INCOME TAX ACT, 1961

Section 263

Revision under section 263 - Erroneous and prejudicial order - Inadequate inquiry, verification not directed to logical conclusion - Powers of CIT under section 263

Not making proper enquiry or failure to make due verification by the AO gives to CIT jurisdiction under section 263. The legal position itself has been made it clear by inserting Explanation (2) to section 263, which is declaratory nature of providing clarity on the issue. The amended law is also squarely applicable in the case of the assessee. The assessee's case was clearly covered by Clause (a) of above Explanation (2) to section 263. Held: Tribunal must examine the nature of inquiries conducted by the AO and whether these inquiries were so deficient as to render the order 'erroneous and prejudicial to the interests of the revenue', within meaning of that expression assigned under section 263. The true test for finding out as to whether Explanation 2(a) had been rightly invoked or not is, therefore, not simply existence of the view, as professed by the Commissioner, about the lack of necessary inquiries and verifications, but an objective finding that the AO has not conducted, at the stage of passing the order which is subjected to revision proceedings, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant that the AO was expected to be. When the facts as emerging out of the scrutiny were apparently in order, and no further inquiry was warranted in his bona fide opinion, he need not conduct further inquiries just because it was lawful to make further inquiries in the matter. A degree of reasonable faith in the assessee and not doubting everything coming to the AO's notice in the assessment proceedings cannot be said to be lacking bona fide, and as long as the path adopted by the AO was taken bona fide and he had adopted a course permissible in law, he cannot be faulted which was a sine qua non for invoking the powers under section 263. The second category of cases could be when the Commissioner finds that necessary inquiries were not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice was caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves with the third possibility, and that is when the Commissioner was satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the AO, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, the Commissioner, in the exercise of his powers under section 263, can set aside an order, for lack of proper inquiry or verification, and ask the AO to conduct such inquiries or verifications afresh.

Relied:L Hirday Naran v. Income Tax Officer (1970) 78 ITR 26 (SC) : 1970 TaxPub(DT) 0391 (SC), Gee Vee Enterprises v. ACIT (1995) 99 ITR 375 (Del) : 1975 TaxPub(DT) 0267 (Del-HC), Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) : 2000 TaxPub(DT) 1227 (SC) and Narayan T Rane v. ITO (2016) 70 taxmann.com 227 (Mum) : 2016 TaxPub(DT) 2516 (Mum-Trib)

REFERRED :

FAVOUR : ????

A.Y. : 2014-15

INCOME TAX ACT, 1961

Section 263 Section 13(2)(c)

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