2022 (11) TMI 1560 - AT - Income Tax

Revision under Section 263 invalid if based only on audit objections without independent inquiry into assessment record

The ITAT Delhi held that the revision under section 263 was unsustainable as the revisional authority relied solely on audit objections without conducting ... Revision u/s 263 - reliance on audit objection - As per CIT assessee failed to reconcile the difference in stock - HELD THAT:- Giving thoughtful consideration to the matter on record it can be observed without doubt that the show cause notice issued u/s 263 is a verbatim reproduction of the audit objection. However, when the order u/s 263 is considered it goes to show that there is no reference of the audit objection. But, what is important and relevant is the fact that except for the queries raised by the audit, the ld. Revisional authority has not gone into any other aspect of the assessment order. Only those heads of queries as raised by the audit party have been considered to be valid grounds to conclude that the assessment order was erroneous and prejudicial to the interest of revenue. Authority has merely taken into consideration audit objection and the response of the assessee on the show cause notice to give a finding in the manner as if the audit objections have been sustained. Although the order of the revisionary authority mentions that the assessment record in the case for the above noted assessment years were called for examination. It nowhere mentions that the audit objection were part of the assessment record. Thus matter extraneous to the assessment record has been considered. Which certainly is not the mandate of Section 263 of the Act. The order of Ld. Revisional authority would have had a more sustainable taste and tenor had it reflected in its order that primary information was the audit objection but for the purpose of section 263, the Ld. had applied its mind independently upon the assessment record from where the errors were disclosed. However, that is not the case here as Ld. Revisional authority has issued notice on audit objections and sustained them with his reasoning too, instead of reflecting in order that an independent enquiry and reasoning was the basis of reaching conclusion that order is prejudicial to the interest of revenue. Audit objection may trigger point but cannot be the basis for issuing show cause notice and to examine the record in context to audit objection alone. Certainly independent enquiry is the foundation of exercising revisional powers which are vested to superior and controlling adjudication authorities. Thus, the ground No. 1 of exceeding jurisdiction u/s 263 deserves to be sustained. The remaining grounds become superfluous. The same is allowed and the impugned order is set aside. Appeals of the assessee are allowed. ISSUES: Whether the revisional authority can exercise powers under section 263 of the Income Tax Act solely on the basis of audit objections.Whether audit objections form part of the 'assessment record' for the purpose of section 263 jurisdiction.Whether the revisional authority applied independent mind before holding the assessment order erroneous and prejudicial to the interest of revenue.Whether issuance of show cause notice under section 263 without independent enquiry and reliance only on audit objections is valid.Whether the impugned revisionary order under section 263 is barred by limitation or violates principles of natural justice. RULINGS / HOLDINGS: The revisional authority cannot exercise powers under section 263 merely on the basis of audit objections; audit objections may be a trigger but cannot be the sole foundation for invoking section 263.Audit objections are extraneous to the 'assessment record' as contemplated under section 263, and reliance on such extraneous material without independent enquiry is impermissible.The revisional authority failed to apply independent mind and merely sustained audit objections without conducting a proper enquiry, rendering the revisionary order unsustainable.The show cause notice issued under section 263 was a verbatim reproduction of audit objections and did not reflect any independent reasoning or enquiry, thus invalidating the exercise of jurisdiction.The revisionary order under section 263 was set aside on grounds of jurisdictional error, and consequential orders based on it were also quashed. RATIONALE: The Court applied the statutory framework of section 263 of the Income Tax Act, which mandates that the revisional authority must be satisfied that the assessment order is 'erroneous in so far as it is prejudicial to the interests of the revenue' after applying independent mind to the 'assessment record.'The Court relied on precedent establishing that audit objections serve as an administrative tool to assist the Commissioner of Income Tax but do not themselves constitute the assessment record or a sufficient basis for revisionary action under section 263.The Court distinguished cases where audit objections were used as a trigger for enquiry from cases where revisionary powers were exercised mechanically without independent assessment, holding the latter invalid.The Court referenced a coordinate bench decision affirming that while internal audit reports may bring omissions or errors to the Commissioner's notice, the Commissioner must independently evaluate the facts before invoking section 263.No dissent or doctrinal shift was indicated; the judgment reaffirmed established principles requiring independent application of mind and proper enquiry prior to revision under section 263.