2012 (2) TMI 403 - AT - Income Tax

Revision under 263 - lack of enquiry - Held That - There is nothing on record which could show that Assessing Officer had inquired into financial charges paid on the borrowed fund for purchase of property which is forming part of closing stock. Assessing Officer has also not inquired into the method of valuation of stock. Assessing Officer has passed a summary order without looking into the issue of genuineness of transactions relating to sale and purchase of shares of G.R. Industries. - Revision justified.

Summary

Issues Involved:
Jurisdiction under section 263 of the Income-tax Act, 1961; Correctness of assessment order under section 143(3); Treatment of financial charges incurred on borrowed funds for property acquisition in closing stock valuation; Justification of CIT's direction for examination of genuineness of transactions related to sale and purchase of shares of a company.

Analysis:

Jurisdiction under section 263 of the Income-tax Act, 1961:
The appeal challenged the jurisdiction assumed by the CIT under section 263 of the Income-tax Act, contending it was arbitrary and bad in law. The AR argued that the assessment under section 143(3) was completed after proper inquiries, and the CIT's intervention was unwarranted. However, the DR argued that the assessment order was prima facie erroneous and prejudicial to revenue as the financial charges for property acquisition were not scrutinized. The Tribunal found that the assessment lacked proper investigation into the financial charges and stock valuation method, supporting the CIT's direction for further examination. The order under section 263 was upheld due to the erroneous nature of the initial assessment.

Correctness of assessment order under section 143(3):
The AR contended that the assessment order was not erroneous and was based on proper discussions and submissions. However, the DR pointed out that the AO did not inquire into the financial charges paid for property acquisition, leading to an undervaluation of closing stock. The Tribunal agreed that the AO's order lacked scrutiny on crucial aspects, rendering it erroneous and prejudicial to revenue. Consequently, the CIT's direction for a thorough examination was deemed justified.

Treatment of financial charges in closing stock valuation:
The key contention revolved around the treatment of financial charges incurred on borrowed funds for property acquisition in the closing stock valuation. The AR argued that interest and borrowing costs were not typically included in inventory costs as per Accounting Standard AS-2. Conversely, the DR emphasized that the financial charges should have been added to the property's cost as per the company's stock valuation policy. The Tribunal concurred with the DR, stating that the AO's failure to consider these charges led to an undervaluation of closing stock, justifying the CIT's directive to add the amount to the income.

Justification of CIT's direction for examination of genuineness of transactions:
Regarding the CIT's direction to investigate the genuineness of transactions related to the sale and purchase of shares of a company, the Tribunal noted that the AO's order was summary and lacked proper consideration of the issue. As a result, the CIT's directive for a thorough examination and investigation was deemed appropriate. The Tribunal upheld the CIT's order and dismissed the appellant's appeal, emphasizing the need for a comprehensive assessment in such cases.

In conclusion, the Tribunal upheld the CIT's direction under section 263, emphasizing the importance of thorough examination and proper scrutiny in assessments to prevent errors and protect the revenue's interests.