2022 (4) TMI 1395 - HC - Income Tax

High Court affirms Tribunal decision on Income Tax Act Section 263 appeal, stresses thorough assessment

The High Court upheld the decision of the Income Tax Appellate Tribunal to set aside the Commissioner of Income Tax's order under Section 263 of the ... Revision u/s 263 - CIT directing the AO to redo the assessment after verifying the valuation, made by the Assessee, of the Work in Progress ( WIP) disclosed in its return of income and further, the profit element contained therein - HELD THAT:- When the Assessee appeared before the CIT, the Assessee contradicted this assumption and contended that it had in fact accounted for the profit element in the WIP. There is nothing in the order of the CIT that indicates that the CIT formed a view that the above contention of the Assessee was erroneous by examining the order of the AO. As rightly pointed out by the ITAT in the impugned order, the AO had in fact called for the details of the closing WIP which had been furnished by the Assessee and had examined it. If the CIT was of the view that the AO had not examined this issue at all, it could then led to the conclusion that the order of assessment was erroneous. That is not, however, the case here. The CIT simply decided that even for verification of the correctness of the submission of the Assessee, the matter had to be remanded to the AO. Section 263 of the Act requires the CIT, after hearing the Assessee, to pass an order by making “such enquiry as he deems necessary”. The purpose of such an enquiry would be to arrive at a subjective view that the order of the AO was erroneous in so far as it is prejudicial to the interest of Revenue. Even if such enquiry may not be mandatory, there has to be some basis on which the CIT can form such a view. In the present case, the basis for forming a view that the profit element in the WIP was not accounted for by the Assessee is absent in the order of the CIT. Consequently, the Court is unable to find any error having been committed by the ITAT in interfering with the said order and setting it aside. No substantial question of law. Issues:1. Appeal against the order of the Income Tax Appellate Tribunal for the Assessment Year 2009-10.2. Justification of setting aside the order of the Commissioner of Income Tax under Section 263 of the Income Tax Act.3. Examination of the valuation of Work in Progress (WIP) and profit element contained therein.4. Interpretation of Section 263 of the Income Tax Act regarding the role of the Commissioner of Income Tax in verifying submissions of the Assessee.5. Assessment of whether the order of the Assessing Officer was erroneous and prejudicial to the interests of the Revenue.Analysis:1. The appeal before the High Court challenged the order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2009-10. The Revenue questioned the ITAT's decision to set aside the order of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, directing the Assessing Officer (AO) to reevaluate the valuation of Work in Progress (WIP) and the profit element disclosed by the Assessee in their return of income.2. The CIT, upon reviewing the assessment record, identified that the profit from WIP, which should have been included in the income, was not disclosed by the Assessee. This led to the CIT issuing a show cause letter to the Assessee under Section 263 of the Act, seeking an explanation for the non-disclosure. The CIT decided to remand the matter to the AO for reevaluation, emphasizing the need to verify the total income and calculation of interest under the Act.3. The ITAT, in its order, highlighted that the CIT's intervention under Section 263 could only be justified if the AO's conclusion was found to be either factually or legally erroneous. The ITAT emphasized that the CIT should have verified the Assessee's submissions or obtained external verification before deeming the AO's order as erroneous. Since this verification process was not followed, the ITAT set aside the CIT's order.4. During the High Court proceedings, arguments were presented regarding the CIT's obligation to verify the Assessee's submissions before remanding the assessment to the AO. The High Court noted that the CIT's conclusion lacked detailed reasons and failed to establish that the AO's order was indeed erroneous and prejudicial to revenue interests. The Court emphasized the need for a subjective view based on an enquiry to deem the AO's order as erroneous under Section 263.5. Ultimately, the High Court upheld the ITAT's decision to set aside the CIT's order, stating that there was no substantial question of law warranting further consideration. The Court concluded that the CIT's order lacked a sufficient basis for deeming the Assessee's submission as incorrect, and thus, the appeal was dismissed.This detailed analysis of the judgment showcases the legal intricacies involved in the interpretation and application of Section 263 of the Income Tax Act, emphasizing the importance of thorough verification and subjective assessment before deeming an assessment order as erroneous and prejudicial to revenue interests.