STERLING FARM RESEARCH AND SERVICES PRIVATE LIMITED,ERNAKULAM vs. THE PCIT, KOCHI-1, KOCHI

The appeal, filed on 30.05.2022, is within time, i.e., in view of exclusion of the period from 15.03.2020 to 28.02.2022 for the purpose of reckoning limitation by the Hon'ble Apex Court per its suo motu Writ Petition (C) No. 3/2020, dated 10.01.2022.

The brief facts of the case are that the assessee, a domestic company in the business of testing and analytics, besides producing fertilizers, through it’s two units, the Test House Division (STH) and Fertilizer Division (FD) respectively, returned it income for the year on 30.09.2016 at Rs.495.24 lakhs, including current year business (AY : 2016-17) Sterling Farm Research and Services Pvt. Ltd. v. Dy. Commissioner of Income Tax-1 loss of Rs.133.67 lakhs and long term capital gain (LTCG) of Rs. 628.91 lakhs on sale of STH. Subsequently, assessment was made accepting the assessee’s returned LTCG. The relevant discussion in the assessment order reads as under: ‘3. Subsequently notice u/s.142(1) were issued on 21.11.2018, 04.12.2018 and 11.12.2018. Most of the replies were filed manually. The details furnished by the assessee have been verified.’ ‘6. During the year under consideration assessee has sold various assets of the company and produced supporting documents for income from Capital Gain declared. All the documents / material produced are verified.’ (emphasis, supplied) The assessment record was subsequently examined by the competent authority, being the Principal Commissioner of Income Tax, Kochi (Pr. CIT). In his view the Assessing Officer (AO) had, while examining the assessee’s returned LTCG, omitted to inquire into and verify the following two aspects of the assessment: (a) the sale of STH Unit to Neogen Food and Animal Security (India) Private Limited (Neogen) vide Agreement dated 21.05.2015, effective 01.06.2015, was an asset purchase agreement, and not, as stated, a business purchase agreement. Reference was made by him to Cl. 2 of the agreement whereby the buyer shall not assume any debts, liabilities or obligations of any nature of the assessee, whether related to business or not. Provisions of section 50, implying capital gain being assessable as a short-term capital gain (STCG) shall apply instead of sec.50B for `slump sale’, as invoked, returning capital gain as LTCG, which stood assessed as such. (b) a sum of Rs. 1 crore, forming part of the sale consideration per the said Agreement, was not included in the computation of capital gain. The same, reserved for certain compliances, was received in the following year, which though would be of no consequence as capital gain is chargeable in the year of ‘transfer’. The AO had, not inquiring in the matter, merely accepted the version of the assessee. Adverting to Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83 (SC) and Raja & Co. vs. CIT [2011] 335 ITR 381 (Ker), wherein it had been held that an incorrect assumption of facts or incorrect application of law would render an order as erroneous, as indeed orders passed without applying the principles of natural justice or application of mind. There had been clearly an incorrect assumption of facts as indeed non-application of mind in the instant case, causing a prejudice to 2 (AY : 2016-17) Sterling Farm Research and Services Pvt. Ltd. v. Dy. Commissioner of Income Tax-1 the Revenue. The assessment was accordingly in exercise of his revisionary power u/s.263 set aside for a de novo examination and decision in accordance with law per a speaking order. Aggrieved, the assessee is in appeal before us.

We have heard the parties, and perused the material on record. 4.1 The law in the matter is trite. Lack of enquiry would by itself result in the ensuing assessment as being erroneous and prejudicial to the interest of the Revenue, liable for revision, toward which the ld. Pr. CIT cites Malabar Industrial Co. Ltd. (supra) and Raja & Co. (supra). Non-application of mind, as explained by the Apex Court in Malabar Industrial Co. Ltd. (supra), is one of the ingredients that renders an order as prejudicial and erroneous to the interest of the Revenue. Absence or lack of enquiry is an attribute, a manifestation, of this non-application, so that an order imbued therewith would be liable to revision. This represents trite law, since co-opted on the Statute vide Explanation 2(a) to s. 263(1). As explained therein, where the AO accepts the assessee’s version in the absence of any supporting material and without making any enquiry, his order would be erroneous, and exercise of jurisdiction u/s. 263(1) justified. As an example, it, citing it’s earlier decisions in Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), held that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the AO accepting the same would be subject to sec. 263. The decision by the Hon’ble jurisdictional High Court, reported at [1992] 198 ITR 611 (Ker), holding the assessment as without application of mind, was, accordingly, affirmed. In Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Del), again with reference to judicial precedents, it stands explained that the order of the AO becomes erroneous on a failure to make enquiry where the circumstances call for it. This is not because there is anything wrong in the order if all the facts stated therein are assumed to be correct. However, the AO is not only an adjudicator but also an investigator and, therefore, cannot remain passive in the face of a return which is apparently in order 3