2017 (11) TMI 797 - AT - Income Tax

Revision u/s 263 - CIT has exercised his jurisdiction merely on the basis of audit objection - Held that - CIT before holding the order of AO as erroneous in so far as prejudicial to the interest of revenue has to find out error after examination of the records. The mere finding of Ld. Pr CIT is that no documentary evidences are available on record does not render the order of the AO as erroneous and prejudicial to the interest of Revenue. In our considered view it was the duty under the Act that the Ld. PR CIT to make necessary inquiry for arriving at a conclusion that the order of AO is erroneous in so far as prejudicial to the interest of revenue. In absence of any specific error we set aside the order passed by Ld. Pr CIT u/s 263 of the Act. Thus the grounds of appeal raised by the assessee are allowed.

Summary

Issues Involved:
1. Sustainability of the order under Section 263 of the Income Tax Act, 1961, passed in pursuance to an audit objection.
2. Whether the Assessing Officer (AO) applied his mind to the details of purchase while passing the assessment order.
3. Alleged undervaluation of closing stock due to misinterpretation of the method of ascertainment of cost.
4. The appellant's right to raise additional grounds during the hearing.

Detailed Analysis:

Issue 1: Sustainability of the Order under Section 263
The primary issue raised by the assessee is whether the Commissioner of Income Tax (CIT) erred in holding the order of the Assessing Officer (AO) passed under Section 143(3) as erroneous and prejudicial to the interest of revenue under Section 263 of the Income Tax Act, 1961. The assessee argued that the proceedings under Section 263 were initiated based on an audit objection without the CIT applying his own mind. The CIT observed discrepancies in the purchase figures and undervaluation of closing stock, which were not addressed by the AO. The Tribunal concluded that the CIT did indeed apply his mind independently and did not solely rely on the audit objection, thus the initiation of proceedings under Section 263 was justified.

Issue 2: AO's Application of Mind to Purchase Details
The CIT noted a discrepancy between the purchase expenses shown in the profit and loss account (?16,32,03,915) and the total purchases during the assessment proceedings (?16,58,28,272), resulting in a difference of ?26,24,357. The assessee contended that this difference was due to VAT liability adjustments not reflected in the trading/profit and loss account. The CIT found no material on record to substantiate this reconciliation and thus deemed the AO's order erroneous and prejudicial to the interest of revenue. The Tribunal upheld the CIT's observation, noting the lack of documentary evidence to support the assessee's claim regarding VAT adjustments.

Issue 3: Undervaluation of Closing Stock
The CIT observed that the closing stock was valued at ?230 per kg, whereas the purchase cost during the year was ?298.10 per kg, leading to an alleged undervaluation of ?67,17,784. The assessee argued that the closing stock was consistently valued at cost, which had been accepted in previous and subsequent years, and any enhancement in closing stock valuation would have a neutral revenue effect. The CIT found no qualitative and quantitative stock statement to justify the valuation method used by the assessee and thus held the AO's order as erroneous and prejudicial to the interest of revenue. The Tribunal agreed with the CIT's observation, emphasizing the need for proper documentation to support the valuation method.

Issue 4: Right to Raise Additional Grounds
The assessee reserved the right to raise additional grounds during the hearing. However, this issue was not elaborated upon in the judgment, and thus no specific ruling was provided on this matter.

Conclusion:
The Tribunal concluded that the CIT had applied his mind independently and not merely relied on the audit objection. The discrepancies in purchase details and undervaluation of closing stock were not adequately addressed by the AO, rendering the original assessment order erroneous and prejudicial to the interest of revenue. Consequently, the Tribunal set aside the order passed by the CIT under Section 263, allowing the appeal of the assessee. The order was pronounced in the open court on 10/11/2017.