Rahul Gupta vs PCIT

“1.

On the facts and circumstances of the case, the order of PCIT u/s 263 is bad in law as well on facts.

2.

On the facts and the circumstances of the case the PCIT has erred in holding that the order of the AO is erroneous in so far as prejudicial to the interest of revenue.

3.

On the facts and circumstances of the case, the PCIT u/s 263 has erred in observing that AO has accepted the returned income of the assessee without making proper enquiries and without considering relevant evidences.

4.

On the facts and circumstances of the case, the PCIT u/s 263 has erred in observing that AO failed to verify the genuineness of the transaction of sale/purchase of the shares by the assessee despite having report of investigation wing.

5.

On the facts and circumstances of the case, the PCIT has erred in relying on Explanation-2 to Section 263 ignoring that explanation cast certain burden on PCIT before invocation.

6.

The Appellant craves the leave to add/modify/alter any ground during the course of hearing/pendency of appeal.”

“4.

We have heard the rival submissions and perused the materials available on record. The assessment for the Asst Year 2011-12 was completed u/s 143(3) r.w.s 147 of the Act on 16/11/2019 determining the total income of Rs.3,90,290/- accepting the return of income. The reasons recorded for reopening the assessment are as under:-

“11.

Reasons for the belief that income has escaped assessment In this case, AIR as well as CIB information for the F.Y. 2010-11 (Relevant to the A.Yr. 2011- 12) has been received that assessee has done following transaction:-

1.

Cash deposit above Rs. 10 Lacs of Rs. 35,80,000/-having account held with IDBI bank ltd.

2.

Purchase of Immovable property of Rs.66,14,000/- with Sub Registrar-l, Bulandshahr.

3.

Paid Rs. 5 lacs or more for acquiring bonds issued by RBI of Rs. 20,00,000/-

4.

Time deposit exceeding Rs. 2 Lacs with a banking company of Rs.5,50,000/-having account held with Union Bank.

To verify the above information, a query letter dated 19.02.2018 was issued and served through speed post to the assessee. Assessee submitted detailed reply and submitted copy of ITR showing income of Rs.3,90,290/- filed on 30.03.2013. On perusal of assessee reply it was found that assessee has sold plots of Rs.59,49,500/- and from this amount she has done above transaction and purchased RBI bonds and done time deposits. During verification it was noticed that assessee has taken cost of improvement of Rs. 15,81,658/- and not produced specific evidence regarding this also assessee has not submitted any cogent reply regarding time deposit of Rs. 5.50,000/- held with Union Bank. Thus assessee has failed to prove genuineness and creditworthiness of above transaction, meaning thereby above transaction has not been disclosed before the department. Since necessary permission u/s 133(6) of the Income Tax Act, 1961 has already been accorded by the Ld. Principal Commissioner of Income Tax, Ghaziabad. In view of the above, I have reason to believe that the income of Rs.1,27,44,000/- has escaped assessment within the meaning of Sec. 147 of the Income Tax Act, 1961.” Dated: 16.03.2018”

5.

The assessee in response to notice u/s 148 of the Act issued on 29/03/2018 responded that the return already filed on 30/03/2013 declaring taxable income of Rs.3,90,290/- may be considered as a return in response to notice u/s 148 of the Act. Subsequently, the assessee furnished various replies together with documentary evidences in response to various queries raised by the Ld. AO, including those issues that are subject matter of reasons recorded for reopening the assessment. The Ld. AO after examining the detailed explanations given by the assessee together with documentary evidences did not draw any adverse inference thereon and accepted the returned income of the assessee in the reassessment order passed on 16/11/2018. In other words, no addition was made by the Ld. AO in the reassessment proceeding in respect of issues that are subject matter of reasons recorded for reopening the assessment.

6.

This reassessment was sought to be revised by the Ld. PCIT by invoking his revision jurisdiction u/s 263 of the Act on the issue of capital gains, investment of Rs.5,50,000/- in time deposits with the Axis Bank and deduction u/s 54 of the Act on the ground that the Ld. AO had not made enquiries on the same thereby making his order erroneous and prejudicial to the interest of the Revenue.

7.

