S.263 of Income Tax Act Can Be Invoked Only in Cases of ‘Lack of Inquiry,’ Not Merely for Inadequate Inquiry: Madras HC Upholds AO’s Order [Read Order]

In a recent ruling, the Madras High Court held that Section 263 of theIncome Tax Act, 1961 can be invoked only in cases of “lack of inquiry” and not merely for “inadequate inquiry.”

Arul Industries, the appellant, filed its return of income for the assessment year 2007-08 declaring nil income. A survey under Section 133A was carried out on its premises in October 2009 while regular assessment proceedings were already in progress. The return was processed, and assessment was completed under Section 143(3) on 15 December 2009, determining a total income of Rs. 47,89,800, which included long-term capital gains from the sale of an old building.

Later, proceedings were initiated under Section 153C, and a fresh order was passed, wherein the Assessing Officer reworked the depreciation claim and treated the old building as a business asset.

The Commissioner of Income Tax invoked Section 263 and set aside the assessment, holding that the Assessing Officer had not properly examined the difference in the cost of construction and the treatment of capital gains. The assessee appealed to the ITAT but was unsuccessful, leading to the present appeal before the High Court.

The assessee's counsel argued that the Assessing Officer had indeed made inquiries, discussed with the assessee’s representative, and applied his mind before concluding that the property was a business asset.

The counsel submitted that even if the inquiry was not elaborate, it could not be said that there was a complete absence of inquiry, which alone would give the Commissioner power under Section 263.

The revenue’s counsel argued that the Assessing Officer had assumed facts without conducting proper inquiry and thus the Commissioner was justified in exercising revisional jurisdiction.

The Division Bench comprising Chief Justice Manindra Mohan Shrivastava and Justice Sunder Mohan observed that the Assessing Officer had examined the records, considered the property purchase from the Tamil Nadu State Industrial Development Corporation, and discussed the matter with the assessee’s representative before arriving at his conclusion.

The court explained that this was not a case of no inquiry but at best of inadequate inquiry which does not permit action under Section 263.

The court held that the Commissioner had no jurisdiction to invoke Section 263 in the facts of the case. The first question of law was answered in favour of the assessee and against the Revenue. The appeal was allowed, with the Court stating that the other questions of law became academic in nature.

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