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CaseIQ

Basant v. Commissioner of Income-tax

Income Tax Appellate Tribunal

Jan 19, 2012

Judgment

Subsequent
References

CaseIQ

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Tribunal Summary: Appeal against CIT-II, Jodhpur order under s.263 — Assessment year 2006-07 (noted as 2008-09 in appeal)

Factual and Procedural Background

The assessee filed its income tax return on 27 October 2006 declaring nil income after claiming a deduction under section 10B of the Income-tax Act, 1961 amounting to Rs. 1,43,89,613. The assessment was completed under section 143(3) on 30 December 2008, leaving income as nil.

The Commissioner of Income-tax (CIT)-II, Jodhpur examined the assessment records and, noting alleged omissions, mistakes and lack of proper inquiry by the Assessing Officer (AO), issued a show-cause notice dated 19 February 2010 proposing action under section 263 of the Act. The CIT's statutory objection focused on the AO's alleged failure to properly consider the conditions in section 10B(2) and on an alleged incorrect application of CBDT Circular No.1 of 2005.

The show-cause referred to a prior assessment year (2005-06) where the AO had disallowed the section 10B deduction and to an earlier questionnaire issued by the AO on 8 August 2008. The CIT concluded that the AO had not examined all three mandatory conditions in section 10B(2) and set aside the AO's assessment as erroneous and prejudicial to the revenue, directing the AO to pass a fresh order after further examination.

The assessee appealed to the Tribunal against the CIT's order under section 263. The Tribunal considered written submissions, the record of correspondence involving the AO and the Joint CIT (including a petition under section 144A), the AO's contemporaneous report, the AO's assessment order, and precedential material referred to by the parties.

Legal Issues Presented

Whether the CIT was justified in invoking section 263 on the ground that the AO's assessment order was erroneous and prejudicial to the interest of the Revenue because the AO allegedly failed to make proper and in-depth inquiry before allowing deduction under section 10B.
Whether an assessment order that is concise (not elaborate) can be treated as erroneous and prejudicial to the revenue where the record shows that relevant inquiries and examinations were in fact made by the AO.
Whether the AO had failed to consider the specific eligibility conditions under section 10B(2), namely clauses (i), (ii) and (iii), before allowing the deduction.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The AO had issued a detailed questionnaire dated 8 August 2008 and the assessee had responded; therefore, an inquiry was made prior to passing the assessment.
The AO had forwarded his report to the Joint CIT for approval; the Joint CIT in turn issued directions and requested specific verifications, which the AO carried out before passing assessment under section 143(3) on 30 December 2008.
For assessment year 2005-06 the CIT(A) had allowed the deduction after finding that all three conditions of section 10B(2)(i)–(iii) were satisfied; a copy of that CIT(A) order was placed before the AO and considered by the AO while deciding the later assessment.
The AO's order accepted the assessee's claim after examination and therefore cannot be treated as erroneous and prejudicial to the revenue; assessment does not have to be lengthy provided proper inquiry was made.
The assessee relied on various case laws (filed with written submissions) and submitted that the CIT's order under section 263 should be quashed.

Respondent's (Revenue / CIT-Departmental Representative) Arguments

The CIT-DR supported the CIT's order, contending that the AO's assessment order was brief and did not disclose what inquiries had been made.
It was argued that the AO had failed to make the required inquiry into eligibility for section 10B and had not followed directions of the Joint CIT, thereby justifying initiation of proceedings under section 263 to keep the matter alive for the Department.
The Department had not accepted the Tribunal's order for assessment year 2005-06, which also weighed in favour of reopening the assessment under section 263, according to the Revenue's submissions.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Gabriel India Ltd. [1993] 203 ITR 108 / 71 Taxman 585 (Bom.)	Principle that an assessment order need not be elaborate; what matters is whether a proper inquiry was carried out before arriving at the conclusion.	The Tribunal relied on this authority to support its conclusion that the AO's concise findings—when supported by documentary evidence of inquiry (questionnaire, reports, correspondence and prior orders)—were adequate, and therefore the CIT's action under section 263 was not justified.

