2023 (1) TMI 1478 - AT - Income Tax

Revision u/s 263 - Validity of reassessment proceedings - as argued reasons for reopening are incorrect and non-existent and therefore the approval given by the PCIT u/s 151 of the I.T. Act was also in a mechanical manner without due application of mind - unexplained investment u/s 68 - HELD THAT - If the reopening was made on the basis of information obtained from investigation wing twhich was approved by the ld. PCIT u/s. 151(1)(a) of the Act for giving his approval for the reopening and the assessment is accordingly made then if the plea of the ld. PCIT that the order has become erroneous and prejudicial to the interest of the revenue is accepted then in that case the reasons recorded were incomplete and that the approval given was in a mechanical manner by the ld.PCIT. Under these circumstances the reassessment proceedings are to be held as null and void since the same is not based on proper verification of facts. Neither the AO nor the ld. PCIT has admittedly any other information other than the very same bank account which was filed by the assessee and the balance sheet which was already available on record. Therefore there cannot be any error in the re-assessment order which was based on the report of the investigation wing especially when the reopening was made after due approval given by the ld. PCIT to the extent of Rs. 1, 65, 00, 000/-. Once the order is not erroneous then the twin conditions namely the order is erroneous and the order is prejudicial to the interest of the revenue are not satisfied. Therefore in view of the decision of Malabar Industrial Co. Ltd 2000 (2) TMI 10 - SUPREME COURT the order cannot be revised u/s. 263 of the I.T. Act in absence of fulfillment of the twin conditions. We are of the considered opinion that the order passed by the AO cannot be termed as erroneous although it may be prejudicial to the interest of the revenue. Assessee appeal allowed.

Summary

The core legal questions considered in this judgment revolve around the validity and scope of reassessment proceedings under section 147 of the Income Tax Act, 1961, and the revisional jurisdiction of the Principal Commissioner of Income Tax (PCIT) under section 263 of the Act. Specifically, the issues include:

1. Whether the reassessment proceedings initiated under section 147, based on information received from the Investigation Wing regarding accommodation entries amounting to Rs. 1,65,00,000/-, were valid and properly approved by the PCIT under section 151(1)(a).

2. Whether the PCIT was justified in invoking the revisional powers under section 263 to set aside the assessment order on the ground that the Assessing Officer (AO) erroneously limited the addition to Rs. 1,65,00,000/- instead of Rs. 4,82,25,000/- (the entire preference share capital received from a shell company), thereby prejudicing the revenue.

3. Whether the revisional jurisdiction under section 263 can be exercised beyond the scope of the reasons recorded for reopening the assessment under section 147.

4. Whether the twin conditions for invoking section 263 - that the order is both erroneous and prejudicial to the interest of the revenue - were satisfied in the present case.

5. Whether the approval given by the PCIT under section 151(1)(a) for reopening the assessment was mechanical or without application of mind, thereby invalidating the reassessment proceedings and the subsequent revision under section 263.

6. The applicability of Explanation 2 of the Proviso to section 263, introduced by the Finance Act, 2015, regarding the scope of revision in cases of reassessment.

Issue-wise Detailed Analysis:

Issue 1: Validity of Reassessment Proceedings under Section 147

The legal framework mandates that reopening of assessment under section 147 requires the AO to have a reason to believe that income has escaped assessment. Such reopening must be approved by the PCIT under section 151(1)(a). The AO relied on information from the Investigation Wing, Kolkata, indicating that the assessee had received accommodation entries of Rs. 1,65,00,000/- routed through shell companies, which were not disclosed in the original return.

The AO recorded reasons for reopening, which were approved by the PCIT. Subsequently, the AO completed reassessment under sections 143(3) and 147, making an addition of Rs. 1,65,00,000/- under section 68 as unexplained cash credits, holding that the assessee failed to prove the genuineness of the transaction.

The Court noted that the AO's reopening and assessment were based on specific information and that the PCIT had given prior approval after examining the relevant details. This indicates that the reopening was not arbitrary but founded on material information, satisfying the legal requirements for valid reassessment.

Issue 2: Jurisdiction of PCIT under Section 263 to Set Aside the Assessment Order

Section 263 empowers the PCIT to revise an order if it is erroneous and prejudicial to the interests of the revenue. The PCIT contended that the AO erred in limiting the addition to Rs. 1,65,00,000/- when the actual increase in share capital was Rs. 4,82,25,000/-, as per the balance sheet and notes thereto. The PCIT held that the AO failed to apply his findings to the full amount and thus the order was erroneous and prejudicial.

