2014 (3) TMI 932 - AT - Income Tax

Tribunal quashes CIT order under IT Act, successor cannot review predecessor, appeal allowed

The Tribunal quashed the CIT's order under section 263 of the IT Act, ruling that the successor CIT cannot review the predecessor's order. The issues ... Revision u/s 263 of the Act – Validity of taking up of closed matters by the successor CIT - Loss incurred in Sterling Exports – Held that:- An error which is not raised in the 263 notice cannot be raised by the CIT – The decision in COMMISSIONER OF INCOME TAX, DELHI (CENTRAL) – I Versus CONTIMETERS ELECTRICALS PVT. LTD. [2008 (12) TMI 4 - HIGH COURT DELHI] followed - the department cannot travel beyond the show cause notice - it would be against the principles of natural justice that a person who has not been confronted with any ground be saddled with the liability - the issue did not form part of the show cause notice and the assessee was not even confronted with it, even before the CIT, it cannot for the basis for revision of the assessment order under section 263 – thus, the issue of SE loss having not been mentioned u/s 263 show cause notice, the setting aside order by CIT in this behalf cannot be sustained - Successor CIT cannot take up the closed 263 proceedings on the same issues and review the order of her predecessor on same issues. FDR Interest u/s 10AA of the Act – Held that:- The show cause notice was to verify whether interest income was included in the books or not – Assessee had demonstrated this aspect to the satisfaction of audit party, CIT(Audit) and predecessor CIT - the set aside for a new issue i.e. eligibility of FDR interest u/s 10AA cannot be sustained. The issue has been examined by CIT and sec. 10AA eligibility has not been disturbed in 263 order - Thus the direction to re-examine eligibility of 10AA qua the FDR interest has to fail on both counts i.e. it is not raised in show cause notice and sec. 10AA has been not disturbed - as long as the audit correspondence, letter of CIT(Audit) and predecessor CIT correspondence and order are available on record, they become part of record - Successor CIT cannot gloss over the same as it implies non perusal of record and non-application of mind - These omissions violate the 263 provisions – Decided in favour of Assessee. Issues Involved:1. Validity of the order passed by CIT under section 263 of the IT Act.2. Whether the loss of Rs. 23,02,984/- from Sterling Exports was considered at the assessment stage.3. Whether interest accrued on fixed deposits in Sterling Securities Service was accounted for.4. Whether the CIT can review the order of her predecessor.5. Whether the CIT can initiate proceedings under section 263 based on an audit objection.Detailed Analysis:1. Validity of the Order Passed by CIT Under Section 263 of the IT Act:The assessee challenged the validity of the CIT's order dated 26.03.2013, which set aside two issues for re-examination by the AO: the loss of Rs. 23,02,984/- from Sterling Exports and the interest accrued on fixed deposits in Sterling Securities Service. The CIT's order was contested on the grounds that the predecessor CIT had already dropped the proceedings under section 263 after finding the assessee's submissions satisfactory. It was argued that the successor CIT could not review the order of her predecessor, making the impugned order contrary to law and thus nullity.2. Consideration of Loss from Sterling Exports:The CIT's order was challenged for setting aside the issue of the loss from Sterling Exports without it being mentioned in the original 263 notice. The assessee contended that an error not mentioned in the show cause notice could not be revised under section 263. The Tribunal supported this view, citing the Delhi High Court judgment in Contimeters Electricals and the Supreme Court judgment in Toho Engineering, which held that the department could not travel beyond the show cause notice. Consequently, the setting aside of the loss from Sterling Exports was deemed unsustainable.3. Accounting for Interest on Fixed Deposits:The CIT's notice under section 263 alleged that the interest accrued on fixed deposits was not declared, resulting in underassessment of income. The assessee demonstrated that the interest was included in the books and that the net interest income was reflected in the P&L account. The Tribunal noted that the issue had been verified by the audit party, CIT (Audit), and the predecessor CIT, who had found the assessee's explanation satisfactory and closed the proceedings. The Tribunal held that the successor CIT could not reopen the closed proceedings on the same issues, making the 263 order unsustainable.4. Review of Predecessor's Order by Successor CIT:The Tribunal found that the predecessor CIT had concluded the 263 proceedings after due verification of the record and the assessee's explanations. The successor CIT's action to reopen the closed proceedings was deemed a review of the predecessor's order, which is not permitted under the IT Act. The Tribunal held that the successor CIT had no jurisdiction to revive the closed proceedings, making the impugned order invalid.5. Initiation of Proceedings Under Section 263 Based on Audit Objection:The assessee argued that the 263 proceedings were initiated based on an audit objection, without independent application of mind by the CIT. The Tribunal noted that the audit objections had been duly explained by the AO and accepted by the CIT (Audit) and the predecessor CIT. The Tribunal held that the successor CIT's action based on third-party opinion without independent verification was bad in law and unsustainable.Conclusion:The Tribunal quashed the impugned 263 order on both legal and factual grounds, holding that the successor CIT could not review the predecessor's order, and that the issues raised were either not mentioned in the show cause notice or had already been satisfactorily explained and closed. The appeal was allowed in favor of the assessee.