2022 (11) TMI 381 - AT - Income Tax

Revision u/s 263 by CIT - disallowances of expenses were on adhoc basis - HELD THAT - The purpose of framing scrutiny assessment u/s 143(3) inter-alia, to see that the Assessee is maintaining proper records, books of accounts etc. and compliance of various applicable provisions of the 1961 Act are made, to finally arrive at income chargeable to tax and compute tax liability of the tax-payer within the mandate of the provisions of the 1961 Act. In case of non compliances of various applicable provisions of the 1961 Act, consequential penal provisions are prescribed in the 1961 Act itself which will get attracted and which has direct bearing on computing income chargeable to tax. Thus, there is a complete non application of mind by the AO as the AO merely accepted the contentions of the assessee by accepting the replies filed by the assessee, without any verification . Interestingly, the AO who framed assessment for ay 2014-15 is the same who framed the assessment for ay 2016-17(year under consideration), and exactly similar additions under the same head of disallowance of expenses ( Labour Charges, Travelling Expenses and Office Expenses) were made in both the years, albeit in ay 2014-15, the additions for aggregate of disallowance of expenses were to the tune of Rs. 45,000/-, while in the year under consideration the aggregate of disallowance of expenses under the same heads were to the tune of Rs. 20,000/- . In both these years, the aforesaid disallowances of expenses were on adhoc basis, without pinpointing the particular expenses which could not be verified by the AO. Thus, it appears that there is complete non application of mind by AO while framing assessment u/s 143(3) and the replies filed by the assessee were merely accepted by AO without making any enquiry / verification whatsoever to arrive at the income chargeable to tax. PCIT has rightly invoked provisions of Section 263 and rightly set aside the assessment order passed by AO , and directions were rightly issued by ld. PCIT for denovo assessment. Assessee in the proceedings before ld. PCIT u/s 263 of the 1961 Act gave general replies, but could not repel that the assessment order dated 22.02.2018 passed by the AO u/s 143(3) was suffering from complete non application of mind , and that merely contentions of the assessee were accepted by AO without any verification whatsoever. We hold that the clause (a) to Explanation 2 to Section 263(1) is clearly applicable, as the AO has passed an assessment order u/s 143(3) , dated 22.02.2018, without making inquiries and verifications which should have been made, and the replies filed by the assessee were simply accepted by AO without any application of mind whatsoever and without making any verifications .Thus, the assessment order passed by AO was clearly erroneous so far as prejudicial to the interest of Revenue and was rightly set aside by PCIT by invoking his revisionary powers u/s 263 and we uphold the revisionary order passed by ld. PCIT u/s 263. Appeal filed by assessee stands dismissed.

Issues Involved:
1. Validity of the revisionary order passed under Section 263 of the Income-tax Act, 1961.
2. Adequacy of inquiries and verifications conducted by the Assessing Officer (AO) during the assessment proceedings.
3. Justification for disallowances made by the AO on various expense heads.
4. Compliance with procedural requirements and application of mind by the AO in framing the assessment order.

Issue-wise Detailed Analysis:

1. Validity of the revisionary order passed under Section 263 of the Income-tax Act, 1961:
The appeal in ITA No.11/Alld./2019 for the assessment year 2016-17 was filed by the assessee against the revisionary order dated 13.11.2018 passed by the Principal Commissioner of Income Tax (PCIT), Allahabad, under Section 263 of the Income-tax Act, 1961. The PCIT held that the assessment order dated 22.02.2018 passed by the AO under Section 143(3) was erroneous and prejudicial to the interest of Revenue. The PCIT directed the AO to make a full and proper inquiry and apply the provisions of law properly while making a fresh assessment denovo. The Tribunal upheld the PCIT's order, noting that the AO had failed to make necessary inquiries and verifications, thereby justifying the invocation of Section 263.

2. Adequacy of inquiries and verifications conducted by the Assessing Officer (AO) during the assessment proceedings:
The PCIT observed that the AO did not make any expected inquiries regarding low income from TCS receipts, which was the reason for selecting the case for full scrutiny. The AO was required to make intensive inquiries and effective investigations to determine whether the income from the liquor business was correctly shown by the assessee. However, the AO completed the assessment in haste without making full and proper inquiries, which was prejudicial to the interest of the revenue. The PCIT issued a show-cause notice to the assessee, highlighting several deficiencies in the AO's inquiry process, including failure to verify the purchase price of liquors, selling price, margin of profit, and the genuineness of cash deposits.

3. Justification for disallowances made by the AO on various expense heads:
The AO disallowed Rs. 10,000/- under the head Labour Charges, Rs. 5,000/- under the head Travelling Expenses, and Rs. 5,000/- under the head Office Expenses on the grounds that these expenses remained unverifiable due to a lack of supporting evidence. The PCIT found these lump sum disallowances untenable in the eye of law because the AO failed to specify which expenditures lacked supporting evidence. If there were no supporting evidence, the entire expense should have been disallowed, not just a lump sum amount. This revealed that the AO made disallowances without application of mind, rendering the assessment order erroneous and prejudicial to the interest of revenue.

4. Compliance with procedural requirements and application of mind by the AO in framing the assessment order:
The PCIT noted several procedural discrepancies in the assessment process. The AO mentioned a last hearing date of 04.09.2017, but note sheet proceedings indicated attendance on various dates up to 12.02.2018. The assessment order was dated 22.02.2018, but the demand notice was served on 20.03.2018, after the AO's superannuation on 28.02.2018. The AO accepted cryptic replies and incomplete documents from the assessee without obtaining necessary information from liquor sellers or investigating the sources of initial cash deposits. The AO also failed to verify the genuineness of cash deposits in bank statements and did not examine the cash flow, cash book, and financial statements. The AO did not make any apparent inquiry about assets and investments, nor did he verify the source of cash deposits and utilization of cash correctly in the accounts.

Conclusion:
The Tribunal upheld the PCIT's revisionary order under Section 263, agreeing that the AO's assessment order was erroneous and prejudicial to the interest of revenue due to a lack of proper inquiries and verifications. The AO's failure to apply the provisions of law properly and the procedural discrepancies in the assessment process justified the invocation of Section 263. The appeal filed by the assessee was dismissed.

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