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2025 (6) TMI 909 - HC - Income TaxRevision u/s 263 - CIT directed AO to examine the credit appearing in the books of the assessee as share capital including premium and nature of transactions to the identity of the investors and its genuineness - ITAT setting aside the order passed by PCIT u/s 263 HELD THAT - After noting the statutory provision it has been rightly pointed out by the learned Tribunal that before passing an order for modifying enhancing or cancelling the assessment the PCIT was supposed to either himself make or caused to make an enquiry as deem necessary. In this regard it is relevant to take note of the words as he deems necessary which would indicate that it would be incumbent upon the PCIT to make or cause to make an enquiry. On perusal of the order passed by the PCIT it is seen that the reply submitted by the assessee on the various issues was not taken note of which was statutorily required to be done so as to enable the PCIT to secure the prima facie opinion as to whether the order of the AO was erroneous so far as it was prejudicial to the interest of revenue. It is not clear from the order passed by the PCIT as to whether the assessment files were perused since in the assessment order passed u/s 143 (3) r/w Section 263 of the Act the AO records the various documents which were produced by the assessee and also records that the details of documents were examined and the case was discussed and thereafter the AO has recorded that the genuineness identity and creditworthiness of the share subscribers were verified from the documents produced and the source of funds have also been explained. Therefore to disallow such finding the PCIT is required to form a prima facie opinion and merely because the assessment order is not a lengthy order will not be a ground to set aside the assessment order that too for the second time. That apart the PCIT has also not pointed out as to what was the nature and the manner of enquiry which was required to be done and merely proceeded on the basis that there was lack of enquiry on the part of the Assessing Officer. Thus Tribunal was right in allowing the assessee s appeal and setting aside the order passed by PCIT under Section 263 of the Act.
1. ISSUES PRESENTED and CONSIDERED
The Court considered the following core legal questions arising from the appeal filed by the revenue under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (the Tribunal): i) Whether the Tribunal erred in law by quashing the revisionary order passed under Section 263 of the Act, ignoring the Principal Commissioner of Income Tax's (PCIT) power to revise an assessment order deemed erroneous due to insufficient enquiry by the Assessing Officer (AO). ii) Whether the Tribunal committed an error in law by accepting the assessee's and subscriber companies' submissions based solely on documentary evidence without addressing alleged inadequacies and lacunae in the investigation process concerning the true nature of share capital transactions. iii) Whether the Tribunal erred in not recognizing that the assessment order dated 19.08.2016 passed under Section 143(3) read with Section 263 was erroneous and prejudicial to revenue interests due to inadequate enquiry, as contemplated under Explanation 2.C of Section 263. 2. ISSUE-WISE DETAILED ANALYSIS Issue i): Legality of Quashing the Revisionary Order under Section 263 Relevant Legal Framework and Precedents: Section 263 of the Income Tax Act authorizes the PCIT to revise an assessment order if it is found to be "erroneous in so far as it is prejudicial to the interests of the revenue." Explanation 2.C mandates that the PCIT must form a prima facie opinion on the erroneous nature of the order after making or causing to make such enquiry as deemed necessary. The Court also referred to a precedent wherein a similar finding by the PCIT-that any order passed subsequent to a Section 263 order must be in favour of the revenue-was held erroneous by the Calcutta High Court, and the Supreme Court dismissed the revenue's appeal against that decision. Court's Interpretation and Reasoning: The Court held that the PCIT's notion that any order following a Section 263 revision must enhance or strengthen revenue recovery is legally incorrect. The power under Section 263 is discretionary and must be exercised based on a prima facie opinion formed after requisite enquiry. The Court emphasized that the PCIT must either personally conduct or cause an enquiry "as he deems necessary" before passing a revisionary order, and mere dissatisfaction with the length or detail of the AO's assessment order is insufficient. Key Evidence and Findings: The PCIT's order dated 12.03.2019 was challenged on grounds that it did not consider the assessee's detailed replies and documentary submissions, nor did it specify what further enquiry was required. The AO's assessment order of 19.08.2016 recorded verification of the genuineness, identity, creditworthiness of shareholders, and source of funds, based on documents produced and discussions held. Application of Law to Facts: The Court found that the PCIT failed to demonstrate that the AO's order was erroneous or prejudicial to revenue, as required by Section 263. The PCIT did not show that an enquiry was made or caused to be made before passing the revisionary order, nor did it specify the nature of enquiry that was lacking. The Tribunal correctly noted these deficiencies and quashed the PCIT's order. Treatment of Competing Arguments: The revenue argued that the AO's enquiry was inadequate and that the PCIT's revision was justified. The Court rejected this, relying on the statutory mandate for enquiry before revision and the principle