Assessment inquiry into alleged hawala trading based on VAT/Sales Tax inputs; s.263 revision upheld for inadequate probe

Revision under s. 263 was upheld on the issue whether the assessment was "erroneous and prejudicial to the interests of the Revenue" due to inadequate inquiry into alleged hawala trading. The HC held that the AO failed to comply with the statutory duty to conduct proper probe and inquiry, instead making an estimate and accepting a vague, general explanation, particularly when the assessee effectively had no answer to the notice. Reliable information from VAT/Sales Tax authorities regarding transactions with suspected hawala dealers justified invocation of s. 263. The HC found no legal error or perversity in the Commissioner's or Tribunal's orders, and dismissed the challenge, sustaining revision.

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Issues Involved:
1. Genuineness of purchases by the assessee.
2. Jurisdiction and exercise of revisional power by the Commissioner under Section 263 of the Income Tax Act, 1961.
3. Whether the Assessing Officer's order was erroneous and prejudicial to the interest of the Revenue.

Issue-wise Detailed Analysis:

1. Genuineness of Purchases by the Assessee:
The assessee, a company operating a Five Star Hotel, was required to maintain high standards and thus made substantial purchases from various suppliers. During the assessment, the Assessing Officer questioned the genuineness of purchases amounting to Rs. 3,60,24,582. Despite the assessee providing voluminous documentary evidence, the Assessing Officer was not satisfied and proposed treating the entire amount as non-genuine. The assessee, seeking to avoid prolonged litigation, offered to have the gross profit rate on these purchases assessed as income. Consequently, the Assessing Officer assessed 15% of the purchases as income, amounting to Rs. 54,03,687, and initiated penal action.

2. Jurisdiction and Exercise of Revisional Power by the Commissioner under Section 263:
The Commissioner of Income Tax deemed the Assessing Officer’s assessment erroneous and prejudicial to the interest of the Revenue, arguing that the entire purchases should have been disallowed. The Commissioner issued a notice under Section 263, asserting that the assessment should be revised. The assessee contested this, arguing that the Commissioner had no jurisdiction as the Assessing Officer had already considered all relevant materials and explanations. The Tribunal upheld the Commissioner’s view, emphasizing that the Assessing Officer failed to make a proper inquiry into the genuineness of the purchases.

3. Whether the Assessing Officer's Order was Erroneous and Prejudicial to the Interest of the Revenue:
The Tribunal and the Commissioner found that the Assessing Officer did not conduct a thorough inquiry, especially given the information from the Sales Tax Department about certain suppliers being 'hawala operators'. The Assessing Officer’s reliance on the assessee's vague explanations and the decision to assess only 15% of the purchases as income were deemed insufficient. The Tribunal noted that the Assessing Officer failed to verify whether the goods were actually supplied and installed, particularly for items like furniture, plumbing, and electrical supplies. This lack of due diligence rendered the assessment order erroneous and prejudicial to the Revenue’s interest.

Conclusion:
The High Court dismissed the appeal, agreeing with the Tribunal and the Commissioner that the Assessing Officer’s order was erroneous and prejudicial to the interest of the Revenue. The court emphasized that the Assessing Officer failed to fulfill his statutory duties by not conducting a thorough investigation into the genuineness of the purchases, especially in light of credible information from the VAT and Sales Tax authorities. The court found no substantial questions of law in the appeal, thereby upholding the revisional powers exercised under Section 263 of the Income Tax Act, 1961.

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