2015 (4) TMI 479 - HC - Income Tax

Appeal against cancellation of order passed under Section 263 of the Income Tax Act, 1961 - Relevant enquiry was not undertaken - Held that - The power under section 263 of the Act can be exercised where the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue. When an order is erroneous, then the order is also deficient and in order to remedy the situation, power under section 263 of the Act has been given. Therefore, the view that the power could not have been exercised to allow the Assessing Officer to make up the deficiency is altogether an incorrect impression of the law. It is not the law that the assessing officer occupying the position of an investigator and adjudicator can discharge his function by perfunctory or inadequate investigation. Such a course is bound to result in erroneous and prejudicial orders. Where the relevant enquiry was not undertaken, as in this case, the order is erroneous and prejudicial too and therefore revisable. Investigation should always be faithful and fruitful. Unless all fruitful areas of enquiry are pursued the enquiry cannot be said to have been faithfully conducted. In a different context the Apex Court observed contra veritatem lex nunquam aliquid permittit implies a duty on the Court to accept and accord its approval only to a report which is the result of faithful and fruitful investigation . - Decided in favour of appellant.

Issues Involved:
1. Legitimacy of the exercise of power under section 263 of the Income Tax Act, 1961 by the Commissioner of Income Tax (CIT).
2. Adequacy of the enquiry conducted by the Assessing Officer (AO) regarding the creditworthiness of creditors.
3. Justification of the Income Tax Appellate Tribunal's (ITAT) decision to set aside the CIT's order.

Issue-Wise Detailed Analysis:

1. Legitimacy of the exercise of power under section 263 of the Income Tax Act, 1961 by the Commissioner of Income Tax (CIT):
The CIT exercised power under section 263 of the Income Tax Act, 1961, to set aside the assessment order on the grounds that the AO failed to properly investigate the creditworthiness of the creditors providing unsecured loans to the assessee. The CIT noted that the creditors had either nil or negligible income to support the huge cash credits and that identical amounts were deposited in their bank accounts just before advancing the loans, indicating accommodation entries. The CIT concluded that the AO's failure to apply his mind to all aspects of the case constituted an erroneous order prejudicial to the interest of the revenue.

2. Adequacy of the enquiry conducted by the Assessing Officer (AO) regarding the creditworthiness of creditors:
The Tribunal found that the AO had conducted enquiries by deputing an inspector to verify the loan transactions, examining the return of income, balance sheet, profit and loss account, and bank statements of the lenders, and obtaining confirmations from the lenders. The Tribunal held that the AO had applied his mind and taken a possible view based on the enquiries conducted. It emphasized that proceedings under section 263 cannot be initiated merely because the CIT, in his supervisory capacity, believes that more enquiry should have been made. The Tribunal cited multiple judgments supporting the view that if the AO has conducted enquiries and considered the facts, the CIT cannot invoke section 263 merely due to a difference in opinion.

3. Justification of the Income Tax Appellate Tribunal's (ITAT) decision to set aside the CIT's order:
The Tribunal's decision to set aside the CIT's order was based on the premise that the AO had conducted adequate enquiries and applied his mind before accepting the loan transactions. The Tribunal held that the CIT's power under section 263 cannot be used to allow the AO to make up for any perceived deficiencies in the enquiry. The Tribunal referred to various judgments, including those from the Delhi High Court and Bombay High Court, which established that the CIT must demonstrate a patent error by the AO resulting in prejudice to the revenue to invoke section 263. The Tribunal concluded that the CIT's observation that the AO failed to enquire into the creditworthiness of the loan creditors was incorrect.

Conclusion:
The High Court set aside the Tribunal's order, agreeing with the CIT that the AO's enquiry into the creditworthiness of the creditors was inadequate. The Court emphasized that mere examination of documents like bank passbooks and balance sheets without investigating the actual creditworthiness of the creditors constitutes non-application of mind, making the AO's order erroneous and prejudicial to the interest of the revenue. The Court reiterated that the CIT's power under section 263 is wide and can be exercised to remedy deficiencies in the AO's enquiry. The appeal was allowed, and the Tribunal's order was set aside to the extent it pertained to the unsecured loans.

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