Valuation of leased closing stock and change in business treated as missed inquiry, revisional order upheld.

Assessing Officer failed to inquire into valuation of leased-out closing stock and the tax effect of a change in nature/mode of business despite documentary indicators; Explanation 2(a) to section 263 treats an order passed without requisite inquiries as erroneous and prejudicial. ITAT Raipur held that the absence of verification on these material points satisfied the statutory test for revision and required reframing of assessment. Consequently the revisional exercise under the provision was justified and the revisional order setting aside the assessment and directing fresh consideration was upheld.

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Issues: Whether the Principal Commissioner of Income Tax was justified in invoking section 263 of the Income-tax Act, 1961 (Explanation 2(a) to section 263) to set aside the assessment order passed under section 143(3) for failure of the Assessing Officer to make inquiries/verifications regarding valuation of leased-out closing stock and change in nature/mode of business leading to escapement of income.

Analysis: The proceedings concern alleged omission by the Assessing Officer to inquire into (i) valuation of the leased-out closing stock as on 02.12.2018 and (ii) implications of the assessee having leased out the stock (change in nature/mode of business) which could give rise to assessable income by way of appreciated value. The statutory test under section 263 requires that an order must be both erroneous and prejudicial to the interests of revenue; Explanation 2(a) deems an order erroneous and prejudicial where it is passed without making inquiries or verification which should have been made. The record shows that specific factual circumstances (lease agreement, survey findings, absence of subsequent sales in accounts) put the Assessing Officer on notice of a potential change in business pattern and a valuation issue. Notices under section 142(1) were issued but the assessment order does not reflect inquiry or verification on the critical issue of valuation of the leased stock and its tax implications. Where the Assessing Officer has not made inquiries or verifications which ought to have been made on an obvious material point, revision under section 263 may be exercised to set aside the assessment and direct fresh consideration; established precedents permit such revision where there is lack of proper inquiry though not where merely a different plausible view has been taken.

Conclusion: The invocation of section 263 (Explanation 2(a)) to set aside the assessment in respect of the valuation of the leased-out closing stock and to direct the Assessing Officer to reframe the assessment was justified. The appeal against the revisional order is dismissed and the revisional order is upheld.

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