2022 (7) TMI 384 - AT - Income Tax

Revision u/s 263 by CIT - an order which is prejudicial to the interests of the revenue - CIT observed that, AO not making inquiries or verification with respect to the difference in the figures - lack of inquiry v/s inadequate inquiry - As per PCIT AO during the assessment proceedings has not verified the difference in the amount of gross value shown in the profit and loss account viz a viz gross value of the services - HELD THAT - An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgments by various Hon ble High Courts in this regard. Delhi High Court in the case of CIT Vs. Sunbeam Auto 2009 (9) TMI 633 - DELHI HIGH COURT made a distinction between lack of inquiry and inadequate inquiry. The Hon ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. The principle which emerges is that the phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Assessing Officer adopts one of the course permissible in law and it has resulted in loss of revenue; or where two views are possible and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order causing prejudice to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law, or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind. In the case of the assessee the AO during the course of assessment proceedings, made enquiries on this issue and after consideration of written submissions filed by the assessee and documents / evidence placed on record, framed the assessment under section 143(3) of the Act without making the addition of the amount as note above. This fact can be verified from the notice under section 142(1) of the Act by the AO and submission in reply of the assessee against such notice. Thus it is not the case that the AO has not made any enquiry. Indeed the Pr. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of cash deposited during the demonization period. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the AO had made enquiries and after consideration of materials placed on record accepted the genuineness of the claim of the assessee. There is a difference between the value of the services provided by the assessee which are subject to the provisions of service tax viz a viz the income which has to be accounted for the purpose of income tax. As such the advance received by the assessee cannot be categorised as income under the provisions of Income Tax Act whereas the services rendered by the assessee even with respect to the advances received are subject to service tax. Therefore, merely these amounts are not matching, no inference again the assessee can be drawn. Furthermore, all the details with respect to the service tax were available before the AO during the assessment proceedings. Thus it cannot be said that there was no application of mind of the AO in the given facts and circumstances. There was a specific question raised by the AO which was duly answered by the assessee as evident from the details furnished in the preceding paragraph. Thus we hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue - the revisional order passed by the learned PCIT is not sustainable - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessment order passed by the Assessing Officer (AO) under section 143(3) of the Income Tax Act, 1961, was erroneous and prejudicial to the interest of the Revenue.
2. Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking the provisions of section 263 of the Act.

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial Assessment Order:
The primary issue raised by the assessee was that the PCIT erred in holding the assessment framed under section 143(3) of the Act as erroneous and prejudicial to the interest of the Revenue. The PCIT found a discrepancy between the gross value of services provided (?5,31,80,902) and the gross value of sales shown in the profit and loss account (?4,66,04,750), leading to a difference of ?65,76,152. The PCIT contended that the AO did not verify this difference during the assessment proceedings. However, the assessee argued that the service tax is levied even on advance payments, which are not shown as income in the same year but offered to tax upon transaction completion. The PCIT was not convinced and initiated proceedings under section 263, stating that the AO failed to conduct necessary enquiries, thus making the order erroneous and prejudicial to the Revenue's interest.

2. Justification for Invoking Section 263:
The Tribunal analyzed whether the AO's order could be termed erroneous and prejudicial to the Revenue's interest. The Tribunal emphasized that an inquiry deemed inadequate by the PCIT does not make the AO's order erroneous. The AO's prerogative is to make inquiries to the extent deemed proper. The Tribunal cited several judgments, including those of the Delhi High Court and Bombay High Court, which distinguished between "lack of inquiry" and "inadequate inquiry." The Tribunal noted that if the AO made inquiries and applied his mind, the order could not be set aside merely due to the PCIT's differing opinion. The Tribunal also referred to the Supreme Court's judgment in Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates, which upheld that detailed inquiries by the AO could not be overridden by the PCIT's revisionary powers under section 263.

Analysis of Judicial Precedents:
The Tribunal referenced multiple judicial precedents to support its decision. It cited the Delhi High Court's ruling in CIT Vs. Sunbeam Auto, which held that an order could not be set aside under section 263 if the AO made inquiries, even if deemed inadequate by the PCIT. The Bombay High Court in Gabriel India Ltd. emphasized that the PCIT's initiation of proceedings must be based on materials on record and not on fishing expeditions. The Tribunal also cited the Mumbai ITAT's decision in Sh. Narayan Tatu Rane Vs. ITO, which clarified that the PCIT must demonstrate that the AO's inquiries were unreasonable or inadequate.

Conclusion:
The Tribunal concluded that the AO had made inquiries and applied his mind to the issue at hand. The notice under section 142(1) and the assessee's responses demonstrated that the AO had considered the necessary details. The Tribunal found no error in the AO's assessment that caused prejudice to the Revenue's interest. The PCIT's order under section 263 was deemed unsustainable, and the appeal filed by the assessee was allowed.

Final Order:
The Tribunal quashed the revisional order passed by the PCIT and allowed the appeal filed by the assessee. The order was pronounced in open court on 30/06/2022.