2025 (6) TMI 316 - AT - Income Tax

Revision u/s 263 - a per CIT AO has not properly examined the claim of exemption u/s 10(38) on long-term capital gains (LTCG) arising from sale of shares - HELD THAT - From perusal of the assessment order it is not discernible that whether the AO has carried out the requisite inquiries or verification which should have been made as there is no mention of the issues in the assessment order which has been examined/investigated by the AO. The show-cause notice issued by the PCIT clearly show that the AO has not carried out the requisite inquiries or verification which should have been made. As far as the issue of capital gains claimed exempt u/s 10(38) of the Act is concerned there were many decisions of the Tribunal and High Court in favour of the Revenue wherein the capital gains arisen on sale of shares of M/s. CCL International Ltd. had been held bogus and taxed accordingly. None of the document was furnished by the Ld. Counsel before us which may demonstrate that the AO has carried out any investigation. From the assessment order it is not evident that the AO has gone through various details documents etc. furnished by the assessee during the assessment proceedings and carried out any further investigations which should have been made before arriving the conclusion that the capital gains has been genuinely claimed exempt under section 10(38) of the Act. Hon ble Supreme Court in the case of Paville Project Pvt. Ltd 2023 (4) TMI 295 - SUPREME COURT had stated that the scheme of the Income Tax was to levy and collect tax in accordance with the provisions of the Act which was entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer the Revenue was losing tax lawfully payable by a person it will certainly be prejudicial to the interests of the Revenue. Thus we hold that the Ld. PCIT has rightly exercised his jurisdiction under section 263 of the Act in setting aside the assessment order of the AO being erroneous in so far it is prejudicial to the interest of the Revenue. Accordingly we uphold the order of the Ld. PCIT and dismiss this appeal of the assessee.

Summary

The core legal questions considered in this judgment revolve around the validity and propriety of the revisionary order passed under section 263 of the Income Tax Act, 1961 (the Act) by the Principal Commissioner of Income Tax (PCIT). The issues include whether the assessment order passed under section 143(3) was erroneous and prejudicial to the interests of the revenue due to lack of necessary inquiries and verifications by the Assessing Officer (AO), whether the AO properly examined the claim of exemption under section 10(38) on long-term capital gains (LTCG) arising from sale of shares of a particular company, the applicability and scope of section 263 and its Explanation 2, and whether the revisionary jurisdiction was invoked correctly in light of the facts and judicial precedents.

One significant issue is the genuineness of the LTCG claimed exempt under section 10(38) on sale of shares of M/s. CCL International Ltd., especially in the backdrop of an investigation report by the Directorate of Income Tax Investigation (Inv.) Kolkata indicating a racket involving accommodation entries to generate bogus LTCG using penny stocks including CCL International Ltd. Another key issue is whether the AO conducted adequate inquiries and verifications regarding various suspicious transactions, such as purchase and sale of shares, current liabilities and their confirmations, receipt of large sums from third parties, and transactions involving immovable property where the purchase price was significantly lower than stamp duty valuation.

Further issues include the procedural propriety of the PCIT's order under section 263, including whether principles of natural justice were observed, whether the revision was barred by limitation, and whether reliance on audit objections as a basis for revision was permissible. The correctness of the AO's acceptance of the assessee's explanations and documents without conducting independent verification, especially in light of contradictory material and investigation reports, was also examined.

Regarding the first issue of the correctness of the assessment order under section 143(3), the legal framework includes section 263 of the Act, particularly Explanation 2 which defines when an order is deemed erroneous and prejudicial to the interests of the revenue. Explanation 2(a) states that an order passed without making inquiries or verification which should have been made is deemed erroneous and prejudicial. The Court also relied on judicial precedents, including the Supreme Court's ruling in Malabar Industrial Co. Ltd. which clarified the twin conditions for invoking section 263: the order must be erroneous and prejudicial to revenue. The Court further cited the Supreme Court's decision in Paville Project Pvt. Ltd. which upheld the exercise of revisionary jurisdiction where the AO's order was found erroneous and prejudicial due to lack of proper inquiry.

