Revision u/s 263 – Inquiry conducted by the A.O. – Inadequacy in conduct of inquiry – Revision bad in law

Revision u/s 263 – Inquiry conducted by the A.O. – Inadequacy in conduct of inquiry – Revision bad in law

The PCIT vide his orders dated 28th March, 2019, interfered with the assessment orders dated 31st January, 2017 and 27th September, 2017 passed by the A.O. concerning the respondent / assessee pertaining to A.Ys. 2012-13 and 2013-14, respectively.

The PCIT had interfered with the original assessment orders because of a view held by him that interest earned by the assessee against fixed deposits was adjusted, i.e., deducted from the value of the inventory and not credited to the Profit & Loss account. The PCIT noted that the tax auditor, in the report filed in Form 3CD, had observed that interest earned on fixed deposits pertained to ‘other income’ and had not been credited to the P&L account. The interest earned on fixed deposits in A.Y. 2012-13 was Rs. 9,47,04,585, whereas in A.Y. 2013-14 it was Rs. 4,32,91,517.

Consequently, after the PCIT had issued two separate show cause notices to the assessee concerning the aforementioned A.Ys. dated 20th February, 2019 and had received replies against the same, he proceeded to pass two separate orders of even date, i.e., 28th March, 2019 concerning A.Ys. 2012-13 and 2013-14. The PCIT interfered with the orders of assessment on the ground that they had been passed without making any inquiries as to whether the interest earned by the assessee had any nexus with the real estate project the construction of which was undertaken by the assessee. Thus, according to the PCIT, the assessment orders were ‘erroneous’ insofar as they were prejudicial to the interests of the Revenue. In the appeals preferred before the Tribunal by the assessee, the view held by the PCIT was reversed. Thus, the Revenue approached the High Court by way of the instant appeals.

The High Court observed that it is not in dispute that the assessee was engaged, inter alia, in the business of promotion, construction and development of commercial projects. It is also not in dispute that the assessee had undertaken construction / development of a project allotted to it by the Haryana State Industrial and Infrastructure Development Corporation (‘HSIIDC’). It was observed that on 11th August, 2016, the Chartered Accountants of the assessee, i.e., BSR and Co. LLP, filed their response to certain queries raised by the A.O. at a hearing held before him on 9th August, 2016 concerning A.Y. 2013-14. One of the queries raised concerned the exclusion of interest received on fixed deposits from the category / head ‘income from other sources’. Likewise, in response to a notice dated 14th September, 2017 issued by the A.O. under sections 154 and 155 in respect of A.Y. 2012-13, a reply was submitted by the assessee on 12th October, 2017. In the notice dated 14th September, 2017, inter alia, it was brought to the attention of the assessee that audit scrutiny had, amongst others, raised objections regarding the interest earned on fixed deposits in A.Y. 2012-13 which was not credited to the P&L account and had been deducted from the value of inventory. The assessee had filed an appropriate reply.

The Court observed that having regard to the aforesaid documents, it cannot be said that the inquiry or verification was not carried out by the A.O. The Tribunal has recorded findings of fact concerning the inquiry made by the A.O.

The fact that the A.O. has not given reasons in the assessment order is not indicative, always, of whether or not he has applied his mind. Therefore, scrutiny of the record is necessary and while scrutinising the record the Court has to keep in mind the difference between lack of inquiry and perceived inadequacy in inquiry. Inadequacy in conduct of inquiry cannot be the reason based on which powers u/s 263 can be invoked to interdict an assessment order. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately.

The Income-tax Officer had made inquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be ‘erroneous’ simply because in his order he did not offer an elaborate discussion in that regard. The A.O., having received a response to his query about the adjustment of interest in the A.Y.s concerned, against inventory, concluded that there was a nexus between the receipt of funds from investors located abroad and the real estate project, which upon being invested generated interest. Thus, it cannot be said that the conclusion arrived at by the A.O., that such adjustment was permissible in law, was erroneous.

The Court observed that in the instant cases, it was not as if the funds were surplus and therefore invested in a fixed deposit. The funds were received for the real estate project and while awaiting their deployment, they were invested in a fixed deposit which generated interest.

Furthermore, the Court observed that it need not examine whether Clauses (a) and (b) of Explanation 2 appended to section 263 could have been applied to the A.Y.s in question since, on facts, it has been found by the Tribunal that an inquiry was, indeed, conducted by the A.O.

Thus, for the reasons stated, the Revenue appeals are dismissed.