2010 (2) TMI 913 - AT - Income Tax

ITAT upholds CIT's action under section 263, deeming AO's assessment order erroneous.

The Income Tax Appellate Tribunal (ITAT) upheld the Commissioner of Income-tax's (CIT) action under section 263, finding the Assessing Officer's (AO) ... Jurisdiction power u/s 263 by CIT(A) - AO failed to investigate the international transaction with associate concerns - no whisper in the assessment order in respect of commission paid to the agent and the general expenses - Held that:- The first argument of the assessee that inquiry, in international transaction with associate concerns for the purpose of transfer pricing the value of international transaction should be more than Rs.5 crores is concerned, DR has rightly demonstrated that it is in respect of a reference to the TPO otherwise Assessing Officer can take cognizance under sec. 92-C. Except the issue in respect of brokerage all other issues have not been considered by the Assessing Officer. Learned Commissioner has not adjudicated the issue conclusively in the present proceedings. He has test-checked the assessment order prima-facie whether the Assessing Officer has accepted the accounting entry of the assessee without any inquiry or not. He has not made the addition. He simply set aside the issue to the Assessing Officer on a prima facie satisfaction that no inquiry was conducted by the Assessing Officer while framing the assessment order - if AO had taken a view permissible under the law and where two views are possible on that issue then the view of Assessing Officer even though not matching with the Learned Commissioner's views, Learned Commissioner would not be able to substitute his view by exercising powers under sec. 263. In the present case, there are no views expressed by the AO on the issues. The one of the issues which has been considered by the AO in respect of brokerage, which has been traveled in appeal before the Learned Commissioner, this cannot be taken up by the Learned Commissioner while exercising the powers under sec. 263 of the Act in view of clause (c) Explanation 1 appended to sec. 263. We modify the order of the Learned Commissioner to the extent and direct the Assessing Officer not to investigate the issue in respect of brokerage of Rs.11,52,195 - appeal of the assessee is partly allowed Issues Involved:1. Validity of the Commissioner of Income-tax's (CIT) action under section 263 of the Income-tax Act, 1961.2. Examination of international transactions with associate concerns.3. Verification of brokerage expenses.4. Verification of general charges.5. Verification of commission on sales.Detailed Analysis:1. Validity of the CIT's Action under Section 263:The primary grievance of the assessee is that the CIT erred in taking cognizance under section 263 of the Income-tax Act and setting aside the assessment order without proper examination of the facts and circumstances. The CIT formed an opinion that the Assessing Officer (AO) failed to conduct proper inquiries on certain issues, rendering the assessment order erroneous and prejudicial to the interest of the revenue.2. Examination of International Transactions with Associate Concerns:The CIT noted that the AO did not verify whether the international transactions with associate concerns were made at arm's length price. The assessee argued that the total volume of international transactions was less than Rs. 5 crores and maintained accounts in Form No. 3CEB based on the cost-plus method. The CIT, however, maintained that the AO should have conducted inquiries regardless of the transaction volume, as per section 92-C of the Act.3. Verification of Brokerage Expenses:The CIT observed that brokerage expenses of Rs. 11,52,195 were allowed without verification. The assessee contended that this issue was examined by the AO and also traveled before the CIT(Appeals). The CIT cannot take cognizance of this issue once it was disputed before the First Appellate Authority, as per clause (c) of Explanation to section 263(1) of the Act.4. Verification of General Charges:The CIT found that general charges of Rs. 11,20,500 were claimed and allowed without any verification. The assessee argued that the AO had verified these expenses before accepting them.5. Verification of Commission on Sales:The CIT noted that the commission on sales claimed at Rs. 16,96,845 was allowed without any verification. The assessee submitted details of this payment and argued that the AO accepted the claim after proper scrutiny. The CIT, however, believed that the AO accepted the assessee's version without verifying the facts, particularly the substantial rate of commission when additional expenses were considered.Analysis of Legal Precedents and Principles:The ITAT analyzed various authoritative pronouncements, including the Supreme Court's decision in Malabar Industries and the Bombay High Court's decision in Gabriel India Ltd., to outline the principles for judging the CIT's action under section 263. The CIT must record satisfaction that the AO's order is erroneous and prejudicial to the interest of the revenue. An order passed without application of mind or proper inquiry falls under the category of erroneous order.Conclusion:The ITAT concluded that the CIT was justified in taking action under section 263 for most issues, as the AO failed to conduct proper inquiries. However, the issue of brokerage expenses, which was already examined by the AO and traveled before the CIT(Appeals), could not be taken up by the CIT under section 263. The appeal of the assessee was partly allowed, directing the AO not to investigate the issue of brokerage expenses.Final Order:The appeal of the assessee is partly allowed, with the AO directed not to investigate the brokerage expenses issue of Rs. 11,52,195.