Non-conduct of proper enquiry renders the order erroneous and prejudicial to the interests of the Revenue. In more than one case this principle is asserted as under:
The Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 has opined as under (headnote):
“. . . He accepted the entry in the statement of account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the Income-tax Officer was erroneous was irresistible. The High Court had rightly held that the exercise of jurisdiction by the Commissioner under section 263(1) was justified.”
In the case of CIT v. Kohinoor Tobacco Products P. Ltd. [1998] 234 ITR 557, the hon’ble Madhya Pradesh High Court has held as under (head-note) :
“. . . This failure on the part of the Assessing Officer to make necessary enquiry rendered the assessment erroneous and also prejudicial to the interests of the Revenue.”
The Madhya Pradesh High Court in the case of CIT v. Mahavar Traders [1996] 220 ITR 167 has held as under (headnote) :
“Held, that the Income-tax Officer should have examined the matter in the light of the conditions mentioned in both the sections before granting relief. The Commissioner of Income-tax had not given any finding but only remanded the case to the Income-tax Officer for making assessment afresh. The Tribunal instead of approaching the matter in the proper prospective, had on their own started making enquiries and found that the order passed by the Income-tax Officer was correct. This was erroneous. The order passed by the Commissioner of Income-tax was valid.”
The Delhi High Court in the case of Duggal and Co. v. CIT [1996] 220 ITR 456, has held as under (headnote) :
“The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is incumbent on the Income-tax Officer to further investigate the facts stated in the return, when circumstances would make such an inquiry prudent and the word `erroneous’ in section 263 of the Income-tax Act, 1961, includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.”
The Allahabad High Court in the case of Swarup Vegetable Products Industries Ltd. (No. 1) v. CIT [1991] 187 ITR 412 has observed as under (headnote) :
“It is beyond dispute that, under section 263 of the Income-tax Act, 1961, the Commissioner has power to set aside the assessment order and send the matter for fresh assessment if he is satisfied that further enquiry is necessary and that the order of the Income-tax Officer is prejudicial to the interests of the Revenue.”
Also the Delhi Tribunal in Nancy Krafts P. Ltd. v. Assistant Commissioner of Income-tax (2011) 10ITR (Trib) 193 has held that if there was no application of mind by the Assessing Officer the succeeding Assessing Officer is entitled to reopen the assessment and the reopening of the assessment in that case would be valid.
Yet further on the core subject of inquiry the Delhi High Court in Income-tax v. Anil Kumar Sharma (2011) 335ITR83 held that there is a distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Income-tax Act, 1961, merely because he has a different opinion in the matter.
Thus the poor assessee has to go through the rigmarole of scrutiny assessment once again if the AO does not apply his mind during assessment proceedings on a subject or fails to conduct an inquiry or fails to conduct a enquiry proper. Thus both sections 147 and 263 work as some kind of a sharp sword hovering over his head.
The Supreme Court in Auto and Metal Engineers v. Union of India (1998) 229ITR399 held that under the provisions of sections 139 to 158, the process of assessment involves:
- filing of the return of income under section 142(1);
- inquiry by the Assessing Officer in accordance with the provisions of sections 142 and 143;
- making of the order of assessment by the Assessing Officer under section 143(3) or section 144; and
- issuing of the notice of demand under section 156 on the basis of the order of assessment.
Thus enquiry by the AO forms an integral part of assessment. S. 142 provide for provisions in regard to ‘enquiry before assessment’ as under:
“142. Enquiry before assessment.–(1) For the purpose of making an assessment under this Act, the Assessing Officer may serve on any person who has made a return under section 115WD or section 139 or in whose case the time allowed under sub-section (1) of section 139 for furnishing the return has expired, a notice requiring him, on a date to be therein specified,–
(i) where such person has not made a return within the time allowed under sub-section (1) of section 139 3or before the end of the relevant assessment year to furnish a return of his income or the income of any other person in respect of which he is assessable under this Act, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed, or
Provided that where any notice has been served under this sub-section for the purposes of this clause after the end of the relevant assessment year commencing on or after the 1st day of April, 1990 to a person who has not made a return within the time allowed under sub-section (1) of section 139 or before the end of the relevant assessment year, any such notice issued to him shall be deemed to have been served in accordance with the provisions of this sub-section.
