PR. COMMISSIONER OF INCOME TAX vs. M/S HARI OM STONES

Facts

The Pr. Commissioner of Income Tax (PCIT), Alwar, filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (ITAT), Jaipur, dated April 4, 2018. The ITAT had allowed the appeal of the assessee, M/s Hari Om Stones, reversing the order of the CIT, Alwar, dated March 15, 2016. The CIT had invoked revisional powers under Section 263, considering the assessment order for Assessment Year 2011-12, passed by the Assessing Officer (AO) on March 24, 2014, to be prejudicial to the interests of the revenue due to alleged lack of proper inquiry. The AO had initially enhanced the trading income from Rs. 2,99,820/- to Rs. 4,55,556/- by making additions to various expenses.

Held

The High Court concurred with the view of the ITAT. The ITAT had found that the assessment year 2011-12 was the first year of operation for the assessee, a partnership firm with 17 partners. The partnership deed, detailing partner shares and remuneration, was submitted to the AO. The case was selected for compulsory and complete scrutiny. The ITAT noted that the AO had made inquiries on various issues, including remuneration to partners and expenses/receipts, and the assessee had provided supporting details, as evidenced by letters submitted to the AO and the production of books of accounts. Therefore, the ITAT concluded that the AO had taken into consideration the material before him, applied the law and facts, and conducted necessary inquiries. Consequently, the ITAT held that the assessment order passed under Section 143(3) was not erroneous and not prejudicial to the interests of the revenue. The High Court agreed that the nature of the assessment order did not bring the case within the purview of Section 263, as it could not be considered prejudicial to the interests of the revenue. The High Court relied on the Supreme Court's judgment in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax, Kerala State, to define 'prejudicial to the interests of the Revenue' in conjunction with an erroneous order. The appeal was dismissed as it did not raise any substantial question of law.

Key Issues

1. Whether the assessment order passed by the Assessing Officer under Section 143(3) for Assessment Year 2011-12 was erroneous and prejudicial to the interests of the revenue, as contemplated under Section 263 of the Income Tax Act, 1961, due to alleged lack of proper inquiry into the genuineness of loans and capital introduced by partners? Assessee's Contentions (as per ITAT's findings): - The assessment year 2011-12 was the first year of operation for the partnership firm. - The partnership deed, specifying partner shares and remuneration, was submitted to the AO. - The case was selected for compulsory and complete scrutiny. - The AO made inquiries on various issues, and the assessee submitted requested details, including those regarding remuneration to partners and expenses/receipts. - Evidence from the paper book (pages 105-106 and 50-52) indicated that the AO considered the material, applied law and facts, and conducted necessary inquiries. - The order passed by the AO was not erroneous or prejudicial to the revenue. Revenue's Contentions (as per CIT's order and High Court's summary): - The AO failed to make proper inquiry to determine if money was lent by third parties or originated from the assessee's own resources. - The genuineness of loans and capital introduced in the names of partners was not adequately investigated. - The creditworthiness of alleged lenders was not inquired into. - The assessment order was erroneous and prejudicial to the interests of the revenue.