2019 (7) TMI 2064 - HC - Income Tax

HC confirms proper AO inquiry; revisional power under Section 263 wrongly used by CIT, appeals dismissed

The Principal Commissioner Versus Sterling Biotech Limited

The Principal Commissioner Versus Sterling Biotech Limited - TMI 1. ISSUES PRESENTED and CONSIDERED Whether the Income Tax Appellate Tribunal (ITAT) was correct in quashing the revisionary order passed under section 263 of the Income Tax Act, 1961, on the ground that the Assessing Officer (AO) had not conducted the necessary inquiries as required by Explanation 2 to sub-section (1) of section 263. Whether the AO erred in allowing telescoping of cash transactions recorded in seized material without establishing nexus between cash generation and its application, thereby failing to properly apply section 69 of the Act. Whether the AO wrongly allowed deduction under section 10B of the Act despite non-compliance with conditions related to usage of new machinery, as evidenced by statements during search operations. Whether the AO failed to investigate the significant disparity between export product prices and local market prices before allowing deduction under section 10B. Whether the AO improperly accepted the financial results of the Dubai branch without conducting any verification or investigation. Whether the AO failed to investigate details of 151 entities found during search and accepted the assessee's submissions without verification. Whether the AO neglected to investigate foreign investments by the assessee and related group information seized during search. Whether the AO arbitrarily adopted a 5% wastage rate without basis or consideration of seized manufacturing reports. Whether the AO accepted asset addition details submitted by the assessee without conducting any investigation into their correctness. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Revisionary Order under Section 263 for Lack of Inquiries by AO Legal Framework and Precedents: Section 263 empowers the Commissioner to revise an assessment order if it is erroneous and prejudicial to the interests of revenue. Explanation 2 to sub-section (1) mandates that the AO must have failed to make inquiries or verification which he ought to have made. Court's Interpretation and Reasoning: The Tribunal examined whether the AO had conducted the necessary inquiries before completing the assessment. It found that the AO had indeed made full inquiries into the relevant issues. Key Evidence and Findings: The Tribunal reviewed the assessment records and noted that the AO investigated the seized materials, cash transactions, machinery usage, pricing, foreign branch results, and other relevant aspects. Application of Law to Facts: Since the AO carried out the requisite inquiries, the Commissioner's exercise of revisional power under section 263 was unwarranted. Treatment of Competing Arguments: The Commissioner contended that the AO's order was erroneous due to lack of inquiry; the Tribunal disagreed based on the record. Conclusion: The revisional order under section 263 was rightly quashed by the Tribunal; no error was found in the AO's assessment. Issue 2: Allowance of Telescoping of Cash Transactions Without Establishing Nexus under Section 69 Legal Framework and Precedents: Section 69 deals with unexplained cash credits and requires establishing a nexus between cash generation and its application. Court's Interpretation and Reasoning: The Tribunal found that the AO had examined the seized cash transaction records and considered the nexus before allowing telescoping. Key Evidence and Findings: The AO had scrutinized the seized material and cash flow details to verify the legitimacy of cash transactions. Application of Law to Facts: The AO's approach complied with the statutory requirements; no error was committed. Treatment of Competing Arguments: The Commissioner argued that nexus was not established; the Tribunal rejected this, finding adequate inquiry. Conclusion: The AO's order was not erroneous or prejudicial; the revision under section 263 was unjustified. Issue 3(i): Deduction under Section 10B Despite Non-Compliance Regarding New Machinery Usage Legal Framework and Precedents: Section 10B grants deduction subject to conditions including usage of new machinery for production. Court's Interpretation and Reasoning: The Tribunal noted that the AO had considered the statement of the Deputy General Manager and other evidence before allowing deduction. Key Evidence and Findings: The statement indicated that machinery was acquired in 2006 and used for production; the AO found compliance with section 10B conditions. Application of Law to Facts: The AO's conclusion