2025 (5) TMI 1167 - AT - Income Tax

Revision u/s 263 - inadequacy in enquiry on LTCG claimed - re-assessment order so framed u/s 147 r.w.s. 144B be modified/set aside on the ground that such order of the AO is erroneous and pre-judicial to the interest of the Revenue - HELD THAT - We are unable to see any purport in alleged inadequacy of enquiry of such points. Once the assessee has sold the shares on the platform of exchange at the quoted price the obligation of the assessee ends unless there is any positive material in the possession of the Department to suggest that the assessee has indulged in any concerted action giving rise to unlawful profits to the assessee. The Pr.CIT to our mind has attempted to shift the burden on the assessee on the points where he has no control. The enquiry could have been made by the Revenue from the Exchange. No such enquiry has been made or proposed by the Pr.CIT. The Pr.CIT has made allegations cursorily without collecting any material adverse to the assessee. The Pr.CIT has merely alleged inadequacy in enquiry without any sound basis and without making even some minimal enquiry himself. No third party statement or SEBI report etc. is available adverse to the assessee to impair the bonafides of claim of the assessee. No adverse material has been brought on record to warrant a further probe as suggested in the allegation made u/s 263 of the Act. In our opinion the view taken by the AO thus cannot be assailed solely based on suspicion surmises. We also find merit in the contention of the assessee that some inadequacy in the manner of inquiry cannot necessarily be a ground for invocation of powers under s. 263 of the Act. Such view has been expressed in the judgments rendered in the case of CIT vs. Sunbeam Auto Ltd. 2009 (9) TMI 633 - DELHI HIGH COURT DG Housing Projects Ltd. 2012 (3) TMI 227 - DELHI HIGH COURT Clix Finance India Pvt. Ltd. And Klaxon Trading Pvt. Ltd. etc. 2024 (3) TMI 157 - DELHI HIGH COURT . In the instant case the alleged inadequacy on various points beyond the command of assessee is also devoid of any rationale. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the Principal Commissioner of Income Tax (Pr.CIT) was justified in assuming jurisdiction under section 263 of the Income Tax Act, 1961 ("the Act") to revise the re-assessment order passed under section 147 read with section 144B of the Act for assessment year 2015-16.

(b) Whether the re-assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of revenue so as to warrant interference under section 263.

(c) Whether the AO had conducted adequate enquiry and verification of the claim of Long-Term Capital Gains (LTCG) exempt under section 10(38) of the Act, particularly in light of allegations that the transactions were bogus and involved penny stocks.

(d) Whether the Pr.CIT was justified in setting aside the re-assessment order merely on the basis of alleged inadequacy of enquiry without conducting any independent verification or enquiry himself.

(e) The scope and limits of the revisional jurisdiction under section 263 of the Act, especially regarding substitution of the AO's view and the requirement of the twin conditions - the order being erroneous and prejudicial to revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Jurisdiction under section 263 and whether the re-assessment order was erroneous and prejudicial

Legal framework and precedents: Section 263 empowers the Pr.CIT/CIT to review any order passed by the AO if it is found to be erroneous and prejudicial to the interest of revenue. The revisional power is wide but is circumscribed by the twin conditions that the order must be both erroneous and prejudicial. The revisional authority must give the assessee an opportunity of being heard and may pass such order as justified, including setting aside the assessment for fresh determination.

Judicial precedents emphasize that the revisional jurisdiction is not to be exercised lightly or as a substitute for the AO's discretion, and mere inadequacy of enquiry without material adverse to the assessee is insufficient to invoke section 263.

Court's interpretation and reasoning: The Tribunal noted that the Pr.CIT invoked section 263 on the ground that the AO's re-assessment order was passed without proper enquiry and verification of the LTCG claim, and thus was erroneous and prejudicial to revenue. The Pr.CIT's dissatisfaction stemmed from the AO's failure to enquire into the identity of the purchaser of shares, the phenomenal increase in share price, and how the assessee identified the shares for investment.

However, the Tribunal observed that the AO had made specific enquiries, called for and examined documents such as Demat account statements, contract notes, bank statements, details of Securities Transaction Tax (STT) paid, and investment details. The AO accepted the claim of LTCG as exempt after considering the evidence, and no addition was made despite the reassessment.

The Tribunal held that the Pr.CIT's assumption of jurisdiction was based on mere suspicion and surmises without any tangible adverse material. The Pr.CIT did not conduct any independent enquiry or verification, nor did he collect any third-party evidence such as SEBI reports or statements from the stock exchange. The Tribunal found that the Pr.CIT's reliance on the investigation wing's report without independent scrutiny was insufficient to establish that the AO's order was erroneous or prejudicial.

Key evidence and findings: The assessee furnished comprehensive documentary evidence supporting the genuineness of transactions, including online purchase and sale through recognized stock exchange platforms, contract notes, and payment of STT. The AO examined the financial strength of the company whose shares were traded, and found no reason to doubt the bonafides of the transactions.

Application of law to facts: The Tribunal applied the twin conditions test under section 263 and found the AO's order was not erroneous or prejudicial. The AO's conclusion was based on material evidence and permissible view. The Pr.CIT's dissatisfaction with the extent of enquiry did not amount to jurisdictional error.

Treatment of competing arguments: The assessee argued that the Pr.CIT's jurisdiction was wrongly assumed and that the AO had conducted adequate enquiries. The Pr.CIT contended that the reassessment was flawed due to inadequate enquiry. The Tribunal sided with the assessee, emphasizing that inadequacy of enquiry alone cannot justify revisional interference without adverse material.

