2019 (11) TMI 413 - HC - Income Tax

Revision u/s 263 - case of assessee was selected for scrutiny and assessment was completed under Section 143(3) of the Act - Disallowance of genuineness of salary and other expenses - payment of huge salary in cash - HELD THAT - AO while making assessment had considered the Tax Audit Report filed in Form 3CB enclosed with the return. AO disallowed six expenses claimed under the heads electricity and water expenses, miscellaneous expenses, staff welfare expenses, telephone expenses, travelling expenses and wage and freight expenses. CIT while exercising power under Section 263 of the Act had remanded the matter back to AO on the ground that necessary enquiries were not conducted and he failed to apply his mind in all perspective on the issues mentioned in Paras 3(I), 3(II), 3(III) and 3(IV) of the show-cause notice dated 17.03.2008, as such the assessment order was set aside restoring file to AO for further verification. Tribunal while dealing with first substantial question of law as regards deposits introduced by members of AOP has recorded a categorical finding and held that CIT has not considered the assessment order as erroneous and prejudicial to the interest of revenue on the basis of these deposits at the time of examination of records and application of his mind thereto, it cannot be relevant to hold now that assessment order is erroneous and prejudicial to the interest of revenue.Thus, the first question raised is finding of fact, and no interference is required. Allowance of expenses by AO without proper verification - Assessment order does not reveal the fact that the AO had made any verification of the allowances as claimed by assessee and the CIT had rightly remanded the matter so far as the verification of salary, rent and expenses in respect of wages and freight incurred by assessee and allowed by assessing authority, is concerned - matter needs to be remitted to the assessing authority only on question of verification of salary, rent and wages and freight expenses incurred by assessee for verification.

Summary

Issues:
1. Validity of the order passed under Section 263 of the Income Tax Act.
2. Allowance of expenses by the Assessing Officer without proper verification.

Analysis:

Issue 1: Validity of the order passed under Section 263 of the Income Tax Act:
The appeal arose from an order passed by the Income Tax Appellate Tribunal (ITAT) in relation to an assessment year. The case involved an Assessee, an Association of Persons (AOP) with 33 members, engaged in retail and wholesale activities of country-made foreign liquor in certain districts. The Commissioner of Income Tax (CIT) found the assessment order erroneous and prejudicial to the revenue's interest under Section 263, leading to a series of appeals and remands. The ITAT eventually set aside the CIT's order, prompting the revenue to appeal before the High Court.

The revenue contended that the CIT's order for fresh assessment was in the interest of revenue due to discrepancies highlighted in the Tax Audit Report. However, the respondent-assessee argued that the AO had considered all relevant records and the assessment order was not erroneous. The High Court observed that the AO had disallowed certain expenses claimed by the assessee, leading to the CIT's intervention under Section 263. The Tribunal concluded that the assessment order was not erroneous or prejudicial to the revenue's interest based on the deposits introduced by the AOP members. The Court upheld this finding as a factual matter, requiring no interference.

Issue 2: Allowance of expenses by the Assessing Officer without proper verification:
The second substantial question revolved around the allowance of expenses by the Assessing Officer (AO) without adequate verification. The CIT had noted discrepancies in the verification process, specifically regarding salary payments made in cash, rent payments, and expenses related to wages and freight. The AO had accepted these expenses without thorough verification, leading to the CIT's order under Section 263. The High Court examined the Tribunal's reliance on the assessment order and found that the AO had not sufficiently verified the claimed expenses.

The Court concurred with the need for proper verification of salary, rent, and wages/freight expenses incurred by the assessee. Consequently, the matter was remitted to the assessing authority for thorough verification within a specified timeframe. The appeal was partly allowed in favor of the revenue, emphasizing the importance of verifying expenses to ensure accurate assessment.

In conclusion, the High Court's judgment addressed the validity of the CIT's order under Section 263 and the necessity for proper verification of expenses by the Assessing Officer, highlighting the importance of thorough scrutiny in income tax assessments.