2018 (7) TMI 1615 - AT - Income Tax

Usurpation of jurisdiction of Pr. C.I.T. u/s 263 - interference in the order passed by Assessing Officer u/s 143(3) by CIT-A - G.P. rate determination by AO - Held that - AO has discharged his duty as an investigator as well as that of an adjudicator and has applied his mind on the issue before him and taking into consideration the explanation rendered by the assessee, has taken a reasonable and plausible decision to impose gross profit rate of 3.5% and also making ad hoc addition of ₹ 50,00,000/- on the undisclosed sales and has made the addition of ₹ 40,50,672/-., which decision is in line with the ratio laid in President Industries Ltd. 1999 (4) TMI 8 - GUJARAT HIGH COURT and Tribunal s decision in India Seed 2000 (1) TMI 146 - ITAT DELHI-B . Therefore, the order of AO cannot be termed as unsustainable in law. Therefore the jurisdictional fact for usurping the jurisdiction is absent and the action of Ld. Pr. CIT is without jurisdiction and all subsequent action is null in the eyes of law. Therefore, we are inclined to quash the order impugned before us. - Decided in favour of assessee

Summary

Issues Involved:

1. Usurpation of Jurisdiction by Principal CIT under Section 263.
2. Examination of undisclosed sales and purchases.
3. Adequacy of Assessing Officer's inquiry.
4. Determination of undisclosed profit.
5. Validity of the Principal CIT's order.

Issue-wise Detailed Analysis:

1. Usurpation of Jurisdiction by Principal CIT under Section 263:

The assessee challenged the Principal CIT's jurisdiction under Section 263 of the Income Tax Act, arguing that the Assessing Officer (AO) had conducted a proper inquiry and applied his mind before passing the assessment order. The Tribunal referred to the Supreme Court's decision in Malabar Industries Ltd. vs. CIT, which established that for the Principal CIT to assume revisional jurisdiction, the AO's order must be both erroneous and prejudicial to the interest of the revenue. The Tribunal emphasized that an order cannot be deemed erroneous simply because the Principal CIT disagrees with the AO's approach unless the AO's view is unsustainable in law.

2. Examination of Undisclosed Sales and Purchases:

The Principal CIT found that the AO failed to inquire into the undisclosed purchases and sales and determine the profit from the undisclosed business. The AO had noted undisclosed sales of ?38,25,90,618/- and applied a Gross Profit (GP) rate of 3.5%, resulting in an addition of ?1,37,40,672/-. The assessee had already added ?96,90,000/- to its income, leading to a final addition of ?40,50,672/-. The Principal CIT argued that the AO should have added the difference between the undisclosed sales and purchases to the total income.

3. Adequacy of Assessing Officer's Inquiry:

The Tribunal highlighted the distinction between "lack of inquiry" and "inadequate inquiry." It noted that the AO had conducted an inquiry, albeit not to the Principal CIT's satisfaction. The AO had considered the impounded documents, the assessee's explanations, and the GP rates from previous years before applying a 3.5% GP rate. The Tribunal stated that if the Principal CIT believed the inquiry was inadequate, he should have conducted his own investigation and demonstrated that the AO's findings were unsustainable in law.

4. Determination of Undisclosed Profit:

The Tribunal observed that the AO had accepted the assessee's GP rate of 2.5% on undisclosed sales in the previous assessment year (AY 2011-12) and noted that the undisclosed investment for purchases was already accounted for. The AO had applied a 3.5% GP rate for the current assessment year (AY 2012-13) and made an ad hoc addition of ?50,00,000/-. The Tribunal found this approach reasonable and in line with judicial precedents, including the Gujarat High Court's decision in President Industries Ltd. and the Delhi Tribunal's decision in India Seed House vs. ACIT.

5. Validity of the Principal CIT's Order:

The Tribunal concluded that the AO had conducted an inquiry and applied his mind before passing the assessment order. The Principal CIT's order was based on the belief that the AO had not conducted a proper inquiry into the undisclosed purchases. However, the Tribunal found that the AO's approach was reasonable and that the Principal CIT had not demonstrated that the AO's findings were unsustainable in law. Therefore, the Tribunal quashed the Principal CIT's order, deeming it without jurisdiction.

Conclusion:

The Tribunal allowed the assessee's appeal, quashing the Principal CIT's order under Section 263. It held that the AO had conducted an adequate inquiry and that the Principal CIT had not provided sufficient grounds to demonstrate that the AO's order was erroneous and prejudicial to the interest of the revenue. The Tribunal emphasized the importance of distinguishing between lack of inquiry and inadequate inquiry and reiterated that the Principal CIT must conduct his own investigation to establish that the AO's findings are unsustainable in law before exercising revisional jurisdiction.