2018 (7) TMI 1485 - HC - Income Tax

Revision u/s 263 - incurring of trading loss - as per CIT-A AO has failed to make any enquiry as regards the huge duty drawback claimed by the assessee and the modus operandi of the assessee - Held that - In this Court s opinion, all findings and reasoning are clearly indefensible; they amount to putting a gloss over the AO s glaring omissions. Repeated decisions have emphasized that the AO should at least as regards what appears from the record, and what are issues inquired into, during scrutiny assessment, indicate the briefest of reasons, accepting or rejecting any argument. In this case, the mere fact that out of 80 debtors, particulars of 22 were furnished and that PAN particulars of most of them were not provided (for AY, cannot lead to the conclusion that the doubting of genuineness of those transactions was unwarranted, under Section 263) This Court s opinion, the ITAT s approach was entirely faulty; it overlooked that the explanation, if any, why interest deduction was necessary, given that it had advanced substantial amounts on interest free basis was not reflected in the AO s order. Likewise, on the issue of purchases, the lack of any factual foundation and why despite verification only 37 out of 111 parties came forward, the expenses could be allowed, is absent. For the other years, the reasoning why 22 parties could have been taken into account, for a vast majority of others (58) is absent, for AY 2011-12. ITAT s findings amount to supplying reasons in respect of the AO s order, on aspects, which are not expressly reflected in the assessment order. It is no doubt the duty of the CIT to record why revision is warranted; however, the ITAT s jurisdiction is not to rewrite the AO s order and improve upon it, in a manner of speaking. Clearly, the orders of the ITAT cannot be sustained. They are set aside. Question of law is answered in favour of the Revenue and against the assessee

Issues Involved:
1. Validity of invocation of Section 263 of the Income Tax Act, 1961.
2. Adequacy of Assessing Officer's (AO) inquiries.
3. Genuineness of loans and transactions.
4. Verification of sundry creditors.
5. Disallowance under Section 14A of the Act.
6. Duty drawback and trading loss.

Detailed Analysis:

1. Validity of Invocation of Section 263 of the Income Tax Act, 1961:
The central issue was whether the ITAT erred in holding that the invocation of Section 263 by the Commissioner of Income Tax (CIT) was not warranted for the assessment years (AY) 2011-12 and 2012-13. The CIT had issued a Show Cause Notice under Section 263, observing that the AO failed to make necessary inquiries into various aspects, including trading loss and the genuineness of transactions. The CIT's revision orders enhanced the assessee’s income, holding that the AO’s original order was erroneous and prejudicial to the interest of Revenue.

2. Adequacy of Assessing Officer's (AO) Inquiries:
The CIT found that the AO did not conduct adequate inquiries into several critical issues, such as the duty drawback claimed by the assessee and the genuineness of transactions. The AO's failure to investigate these aspects was considered a significant lapse. The ITAT, however, held that the AO had scrutinized all details and explanations supported by documentary evidence, thus rejecting the CIT’s assertion of inadequate inquiry.

3. Genuineness of Loans and Transactions:
The CIT observed that the AO failed to investigate the genuineness of loans and transactions, particularly those involving family members and entities suspected of bogus exports. The CIT noted that the assessee received loans from individuals linked to entities involved in fraudulent activities. The ITAT, on the other hand, found that the assessee had submitted complete details of unsecured loans, including confirmations and bank statements, which were examined by the AO. Therefore, the ITAT concluded that there was no lack of inquiry on the AO’s part.

4. Verification of Sundry Creditors:
For AY 2011-12, the CIT highlighted that the AO did not verify the genuineness of sundry creditors adequately. Only 22 out of 80 sundry creditors were verified, and the PAN details of many were not provided. The ITAT disagreed, stating that the AO conducted a discreet inquiry, and the lack of further verification did not warrant the CIT’s intervention under Section 263.

5. Disallowance under Section 14A of the Act:
The CIT found that the AO failed to investigate the disallowance under Section 14A of the Act adequately. The ITAT held that the assessee claimed no exempt income and cited relevant case law to support its position. Therefore, the ITAT disagreed with the CIT’s assertion of a lack of inquiry.

6. Duty Drawback and Trading Loss:
The CIT emphasized the need for further investigation into the duty drawback claimed by the assessee, given the involvement of the assessee’s brother in fraudulent exports. The ITAT found that the AO had considered the export incentives and foreign exchange fluctuations while computing the trading loss. However, the court noted that the AO's order did not reflect any findings or observations on these issues, indicating a lack of proper inquiry.

Conclusion:
The court found that the ITAT’s approach was faulty and that it had overlooked the AO’s omissions. The AO's order lacked necessary inquiries into critical aspects, such as the genuineness of loans, interest deductions, and the verification of sundry creditors. The ITAT’s findings amounted to supplying reasons for the AO’s order, which were not reflected in the assessment order. Consequently, the court set aside the ITAT’s orders, holding that the CIT’s invocation of Section 263 was justified. The appeals were allowed in favor of the Revenue.

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