(ii) to produce, or cause to be produced, such accounts or documents as the Assessing Officer may require, or
(iii) to furnish in writing and verified in the prescribed manner information in such form and on such points or matters (including a statement of all assets and liabilities of the assessee, whether included in the accounts or not) as the Assessing Officer may require:
Provided that–
(a) the previous approval of the 1Joint Commissioner shall be obtained before requiring the assessee to furnish a statement of all assets and liabilities not included in the accounts;
(b) the Assessing Officer shall not require the production of any accounts relating to a period more than three years prior to the previous year.
(2) For the purpose of obtaining full information in respect of the income or loss of any person, the Assessing Officer may make such enquiry as he considers necessary.”
Prima facie therefore the enquiry would mean seeking following information:
- ITR copy;
- Financials;
- Books of account or documents as may be required by the AO;
- Statutory forms and reports as applicable such tax audit report, MAT calculations, form for deductions, TP forms etc.;
- Besides the AO may call for any other information as he may consider necessary.
Thus if the AO has failed to make an enquiry before assessment as referred to in the provisions of s. 142 the assessment may get vitiated and therefore would call for revision or reopening, as the case , may be.
But to rate an assessment as proper or improper, adequate or inadequate is something that is not a prerequisite to hold as proper the application of the provisions of section 147 or section 263 in a particular case. Nowhere in the two sections there is any utterance of words suggesting improper or inadequate enquiry or for that matter non application of mind. In fact there can be no order without an enquiry in a scrutiny case in view of inbuilt scheme of enquiry before assessment. Thus to regard an order as erroneous only because of lack of enquiry or improper or inadequate enquiry amounts to cut-sizing the sanctity of assessment procedure.
The Income tax Act mandates enquiry by the Assessing Officer before every assessment. Only thereupon shall he frame an assessment on the basis of accounts, documents and information gathered by him which has a bearing on the assessment.
Application of mind is necessary as far as in completing the assessment proceedings but only since the mind is not applied to a particular subject or a desired enquiry is not made or for that matter a deduction claimed is not recomputed as per law does not mechanically authorize any revision or reopening in the absence of any specific mandate under the law. It is only the fact sequence in a particular case scenario that would advocate a revision at most in select case. The procedure laid down in section 142(1) is to enable the AO to make such enquiries as he deems fit in order to be satisfied as to the correctness of the return filed or other claims made by the assessee before the officer completes the assessment.
In the Malabar Industrial case (supra) before the Supreme Court it was found that there was an annexure to the return filed for the
assessment year in question where the amount received by the assessee was noted as compensation and damages for loss of agricultural income being claimed exempt from tax. And the Income-tax Officer accepted the same and endorsed nil assessment for that year without gathering any supporting material and without making any enquiry. It is only under such circumstances that the Apex Court held that on these facts the conclusion that the order of the Income-tax Officer was erroneous is irresistible. In other words the facts in this case clearly speak of a subject matter of claim for exemption by way of a annexure/note to the computation of which no enquiry was made before assessment thus questioning the validity of the assessment. Had this been supported with a decision of any Court or explicit reasoning the scenario would have changed no matter no further enquiry on the subject.
Thus it is not that in every case where the AO accepts the claim of the assessee without further enquiry would warrant a revision. Only since the AO has failed to make an enquiry in regard to a particular claim does not automatically provide any authority to revise the assessment in the absence of specific mention in the Act. Every case fact will only help decide if it warrants a revision or not. No enquiry or assessment without an enquiry is not the sole criterion. The revision action is more to do with the assessee’s presentation of facts of the case before the assessing officer and the accompanying documents and supporting evidences for claims, if any made in the return of income rather than the level of enquiry made by the AO. If full information is available on the record then the mere fact that no enquiry is made by the AO would not turn tables against the assessee.
Gopal Nathani
FCA