2017 (4) TMI 816 - AT - Income Tax

Revision u/s 263 - inadequate enquiry versus lack of enquiry - assessee borrowed interest bearing loans and extended interest free loans - erroneous and prejudicial to the interest of the Revenue - Held that - When the entire capital account of the assessee has been examined by the AO and nothing has been brought on record by ld. CIT that there is any escapement of income by making withdrawal from the capital account as its closing balance was ₹ 14.86 crores during the year under assessment. Also When the assessee submitted the complete details of unsecured loans along with confirmation of each of the transaction, bank account of each of the person and income-tax acknowledgement return of each lenders from whom unsecured loans were availed to the AO who has duly examined the same during the course of assessment, it cannot be a case of lack of enquiry. On proof of ownership of the premises / factory located there is not an iota of doubt on the file to dispute the fact that the factory premises and goddown is ancestral property of assessee s family. Moreover, when no rent has been claimed in the balance sheet qua the property in question it would not affect the tax liability of the assessee in any manner. The assessee argued that the assessee could not furnish PAN of only those parties in whose case there was no further transactions at the time of assessment proceedings and that the account of the 13 parties out of 17 parties stood squared off in subsequent years and details thereof was filed before ld. CIT. This fact goes to prove that a discreet enquiry has been conducted by the AO qua all the sundry creditors and the findings of the ld. CIT that the AO did not make any enquiry even on sample basis to find out the genuineness of the sundry creditors is based upon surmises. At the most, it can be a case of inadequate enquiry, in which ld. CIT has no power to intervene u/s 263 of the Act. Bare perusal of the written submissions filed by the Revenue, it goes to prove that the Revenue has merely relied upon the case law to clarify the legal position so as to invoke the provisions contained u/s 263 of the Act but has failed to bring on record that the order passed by the AO was erroneous and prejudicial to the interest of the Revenue by bringing on record the evidence as we have discussed in detail in the preceding paras. This is a case of inadequate enquiry on the part of the AO and not a case of lack of enquiry by any stretch of imagination thus the order passed by CIT u/s 263 is hereby quashed. Resultantly, the appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Assessment order being erroneous and prejudicial to the interest of Revenue.
3. Adequacy of inquiries made by the Assessing Officer (AO).
4. Drawing adverse inferences based on surmises and conjectures.

Issue-Wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act:
The Principal Commissioner of Income Tax (CIT) invoked jurisdiction under Section 263, contending that the assessment order passed by the AO was erroneous and prejudicial to the interest of Revenue. The CIT issued a show-cause notice to the assessee, alleging various deficiencies in the AO's assessment process, including failure to make necessary inquiries and verification. The CIT's jurisdiction under Section 263 was challenged by the assessee on the grounds that the assessment order was neither erroneous nor prejudicial to the interest of Revenue.

2. Assessment Order Being Erroneous and Prejudicial to the Interest of Revenue:
The CIT held that the AO's assessment order was erroneous and prejudicial to the interest of Revenue. The CIT pointed out that the AO failed to make inquiries regarding the trading loss, withdrawals from the capital account, loans and advances, sundry creditors, and ownership of factory premises. The CIT also alleged that the AO did not inquire about the bifurcation of trading accounts for garments and diamonds and did not make any disallowance under Section 14A/Rule 8D for investments made by the assessee.

3. Adequacy of Inquiries Made by the Assessing Officer (AO):
The assessee argued that the AO had made all necessary inquiries and verifications required for the assessment. The AO issued a notice under Section 142(1) and obtained detailed submissions and documents from the assessee. The AO examined the assessee's books of accounts, vouchers, and other relevant documents. The assessee provided explanations and evidence for each point raised by the CIT, including details of export incentives, fluctuations in exchange rates, capital account, loans, and sundry creditors. The assessee contended that the AO's inquiries were adequate and that the CIT's allegations were factually and legally untenable.

4. Drawing Adverse Inferences Based on Surmises and Conjectures:
The CIT drew adverse inferences against the assessee based on alleged information regarding the Directorate of Revenue Intelligence (DRI) investigation into the assessee's brother, Sehdev Gupta. The assessee argued that it had no trading transactions with Sehdev Gupta during the relevant year and that the CIT's adverse inference was based on surmises and conjectures without any material evidence. The assessee also contended that the AO had examined the capital account, loans, and sundry creditors in detail and that the CIT's allegations of lack of inquiry were factually incorrect.

Conclusion:
The Tribunal held that the AO had made adequate inquiries and verifications during the assessment process. The Tribunal found that the CIT's allegations were based on incorrect facts and surmises. The Tribunal relied on various judicial precedents, including decisions of the Supreme Court and High Courts, to conclude that the CIT could not invoke Section 263 merely because the AO's inquiries were considered inadequate. The Tribunal quashed the CIT's order under Section 263, holding that the assessment order was neither erroneous nor prejudicial to the interest of Revenue. The appeal filed by the assessee was allowed.