2016 (1) TMI 1104 - HC - Income Tax

High Court Upholds ITAT Decision on Income Tax Act Section 263 Appeal

The High Court upheld the ITAT's decision to set aside the CIT's order under Section 263 of the Income Tax Act. The court found that the Assessing Officer ... Revision u/s 263 - non assigning reasons for accepting the valuation of the work-in-progress by AO - Held that:- The twin test propounded by the Hon'ble Courts for invoking the provisions of Section 263 of the Act, are not satisfied in the present case. As discussed above, the CIT proceeded to initiate proceedings under Section 263 of the Act only on the ground that the Assessing Officer has not assigned any reasons for accepting the valuation of the work-in-progress declared by the assessee. As per the materials placed before the Tribunal in the records pertaining to the assessment year in question, a detailed examination is made by the Tribunal, Tribunal is of the view that the Assessing Officer has applied his mind before accepting the figure declared by the assessee in the work-in-progress report. Such an order cannot be held to be erroneous and prejudicial to the interest of the revenue. It is not a case of 'lack of inquiry'. Further inquiry ordered by the CIT would amount to fishing/rowing inquiry in the matter already concluded. The ITAT having considered the material placed before it, rightly set-aside the order passed under Section 263 of the Act, as not sustainable. Accordingly, the assessee's appeal is allowed as the consequential order passed under Section 143(3) read with Section 263 of the Act does not survive for consideration as having become infructuous. No exception can be found with the well reasoned order passed by the ITAT. - Decided against revenue Issues Involved:1. Validity of the order passed by the CIT under Section 263 of the Income Tax Act.2. Whether the ITAT was correct in canceling the CIT's order under Section 263.3. Assessment under Section 143(3) read with Section 263.Detailed Analysis:Issue 1: Validity of the order passed by the CIT under Section 263 of the Income Tax ActThe CIT initiated proceedings under Section 263 of the Income Tax Act, 1961, on the grounds that the assessment order concluded by the Assessing Officer (AO) was erroneous and prejudicial to the interest of the revenue. The CIT directed the AO to adopt a higher value of work-in-progress than what was initially accepted. The CIT's computation resulted in a significant increase in the total income of the assessee. The CIT's order was challenged by the assessee before the ITAT, which set aside the CIT's order.Issue 2: Whether the ITAT was correct in canceling the CIT's order under Section 263The ITAT, after considering the submissions from both parties, set aside the CIT's order under Section 263. The ITAT found that the AO had applied his mind and verified the material placed by the assessee regarding the work-in-progress. The ITAT concluded that the AO's acceptance of the closing work-in-progress was justified and not erroneous or prejudicial to the revenue's interest. The ITAT also noted that the CIT's computation would result in an unrealistic profit margin for the assessee, which was not in line with the usual profit margins in the real estate business.Issue 3: Assessment under Section 143(3) read with Section 263The assessment under Section 143(3) read with Section 263 was rendered infructuous as the ITAT canceled the CIT's order under Section 263. The ITAT's decision was based on a detailed examination of the records and the material placed before it, concluding that the AO had conducted adequate inquiries and applied his mind before accepting the work-in-progress figures provided by the assessee.Additional Points:1. Arguments by Revenue Counsel:- The AO had accepted the valuation of closing stock without proper application of mind.- The CIT's order under Section 263 was justified as it corrected an erroneous and prejudicial assessment order.2. Arguments by Assessee's Counsel:- The AO had conducted a detailed inquiry and verified the material provided by the assessee.- The twin conditions for invoking Section 263 (order being erroneous and prejudicial to the revenue) were not satisfied.- The computation by the CIT would result in an unrealistic profit margin, which was not in line with industry norms.3. Reliance on Judgments:- The ITAT and the High Court relied on various judgments, including those from the Supreme Court and High Courts, which established that mere inadequate inquiry does not justify invoking Section 263 unless the order is erroneous and prejudicial to the revenue.4. Conclusion by the High Court:- The High Court upheld the ITAT's decision, stating that the CIT's invocation of Section 263 was uncalled for as the AO's order was not erroneous or prejudicial to the revenue.- The High Court noted that further inquiry by the CIT would amount to a fishing/rowing inquiry in a matter already concluded.- The amendment to Section 263 by the Finance Act, 2015, was not applicable to the case at hand.Final Judgment:The High Court dismissed the revenue's appeals, answering the substantial questions of law in favor of the assessee and against the revenue. The ITAT's order setting aside the CIT's order under Section 263 was upheld, and the consequential assessment order under Section 143(3) read with Section 263 was rendered infructuous.