S. 263 CIT cannot set aside Assessment order passed after proper examination, inquiry & verification

Issue before tribunal:

• Whether CIT can assume jurisdiction u/s 263 on the facts and circumstances of the case.
• Whether order of the AO was erroneous and prejudicial to the revenue.

Brief facts:

• A search and seizure operation was carried out in Mahesh Mehta group of cases. During the course of search certain documents belonging to the assessee were seized at the residential premises.
• On the basis of said documents so seized and after recording satisfaction, proceedings u/s 153C of the Act were initiated and the notice u/s 153C of the Act was issued.
• In response to the same, the assessee had filed a letter stating that the assessee has already filed her return which may be treated as filed u/s 153C of the Act.
• The assessment u/s 143(3)/153C of the Act was completed at the returned income which was declared in the original return.
• Subsequently, on examination of assessment records, the CIT observed that the assessment order passed by the AO is erroneous as well as prejudicial to the interest of revenue.
• The assessee was asked to show cause as to why in the light of facts contained in the show cause notice assessment order dated 28.12.2011 may not be considered as erroneous and prejudicial to the interest of revenue as per provisions of section 263 of the Act.
• After considering the reply of the assessee the CIT held that AO has failed to conduct proper inquiry and verification on the issues contained in the show cause notice.

Contention of the revenue:

• Assessment was completed without proper examination, inquiry and verification on three issues viz. claim of interest expenses amounting to Rs.6,36,111/-, issue of transaction of Rs.1 crore with regard to property purchased by the assessee jointly with her husband from M/s Honest Estates Pvt. Ltd. and issue of capital gain out of which Rs.1 crore was diverted from capital gain to income from other sources.
• Revenue relied upon the decision of Hon’ble Jurisdictional High Court of Delhi in the case of Duggal & Co. vs CIT (1996) 220 ITR 456 (Del), the CIT(A) was competent to exercise his power u/s 263 of the Act where the ITO/AO while allowing deduction for interest and on other issues omitted to inquire into the matter in a proper way.
• Where inquiry or verification is warranted but not done, it would certainly cause prejudice to the interest of revenue and the Commissioner shall be justified in invoking provisions of section 263 of the Act and in remanding the matter back to the AO for making such necessary inquiry.

Contention of the assessee:

• Assessee placed reliance on the ratio of the decision of Hon’ble Jurisdictional High Court of Delhi in the case of ITO vs D.G. Housing Project Ltd. (2012) 343 ITR 329 (Del) submitted that the Commissioner cannot remand the matter for a fresh decision to the AO to conduct further inquiry without a finding that the order of the AO is erroneous as well as prejudicial to the interest of revenue and such finding of the CIT that the order is erroneous is a consideration precedent for exercise of jurisdiction u/s 263 of the Act.
• Assessee relied upon the submission filed before ITAT.

Held by the tribunal:

• High Court of Delhi in the case of ITO vs DG Housing Projects Ltd. (supra), wherein it was held that the Commissioner cannot remit the matter for fresh decision to AO to conduct further inquiry without a finding that the order of the AO is erroneous because such finding that the order is erroneous is condition precedent u/s 263 of the Act.
• In the cases where there is inadequate inquiry but not lack of inquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous.
• CIT can direct reconsideration of assessment on the ground of lack of enquiry but only when the order is erroneous and an order of remit cannot be passed by the CIT to ask the AO to decide whether the order was erroneous and such order is not permissible under the provisions of section 263 of the Act.

Conclusion:

Pre-condition for invoking section 263 of the Act is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. In this case it was found by tribunal that AO has conducted enquiry while passing assessment order and CIT is failed to establish that order is erroneous in light of lack of enquiry of the part of AO.