2016 (4) TMI 732 - AT - Income Tax

Revision u/s 263 - uninquired unsecured loans - Held that - No hesitation in holding that the case under consideration is a glaring example of not making a relevant enquiry which amounts to no enquiry and is a case of non-application of mind by the AO. We therefore uphold the order of the CIT u/s.263 of the Act, in so far as it concerns direction to the AO to investigate regarding the unsecured loans appearing in the balance sheet of the Assessee. Receipt of advances from customers by the Assessee and the complaint of the CIT in the order u/s.263 of the Act that the AO ought to have made investigation into such unusual practice which was not prevalent in the concerned trade, we are of the view that even in respect of these advances received against future supplies, proper enquiries ought to have been made by the AO before completing the Assessment because there were several suspicious circumstances which warranted a probe by the AO. Admittedly no such probe has been made by the AO. The reasons given for upholding exercise of jurisdiction u/s.263 of the Act, in respect of unsecured loans received during the previous year would equally apply to these advances also. Thus we uphold the order u/s.263 of the Act - Decided against assessee

Summary

Issues:
1. Whether the order of the Assessing Officer (AO) determining total income was erroneous and prejudicial to the interest of the revenue.
2. Whether the AO failed to make proper inquiries regarding unsecured loans and advances from customers.
3. Whether the Commissioner of Income Tax (CIT) was justified in invoking Section 263 of the Income Tax Act.

Analysis:
1. The appeal by the Assessee challenged the order of the AO for the assessment year 2008-09. The CIT, under Section 263 of the Act, found the AO's order erroneous and prejudicial to revenue due to unverified unsecured loans and unusual customer advances. The CIT observed that the AO did not establish the capacity and genuineness of transactions involving unsecured loans raised from 19 persons. The CIT directed the AO to conduct proper inquiries and draw conclusions, citing legal precedents emphasizing the importance of thorough investigations by the AO.

2. The CIT also highlighted the issue of huge advances received from customers, particularly from a specific company, which the Assessee repaid without proper documentation. The CIT noted that the AO failed to make necessary inquiries into these transactions, which were deemed unusual. The Assessee argued that such practices were common in the business and provided explanations for the transactions. However, the CIT maintained that the lack of proper investigation by the AO rendered the assessment order erroneous and prejudicial to revenue.

3. The Assessee contended that where the AO conducts an inquiry and is satisfied with transaction genuineness, the CIT should not intervene through revision. The Tribunal referred to a relevant judgment regarding inadequate inquiries leading to erroneous orders. The Tribunal upheld the CIT's order under Section 263, emphasizing the importance of thorough investigations by the AO, especially concerning unsecured loans and customer advances. The Tribunal dismissed the Assessee's appeal, affirming the CIT's decision.

In conclusion, the Tribunal upheld the CIT's decision under Section 263, emphasizing the necessity of thorough investigations by the AO to prevent erroneous assessments prejudicial to revenue. The judgment highlighted the legal significance of conducting proper inquiries into financial transactions to ensure compliance with tax laws and protect revenue interests.