Large depreciation claim in assessment, partly examined by AO; s.263 revision upheld, but remanded for hearing on overlooked aspects

The dominant issue was whether the Commissioner could invoke s.263 to revise an assessment where the AO examined only a part of a large depreciation claim and did not consider the claim in full. Applying s.263(1) Expln. (c) (post-1989) and SC authority, the HC held that such non-consideration constituted an "error" amenable to revision; consequently, the Commissioner's jurisdiction under s.263 was affirmed. A further issue was whether the revisional order was vitiated for want of a pre-decisional opportunity on certain aspects. Relying on SC precedent, the HC held the Commissioner could examine all aspects forming part of the AO's order, but the absence of hearing required limited remand; the Commissioner was directed to hear the assessee on those aspects and then pass a fresh order.

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Issues Involved:
1. Jurisdiction and legality of the order under Section 263 of the Act.
2. Adequacy of the Assessing Officer's (AO) inquiries during the original assessment.
3. Inclusion of issues not mentioned in the show cause notice in the order under Section 263 of the Act.

Detailed Analysis:

1. Jurisdiction and Legality of the Order under Section 263:
The appellant contended that the order dated 31.03.2016 under Section 263 was without jurisdiction, illegal, and bad in law. The Tribunal upheld the order, stating that the AO did not make adequate inquiries regarding the variation in the cost of fixed assets. The court referenced the case of Malabar Industrial Co. Ltd. vs Commissioner of Income Tax, emphasizing that an assessment order could not be considered prejudicial to the interests of the revenue if it was subject to scrutiny and the AO applied his mind.

The court concluded that the non-consideration of the larger claim for Rs. 298.93 crores as depreciation and the consideration of only a part of it by the AO was an error that could be corrected under Section 263, as per the ruling in Commissioner of Income Tax vs Aruba Mills.

2. Adequacy of the AO's Inquiries:
The appellant argued that the AO had raised specific queries and applied his mind to the concerned issues during the original assessment, referencing the special auditor’s report and the scrutiny assessment under Section 143(3). The Tribunal, however, found that the AO did not make adequate inquiries regarding the variation in the cost of fixed assets.

The court cited the case of Commissioner of Income Tax v Sunbeam Auto Ltd, which distinguishes between "lack of inquiry" and "inadequate inquiry." It held that if there was any inquiry, even inadequate, it would not justify the Commissioner passing orders under Section 263 merely because he had a different opinion.

3. Inclusion of Issues Not Mentioned in the Show Cause Notice:
The appellant contended that the order under Section 263 included issues related to TDS provisions and related party transactions, which were not part of the show cause notice, and no opportunity of hearing was provided. The Tribunal set aside the CIT's order on these issues and directed a fresh order after providing a reasonable opportunity to the assessee.

The court referenced Commissioner of Income tax v Amitabh Bacchan, which upheld the power of the Commissioner to consider all aspects that were the subject matter of the AO’s order, even if they were not part of the show cause notice, as long as the assessee was given an opportunity to be heard. The court ruled that the lack of pre-decisional opportunity was a curable defect and did not vitiate the entire order.

Conclusion:
The court answered all questions in the negative, against the assessee, and upheld the Tribunal's decision. The appeal was dismissed, with the court directing the CIT to reconsider the issues related to TDS provisions and related party transactions after providing the assessee an opportunity to be heard.

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