The core legal questions considered in this judgment revolve around the validity and scope of the revisional powers exercised under section 263 of the Income Tax Act, 1961. Specifically, the issues are:
1. Whether the assessment order passed under section 143(3) of the Act for the assessment year 2019-20 is erroneous and prejudicial to the interest of revenue on the ground that the Assessing Officer (AO) failed to make necessary inquiries, verifications, or examinations regarding provisions made by the assessee for construction expenditure and defect warranty.
2. Whether the AO had indeed made adequate inquiries during the assessment proceedings, particularly in relation to the provision for construction expenses and defect warranty claimed by the assessee.
3. The extent and limits of the revisional jurisdiction under section 263, especially distinguishing between lack of inquiry and inadequate inquiry by the AO.
4. The applicability of judicial precedents on the scope of section 263 and the principle of "plausible view" taken by the AO.
Issue-wise Detailed Analysis
Issue 1: Whether the assessment order is erroneous and prejudicial to revenue due to lack of proper inquiry on provisions for construction expenditure and defect warranty
The legal framework involves section 263 of the Income Tax Act, which empowers the Principal Commissioner or Commissioner to revise an assessment order if it is found to be erroneous and prejudicial to the interest of revenue. Explanation 2 to section 263(1) clarifies that an order is deemed erroneous if passed without making inquiries or verification which should have been made.
The Ld. PCIT, relying on various judicial pronouncements including the Supreme Court decisions in Rampyari Devi Saraogi v. CIT and Malabar Industrial Co. Ltd. v. CIT, held that the AO had not properly examined or verified the rationale behind the provision for construction expenses amounting to Rs. 9.87 crores and defect warranty of Rs. 2.25 crores. It was noted that the project "Ganga Platino" was completed on 19.04.2018, yet the assessee made provisions for expenses to be incurred in the future and booked significant expenses after project completion without furnishing detailed supporting evidence.
The PCIT observed that the AO failed to question the necessity of such provisions or verify the genuineness and authenticity of the expenses, thus resulting in under-assessment of income. The PCIT invoked Explanation 2(a) of section 263(1), which deems an order erroneous if passed without necessary inquiries or verification, and set aside the assessment order directing a fresh assessment after proper examination.
Issue 2: Whether the AO had made adequate inquiries during the assessment proceedings
The assessee contended that the AO had raised specific queries through notices under section 142(1) of the Act regarding the provision for construction expenditure and defect warranty. The assessee furnished detailed replies, including ledger extracts, engineer's certificates, and explanations based on the Real Estate (Regulation and Development) Act, 2016, which mandates promoters to rectify structural defects within five years at their own cost.
The AO, after receiving these replies, completed the assessment order under section 143(3), accepting the claims. The assessee argued that this demonstrated application of mind and inquiry by the AO, negating any claim of lack of inquiry. The assessee relied on several judicial decisions including CIT v. Fine Jewellery (India) Ltd., M/s. Angre Port Private Ltd. v. PCIT, and others, which hold that specific queries raised and replied to during assessment proceedings indicate that the AO applied his mind and made inquiries, even if the assessment order itself does not elaborate on every detail.
The Tribunal examined the record and found that the AO had indeed issued detailed questionnaires and the assessee had responded comprehensively. It was also noted that the AO had considered the replies before completing the assessment. Thus, the Tribunal concluded that there was no "lack of inquiry" but at most "inadequate inquiry," which does not justify invoking section 263.
Issue 3: The scope and limits of revisional jurisdiction under section 263
The Tribunal extensively analyzed the jurisprudence on the scope of section 263, emphasizing the distinction between lack of inquiry and inadequate inquiry. It cited authoritative rulings from the Supreme Court and various High Courts, including:
- The Supreme Court in Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd. held that if the AO has made inquiries and taken a plausible view, the order cannot be deemed erroneous or prejudicial to the revenue.
- The Delhi High Court in CIT v. Sunbeam Auto Ltd. clarified that an order cannot be set aside merely because the Commissioner disagrees with the extent of inquiry; only where there is complete lack of inquiry can section 263 be invoked.
- Other decisions (e.g., Gabriel India Ltd., Sh. Narayan Tatu Rane v. ITO) emphasize that the Commissioner cannot substitute his judgment for that of the AO unless the order is legally erroneous.
The Tribunal noted that the AO's inquiries and the assessee's responses, although not exhaustively discussed in the assessment order, demonstrate application of mind and inquiry. The Commissioner's order under section 263 was thus found to be an impermissible substitution of judgment rather than a correction of an erroneous order.
Issue 4: Application of law to facts and treatment of competing arguments
The PCIT argued that the AO should have questioned the rationale of provisions made after project completion and verified the authenticity of expenses more rigorously. The assessee countered that detailed queries were raised and replied to, and the AO accepted the explanations, which is sufficient to demonstrate inquiry.
The Tribunal, after considering the evidence, including the notices, replies, ledger extracts, and statutory provisions cited by the assessee, found that the AO had indeed made inquiries and applied mind. The Tribunal relied on the principle that section 263 cannot be invoked merely because the Commissioner would have taken a different view. The Tribunal held that the PCIT's order setting aside the assessment order under section 263 was not justified.
Significant Holdings
"An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer"s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry."
"If from the assessment records, it is evident that the Ld. AO has made due enquiries in response to which assessee has filed its submissions, then even if the assessment order does not discuss all aspects in detail with regards to claim of the assessee, it cannot be held that the order is erroneous and prejudicial to the interests of the Revenue."
"Section 263 of the Act does not visualise a case of substitution of the judgment of the Principal CIT for that of the Assessing Officer, who passed the order unless the decision is held to be wholly erroneous."
"The Commissioner can exercise revisional powers under Section 263 of the Act only when it is found that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of Revenue."
In conclusion on each issue:
- The assessment order was not erroneous or prejudicial to revenue as the AO had made specific inquiries and applied mind before accepting the provisions claimed by the assessee.
- The AO's inquiry, although not exhaustively recorded in the assessment order, was adequate and not lacking, thus not attracting the application of section 263.
- The revisional jurisdiction under section 263 is limited and cannot be exercised merely because the Commissioner disagrees with the AO's view; only in cases of lack of inquiry or legally erroneous orders can it be invoked.
- The PCIT's order setting aside the assessment order under section 263 was therefore not sustainable and was set aside by the Tribunal, allowing the appeal filed by the assessee.