The Delhi High Court division bench comprising of Justice S. Ravindra Bhat and Justice Sanjeev Sachdeva recently ruled that revisional order under Section 263 of the Income Tax Act, 1961 cannot be passed without hearing assessees’ submission.
During the course of assessment a special audit of the assessee’s accounts was directed, under Section 142(2A) of the Act. The special auditor’s report contains elaborate comments in connection with the terms of reference for special audit framed by the AO.
The aforesaid report contains the issues like reconciliation of fixed assets and depreciation thereon, arm’s length nature of transactions entered into with related parties, and compliance with provisions of Chapter XVIIB of the Act relating to tax deduction at source and effect of noncompliance thereof.
After considering this aforesaid special auditor’s report the AO completed the assessment under section 143(3) of the Act. The assessee appealed against the AO’s order; the appeal was disposed of on further, granted partial relief to the assessee in respect of disallowance made under Section 40(a) (ia) of the Income Tax Act.
Following this, the Commissioner initiated proceedings under section 263 of the Act alleging that there was variation in cost of fixed assets, which aspect had not been verified or examined by the AO while framing assessment under section 143(3) of the Act.
The assessee’s appeal to the ITAT was rejected by finding that the assessment was concluded by the AO without making adequate enquiries with respect to variation in cost of fixed assets and accordingly, order passed by the Respondent under Section 263 of the Act was upheld.
Before the High Court, the assessee argued that the order of the CIT under Section 263 could not be upheld under any circumstance and the ITAT, in refusing to set it aside, compounded the error and also submitted that each on the three points were revisional order exercised had been inquired into during the original assessment; the appellate order had dealt with those aspects.
The counsel of assessee also submitted that courts have held that once relevant details/ documents are available on record pertaining to original assessment it may not even be necessary for the AO to conduct detailed enquiry; in such circumstances, it cannot be presumed that the assessing officer had not examined the claims of the assessee.
Countering the assessee’s argument the Revenue submitted that the lack of opportunity at the revisional stage under Section 263 does not spoil the quality of the entire order or the proceedings; rather it is a curable defect.
While hearing both the parties contention the High Court ruled that the revisional order, to the extent that it did not provide any pre-decisional opportunity to address the issues it dealt with, could not be sustained.
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