AO's proper inquiry into sub-contractor expenses defeats revision under section 263 based on mere suspicion

ITAT Indore allowed the assessee's appeal and set aside the Pr. CIT's revision order u/s 263. The tribunal held that the AO had conducted proper inquiry into sub-contractor payment expenses and taken a reasonable view after considering supporting documents including work orders and TDS compliance. The Pr. CIT's findings were based on mere suspicion rather than establishing clear errors in law. Since the AO's order was neither contrary to facts nor impermissible under law, the revision u/s 263 was not justified.

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Issues Involved:
1. Jurisdiction and legality of the order u/s 263.
2. Adequacy of inquiries conducted by the Assessing Officer (AO).
3. Genuineness of expenses claimed by the assessee.
4. Application of Explanation 2 to Section 263.
5. Distinction between "lack of inquiry" and "inadequate inquiry."

Summary:

The appeal by the assessee challenges the revision order dated 28.03.2023 of the Pr. Commissioner of Income Tax (Pr. CIT), Bhopal, passed u/s 263 for the Assessment Year 2018-19.

1. Jurisdiction and legality of the order u/s 263:

The assessee contended that the order of the Pr. CIT u/s 263 is illegal, void, and without jurisdiction. The Pr. CIT invoked Section 263 without considering that the assessment order was framed u/s 143(3) after due inquiry and was neither erroneous nor prejudicial to the interest of the revenue.

2. Adequacy of inquiries conducted by the AO:

The AO issued notice u/s 142(1) and called for exhaustive details regarding payments to sub-contractors, including their PAN, payment details, TDS amount, and supporting documents. The assessee provided these details, and the AO conducted a due inquiry, issuing notices u/s 133(6) to the sub-contractors. The AO accepted the claim of the assessee as genuine after satisfying himself with the inquiry.

3. Genuineness of expenses claimed by the assessee:

The Pr. CIT found the AO's order erroneous and prejudicial to the interest of the revenue, stating that the AO failed to verify the genuineness of expenses claimed by the assessee. The Pr. CIT noted that the assessee did not provide sufficient evidence regarding the identity and details of the sub-contractors and observed that no payments were made to the sub-contractors during the year or the subsequent year. However, the assessee argued that payments were deferred as per the terms of the work order, which required payment only after the performance guarantee period.

4. Application of Explanation 2 to Section 263:

The assessee argued that Explanation 2 to Section 263 does not override the law interpreted by various High Courts, which requires the CIT to conduct an inquiry and record a finding before treating the AO's order as erroneous and prejudicial to the interest of the revenue. The Pr. CIT did not conduct such an inquiry, making the order u/s 263 vitiated and bad in law.

5. Distinction between "lack of inquiry" and "inadequate inquiry":

The Tribunal noted that the AO conducted an inquiry, albeit possibly inadequate, but not a lack of inquiry. The AO issued detailed questionnaires and notices, and the assessee provided relevant details and documents. The Tribunal held that the Pr. CIT cannot invoke Section 263 merely because he disagrees with the AO's view or finds the inquiry inadequate without conducting an inquiry himself and providing a conclusive finding that the AO's order is unsustainable in law.

In conclusion, the Tribunal found that the AO conducted a due inquiry and took a possible view based on the facts and evidence. The Pr. CIT's order u/s 263 was set aside as it was not sustainable in law.

Order pronounced in the open court on 12.06.2024.

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