2014 (10) TMI 611 - AT - Income Tax

Tribunal upholds CIT's order under Section 263, affirms proviso to Section 68, and directs additional verification.

The Tribunal dismissed the appeal, upholding the CIT's order under Section 263 as justified and within the limitation period. The AO's insufficient ... Revision u/s 263 - Erroneous and prejudicial order to the interest of the revenue - period of limitation - Held that:- The assessee has filed a letter dated 'nil' informing the AO of the commission income having been omitted to have been offered to tax - In the said letter the assessee has also enclosed profit and loss account - It is on the basis of this letter that notice u/s 148 was issued - in the letter and response to the notice u/s 148 the assessee itself has back tracked on its letter earlier filed having the escaped income - in the course of 142(1) proceedings the assesee voluntarily has produced details of the share application and the share premium received by the assessee - the assessee was meticulously by design drawn the attention of the AO to the share application money and the share premium - if there is any error which is prejudicial to the interest of the Revenue on the issue of share application moneys and share premiums then it would be in the reopened assessment which has been rightly revised by the CIT u/s 263 - If this re- assessment order is taken into consideration then the order passed u/s 263 is well within the limitation - a perusal of the order passed u/s 263 clearly shows that it is this reassessment order which the CIT has held to be erroneous and prejudicial to the interest of the Revenue, in so far as, no investigation whatsoever have been done by the AO, much less any investigation worth its name - This is also clearly evidence from the order sheet notings in the assessment folder - the order passed u/s 263 is not barred by limitation – Decided against assessee. Validity of order u/s 147 – Whether there was lack of proper enquiry as to the issue of share capital premium when the reopening was done for the specific purpose of escapement of commission income – Held that:- The AO cannot in a reopened assessment do roving enquiry, but what is to be understood is that it is not the reassessment which are in appeal, but, it is revisionary proceedings - If at all, the assessee wanted to challenge the so called roving enquiry which has been done by design, it was to be done within the prescribed time provided in respect of reopened assessment It is not something that can be done in an appeal against the revisionary order passed u/s 263 - The assessee himself having brought to the attention the issues to the AO and the AO have not done any investigation and as rightly submitted by the assessee, being lack of proper enquiries as to the issue of share capital and premium, the action of the ld. CIT in invoking the provisions of 263 is on a right footing and does not call for any interference – Decided against assessee. Addition of share capital u/s 68 – Held that:- The assessee has made investments in other companies also - The assessee came into existence on 20th November, 2007 with an initial share capital of about ₹ 1 or 2 lakh - The assessee decide to increase its share capital vide an ordinary meeting of the members of the company held on 31.03.2008 and increased the authorised share capital of the company from ₹ 2 lakhs to ₹ 35 lakhs - The issue of section 68 would clearly apply, as the proviso which has been added w.e.f. 01.04.2013 specifically provides for verification of the source of the source especially in respect of share application money, share capital, share premium or any such amount, by whatever name called - The AO have not conducted the enquiry to its logical end and having been carried away by the design of the assessee, CIT was right in invoking the provision of section 263 - proviso to section 68 has been introduced after the decision in COMMR. OF INCOME TAX Versus M/s LOVELY EXPORTS(PVT) LTD [2008 (1) TMI 575 - SUPREME COURT OF INDIA] - as the proviso is now applicable the AO would be right in verifying the source of the source - invocation of the proviso of section 68 has not been done by the CIT and that the CIT has done in his order u/s 263 is to treat the reassessment order passed by the AO to be erroneous and prejudicial to the interest of the Revenue, in so far as, the issue of share capital has not been looked into or investigated by the AO - Thus it is in the proceedings in consequence to the 263 order that the proviso to section 68 would be more applicable –Decided against assessee. Power to give directions - Whether the CIT in exercise of power u/s 263 can give direction in respect of subsequent assessment for which revisionary power u/s 263 has not been exercised – Held that:- CIT after verifying the records as available have issued the show cause notice and after considering the reply of the assessee had done further investigation and as the information was not fully coming from the assessee had directed the AO to verify whether these three issues relate to the same assessment year - In the order passed u/s 263 the CIT has not in any case extended his jurisdiction u/s 263 to any other assessment year - There is no direction in the order of the CIT directing the AO to consider anything for any other AY - The direction of the CIT is specific - Now it is for the assessee to show as to which year