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2021 (12) TMI 975 - AT - Income TaxRevision u/s 263 by CIT - AO was erroneous and prejudicial to the interest of the revenue for the reason that the AO failed to obtain any reconciliation of the turnover as per Profit and Loss account with the total invoice value and whether the invoices were raised on cost plus method, which receiving the corresponding amount from the clients - HELD THAT - The law is well settled that if there is a failure on the part of AO to make an enquiry on the issue which calls for an enquiry, that by itself will render the order of assessment erroneous and prejudicial to the interests of the revenue. It has been so held by the Hon ble Delhi High Court in the case of Gee Vee Enterprises Vs. DCIT 1974 (10) TMI 29 - DELHI HIGH COURT We are of the view that the mere fact the Assessee gave a reconciliation of sales as per invoices and as per the profit and loss account and the fact that the very same AO made enquiries in AY 2013-14 and therefore he was well aware of the issue and accepted the reconciliation given by the Assessee cannot be the basis to hold that the AO made necessary enquires. Since there was a failure on the part of AO to make necessary enquiry, we are of the view that the CIT was justified in invoking jurisdiction u/s. 263 of the Act in the facts and circumstances of the present case. We are of the view that we need not examine the arguments of the learned counsel for the Assessee in this regard because Explnation-2 is only a deeming provision and if on facts it is found that the AO did not make any enquiries before concluding the assessment there is no need to take recourse to the deeming provisions. We are of the view that the scope of enquiry in the set aside proceedings will be restricted to the directions as set out above and to this extent the impugned order is modified. With these observations, we partly allow the appeal of the Assessee.
Issues Involved:
1. Whether the Assessing Officer (AO) failed to make necessary inquiries regarding the reconciliation of turnover as per Profit and Loss account with the total invoice value. 2. Whether the order of the AO was erroneous and prejudicial to the interest of the revenue. 3. Applicability of Explanation 2 to Section 263 of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Failure to Make Necessary Inquiries The Pr.CIT exercised his powers under Section 263 of the Income Tax Act, 1961, contending that the AO's order was erroneous and prejudicial to the interest of the revenue. The primary reason cited was the AO's failure to obtain a reconciliation of the turnover as per the Profit and Loss account with the total invoice value. The AO did not verify whether the invoices were raised on a cost-plus method and whether the corresponding amounts were received from clients. This failure was significant, especially since similar issues had been raised in previous assessment years (AY 2010-11 to 2012-13). Issue 2: Erroneous and Prejudicial Order The Assessee argued that the AO had made proper verification and inquiries during the assessment proceedings for AY 2013-14 and had accepted the reconciliation provided. The Assessee contended that the AO applied his mind while passing the final assessment order for AY 2014-15 and that merely because adjustments were made in prior years, it did not render the order erroneous. However, the Pr.CIT was not convinced and proceeded to revise the AO's order, setting it aside for further verification and examination of the turnover as per the Profit and Loss account and invoices raised. The Tribunal noted that the mere submission of a reconciliation statement by the Assessee and the fact that the AO had made inquiries in the previous year could not be the basis to hold that the AO made necessary inquiries for AY 2014-15. The Tribunal cited the Hon'ble Delhi High Court's decision in Gee Vee Enterprises Vs. DCIT, which emphasized that failure to make necessary inquiries renders an order erroneous and prejudicial to the interests of the revenue. Issue 3: Applicability of Explanation 2 to Section 263 The Assessee argued that Explanation 2 to Section 263, introduced by the Finance Act, 2015, effective from 1.6.2015, was not applicable to AY 2014-15. Explanation 2 deems an order erroneous and prejudicial to the interests of the revenue if the AO fails to make necessary inquiries or verification. The Tribunal, however, did not delve into this argument, stating that if on facts it is found that the AO did not make any inquiries before concluding the assessment, there is no need to take recourse to the deeming provisions of Explanation 2. Conclusion: The Tribunal concluded that the AO failed to make necessary inquiries regarding the reconciliation of turnover as per the Profit and Loss account with the total invoice value. This failure justified the Pr.CIT's invocation of jurisdiction under Section 263. The Tribunal referenced its own decision in a similar case (2021) 125 Taxmann.com 224 (Bangalore-Trib.), where it was held that the issue should be remanded to the AO for fresh consideration, requiring a detailed reconciliation of the differences between the revenue recorded in financial statements and as per the invoices. The Tribunal modified the scope of inquiry in the set-aside proceedings to be restricted to the directions set out in its order and partly allowed the appeal of the Assessee. The appeal was pronounced in the open court. Result: The appeal by the Assessee is partly allowed.
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