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Judgment
PER MANISH AGARWAL, AM,
This appeal by the assessee is directed against the order of the Pr. Commissioner of Income Tax-4, Delhi, having DIN No. ITBA/REV/F/REV5/2024-25/1073782930(1), dated 27.02.2025 for Assessment Year 2021-22, passed under section 263 of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’).
Brief facts of the case are that the assessee company is engaged in the business of supplying of hospital products and trading of medical products. The Return of Income during the year under appeal was filed on 12.03.2022 declaring income of Rs.1,67,35,850/-. The case of the assessee was selected for complete scrutiny under CASS and the reason of scrutiny given was large increase in revenue from operations in the healthcare and pharma industry and further for the reason to verify large increase in turnover but there is no corresponding increase in net profit. Accordingly, the Assessing Officer issued various notices under section 143(2) dated 28.06.2022 followed by notices u/s 142(1) along with questionnaire and the show-cause notice. The assessee made reply to the same. After considering the submissions made by the assessee, he Assessing Officer observed that during the year under appeal, there was substantial increase in turnover from Rs. 38,91,08,598/- to Rs.69,79,72,191/- however, gross profit has fallen from 18.48% to 10.59%. The Assessing Officer appreciated the submissions of the assessee that the year under appeal was badly affected by Covid-19 and there was great difficulty to cop up between supply and demand and vice versa. Looking to the factors which are beyond the control of assessee, Assessing Officer accepted the income declared in the return of income filed. Thereafter, Ld. PCIT in terms of the show-cause notice issued under section 263 of the Act dated 22.11.2023 has observed that the assessment order passed is erroneous as well as prejudicial to the interest of the Revenue as the Assessing Officer has not made proper enquiry or investigations with respect to substantial fall in gross profit. The Ld. PCIT further observed in show-cause notice that assessee has given advances to M/s Narula Exports, which are covered under the provisions of section 2(22)(e) of the Act. Ld. PCIT further observed that Assessing Officer has not examined reasonableness of the expenses against the payments of Rs.25,29,99,175/- made to the related parties. Accordingly, ld. PCIT proposed to initiate proceedings u/s 263 of the Act. The assessee in reply, filed detailed submissions, wherein, it is stated that the issue for selection of scrutiny was large turnover which corresponding decrease in the profits. However, the ld. PCIT in the show-cause notice has raised new issues of advance to M/s Narula Exports being covered under section 2(22)(e) of the Act and further alleged that the Assessing Officer has failed to verify the payments made to the related parties.
Before us, ld. AR for the assessee submits that the case of the assessee was selected for scrutiny for the reason “large increase in turnover but there is no corresponding increase in the net profit”. The ld. AR submits that the Assessing Officer vide notice issued u/s 142(1) dated 15.07.2022 has asked the assessee to file explanation on issue for which case was taken for scrutiny. The ld. AR further submits that ld. PCIT in the show-cause notice has raised three issues, which are (i) failure to examine the sharp decrease in gross profit (ii) failure to examine the money advances to M/s Narula Exports of Rs.1,36,62,892/- which should be covered u/s 2(22)(e) of the Act, (iii) payments of Rs.25,29,99,175/- made to related parties, which were not examined and accordingly the assessee was asked to explain as to why the assessment order should not be treated as erroneous and prejudicial to the interest of the Revenue. The ld. AR submits during the course of assessment proceedings in terms of the reply filed on 15.07.2022 available at page-3 of the paper book and further reply dated 12.10.2022 available at page-55 of the paper book, assessee has explained the circumstances due to the which gross profit had fallen as compare to preceding year. Thereafter, the Assessing Officer vide notice u/s 142(1) dated 20.10.2022 further asked the assessee to explain the reasons which were duly replied in terms of reply filed on 31.10.2022. The ld. AR submits that ld. PCIT in its order in para 7 has observed that Assessing Officer has not examined the issue of payment of commission, payment of professional expenses and rent etc. However, nowhere in the show-cause notice through which present proceedings u/s 263 were initiated, these issues were never raised by the ld. PCIT. Therefore, without confronting the same, action of the Ld. PCIT in holding the assessment order as erroneous and prejudicial to the interest of the Revenue on this issue is not correct.
