Sunday, 9 February 2020

Doctrine of Merger

  1. Assessee who is resident in India filed the return of income u/s 139(1) on 31-07-2014 for the AY 2013-14 declaring the income at 50 crore INR. Assessee is an individual engaged in the business of manufacturing & export of readymade garments.
  2. Return was processed under section 143(1) without any variation.
  3. On 30-11-2015, assessment u/s 143(3) was finalised by making addition on account of bogus purchase to the tune of Rs 5 crore by assessing officer.
  4. Aggrieved by that, assessee filed the appeal before CIT Appeal and CIT appeal partly allowed the appeal & restricted the addition to the extent of 2 crores & deleted the addition of 3 crore.
  5. Against this order both AO & Assessee are in appeal at tribunal and both the cases are pending.
  6. For the same AY, On 29-03-2016, AO issued the notice u/s 148 by alleging that assessee has claimed the bogus gifts.
  7. Assessee filed a fresh return which was identical to the return u/s 139(1).
  8. Assessment order u/s 143(3) read with section 147, was framed on 31-08-2016 and addition on account of bogus gifts were made to the tune of 1 Crore INR.
  9.  Aggrieved by that, assessee filed the appeal before CIT Appeal challenging reassessment as well as addition. Case is yet to be disposed.
  10. On 31-03-2019, Principal Commissioner of Income Tax Issued the notice under section 263 by alleging that during the proceedings under section 143(3) rws 147, AO should have inquired about the source of the fresh investment in the residential house owned by the assessee to the tune of 5 crore & such absence of the inquiry by AO makes the assessment order erroneous & prejudicial to the interest of revenue & accordingly he set aside the order passed by the AO dated 31-08-2016 & directed the AO to make the fresh assessment order after making investigation as stated above.
  11. Assessee contended that stand taken by PCIT is not correct as the matter raised by PCIT stands covered in the assessment order dated 30-11-2015 and by doctrine of merger, this issue is no more open under section 263.

In the light of the above facts, you are required to write a note:
A. If course of action adopted by the PCIT u/s 263 is valid or not
B. What could be the possible recourse & available defence for the assessee henceforth.
C. Would your answer be different if assessee has been non resident.
Hint:
  • Absence of inquiry vs Sufficiency of the inquiry
  • Doctrine of Merger
Please give your answers in comment section.

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