Court's Reasoning and Analysis

The Tribunal examined the record of pre-assessment correspondence and actions and the contemporaneous materials relied upon by the AO. Key elements of the Tribunal's analysis were:

The AO had issued a detailed questionnaire dated 8 August 2008 and the assessee had filed detailed replies; this established that an inquiry had been initiated and pursued by the AO.
The AO submitted a pointwise report to the Joint CIT; the Joint CIT in turn wrote back noting that there was "no dispute" on the assessee's status as a manufacturer but asked the AO to verify vital facts and other details. Those suggested verifications were carried out by the AO before finalizing the assessment.
The Tribunal observed that the AO had considered the CIT(A)'s order for assessment year 2005-06 (in which the deduction under section 10B was allowed and later confirmed by the Tribunal in ITA No. 614/Jd/2008 dated 20 Nov 2009), and that this order had been placed on the file and considered while passing the subsequent assessment.
The AO's assessment order, though concise, contained an explicit statement that the claim under section 10B "was deeply examined" and listed the categories of books and records examined (cash book, ledger, journal, purchase register, sale register, bills and vouchers), and stated that after discussion and a thorough examination the claim was found acceptable. The Tribunal reproduced that passage from the AO's order.
Applying the principle from CIT v. Gabriel India Ltd., the Tribunal held that a concise assessment order is not necessarily defective if the record demonstrates that a proper and adequate inquiry was conducted. The Tribunal found that the sequence of questionnaire, replies, AO's report to Joint CIT, Joint CIT's directions and the AO's consideration of the CIT(A) order together demonstrated that the AO had indeed made the necessary inquiries.
Given this factual matrix, the Tribunal concluded that the CIT's exercise of jurisdiction under section 263 was unjustified because the AO's order was not shown to be erroneous or prejudicial to the revenue.

Holding and Implications

The appeal is allowed: the order of the CIT under section 263 is set aside and the AO's original assessment order is restored.

Consequences of the decision:

Direct effect: The Tribunal restored the AO's assessment dated 30 December 2008 which accepted the assessee's claim of deduction under section 10B and left income at nil for the relevant year. The CIT's direction to the AO to pass a fresh order under section 263 was quashed.
Broader implications: The Tribunal relied on established principle (CIT v. Gabriel India Ltd.) that an assessment order need not be elaborate if the record demonstrates a proper inquiry. The opinion confines itself to the facts of the case and does not purport to lay down any novel legal rule beyond application of that principle to the record before it. The order does not articulate any additional precedent purportedly created by this decision.

Note: This summary is strictly based on the material contained in the provided Tribunal order and does not add or infer facts beyond the text of that order.

Show all summary ...

ORDER

R.K. Gupta, Judicial Member - This appeal filed by the assessee is directed against the order of the CIT-II, Jodhpur, dt. 24th March, 2011 relating to asst. yr. 2008-09 (sic—2006-07).

2. The assessee is objecting to the order passed under s. 263 of the IT Act, 1961 (in short, 'the Act') by the CIT-II, Jodhpur, on 24th March, 2011.

2.1 The brief facts of the case are that the assessee filed its return of income on 27th Oct., 2006 declaring 'nil' income after claiming deduction under s. 10B of the Act to the tune of Rs. 1,43,89,613. The assessment was completed under s. 143(3) on 30th Dec., 2008 at nil income.

2.2 On examination of the case records of the assessee, the learned CIT noted that there are certain omissions, mistakes, irregularities, shortcomings etc. besides non-verification of certain facts and lack of inquiry whereas the facts warranted proper and in-depth investigation and inquiry. Thereafter, the assessee was issued show-cause notice dt. 19th Feb., 2010 that as to why action under s. 263 of the Act be not initiated. In the show-cause notice, the learned CIT noted that while allowing deduction under s. 10B various points were not considered by the AO and neither any in-depth study of the documents was made. It was observed by the learned CIT that Circular No. 1 of 2005 [(2005) 193 CTR (St) 85] of CBDT was wrongly considered by the AO. It was further observed that the AO has not considered the provisions of s. 10B(2) which requires the assessee to fulfil certain conditions to claim deduction under s. 10B of the Act. It is also observed that though the AO issued a questionnaire dt. 8th Aug., 2008 wherein queries in respect of eligibility for claim of deduction under s. 10B were raised in the light of the adverse findings given in the asst. yr. 2005-06. The learned CIT also noted that in the asst. yr. 2005-06, the claim of deduction under section disallowed by the AO by holding that all the three major eligibility conditions enumerated in ss. 10B(2)(i), 10B(2)(ii) and 10B(2)(iii) were not fulfilled. The learned CIT noted that while reply filed before the AO in response to notice dt. 8th Aug., 2008, the assessee has replied in respect of two conditions only i.e. mentioned in ss. 10B(2)(i) and 10B(2)(iii) and other crucial condition mentioned in s. 10B(2)(ii) was not discussed and was not replied and AO also failed to notice the above omission. Accordingly, the learned CIT issued show-cause notice, as stated above. Detailed reply was filed by the assessee in response to show-cause notice, which is reproduced in the order of the learned CIT at pp. 4 to 7. Thereafter, the learned CIT examined the reply and discussed by him in his order in detail and found that the AO was not justified in allowing claim of deduction under s. 10B as all the three conditions were not satisfied. The learned CIT also observed that the existing infrastructure has been taken over and put to use by the assessee. The two conditions (ii) and (iii) of s. 10B(2) were not fulfilled. Accordingly, it was held that the AO failed to examine thoroughly these issues and held that deduction allowed under s. 10B was allowed without examination and, therefore, held that order of the AO was erroneous and prejudicial to the interest of the Revenue. Accordingly, he set aside the order of the AO and directed the AO to pass a fresh order after examining the issue in the light of his observation in his order.

