inquiries before canceling the assessment order if the ITO's failure to make necessary inquiries is evident from the record.

4. The impact of the CIT's order on the assessee and whether it caused prejudice:

The assessee contended that the CIT's order caused prejudice as it set aside the ITO's assessment without pointing out specific defects in the accounts. The Tribunal, however, held that the CIT's direction to the ITO to make a fresh assessment after allowing the assessee an opportunity to be heard did not cause any prejudice. The Tribunal emphasized that the CIT's action was justified as the ITO had failed to make necessary inquiries, and the assessee would have the opportunity to present its case during the fresh assessment.

Conclusion:

The Tribunal upheld the CIT's order under section 263, concluding that the ITO's failure to make proper inquiries rendered the assessment order erroneous and prejudicial to the interests of the Revenue. The Tribunal emphasized that the CIT's direction for a fresh assessment after allowing the assessee an opportunity to be heard was in accordance with the law and did not cause any prejudice to the assessee. The appeal filed by the assessee was rejected.