CIT must establish that order is erroneous before remanding matter to AO u/s 263
9:40 amCIT must establish that order is erroneous before remanding matter to AO u/s 263
Citation of the Case: – Lakshya Seth vs. ITO (ITAT Delhi), Income tax (Appeal) no. 218 of 2015, Date of Judgment: 07/10/2015
Brief of the Case
ITAT Delhi held In the case of Lakshya Seth vs. ITO that CIT cannot remand the matter to the AO to decide whether findings recorded are erroneous. In the case where there is inadequate inquiry but not lack of inquiry, again the CIT must give and record his finding that the order/inquiry made is erroneous and this can happen if an inquiry is conducted by the CIT and thereafter he is able to establish and shows the error or mistake made by the AO, making the order unsustainable in law.
Facts of the Case
The AO selected the case for scrutiny through CASS with the reason that the AO should examine the source of cash deposited in the savings bank account as per AIR information. The AO completed the assessment by making an addition of Rs.6,11,230/- on surrendered amount made by the assessee vide order sheet dated 20.12.2013 as business income @8% of gross receipts of Rs.76,40,380 as prescribed u/s 44AF of the Act. Finally, the said addition was made being 8% of turnover made on account of trading of cloth during the relevant financial period. The AO completed the assessment u/s 143(3) at an income of Rs.7,52,860/- as against the returned income of Rs.1,40,180.
Subsequently the CIT issued notice u/s 263 on 9.9.2014. After considering the reply and explanation of the assessee, the CIT held that impugned assessment order is erroneous and prejudicial to the interest of revenue as not only assessment order has been passed in utmost haste and in a cryptic manner but the AO has also allowed benefit of section 44AD/AF erroneously without considering whether conditions thereto are fulfilled, and also not by applying provisions of section 69A. Finally, the CIT held that the order passed by the AO u/s 143(3) deserves to be cancelled and he directed the AO to make a fresh assessment after considering correct and legal and factual position in this regard.
Contention of the Assessee
The ld counsel of the assessee submitted that the AO only referred to provisions of section 44AF of the Act which provides estimation of business income @ 5% of gross receipts/turnover whereas the AO took 8% of gross receipts/turnover of cloth business of the assessee for determination of business income from trading of cloth earned by the assessee during the relevant financial period which cannot be said to be erroneous or prejudicial to the interest of revenue because the AO has adopted a higher percentage for making estimation of business income of the assessee from cloth business.
He further submitted that the assessee had declared the details of all seven bank accounts showing total cash deposit of Rs.70,77,034/- during original assessment proceedings as against the details asked by the AO for only bank account with HDFC Bank where the cash of Rs.30,59,310 was reported in the AIR as available with the Income tax department. Ld. AR strongly contended that the assessee was fair enough in submitting all details of cash deposits to his bank account and the assessee not only submitted details of cash deposit with HDFC Bank but also submitted details of other bank accounts of the assessee and these facts were properly explained before the AO and after examining the same, the AO recorded his satisfaction in this regard.
He finally submitted that as per dicta laid down by Hon’ble Jurisdictional High Court of Delhi in the case of ITO vs D.G. Housing Projects Ltd. dated 1.3.2012 in ITA 179/2011, when the AO had adopted one of the courses permissible and available to him and this has resulted in loss to revenue; or two views are possible and the AO has taken one view with which the CIT may agree; the said orders cannot be treated as erroneous order prejudicial to the interest of revenue unless view taken by the AO is unsustainable in law.
He further submitted that the CIT has not given any finding to establish that the view taken by the AO is unsustainable in law and therefore order is erroneous and prejudicial to the interest of revenue because the CIT must show that prejudice is caused to the interest of revenue. The AR vehemently contended that while the AO has taken higher percentage of 8% instead of 5% as provided u/s 44AF of the Act, then the view taken by the AO cannot be held as erroneous and prejudicial to the interest of revenue.
Contention of the Revenue
The ld counsel of the revenue supported the orders of CIT. It was submitted that the case was selected for scrutiny with the main objective that the AO should examine the source of cash deposited in the SB account of the assessee and the AO, instead of examining the source of said cash deposit, proceeded to invoke provisions of section 44AF of the Act which was not applicable to the assessee’s case as the turnover of the assessee was much higher than the prescribed limit of Rs. 60 lakh, hence order passed by the AO was not only erroneous but also prejudicial to the interest of revenue which cannot be held as sustainable and in accordance with the provisions of the Act.