At the outset, we find once the Ld. AO having recorded the reasons for reopening the assessment and having formed a belief that income of the assessee had escaped assessment, had not made any addition in the reassessment proceedings in respect of issues that are subject matter of reopening. Hence, the very basis of formation of belief for the Ld. AO vanishes. Hence, the Ld. AO could not have framed any reassessment per se. Logically the Ld. AO should have simply dropped the initiation of reassessment proceedings instead of passing a separate reassessment order. Once, the reassessment order per se framed by the Ld. AO is not sustainable in the eyes of law, any revision order passed thereon u/s 263 seeking to revise such unsustainable order cannot be accepted in the eyes of law and consequential revision order also passed u/s 263 of the Act deserves to be quashed. Our view is further fortified by the decision of the Delhi Tribunal in the case of Sh. Pramajit Singh vs. PCIT in ITA No. 446/Del/2022 dated 01/12/2023 wherein the Tribunal placed reliance on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Software Consultants. in ITA No.914 of 2010 dated 17/01/2012. The relevant operative portion of the decision of the Tribunal are as under:-

“15.

This is an undisputed fact that the issues which prompted the Assessing Officer to reopen the assessment were duly considered and reply of the assessee was accepted and no addition was made. This fact has also not been disturbed by the PCIT in his order u/s 263 of the Act.

16.

In our considered opinion, the Assessing Officer could not have made the addition on the issues raised by the PCIT in his order as no addition was made on account of reasons recorded for reopening the assessment.

17.

The Hon'ble High Court of Delhi in the case of CIT Vs. Software Consultants I.T. Appeal No. 914 of 2010 order dated 17.01.2012 21 Taxmann.com 155 was seized with the following question of law:

“Whether the Tribunal was right in law in holding that the CIT had wrongly invoked the jurisdiction u/s 263 of the Act.”

18.

The Hon'ble High Court, on facts similar to the facts of the appeal under consideration, held as under:

“9.

One of the contentions, which has been accepted by the tribunal is that the order of the Assessing Officer cannot be regarded as erroneous even if the Assessing Officer had failed to carry out necessary verification and required enquiries in respect of the share application money, as no addition has been made on account of the reasons for reopening, which were recorded before issue of notice under Section 148 of the Act. It has been held that the Assessing Officer could not have made an addition on account of share application money as no addition has been made on account of FDRs of Rs.20 lacs. The tribunal has noticed and recorded that in the reasons for reopening it was mentioned that the assessee had made investment in form of FDRs of Rs.20 lacs but in the assessment order passed under Section 147/143(3) of the Act it has been held that the respondent assessee had been able to show and establish the genuineness of and capacity to make the said investment.

10.

Similar issue had arisen before this Court in Ranbaxy Laboratories Limited versus CIT, (2011) 336 ITR 136 (Delhi). In the said case, the Division Bench had also examined Explanation 3 to Section 147, which was inserted by Finance (No. 2) Act of 2009 with retrospective effect from 1st April, 1989. Reference was made to the decision of the Bombay High Court in CIT versus Jet Airways India Limited, (2011) 331 ITR 236 (Bom.) in which it has been held as under:

"The effect of section 147 as it now stands after the amendment of 2009 can, therefore, be summarised as follows : (i) the Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year ; (ii) upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the Assessing Officer has to serve on the assessee a notice under sub- section (1) of section 148 ; (iii) the Assessing Officer may assess or reassess such income, which he has reason to believe, has escaped assessment and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section ; and (iv) though the notice under section 148(2) does not include a particular, issue with respect to which income has escaped assessment, he may none the less, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section."

11.

Thereafter, the High Court referred to the decision of the Rajasthan High Court in the case of CIT versus Shri Ram Singh, (2008) 306 ITR 343 (Raj.) in which it has been observed as under:

"It is only when, in proceedings under section 147 the Assessing Officer, assesses or reassesses any income chargeable to tax which has escaped assessment for any assessment year, with respect to which he had 'reason to believe' to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under section 147.

To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings under section 147, the Assessing Officer were to come to the conclusion, that any income chargeable to tax, which, according to his 'reason to believe', had escaped assessment for any assessment year, did not escape assessment, then, the mere fact that the Assessing Officer entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the Assessing Officer may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under section 147."

12.

The Division Bench in Ranbaxy Laboratories Limited (supra)considered the judgment of the Supreme Court in the case of V. Jagmohan Rao versus CIT and EPT, (1970) 75 ITR 373(SC) and CIT versus Sun Engineering Works Private Limited, (1992) 198 ITR 297 (SC) and has then elucidated:

"18.