that the revisionary power is not to be exercised merely because the AO's order is brief or less detailed. Conclusion: The Court concluded that the PCIT's order under Section 263 was legally unsustainable and rightly quashed by the Tribunal. Issue ii): Acceptance of Assessee's Submissions Based on Documentary Evidence Relevant Legal Framework and Precedents: The assessment process under Section 143(3) requires the AO to verify the genuineness and creditworthiness of share capital transactions. The PCIT's revision under Section 263 was premised on the ground that the AO merely accepted the assessee's submissions on paper without adequate independent verification. Court's Interpretation and Reasoning: The Court examined the AO's order and noted the AO had examined the documents produced, including audited accounts, shareholder details, bank account information, and explanations regarding the source of funds. The AO's findings recorded that the genuineness and identity of the subscribers were verified. The Court held that the AO's enquiry met the statutory requirements and that the PCIT failed to identify any specific lacuna or inadequacy in the enquiry process. Key Evidence and Findings: The AO's order detailed the documents examined and the explanations received from the assessee's authorized representative. The PCIT's order did not point to any missing or contradictory evidence that would justify setting aside the assessment order. Application of Law to Facts: The Court found that the AO's acceptance of the assessee's submissions was not arbitrary or without enquiry. The PCIT's reliance on a general assertion of inadequate enquiry, without pointing to particular deficiencies, was insufficient to invoke Section 263 revision. Treatment of Competing Arguments: The revenue contended that the enquiry was superficial and based only on paper submissions. The Court rejected this, emphasizing the AO's documented verification and the absence of any indication that the enquiry was perfunctory. Conclusion: The Court upheld the Tribunal's finding that the AO had conducted a proper enquiry and that the PCIT erred in disregarding this. Issue iii): Whether the Assessment Order was Erroneous and Prejudicial as per Explanation 2.C of Section 263 Relevant Legal Framework and Precedents: Explanation 2.C to Section 263 requires the PCIT to form a prima facie opinion that the assessment order is erroneous and prejudicial to revenue interests after making or causing enquiry. The power is not to be exercised lightly or on mere suspicion. Court's Interpretation and Reasoning: The Court noted that the PCIT's order did not demonstrate that such a prima facie opinion was formed on a proper factual basis. The PCIT did not specify what enquiry was made or what facts led to the conclusion that the AO's order was erroneous. The Court underscored that the AO's order had recorded verification of key aspects relevant to the share capital transactions, including the identity and creditworthiness of shareholders and source of funds. Key Evidence and Findings: The PCIT's order was silent on whether the assessment records or the assessee's replies were considered. The AO's order contained detailed findings based on documents and explanations. The PCIT's order relied on the absence of a lengthy enquiry without indicating any factual errors or omissions in the AO's order. Application of Law to Facts: The Court held that the PCIT failed to comply with the statutory mandate of forming a prima facie opinion on a factual basis. The absence of any pointed enquiry or factual basis rendered the revisionary order unsustainable. Treatment of Competing Arguments: The revenue's argument that the AO's order was erroneous due to lack of enquiry was rejected for lack of evidentiary support. The Court emphasized that the revisionary power under Section 263 cannot be exercised on mere conjecture or dissatisfaction with the AO's order length or detail. Conclusion: The Court concurred with the Tribunal that the PCIT's order was legally flawed for failure to form a proper prima facie opinion and to conduct or cause enquiry as required. 3. SIGNIFICANT HOLDINGS The Court made the following crucial legal determinations: "The power under Section 263 of the Income Tax Act is discretionary and can only be exercised where the Principal Commissioner of Income Tax forms a prima facie opinion that the assessment order is erroneous and prejudicial to the interests of revenue, after making or causing to make such enquiry as he deems necessary." "It is erroneous to hold that any order passed subsequent to an order under Section 263 must necessarily be in favour of the revenue. Such a view was rejected in the precedent where the Supreme Court dismissed the revenue's appeal against the High Court's decision." "The Principal Commissioner of Income Tax must take into account the assessee's replies and documentary evidence before forming a prima facie opinion. Failure to do so renders the revisionary order liable to be quashed." "The mere brevity or lack of length in the assessment order passed by the Assessing Officer is not a ground for invoking revisionary powers under Section 263, especially where the AO has recorded verification of the relevant facts and documents." "The Tribunal was correct in setting aside the order passed under Section 263, as the Principal Commissioner of Income Tax did not comply with the statutory requirement of enquiry and formation of prima facie opinion." Accordingly, the Court dismissed the revenue's appeal and answered the substantial questions of law against the revenue, thereby upholding the Tribunal's order quashing the revisionary order under Section 263.
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