Revisionary Power Can't Be Invoked On Allegation Of Improper Inquiry By AO: Delhi ITAT

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the assessment order cannot be held to be erroneous and prejudicial to the interest of revenue merely on the allegation that the Assessing Officer has not made an inquiry and verification with regard to cash deposits as well as scrap sales.

The bench of Saktijit Dey (Vice President) and Naveen Chandra (Accountant Member) has observed that on the mere allegation that, in the opinion of the revisionary authority, the Assessing Officer has not made inquiries or verifications that should have been made, revisionary power can be invoked. Allegation of lack of inquiry by the Assessing Officer has to be substantiated based on record and cannot be conjured out of thin air.

The appellant/assessee is a resident individual and is stated to be engaged in the manufacturing and trading of agricultural implements such as harrows, thrashers, cultivators, etc. The assessee maintains regular books of account, and such books of account have been subjected to statutory audit under Section 44AB.

The assessee filed his return of income, declaring income. The assessee's case was selected for scrutiny to verify “large turnover shown in income tax return, but audit report not filed." The assessing officer issued notices under sections 142(1) and 143(2) from time to time, calling upon the assessee to furnish various details. As observed by the Assessing Officer, in response to notices, the assessee furnished replies, documents, books of account, bills, vouchers, etc., which were verified on a test-check basis. While verifying the books of account and documents filed by the assessee, the assessing officer made the disallowances for car running and repair and maintenance expenses.

After the addition of disallowances, the total income was determined at Rs. 8,91,626. The assessment was completed under Section 143(3).

After the completion of the assessment, the PCIT called for and examined the assessment records. While doing so, he was of the view that in the course of assessment proceedings, the Assessing Officer has not verified or examined certain issues, such as cash deposited in the bank account during the demonetization period and the taxability of scrap sales of Rs. 7,46,000. In the course of assessment proceedings, the assessee did not furnish Form 3CA of the audit report. Without taking Form 3CA on record, the assessing officer completed the assessment. Thus, he was of the view that the assessment order, having not examined or inquired into the aforesaid issues, is erroneous and prejudicial to the interest of revenue.

The PCIT issued a show-cause notice under Section 263 requiring the assessee to explain why the assessment order should not be revised. In response to the show-cause notice, the assessee furnished a detailed reply objecting to the initiation of proceedings under Section 263 of the Act.

The assessee contended that at the time of assessment proceedings, since the assessing officer has made a detailed inquiry with regard to the cash deposited during the demonetization period, the assessment order cannot be treated as erroneous and prejudicial to the interest of revenue on the ground that the assessing officer has not examined the issue.

The primary conditions for invoking Section 263 of the Act are that the order sought to be revised must be erroneous and, at the same time, prejudicial to the interest of revenue. Unless these twin conditions are satisfied, Section 263 of the Act cannot be invoked. In the facts of the present case, PCIT has put much emphasis on Explanation 2 to Section 263.

The tribunal noted that Explanation 2 to Section 263 does not invest unbridled power in the revisionary authority so as to empower him to invoke revisionary jurisdiction arbitrarily. The words appearing in Explanation 2(a) to the effect that “the order is passed without making inquiries or verifications that could have been made” certainly do not mean that on the mere allegation that, in the opinion of the revisionary authority, the Assessing Officer has not made inquiries or verifications that should have been made, revisionary power can be invoked.

The tribunal held that exercise of jurisdiction under Section 263 is invalid and, hence, unsustainable, as the assessment order cannot be held to be erroneous and prejudicial to the interest of Revenue.

The tribunal quashed the order passed under Section 263 and restored the assessment order.

Counsel For Appellant: Gautam Jain

Counsel For Respondent: T. James Singson

Case Title: Sh. Dharam Singh Versus PCIT

Case No.: ITA No.821/Del/2022

Click Here To Read The Order