2020 (1) TMI 1740 - AT - Income Tax

Appeal allowed: Revision under Section 263 quashed where AO conducted adequate inquiry under s.143(2) and took conscious view

Mewat Grit Udyog Versus Pr. CIT, Delhi

ITAT, Delhi - AT allowed the appeal and quashed the order passed under section 263. The Tribunal found the AO had sought extensive information via the ... Revision u/s 263 - cash capital contributions by partners, cash deposits in bank accounts, cash discount debited in the profit & loss account, and disallowance u/s 40(a)(ia) matters on which the Assessing Officer failed to make requisite enquiry - HELD THAT:- A perusal of the all the material stated clearly reveals that in the questionnaire attached to the notice u/s 143(2) of the Act issued on 7/8/2012 the AO sought details and production of the material covered by as many as 46 items and the assessee produced the books of accounts including the cashbook, ledgers, bank statement etc and furnished all the details sought by the AO. On the face of the questionnaire issued by AO and the reply furnished by the assessee, it does not look like a matter where the AO had taken a view without making any enquiry or an adequate enquiry. AO sought all the requisite details and the assessee furnished the same. It is obvious that the assessment order does not reflect all this process, but as is held by the Hon’ble jurisdictional High Court and also other fora, merely because the assessment order does not refer to the queries raised and the details furnished by the assessee during the course of scrutiny, it cannot be held that there is no enquiry and therefore the assessment was erroneous and prejudicial to the interest of the Revenue. All the conceivable details were sought by the AO and furnished by the assessee and the presumption of law is that the AO concluded the assessment only on consideration of all this material. On the face of the queries and the explanation and material furnished by the assessee, it is not possible to draw an inference that there is either no enquiry or inadequate enquiry. It shall be kept in mind that in the case of Gee Vee Enterprises [1974 (10) TMI 29 - DELHI HIGH COURT] held that it is only having had regard to the facts and circumstances of the case, an assessment order could be regarded as erroneous or that the AO should have made further enquiries before accepting the statements made by the assessee in the return of income. Insofar as the issue of disallowance u/s 40(a)(ia) of the Act is concerned, law is fairly settled by now that the 2nd proviso to section 40(a)(ia) of the Act is retrospective in nature and such an issue is no longer res Integra. We find that the deletions of the additions made on account of partners’ capital contribution, cash deposits in bank accounts and cash discount and the partial relief in respect of the disallowance of section 40(a)(ia) lends any amount of support to the contentions of the assessee that it is only after having satisfied with the explanation as offered and material submitted by the assessee, in the original assessment proceedings, AO had taken a conscious view on these aspects. There was sufficient enquiry on the part of the Assessing Officer during the original assessment proceedings on all the aspects taken up by the Ld. CIT for revising the order under section 263 of the Act, we are of the considered opinion that the discussion on the other propositions raised by the assessee will only be academic and suffice it to say that the impugned order passed under section 263 of the Act has no legs to stand. With this view of the matter, we allow the grounds of appeal and quash the impugned order passed by the learned CIT. ISSUES PRESENTED AND CONSIDERED 1. Whether the order passed by the Assessing Officer under section 143(3) can be held to be erroneous and prejudicial to the interest of Revenue under section 263 on the ground of absence of enquiry or inadequate enquiry, where the Assessing Officer had issued a detailed questionnaire and the assessee furnished books, bank statements, ledgers and other documents. 2. Whether specific items in the assessment - (a) cash capital contributions by partners, (b) cash deposits in bank accounts, (c) cash discount debited in the profit & loss account, and (d) disallowance under section 40(a)(ia) - were matters on which the Assessing Officer failed to make requisite enquiry such as to render the assessment order erroneous and prejudicial to Revenue under section 263. 3. Whether the fact that the assessment order does not expressly record all queries raised and the details furnished during scrutiny permits the Commissioner to exercise revisionary jurisdiction under section 263. 4. Whether the second proviso to section 40(a)(ia) (as applicable) is retrospective in operation and affects the validity of any disallowance made under that section for the relevant year. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of section 263: absence of enquiry vs inadequate enquiry; requirement for setting aside assessment Legal framework: Section 263 confers power on the Commissioner to revise an assessment if the assessment order is found to be 'erroneous insofar as it is prejudicial to the interests of the Revenue.' The power presupposes either lack of enquiry or an erroneous view of law/fact leading to prejudice. Precedent treatment: The Tribunal considered authorities cited by the parties emphasizing the distinction between lack of enquiry and inadequate enquiry (including reliance placed by parties on higher court decisions addressing interpretation of section 263). The judgment refers to the principle that mere absence of detailed recitals in the assessment order does not automatically equate to lack of enquiry. Interpretation and reasoning: The Tribunal examined the material on record - notably a comprehensive questionnaire issued under section 142(1)/143(2) covering multiple items and specific documentary requisitions, along with the assessee's production of cashbooks, ledgers, bank statements and other supporting material. The Tribunal found that the Assessing Officer had in fact sought extensive information (46 items in the questionnaire) and had examined test-checked items. The Tribunal held that, on the face of the record, there was sufficient enquiry and it was not open to draw an inference of either lack of enquiry or merely inadequate enquiry amounting to jurisdictional defect under section 263. Ratio vs. Obiter: Ratio - where the Assessing Officer issues specific requisitions and receives detailed responses and documents, absence of express narration of those interactions in the assessment order does not per se render the order erroneous under section 263. Obiter - general remarks on the need for Commissioner to point to material showing prejudice were made in context of the facts. Conclusion: Revision under section 263 could not be sustained on the basis of alleged absence or inadequacy of enquiry because the record demonstrated that requisite enquiries were made and documents were furnished and considered. Issue 2 - Cash capital contributions by partners; whether AO failed to verify source or improbability warranted further enquiry under section 263 Legal framework: Transactions involving large cash capital infusion by partners raise questions of genuineness and source; an Assessing Officer is expected to verify source and genuineness by seeking and examining relevant records. Precedent treatment: The Commissioner challenged the assessment on the ground that the AO did not appropriately appreciate the evidence and should have further investigated how proprietorship concerns or other firms could mobilize substantial cash. The Tribunal considered that the AO had specifically asked for details of capital additions in the questionnaire and the assessee produced consolidated partner capital account, ledgers, cashbook and related material which were on record. Interpretation and reasoning: The Tribunal held that issuance of the questionnaire asking for the source of capital and subsequent production of documentary evidence undermined the premise that there was no enquiry. The Tribunal also noted that additions on account of partners' capital were subsequently deleted by the appellate authority when challenged after the AO acted under section 263, which reinforced that the AO had considered the material and formed a view. Ratio vs. Obiter: Ratio - where AO requests source particulars and receives substantive ledger and cashbook entries, the Commissioner cannot mount a successful section 263 revision merely by asserting the need for further enquiry absent demonstrable failure by the AO to consider the material. Obiter - comments touching on improbability of withdrawals by less-sound firms were treated as part of Revenue's contentions but not adopted to sustain revision. Conclusion: Revision on account of partners' cash capital contributions was not justified because the AO had made specific enquiries and had material before him to form a conclusion; therefore the section 263 order setting aside the assessment on this ground was quashed. Issue 3 - Cash deposits in bank accounts; adequacy of verification by the AO Legal framework: Bank deposits in cash require verification of source; Assessing Officer may call for bank statements, inventory, cashbook entries and corroborative ledgers to verify deposits. Precedent treatment: The Commissioner faulted the AO for not verifying cash deposits (totalling a specified amount), but the Tribunal examined the record of requisitions (questions No.2 and 45) and replies wherein certified bank statements, bank inventory, cashbook and ledger copies for specified months were furnished. Interpretation and reasoning: The Tribunal held that because the AO had sought and had before him certified bank statements and related cashbook and ledger entries, the premise of absence of enquiry was not sustainable. The Tribunal emphasized that lack of detailed recital in the assessment order of every query and reply does not lead to the inference of no enquiry when the documentary trail exists. Ratio vs. Obiter: Ratio - production of bank statements and cashbooks in response to specific queries indicates enquiry; in such circumstances section 263 cannot be invoked for alleged non-verification. Obiter - observations concerning merits of particular bank entries were unnecessary in view of the finding that enquiry occurred. Conclusion: The AO's verification of bank deposits was adequate on the available record; the revision under section 263 on this ground failed. Issue 4 - Genuineness and veracity of cash discount entries debited in profit & loss account Legal framework: Large cash discount expenses require verification of payees, business purpose and documentary support; AO is expected to examine ledgers and supporting vouchers or run test checks. Precedent treatment: Revenue contended that the AO did not verify names of persons to whom discounts were given or business necessity; record shows assessee produced details of expenses payable, payments made, month-wise ledger accounts and that the AO examined these on a test-checked basis. Interpretation and reasoning: The Tribunal found that the AO had obtained and examined the relevant ledgers and payment details; hence the allegation of no enquiry was not borne out. The Tribunal reiterated that mere absence of express recitals in the assessment order is not determinative where the AO's requisitions and the assessee's responses are on record. Ratio vs. Obiter: Ratio - where requisite ledger and payment details are filed and test checks are recorded by the AO, the Commissioner cannot set aside the assessment solely on allegations of non-verification. Obiter - the Tribunal did not examine substantive correctness of the cash discount claim, as that was unnecessary given the procedural finding. Conclusion: The section 263 revision on account of cash discount veracity failed because the AO had called for and examined supporting materials. Issue 5 - Disallowance under section 40(a)(ia); applicability of second proviso and outcome Legal framework: Section 40(a)(ia) penalizes failure to deduct tax at source; the second proviso (as discussed) has retrospective effect according to accepted position of law noted by the Tribunal. Precedent treatment: Parties referred to authorities regarding applicability and retrospective effect of the proviso. The Tribunal observed that law is 'fairly settled' that the second proviso to section 40(a)(ia) is retrospective. Interpretation and reasoning: The Tribunal recorded that the appellate outcomes (deletions and partial relief given by the first appellate authority on issues including section 40(a)(ia)) supported the conclusion that the AO had considered materials and that legal developments on the proviso applied. Ratio vs. Obiter: Ratio - the retrospective operation of the second proviso to section 40(a)(ia) is acknowledged and relevant to the assessment year in question. Obiter - ancillary remarks on specific factual payments were not necessary to the Tribunal's disposal. Conclusion: The Commissioner's invocation of section 263 in respect of disallowance under section 40(a)(ia) was not sustainable in the circumstances; part relief granted on appeal and settled law on the proviso further undermined the revision. Cross-reference and overall conclusion Cross-reference: Issues 1-4 are interlinked by the central question whether the AO had in fact conducted requisite enquiries; the Tribunal's finding on the questionnaire, production of books and test checks is dispositive for all these issues (see Issues 1-4 above). Issue 5 is addressed both on procedural enquiry and on settled statutory interpretation regarding section 40(a)(ia). Overall conclusion: The Commissioner's order under section 263 lacked basis because the record demonstrated that the Assessing Officer had made specific enquiries and had before him detailed documentary material; the mere absence of detailed recital in the assessment order does not establish lack of enquiry. Consequently, the revisionary order was quashed and the appeal allowed.