2018 (8) TMI 747 - AT - Income Tax

Revision u/s 263 - Doctrine of merger - CIT observed that, AO has not made necessary enquiries/ verification with reference to the purchases - AO has rejected the books of assessee and disallowed 25% of such purchase in the assessment - Held that - when the addition made by the AO was the subject matter of appeal before the ld. CIT(A) and this issue was pending before the ld. CIT(A) then, the Pr. CIT has not powered to invoke the jurisdiction of U/s 263 of the Act on the same issue. In view of the above facts and circumstances of the case the issue which was the subject matter of appeal before the ld. CIT(A) at the time of issuing the show cause notice then, the initiation of proceedings U/s 263 itself is not valid. - Decided in favor of assessee.

Summary

Issues Involved:
1. Legality of the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act.
2. Adequacy of the Assessing Officer’s (AO) disallowance of 25% of the purchases from M/s Mohit International and M/s Nakshatra Business Pvt. Ltd.
3. Jurisdiction of the Pr. CIT to invoke Section 263 when the issue is already pending in appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].
4. Compliance with the principles of natural justice in the issuance and execution of the show cause notice by the Pr. CIT.

Detailed Analysis:

1. Legality of the Order Passed by Pr. CIT under Section 263:
The assessee contested the legality of the Pr. CIT's order under Section 263, arguing that it was "illegal & bad in law." The Pr. CIT issued a show cause notice at the end of the limitation period and passed the order on 31.03.2018, claiming that the AO's disallowance of only 25% of unverifiable purchases was erroneous and prejudicial to the interest of the Revenue. However, the Tribunal observed that the AO had made a reasoned judgment in disallowing 25% of the purchases, and this decision was already under appeal before the CIT(A). Therefore, the Tribunal found the invocation of Section 263 by the Pr. CIT to be invalid.

2. Adequacy of AO’s Disallowance of 25% of Purchases:
The AO disallowed 25% of the purchases from M/s Mohit International and M/s Nakshatra Business Pvt. Ltd., amounting to ?10,38,850/-, based on the findings of the Investigation Wing, Mumbai, which indicated that these entities provided accommodation entries for bogus purchases. The Pr. CIT argued that the entire amount should have been disallowed. However, the Tribunal noted that the AO's decision to disallow 25% was based on a detailed examination of the evidence and was a plausible view. The Tribunal cited the case of CIT vs. Narottam Mishra, which held that if two views are possible and the AO has taken one, it cannot be deemed erroneous merely because the Pr. CIT disagrees.

3. Jurisdiction of Pr. CIT to Invoke Section 263:
The Tribunal emphasized that Section 263 cannot be invoked if the issue is already pending in appeal before the CIT(A). The Tribunal referred to Explanation-1(c) to Section 263(1), which states that the Pr. CIT's revisional powers do not extend to matters that have been considered and decided in an appeal. Since the assessee had already appealed against the AO's disallowance of 25% of the purchases, the Pr. CIT had no jurisdiction to revise the AO’s order on the same issue. The Tribunal cited the Supreme Court’s decision in CIT vs. Arbuda Mills Ltd., which clarified that the Pr. CIT's powers under Section 263 do not extend to matters already considered in an appeal.

4. Compliance with Principles of Natural Justice:
The Tribunal found that the Pr. CIT issued the show cause notice on 29.03.2018 and passed the order on 31.03.2018, in haste, without adequately considering the assessee's reply. This rushed process violated the principles of natural justice. The Tribunal noted that the Pr. CIT did not even reference the assessee's reply in the impugned order, rendering it unsustainable in law. The Tribunal set aside the Pr. CIT's order, emphasizing the need for adherence to procedural fairness and thorough consideration of all relevant materials.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the Pr. CIT's order under Section 263. The Tribunal held that the Pr. CIT lacked jurisdiction to revise the AO’s order on an issue already under appeal and that the rushed issuance and execution of the show cause notice violated principles of natural justice. The AO’s disallowance of 25% of the purchases was deemed a plausible view, and the Pr. CIT's disagreement did not render it erroneous.