2019 (2) TMI 292 - HC - Income Tax

Revision u/s 263 - power of CIT for assessment in revision order - Held that - The only limitation on CIT s power is that he must have some material which would enable him to form a prima facie opinion that the order passed by the officer was erroneous in so far as it is prejudicial to the interests of the revenue. Once he concludes on the basis of the material that the order of the AO was erroneous and prejudicial to the interests of the revenue, the CIT is empowered to pass an order as the circumstances of the case may warrant. He may pass an order enhancing the assessment or he may modify the assessment. He is also empowered to cancel the assessment and direct a fresh assessment. CIT is fully competent to adopt any one of the three causes indicated by the said provision. CIT while coming to the conclusion that declared income is to be enhanced by ₹ 1,83,80,208/- had dealt with the matter in detail before so concluding. It is considered appropriate to direct the Registry of this Court to forward a copy of this order to the Central Board of Direct Taxes (CBDT) to issue necessary instructions to all the Assessing Officers that in cases of search and seizure or where survey operations have been carried out by the Department and surrender made or concealed income detected, to ensure proper scrutiny of such cases and discuss reasons for rejecting or accepting the books of account of the assessee and not to merely record in slipshod or cursory manner that the books of account produced and test checked as done by the AO in the present case.

Issues Involved:
1. Justification of ITAT in quashing the revisionary order under Section 263 by CIT.
2. Proper verification by the Assessing Officer during assessment.
3. Application of principles of natural justice and thorough examination of books of account.
4. Scope and exercise of powers under Section 263 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Justification of ITAT in Quashing the Revisionary Order under Section 263 by CIT:
The core issue was whether the ITAT was justified in quashing the revisionary order under Section 263 made by the CIT without appreciating that the figures compared by the assessee were based on defective books of account admitted by the assessee during the survey. The High Court noted that the Tribunal relied on the Supreme Court's decision in Malabar Industrial Company Limited vs. Commissioner of Income Tax, which emphasized that an order is erroneous if there is an incorrect assumption of facts or incorrect application of law. The Tribunal's decision to cancel the CIT's order was deemed erroneous by the High Court, as the assessment order was found to be both erroneous and prejudicial to the interests of the revenue.

2. Proper Verification by the Assessing Officer During Assessment:
The High Court scrutinized the assessment process and found that the Assessing Officer (AO) failed to verify the correctness of the books of account, despite a significant surrender of ?2,15,00,000/- made by the assessee during the survey. The AO merely noted that books of accounts were produced and test-checked without applying due diligence, especially given the substantial discrepancies and surrender made by the assessee. The AO's lack of thorough examination and failure to reject the unreliable books of account was highlighted as a significant oversight.

3. Application of Principles of Natural Justice and Thorough Examination of Books of Account:
The judgment emphasized that under Section 263, the CIT must provide an opportunity of hearing to the assessee and record a prima facie finding that the AO's order is erroneous and prejudicial to the revenue. The High Court observed that the AO did not apply their mind to the discrepancies in the books of account, which were admitted by the assessee during the survey. The Tribunal's observation that the AO should discuss various aspects of the case in the assessment order was noted, but the High Court concluded that the AO's failure to do so warranted the CIT's intervention under Section 263.

4. Scope and Exercise of Powers under Section 263 of the Income Tax Act, 1961:
The High Court reiterated the broad scope of the CIT's powers under Section 263, which can be invoked if the AO's order is erroneous and prejudicial to the interests of the revenue. The CIT is empowered to enhance or modify the assessment or direct a fresh assessment. The High Court supported the CIT's detailed examination and rejection of the books of account, given the significant discrepancies and the assessee's failure to provide a satisfactory explanation. The CIT's computation of enhanced income based on the gross profit rate of the previous year was upheld, as the AO's assessment was found to be inadequate and not in line with the principles of natural justice.

Conclusion:
The High Court allowed the appeal, setting aside the ITAT's order and affirming the CIT's revisionary order under Section 263. The substantial question of law was answered in favor of the revenue. Additionally, the Court directed the Central Board of Direct Taxes (CBDT) to instruct all Assessing Officers to ensure proper scrutiny and detailed discussion in cases of search, seizure, or survey operations, emphasizing the need for thorough verification and reasoned assessment orders.

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