3. The learned counsel for the assessee, who appeared before the Tribunal stated that it is an admitted fact that the AO had issued detailed questionnaire on 8th Aug., 2008 before passing assessment. The assessee filed the reply and thereafter AO also sent his report to the Jt. CIT for his approval, who also issued a notice to him to consider the issue in detail. In the meantime, the order of the learned CIT(A) for the asst. yr. 2005-06 was already pronounced by which deduction under s. 10B was allowed after ascertaining the factual aspect that all the three conditions enumerated in ss. 10B(2)(i) to 10B(2)(iii) were fulfilled. Copy of the order of the CIT(A) was filed before the AO. After examining the order of the learned CIT(A) then only the AO passed his order accepting the claim of the assessee in respect to deduction claimed under s. 10B of the Act. It is also a matter of fact that deduction under s. 10B was denied while passing assessment for the asst. yr. 2005-06 and AO has issued questionnaire dt. 8th Aug., 2008 to file the details in the light of the decision for the asst. yr. 2005-06, as the claim of the assessee was denied earlier. It means that the AO was aware of the fact that in earlier year the claim of deduction was denied and, therefore, he issued a detailed questionnaire. Therefore, the order of the AO cannot be held as erroneous and prejudicial to the interest of the Revenue. It was further submitted that the order of the learned CIT(A) has been affirmed by the Tribunal for the asst. yr. 2005-06. Therefore, in view of the above facts and reasons also, the issue is covered by the decision of the Tribunal now. It was also submitted that for the asst. yr. 2004-05, deduction claimed by the assessee was allowed by the ITO himself while passing assessment order under s. 143(3) of the Act. It was further explained that in fact, the assessee has filed the petition under s. 144A before the Jt. CIT in which it was requested that the assessee is engaged in the business of manufacture/production and export of handicraft articles of artistic value, and assessee is 100 per cent EOU and is claiming deduction under s. 10B of the Act for the last many years. It was further submitted that deduction under s. 10B for the asst. yr. 2005-06 was disallowed. The assessee preferred an appeal before the learned CIT(A) and the learned CIT(A) has allowed the claim of the assessee. In this background, it was submitted that report should be sought from the AO as the AO seems inclined to disallow the claim of the assessee under s. 10B. Copy of this petition is placed at pp. 151 and 152 of the assessee's paper book. It was further submitted that Jt. CIT vide letter dt. 19th Dec., 2008 asked for the report from the AO. The AO was requested that report should be submitted by 24th Dec., 2008. It was explained here before the Tribunal that in these circumstances, the AO sent her report to the Jt. CIT vide letter dt. 26th Dec., 2008, copy of the same is placed at pp. 153 to 157 of the paper book. Thereafter, Jt. CIT sent a letter to the AO by which it was stated that after taking into account assessee's petition and your report, there remains no litigation and consequently no requirement for my intervention as far as the question of treating the assessee as manufacturer is concerned. Thereafter, the Jt. CIT suggested to verify the various other details which are mentioned in paras (a) and (b) of his reply dt. 29th Dec., 2008, copy of the same is placed at pp. 158 to 160 of the paper book. Copy of this reply was also sent to the assessee by Jt. CIT, as it is mentioned in the letter sent to the AO. Accordingly, it was submitted that thereafter the AO examined those very details as suggested by the Jt. CIT and taking into consideration the order of the CIT(A) who allowed the claim of the assessee and then only passed order under s. 143(3) on 30th Dec., 2008. Accordingly, it was submitted that neither there was any lack of inquiry nor the order of the AO can be said to be erroneous and prejudicial to the interest of the Revenue. It was further mentioned that it is not necessary that the assessment should be made in elaborate manner but the same should be made after making inquiry. The AO has already made detailed inquiry and then only has allowed the deduction to the assessee while passing order under s. 143(3) of the Act. Reliance was also placed on the various case laws mentioned in the written submissions. List of judgments is also placed on record. Accordingly, it was submitted that the order of the learned CIT is liable to be quashed.

