2017 (10) TMI 720 - AT - Income Tax

Revision u/s 263 - Held that - We are of the considered view that in the backdrop of the explanation/objections filed by the assessee during the course of revisional proceedings in respect of certain issues on which the CIT had sought to revise the order passed by the A.O under Sec. 143(3), the CIT had failed to point out as to how the order of the A.O was found to be erroneous . We are of the considered view that in the absence of clear observations of the CIT as to how the order of the A.O after considering the explanation/objections filed by the assessee was found to be erroneous in respect of the said respective issues, thus, can safely be held to have failed the fundamental requirement for valid assumption of jurisdiction as per the mandate of law. We are not persuaded to accept the contention of the ld. D.R that as the A.O had passed the assessment order without making inquiries and verifications which he should have made in the opinion of the CIT, therefore, the same rendered the order passed by him amenable for revision under Sec. 263. We thus decline to accept the aforesaid contentions raised by the ld. D.R before us. We thus after giving a thoughtful consideration to the order passed by the CIT under Sec. 263 in the backdrop of the submissions raised by the authorized representatives of both the parties, perusing the order passed by the A.O under Sec. 143(3) deliberating on the judicial pronouncements relied upon by the parties and the material available on record, thus, focusing on the proprietary of the order passed by the CIT by invoking his powers under s. 263, keeping in view the scope of the said statutory provision, are unable persuade ourselves to uphold the order passed by the CIT under Sec. 263 of the Act . We thus in light of the observations and reasonings recorded hereinabove, set aside the order passed by the CIT under Sec. 263. The appeal of the assessee is allowed.

Issues Involved:
1. Legality and validity of the order passed under Section 263 of the Income Tax Act, 1961.
2. Whether the assessment order passed by the Assessing Officer (A.O) under Section 143(3) was erroneous and prejudicial to the interest of the revenue.
3. Examination of various expenses and verifications conducted by the A.O.
4. Examination of the system of accounting followed by the assessee.
5. Applicability of Explanation 2 of Section 263.

Detailed Analysis:

1. Legality and Validity of the Order Passed under Section 263 of the Income Tax Act, 1961:
The assessee contended that the order passed under Section 263 was illegal, invalid, and bad in law. The CIT initiated proceedings under Section 263, believing the assessment framed by the A.O was erroneous and prejudicial to the interest of the revenue. The Tribunal noted that the CIT must provide a detailed explanation of why the order is considered erroneous and prejudicial, which was not adequately done in this case.

2. Whether the Assessment Order Passed by the A.O under Section 143(3) was Erroneous and Prejudicial to the Interest of the Revenue:
The CIT identified several issues indicating that the A.O failed to make necessary verifications, including:
- Verification of high expenses claimed by the assessee.
- Examination of the basis of valuation of Work-in-Progress (WIP).
- Verification of the net profit rate and VAT liability.
- Examination of the genuineness of sundry creditors and the system of accounting.

The Tribunal observed that the A.O had previously scrutinized similar issues in earlier assessments and found no discrepancies. The Tribunal emphasized that the CIT must deliberate on the explanations provided by the assessee, which was not done in this case.

3. Examination of Various Expenses and Verifications Conducted by the A.O:
The CIT argued that the A.O failed to verify the heavy labor charges claimed by the assessee. The assessee provided detailed explanations and supporting documents during the revisional proceedings, which the CIT did not adequately consider. The Tribunal noted that the CIT's failure to address the assessee's explanations rendered the revisional order invalid.

4. Examination of the System of Accounting Followed by the Assessee:
The CIT questioned the system of accounting followed by the assessee. The assessee clarified that it followed the mercantile system of accounting, supported by the audit report and return of income. The Tribunal found that the CIT did not provide a valid reason for rejecting the assessee's explanation.

5. Applicability of Explanation 2 of Section 263:
The CIT relied on Explanation 2 of Section 263, introduced by the Finance Act, 2015, to argue that the A.O's failure to make necessary inquiries rendered the order erroneous. The Tribunal held that Explanation 2 is not retrospective and does not apply to the assessment year in question. The Tribunal also noted that the A.O had conducted sufficient inquiries and verifications during the assessment proceedings.

Conclusion:
The Tribunal concluded that the CIT did not provide adequate reasons for considering the assessment order erroneous and prejudicial to the interest of the revenue. The explanations and supporting documents provided by the assessee were not properly considered. The Tribunal set aside the order passed by the CIT under Section 263, allowing the appeal of the assessee.

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