We are in complete agreement with the reasoning of the Division Bench of the Bombay High Court in the case of CIT v. Jet Airways (I) Limited [2011] 331 ITR 236 (Bom). We may also note that the heading of section 147 is "income escaping assessment" and that of section 148 "issue of notice where income escaped assessment". Sections 148 is supplementary and complimentary to section 147. Sub-section (2) of section 148 mandates reasons for issuance of notice by the Assessing Officer and sub-section (1) thereof mandates service of notice to the assessee before the Assessing Officer proceeds to assess, reassess or recompute the escaped income. Section 147 mandates recording of reasons to believe by the Assessing Officer that the income chargeable to tax has escaped assessment. All these conditions are required to be fulfilled to assess or reassess the escaped income chargeable to tax. As per Explanation 3 if during the course of these proceedings the Assessing Officer comes to conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. However, the Legislature could not be presumed to have intended to give blanket powers to the Assessing Officer that on assuming jurisdiction under section 147 regarding assessment or reassessment of the escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. For every new issue coming before the Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under section 148.

19.

In the present case, as is noted above, the Assessing Officer was satisfied with the justifications given by the assessee regarding the items, viz., club fees, gifts and presents and provision for leave encashment, but, however, during the assessment proceedings, he found the deduction under sections 80HH and 80-I as claimed by the assessee to be not admissible. He consequently while not making additions on those items of club fees, gifts and presents, etc., proceeded to make deductions under sections 80HH and 80-I and accordingly reduced the claim on these accounts.

20.

The very basis of initiation of proceedings for which reasons to believe were recorded were income escaping assessment in respect of items of club fees, gifts and presents, etc., but the same having not been done, the Assessing Officer proceeded to reduce the claim of deduction under sections 80HH and 80- I which as per our discussion was not permissible. Had the Assessing Officer proceeded to make disallowance in respect of the items of club fees, gifts and presents, etc., then in view of our discussion as above, he would have been justified as per Explanation 3 to reduce the claim of deduction under sections 80HH and 80-I as well."

13.

On the second aspect raised by the Commissioner of Income Tax with regard to the Assessing Officer accepting the loss return of Rs.1,02,756/-, we are of the view that the same did not require exercise of revisionary power under Section 263 of the Act. The observations of the Assessing Officer were only to the extent of stating that he had accepted the return. Benefit of carry forward of loss can be claimed in case a return is filed under Section 139(1). It is not the case of the Revenue that the assessee had tried to claim benefit of carry forward of loss on the basis of the order passed under Section 147/143(3) of the Act.

14.

For exercise of power under Section 263 of the Act, it is mandatory that the order passed by the Assessing Officer should be erroneous and prejudicial to the interest of the Revenue. In the present case, the Assessing Officer did not make any addition for the reasons recorded at the time of issue of notice under Section 148 of the Act. This position is not disputed and disturbed by the Commissioner of Income Tax in his order under Section 263 of the Act. Sequitur is that the Assessing Officer could not have made an addition on account of share application money in the assessment proceedings under Section 147/148. Accordingly, the assessment order is not erroneous. Thus, the Commissioner of Income Tax could not have exercised jurisdiction under Section 263 of the Act.

15.

The question of law is accordingly answered in affirmative against the Revenue and in favour of the assessee. There will be no order as to costs.”

19.

As mentioned elsewhere, the facts of the case in hand are pari materia same as the facts considered by the Hon'ble High Court [supra]. Therefore, we have no hesitation in setting aside the order of the PCIT dated 17.02.2022 and restore that of the Assessing Officer dated 06.08.2019

20.

In the result the appeal of the assessee in ITA No. 446/DEL/2022 is allowed.”

8.

In view of the aforesaid observations and respectfully following the judicial precedents relied upon herein above, we have no hesitation to hold that the Ld. PCIT erred in assumption of jurisdiction u/s 263 of the Act in the facts and circumstances of the instant case. Since, revision order passed u/s 263 of the Act is quashed on legal ground, the other factual and legal arguments made by the Ld. AR need not be adjudicated and they are left open.

9.

In the result, the appeal filed by the assessee is allowed.”

“6.

We have considered the rival contentions and perused the documents placed on record and case law relied upon. It is true that the proceedings were initiated u/s. 147 on receipt of information that a particular property has been transacted and assessee in response not only filed the return of income but also explained in the course of assessment, the disputed nature of the transaction, the litigation between the parties and final compromise settlement dt. 21-09-2013 before the Lok Adalat. It is not a case where enquiries have not been done by the AO. The enquiries have been conducted and AO was satisfied that capital gains have indeed does not arise.

6.1.

The opinion of the CIT that capital gains should have brought to tax in this year based on the interpretation of law, is another opinion which cannot be substituted with that of the AO in the proceedings u/s. 263 of the Act. It is trite law that CIT cannot exercise the jurisdiction u/s. 263, once AO raises queries and enquires about the issue. The Hon'ble Jurisdictional High Court in the case of Spectra Shares & Scrips Pvt Ltd., Vs. CIT (354 ITR 35 (AP)) has held that if a query was raised during the course of scrutiny by AO, it was answered to the satisfaction of AO, but neither query nor the answer was reflected in the assessment order, this would not by itself lead to the conclusion that the order of AO called for interference and revision.