Conclusions: The revisional order was found to be without jurisdiction and unsustainable in law. The Tribunal quashed the order passed under section 263.

Issue (c): Adequacy of enquiry into LTCG claim and allegations of bogus transactions

Legal framework: LTCG arising from sale of shares is exempt under section 10(38) subject to satisfaction of conditions including payment of STT. The AO must verify genuineness of transactions if there is suspicion of bogus transactions or unaccounted income.

Court's reasoning: The Tribunal noted that the AO had called for and examined relevant documents and explanations from the assessee. The AO had satisfied himself about the genuineness of the LTCG claim and accepted the exemption. The Pr.CIT's criticism that the AO did not enquire about the identity of the purchaser or reasons for price increase was held to be unreasonable because the assessee was not privy to such information and the transactions were on recognized stock exchange platforms.

Further, the Tribunal observed that the Pr.CIT failed to conduct any enquiry himself or obtain third-party evidence to support the allegations of bogus transactions. Mere allegations based on investigation reports without corroborative material do not justify setting aside the assessment.

Key evidence: Demat account statements, contract notes, bank statements, STT payment details, and the financial statements of the company were examined by the AO. The Security Appellate Tribunal's earlier order also found no collusion or meeting of minds to support the allegation of bogus transactions.

Application of law to facts: The AO's enquiry was adequate and based on tangible material. The burden to prove bogus transactions lies on the revenue, which was not discharged.

Treatment of competing arguments: The assessee submitted that the increase in share price and choice of investment are market-driven and not within the assessee's control. The Pr.CIT's expectation of enquiry into these aspects was misplaced.

Conclusion: The enquiry conducted by the AO was sufficient, and the LTCG claim was bonafide. The allegations of bogus transactions were unsubstantiated.

Issue (d): Whether the Pr.CIT was justified in setting aside the re-assessment order without independent enquiry

Legal framework: The revisional authority must conduct or cause to be conducted such enquiry as deemed necessary before passing an order under section 263. Reliance solely on reports or allegations without independent verification is inadequate.

Court's reasoning: The Tribunal found that the Pr.CIT did not conduct any enquiry or verification himself, nor did he seek material from third parties such as the stock exchange or SEBI. The revisional order was passed on the basis of suspicion and the investigation wing's report alone.

Key findings: No adverse material was collected or produced by the Pr.CIT to justify interference. The Pr.CIT's action amounted to substituting his view without proper inquiry.

Application of law to facts: The revisional jurisdiction cannot be exercised in a vacuum of material or on mere suspicion. The Pr.CIT's failure to conduct enquiry was a significant flaw.

Conclusion: The revisional order was illegal and bad in law for lack of proper enquiry.

Issue (e): Scope and limits of revisional jurisdiction under section 263

Legal framework: The revisional jurisdiction under section 263 is to be exercised sparingly and only where the AO's order is both erroneous and prejudicial to revenue. It is not intended to substitute the AO's opinion or to act as an appellate authority.

Court's reasoning: The Tribunal reiterated that mere dissatisfaction with the AO's enquiry or difference of opinion does not justify revisional interference. The revisional authority must objectively justify its action based on material.

Precedents: The Tribunal referred to judgments of the Delhi High Court which held that inadequacy of enquiry alone is insufficient to invoke section 263, and that the AO's order must be shown to be erroneous and prejudicial.

Application of law to facts: The Pr.CIT's action was based on subjective dissatisfaction without objective material. The twin conditions for exercise of revisional jurisdiction were not met.

Conclusion: The revisional jurisdiction was wrongly exercised and the order under section 263 was set aside.

3. SIGNIFICANT HOLDINGS

"Supervisory jurisdiction vested under section 263 of the Act enables the concerned Pr.CIT/CIT to review the records of any proceedings and order passed therein by the AO. It empowers the Revisional Commissioner concerned to call for and examine the records of another proceeding under the Act and if he considers that any order passed therein by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue, then he may (after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary), pass such order thereon as the circumstances of the case justify, including the order enhancing or modifying the assessment or cancelling the assessment and directing afresh assessment."

"The revisional powers conferred on the Pr.CIT/CIT under section 263 of the Act are of wide amplitude with a view to address the revenue risks which however need to be objectively justifiable."

"Once the assessee has sold the shares on the platform of exchange at the quoted price, the obligation of the assessee ends unless there is any positive material in the possession of the Department to suggest that the assessee has indulged in any concerted action giving rise to unlawful profits to the assessee."

"The Pr.CIT, to our mind, has attempted to shift the burden on the assessee on the points where he has no control. The enquiry could have been made by the Revenue from the Exchange. No such enquiry has been made or proposed by the Pr.CIT."

"The Pr.CIT has made allegations cursorily without collecting any material adverse to the assessee. The Pr.CIT has merely alleged inadequacy in enquiry without any sound basis and without making even some minimal enquiry himself."

"Some inadequacy in the manner of inquiry cannot necessarily be a ground for invocation of powers under section 263 of the Act."

"In the light of delineation, the facts of the present case do not indicate that the twin conditions contained in section 263 co-exist. The revisional order is thus quashed and set aside."

The Tribunal finally allowed the appeal, holding that the revisional order passed under section 263 was without jurisdiction and the assessment order passed by the AO was neither erroneous nor prejudicial to the interest of revenue.