on machinery usage was supported by evidence. Treatment of Competing Arguments: The Commissioner's contention of non-compliance was not accepted due to lack of contrary evidence. Conclusion: The deduction under section 10B was rightly allowed; no error in assessment. Issue 3(ii): Failure to Investigate Disparity in Export and Local Market Prices Before Allowing Deduction under Section 10B Legal Framework and Precedents: Verification of export prices compared to local market prices is relevant to ascertain genuineness of transactions under section 10B. Court's Interpretation and Reasoning: The Tribunal found that the AO had examined pricing details and found no irregularity warranting disallowance. Key Evidence and Findings: The AO considered market data and export records before concluding on the deduction. Application of Law to Facts: The AO's verification was adequate and in accordance with law. Treatment of Competing Arguments: The Commissioner's argument on price discrepancy was rejected due to lack of substantive proof. Conclusion: The deduction was properly allowed; no error or prejudice to revenue. Issue 4: Acceptance of Dubai Branch Financial Results Without Investigation Legal Framework and Precedents: AO is required to verify correctness of branch financials before acceptance. Court's Interpretation and Reasoning: The Tribunal held that the AO had examined available data and found the branch results acceptable. Key Evidence and Findings: No evidence was found indicating that AO failed to investigate or that branch results were unreliable. Application of Law to Facts: The AO's acceptance was not erroneous or prejudicial. Treatment of Competing Arguments: The Commissioner's claim of non-investigation was not substantiated. Conclusion: The assessment order was valid in this respect. Issue 5: Failure to Investigate 151 Entities Found During Search Legal Framework and Precedents: AO must verify facts behind submissions related to entities found during search operations. Court's Interpretation and Reasoning: The Tribunal found that the AO had examined details and did not merely accept self-serving statements without verification. Key Evidence and Findings: The AO conducted necessary inquiries into the entities' details as per record. Application of Law to Facts: The AO's approach was consistent with statutory duties. Treatment of Competing Arguments: The Commissioner's contention was rejected due to lack of evidence of inadequate inquiry. Conclusion: No error in assessment on this ground. Issue 6: Lack of Investigation into Foreign Investments by Assessee and Group Legal Framework and Precedents: AO is required to investigate foreign investments when information is available from search. Court's Interpretation and Reasoning: The Tribunal observed that the AO had examined seized information relating to foreign investments. Key Evidence and Findings: The AO's inquiries covered foreign investments and related group details. Application of Law to Facts: The AO complied with investigation requirements. Treatment of Competing Arguments: The Commissioner's argument was unsupported by record. Conclusion: No error or prejudice found. Issue 7: Arbitrary Adoption of 5% Wastage Rate Without Basis Legal Framework and Precedents: AO must base wastage rates on available material and manufacturing reports. Court's Interpretation and Reasoning: The Tribunal found that the AO had considered manufacturing reports and seized material before adopting wastage rate. Key Evidence and Findings: The AO's adopted rate was consistent with evidence. Application of Law to Facts: The adoption was not arbitrary or erroneous. Treatment of Competing Arguments: The Commissioner's claim lacked evidentiary support. Conclusion: No error in assessment order. Issue 8: Acceptance of Asset Addition Details Without Investigation Legal Framework and Precedents: AO must verify correctness of asset additions claimed by assessee. Court's Interpretation and Reasoning: The Tribunal found that AO had examined the details and supporting documents before acceptance. Key Evidence and Findings: AO's inquiry was adequate and consistent with statutory requirements. Application of Law to Facts: No error or prejudice to revenue was found. Treatment of Competing Arguments: The Commissioner's contention was rejected. Conclusion: Assessment order was valid. Overall Conclusion: The Tribunal correctly held that the AO had conducted full and proper inquiries on all issues raised by the Commissioner under section 263. The revisional orders were therefore invalid and rightly quashed. No question of law arises from the Tribunal's findings. The appeals by revenue are dismissed.