2015 (4) TMI 439 - AT - Income Tax

Revision u/s 263 - Bogus expenditure - earlier assessment order passed u/s 143(3) r/w Section 153A quashed - Expenses claimed by the assessee company and offered to tax by the recipient company become revenue neutral and therefore it cannot be said that the order of the AO was prejudicial to the interest of revenue as submitted by assessee - Held that - It is well-settled principle that the Revenue authorities are duty bound to tax right person and right person alone. By right person is meant the person who is liable to be taxed according to law with respect to a particular income. The meaning of wrong person is obviously used as the opposite of the expression right person . Ratio of decision ITO vs Ch. Atchaiah 1995 (12) TMI 1 - SUPREME Court clarifies that merely because of a wrong person is taxed with respect to a particular income the AO is not precluded from taxing the right person with respect to that income. Same is the case here when assessee company made a bogus claim of expenditure then the assessee cannot avail immunity from tax liability by stating that the impugned amount of expenditure claim has been taxed in the hands of respective payee companies. The present case is squarely covered in favour of the revenue by the decisions of Gee Vee Enterprises vs ACIT (1974 (10) TMI 29 - DELHI High Court) and CIT vs Nagesh Knitwears P. Ltd. (2012 (6) TMI 65 - DELHI HIGH COURT ) as in the present case the AO did not raise any query or make any inquiry pertaining to the claim of expenses submitted by the assessee in its books and statements of accounts submitted along with return and this is a clear case of lack of inquiry . We may also point out that if the AO fails to conduct the said investigation he commits the error and the word erroneous includes failure to make inquiry. In such cases the order becomes erroneous because necessary inquiry or verification has not been made and not because a wrong order has been passed on merits. We further hold that if from the detailed investigation conducted by the Investigation Wing of the department it is revealed that the bogus expenses have been claimed by the assessee with the intention to reduce its tax liability then the order is also prejudicial to the interest of revenue. The argument of the ld. Counsel of the assessee about revenue neutrality is not applicable to the facts and circumstances of the present case. Hence we are of the view that the CIT(A) invoked provisions of section 263 of the Act in a judicious and proper manner and we are unable to see any ambiguity perversity or any other valid reason to interfere with the same - Decided against assessee.

Summary

Issues Involved:
1. Legality of the CIT's order under Section 263 of the Income Tax Act, 1961.
2. Validity of the assessment orders passed under Section 143(3) read with Section 153A of the Income Tax Act, 1961.
3. Examination of alleged bogus expenses and their taxability.

Detailed Analysis:
1. Legality of the CIT's Order under Section 263 of the Income Tax Act, 1961:

The assessee challenged the CIT's order under Section 263, arguing that it was against law and facts. The CIT's order set aside the assessment orders for AY 2006-07 to 2010-11 on the grounds that they were erroneous and prejudicial to the interests of the Revenue. The assessee contended that the twin conditions of Section 263 were not fulfilled. The CIT directed the AO to examine the taxability of alleged bogus expenses without appreciating the factual position and detailed submissions made by the assessee.

The Tribunal observed that the AO did not raise any query or make any inquiry about the expenses claimed by the assessee. The Tribunal held that the case involved a "lack of inquiry" rather than "inadequate inquiry." The Tribunal relied on the decisions of the Hon'ble Delhi High Court in CIT vs Nagesh Knitwears Pvt. Ltd. and Gee Vee Enterprises vs ACIT, which distinguished between lack of inquiry and inadequate inquiry. The Tribunal concluded that the CIT was justified in invoking Section 263 as the AO failed to make necessary inquiries, rendering the assessment order erroneous and prejudicial to the interests of the Revenue.

2. Validity of the Assessment Orders Passed under Section 143(3) read with Section 153A of the Income Tax Act, 1961:

The assessee argued that under the scheme of reassessment under Section 153A, no addition could be made beyond incriminating material found during the search operation. The Tribunal noted that the AO did not raise any query or doubt about the expenses booked against certain companies during the assessment proceedings. The Tribunal held that the AO's failure to make inquiries or verification rendered the assessment orders erroneous and prejudicial to the interests of the Revenue.

The Tribunal emphasized that the AO is both an investigator and an adjudicator and must ascertain the truth of the facts stated in the return when circumstances provoke an inquiry. The Tribunal concluded that the assessment orders were rightly set aside by the CIT under Section 263.

3. Examination of Alleged Bogus Expenses and Their Taxability:

During the search operation, it was found that the assessee company was involved in inflating expenses using various non-genuine parties, thereby reducing its tax liability. The CIT directed the AO to examine the taxability of the alleged bogus expenses amounting to significant sums for different assessment years.

The assessee contended that the expenses claimed were revenue neutral as the recipient companies were also tax payees. However, the Tribunal rejected this argument, stating that the AO must tax the right person and the right person alone. The Tribunal held that the CIT was justified in directing the AO to examine the taxability of the alleged bogus expenses as the AO's failure to do so rendered the assessment orders erroneous and prejudicial to the interests of the Revenue.

Conclusion:
The Tribunal upheld the CIT's orders under Section 263, setting aside the assessment orders for AY 2006-07 to 2010-11. The Tribunal concluded that the AO's failure to make necessary inquiries and verification rendered the assessment orders erroneous and prejudicial to the interests of the Revenue. The appeals of the assessee were dismissed.