2020 (9) TMI 1126 - AT - Income Tax

Revision u/s 263 - CIT directing AO for re-examination of the audited accounts and examine the genuineness of unsecured loan, Sundry Creditors/ details of payable and also Sundry Debtors shown under current assets of the balance sheet - Also re-examine the valuation of stock recorded in the books of account of the assessee which has reported to the bank - HELD THAT - Pr.CIT has observed that there is stock statement on record which has been submitted by the assessee to the Punjab National Bank in inflated value, therefore, the difference shall be treated as unaccounted sales. In respect of other findings of the ld.Pr.CIT, the AO did not enquire in depth which ought to have been done for competing the assessment proceedings as per the provisions of I.T.Act. Even before the proceeding u/s.263/143(3) of the Act before the AO, the assessee did not produce books of accounts. CIT should have got confirmed from Punjab National Bank as to whether the stock statement has been submitted before the bank is correct or not by making independent enquiry. From the order of ld. Pr.CIT it is not clear that as to whether any enquiry has been done by the ld.Pr.CIT or not and it is also not clear whether there was a difference in quantitative details or only on value shown in the stock statement. In this regard, the ld. Pr.CIT is not justified for making direction to the AO for reexamination of the valuation of stock recorded in the books of accounts of the assessee reported to the bank. We observe from the record of authorities below and order sheet the AO had asked to the assessee many times for producing the books of accounts but the assessee failed to produce at any stage before the authorities below. The ld.Pr. CIT has observed that in respect of unsecured loans sundry creditors/liabilities and sundry debtors on asset side appearing on the balance sheet as on 31.03.2010 - AO should have done enquiry for the genuineness of the current liabilities and current assets which has been observed by the ld.Pr.CIT. The AO is not only an adjudicator, he is also an investigator before coming to any conclusion with regard to the genuineness of the transactions done by the assessee, which is lack in this case. Order of the AO in respect of unsecured loans, sundry creditors/liabilities and sundry debtors accepted by the AO is erroneous and prejudicial to the interest of revenue. We hereby make it clear that the direction of the ld. Pr.CIT in respect of stock differences found from the record is not required to further verification and in respect of unsecured loans, sundry creditors/liabilities and sundry debtors the AO has to follow the direction of the ld. Pr.CIT. Therefore, the ld. Pr.CIT has rightly invoked his power provided u/s.263(1) of the Act to the extent of the decision of the ld. Pr.CIT in this regard. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Legality of the order passed under Section 263 of the Income Tax Act.
2. Justification of the CIT's direction for reexamination of audited accounts.
3. Justification of the CIT's direction to reexamine the valuation of stock.
4. Legality of the AO's assessment process and the necessity of further inquiries.

Detailed Analysis:

1. Legality of the order passed under Section 263 of the Income Tax Act:
The assessee contended that the order passed by the CIT under Section 263 was illegal, arbitrary, and against the facts on record. The CIT invoked Section 263 due to the AO's failure to conduct proper inquiries during the assessment proceedings. The CIT referenced rulings from the Supreme Court in Ramapyari Devi Sarogi v. CIT and Smt. Tara Devi Aggarwal v. CIT, which stated that lack of inquiry or verification constitutes prejudice to the revenue and involves errors of fact and law. The Tribunal upheld the CIT's invocation of Section 263, stating that the AO's order was erroneous and prejudicial to the interest of the revenue due to the lack of proper inquiry.

2. Justification of the CIT's direction for reexamination of audited accounts:
The CIT directed the AO to reexamine the genuineness of unsecured loans, sundry creditors, and other liabilities shown in the balance sheet. The Tribunal found that the AO had not conducted in-depth inquiries into these items, which should have been done as per the provisions of the Income Tax Act. The Tribunal agreed with the CIT that the AO should have verified the genuineness of these liabilities and assets, as the AO is not only an adjudicator but also an investigator.

3. Justification of the CIT's direction to reexamine the valuation of stock:
The CIT observed a significant discrepancy between the stock value reported to the Punjab National Bank and the stock recorded in the books of the assessee. The CIT directed the AO to reexamine this valuation. The Tribunal noted that the AO had already added the difference in stock found during the survey to the total income of the assessee. However, the Tribunal found that the CIT did not conduct an independent inquiry to confirm whether the stock statement submitted to the bank was correct. Therefore, the Tribunal held that the CIT's direction for further verification of the stock valuation was not justified.

4. Legality of the AO's assessment process and the necessity of further inquiries:
The AO completed the assessment based on the audit report and financial statements without the production of books of accounts by the assessee. The CIT found that the AO's lack of inquiry into unsecured loans, sundry creditors, and other liabilities was erroneous and prejudicial to the revenue. The Tribunal agreed with the CIT that the AO should have conducted thorough inquiries and verifications. The Tribunal cited Section 263(1) of the Income Tax Act, which allows the CIT to revise any order passed by the AO if it is erroneous and prejudicial to the interests of the revenue. The Tribunal partially upheld the CIT's order, directing the AO to follow the CIT's instructions regarding the verification of unsecured loans, sundry creditors, and other liabilities.

Conclusion:
The Tribunal upheld the CIT's invocation of Section 263 for the reexamination of unsecured loans, sundry creditors, and other liabilities, but found the direction for further verification of stock valuation unjustified. The appeal was partly allowed, affirming the need for proper inquiries and verifications by the AO as per the provisions of the Income Tax Act.