2022 (8) TMI 1312 - AT - Income Tax

Tax Tribunal Empowers Principal Commissioner for Inquiries Beyond Notice

The tribunal held that the Principal Commissioner of Income Tax (Pr. CIT) has the authority to direct the Assessing Officer (AO) to conduct additional ... Revision under section 263 - limited scrutiny versus comprehensive scrutiny - plenary power of the assessing authority to assess total income - absence of proper enquiry / non-application of mind - Explanation 2(c) to section 263 - binding nature of Board Instructions under section 119 - conversion of limited scrutiny into comprehensive scrutinyRevision under section 263 - limited scrutiny versus comprehensive scrutiny - plenary power of the assessing authority to assess total income - absence of proper enquiry / non-application of mind - Explanation 2(c) to section 263 - binding nature of Board Instructions under section 119 - Whether the Principal Commissioner (revisionary authority) can direct the Assessing Officer to inquire into aspects of the return beyond the areas specified in the notice issued under section 143(2) (i.e., expand a 'limited scrutiny') and whether such direction falls within the scope of revision under section 263. - HELD THAT: - The Tribunal held that there is no absolute legal bar on extending the scope of enquiry beyond the areas specified in a notice under section 143(2). The assessing authority has a plenary duty to assess the total income and cannot remain passive where circumstances provoke further inquiry; a Board Instruction limiting initial scope (limited scrutiny) is regulatory and procedural under section 119 and may prescribe a mechanism for conversion but cannot curtail the AO's statutory assessment power. Where the AO fails to make inquiries which ought to have been made, the order can be regarded as erroneous and prejudicial to the revenue under the four fold Malabar test (wrong assumption of fact, incorrect application of law, non application of mind, omission of principles of natural justice). Explanation 2(c) to section 263 (failure to follow instructions under section 119) renders such an order erroneous where applicable. The Tribunal emphasised that Board Instructions are binding but their procedural requirement to seek higher approval for expanding scope is enabling; non observance of the procedure can justify revision under section 263 provided the statutory conditions for revision (order erroneous and prejudicial to revenue) are established. The only statutory limitation is where the AO, after proper inquiry, takes a plausible view; revision cannot substitute the AO's bona fide view. [Paras 2, 3, 5]Held that the Pr. CIT may direct the AO to inquire into aspects beyond the 143(2) notice where lack of proper inquiry renders the assessment erroneous and prejudicial to revenue; Board Instructions under section 119 do not oust the statutory powers of the AO or the revisional power under section 263 but provide procedural regulation whose non observance may attract revision.Absence of proper enquiry / non-application of mind - conversion of limited scrutiny into comprehensive scrutiny - Explanation 2(c) to section 263 - Whether, in Alankar (ITA No.22/Jab/2022), the AO's failure to inquire into excess stock seized during survey rendered the assessment erroneous and prejudicial to the revenue and warranted revision under section 263. - HELD THAT: - The Tribunal found that during survey an excess stock was found and admitted but no inquiry was made by the AO in assessment relating to that excess stock; prima facie the excess stock raised issues under section 69A (undisclosed assets) and could indicate undisclosed sales and income for the year. In the absence of any explanation having been elicited or considered, the failure to inquire was a lack of proper enquiry rendering the assessment erroneous and prejudicial to the revenue. The Tribunal set aside the assessment and directed that the AO, after giving the assessee a reasonable opportunity of being heard, adjudicate the matter afresh and record definite findings of fact; reference was made to the correct approach for distinguishing concealed income from disclosed funds. [Paras 4]Revision under section 263 upheld; assessment set aside and remanded to the AO for fresh adjudication on the excess stock (including consideration under section 69A) after affording opportunity of hearing and recording definite findings.Absence of proper enquiry / non-application of mind - binding nature of Board Instructions under section 119 - conversion of limited scrutiny into comprehensive scrutiny - Whether, in Vinod Kumar Rajput (ITA No.15/JAB/2021), the AO's failure to enquire into the decline in gross profit rate and related aspects (and whether s.40A(3) and TDS provisions applied) rendered the assessment erroneous and prejudicial to the revenue, and what relief should follow. - HELD THAT: - The Tribunal held that the AO ought to have examined the decline in gross profit rate and the high proportion of raw material expenditure relative to turnover; those aspects warranted enquiry. However, on the specific questions of applicability of section 40A(3) and TDS provisions (sections 194C/194I), the assessee had produced tax audit report entries (Clauses 21(d) and 33) showing no violation and the Tribunal found no infirmity in the AO not having inquired into those specific matters at the time; Explanation 2(a) to section 263 requires circumstances warranting enquiry. The order was modified