2017 (3) TMI 1465 - AT - Income Tax

Appeal granted on capital accounts, loans; order modified on profit rate adjustment. Fresh assessment order required.

The Tribunal partly allowed the appeal, upholding the Commissioner of Income Tax's order regarding accretion to partners' capital accounts and unsecured ... Revision u/s 263 - decline in GP rate from 5.19% in AY 2010-11 to 3.17% in the impugned assessment year - Held that:- AO has made relevant enquiries and after being satisfied has accepted the the fall in the GP rate and trading results. The reasons for the fall in GP rate has been explained by the assessee and duly considered by the AO in terms of increase of prices of the raw material. Once the necessary enquiries have been made and the explanation furnished by the assessee explaining its position, it is the discretion of the AO to accept the explanation of the assessee or where he is not satisfied with the assessee’s explanation, to carry out further enquiries in the matter. In the instant case, the necessary enquiries have been made by the AO and accordingly we do not see a reason for the ld. CIT to exercise his revisionary powers u/s 263 of the IT Act. Accretion/addition to Partners capital account - Held that:- Merely raising a query is not sufficient enough to dislodge the revisionary jurisdiction under section 263 of the Act. What is essential is that relevant questions are asked and enquiries are made to examine about a particular transaction, explanation of the assessee is sought and then a final view is formed by the AO taking into consideration all the relevant facts and circumstances of the case. Now given that the assessee has furnished its explanation regarding the source of deposits in the partner’s capital account and having considered the said explanation, the ld. CIT is correct in remanding the matter back to the AO to examine the said explanation of the asessee. Had the assessee furnished the said explanation before the AO, the ld. CIT may not have the occasion to exercise his revisionary powers u/s 263 of the Act. In our view, these are the basic and the relevant enquiries in terms of examining the source of accretion to the capital account which the AO should have been made at the first place and the AO having been failed to do, the ld. CIT was correct in exercising his revisionary powers u/s 263 of the Act. Unsecured loans - Held that:- In the instant case, though the AO has raised the initial enquiry about this test but while concluding the assessment, there is nothing on record to suggest that he has carried out the necessary investigation to test these basic requirements. This clearly shows nonapplication of mind by AO, blindly accepting what is being part- submitted by the assessee, without conducting the necessary enquiry and investigation which are bare minimum to examine the transactions in respect of unsecured loans. As we have stated earlier, merely raising a query is not sufficient enough to dislodge the revisionary jurisdiction under section 263 of the Act. What is essential is that relevant questions are asked and enquiries are made to examine about a particular transaction, explanation of the assessee is sought and then a final view is formed by the AO taking into consideration all the relevant facts and circumstances of the case. We therefore do not see any justifiable reason to interfere with the order of ld CIT in this regard. Appeal decided partly in favour of assessee Issues Involved:1. Legality of the order passed by the Commissioner of Income Tax (CIT) under section 263 of the IT Act, 1961.2. Whether the assessment order passed by the Assessing Officer (AO) was without making necessary enquiries or verification.3. Specific issues raised under section 263 regarding:- Decline in Gross Profit (G.P.) rate.- Accretion/addition to partners' capital accounts.- Unsecured loans/cash credits.Detailed Analysis:Legality of the Order Passed by CIT:The assessee contested that the order passed by the CIT under section 263 was illegal and bad in law. The CIT's order was challenged on the grounds that the AO had made necessary enquiries and verifications during the assessment proceedings, and thus the assessment order could not be deemed erroneous and prejudicial to the interest of the revenue.Enquiries and Verification by AO:The CIT held that the AO failed to make necessary enquiries or verifications on three specific issues: decline in G.P. rate, accretion/addition to partners' capital accounts, and unsecured loans. The CIT argued that the AO's acceptance of the assessee's submissions without proper enquiry constituted an erroneous order prejudicial to the revenue.Decline in Gross Profit Rate:The CIT noted that the AO accepted the decline in G.P. rate without proper verification. However, the assessee provided a comparative chart showing sales, G.P. rate, and N.P. rate for relevant years, explaining that the fall in G.P. rate was due to an increase in raw material prices. The AO accepted these explanations after examining the books of accounts and other relevant details. The Tribunal held that the AO made relevant enquiries and accepted the trading results after being satisfied with the explanations provided. Therefore, the CIT's exercise of revisionary powers under section 263 on this issue was not justified.Accretion/Addition to Partners' Capital Accounts:The CIT found that the AO failed to verify the sources of accretion/addition to the partners' capital accounts. Although the assessee provided copies of capital accounts and returns of income, the AO did not obtain individual bank statements or other necessary details. The Tribunal agreed with the CIT that the AO's failure to verify the sources constituted an incorrect assumption of facts and non-application of mind. The CIT was correct in remanding the matter back to the AO for further verification.Unsecured Loans/Cash Credits:The CIT observed that the AO accepted the unsecured loans based on ledger accounts and confirmations without verifying the identity, genuineness, and creditworthiness of the creditors. The Tribunal upheld the CIT's view, stating that the AO's failure to conduct necessary enquiries and verification rendered the assessment order erroneous and prejudicial to the revenue.Conclusion:The Tribunal concluded that the CIT's exercise of revisionary powers under section 263 was justified in respect of the issues concerning accretion to partners' capital accounts and unsecured loans. However, the Tribunal found that the AO made necessary enquiries regarding the decline in G.P. rate, and thus, the CIT's order was modified to exclude this issue. The appeal filed by the assessee was partly allowed.Order:The appeal is partly allowed, with the CIT's order being upheld concerning accretion to partners' capital accounts and unsecured loans, and modified concerning the decline in G.P. rate. The AO is directed to pass a fresh assessment order after proper verification and enquiry into the specified issues.