2002 (10) TMI 224 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the order passed under section 263 of the Income-tax Act.
2. Adequacy of the enquiry made by the Assessing Officer (AO) regarding property income and investment in the construction of a multi-storeyed building.
3. Validity of initiating proceedings under section 263 based on subsequent material.
4. Application of the principle of res judicata in income tax assessments.

Detailed Analysis:

1. Legality of the Order Passed Under Section 263:
The appeals challenged the legality of the order passed under section 263 of the Income-tax Act, which set aside the assessment order dated 9-3-2001 for the assessment year 1998-99. The appellants argued that the order was "absolutely illegal, arbitrary and bad in law." The Tribunal concluded that the CIT was justified in invoking section 263 as the AO had not conducted proper enquiries, making the assessment order erroneous and prejudicial to the interests of the Revenue.

2. Adequacy of Enquiry by the Assessing Officer:
The CIT observed that the AO had not investigated the correct income from house property, the investment in the construction of the house property, or the income from other sources. The AO's assessment was made in a "routine manner," and the CIT noted that the AO had admitted in an Office Note that he could not determine the fair rental value of properties due to lack of time. The Tribunal agreed with the CIT that the AO failed to make necessary enquiries, thereby justifying the CIT's order under section 263.

3. Validity of Initiating Proceedings Under Section 263 Based on Subsequent Material:
The appellants argued that proceedings under section 263 could not be initiated based on subsequent material, such as the Inspector's report, which was not available at the time of assessment. The Tribunal, however, held that the CIT could use all records available at the time of examination, including the Inspector's report, which estimated higher rental values and investment costs than disclosed by the assessees. This justified the CIT's action under section 263.

4. Application of the Principle of Res Judicata:
The appellants contended that the principle of res judicata should apply as the facts had been investigated in the assessment year 1996-97. The Tribunal, however, upheld the CIT's view that the principle of res judicata does not apply to income tax assessments, and each assessment year is independent. The CIT found that the AO had not made proper enquiries even in the assessment year 1996-97.

Conclusion:
The Tribunal confirmed the CIT's order under section 263 for all three assessees, dismissing the appeals. The Tribunal found that the AO had not made proper enquiries before passing the assessment order, and the CIT was justified in setting aside the order and directing the AO to make fresh assessments after proper investigations. The Tribunal supported its decision with various High Court rulings, emphasizing the AO's duty to investigate the correctness of the facts stated in the return when circumstances provoke an enquiry.