The ld. AR further drew our attention to the notice issued u/s 142(1) dated 20.10.2022 placed at pages 56 to 59 of the paper book, wherein, the Assessing Officer has specifically asked the assessee to file the details of commission, legal and professional fee and rent paid, which were duly replied dated 31.10.2022. The ld. AR further submits that the assessee has filed all the relevant details with respect to the claim of these expenses before the Assessing Officer, who has examined the same with reference to the business of the assessee and thereafter had not raised any further enquiry in this regard.
With respect to the observations of the ld. PCIT in para 7 that there were huge increase in project installation expenses, the ld. AR submits that the Assessing Officer vide notice u/s 142(1) dated 20.10.2022 and further vide notice u/s 142(1) dated 04.11.2022 had asked the assessee to file the details of project installation expenses which were duly replied in terms of reply filed on 15.11.2022, wherein, the assessee has filed all the relevant details alongwith bills issued by the respective parties. The ld. AR further submits that other issue of advance to M/s Narula Exports covered u/s 2(22)(e) of the Act, the Assessing Officer made specific query of advances given which were duly replied. The ld. AR submits that reasons for scrutiny was for examine the large increase in turnover vis-a-vis lower gross profit does not refer any such issue of application of provisions of section 2(22)(e) of the Act, even-though the Assessing Officer has made detailed enquiries in this regard. The ld. AR thus submits that the action of the ld. PCIT in holding the assessment order as erroneous and prejudicial to the interest of revenue on this score is correct.
Regarding payments to related parties, ld. AR submits that reasons given has not referred any verification of such payments. For this, ld. AR placed reliance on the order of Co-ordinate Bench of Lucknow Tribunal in the case of O.P. Associates vs PCIT in ITA No.64/LKW/2022 and further submits that the Assessing Officer vide notice issued u/s 142(1) dated 20.10.2022 had asked to file the details of purchases as well as the payment of rent paid to related party and thoroughly examined these issues, therefore, it could not be said that the Assessing Officer has not made any enquiry or made inadequate enquiry. The ld. AR further placed reliance on the judgment of Hon’ble Delhi High Court in the case of Sunbeam Auto Ltd. reported in [2011] 332 ITR 167 (Del.) and the Hon’ble Bombay High Court in the case of CIT vs Gabriel India Ltd. reported in [1993] 203 ITR 108 (Bom.), wherein, it is settled that power to invoke section 263 does not arise in cases of inadequate enquiry. The ld. AR further placed reliance on the judgment of Hon’ble Supreme Court in the case of PCIT vs M/s V-Con Integrated Solutions Pvt. Ltd. [Special Leave Petition (Civil) Diary No.13205/2025, wherein, the Hon’ble Supreme Court has held that power under section 263 of the Act can be exercised by the Commissioner of Income Tax but by going into the merits and making an addition, and not by way of remand, recording that there was failure to investigate. The ld. AR submits that in the instant case ld. PCIT has not pointed out any error or omission in the details filed by the assessee rather the whole allegation of the ld. PCIT is revolving around that the Assessing Officer has not made adequate enquiries and verification which in his opinion should have been made in a particular manner. He, therefore, prayed that the order passed u/s 263 of the Act be quashed.
On the other hand, the ld. CIT-DR vehemently supported the order of Ld. PCIT and submits that in para-5 of the assessment order, AO simply reproduced the reasons given by the assessee for the fall in gross profit. A bare perusal of which, it is evident that the AO has accepted the contention of the assessee without making any further enquiries or verification. The AO also failed to make enquiries with respect to substantial increase in project and installation expenses and further no enquiries whatsoever were made independently from the persons to whom commission was paid. Ld. CIT-DR submits that the assessment order is very cryptic and does not speak about any enquiries or investigation carried out by the AO before accepting the returned income. The ld. CIT DR further submits that issue of payment to related parties has not been examined at all and further the advance paid covered under section 2(22)(e) of the Act has not been considered. AS per ld. CIT DR, since the reasons for scrutiny is to verify large increase in turnover with no corresponding in net profit, the AO should examine all the factors responsible for such decrease in net profit which comprises of claim in the Profit & Loss Account. However, in the instant case as observed by the ld. PCIT, the AO has failed to make such any enquiry or verification with respect to substantial increase in various expenses and accepted the contentions of the assessee that fall in gross profit is mainly due to Covid-19. The ld. CIT-DR submits that the assessee is in the business of healthcare and pharma industry which was the only sector benefited by Covid-19 and therefore the claim of the assessee that its business was suffered due to Covid-19 could not be acceptable. He, therefore, requested for confirmation of order of ld. PCIT. In this regard, ld. CIT-DR further placed reliance upon the various judgment referred by ld. PCIT in the order.
