2008 (1) TMI 497 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the IT Act.
2. Setting aside the order under Section 158BC and issuing unwarranted directions.
3. Non-consideration of investment required for undisclosed turnover.
4. Non-application of Section 40A(3) regarding cash purchases.

Detailed Analysis:

1. Jurisdiction under Section 263 of the IT Act:
The appellant argued that the CIT (Central), Pune erred in assuming jurisdiction under Section 263 of the IT Act. The appellant contended that the AO had based his order on a special audit report, and hence, the order should not be considered erroneous. The appellant cited several case laws to support the argument that the AO had taken a possible view and had conducted proper enquiries, thus negating the need for revision under Section 263.

The Tribunal, however, concluded that the scope of Section 263 is broad and allows the CIT to revise an order if it is considered erroneous and prejudicial to the interests of the Revenue. The Tribunal emphasized that the CIT has the power to set aside an assessment order and direct fresh assessments if further enquiries are deemed necessary.

2. Setting aside the order under Section 158BC and issuing unwarranted directions:
The CIT set aside the order passed under Section 158BC, directing the AO to re-examine the issue of undisclosed investment required to achieve the unaccounted sales for certain financial years. The appellant challenged this direction, arguing that the CIT's order was based on guesswork and probabilities and that the AO had already considered the necessary aspects while passing the block assessment order.

The Tribunal upheld the CIT's directions, stating that the CIT had identified specific areas where the AO had failed to conduct necessary investigations, making the order erroneous and prejudicial to the Revenue's interests.

3. Non-consideration of investment required for undisclosed turnover:
The CIT observed that the AO had not considered the investment required by the assessee to achieve substantial turnover of undisclosed transactions. The CIT noted that the AO and the CIT(A) had only considered the initial investment for the first three years of the block period and had not accounted for the higher turnover in the later years.

The Tribunal agreed with the CIT's observation, noting that the initial investment of Rs. 10,00,000 was insufficient to cover the huge turnover of around Rs. 96 crores detected for the later part of the block period. The Tribunal found that the AO had failed to investigate this aspect adequately, justifying the CIT's invocation of Section 263.

4. Non-application of Section 40A(3) regarding cash purchases:
The CIT noted that the AO had not applied the provisions of Section 40A(3) of the IT Act, which requires disallowance of 20% of cash purchases exceeding Rs. 20,000. The CIT observed that there were cash purchases of over Rs. 93.76 crores during the relevant period, which had escaped assessment.

The Tribunal found substance in the CIT's observation, noting that the records and the impugned assessment order did not contain any discussion on this issue. The Tribunal concluded that the CIT was justified in remitting the matter to the AO for fresh assessment regarding the applicability of Section 40A(3).

Conclusion:
The Tribunal dismissed the appeal, upholding the CIT's invocation of Section 263. The Tribunal confirmed that the AO's order was erroneous and prejudicial to the interests of the Revenue, justifying the CIT's directions for further investigation and fresh assessment.