The assessee argued that the reassessment was confined to the Rs. 1,65,00,000/- figure as per the reasons recorded and approved for reopening, and the PCIT could not expand the scope of revision beyond that. The Court examined the balance sheet and found that the share capital had indeed increased by Rs. 4,82,25,000/-, but the AO had only disallowed Rs. 1,65,00,000/-.

However, the Court emphasized that the PCIT, having earlier approved the reopening based on the Rs. 1,65,00,000/- figure, could not revisit the same information to expand the scope of reassessment under section 263. The Court held that if the PCIT believed the reasons for reopening were incomplete, the approval given was mechanical and flawed, thereby invalidating the reassessment and subsequent revision.

Issue 3: Scope of Revision under Section 263 vis-`a-vis Reasons for Reopening under Section 147

The Court referred to established precedents that the revisional jurisdiction under section 263 cannot be exercised beyond the reasons recorded for reopening under section 147. The PCIT cannot direct the AO to make additions or enquiries on issues not forming part of the original reasons for reopening.

In this case, the reassessment was limited to Rs. 1,65,00,000/- based on specific information. The PCIT's attempt to expand the scope to Rs. 4,82,25,000/- was beyond the reasons recorded and approved, and thus impermissible.

Issue 4: Satisfaction of Twin Conditions for Invoking Section 263

The Court reiterated the well-settled legal principle that both conditions - the order must be erroneous and prejudicial to the revenue - must be satisfied for invoking section 263. The Court found that while the order might be prejudicial, it was not erroneous since the AO acted within the scope of the reasons for reopening and made an addition accordingly.

Hence, the PCIT's invocation of section 263 was not justified.

Issue 5: Validity of Approval Given by PCIT under Section 151(1)(a)

The Court observed that the PCIT had given approval for reopening after due examination of the reasons recorded by the AO. If the PCIT later found the reasons incomplete or incorrect, it implied that the approval was mechanical and without proper application of mind.

Such mechanical approval invalidates the reassessment proceedings, and consequently, any revision under section 263 based on the same facts is also invalid.

Issue 6: Applicability of Explanation 2 of Proviso to Section 263

The Explanation 2 to the Proviso of section 263, effective from 01.06.2015, restricts the PCIT's revisional powers in cases of reassessment. The Court held that this Explanation does not have retrospective effect and does not apply to the present case. However, the Court noted that the CIT(A) has the power to enhance income during appeals, which provides an adequate remedy for the revenue.

Key Evidence and Findings:

- Information from the Investigation Wing, Kolkata, indicating accommodation entries routed through shell companies.

- Balance sheet and notes showing increase in share capital from Rs. 3,42,070/- to Rs. 4,85,67,070/- with allotment of preference shares amounting to Rs. 4,82,25,000/- to a shell company.

- AO's addition of Rs. 1,65,00,000/- under section 68 after detailed enquiry.

- PCIT's approval of reopening based on Rs. 1,65,00,000/- figure.

Application of Law to Facts and Treatment of Competing Arguments:

The Court balanced the AO's limited reassessment scope against the PCIT's attempt to expand it via revision. It emphasized procedural propriety, holding that the PCIT cannot revise an order on grounds beyond the reasons for reopening. The Court also recognized the principle that the same authority cannot approve reopening and later invalidate the reassessment on the same facts without new information.

The assessee's contention that the AO had duly examined and disallowed the amount based on the reasons recorded was accepted. The PCIT's reliance on the entire share capital increase, which was not part of the reopening reasons, was rejected.

Significant Holdings:

"If the reopening was made on the basis of information obtained from investigation wing to the extent of Rs. 1,65,00,000/- which was approved by the ld. PCIT u/s. 151(1)(a) of the Act for giving his approval for the reopening and the assessment is accordingly made then if the plea of the ld. PCIT that the order has become erroneous and prejudicial to the interest of the revenue is accepted then in that case, the reasons recorded were incomplete and that the approval given was in a mechanical manner by the ld.PCIT. Under these circumstances, the reassessment proceedings are to be held as null and void since the same is not based on proper verification of facts."

"The revisional jurisdiction under section 263 cannot be exercised beyond the reasons recorded for reopening under section 147. The PCIT cannot direct the AO to make additions or enquiries on issues not forming part of the original reasons for reopening."

"The twin conditions for invoking section 263 - that the order is both erroneous and prejudicial to the interest of the revenue - must be satisfied. An order prejudicial to revenue but not erroneous cannot be revised under section 263."

"When no new material other than that examined by the AO originally is found on record for the purpose of initiating reassessment, the proceedings under section 148 would be invalid and bad in law."

In conclusion, the Court held that the reassessment order passed by the AO was not erroneous, although it may be prejudicial to the revenue, and therefore, the PCIT was not justified in setting it aside under section 263. The appeal filed by the assessee was allowed accordingly.