Mere Lack Of Inquiry By AO Not Sufficient For S. 263 Revision
The CIT passed an order u/s 263 taking the view that as the AO had not inquired into the genuineness of capital investments made by the partners, the assessment order was erroneous and prejudicial to the interests of the revenue. Though the assessee submitted material before the CIT as to why the capital investments were genuine, the CIT did not deal with the submissions but instead directed the AO to look into the matter and reframe the assessment. On appeal by the assessee, the Tribunal struck down the revision order. On appeal by the department, HELD dismissing the appeal:
(i) Power u/s 263 cannot be exercised unless both conditions are satisfied i.e. the order is (i) erroneous and (ii) prejudicial to the interest of the revenue. There is a fine though subtle distinction between “lack of inquiry” and “inadequate inquiry”. It is only in cases of “lack of inquiry” that revisional powers u/s 263 can be exercised. Further, while lack of enquiry by the AO may render the assessment order “erroneous” it is not necessarily “prejudicial to the interests of the revenue”. The CIT must deal with the submissions of the assessee and give reasons as to how the order is erroneous and prejudicial to the interests of the revenue. A bare assertion is not sufficient. S. 263 proceedings cannot be initiated with a view to starting fishing and roving inquiries.
(ii) On facts, the CIT had revised the assessment on the basis that the AO had not made proper inquiry. Assuming this was so, it only meant that the order was “erroneous” but it did not follow that the order was also “prejudicial”. The CIT ought to have dealt with the submissions of the assessee and recorded a finding on how the failure of the AO was prejudicial to the interests of the revenue instead of merely directing the AO to look into the matter.