2016 (6) TMI 793 - AT - Income Tax

Revision u/s 263 - violation of the provisions of section 40A(3) - proceedings initiated on the basis of the audit objections - Held that - The examination of violation of the provisions of section 40A(3) has been examined by the Assessing Officer on three occasions and he had not found any violation of such provisions. The reply filed by the assessee clearly shows that to manage his business at various places the advances were made to various supervisors engaged working in various locations and these supervisors used to submit the details of material purchased by them and for making payments to labour and each payment was less than ₹ 20,000 and, therefore, in fact, there was no violation of the provisions of section 40A(3). Assessing Officer has already applied his mind and has taken a concise decision of not making addition for violation of the provisions as there were no violation at all and, therefore, the order passed by the Assessing Officer was not erroneous and was not prejudicial to the interests of the Revenue. The proceedings under section 263 were initiated on the basis of the audit objections as is noted by the learned Commissioner in his order. The honourable Punjab and Haryana High Court in the case of CIT v. Sohana Woollen Mills 2006 (9) TMI 157 - PUNJAB AND HARYANA High Court wherein held Commissioner of Income-tax not justified in invoking jurisdiction under section 263 on the strength of an audit note - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of the order passed under section 263 of the Income-tax Act, 1961.
2. Examination of alleged violation of provisions of section 40A(3) of the Income-tax Act, 1961.
3. Basis for initiation of proceedings under section 263, particularly in relation to audit objections.

Issue-wise Detailed Analysis:

1. Validity of the order passed under section 263 of the Income-tax Act, 1961:
The appellant contended that the order passed by the Commissioner of Income-tax (CIT) under section 263 was against the facts of the case and untenable in law. The appellant argued that the Assessing Officer (AO) had already examined the books of account and other details thoroughly before passing the assessment order, which included an addition of Rs. 1 lakh. The appellant also argued that the order of the AO was neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal found that the AO had indeed examined the issue of alleged violation of section 40A(3) during the assessment proceedings, and thus, the CIT's invocation of section 263 was not warranted. The Tribunal emphasized that for an order to be revised under section 263, it must be both erroneous and prejudicial to the interests of the Revenue, which was not the case here.

2. Examination of alleged violation of provisions of section 40A(3):
The appellant argued that the AO had already examined the issue of alleged violation of section 40A(3) during the assessment proceedings. The Tribunal noted that the AO had specifically asked about the violation of section 40A(3) in the questionnaire, and the appellant had replied that there was no violation. The tax audit report also did not point out any violation of section 40A(3). The Tribunal found that the AO had examined the issue on three occasions: during the assessment proceedings, after the assessment proceedings, and during the initiation of reassessment proceedings under section 147. The Tribunal concluded that the AO had applied his mind and found no violation of section 40A(3), and thus, the order was not erroneous or prejudicial to the interests of the Revenue.

3. Basis for initiation of proceedings under section 263, particularly in relation to audit objections:
The appellant argued that the reassessment proceedings were initiated based on an audit objection, which were later dropped, but on the same date, a proposal for initiation of action under section 263 was made based on the same audit objection. The Tribunal referred to the Punjab and Haryana High Court's decision in the case of CIT v. Sohana Woollen Mills, which held that mere audit objections and the possibility of a different view are not sufficient to hold that an AO's order is erroneous or prejudicial to the interests of the Revenue. The Tribunal concluded that the proceedings under section 263 were initiated based on audit objections, which was not warranted by law.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, quashing the order passed by the CIT under section 263 of the Income-tax Act, 1961. The Tribunal emphasized that the AO had already examined the issue of alleged violation of section 40A(3) thoroughly, and there was no material to suggest that the AO's order was erroneous or prejudicial to the interests of the Revenue. The Tribunal also noted that the initiation of proceedings under section 263 based on audit objections was not justified.