the issues raised by the ld. CIT would relate to - It is only in the knowledge of the assessee as to what the assessee has done in his books - What has happened in the assessee's books cannot be within the knowledge of the ld. CIT - as it is noticed that the CIT has invoked revisionary powers for the relevant AY and has not given any direction in respect of any subsequent AY, the order of the CIT is upheld – Decided against assessee. Erroneous and prejudicial to the interest of the revenue or not - Whether order passed by the AO can be said to be erroneous and prejudicial to the interest of the revenue when the AO has passed the order after inquiry or investigation on the issue of share capital – Held that:- The fact that the AO has not taken the issue of the share capital to its logical conclusion is evident - the whole reopening itself was by design of the assessee is also evident - Now to take shelter under such design and claim that investigation and inquiry has been done by the AO when the facts clearly stand against such claim is also evident - In any case in regard to the issues of the show cause notice u/s 263 in such cases the issue has been decided in Zigma Commodities Private Ltd; & Another Versus Income Tax Officer And Others [2014 (5) TMI 672 - CALCUTTA HIGH COURT] - CIT has verified and has found that the investigation was not done – Thus, clearly recognizing the design of the assessee in respect of re-assessments – Decided against assessee. Issues Involved:1. Limitation of the order passed under Section 263.2. Erroneous and prejudicial nature of the order under Section 147 regarding share capital/premium.3. Justification of addition under Section 68 in view of judicial precedents.4. Jurisdiction of CIT under Section 263 concerning subsequent years.5. Adequacy of inquiry by the AO on share capital.6. Generalized background for holding the order erroneous.7. Requirement for CIT to make inquiries before concluding.Issue-wise Detailed Analysis:1. Limitation of the Order Passed under Section 263:The assessee argued that the order under Section 263 was barred by limitation as the issue of share capital was not part of the reasons for reopening under Section 147. The Revenue contended that once the assessment is reopened under Section 147, all issues are open for consideration. The Tribunal held that since the assessee had voluntarily provided details of share application and premium during the reassessment, the issue was within the scope of the reassessment. Thus, the order under Section 263 was within the limitation period.2. Erroneous and Prejudicial Nature of the Order Under Section 147 Regarding Share Capital/Premium:The assessee argued that the reopening was for the specific purpose of taxing commission income, and the AO should not have made roving inquiries into share capital/premium. The Tribunal held that the issue was not about the reassessment but the revisionary proceedings. Since the AO did not conduct proper inquiries into the share capital and premium, the CIT's invocation of Section 263 was justified.3. Justification of Addition under Section 68 in View of Judicial Precedents:The assessee cited judicial precedents, including Lovely Exports and Bharat Engineering, to argue that no addition under Section 68 could be made. The Revenue countered that the share capital and premium were issued fraudulently for converting black money. The Tribunal held that the proviso to Section 68, introduced w.e.f. 01.04.2013, allows verification of the source of the source. The AO's failure to conduct proper inquiries justified the CIT's invocation of Section 263.4. Jurisdiction of CIT under Section 263 Concerning Subsequent Years:The assessee argued that the CIT's directions extended to subsequent years. The Revenue contended that the CIT's directions were specific to the relevant assessment year. The Tribunal found that the CIT had not extended his jurisdiction to subsequent years and that the directions were within the scope of the relevant assessment year.5. Adequacy of Inquiry by the AO on Share Capital:The assessee claimed that the AO had conducted proper inquiries. The Tribunal found that the AO's inquiries were inadequate and that the reassessment was orchestrated by the assessee. The Tribunal upheld the CIT's order under Section 263, citing the lack of proper investigation by the AO.6. Generalized Background for Holding the Order Erroneous:The assessee argued that the CIT's order was based on a generalized background without specific material against the assessee. The Tribunal, referencing its findings on the adequacy of inquiry, rejected this argument and upheld the CIT's order.7. Requirement for CIT to Make Inquiries Before Concluding:The assessee contended that the CIT should have made inquiries himself before concluding that the AO's order was erroneous and prejudicial. The Tribunal, referencing its findings on the adequacy of inquiry, rejected this argument and upheld the CIT's order.Conclusion:The Tribunal dismissed the appeal of the assessee, holding that the CIT's order under Section 263 was justified and within the limitation period. The AO's failure to conduct proper inquiries into the share capital and premium warranted the revisionary proceedings under Section 263. The Tribunal also clarified that the proviso to Section 68, introduced w.e.f. 01.04.2013, was applicable and justified the CIT's directions for further verification.