Brief of the case
In the case of M/s A.V. Industries vs ACIT, Mumbai Tribunal held that when the assessee shows from the record that the necessary enquiries were made by the AO and the AO had applied his mind and the view adopted by him was one of the possible views, then it cannot be said that the order of the AO is erroneous. Once the Ld. CIT had proceeded to make an enquiry regarding the genuineness of the claim of the assessee, he was supposed to make a prima-facie opinion which may not be a concluding opinion to hold that the order of the AO in his view was erroneous so far as it was prejudicial to the interest of Revenue.
Fact of the case
In the present case, the assessment order passed by the A.O. u/s 143(3) relevant to A.Y. 2005-06 was annulled by the CIT exercising his revisional jurisdiction u/s 263. The Ld. CIT issued show cause notice and in compliance to the said notice, assessee filed point wise written submissions and explanations. The Ld. CIT after considering the submissions concluded that the claim of the assessee has not been allowed after proper verification. He, therefore, treated the assessment made by the AO as erroneous in so far as it was prejudicial to the interest of Revenue and A.O. was directed for making denovo assessment. Being aggrieved by the order of the Ld. CIT, the assessee filed the appeal before tribunal.
Contention of Revenue
The Ld. D.R. relied upon the order of various authorities to stress the point that if the Commissioner finds that there was a lack of enquiry on the part of the AO regarding the claim made by the assessee, the order can be treated as erroneous and the Commissioner exercising his powers under section 263 can direct the AO to make appropriate enquiries/verifications etc.
Contention of Assessee
The Ld. A.R., on the other hand, relied upon the order of various authorities to stress that there is a difference between lack of enquiries and inadequate enquiries. The Commissioner must give a finding of fact or of law that the order is erroneous so far as it is prejudicial to the interest of Revenue by making proper enquiries after seeking explanation from the assessee. Where the AO has applied his mind and the view taken by him is one of the possible views, then the order cannot be said to be erroneous or prejudicial to the interest of Revenue, even, if the Commissioner has a different view from that of the AO. Where the AO has made enquiries in respect of the claim of the assessee, order cannot be said to be erroneous even if the details of enquiries made do not find mention in the assessment order.
Held by Tribunal
The Tribunal noted the assessee has submitted all the required details including ledger account of tools and implements and copies of bills etc during the assessment proceedings u/s 143(3). Beside copies of various other letters addressed to the A.O. to show that from time to time the AO called for various records which were duly submitted and the relevant explanation was given to the AO was also available on record. The Tribunal further noted that in response to the notice issued by the Ld. CIT in relation to the proceedings under section 263, the assessee filed a detailed written reply dated 19.03.10 wherein the assessee duly explained the genuineness of the claim made and that the claim was rightly allowed by the AO. The assessee not only explained about each and every claim/query but also produced the necessary details, charts etc. justifying his claim in this respect. The Tribunal observed that before passing an order of modifying, enhancing or cancelling the assessment, the Ld. CIT was supposed either to himself make or cause to make such an enquiry as he deems necessary as per the relevant provisions of section 263. So far as the words “as he deems necessary” are concerned, the said words suggest that the enquiries which are necessary to form a view as to whether the order of the AO is erroneous and prejudicial to the interest of Revenue or not? and do not mean that the Ld. CIT is left with a choice either to make or not to make an enquiry. Once a point wise reply was given by the assessee, then a duty was cast upon the Ld. CIT to examine the reply of the assessee and form a prima-facie opinion as to whether the order of the AO was erroneous so far as it was prejudicial to the interest of Revenue. The Hon’ble Supreme Court in the case of “Malabar Industrial Co. Ltd. vs. CIT” (2000) 109 Taxman 66 (SC) which has been relied by both the parties, held that as per the provisions of section 263(1) the Commissioner has to be satisfied with twin conditions namely; (i) the order of the AO sought to be revised is erroneous, (ii) it is prejudicial to the interest of Revenue. If one of them is absent, viz., if the order of the ITO is not erroneous but it is prejudicial to the interest of Revenue or if it is erroneous but is not prejudicial to the interest of Revenue, recourse cannot be had to section 263(1).
The opinion of the Commissioner that the AO had not made proper enquiries or verifications should be based on his objective satisfaction and not a substantive satisfaction from the assessment order. Merely because, the assessment order in question is not a detailed order and the AO has not mentioned item wise findings regarding the claims of the assessee, that itself, does not mean that the AO had not made enquiries in this respect. As per the relevant provisions as they stood during the relevant period i.e. for A.Y. 2005-06, whatever required by the AO was to look into the claim of the assessee. Admittedly, the AO asked the assessee to furnish the necessary details from time to time which were duly furnished by the assessee and after considering the same the AO passed the assessment order. In view of the tribunal, when the assessee shows from the record that the necessary enquiries were made by the AO and the AO had applied his mind and the view adopted by him was one of the possible views, then it cannot be said that the order of the AO is erroneous. In the case in hand, after getting the necessary details and explanation from the assessee, the Ld. CIT has not given his opinion regarding the validity or genuineness of the claims made by the assessee. He has simply opined that the AO had not made the necessary enquires. He has neither asked the assessee to show as to what enquiries were made by the AO nor himself has looked into the explanations submitted by the assessee.
Since, the Hon’ble Supreme court and various other High Courts including Jurisdictional High Court have been almost unanimous in holding that before enhancing or annulling or modifying or cancelling the assessment while exercising his powers under section 263 of the Act, the Commissioner must record a finding of fact or of law that the order of the AO is erroneous and is also prejudicial to the interest of Revenue as discussed above. In the case in hand, as discussed above, this prerequisite condition has not been satisfied as the Commissioner after calling for the explanation from the assessee has failed to make necessary exercise in examining or cause to examine the explanation/details submitted by the assessee for the justification of its claim. Hence, in the light of the various case laws as analyzed above, the order of the Commissioner exercising jurisdiction under section 263 of the Act cannot be held to be sustainable in law and the same was accordingly set aside. Appeal of the assessee allowed.
It is pertinent to mention here that a deeming fiction has been created in section 263 of the Act by the amendment made by Finance Act, 2015 w.e.f. 01.06.15 to provide clarity on the issue of the interpretation of expression “erroneous in so far as it is prejudicial to the interest of the revenue”.