2023 (5) TMI 735 - AT - Income Tax

Revision u/s 263 - Validity of assessment order passed u/s 143(3) - unexplained credit on account of capital contribution from 2 partners of the assessee firm, the outstanding balance of the sundry creditor and alleged suppressed production - HELD THAT - AO during the course of assessment proceedings, raises specific query on the issue capital contribution by the partners and required the assessee to furnish supporting evidence which can be verified from the notice issued u/s142(1) and SCN. It is not the case that the AO has not made any enquiry with regard to capital introduction by the 11 partners, as such the AO carried out adequate inquiry with regard to all the 11 partners who introduced capital in the assessee firm and thereafter made addition u/s 68 on account of capital introduced by the 2 partner only. Thus, the allegation of Pr. CIT for initiated proceedings u/s 263 of the Act on the ground that the AO has not made enquiries or verification with regard to other partners is factually incorrect. Even on merit of the case, we note that the honourable courts in series of the cases have held that the capital contribution made by the partner of the firm cannot be subject to the addition in the hands of the partnership firm. In this regard, we find support and guidance from the judgment of Pankaj dyestuff Industries 2005 (7) TMI 601 - GUJARAT HIGH COURT - In view of the above we hold that the allegation framed by the learned PCIT cannot be made subject matter of revision under the provisions of section 263. AO made addition of outstanding sundry creditor on ad-hoc and actual amount worked out for supressed production and amount added while computing assessed income are different - Regarding both the issues, we note that the assessee is in appeal before the learned CIT(A). This fact can be verified from the memo of appeal filed by the assessee before the learned. Once the issue is pending before the learned CIT(A), the same cannot be made subject matter of revision under the provisions of section 263 - we note that in case of CIT vs. Vam Resorts Hotels (P.) Ltd. 2019 (8) TMI 1418 - ALLAHABAD HIGH COURT as held that when an appeal is pending before the appellate commissioner, then the power under section 263 of the Act cannot be exercised.

Summary

Issues Involved:
1. Whether the assessment order passed under section 143(3) of the Income-Tax Act was erroneous and prejudicial to the interest of the Revenue.
2. Whether the Assessing Officer (AO) failed to make proper inquiries or verification regarding the capital introduced by the partners.
3. Whether the AO made an ad-hoc addition of sundry creditors without proper inquiry.
4. Whether there was an error in the computation of suppressed production.

Summary:

Issue 1: Erroneous and Prejudicial Assessment Order
The appeal revolves around the Principal Commissioner of Income-Tax (Pr. CIT) invoking revisionary jurisdiction under Section 263 of the Income-Tax Act, 1961, to revise the assessment order passed under section 143(3) for AY 2015-16. The Pr. CIT held that the assessment order was erroneous and prejudicial to the interest of the Revenue.

Issue 2: Capital Introduction by Partners
The Pr. CIT found that the AO only made an addition of Rs. 12,00,000/- as unexplained credit from 2 partners, ignoring the remaining Rs. 3,10,78,000/- from 9 partners. The Tribunal noted that the AO had raised specific queries regarding capital contributions and received satisfactory replies with supporting documents. It was held that the AO had made adequate inquiries, and the Pr. CIT's allegation was factually incorrect. The Tribunal cited various judicial precedents, including the Delhi High Court in CIT Vs. Sunbeam Auto and the Bombay High Court in Gabriel India Ltd., to support that the adequacy of inquiry is at the AO's discretion.

Issue 3: Ad-hoc Addition of Sundry Creditors
The Pr. CIT also found fault with the AO's ad-hoc addition of 10% of sundry creditors without proper verification. The Tribunal noted that the issue of sundry creditors was pending before the CIT(A), making it ineligible for revision under section 263. The Tribunal referred to the Allahabad High Court in CIT vs. Vam Resorts & Hotels (P.) Ltd., which held that issues pending before the appellate commissioner cannot be revised under section 263.

Issue 4: Suppressed Production
The Pr. CIT observed a discrepancy in the computation of suppressed production, where the AO added Rs. 2,02,36,851/- instead of Rs. 2,08,36,851/-, resulting in an under-assessment of Rs. 6,00,000/-. The Tribunal noted that this issue was also pending before the CIT(A) and thus could not be revised under section 263.

Conclusion:
The Tribunal concluded that the AO had made adequate inquiries and verifications regarding the capital introduction by partners. It also held that issues pending before the CIT(A) cannot be revised under section 263. Consequently, the order of the Pr. CIT was set aside, and the appeal of the assessee was partly allowed. The Tribunal emphasized that an inquiry deemed inadequate by the Commissioner does not render the AO's order erroneous if the AO applied the law correctly.