Heard the parties and perused the material available on record. It is observed that the case of the assessee was selected for complete scrutiny to verify large increase in turnover with no corresponding increase in net profit. It is further observed that the AO had issued notices u/s 142(1) on various occasions firstly on 15.07.2022 (placed at page 1 to 3 of the paper book) wherein the AO has made specific query with respect to reasons for scrutiny, which was replied by the assessee on 13.10.2022 explaining the factors for responsible for fall in GP, placed at page 55 of paper book. Thereafter, vide notice u/s 142(1) dated 20.10.2022, AO further asked the assessee to explain the reasons for sudden decrease in GP. Besides this, AO asked the details of month-wise sales and purchases, reconciliation of GST turnover, details of expenses above Rupees one lakh which includes projects and installation expenses, commission expenses and rent paid. Further, AO asked the assessee to explain nature of advances given and the business expediency of such advances. The AO in said notice further asked to file item-wise details of project and installation expenses in specified format. The assessee had filed its reply on 31.10.2022, wherein ledger account of Narula Export was submitted along with other details as called for by the AO alongwith bills and vouchers. All these documents are placed paper book pages 60 to 188.
It is observed that the AO vide notice dated 04.11.2022 issued u/s 142(1) of the Act asked the assessee to file further details of projects and installation expenses with nature of work done and details of contractors. Besides this, AO asked the assessee to file details of various other expenses. The assessee in terms of letter dated 15.11.2022 had filed all these details along with relevant bills and vouchers which are placed in the paper book at pages 194 to 391.
Thereafter, vide notice under section 142(1) dated 17.11.2022, AO made specific query about the advances given to M/s Narula Exports and further asked to explain as to why the provisions of section 2(22)(e) should not be invoked. The said query letter is placed at page 322 of the paper book. Thereafter, the AO further issued notice on 18.11.2022 and asked the assessee to file details of persons to whom advances were given and purpose thereof including M/s Narula Exports and further asked to verify the expenses claimed under project and installation expenses. The assessee vide reply dated 10.12.2022 explained all the queries raised by the AO. The AO after considering the facts and explanation given and the details and the information tendered by the assessee had taken a view that income declared by the assessee is correct and no addition was made in the assessment order.
From the perusal of the order of the ld. PCIT, it is observed that all these facts and details so filed before the AO were brought to the notice of the ld. PCIT during the course of proceedings u/s 263 of the Act. Further, the ld. PCIT has failed to point out any error or omission in the said details by making verification of the facts and information filed by the assessee. The ld. PCIT has simply observed that the AO should have made further enquiries in this regard.
