2024 (1) TMI 1469 - HC - Income Tax

PCIT jurisdiction u/s 263 for the second time from the same issue - HELD THAT - Tribunal in our view rightly held that Principal Commissioner of Income Tax merely gave directions but did not give any reasons for coming to a conclusion that the assessment should be revised for the second time. Tribunal has noted that assessee no to only filed the complete details in the first round of assessment and again in the second round of assessment and demonstrated clearly by producing records that the transactions were genuine. Thus the Tribunal was satisfied that the view taken by the assessing officer in the second round of the proceedings was permissible under the law. Tribunal has also noted another decision of the Coordinate Bench where the facts appear to be more or less identical to the case on hand. Thus on reappreciation of the factual position the Tribunal has found that it is not the case of non application of mind by assessing officer nor the case of failure of reappreciation of facts. Thus the Tribunal on facts rightly granted relief to the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the Income Tax Appellate Tribunal erred in law by quashing the order passed by the Principal Commissioner of Income Tax (Pr. CIT) on the ground that the Assessing Officer (AO) had conducted a detailed enquiry with proper application of mind and the assessee had furnished complete documentary evidence to the AO's satisfaction.

(b) Whether the Tribunal erred in not applying Explanation 2 to Section 263 of the Income Tax Act, 1961, which deems an AO's order erroneous and prejudicial to the revenue if it is passed without making enquiries or verifications that ought to have been made.

Essentially, the Court was called upon to determine the correctness and legality of the Pr. CIT's invocation of revisionary jurisdiction under Section 263 for a second time on the same issue, and whether the AO's assessment order was indeed erroneous and prejudicial to the revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Legality of the Tribunal's quashing of the Pr. CIT's order on the basis of AO's detailed enquiry and documentary evidence

Relevant legal framework and precedents: Section 263 of the Income Tax Act empowers the Pr. CIT to revise an order of the AO if it is found to be erroneous and prejudicial to the interests of the revenue. The power is discretionary and must be exercised after proper application of mind and on cogent reasons. The AO's order is not to be lightly interfered with if the AO has conducted a thorough enquiry and the assessee has produced satisfactory evidence.

Court's interpretation and reasoning: The Court noted that the Tribunal carefully examined the facts and found that the AO had conducted a detailed enquiry during the second round of assessment proceedings. The AO issued notices under Section 142(1), sought complete details relating to share capital, share premium, and investor particulars, and the assessee complied by filing comprehensive documentary evidence.

Further, the Tribunal found that directors of the investor companies personally appeared before the AO under summons issued under Section 131, gave statements on oath, and the books of accounts were verified. This demonstrated a thorough and proper enquiry by the AO.

The Tribunal held that the AO's second assessment order was based on a permissible view and that the assessee had satisfactorily demonstrated the genuineness of the transactions. Thus, the Tribunal concluded that the AO had applied his mind properly and the assessment order could not be deemed erroneous.

Key evidence and findings: The key evidence included the detailed documentary submissions by the assessee, the personal appearances and sworn statements of investor company directors, and verification of books of accounts by the AO.

Application of law to facts: The Court endorsed the Tribunal's application of the legal principles governing revision under Section 263, emphasizing that the AO's detailed enquiry and acceptance of evidence negated any claim of erroneous or prejudicial order.

Treatment of competing arguments: The revenue argued that the Pr. CIT was justified in revising the assessment order for the second time, implying that the AO's enquiry was deficient or the assessment order erroneous. The Court rejected this, finding no failure in the AO's enquiry or application of mind.

Conclusions: The Tribunal rightly quashed the Pr. CIT's order on the ground that the AO had conducted a proper enquiry and the assessment order was a permissible view supported by evidence.

Issue (b): Applicability of Explanation 2 to Section 263 and whether the Pr. CIT's order was justified

Relevant legal framework and precedents: Explanation 2 to Section 263 states that an AO's order shall be deemed erroneous and prejudicial to the revenue if it is passed without making enquiries or verifications which ought to have been made. The power under Section 263 is to be exercised only if the AO failed to make necessary enquiries or verifications.

Court's interpretation and reasoning: The Court observed that the Tribunal found no failure on the part of the AO to make enquiries or verifications. The AO had issued notices, obtained details, summoned directors for statements, and verified books of accounts. Hence, the condition under Explanation 2 was not satisfied.

Moreover, the Tribunal noted that the Pr. CIT had merely issued directions without giving any reasons for the second revision, thereby failing to satisfy the requirement of reasoned satisfaction necessary for invoking Section 263.

Key evidence and findings: The Tribunal's reliance on the AO's comprehensive enquiry and the absence of any reasoned order from the Pr. CIT were critical findings.

Application of law to facts: Since the AO had made all necessary enquiries and verifications, the AO's order could not be deemed erroneous under Explanation 2. The Pr. CIT's jurisdiction under Section 263 was therefore not properly invoked.

Treatment of competing arguments: The revenue's contention that the AO's order was erroneous due to lack of enquiry was countered by the Tribunal's detailed factual findings confirming the AO's due diligence.

Conclusions: The Tribunal correctly held that Explanation 2 to Section 263 did not apply and that the Pr. CIT's order lacked the requisite reasoned satisfaction, rendering the revision invalid.

3. SIGNIFICANT HOLDINGS

The Court upheld the Tribunal's findings and dismissed the appeal, holding as follows:

"The Tribunal was satisfied that complete enquiry was conducted by the assessing officer when the matter went before him for the second time pursuant to the order passed under Section 263 of the Act."

"The Principal Commissioner of Income Tax merely gave directions but did not give any reasons for coming to a conclusion that the assessment should be revised for the second time."

"The assessee not only filed the complete details in the first round of assessment and again in the second round of assessment and demonstrated clearly by producing records that the transactions were genuine."

"The view taken by the assessing officer in the second round of the proceedings was permissible under the law."

"It is not the case of non-application of mind by assessing officer nor the case of failure of reappreciation of facts."

Core principles established include:

• The revisionary jurisdiction under Section 263 cannot be exercised without proper application of mind and reasoned satisfaction by the Pr. CIT.