2021 (3) TMI 811 - AT - Income Tax

Revision u/s 263 - Addition u/s 68 - order passed by Assessing Officer u/s 143(3) was held to be erroneous and prejudicial to the interest of the Revenue - HELD THAT - Where there is a failure to offer explanation on part of the assessee and its shareholders and it would be incumbent on part of the AO to seek such an explanation and where the AO has not sought such an explanation and there is thus a failure to record the satisfaction by the AO, the same will render the order erroneous due to non-application of relevant provisions as applicable in the instant case and thus, the order so passed would be without application of mind. In the instant case, we find that during the course of assessment proceedings, the AO vide notice u/s 142(1) dated 24.08.2017 has enquired about the source of increase in share capital during the year under consideration along with documentary evidence and in response, the assessee company vide letter dated NIL- Annexure C has submitted a chart giving the name of the three shareholders and amount of share capital allotted to each of them during the month of December 2014, January 2015 and March 2015 totalling ₹ 120 crores. There is no explanation submitted regarding source of such funds and no documentary evidence has been brought on record by the assessee company. AO has however taken the said submission on face value and no further show-cause or enquiry/examination has been conducted by him. Useful reference can be drawn to facts and findings of Malabar Industrial Co. ltd 2000 (2) TMI 10 - SUPREME COURT . In that case, the appellant entered into an agreement for sale of the estate of rubber plantation and the agreement provided, inter alia, for payment of the consideration in instalments as scheduled therein. Purchaser could not adhere to the schedule and on his request, the parties agreed to the extension of time for payment of the instalments on condition of his paying compensation/damages for loss of agricultural income and other liabilities. Accordingly, the appellant passed a resolution also to that effect on 25-9- 1983 and the purchaser paid the said amount. In the annexure to the return filed by it for the assessment in question, the amount was noted as compensation and damages for loss of agricultural income. By order dated 31-10-1985, the ITO accepted the same and endorsed nil assessment for that year. The Commissioner having examined the records of the assessment found that the nil assessment order passed by the ITO was erroneous and it was prejudicial to the interests of the Revenue and held that the said amount was unconnected with any agricultural operation activity and was liable to be taxed under the head 'Income from other sources'. In the instant case as well, there is no material on record to demonstrate the source of funds so infused by way of share capital in the assessee company. The Assessing officer has merely relied on the statement of the assessee company that the shares have been allotted to the respective shareholders and in support, only the name of the shareholders and respective amount invested by them have been submitted. We therefore find that the facts of the present case are pari- materia with that of the Malabar Industrial (supra) and following the same, the order so passed by the AO is clearly erroneous and prejudicial to the interest of Revenue. Where the matter has not been examined by the AO at first place, the law doesn t contemplate that the ld Pr CIT should step in the shoes of the AO and examine all such material and evidence for the first time. Had it been a case of an enquiry already been conducted by the AO, in such a scenario, where the ld Pr CIT holds a different point of view, in such a scenario, he has to record as to why the enquiry so conducted by the AO is erroneous and prejudicial to the interest of Revenue. Therefore, the contention so advanced by the ld AR cannot be accepted. AO did not make any inquiries to ascertain whether the business of the assessee company was set up or not and consequent claim of business loss rendering the order so passed as erroneous and prejudicial to the interest of Revenue - Pr CIT has already held that issue of setting up of business is to be largely decided by the facts of each case and the AO has been directed to verify the necessary details in case of the assessee and the decide the same a fresh. Therefore, it is not a case that the said decision has been held as binding on the AO rather the AO has been directed to apply the legal proposition so emerging therefrom and apply the same to the facts of the present case. The AO was also directed to provide an opportunity to the assessee and the said opportunity may now be read and understood to also allow the assessee to bring the distinguishing features as so contended by the AR. Increase in tangible assets where the AO failed to verify purchase of fixed assets made during the year - Pr CIT has recorded a finding that no details were available on record and such details have been submitted during the revisionary proceedings vide letter dated 9.03.2020 and the AO has been directed to verify the same. No contention has been advanced by the ld AR in this regard, hence, no interference is called for. Outward foreign remittance towards purchase of machinery which has not been examined by the AO during the assessment proceedings - Pr CIT has recorded a finding that the assessee has submitted Form 15CA vide reply dated 9.03.2020 and the AO has been directed to verify the same. No contention has been advanced by the ld AR in this regard, hence, no interference is called for. We accordingly upheld the order passed by the ld Pr CIT u/s 263 of the Act setting aside the assessment order passed by the Assessing officer for the limited purposes of examining the aforesaid issues afresh after making necessary examination and verification and providing necessary opportunity to the assessee. - Decided against assessee.

Summary

Issues Involved:
1. Increase in share capital and lack of inquiry by the Assessing Officer (AO).
2. Claim of business loss without verifying if the business was set up.
3. Verification of purchase of fixed assets.
4. Outward foreign remittance towards purchase of machinery.

Issue-wise Detailed Analysis:

1. Increase in Share Capital and Lack of Inquiry by the AO:
The assessee's case was selected for complete scrutiny due to a substantial increase in share capital. The Pr. CIT noted that the AO did not verify the source of the ?120 crore increase in share capital. The assessee argued that the shares were allotted to the same shareholders as the previous year, and the AO had conducted sufficient inquiries. However, the Tribunal found that the AO failed to verify the source of funds and did not conduct necessary inquiries, rendering the assessment order erroneous and prejudicial to the interest of the Revenue. The Tribunal upheld the Pr. CIT’s decision to set aside the assessment for fresh examination.

2. Claim of Business Loss Without Verifying if the Business was Set Up:
The Pr. CIT questioned the AO's acceptance of the assessee's claim of business loss amounting to ?56,52,325/- without verifying if the business had been set up. The assessee contended that the business had incurred expenses for employee training and salaries, indicating that the business was operational. The Tribunal noted that the AO did not carry out any inquiry to determine if the business was set up, and directed the AO to verify the necessary details and decide the matter afresh.

3. Verification of Purchase of Fixed Assets:
The Pr. CIT found that the AO failed to verify the purchase of fixed assets amounting to ?63.25 crore. The assessee submitted details during the revisionary proceedings, which were not available during the assessment. The Tribunal upheld the Pr. CIT’s direction to the AO to verify the details of the fixed assets.

4. Outward Foreign Remittance Towards Purchase of Machinery:
The Pr. CIT noted that the AO did not examine the large outward foreign remittance towards the purchase of machinery. The assessee submitted Form 15CA during the revisionary proceedings. The Tribunal upheld the Pr. CIT’s direction to the AO to verify the outward remittances.

Conclusion:
The Tribunal upheld the order passed by the Pr. CIT under section 263 of the Act, setting aside the assessment order for examining the issues afresh. The appeal of the assessee was dismissed.