The Hon’ble Delhi High Court in the case of in the case of Sunbeam Auto Ltd. (supra) and the Hon’ble Bombay High Court in the case of CIT vs Gabriel India Ltd. (supra) has held that under section 263, the ld. PCIT cannot ask to make enquiries in the manner he likes, once it is established that the Assessing Officer has made the enquiries and verifications ,they may be in the opinion of Ld. PCIT are inadequate however this alone cannot be the reason for holding the assessment order as erroneous and prejudicial to the interest of the Revenue. It is further observed that the issues raised by the Ld. PCIT with respect to the non-invocation of section 2(22)(e) and further non-verification of the payments made to related parties are not covered under the reasons for scrutiny in the instant case. The Co-ordinate Bench of the Lucknow Tribunal in the case of O.P. Associates vs PCIT in para -8 of the order has discussed this issue and made following observations:-
“...8. In the present case, on a perusal of the order of the Ld. PCIT, we observe that the case was picked up for complete scrutiny but the CASS selection reasons for the same were (i) large cash deposit during demonetization period (ii) abnormal increase in sales with the lower profitability. Now while the case was picked up for complete scrutiny, the indicator of the reasons why it had been picked up in CASS, would to our mind indicate the focus with which this complete scrutiny was to be taken up. The Assessing Officer had been given powers to examine all the accounts of the assessee with a view to determine whether the large value of cash deposited during the demonetization period needed to be brought to tax and whether the profits had been adequately recorded in view of the sales made. When considering the import of Explanation 2(a) of Section 263 of the Act, we are of the opinion that complete scrutiny, with such indicators does not mean that each and every aspect of the assessee’s accounts was required to be looked into, if they were not immediately relevant to the reasons for the selection and in our opinion, a failure to conduct enquiries not related to the main reason for selection, would not render a case to be one of lack of enquiry or verification under Explanation-2(a) of Section 263 of the Act. That being the case, we may examine the conclusions of the Ld. PCIT in the light of enquiries conducted by the Assessing Officer to determine whether in fact these conclusions were warranted. The Ld. PCIT has held that on examination of records, it is evident that the assessment order was passed without proper enquiry with regard to the following points, (i) no enquiry made by the AO regarding genuineness of the source of the cash deposits of Rs.12.76 crore and Rs.11.98 crore in old SBNs during the demonetization period (ii) AO did not enquire about the details of licence issued to assessee for the trading of liquor (iii) AO failed to obtain the ledgers/confirmation from parties through which the assessee as made a purchase of Rs.74,05,11,413/- (iv) AO did not examine about the genuineness of the creditworthiness of the persons who had given unsecured loans of Rs.7.91 crore to the assessee. Further, (v) no enquiry made by the AO regarding the genuineness and the correctness of the sundry creditors amounting to Rs.9.13 crore which were shown as liabilities for the balance-sheet of the assessee (vi) there were many expenses like, “assessment fees”, “breach expenses” and “license fee canteen”, amounting to Rs.2,55,69,417, Rs.17,70,861/- and Rs.20,36,350/- respectively, which were not examined neither with regard to genuineness of the expenses claimed nor whether the same were allowable as per the provisions of the Act (vi) substantial amount of rent expense amounting to Rs.34,82,500/- was paid in cash by assessee but this issue was not examined by the AO. The Ld. PCIT has also held that the assessee has not submitted any reply with regard to specific points raised in the show cause notice during the proceedings u/s 263 of the Act...”
The Co-ordinate Bench of ITAT, Delhi in the case of Mukul Rohatgi vs PCIT in ITA No.2427/Del/2025 vide order dt. 16.02.2026, has held that once the AO has made the inquiries and investigations, ld. PCIT must bring the material on record to point out what was the error based on which the revisionary powers are exercised by him. The relevant observations as contained in para 43 of the order are reproduced as under:-
43.“On each of the issues discussed above i.e., investment made by the assessee in various funds whether these are equity oriented funds or not and liable to capital gain tax under the head 'long term capital gain' to be taxed under Section 112A of the Act or normal provisions under the head 'short term capital gain', secondly, the nil ALV or lower ALV as discussed in regard to above stated properties, in the above part of this order vide Paragraph No. 07 to 40, and non-initiation of penalty proceedings under Section 271C of the Act, whether these attract the revision provisions under Section 263 of the Act or not. We note that the learned PCIT was of the view that the investment made by the assessee in funds was not equity oriented funds and once these are not equity-oriented funds, these are not to be taxed under the special rate of taxation under Section 112A of the Act. We note that the assessee could explain before us that the funds are equity-oriented funds and we have given a clear finding in paragraph 6 of this order. We also find that the PCIT has not given a finding or has not observed that how these funds are not equity oriented funds and without that, the PCIT cannot invoke the revisionary power. We are of the view that consideration of the PCIT as to whether an order is