INCOME TAX ACT, 1961

Revision under section 263- Condition precedent-AO's order whether erroneous

Assessee-company was engaged in the business of manufacturing certain auto parts and had been supplying same to various car manufacturers in India. It had been allowed deduction of expenditure incurred on the manufacture of tools and dyes as revenue expenditure. CIT not exercising his powers under section 263, set aside assessment order with a view that the accounting practice followed by assessee to debit the entire cost of manufacturing tools and dyes in the year of installation was not correct and AO had allowed said expenditure without making proper inquiry. He, therefore, remitted to AO to re-examine all aspects of the issue of allowability of expenses on the manufacture of tools and dyes. Tribunal set aside order of CIT. Held:Revenue submitted that while passing the assessment order, AO did not consider the aspect specifically whether the expenditure in question was revenue or capital expenditure. That argument predicated on the assessment order, which apparently did not give any reason while allowing the entire expenditure as revenue expenditure. There are judgments galore laying down the principle that AO in assessment order was not required to give detailed reasons in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. One has to keep in mind the distinction between lack of inquiry and inadequate inquiry. If there was any inquiry, even inadequate, that would not, by itself, give occasion to the Commissioner to pass orders under section 263 merely because he has different opinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open. [Para 12]

That clearly showed that AO had undertaken the exercise of examining as to whether the expenditure incurred by assessee in the replacement of dyes and tools was to be treated as revenue expenditure or not. It appeared that since AO was satisfied with the assessees explanation, he accepted the same. [Para 14]

Even CIT conceded the position that AO made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that AO should have made further inquiries rather than accepting the assessees explanation. Therefore, it could not be said that it was a case of lack of inquiry. [Para 15]

Income-tax Act, 1961 Section 263

Case Law Analysis:CIT v. Mysore Spun Concrete Pipe (P.) Ltd. [1992] 194 ITR 159 / 60 Taxman 170 (Kar.) [Para 18] followed.