He further pointed out that AO is not allowed to make estimation of profit u/s 44AB of the Act where the total turnover/gross receipts are higher than Rs. 60 lakh during the relevant financial year, therefore, the approach of the AO was not sustainable and in accordance with the provisions of the Act and hence, the CIT rightly clothed himself for invoking provisions of section 263 and for passing impugned order directing the AO to make fresh assessment after considering the correct legal and factual position of the case.
Held by ITAT
In this case, it is clear that the main thrust of the department was that the AO should examine and verify the amounts of cash deposited to the bank account of the assessee and during the assessment proceedings, the assessee not only submitted details of alleged amount of Rs.30,59,310 but submitted details of Rs.42,64,130 deposited in HDFC Bank and in addition to that, the assessee also submitted details of total cash deposit of Rs.70,77,034 of all seven bank accounts including bank account in HDFC Bank which was pointed out by the AIR information. We cannot ignore that the total financial/trading transaction of the assessee were adopted by the AO for making estimation of business profit at 8% of gross receipts/turnover putting all the accounts together irrespective of any real profit earned by the assessee.
It is clear that when the gross receipts of the assessee were more than Rs.40 lakh, then the provisions of section 44AF (1) are not applicable but the AO made estimate of profit earned by the assessee during the relevant financial period for trading of cloth by estimating 8% of total gross receipts, then the recourse adopted by the assessee is more than beneficial to the revenue and which cannot be held as prejudicial to the interest of revenue.
Further the CIT has directed the AO to make a fresh assessment after considering the correct legal and factual position and he has not drawn any definite conclusion that the view taken by the AO is not sustainable and in accordance with law and therefore, the same is erroneous and prejudicial to the interest of revenue.
It is important to note here that when the assessee could not file his books of accounts and other record and he lodged an FIR with Police Station, Naraina, New Delhi, then the AO had no alternative but to estimate the profit on the basis of information available before him during the assessment proceedings and the AO estimated the business income of the assessee @8% of gross receipts merely referring to section 44AF of the Act which provides application of 5% in the cases where turnover is not more than Rs. 40 lakh from retail business.
As the AO followed a proper procedure for framing assessment and for estimating business income of the assessee which cannot be held as sustainable or against the provisions of the Act. At this juncture, it would be appropriate to respectfully refer to the dicta laid down by Hon’ble Jurisdictional High Court in the case of ITO vs DG Housing Projects Ltd. (supra) wherein their lordships held that in the case of wrong opinion or finding on merits, CIT has to come to the conclusion and himself decide that the order is erroneous by conducting necessary inquiry before the order u/s 263 is passed. In such a case, the order of the AO will be erroneous because the order passed is not sustainable in law and said finding must be recorded. In this judgment, it was also held that the CIT cannot remand the matter to the AO to decide whether findings recorded are erroneous. In the case where there is inadequate inquiry but not lack of inquiry, again the CIT must give and record his finding that the order/inquiry made is erroneous and this can happen if an inquiry is conducted by the CIT and thereafter he is able to establish and shows the error or mistake made by the AO, making the order unsustainable in law.
It was further held that the matter cannot be remitted for a fresh decision to the AO to conduct further inquiry without a finding that the order is erroneous is a condition or requirement which must be satisfied for valid exercise of jurisdiction u/s 263 of the Act. Lastly, their lordships, speaking for the jurisdictional High Court, made it clear that in such matters, to remand the matter/issue to the AO would imply and mean that the CIT has not examined and decided whether or not the order is erroneous but has directed the AO to decide the aspect/question.
The present case is not a case of no inquiry and when the AO had adopted one of the courses permissible and available to him under the provisions of the Act and act of the AO has resulted in loss to the revenue or two views were possible and the AO has adopted one view which was not agreeable to the CIT, then the said assessment order cannot be treated as erroneous order prejudicial to the interest of revenue unless the view adopted by the AO is held as unsustainable and not in accordance with law.
In the present case, the AO inquired about the cash deposited by the assessee during the relevant financial period and the assessee submitted his reply stating the details of cash deposits to all seven bank accounts including alleged by the department through AIR information which was considered and the AO has not taken total turnover of assessee in the trading of cloth and the AO has adopted higher figure taking total amount of gross receipts of Rs.76,40,380 during the relevant financial period. The CIT has not brought out any fact to establish that the assessee had not undertaken any inquiry in regard to the alleged cash deposited to his bank account and the CIT has not brought out any fact to this effect that in absence of amount and other records, which were lost by the assessee, the AO was not correct in making estimation of business income @8% of gross receipts and the conclusion drawn by the AO was not in accordance with the provisions of the Act and thus, the same was unsustainable in law.
Accordingly appeal of the assessee allowed.
Direct link to download the full text of the above judgment –
CA Deepak Aggarwal
Posts
0 comments