2016 (10) TMI 417 - AT - Income Tax

Invalidity of Income Tax Commissioner's Order under Section 263 due to Lack of Independent Review

Arabinda Roy, C/o Somnath Ghosh Versus Commissioner of Income Tax-XX, Kolkata

The tribunal held that the Commissioner of Income Tax's order under Section 263 was invalid as it was based on audit objections without independent ... Revision u/s 263 - erroneous order - genuineness of the unsecured loan - Held that:- In the instant case, the Ld. CIT has not established anywhere in the impugned order that the assessment order of the AO is erroneous as well as prejudicial to the interests of the revenue. The non-compliance with the statutory prescription as evident from the impugned order is a serious infirmity vitiating the validity of the proceedings. In a situation where the Assessing Authority as an adjudicator decides an issue and renders a wrong decision which is unsustainable in law. It can be corrected by the Commissioner in exercise of revisionary power. In such cases, the Ld. CIT has to come to the conclusion and himself decide that the order is erroneous by conducting appropriate enquiry if required and necessary before the order u/s. 263 of the Act is passed. In such cases, the order of the Assessing Authority will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. The jurisdictional precondition stipulated is that the Ld. CIT must come to the conclusion that the order is erroneous and is unsustainable in law. The finding of an 'error' is the condition precedent for proceedings u/s. 263 of the Act which is palpably missing in his order and accordingly, the specious conclusion of the Ld. CIT without laying down any basis therefore is totally contrary to law. Therefore, the conditions precedent for invoking the provisions of sec 263 of the Act not having been satisfied, the action of the Ld. CIT of assuming jurisdiction there under is in contravention of the settled position in this regard. In view of above, we hold that the order passed by the ld. CIT is not sustainable in the law and accordingly we reverse the same. Hence the grounds of appeal of the assessee are allowed. Issues Involved:1. Jurisdiction under Section 263 of the Income Tax Act, 1961.2. Examination of unsecured loans and interest expenses.3. Verification of credit entries in the bank statement.4. Verification of debit entries in the bank statement.5. Examination of cash cheque payments exceeding Rs. 20,000.6. Verification of agricultural income.Detailed Analysis:1. Jurisdiction under Section 263 of the Income Tax Act, 1961:The assessee contested the jurisdiction of the Commissioner of Income Tax (CIT) under Section 263, claiming that the conditions precedent for assuming such jurisdiction were not met. The tribunal noted that the CIT initiated proceedings based on an audit objection without independent application of mind, which is a sine qua non for assuming jurisdiction under Section 263. The tribunal cited several judgments, including [JEEWANLAL (1929) LTD. -VS- ADDL.C.I.T. (1977) 108 ITR 407 (CAL)] and [B AND A PLANTATION AND INDUSTRIES LTD AND ANOTHER -VS- C.I.T. (2007) 290 ITR 395 (GAU)], to support the view that CIT's notice was invalid as it was based on audit suggestions without CIT's discretion and judgment.2. Examination of unsecured loans and interest expenses:The CIT found that the Assessing Officer (AO) did not verify the genuineness, identity, and creditworthiness of loan creditors and the interest expense of Rs. 60,000. The assessee argued that these loans were carried forward from earlier years and the interest was paid based on declarations in Form 15H/15G, making TDS deduction unnecessary. The tribunal noted that the AO had accepted these explanations during the assessment, and the CIT did not provide contrary evidence. The tribunal emphasized that inadequate inquiry by the AO does not justify revision under Section 263 unless it results in an erroneous order.3. Verification of credit entries in the bank statement:The CIT noted that the AO failed to verify three credit entries totaling Rs. 3.5 lakh. The assessee explained these were sale proceeds of potatoes, and the AO had accepted this during the assessment. The tribunal observed that the CIT did not provide evidence to dispute the AO’s acceptance of these entries as genuine sale proceeds.4. Verification of debit entries in the bank statement:The CIT pointed out that the AO did not verify two debit entries totaling Rs. 2.75 lakh. The assessee clarified that these payments were for purchases made in the previous year. The tribunal found that the AO had accepted these explanations during the assessment, and the CIT did not establish any error in the AO’s acceptance.5. Examination of cash cheque payments exceeding Rs. 20,000:The CIT noted payments exceeding Rs. 20,000 to Shri U. Tiwary, suggesting a violation of Section 40A(3). The assessee explained that Tiwary, a trusted employee, withdrew cash for business expenses, and no individual payment exceeded Rs. 20,000. The tribunal highlighted that Section 40A(3) applies to expenses, not withdrawals, and the AO had accepted the assessee’s explanations. The tribunal cited [SUSHANTA SARKAR - VS- I.T.O. (I.T.A. NO. 95/KOL/09 DATED 27-03-2009)] to support that cash withdrawals do not attract Section 40A(3).6. Verification of agricultural income:The CIT questioned the agricultural income of Rs. 5,000 shown by the assessee, noting no agricultural land in the balance sheet. The assessee claimed the land was inherited and not listed in the business balance sheet. The tribunal emphasized the rule of consistency, noting that the AO had accepted this income in previous years without dispute. The tribunal found that the CIT did not provide evidence to challenge the AO’s acceptance of the agricultural income.Conclusion:The tribunal concluded that the CIT's order under Section 263 was based on audit objections without independent application of mind, rendering the proceedings invalid. The tribunal emphasized that the AO had conducted necessary inquiries and accepted the assessee’s explanations during the assessment. The tribunal held that the CIT did not establish that the AO’s order was erroneous and prejudicial to the interest of revenue. Consequently, the tribunal reversed the CIT’s order and allowed the assessee’s appeal.