erroneous insofar as it is prejudicial to the interest of the Revenue must be based on materials on record of the proceedings called for by him. If there is no such material on record on the basis of which it can be said that the PCIT acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without justification. In similar circumstances, Hon'ble Bombay High Court in the case of CIT Vs. Gabriel India Ltd. (199) 203 ITR 108 (Bom) held the similar views. We are of the view, though, it is not expected of the PCIT to record his final conclusion in the order passed in revision proceedings under Section 263 of the Act, but, he must, at least indicate in his order how the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. The revisional power under Section 263 of the Act is not meant to be exercised to correct every error of fact, but the error must be of such a nature that it is erroneous and prejudicial to the interest of the Revenue. The PCIT, in revisional proceedings under Section 263 of the Act, has no jurisdiction to set aside the order of assessment merely to conduct another Investigation without finding the basis or without any material that the order is erroneous one and also prejudicial to the interest of the Revenue. We noted from the findings of the PCIT, in the present case before us, on various issues that the PCIT has not recorded reason for his conclusion, which is necessary for any quasi-judicial order required to be made by a quasi-judicial authority. The necessary consequence of revision order is that while passing the order revising an order passed by a subordinate authority, the PCIT must record reasons in support of his conclusion that the order is revised being erroneous and that it would be prejudicial to the interest of the Revenue due to such errors. In case the PCIT does not indicate the reasons for invoking the provisions of Section 263, his order cannot be held to be valid. In the present case, the entire material in regard to all the funds and the properties where ALV was questioned by the PCIT, the assessee has produced relevant material and offered explanations in pursuance to the notices issued under Section 142(1) and 143(2) of the Act and, after considering the materials and explanations, the Assessing Officer passed the assessment order and came to a conclusion and accepted the explanation. The mere fact that a different view can be taken, should not be the basis for an action or invocation of Section 263 of the Act. Such action, if taken, cannot be held to be justified because the material was there in the assessment record and the said material was considered by the Assessing Officer and a particular view was taken. This view of ours is supported by the decision of Hon'ble Supreme Court in the case of The Malabar Industrial Co. Ltd. Vs. CIT (2000) 243 ITR 83 (Supreme Court).”
The Hon’ble Supreme Court in the case of Pr. CIT vs Shreeji Prints (P.) Ltd. reported in [2021] 130 taxmann.com 294 (SC) has held as under:-
“Section 69, read with section 263, of the Income-tax Act, 1961 -Unexplained investments (Unsecured loans) - Assessment year 2013-14 - Assessee-company had received unsecured loans from two different companies - Commissioner noting that said loans were shown as investment in assessee's name in balance sheet of respective companies exercised revisionary powers and passed an order without giving an opportunity to assessee of being heard, invoking Explanation 2 to section 263 - High court by impugned order held that since Assessing Officer has made inquires in details and accepted genuineness of loans receive by assessee, such view of Assessing Officer was a plausible view and same cannot to be considered erroneous or prejudicial to interest of revenue -Whether SLP against said impugned order was to be dismissed – Held, Yes”
The Hon’ble Supreme Court in the case of PCIT vs NYA International, while dismissing the SLP filed by the Revenue in Special Leave Petition (civil) Diary No.1845/2025 the Hon’ble Court vide order dated 17.02.2025 has observed as under:-
“Delay condoned. This special leave petition is misconceived and is completely contrary to the law pertaining to Section 263 of the Income Tax Act, 1961. The notice under Section 148 of the 1961 Act referred to two reasons. The first reason was with regard to non-declaration of the account in ING Vysya Bank with a credit of Rs.70,13,43,319/-(Rupees seventy crores thirteen lakhs forty three thousand three hundred and nineteen only). The second reason was with regard to the claim of deduction under Section 10AA of the 1961 Act. It is accepted that a reassessment order under Section 148 read with Section 143(3) of the 1961 Act was passed. Addition was not made for the first reason. In the given facts, the assertion by the Revenue that inquiry and verification in re the bank account was not made is ex-facie incorrect. This being the position, this is not a case of failure to investigate, but as no addition was made, the Revenue can argue that it is a case of wrong conclusion and decision in the re-assessment proceedings. Therefore, to exercise jurisdiction under Section 263 of the 1961 Act, the Commissioner of Income Tax should have examined the merits and only on reaching a finding that the re-assessment order was erroneous and prejudicial to the interest of the Revenue made an addition. This is not a case of 'no inquiry and verification', but as made out by the Revenue, a case of wrong conclusion. The difference between the two situations is clear and has different consequences. This being the position, the High Court was right in dismissing the appeal preferred by the Revenue. The special leave petition is dismissed in the above terms. Pending application(s), if any, shall stand disposed of.”