to allow the AO, while re examining profitability and expenditure, to investigate and adjudicate on any apparent violations of section 40A(3) or TDS provisions if such instances surface during that enquiry; the AO should afford the auditor and assessee opportunity to be heard if he chooses to proceed. [Paras 4]Impugned revision partly sustained and partly modified; AO directed to re examine profitability and related expenditures and, if in that process apparent violations of section 40A(3) or TDS provisions are found, to adjudicate thereon after giving opportunity of hearing.Final Conclusion: The Tribunal held that a revision under section 263 can lawfully direct the AO to inquire beyond the areas specified in a section 143(2) notice where a lack of proper enquiry renders the assessment erroneous and prejudicial to the revenue; Board Instructions under section 119 regulate but do not curtail the statutory assessment or revisional powers. Applying these principles, the Tribunal upheld revision in Alankar, set aside the assessment and remanded it for fresh adjudication on excess stock (including consideration under section 69A), and partly allowed the appeal in Vinod Kumar Rajput by directing re examination of profitability with liberty to the AO to probe and decide any resultant violations of section 40A(3) or TDS provisions after affording opportunity of hearing. Issues Involved:1. Competence of the Principal Commissioner of Income Tax (Pr. CIT) to direct the Assessing Officer (AO) to make enquiries beyond the scope of limited scrutiny.2. Examination of whether the AO conducted proper enquiries during the assessment proceedings.3. Applicability and binding nature of Board Instructions on the AO and their impact on the revisionary power under section 263.4. Specific case analyses for the two appellants regarding the scope of enquiries and the nature of income assessed.Issue-wise Detailed Analysis:1. Competence of the Principal Commissioner of Income Tax (Pr. CIT) to Direct Enquiries Beyond Limited Scrutiny:The primary issue was whether the Pr. CIT could direct the AO to make enquiries beyond the areas specified in the limited scrutiny notice under section 143(2). The tribunal examined section 263 of the Income Tax Act, which allows the Pr. CIT to revise any order passed by the AO if it is erroneous and prejudicial to the interests of the revenue. The tribunal referred to the case of Nitin Sharma v. Pr. CIT, which established that an absence of proper enquiry by the AO could render an order erroneous. The tribunal concluded that there is no legal restriction on the Pr. CIT's power to extend the scope of enquiry if circumstances warrant it.2. Examination of Whether the AO Conducted Proper Enquiries During the Assessment Proceedings:The tribunal analyzed whether the AO conducted proper enquiries in the cases of the two appellants. It was noted that in the case of Alankar, the AO did not enquire into the excess stock found during a survey, which was surrendered by the assessee. The tribunal held that the AO should have examined whether this stock should be taxed under section 69A as undisclosed assets, subject to a higher tax rate under section 115BBE. In the case of Vinod Rajput, the AO failed to enquire into the decline in gross profit rate and the high raw material expenditure. The tribunal found that these issues warranted further enquiry by the AO.3. Applicability and Binding Nature of Board Instructions on the AO and Their Impact on the Revisionary Power Under Section 263:The tribunal discussed the binding nature of Board Instructions issued under section 119, which regulate the scope of limited scrutiny assessments. It was noted that while these instructions are binding on the AO, they do not limit the Pr. CIT's revisionary power under section 263. The tribunal emphasized that the AO is duty-bound to assess the total income of the assessee and cannot remain passive in the face of returns that call for further enquiry. The tribunal also referred to the case of Mahendra Singh Dhankar (HUF) v. Asst. CIT, which held that the AO should seek approval for comprehensive scrutiny if warranted.4. Specific Case Analyses for the Two Appellants:- Alankar (ITA No. 22/Jab/2022): The tribunal upheld the Pr. CIT's revisionary order, directing the AO to examine the excess stock found during the survey, which was surrendered by the assessee. The AO failed to enquire whether this stock should be taxed under section 69A, leading to an erroneous and prejudicial assessment order.- Vinod Rajput (ITA No. 15/JAB/2021): The tribunal found that the AO did not properly enquire into the decline in gross profit rate and high raw material expenditure. However, it did not find any infirmity in the AO's non-enquiry regarding sections 40A(3) and 194C/194I, as these were covered in the tax audit report. The tribunal modified the Pr. CIT's order accordingly, allowing the AO to examine these aspects if they arise during the assessment of profitability.Conclusion:The tribunal concluded that the Pr. CIT was within his rights to direct the AO to make further enquiries beyond the scope of limited scrutiny if circumstances warranted it. The AO's failure to conduct proper enquiries rendered the assessment orders erroneous and prejudicial to the interests of the revenue. The tribunal upheld the Pr. CIT's revisionary orders in both cases, with modifications in the case of Vinod Rajput. The appeals were dismissed in part and allowed in part, respectively.