Court Rules for Fresh Assessment After AO's Errors in Business Expenses and Loss Verification u/s 263.

The Pr. Commissioner of Income Tax, Panaji – Goa. Versus Zuari Maroc Phosphates Ltd.

The Pr. Commissioner of Income Tax, Panaji – Goa. Versus Zuari Maroc Phosphates Ltd. - [2021] 432 ITR 316 (Bom) Issues Involved:
1. Justification of ITAT in allowing the appeal filed by the assessee under Section 263.
2. Determination of whether the order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue.

Detailed Analysis:

Issue I: Justification of ITAT in Allowing the Appeal Filed by the Assessee Under Section 263

3. The assessee filed a return for AY 2009-10 declaring a total loss of Rs. 1,78,57,950/-. The case was selected for scrutiny, and the AO added Rs. 2,31,010/- as income from other sources while accepting the business losses of Rs. 1,78,57,950/- to be carried forward.

4. The Commissioner of Income Tax invoked Section 263, set aside the AO's order, and directed a fresh assessment to verify the allowability of the expenditure and carry forward of the losses.

5. The ITAT set aside the Commissioner’s order, leading to the present appeal by the Revenue.

6. The Revenue argued that the AO's order was erroneous and prejudicial to its interest as the assessee did not carry out any business during the relevant year and incorrectly allowed the carry forward of losses.

7-10. The assessee contended that it was engaged in business activities and the AO’s findings were correct. The assessee also argued that the Commissioner did not conclusively find the AO’s order erroneous but only “prima facie erroneous” and did not conduct a thorough inquiry.

11. The court noted that the AO accepted the assessee's business expenses without proper verification, which indicated non-application of mind and justified the Commissioner’s invocation of Section 263.

Issue II: Determination of Whether the Order Passed by the AO Was Erroneous and Prejudicial to the Interest of the Revenue

12-15. The AO treated Rs. 2,31,010/- as income from other sources and disallowed related expenses. However, the AO accepted business expenses of Rs. 2,84,09,850/- without verifying the nexus with business activities, indicating non-application of mind.

16-17. The court found that the AO failed to inquire into the explanation provided by the assessee and merely accepted the expenses, which was erroneous and prejudicial to the Revenue.

18-20. The court referenced Malabar Industrial Co. Ltd. to support that incorrect assumptions or non-application of mind by the AO justify revisional jurisdiction under Section 263. The AO’s order allowed carry forward of losses without proper inquiry into the business activities, causing a revenue loss.

21. The Commissioner’s use of “prima facie” indicated the need for a detailed inquiry by the AO, which justified the remand order.

22-23. The court distinguished this case from others cited by the assessee, emphasizing that the AO’s order lacked any discussion or inquiry, unlike the cases where plausible views were taken.

24-27. The court cited various judgments supporting the necessity of inquiry by the AO and the Commissioner’s right to invoke Section 263 when such inquiry is lacking.

28-29. The court referenced Amitabh Bachchan’s case, where the Supreme Court upheld the Commissioner’s revisional jurisdiction for lack of proper inquiry by the AO.

30. The court concluded that the ITAT was not justified in interfering with the Commissioner’s order, as the AO’s order was erroneous and prejudicial to the Revenue, fulfilling the conditions under Section 263.

31. The court set aside the ITAT’s order, answering the substantial questions of law in favor of the Revenue, directing the AO to make a fresh order after giving the assessee a reasonable opportunity of being heard.

32. The appeal was allowed with no order as to costs.