4. The learned CIT-Departmental Representative, on the other hand, placed strong reliance on the order of the CIT. It was further stated that the learned CIT has discussed all the issues in detail and found that the order of the AO was lacking inquiry and therefore, the same was erroneous and prejudicial to the interest of the Revenue. The attention of the Bench was drawn to the copy of the assessment order placed on record and stated that this is a small order and not detailed one, neither there is any whisper that what inquiry has been made by the AO while allowing deduction under s. 10B. It was also submitted that the Department has to keep the issue alive, therefore, it was necessary on the part of the learned CIT to start proceedings under s. 263 of the Act, otherwise the order of the AO could have reached to its finality. It was also submitted that the Department has not accepted the order of the Tribunal for the asst. yr. 2005-06 and therefore, due to this reasoning also it was necessary to initiate proceedings under s. 263 of the Act. Even otherwise, as stated above, no inquiry whatsoever was made by the AO while allowing deduction under s. 10B of the Act. It was also submitted that even the directions issued by the Jt. CIT were not met with by the AO. Therefore, the order of the AO was not correct.

5. After considering the rival submissions and carefully perusing the relevant materials available on record along with the case laws cited by the assessee, we found that the order of the learned CIT is liable to be quashed. The learned CIT himself in his order is admitting that a detailed questionnaire dt. 8th Aug., 2008 was issued by the AO to the assessee to file the details in the light of assessment order passed for the asst. yr. 2005-06, wherein deduction claimed under s. 10B was denied. From this fact alone, it establishes that the AO has made inquiry. Various details were filed by the assessee. The AO was examining those details and assessee was in apprehension that the AO is going to disallow the claim of the assessee in spite of the order of the learned CIT(A), who allowed claim of deduction under s. 10B for the asst. yr. 2005-06. Therefore, petition under s. 144A was filed and report was sought from the AO by the Jt. CIT. The AO has also submitted her report pointwise about the claim of deduction and detail of deduction. Then Jt. CIT wrote a letter to the AO that there is no dispute now that assessee is manufacturer, however, he has to ensure some vital facts. Thereafter the AO after taking into consideration the letter of the Jt. CIT, submissions of the assessee, order of the learned CIT(A), allowed the claim of the assessee. Though the AO has not mentioned all these facts in his order but the AO has mentioned at p. 2 of his order in the following manner :

"The claim of the exemption under s. 10B of the assessee was deeply examined. Books of account comprising of cash book, ledger, journal, purchase register, sale register, purchase and sale bills and other bills and vouchers were examined. After discussion with the learned Authorised Representative of the assessee, and thorough examination of records and submissions, income as shown by the assessee in its return is accepted and the claim of exemption laid by the assessee under s. 10B is also found to be acceptable."

6.1 These findings of the AO may not be elaborate findings but it cannot be said that the AO has not examined the case. The AO has used the words "claim of exemption under s. 10B of the assessee was deeply examined". It cannot be taken lightly. It is further seen that all the correspondence made by the assessee with Jt. CIT, then comments of the AO to Jt. CIT, then letter of the Jt. CIT to the AO and then order of the learned CIT(A) for the asst. yr. 2005-06 by which deduction under s. 10B was allowed, were considered by the AO and then only these findings were given and claim of the assessee was accepted. Therefore, in no way, it can be said that the AO has not made any inquiry. The Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108/71 Taxman 585 (Bom.) has held that it is not necessary that the order should be elaborate but the same should be after making proper inquiry. The AO has already made proper inquiry as mentioned above. Therefore, if the order of the AO is precise and in summary manner, it cannot be said that the same is erroneous and prejudicial to the interest of the Revenue. Various other decisions mentioned in the written submissions are in support of the case of the assessee. Therefore, we are not inclined to discuss those decisions in detail as on the facts of the present case discussed above, it is amply proved that the AO has made detailed inquiry before allowing deduction under s. 10B of the Act. It is worth mentioning here that the order of the learned CIT(A) for the asst. yr. 2005-06 has been approved by the Tribunal. Copy of the Tribunal's order decided in ITA No. 614/Jd/2008, for the asst. yr. 2005-06 vide order dt. 20th Nov., 2009, is placed in the paper book at pp. 47 to 63, wherein the issue has been discussed in detail and then only the order of the CIT(A) was confirmed. Therefore, for this reason also, it cannot be said that the view adopted by the AO was incorrect.

6.2 In view of the above facts and circumstances of the case, we set aside the order of the learned CIT and restore the order of the AO passed originally. Accordingly, the appeal of the assessee is allowed.

7. In the result, the appeal filed by the assessee is allowed.