6.2.

Vide the Finance Act, 2015, the explanation-(2) was introduced w.e.f. 01-06-2015, which is as under:

"Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner.-

(a)

the order is passed without making inquiries or verification which should have been made;

(b)

the order is passed allowing any relief without inquiring into the claim;

(c)

the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119: or

(d)

the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person".

6.3.

As per this, the order deemed to be erroneous under clause (a) only when the order is passed without making enquiries or verification which should have been made. In this case, there is no fining by the CIT that no query has been caused or no verification has been made. Therefore, even considering the explanation (2), the order cannot be considered as 'erroneous'.

7.

Similar issue was considered by the Co-ordinate Bench in the case of Infinity Infotech Parks Ltd., Vs. DCIT in ITA No. 329/Kol/2017, dt. 02-06-2017, wherein on similar facts, it was held as under:

“32.

In respect of other items set out in the show cause notice u/s 263 of the Act where there was no allegation that there was failure on the part of the AO to make and proper enquiries before completing the assessment, the CIT in the impugned order has held that the order of the AO on those items were also liable to be set aside on that ground holding that order of the AO was erroneous and prejudicial to the interest of the revenue. In this regard it is seen that the show cause notice u/s.263 of the Act issued by the CIT was dated 20.9.2016. The Assessee had filed his reply to the said show cause notice on 12.1.2017 and on the very same date, the CIT had passed the impugned order. It is thus clear that the Assessee was not put on notice that the. CIT intends to invoke jurisdiction u/s.263 of the Act on the ground of lack of enquiry by the AO. It is also seen that when CIT's specific objection in the show cause notice u/s 263 of the Act on issues other than the issues on which the CIT in his show cause notice has alleged lack of enquiry on the part of the AO, the Assessee has given his explanation as to how on those issues the order of the AO was not erroneous. The CIT before exercising jurisdiction uls.263 of the Act by setting aside the order of the AO, ought to have given his own specific finding on those objections and without doing so, the CIT cannot exercise jurisdiction u/s 263 of the Act. The Hon'ble Delhi High Court in the case of ITO Vs. D.G.Housing Projects Ltd. (supra) has taken the view that while the AO is both an investigator and an adjudicator, a distinction has to be drawn between a case where the AO has not conducted any enquiry or examined any evidence whatsoever ("lack of inquiry") from one (i) where there is enquiry but the findings are erroneous, and (ii) where there.is failure to make proper or full verification or enquiry ("inadequate inquiry"). The fact that the assessment order does not give any reasons for allowing the claim is not by itself indicative of the fact that the AO has not applied his mind on the issue. All the circumstances have to be seen. A case of lack of enquiry would by itself render the order being erroneous and prejudicial to the interest of, the Revenue. In a case where there is inquiry by the AO, even if inadequate, the CIT would not be entitled to revise u/s 263 on the ground that he has a different opinion in the matter. Also, in a case where the AO has formed a wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry before passing the s. 263 order. The CIT is entitled to collect new material to show how the order of the AO is erroneous. The CIT cannot remand the matter to the AO for further enquiries or to decide whether the findings recorded are erroneous without a finding that the order is erroneous and how that is so. A mere remand to the AO implies that the CIT has not decided whether the order is erroneous but has directed the AO to decide the aspect which is not permissible. On facts, as the CIT had doubts about the valuation and sale consideration received, he ought to have examined the said aspect himself and given a finding on the merits on how the consideration was understated"

8.

The Co-ordinate Bench at Mumbai in the case of Narayan Tatu Rane Vs. ITO 170 taxmann.com 227) (Mumbai-Trib) has held that the newly inserted explanation-2A to Section 263 does not authorise or give unfettered powers to commissioner to revise each and every order, in his opinion same has been passed, without making enquiries verification which should have been made. It was held that since the Commissioner has not brought any material on record to substantiate his inference and Commissioner has passed a revisional order only to carry out fishing and roving enquiries with the object of substituting his views with that of AO, the order of CIT was held bad in law.

"If there was an inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders u/s 263 merely because he has a different opinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open. An assessment order made by the Income Tax Officer cannot branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. There must be some prima facie material on record to show that the 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 was just, has been imposed. The power of the Commissioner u/s 263(1) is not limited only to the material which was available before the AO and in order to protect the interests of the Revenue, the Commissioner is entitled to examine any other records which are available at the time of examination by him and to take into consideration even those events which arose subsequent to the order of the assessment".