2022 (12) TMI 834 - AT - Income Tax

Revision u/s 263 by CIT - order prejudicial to the interests of the revenue' - Bogus Expenses - HELD THAT - 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 the bogus bill issued by the above mention two parties. It is not the case of 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 material placed on record accepted the genuineness of the claim of the assessee. PCIT in his order passed under section 263 of the Act has made reference to the explanation 2 of section 263 of the Act. As attempted by the learned PCIT to hold that there were certain necessary enquiries which should have been made by the AO during the assessment proceedings but not conducted by him. Therefore, on this reasoning the order of the AO is also erroneous insofar prejudicial to the interest of revenue. We make our observation that the learned PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice about the same. Therefore, the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. PCIT erred in taking the re-course of such provisions while deciding the issue against the assessee. Secondly, PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 of the Act. In view of the above and after considering the facts in totality, we hold that there is no error in the assessment framed by the AO under section 143(3) of the Act, causing prejudice to the interest of revenue. Thus, the revisional order passed by the learned PCIT is not sustainable - Appeal of assessee allowed.

Summary

Issues Involved:
1. Whether the assessment order under section 143(3) of the Income-tax Act was erroneous and prejudicial to the interest of Revenue.
2. Whether the Principal Commissioner of Income-tax (PCIT) was justified in invoking section 263 of the Income-tax Act for revising the assessment order.

Issue-wise Detailed Analysis:

1. Whether the assessment order under section 143(3) of the Income-tax Act was erroneous and prejudicial to the interest of Revenue:

The PCIT held that the assessment framed under section 143(3) was erroneous and prejudicial to the interest of Revenue because the Assessing Officer (AO) did not properly verify the bogus expenses claims made by the assessee. The PCIT found that the assessee had claimed expenses of Rs. 24,47,645/- against bills issued by M/s Nehal Construction and M/s Harsh Construction, which were admitted as bogus for AY 2013-14. The AO failed to examine the movement of goods, quantitative stock position, and other relevant points to verify the purchases shown through these parties. Consequently, the PCIT initiated proceedings under section 263.

2. Whether the Principal Commissioner of Income-tax (PCIT) was justified in invoking section 263 of the Income-tax Act for revising the assessment order:

The assessee contended that the assessment was framed by the AO after due verification and application of mind. The AO had issued a notice under section 142(1) and considered the assessee's responses, including the submission of ITRs, bills, service tax details, and TDS deductions. The assessee argued that the PCIT's action was based on the assumption that the AO did not conduct adequate inquiries, which is not a valid ground for invoking section 263.

The Tribunal observed that an inquiry made by the AO, even if considered inadequate, cannot make the order erroneous. The AO's prerogative to make inquiries to the extent he feels proper was upheld. The Tribunal cited various judgments, including CIT Vs. Sunbeam Auto and Gabriel India Ltd., emphasizing the distinction between lack of inquiry and inadequate inquiry. The Tribunal noted that the AO had made inquiries and considered the material placed on record before framing the assessment.

The Tribunal further noted that the PCIT did not specify the nature and manner of inquiries that should have been conducted by the AO. Additionally, the PCIT's reference to Explanation 2 of section 263 in the order, without mentioning it in the show cause notice, deprived the assessee of an opportunity to respond.

Conclusion:

The Tribunal concluded that there was 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 PCIT was quashed, and the appeal filed by the assessee was allowed. The Tribunal held that the AO had made inquiries and applied his mind to the issue, and the PCIT's invocation of section 263 was not justified.