The Hon’ble Delhi High Court in the case of PCIT vs. Clix Finance India Ltd. while concurring to the findings of the Tribunal has observed as under:
“27.Considering the aforesaid judicial pronouncements, it can be safely concluded that inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act. The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. Rather, in our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit. 28. Notably, the ITAT, while making a categorical finding that the CIT had failed to point out any definite or specific error in the assessment order, has satisfactorily explained both the claims in question in Paragraph 8.2 of its order, which reads as under:-
"8.2In the Impugned Order, the Ld. Commissioner of Income Tax-IV, Delhi held that the AO had not examined the aforesaid two issues properly and, therefore, set aside the issues for further inquiries to be conducted by the AO. As regards the first issue is concerned, we note that out of total provision of Rs. 1114.68 lacs, a sum of Rs. 7,60,76,105/- was suo moto added back in the computation of income and a further sum of Rs. 73,46,160- was disallowed by the AO in the original assessment order dated 30.3.2005. Therefore, out of Rs. 1114.68 lacs, Rs. 834.22 lacs already stood disallowed in the original assessment order. The balance amount represented actual write off which was palpably clear from page 2 of the impugned order itself. No deduction on account of any such provision was, therefore, allowed to the assessee. Hence, there is no error or prejudice to the interest of revenue. As regards second issue it was noted that interest rate swap was an actual loss and only the net loss of Rs. 114.05 lacs after setting of gain of interest rate swap was claimed as deduction. However, we find that both these issues were duly examined by the AO vide Questionnaire dated 2.11.2004 (Page 1-2 of the Paper Book) to which replies dated 9.12.2004, 20.12.2004 and 6.1.2005 (Page No. 3-39 of Paper Book-1) were furnished and, therefore, the finding of the Ld. CIT that the issues were not examined properly was not correct. Even the Ld. CIT has not pointed out the definite and specific error in the original assessment order and observed that the inquiry made by the AO was inadequate or improper without first pointing out the error in the original assessment order passed by the AO, particularly because both the aforesaid issues were duly examined at the stage of the original assessment proceedings, hence, the impugned order is beyond jurisdiction, bad in law and void-ab-initio."
29.It is discernible from the aforenoted findings of the ITAT that both the claims were duly examined during the original assessment proceedings itself and neither there was any error nor the same was prejudicial to the interests of the Revenue. Thus, the findings of fact arrived at by the ITAT do not warrant any interference of this Court.
30.So far as the reliance placed by the CIT on Umashankar Rice Mill is concerned, the same is misplaced, particularly in light of the insertion of Explanation 2 to Section 263 of the Act, brought in place by the Finance Act, 2015. The said amendment markedly specifies various conditions to exercise the authority vested in the Commissioner under Section 263 of the Act, leaving no ambiguity in the interpretation of the said provision.
31.In view of the aforesaid, the appeal preferred by the Revenue is dismissed alongwith the pending application(s), if any.”
The Hon’ble Supreme Court in the case of PCIT vs. V. Con Integrated Solutions Private Ltd. (supra) while dismissing the SLP of the assessee observed as under:-
“In our opinion, the order passed by the High Court, which upheld the decision of the Tribunal, is correct on facts and in law. This case does not involve a failure by the assessee officer to conduct any investigation. Instead, according to the Revenue, it is a case where the assessing officer having made inquiries erred by not making additions. The assessee does not have control over the pen of the Assessing Officer. Once the Assessing Office carries out the investigation but does not make any addition, it can be taken that he accepts the plea and stand of the assessee.
In such cases, it would be wrong to say that the Revenue is remediless. The power under Section 263 of the Income Tax Act, 1961, can be exercised by the Commissioner of Income Tax, but by going into the merits and making an addition, and not by way of a remand, recording that there was failure to investigate. There is a distinction between the failure or absence of investigation and a wrong decision/conclusion. A wrong decision/conclusion can be corrected by the Commissioner of Income Tax with a decision on merits and by making an addition or disallowance
There may be cases where the Assessing Officer undertakes a superficial and random investigation that may justify a remit, albeit the Commissioner of Income Tax rust record the abject failure and lapse on the part of the Assessing Officer to establish both the error and the prejudice caused to the Revenue.”