The Court's reasoning emphasized that the AO's order lacked any mention or record of inquiries or verification of critical aspects such as the genuineness of LTCG claimed, the source and timing of payments for shares, and the nature of large liabilities and immovable property transactions. Despite the availability of incriminating evidence, including the detailed investigation report by the Income Tax Investigation Directorate Kolkata exposing a widespread accommodation entry racket involving CCL International Ltd., the AO did not conduct independent verification or confront the assessee with adverse material. The AO's acceptance of incomplete and suspicious documents without further probe was held to demonstrate non-application of mind and failure to discharge quasi-judicial duties.

The Court found that the AO ignored material contradictions such as the mismatch between alleged purchase dates and demat account credits, partial payment of purchase consideration with unexplained balance, absence of confirmations for large liabilities, and failure to verify the nature of land acquisition claimed as exempt. The AO also did not utilize available data under Annual Information Return (AIR) and Information Technology System (ITS) to verify foreign travel and credit card expenses. The Court held that these lacunae amounted to failure to make inquiries or verifications which should have been made, rendering the assessment order erroneous and prejudicial within the meaning of Explanation 2(a) to section 263.

On the issue of the genuineness of LTCG claimed exempt under section 10(38), the Court examined the investigation report of the DGIT (Inv.) Kolkata which revealed a cartel of operators and brokers manipulating penny stock prices to generate bogus LTCG entries. The report identified CCL International Ltd. as one of the 84 scrips used for such accommodation entries. The Court noted that the AO had the report on record but failed to act upon it or verify the assessee's claim in light of the report. The Court rejected the assessee's reliance on a SEBI order which dealt with investor complaints and did not address price manipulation or genuineness of transactions. The Court distinguished judicial precedents cited by the assessee on the basis that in those cases the AO had made adequate inquiries, unlike the present case.

The Court applied the principle that the AO must act as a prudent person and not accept incomplete or suspicious documents at face value, especially where credible adverse material exists. The Court referred to a precedent where acceptance of a gift based solely on an affidavit without verification was held erroneous and prejudicial. The Court held that the AO's failure to verify the source and genuineness of the purchase of shares, the identity and capacity of parties involved, and the authenticity of documents amounted to non-application of mind and justified revision under section 263.

Regarding procedural objections raised by the assessee, including that the revision was based on audit objections and that the PCIT did not demonstrate that the investigation report was available to the AO at the time of assessment, the Court found these arguments unpersuasive. The Court held that the PCIT's order clearly demonstrated that the AO had not made necessary inquiries and verifications, which is sufficient to invoke section 263. The Court also noted that suspicion alone is insufficient but where credible material exists and no inquiry is made, revision is justified. The Court held that the AO's acceptance of documents without independent verification despite the incriminating report was a failure of duty.

The Court further clarified the scope of Explanation 2(a) to section 263, stating that it covers not only cases where no inquiry is made but also where inquiries which should have been made are not actually made. The Court distinguished earlier rulings cited by the assessee which were based on pre-amendment law and did not deal with Explanation 2. The Court emphasized that whether inquiries which should have been made have been made is primarily a question of fact and in the present case, the PCIT rightly concluded that necessary inquiries were not made.

In conclusion, the Court held that the assessment order was erroneous and prejudicial to the interests of the revenue due to the AO's failure to conduct necessary inquiries and verifications, particularly regarding the LTCG exemption claim, large liabilities, immovable property transactions, and other suspicious aspects. The Court upheld the PCIT's order under section 263 setting aside the assessment order and directing the AO to pass a fresh order after proper inquiries, including third-party verifications, and after providing the assessee an opportunity of being heard.

Significant holdings include the Court's verbatim reliance on the Supreme Court's exposition of the meaning of "prejudicial to the interests of the Revenue" in Malabar Industrial Co. Ltd., emphasizing that loss of tax lawfully payable due to an erroneous order is prejudicial. The Court also preserved the principle from Paville Project Pvt. Ltd. that the AO's quasi-judicial function requires diligent investigation and that failure to do so justifies revision under section 263. The Court established that Explanation 2(a) to section 263 encompasses failure to make inquiries which should have been made, even if some inquiries were made but were inadequate.

Final determinations are that the PCIT validly exercised revisionary jurisdiction under section 263; the assessment order dated 31.12.2018 was erroneous and prejudicial due to lack of proper inquiries and verifications; the AO failed to investigate the genuineness of LTCG exemption claim and other suspicious transactions; and the matter is remitted for fresh assessment after proper investigation and opportunity to the assessee. The appeal filed by the assessee against the revisionary order is dismissed.