In the instant case, ld. CIT(A) invoked the provisions of Explanation-2 of section 263 which conferred power to the PCIT/CIT to give directions to the AO for making fresh examination and verification, which is inserted by Finance Act, 2015 in Section 263 with effect from 01.06.2015. As per this Explanation, to declare an order to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of appropriate authority- (i) the order was passed without making inquiries or verifications which should have been made; (ii) the order is passed allowing any relief without inquiring into the claim; (iii) the order is not in accordance with any direction or instructions etc. issued by the Board u/s 119; or (iv) the order was not in accordance with binding judicial precedent.
The Hon’ble Delhi High Court in CIT V/s Vikas Polymers (supra), further observed that as regards the scope and ambit of the expression "erroneous", Hon’ble Bombay High Court in CIT vs. Gabriel India Ltd. (supra) held with reference to Black's Law Dictionary that an "erroneous judgment" means "one rendered according to course and practice of Court, but contrary to law, upon mistaken view of law; or upon erroneous application of legal principles" and thus it is clear that an order cannot be termed as "erroneous" unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as "erroneous" by the Commissioner simply because, according to him, the order should have been written differently or more elaborately. The Section does not visualize the substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is not in accordance with law. Further, each and every erroneous order cannot be the subject matter of revision because the second requirement also must be fulfilled. There must be material on record to show that tax which was lawfully leviable has not been imposed as held in Gabriel India Ltd.(supra). However, the expression "prejudicial to the interest of the revenue", as held by the Supreme Court in the Malabar Industrial Co. Ltd. (supra), is not an expression of art and is not defined in the Act and, therefore, must be understood in its ordinary meaning. The Commissioner's exercise of revisional jurisdiction under the provisions of Section 263 cannot be based on whims or caprice. It is trite law that it is a quasi-judicial power hedged in with limitation and not an unbridled and unchartered arbitrary power. The exercise of the power is limited to cases where the Commissioner on examining the records comes to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interest of the revenue and that fresh determination of the case is warranted. There must be material to justify the Commissioner's finding that the order of the assessment was erroneous insofar as it was prejudicial to the interest of the revenue.
The Hon’ble Delhi High Court, in the aforesaid case of Vikas Ploymers (supra) further observed that there is a fine though subtle distinction between "lack of inquiry" and "inadequate inquiry". It is only in cases of "lack of inquiry" that the Commissioner is empowered to exercise his revisional powers by calling for and examining the records of any proceedings under the Act and passing orders thereon. In Gabriel India Ltd. (supra), it was expressly observed: -
"The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity [Parashuram Pottery Works Co. Ltd. vs. ITO, (1977) 106 ITR 1 (SC)].
It was further observed as under: -
"From the aforesaid definitions as it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasijudicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.
x x x x There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.
The judgements cited by the revenue are on the issue where no enquiry was made by the AO or lack of enquiry on the part of the assessee or where AO has raised the issue but was not replied by the assessee to the satisfaction of the appropriate authorities. In the instant case, Ld. Pr. CIT invoked the Explanation 2 section 263 of the Act to hold the order passed is without making enquiries and verification. However, as observed above in the present case, detailed enquiries and verifications were made on various occasions and after considering the submissions of the assessee on every occasion, AO was of the opinion that the assessee has been able to substantiate the reason for fall in GP and thus accepted the returned income.
In view of the facts and above discussions and respectfully following the judgments of Hon’ble jurisdictional High Court and Hon’ble Supreme Court, we are of the view that once the Assessing Officer has made enquiries and verifications and after making such enquiries and verifications reach to the conclusion that the ld. PCIT cannot held such order is erroneous and prejudicial to the interest of the Revenue for want of further enquiry. Accordingly, the order of the ld. PCIT is hereby quashed. All the grounds of appeal of the assessee are allowed.
In the Result, the appeal of the assessee is allowed.